Tony James, president of Blackstone Group LP (BX:US), said allegations that the biggest buyout firms colluded in bidding on takeovers are untrue and may have been politically motivated in an election year.
“The lawsuit is a complete fabrication and a bunch of malarkey,” James said today in response to a question from Bloomberg News on a conference call discussing third-quarter earnings. “It’s a long, long way from what’s being alleged by these latest attorneys, and I suspect there’s some political motivation lurking in here because we have a private-equity guy running for president,” James said, referring to Republican Mitt Romney, who co-founded Bain Capital LLC and ran the Boston- based buyout firm for 15 years.
Top executives at private-equity firms including Blackstone, Bain, KKR & Co. (KKR:US) and Carlyle Group LP (CG:US) assured each other in e-mails that they wouldn’t compete on deals to avoid driving up prices and angering competitors, according to an amended complaint unsealed last week by a federal judge in Boston. The correspondence was cited as evidence that the firms rigged bids in 19 leveraged buyouts and eight other transactions, including the biggest deals of the LBO boom.
“We would much rather work with you guys than against you,” James wrote in an e-mail to KKR co-founder George Roberts in reference to the buyout of Freescale Semiconductor Ltd. (FSL:US), according to the complaint. “Together we can be unstoppable but in opposition we can cost each other a lot of money.” According to the complaint, Roberts replied, “Agreed.”
The amendment to the complaint, which was first filed in 2007, was unsealed Oct. 11 after U.S. District Judge Edward Harrington granted a request by the New York Times to make it public. Besides James, representatives for KKR and TPG Capital, also named in the complaint, said the firms compete vigorously for deals and there is no evidence of the alleged conspiracy.
“When it comes to big deals, it’s not only perfectly permissible for our firms to team up, but it’s a requirement,” James said today. “And when you’re in any competitive situation, you want to pick the strongest partner you can.”
James spoke as New York-based Blackstone reported a third- quarter profit. The value of the firm’s holdings gained at a quicker pace than a year ago, and its assets exceeded $200 billion for the first time.
Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, was $621.8 million, or 55 cents a share, compared with a loss of $380 million, or 34 cents, a year earlier, Blackstone said today in a statement. Analysts had expected earnings of 42 cents a share, according to the average of 13 estimates (BX:US) in a Bloomberg survey.
Blackstone, under Chief Executive Officer Stephen Schwarzman, is leading a push among the largest so-called alternative-asset firms to expand their businesses beyond traditional leveraged buyouts and bolster assets. Blackstone’s assets rose 7.5 percent from the second quarter to a record $205 billion. The firm last week closed its seventh vehicle dedicated to real estate investments with $13.3 billion, a record for opportunistic property funds, or those designed to acquire assets at a significant discount.
“Asset growth continues at a torrid pace,” Daniel Fannon, a San Francisco-based analyst with Jefferies & Co., wrote in a note to clients today. “Real estate continues to headline growth.”
Blackstone rose (BX:US) 4.5 percent to close at $15.71 in New York trading, the most in more than a month. The shares have advanced 12 percent this year, compared with the 16 percent gain in the Standard & Poor’s 500 Index.
Blackstone said the carrying value of its private-equity portfolio rose 7.1 percent during the quarter, with each fund gaining. The S&P 500 index rose 5.8 percent during that time. The firm’s real estate portfolio gained 4.9 percent, revenues in its hedge-fund business more than doubled and assets in its credit unit rose 62 percent from a year ago.
Performance fees in the third quarter swung to $603 million, compared with a loss of $457 million a year earlier, as fund holdings appreciated at a faster pace. The firm said it has $36 billion of unspent committed capital, or dry powder, and it declared a dividend of 10 cents a share, to be paid on Nov. 30.
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 gain of $128.8 million, compared with a net loss of $274.6 million a year earlier.
Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR, based in New York and run by cousins Roberts and Henry Kravis, is scheduled to report results next week.
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 and 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.
Blackstone’s distributable earnings, which include fee- related earnings and the firm’s slice of investment profits, were $189.6 million for the quarter, or 15 cents a share, compared with $125.7 million, or 10 cents, a year ago. Those earnings have gained 4 percent this year to $540.2 million over the first three quarters of 2011, Blackstone said.
Worldwide, the value of private-equity deals announced in the third quarter fell 29 percent to $95.1 billion from a year earlier, with leveraged buyouts rising 62 percent to $39.3 billion, according to data compiled by Bloomberg.
“Fundraising activity was solid during the quarter,” Steven Fu, an analyst at JMP Securities LLC, wrote in a note to clients before the results were announced.
Blackstone last month finished gathering $2.5 billion for its debut energy fund, Blackstone Energy Partners. The firm also amassed as much as $960 million for its third closed-end fund to invest in non-investment-grade corporate debt.
“Credit and more income-oriented products will continue to lead the way in terms of new commitments,” Credit Suisse AG analyst Howard Chen said in a report before results were announced. “The trend toward more specialized funds focused on particular sectors -- energy and natural resources have been a highlight -- also continues unabated.”
Blackstone’s deals in the quarter included the acquisition of home automation and security company Vivint Inc. for about $2 billion. The firm in July promoted Joseph Baratta, formerly the London-based head of European private equity, to global head of private equity, based in New York.
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