Blackstone Sees More Exits, Fewer Deals

  • Pace of realizations to step up
  • M&A market remains slow
  • Hot credit markets a negative

The firm scored $12.6 billion of realizations in 2012, with half of that coming in the fourth quarter, Stephen A. Schwarzman, Blackstone’s chief executive, told investors on an earnings call with stock analysts. That is likely to be the start of a stronger environment for exits, he said. “We expect this year and next year to be substantially higher for realizations than in the past few years.”

Hamilton E. “Tony” James, Blackstone’s president and chief operating officer, made much the same point in a separate call with reporters. In particular, he said the firm experienced a sharp uptick in real estate realizations in the fourth quarter. “2013 should be a higher year for realizations in general,” James said. “2014 should be another good year.”

But in terms of putting additional capital to work, the firm may face another slow year, for a variety of reasons. James described current conditions as a “slightly slower deal environment than we would like,” while Schwarzman said that “general M&A activity is not all that high right now, and similarly equity markets have come up and yields are low. It’s not an easy environment to put a lot of money out.”

The slow recovery from a deep recession has prompted business owners to hold off on key decisions, while low interest rates provide troubled companies an opportunity to restructure their own finances rather than turning to outside investors, the executives said. In that context, low interest rates are not a benefit, James said. “Hot credit markets are more of a negative than a positive. They drive prices up.”

In the fourth quarter, Blackstone’s economic net income, its preferred measure of reporting earnings, rose 43 percent to $670 million, while revenue rose 33 percent to $4.1 billion. On a per-share basis, ENI of 59 cents topped analyst consensus estimate by 13 cents. The firm’s assets under management stood at $210 billion at year-end, an increase of 26 percent from a year earlier. Much of Blackstone’s growth came from relatively new investing strategies, including real estate, credit and hedge funds.

Lower interest rates are influencing the firm in another way, James mused. Many of Blackstone’s funds have hurdle rates that are typically at 8 percent, representing the return that limited partners must receive before the general partner can begin taking its cut of profits. Those hurdles historically were set to guarantee investor returns compared to risk-free instruments such as U.S. Treasury bonds, but Treasury yields have been on the decline for 30 years. As a result, James said. “You are a bit incentivized to roll the dice and go for higher risk. I’m not sure that’s in the LPs’ interest.”

“Most investors would be really happy today with 8 percent long term,” James said, suggesting that a lower hurdle rate might be more appropriate. “We’re talking with LPs about it.” But, he added: “The chance of lowering that hurdle is not that high.”