Blackstone at a loss for Q3

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.

Blackstone’s debut on the New York Stock Exchange on June 22 at US$31.00 per share was contentious in itself, but the response on the public markets has generally been underwhelming, with the stock surging to US$35.06 on the first day but trading below the opening price ever since – at the time of going to press, Blackstone’s shares were trading at US$22.20.

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.