Blackstone Group LP, the world’s largest private-equity firm, posted an unexpected third-quarter loss on an 11 percent drop in the value of its buyout holdings and forecast stagnant economic conditions into 2012.
The company, led by Chairman Stephen Schwarzman, faced a volatile market in the third quarter as global stocks fell 18 percent, putting “on hold” most plans for initial public offerings of portfolio companies, Blackstone President Tony James said today on a conference call. Unsettled markets helped deals in real estate, debt financing and in Europe.
“The main effects were increasing the investment opportunities and lowering the exit opportunities,” James said. For 2012, “our general economic view is stagnation, slow, not falling apart, but certainly not much in the way of growth. I candidly expect a continuation of the environment we’re in.”
Economic net income, a measure of earnings excluding some costs tied to the firm’s initial public offering, showed a loss of $341.9 million, or 31 cents a share, compared with a profit of $339.3 million, or 31 cents, a year earlier, New York-based Blackstone said today in a statement. That missed the 1-cent average profit estimate of 13 analysts surveyed by Bloomberg, with forecasts ranging from a 41-cent loss to a 39-cent gain.
Worldwide, the value of leveraged buyouts fell 33 percent to $23.2 billion in the third quarter from the second, data compiled by Bloomberg shows, amid signs that banks were hesitant to finance deals because of Europe’s debt crisis and a slowdown in U.S. economic growth.
Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. Publicly traded rivals KKR & Co. and Apollo Global Management LLC are scheduled to report results next month.
“The third quarter presented extremely challenging market conditions, dominated by risk aversion and volatility,” Schwarzman said in the statement. “Our earnings were not immune to the sharp downward trajectory of global markets.”
U.S. and European valuations have “rebounded” since Sept. 30, the firm said in the statement.
Hilton Worldwide, The Weather Channel and Vanguard Health Systems are among 70 companies owned by Blackstone funds. The portfolio has combined annual revenue of about $115 billion, Schwarzman said today on a conference call with investors, and the firm estimates aggregate sales grew 10 percent to 12 percent in the third quarter.
“In terms of new investments conditions remain favorable for us,” Schwarzman said. “Given significant distress in the system and the short supply of opportunistic capital, we expect these conditions to persist for several years.”
Blackstone has invested more than $7 billion in real estate this year, and has raised $4 billion for its latest property fund that the firm expects to exceed $10 billion, Schwarzman said.
European banks are “now really starting to liquidate real estate assets,” he said.
Blackstone rose 1.6 percent to $13.45 at the close in New York. The stock has declined almost 5 percent this year, and trades at less than half its 2007 IPO price of $31 a share.
Performance fees, which include the company’s portion of profits from investments known as carried interest, were a negative $456.3 million, erasing gains recorded in earlier quarters. Investment income was a negative $100.4 million, compared with a gain of $141 million a year earlier.
Emdeon, Jack Wolfskin
Fee-earning assets under management rose to $132.9 billion from $129 billion on June 30.
Blackstone’s economic net income doesn’t comply with U.S. generally accepted accounting principles. The net loss under those standards was $274.6 million in the quarter versus a loss of $44.4 million a year earlier.
During the third quarter, Blackstone agreed to buy Emdeon Inc. for about $3 billion, taking the health-care billing firm private again after two years as a public company. The firm also acquired Jack Wolfskin, a German outdoor clothing company, and Mint Hotels, with eight properties in the U.K. and Europe.
The firm had a record high $33.4 billion of uninvested capital, known as “dry powder,” as of Sept. 30.
Blackstone yesterday said it’s buying a stake in German camera maker Leica Camera AG, and said Oct. 16 it agreed to acquire Antares Restaurant Group, the New Zealand franchiser of Burger King, from Sydney-based Anchorage Capital Partners. Earlier this month, the firm’s credit investment arm GSO Capital Partners LP bought Dublin-based Harbourmaster Capital Management Ltd. to increase its European loan holdings.
Leveraged-loan financing is “pretty healthy” in the U.S., James said, noting that Blackstone’s recent Emdeon debt deal was done at better interest rates and more capital than underwritten, and that most major banks are “open for business.”
“There’s a limit to the size of course,” James said. “Europe is much, much tougher. It’s tough to get debt financing in Europe, and the scale is much more limited.”
Schwarzman, who founded Blackstone in 1985 with Peter G. Peterson and is ranked 66th on the Forbes list of richest Americans, has expanded the firm’s non-LBO businesses such as fund-of-hedge funds, publicly traded debt vehicles, and restructuring advice.
Taxes and Inflation
Private-equity firms get 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 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.
The private-equity industry is likely to be heavily criticized during the U.S. presidential campaign should Mitt Romney win the Republican nomination, James said. Romney was one of the founders of Boston-based buyout firm Bain Capital LLC.
“This is inevitably going to be an extremely negative campaign,” James said. “One of Mitt’s vulnerabilities has been attacking him on private equity,” and “I think it will be villainized by the Democratic machine, and I think it will be terrible for the industry and I’m not looking forward to it.”
James said he expects increased taxes, government spending cuts “and probably inflation” as federal deficit issues are tackled.
“I think all of the affluent people in America will have higher taxes, and I think they should pay more,” James said on the media call. “Don’t tell Steve I said that.”