Blackstone, KKR, Apollo Swing to Losses Amid ‘Brutal’ Economy

Dropping steeply along with a sagging economy, the four largest publicly traded private equity firms all turned in sharply lower performances during the 3rd quarter. All but one of them swung to a loss, a sharp reversal from the substantial profits they posted just three months ago.

Overall, the tougher economy of the past quarter led to lower valuations for the firms’ investment portfolios, and also made exits less favorable. In the meantime, deal financing got tighter.

The Blackstone Group, the largest of the public private equity firms, saw its economic net income (the measure it prefers to use to gauge operating performance) swing to a $342 million loss in the 3rd quarter, compared to a $339 million gain in the 3rd quarter a year ago, and a $703 million gain in the second quarter. The performance was lower than analysts expected.

Despite the loss, Blackstone’s fee-earning assets under management rose sharply to $132 billion, a 27 percent gain over the same quarter a year ago. Furthermore, the firm’s “dry powder” reached $33 billion, giving the firm ample resources to do deals when the opportunity strikes.

Michael Kim, an analyst covering Blackstone for Sandler O’Neill, told Reuters, the sister news service of Buyouts, that Blackstone showed “strength beneath the surface” and that the firm’s “fundamental story is even better than expected.”

Kohlberg Kravis Roberts & Co. also swung to a loss in the third quarter. The firm’s economic net income swung to a $592 million loss compared to a $317 million profit from the same period a year ago, and a $315 million gain in the second quarter. Nevertheless, KKR’s loss was better than analysts expected.

A positive note for the firm was its 41 percent rise in fee-related income. Dry powder stood at $12.8 billion at the close of September. And while the firm’s assets rose by 6 percent to $58.7 billion compared to a year ago, the firm’s assets fell $3 billion when compared to the second quarter.

The firm’s assets will get a boost in the fourth quarter from the deal that KKR signed with the Texas Teacher Retirement System to manage $3 billion of the pension’s money. In addition, the firm announced in October that it would start raising a $6 billion fund focused on Asian buyouts.

Apollo Global Management swung to a huge $1.1 billion loss in economic net income during the 3rd quarter, compared to a $315 million profit during the third quarter a year ago, and a $140 million gain in the second quarter. The loss was substantially worse than analysts had expected, with investors responding on the day of its earnings announcement by driving down the firm’s shares by more than 6 percent. Apollo’s shares have lost 27 percent since they went public at $19 at the end of March.

Apollo’s assets were $65.1 billion at the end of September, up 13 percent from a year ago. However, assets were down nearly 10 percent from the $72 billion under management at the close of the second quarter. Along with KKR, Apollo’s assets will benefit from its contract with Texas Teachers’ to manage $3 billion of the pension’s money.

Apollo said it was keen to capitalize on opportunities from Europe’s debt crisis, particularly with regard to the region’s banks. The firm said it likely would spend some of its $9.4 billion in dry powder on bonds that Europe’s giant banks are looking to dump in order to recapitalize their balance sheets. Apollo said it earned $300 million from such investments in the third quarter.

Rounding out the four publicly traded firms was Fortress Investment Group, whose revenues derived from private equity and hedge funds. In the 3rd quarter, the firm saw pretax distributable earnings (the measurement it uses to report operating results) fall by 45 percent to $43 million, compared to the $72 million that the firm reported in the quarter a year ago. Distributable earnings stood at $46 million in the second quarter of this year.

Assets at Fortress were $43.6 billion at the close of September, down slightly from the $44 billion that the firm managed a year ago. The firm’s assets were about even with the second quarter.

On a conference call, Daniel Mudd, the firm’s chief executive, succinctly summed up the landscape affecting his and other firms: “It was a pretty brutal environment from basically every single perspective.”