Blackstone Group, reported a loss in its first full quarter as a listed entity, with the firm hit by charges relating to the initial public offering, stark conditions in the US property market and the virtual standstill in the credit markets.
As a result of non-cash charges for compensation and other charges related to the IPO (ie, awarding significant slices of equity to insiders), Blackstone was hit with a bill of US$802.6m. While revenues rose from US$461.5m last year to US$526.7m, it reported an overall loss of US$113.2m (or 44 cents per share), compared with a profit of US$372.5m when it was a private business last year. Without the IPO charges, Blackstone would have recorded profit of US$234m.
Along with the IPO charges, Blackstone also suffered from the dark mood in its real estate division following the collapse of the sub-prime mortgage sector in the US.
A 44% drop in revenues to US$109.1m was met with more gloom from Hamilton James, Blackstone’s president and chief operating office, who predicted that the further difficult times lie ahead, with the fallout from the sub-prime crisis likely to be longer and wider-ranging than earlier, optimistic outlooks.
“The mortgage black hole is worsening . . . it is deeper, darker, scarier than what the banks originally thought,” he said, adding that confidence at investment banks was “low”.
Private equity buyout activities were more positive, with revenues rising by 42% to US$227.3m, although much of this came from higher management fees. Blackstone is understood to charge about 1.5% for fund management, a relatively average figure for the industry but considerable given that Blackstone’s most recent vehicle raised US$21.7bn in August – the firm manages about US$33bn of assets in total.
Reports that Blackstone is likely to increase that management fee to nearer 2% have been met with criticism, but founder and chief executive Stephen Schwarzman can point to the firm’s last fund’s “mid-50” per cent returns after fees as proof that you get what you pay for.
This is especially so when Blackstone invested US$6.9bn through its private equity and real estate units last quarter alone – the US$21.7bn fund was already more than two-thirds invested when it reached final close and Blackstone is widely reported to be back on the fundraising trail already with yet another mega target of US$20bn.
Asset management revenues, largely relating to hedge funds active in the US, were up 88% to US$124.9m, with financial advisory revenues also up considerably at 60%, totaling US$84.3m.
Despite this, Schwarzman echoed his colleague’s concerns, noting that the new environment provides both “challenges and opportunities”, with a trade-off between lack of leverage for large private equity and real estate transactions with a more favourable pricing of assets.