Blackstone Will Have to Wait to Join S&P 500. Axon Enterprises Is Getting a Spot.

The news derailed expectations that

Blackstone

(BX), which, with a market value of $110 billion, is the largest company that isn’t now in the S&P 500, might be included. Given its size, profitability and prominence, Blackstone likely will be added to the index sometime this year.

Investors have been aware that Blackstone’s ownership structure, which effectively gives control to CEO Steve Schwarzman, was a potential barrier to inclusion. But recently, S&P Dow Jones Indices relaxed its criteria for inclusion in the S&P 500 index and will allow companies with dual-class stocks.

While Blackstone doesn’t have two classes of stock, the new rules appear to have created the opening it needed to potentially join the index.

Blackstone shares rose in early trading Monday but then slipped back to close 0.7% lower at $88.75. The stock was down 2% following the news that Axon will be included. Expectations that the company will be added to the S&P 500 had boosted Blackstone shares since S&P DJ Indices announced the rule change on April 17.

“Blackstone is by far the largest company by market cap, not included in the S&P 500 today,” Schwarzman said on a call to discuss the firm’s earnings on April 20. “We are hopeful that this development paves the way for our inclusion, which would be very positive for our shareholders.”

In a client note last month, Credit Suisse analyst Bill Katz wrote that the firm’s index experts estimated that “the potential inclusion (of Blackstone) to the S&P 500 would translate into ~88.5M shares needed to be purchased by Passive ETFs.” That is considerable relative to Blackstone’s average daily trading volume of five million shares.

It isn’t clear whether Katz was referring to just exchange-traded funds that track the index, or all S&P 500 index funds.

“As we understand it and though discretionary, S&P Global typically adds issuers quarterly when they rebalance on the third Friday of March, June, September, and December (with notifications two weeks prior to such inclusion) or when removing an underlying company,” Katz wrote:  “As such, investors will most likely look to early June for the next potential addition.”

Blackstone has the equivalent of about 1.2 billion shares outstanding, with more than 700 million held as publicly traded common stock. Roughly 444 million are held as partnership units by Blackstone limited partners and are convertible into common shares on a one-for-one basis. 

Index funds hold about 20% of the stocks in the S&P 500, so their influence is significant. So-called closet indexers—institutional investors including mutual funds whose portfolios closely match the S&P 500—add to the effect on stocks when companies are added or removed.. 

If Blackstone is eventually added, it it isn’t clear whether its weighting would be based on the full share count or just the publicly traded stock. Whatever the calculation, it is apt to result in significant buying of Blackstone stock.

Among alternative asset managers,

Apollo Global Management

(APO) has moved to a single class of stock.

KKR

(KKR) plans to move to such a structure by the end of 2026.

Blackstone has maintained its current structure, giving Schwarzman significant power, in a bet that S&P DJ Indices would relent on its criteria for inclusion in the S&P 500. That move appears to have paid off. 

Prior to the April change, only companies with a single class of stock could join the index. Companies with dual share classes that were included before the single-class rule took effect in 2017 were allowed to remain.

Write to Andrew Bary at andrew.bary@barrons.com

Write to Andrew Bary at andrew.bary@barrons.com