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Blackstone First-Quarter Profit Falls on Performance Fees

Blackstone Group LP (BX), the world’s largest private-equity firm, said first-quarter profit fell 24 percent as slower gains in the value of its holdings hurt performance fees.

Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, dropped to $432.3 million, or 39 cents a share, from $571 million, or 51 cents, a year earlier, New York-based Blackstone said today in a statement. Analysts had expected earnings of 40 cents a share, according to the average of nine estimates in a Bloomberg survey.

Performance fees declined 37 percent to $384.8 million as fund holdings appreciated at a slower pace compared with a year earlier, the firm said. Blackstone, led by Chief Executive Officer Stephen Schwarzman, has led a push among the largest, publicly traded private-equity firms to reduce reliance on buyouts, by expanding its fund-of-hedge-funds businesses as well as its advisory group, which counsels companies on mergers and restructurings.

“The investment thesis for these stocks rests on the firms’ ability to gather assets,” Goldman Sachs analyst Marc Irizarry said in a telephone interview before the results were released. “We expected to see growth in credit and real estate following strong performance by both during the quarter.”

Blackstone’s profit dropped even as the value of its private equity and real estate holdings rose. Private equity assets increased 4.9 percent in the quarter, while real estate gained 4 percent. In last year’s first quarter, real estate increased 8.7 percent.

Assets Rise

Blackstone fell 4.7 percent, the most in four months, to $14.14 at the close of trading in New York. The stock has gained less than 1 percent this year.

The company’s assets under management rose 27 percent from a year earlier to $190 billion. The increase helped boost management and advisory fees to $471.7 million from $412.7 million. The firm declared a dividend of 10 cents a share.

Blackstone has $38 billion of unspent committed capital and has deployed $2.3 billion so far this year, Schwarzman and Laurence Tosi, Blackstone’s chief financial officer, said on a conference call.

Blackstone’s credit investment arm, GSO Capital Partners LP, finished raising $4 billion during the quarter for its second fund, twice the amount of commitments for its first.

Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR & Co. (KKR), the New York firm run by Henry Kravis and cousin George Roberts, is scheduled to report results next week.

Carlyle IPO

Carlyle Group (CG), the Washington-based private-equity firm preparing to go public next month, oversees about $147 billion.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to use it to buy companies within five to six years, overhaul then sell them, and return funds with a profit after about 10 years. The firms, which use debt to finance the transactions and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.

Worldwide, the value of private-equity deals announced in the first quarter fell 41 percent to $53.3 billion from a year earlier, with leveraged buyouts increasing 7 percent to $22.1 billion, according to data compiled by Bloomberg.

‘Europe’s Problems’

“I’m not sure we’re going to have the most favorable environment for equity offerings in the next few months,” Tony James, Blackstone’s president, said on a call with reporters after earnings were released. “The stock market got ahead of itself in the first quarter and it’s correcting now, and Europe’s problems are going to become more obvious and it will continue to correct.”

Private equity has come under a public spotlight this year by opponents of Republican presidential front-runner Mitt Romney. The former governor of Massachusetts was also the CEO of Bain Capital LLC, the Boston-based private-equity firm. Romney’s opponents have accused him of enriching himself at the expense of corporations and their employees.

Schwarzman, who co-founded Blackstone in 1985 with Peter G. Peterson, endorsed Romney last year and held a fundraiser for the candidate at his Park Avenue apartment. Ranked the 66th- richest American by Forbes magazine, Schwarzman has opposed raising the tax on the share of profits given to private-equity managers, known as carried interest, and has endorsed a flat tax as part of comprehensive reform of the U.S. tax code.

“I expect the industry will take more blows from the campaign and more particularly from the PACs,” James said, referring to political action committees. “I’m not looking forward to it, and I don’t think it’s fair or right.”

James has agreed to hold a fundraiser for President Barack Obama this spring, according to two people familiar with the matter, diversifying the political bets for Blackstone.

To contact the reporters on this story: Devin Banerjee in New York at dbanerjee2@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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