Bloomberg News

Blackstone Second-Quarter Profit Drops 74% as Fees Fall

July 19, 2012

Blackstone Profit Drops 74% in ’Miserable’ Quarter for Fees

Pedestrians walk past the offices of the Blackstone Group LP in New York. Photographer: Gino Domenico/Bloomberg

Blackstone Group LP (BX:US), the world’s largest private-equity firm, said second-quarter profit fell 74 percent as market swings hurt the value of its holdings.

Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, dropped to $212 million, or 19 cents a share, from $804 million, or 73 cents, a year earlier, New York-based Blackstone said today in a statement. The result beat the 11-cent average estimate (BX:US) of 14 analysts surveyed by Bloomberg.

Performance fees in the second quarter declined 80 percent to $135 million as the value of fund holdings fell compared with a year earlier. Blackstone, under Chief Executive Officer Stephen Schwarzman, has led a push among the largest, publicly traded private-equity firms to expand beyond traditional buyouts into real estate, hedge funds and credit investing.

“Generally, a pretty miserable situation in the second quarter,” Schwarzman said today on a call with investors and analysts. “Markets have been dominated by tepid volumes and limited conviction. Investors remain apprehensive and hesitant to make decisions.”

Blackstone rose 0.7 percent to close at $12.99 in New York. The stock has declined 7.3 percent this year, compared with the 9.5 percent increase for the Standard & Poor’s 500 Index.

Net Loss

Tepid markets have resulted in “a less robust level of appreciation within the private equity and fund-of-funds portfolios,” Credit Suisse AG analyst Howard Chen said in a research note before the earnings were released. “We anticipate that public equity market depreciation and increased asset price volatility will weigh on mark-to-market fund valuations.”

Blackstone’s economic net income, or ENI, doesn’t comply with U.S. generally accepted accounting principles. Under those standards, known as GAAP, Blackstone had a net loss of $75 million, or a loss of 14 cents per share, compared with a net gain of $86.2 million, or 18 cents, a year earlier. Distributable earnings fell to $188 million, from $191 million a year ago. Blackstone said it will pay a dividend of 10 cents a share on Aug. 31.

Fees last year were boosted by an accounting measure that required Blackstone to recognize a larger share of profit in its real estate business, the company said at the time.

Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR & Co. (KKR:US), the New York firm run by Henry Kravis and cousin George Roberts, is scheduled to report results next week.

Deals Decline

The value of the Blackstone’s private-equity assets fell 4.2 percent during the quarter as falling stock markets hurt publicly traded holdings. Carlyle Group LP (CG:US), the second-biggest buyout equity firm, said last week that its private-equity holdings declined 2 percent.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, overhaul then sell them, and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals 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.

Worldwide, the value of private-equity deals announced in the second quarter fell 36 percent to $101.5 billion from a year earlier, with leveraged buyouts declining 39 percent to $21.7 billion, according to data compiled by Bloomberg.

Real Estate

Blackstone was active in several real estate deals during the quarter as the value of its property holdings gained 2.9 percent. The real estate business, led by Jonathan Gray, agreed to buy the Motel 6 lodging chain for $1.9 billion, applied to buy shopping malls in Turkey, agreed to buy industrial properties valued at $2.1 billion from Walton Street Capital LLC and sold the Wyndham Chicago hotel for $88 million.

Gray has gathered more than $12 billion for the firm’s latest real estate fund, Blackstone Real Estate Partners VII. The fund is on course to be the biggest property opportunity fund ever raised, according to David Chiaverini, an analyst at BMO Capital Markets Corp.

“Blackstone’s real estate effort remains in a market- leading position both in terms of portfolio size and its ability to deploy capital,” Chiaverini said in a July 5 note to clients.

Blackstone’s credit business, called GSO, was the only segment to increase profit over last year. Founded in 2005, GSO is in a “big growth phase” with more than $50 billion under management, its head, Bennett Goodman, said in May. Profit rose 31 percent to $54.7 million.

Total assets under management rose to $190.3 billion from $190.1 billion during the quarter, led by real estate. Blackstone said it has $36 billion of unspent committed capital, known as dry powder.

To contact the reporter on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net

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


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Companies Mentioned

  • BX
    (Blackstone Group LP/The)
    • $33.84 USD
    • -0.34
    • -1.02%
  • KKR
    (KKR & Co LP)
    • $24.31 USD
    • -0.28
    • -1.15%
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