Bloomberg News

Blackstone Fourth-Quarter Profit Falls on Performance Fees

February 04, 2012

(Updates with closing share price in 11th paragraph.)

Feb. 2 (Bloomberg) -- Blackstone Group LP, the world’s largest private-equity firm, said fourth-quarter profit fell 12 percent as performance fees and investment income declined.

Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, dropped to $449.9 million, or 40 cents a share, from $512.7 million, or 46 cents, a year earlier, New York-based Blackstone said today in a statement. The result matched the average estimate of 13 analysts surveyed by Bloomberg.

Blackstone, led by Chief Executive Officer Stephen Schwarzman, has been ahead of rivals in raising new funds and last month closed on $16.2 billion for the sixth-biggest private-equity fund ever, according to London-based researcher Preqin Ltd. The firm over the past years expanded the fund of hedge funds business as well as its advisory group, which counsels companies on mergers and restructurings, to reduce reliance on private equity.

“With the debt talks, Europe in shambles, U.S. downgraded, markets collapsing, who the heck would sell a business in the middle of that?” Schwarzman said on a call with analysts and investors today. “As those issues get resolved one way or another and expansion continues, you’ll see more volume coming in a more traditional fashion in the private-equity area.”

Real Estate

Blackstone deployed a near-record $16 billion last year and returned $9 billion to investors, Tony James, the firm’s president, said in an earlier call with media. The firm expects to invest as much as $10 billion in 2012, with about half designated for private equity.

“You’re probably going to see more activity on the real estate side than on the private-equity side this year,” James said.

Profit from Blackstone’s real estate business rose 56 percent to $1 billion in 2011 from the year before, the firm said, driven by an increase in performance fees. In June, Blackstone acquired the U.S. malls of Australia’s Centro Properties Group for $9.4 billion, the firm’s biggest deal since the leveraged buyout boom collapsed in 2007.

Performance fees overall declined 21 percent to $358.1 million in the fourth quarter compared with a year earlier, and investment income fell 59 percent to $65.5 million, Blackstone said. In the firm’s private-equity business, performance fees dropped 77 percent to $70.9 million and investment income fell 68 percent to $54.5 million last year compared with 2010.

Record Assets

“We just had a fewer amount of exits as the second half of the year was a little bit weaker for equity markets,” Laurence Tosi, Blackstone’s chief financial officer, said on the call with media. “That’s why you saw a slowdown in private-equity fees.”

Blackstone earnings fell even as it ended the year with a record-high $136.8 billion fee-earning assets under management, up 25 percent from 2010. The firm’s largest segment by assets remains its hedge fund-of-funds business, which oversees $37.8 billion.

Blackstone gained 0.2 percent to close at $16.68 in New York trading. The stock has increased 19 percent this year.

Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR & Co. and Apollo Global Management LLC are scheduled to report results next week.

New Jersey Deal

Worldwide, the value of leveraged buyouts rose 30 percent to $31.5 billion in the fourth quarter from the third, according to data compiled by Bloomberg.

In December, Blackstone won as much as $1.8 billion in state pension money from New Jersey, the most an investor has committed to the firm at one time since it closed its first buyout fund in 1987. The state will put up to $1.5 billion into four new custom funds called separately managed accounts.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to use it to buy companies within five to six years, overhaul then sell them, and return funds with a profit after about 10 years. The firms, which use debt to finance the transactions and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.

Spotlight on Practices

Private equity’s practice of increasing the value of companies they own, along with the way the industry’s managers are compensated and taxed, have been put under a public spotlight this year by opponents of Republican presidential front-runner Mitt Romney. A former governor of Massachusetts, Romney was the CEO of Bain Capital LLC, the Boston-based private-equity firm. His opponents accuse Romney of enriching himself at the expense of corporations and their employees.

“Six months ago on this call, I worried out loud about the political attacks on private equity if Mitt Romney ran for president,” James said today on the call with media. “Well, that has certainly come to pass.”

“Private equity is neither our biggest or fastest-growing business,” he added. “It is, nonetheless, an important part of our firm.”

Schwarzman, who co-founded Blackstone in 1985 with Peter G. Peterson, endorsed Romney last year and held a fundraiser for the candidate at his Park Avenue apartment on Dec. 14. Ranked the 66th-richest American by Forbes magazine, Schwarzman has opposed raising the tax on the share of profits given to private-equity managers, known as carried interest, and has endorsed a flat tax as part of comprehensive reform of the U.S. tax code.

‘Critical Capital’

“It is distressing to all of us here, who strive every day to do the best we can for our investors and for the economy overall, to witness the vicious, politically motivated attacks on the private-equity business that are both inaccurate and unfair,” James said. “Private equity provides critical capital for startups, growing companies and struggling businesses on a scale that cannot be replicated elsewhere, especially in times of turmoil.”

The Private Equity Growth Council, the industry’s lobbying group in Washington, today launched a website promoting private equity as an “engine” that helps drive the U.S. economy and features testimonials of people who say the buyout industry has helped their business.

Blackstone was involved in 53 deals last year valued at a combined $27.1 billion. That tops the 36 deals valued at $16.5 billion the firm participated in the year before, according to data compiled by Bloomberg. The firm has “several” IPOs for portfolio companies in its pipeline, James said.

--Editors: Steven Crabill, Josh Friedman

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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