Nov. 6 (Bloomberg) -- Blackstone Group LP, the world's largest private-equity firm, posted the biggest quarterly loss in 18 months as a public company as the financial crisis eroded the value of the businesses and real estate it has acquired.

The loss excluding some costs was $502.5 million, or 44 cents a share, compared with a profit of $234 million, or 21 cents, a year earlier, the New York-based company said today in a statement. The results were worse than even the most pessimistic analysts' estimates, sending Blackstone's stock down 12 percent.

Blackstone's profits have shriveled since Chairman Stephen Schwarzman took the company public in June 2007 at the peak of a two-year boom in leveraged buyouts. Tight lending markets have made it almost impossible to buy and sell companies. Blackstone and rivals have been forced to write down the value of the companies and property they own to match a global decline in prices for almost all types of assets.

``The environment was the worst they've had to experience as a public company,'' said Daniel Fannon, an analyst with Jefferies & Co. in San Francisco, who rates the stock ``hold'' and doesn't own it.

Blackstone wrote down its corporate holdings by about 7.5 percent and real estate investments by 9 percent, President Tony James said on a conference call with reporters. Since the beginning of the year, the firm has reduced the value of about a third of the 40 companies it owns, he said.

Recession Planning

Blackstone gathered managers of those companies recently in New York and told them to revise business plans for a more dramatic economic contraction, James said.

``We told them to go back to the drawing board for a much more severe recession,'' he said.

Executives declined to discuss writedowns on specific companies. Blackstone's biggest holdings include Hilton Hotels Corp., Freescale Semiconductor Inc. and Michaels Stores Inc.

Blackstone highlights economic net income, a nonstandard measure of profit that excludes compensation costs tied to the IPO. On that basis, it had been expected to break even, based on the average estimate of seven analysts in a Bloomberg survey.

The IPO expenses will result in net losses in its first five years as a public company. Blackstone's net loss widened to $340.3 million, or $1.27 a share, from $113.2 million, or 44 cents, a year earlier.

Blackstone fell $1.05 to $7.55 at 4:03 p.m. in New York Stock Exchange composite trading. Blackstone's stock has fallen 76 percent since the IPO, compared with the 41 percent decline by the Standard & Poor's 500 Index.

Fee Reversals

Fees from managing money and advising clients rose 36 percent to $447.4 million as the value of assets climbed 18 percent to $116.3 billion. They were wiped out by a reversal of fees tied to fund performance and losses on investments.

Performance fees were a negative $416.1 million, compared with a positive $149.9 million a year earlier. The firm had a loss on investments of $191.6 million, compared with a gain of $47.3 million a year earlier.

Blackstone reported losses of $309.6 million in its real estate business compared with a profit of $57.1 million a year earlier. The firm had a loss of $126.5 million in its private equity business compared with last year's $148.2 million profit. The marketable alternative asset management unit, which includes its hedge funds and funds of funds and is Blackstone's largest by assets, had a loss of $134.3 million compared with last year's $73.1 million profit.

Earlier this week, KKR & Co. LP 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

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.

3i Group Plc, Europe's largest publicly traded private- equity firm said today it had its first drop in asset values in five years. The London-based firm's asset value dropped to 1,019 pence a share in the six months ended Sept. 30 from 1,077 a share, according to a statement.

``Every private-equity company that I cover values their investments in a different way, said Jackson Turner, an analyst at Argus Research in New York who suggests clients buy the stock.

Fund Raising Slows

Blackstone and KKR also are struggling to persuade investors to pour money into new pools of capital. 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.

Blackstone's advisory business was the only unit to report a gain. Profit from advising clients on mergers and restructuring almost tripled to $61.1 million from $20.8 million a year earlier.

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.

``This is actually, from a historical perspective, a very interesting time to be investing capital,'' Schwarzman said on a conference call with analysts today. ``I believe that Blackstone itself will make some of its best investments these next few years.''

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Gillian Wee in New York at gwee3@bloomberg.net.

Last Updated: November 6, 2008 16:16 EST