When General Electric (NYSE: GE) wanted to unload its $23 billion portfolio of real estate and real estate-backed loans as part of the GE Capital divestiture announced the other day, it called Blackstone Group (NYSE: BX).

When the New Jersey state employee retirement fund recently decided to add $1 billion to the $3 billion already invested with the firm, it called Blackstone.

When owners of Chicago’s Willis Tower opted to unload the building for $1.3 billion this spring, they dealt with the world’s largest buyer of real estate. Ditto for auto-parts supplier Gates Global, sold last year in a $5.4 billion deal to a private equity firm that’s grown so large it’s practically unavoidable.

Given its scale and reach, Blackstone also belongs on the speed dial of equity income investors. It’s a leading alternative investments franchise growing fast and paying a good yield, yet remains priced at a well-below-market multiple.

The rising tide of fund realizations lifted the partnership’s preferred income measure 24% to $4.3 billion last year, while distributable earnings per unit grew 64% as performance fees nearly doubled to $2.7 billion. Assets under management reached $290 billion. Not bad for a firm with fewer than 2,200 employees.

Blackstone’s variable quarterly distributions added up to $2.12 per common unit last year, a 58% increase from 2013. At the current unit price that works out to a trailing annualized yield of 5.3%. Of course, the payout could be lower this year if Blackstone cashes out fewer funds and earns less in performance fees. The partnership merely aims simply to distribute 85% of whatever it might earn, subject to tweaks by management.

But if you annualize the fourth-quarter distribution of 78 cents per unit you end up with a yield of 7.8%, and on the fourth-quarter conference call management said it expects distributable earnings to keep growing this year based on extremely strong business trends.

Chairman and CEO Steve Schwarzman sounded positively miffed about Blackstone’s unit price. “Our stock is now yielding a remarkable 7% for our unitholders,” he said. “This 7% yield makes little sense to me in the world of ultra-low interest rates, and especially given Blackstone‘s enormous momentum.”

“Our 2014 investments, when coupled with our current level of management and incentive fee earnings, should generate around $3 per share in total cash earnings assuming no growth in our asset base. In other words, to understand Blackstone, if we never grow our AUM and simply freeze the business with the same types of general returns we‘re making today, we would generate approximately $3 per share in cash earnings with no growth, and we are growing rapidly.”


Source: Blackstone fourth-quarter presentation

This bull market in financial assets has been very good for Blackstone indeed, though of course it has managed funds and companies like a champ for much longer. The buyout of Hilton Worldwide Holdings at the 2007 market peak, which once looked like a giant bust, turned by dint of economic recovery and  a well-timed debt restructuring into the most profitable private equity deal of all time, with Blackstone’s paper profit now topping $16 billion based on its remaining 76% stake in the hotel chain. It’s the perfect trophy for the “buy it, fix it, sell it” discipline Blackstone touts.

The real estate arm that led the Hilton deal accounted for 41% of Blackstone’s income last year, barely hanging on to its lead over the private equity segment. Hedge Funds, Credit and Financial Advisory accounted for the remainder. The latter, a souvenir from the firm’s start as an investment banking boutique, is being spun off this year as an independent company, in part to eliminate conflicts with Blackstone’s other interests that were seen as stunting the unit’s growth.

In a recent article arguing that the alternative asset management industry is “structurally attractive and misunderstood by investors,” Morningstar’s analyst called Blackstone the clear industry leader “with the strongest record of strategy innovation and fundraising.”

We agree, and expect further capital appreciation from this fast-growing, income-generating business. We are adding Blackstone to the Growth Portfolio. Buy BX below $48.

Rival KKR (NYSE: KKR) remains more heavily concentrated in the private equity space it pioneered, invests heavily in its own funds and commands unshakable loyalty from top clients who’ve invested with KKR for decades.

The $1.90 per unit KKR paid out for 2014 used 77% of its distributable earnings and represented a 36% increase from 2013. Based on the current share price, the trailing yield is 8.3%.

The 94 companies in KKR’s private equity portfolio generate $200 billion in annual revenue and employ almost a million people. Investments on its own behalf generated half of the firm’s $2 billion in cash flow last year, while the other half came from managing investments for clients.

Included in the most recent results were a $240 million writedown of KKR’s energy investments and a $120 million mark against its credit assets.  

The distribution per unit has increased in each of the last four years, and will be boosted in the first half of 2015 by the expected exits from Alliance Boots, Big Heart Pet Brands, Biomet and US Foods.

Along with Blackstone and Oaktree, KKR represents the alternative asset management industry’s elite. We’re adding it to the Aggressive Portfolio. Buy KKR below $26.