Nov. 5 (Bloomberg) -- Blackstone Group LP, manager of the world's largest buyout fund, may report its smallest profit since going public last year as the financial crisis cut fees from leveraged buyouts, real estate investments and hedge funds.

The firm probably will post third-quarter profit tomorrow of 5 cents a share, excluding costs tied to its initial public offering, based on the average estimate of eight analysts in a Bloomberg survey. The New York-based company, run by co-founder Stephen Schwarzman, earned $234 million, or 21 cents, a year earlier.

``It'll be awful,'' said Roy Smith, a former Goldman Sachs Group Inc. partner who's now a finance professor at New York University's Stern School of Business. ``Nobody anticipated how badly the market would go.''

Blackstone's buyout business struggled in the quarter as risk-averse banks and investors refused to finance most acquisitions, while the cooling of the commercial real estate market hurt property investments, analysts said. Fees from hedge funds, which propped up earnings in the first half of the year, probably declined amid falling markets and client redemptions.

The highest estimate for the quarter is a gain of 16 cents, while the lowest is for a loss of 11 cents. The company earned 15 cents in the second quarter and reported a loss of 6 cents in the first three months of the year.

KKR Preview

KKR & Co. LP earlier this week gave investors an idea of the losses being absorbed by private-equity funds as falling stock markets and shrinking economies forced it to write down the value of some of its biggest leveraged buyouts.

KKR Private Equity Investors LP, the firm's publicly traded fund in Amsterdam, reported on Nov. 3 that the value of its investments dropped 15 percent to $3.87 billion in the third quarter, driven by markdowns on stakes in companies including the former TXU Corp. and NXP BV.

``Companies around the world in all industries are facing reduction in valuations,'' George Roberts, co-founder of New York-based KKR, told investors on a conference call.

Blackstone, founded in 1985, went public in June 2007, just before the two-year buyout boom faded. Announced private-equity deals fell more than 70 percent to $198 billion during the first 10 months of this year from the same period in 2007, according to data compiled by Bloomberg.

The stock has fallen 71 percent to $9.03 since the IPO, more than twice the decline of the Standard & Poor's 500 Index. That wiped out $24 billion of market value.

Price/Earnings

Blackstone is trading at 8.7 times estimated profit for 2009, compared with 12.7 times for the companies in the S&P 500. New York-based Goldman, the most profitable securities firm, trades at 7.5 times estimate earnings.

Blackstone's performance has tamped enthusiasm of other large private-equity firms to go public. KKR said this week it would delay its acquisition of KKR Private Equity Investors, which would result in it listing shares in New York.

Apollo Global Management LLC, the private-equity firm managed by Leon Black and Joshua Harris, said it plans to list shares in New York this year, following an offering on Goldman's private exchange last year. No date has been set for the Apollo listing.

Barclays Capital analyst Roger Freeman told clients in a research note that he expects a loss of 5 cents a share on the basis of economic net income, a measure of net income that excludes income taxes and compensation-related charges.

Not Immune

``While Blackstone's fund of hedge funds business has historically remained focused on higher returns with lower volatility, we believe the company may not be immune to negative returns and redemptions in the industry,'' Freeman wrote in a Nov. 4 note. He rates the shares ``neutral'' and doesn't own them.

Freeman estimated a $102 million loss in Blackstone's private-equity business, a loss of $34 million in real estate and a profit of $37 million in the marketable alternative asset management unit, Blackstone's largest by assets.

Commitments to private-equity funds fell to a three-and-a- half year low of $82.3 billion in the third quarter, according to researcher Private Equity Intelligence Ltd. in London. That lack of activity, tied to a dearth of financing for new transactions from investment banks struggling to survive, is affecting fund-raising for private-equity firms.

Harvard University's $36.9 billion endowment is among the institutional investors in talks to reduce its private-equity holdings amid the deal slump, according to a person familiar with the discussions.

Blackstone has focused on smaller deals amid scarce credit, including its recently closed purchase of Apria Healthcare Group Inc. for $1.7 billion. Blackstone also teamed with Bain Capital LLC and NBC Universal to buy the Weather Channel for about $3.5 billion.

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: November 5, 2008 00:01 EST