May 15 (Bloomberg) -- Blackstone Group LP, the buyout firm that went public at the peak of the takeover boom last year, posted an unexpected loss of $66.5 million as fees fell in every business, including deal-making, hedge funds and merger advice.

Revenue tumbled 94 percent to $68.5 million in the first quarter as Blackstone's share of profits from its investment funds turned negative, the New York-based company said today in a statement. The firm, run by Stephen Schwarzman, announced one leveraged buyout, valued at $1.2 billion, in the period, compared with $42 billion in deals a year earlier.

Blackstone was hurt by the evaporation of credit in the second half of last year that brought the LBO market to standstill, and by turbulent stock and bond markets that cut hedge-fund profits. Revenue from real estate funds plunged to $47.9 million from $766.8 million a year earlier, when property values were higher and results were pumped up by its purchase of Equity Office Properties Trust for $39 billion.

``Blackstone has been taking steps to put itself in position to take advantage of market dislocation, but this doesn't look impressive at all,'' said Jackson Turner, an analyst with Argus Research Corp. in New York who recommends clients buy Blackstone shares. ``Real estate was the biggest disappointment. I expected this segment to be the one saving grace this quarter.''

Economic net income, a measure that excludes some compensation costs, was a loss of 6 cents a share, compared with a profit of $838.5 million, or 75 cents, a year earlier. That missed the average estimate of 12 cents a share profit by 7 analysts Bloomberg surveyed.

Fall From IPO

Blackstone rose $1.04 to $20.54 at 4 p.m. in New York Stock Exchange composite trading after Schwarzman told investors the markets were showing ``signs of recovery.'' The stock has fallen 34 percent since its initial public offering in June, cutting the value of Schwarzman's stake to about $4.49 billion.

The stock's fall is more than three times that of the Bloomberg IPO Index, which tracks offerings during their first year.

``Everyone who thought that private equity and hedge funds would be the sexy new entrants has been sorely disappointed,'' said Benjamin Phillips, managing director of strategic analysis at New York-based Putnam Lovell, an investment-banking unit of Jefferies Group Inc. ``The key for these types of companies is they're going to have to diversify the sources of revenue and earnings.''

Blackstone had a net loss of $251 million, or 97 cents a share, including costs related to the vesting of executives' ownership stakes as part of the IPO. The company has said it will continue to post net losses during the next five years because of the vesting expenses.

Disappointing Stock

Blackstone's assets under management rose 37 percent to $113.5 billion from $83.1 billion a year earlier. Hedge-fund assets grew 80 percent to $56.6 billion, making it Blackstone's largest business by that measure. Real estate gained 35 percent to $26.3 billion, while private equity dropped 5 percent to $30.7 billion.

The company makes money by charging to manage those assets for clients, as well as by taking a cut of the profits generated by the funds, known as performance fees.

The corporate buyout unit posted negative revenue of $166.7 million in the quarter, compared with a positive $208.9 million a year earlier. The drop was driven by declines in the value of holdings, including its stake in publicly traded Deutsche Telekom AG, which forced Blackstone to reverse some performance fees.

Revenue from the hedge-fund unit fell 81 percent to $30 million as performance fees declines. Mergers advisory revenue fell 24 percent to $71.2 million.

Still `Some Pain'

Investment banks, the main source of debt financing for LBOs, have pared a $400 billion backlog of committed debt to about $150 billion. Still, they remain reluctant to fund deals as the U.S. faces a potential recession and the banks post losses related to subprime-mortgage lending.

``It's starting to loosen up, but you've still got some pain out there,'' said Paul Schaye, managing director of New York-based Chestnut Hill Partners, which helps buyout firms find investments.

Banks are becoming more cooperative on potential deals as the backlog decreases, Blackstone President Tony James said on a conference call with reporters.

``They are much more confident,'' James said. ``We are getting leverage from the banks now, but I wouldn't call it aggressive.''

Fortress Drops

Fortress Investment Group LLC, the private-equity and hedge-fund manager whose IPO preceded Blackstone's by four months, said May 8 its first-quarter profit dropped 74 percent. New York-based Fortress said unrealized gains on the companies it owns declined 55 percent to $765 million from the previous quarter. That's a sign that future income from fees may decrease.

Blackstone is moving deeper into non-private equity businesses, including hedge funds. Schwarzman, 61, and James earlier this year orchestrated the purchase of GSO Capital Partners LP for as much as $930 million to expand its business of buying distressed debt and leveraged loans.

Blackstone said May 13 it planned to start a fund in Asia designed to make investments around corporate events such as mergers and bankruptcies. The fund will be based in Hong Kong with employees in Tokyo, Mumbai and New York.

Blackstone bought 192 million shares in Deutsche Telekom from state bank KfW Group in April 2006 for 2.68 billion euros ($4.15 billion). The firm met about 15 percent of the purchase price with cash from its own fund and used debt to finance the rest. At the time, James described the former phone monopoly as a ``gold-plated'' company.

By the start of 2008, the value of Blackstone's holding had risen to 2.87 billion euros. Deutsche Telekom stock dropped 30 percent in the first quarter, erasing 850 million euros, or $1.3 billion, from the value of Blackstone's stake in three months.

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

Last Updated: May 15, 2008 16:49 EDT