Blackstone Stays Optimistic Despite Red Ink

The Blackstone Group’s stock is down nearly 40 percent from its IPO price and the firm just turned another quarter of losses, stemming largely from compensation charges related to that massive $4.13 billion initial public offering. Red ink is expected to flow for another five years.

Nevertheless, executives were fairly upbeat earlier this month in a wide-ranging conference call to discuss the company’s second-quarter performance. The frank comments, along with a flood of performance numbers, offered valuable insight into the operations and expectations of an industry stalwart.

Accessing conditions in the buyout business, Tony James, Blackstone’s president and chief operating officer, acknowledged that heavy borrowing is still difficult but also contended that credit markets have opened up again to some extent, providing impetus for deal-making.

“This has driven a pickup of activity, although transaction size remains limited,” James said. “Pricing [of] assets, particularly in the U.S. and Asia, is lower and the number of opportunities is substantial.”

Blackstone has committed to 22 new private equity investments in the past 13 months—the period since market turmoil began last summer, according to James, who said this represents “a near record pace” for any similar period in the firm’s history. Blackstone is getting nearly $8 billion of equity capital into these new investments, he added.

GSO Capital Partners, the debt specialist that Blackstone acquired in March, got plenty of play on the call. This reporting period marked the first full quarter that included GSO Capital’s results, and revenue for the alternative asset management group that it’s a part of jumped 34 percent to $225.2 million.

“For GSO, this is a fantastic period,” James said. “It has raised almost $5 billion of new capital this year, including four new CLOs. We believe we are one of the very few firms who have the investor following to be able to raise new CLOs in this market…”

James also pointed to a $2 billion mezzanine fund that GSO Capital closed in the quarter: “The timing of this fund is propitious, as they’re awash in opportunities because the public market for subordinated debt is effectively shut down.” Later in the call, James lauded the role that GSO Capital played in financing Blackstone’s deal with General Electric’s NBC Universal and Bain Capital to purchase The Weather Channel. That transaction, announced in early July, is worth roughly $3.5 billion, according to media reports.

“Weather Channel is the largest new private equity deal of the year in the U.S. and was done despite the market for subordinated debt being effectively closed because we were able to secure $450 million of mezzanine debt from GSO, as well as a portion of the senior debt facility,” he said.

Another reason for optimism may be the company’s formation of a new business group to focus on investments in the cleantech energy sector. That announcement came on August 7, a day after the company’s second-quarter report was released. Blackstone tabbed James Kiggen to lead the team. Kiggen, previously a senior vice president at AllianceBernstein LP, brought two other executives from that company over to Blackstone. Although it wasn’t specifically disclosed in Blackstone’s press release, PE Hub, the sister Web site of Buyouts, reported the company is raising a dedicated cleantech fund.

Asked about limited partner nervousness, James, whose firm is in the market with a new buyout fund, gave the veteran’s response, citing the cyclical, at times absurdly so, nature of the buyout game.

He referenced industry data showing that difficult times are usually the best ones to be putting capital to work, and that the worst times to do it are at the peaks, such as. late 2006, early 2007. Conversely, the peaks are when it’s easiest to raise money.

“It’s been like that since the industry started in the early ‘80s,” he said.