Blackstone and Fortress suffer losses

Blackstone Group and Fortress Investment Group suffered losses in the second quarter, both plagued by the dislocation in core credit and equity markets that has made the normal course of business nearly impossible.

Blackstone reported a US$156.5m net loss for the second quarter, representing a 120% fall from its US$774.4m profit during the same period last year. But excluding costs associated with its initial public offering last June, Blackstone had a profit of US$165.6m for the second quarter versus a US$66.5m loss in the first quarter. Its shares closed on August 7 at US$18.44, up US$0.07 on the week.

Fortress had a US$55.6m loss, roughly in line with the US$55.1m loss for the same period last year. Excluding costs associated with its IPO, the loss was US$345,000. The stock fell 10.3% to close on Thursday at US$10.32.

Blackstone’s performance was clearly hindered by its 103% drop in performance fees and allocations, which reported a US$13.7m loss compared with a US$453m positive result last year.

That precipitous decline hit corporate private equity and real estate the hardest. The private equity segment reported a quarterly revenue result of US$92.4m, against US$400.5m in the same quarter last year. Only one of four funds last quarter had positive performance fees.

Private equity deployed US$775.9m in the second quarter. Real estate, on the other hand, reported negative revenues of US$14.4m. For the same period last year it had revenues of US$315.1m. Revenues from financial advisory fell by 26% to US$72.9m

The key outperformer was the marketable alternative asset management (MAAM) segment. Thanks in part to the acquisition of GSO Capital, whose results for the first time were fully included, the segment generated revenues of US$225.2m, a 34% increase on last year.

Blackstone isn’t convinced that the worst is behind it.

“We still don’t see things improving for a while,” said Tony James, president and COO, during last week’s conference call. “We expect the economy to continue to be weak well into 2009, possibly . . . into early 2010. And we believe that any US recovery will be slow.”

Investors are still putting money to work in private equity, however. Blackstone’s assets under management grew to US$119bn from about US$113bn at the end of the first quarter. In addition, it has raised more than US$9bn across private equity, real estate and GSO since March, with most of that balance going into its next private equity fund, Blackstone Capital Partners V, which is still awaiting its first close as the fourth fund in finishing its investment cycle.

And Blackstone has made some investments this year, though not its typical fare. Last quarter, it bought three leveraged loan portfolios totalling US$7.8bn. James said the firm purchased the loans at about a 15% discount and the sellers provided long-term financing for 70%–80% of the purchase price. He added the investment would generate 20%–30% returns with “very low risk of principal”.

Peter Briger, president, Fortress hybrid hedge funds, echoed Blackstone’s interest in credit, especially in providing new debt.

“While the loans on banks and investment banks’ balance sheets have certainly gotten more interesting, they’re not as interesting as new extensions of credit in the marketplace,” he said.

Fortress’s assets under management have grown by 23% to US$35.1bn since the second quarter last year, and segment management fee revenues climbed 27% to US$150m in the same period. Private equity funds generated US$32m of pre-tax distributable earnings, compared with US$28m last year. Hedge funds generated US$30m in pre-tax distributable earnings against US$57m for the same quarter last year.