NEW YORK, (Reuters Breakingviews) - Blackstone’s new model has an early shine. Even as investment income fell in the second quarter, the buyout shop led by Stephen Schwarzman increased assets 9% while fee-based earnings jumped nearly a quarter. This steadier sort of income seems to be more highly valued by the growing number of fund managers who can now buy into the firm since it opted to convert from a partnership into a corporation.

Private equity’s secret sauce makes returns lumpy. It takes firms years to generate returns on their varied leveraged buyouts, real estate holdings and credit portfolios. It’s why even broadly successful Blackstone can experience a three-month stretch where investment income, both realized and estimated, halves from a year earlier – as it just did – to $598 million.

At the same time, the industry-leading $545 billion of assets that Blackstone manages throw off a healthy stream of fees. Growth of this sort of income at the current rate would hit the annual target of $2 a share set by Schwarzman and his heir apparent, President Jonathan Gray, within two years.

Their theory of brand value is also bearing out. Blackstone hauled in an impressive $45 billion of new money during the quarter, and $151 billion over the last 12 months. That includes a whopping $22 billion first close on its latest flagship private equity fund.

At long last, Blackstone may be impressing not just investors in its funds but ones who buy its publicly traded shares. The new structure clears the way for more money managers to buy them, and they should soon wind up in more indices and exchange-traded funds. And though Blackstone has underperformed the S&P 500 Index over a five-year stretch, since unveiling its conversion plan in April its value has swollen by 26%, far outpacing the broader market.

There is a degree of cyclicality to the business, so there will be ebbs even in management fees. And Blackstone has big buckets of money it will have to deploy shrewdly to keep proving itself. Rival KKR also may be a cautionary tale; the stock has lost nearly half the 30% gain it experienced after announcing its own corporate conversion last year. Initial indications nevertheless bode well for Blackstone.

CONTEXT NEWS

- Private equity firm Blackstone on July 18 reported second-quarter profit attributable to the group of $306 million, down from $742 million a year earlier. At 45 cents a diluted share, earnings fell short of the mean analyst expectation of 50 cents, according to I/B/E/S data from Refinitiv.

- Fee-related earnings, a measure of profit that does not include future investment gains or losses, were $422 million, up 24% from second quarter 2018. Distributable earnings, which includes fee-based earnings, interest and dividends and realized performance gains, increased 3%, to $761 million.

- Blackstone’s assets under management totalled $545 billion, up 24% from a year earlier.

(Editing by Jeffrey Goldfarb and Amanda Gomez)

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