Alternative investment giant Blackstone Group saw its profits fall by more than a quarter last year in US GAAP terms and recorded a net loss of USD170m for the fourth quarter, the company
Alternative investment giant Blackstone Group saw its profits fall by more than a quarter last year in US GAAP terms and recorded a net loss of USD170m for the fourth quarter, the company reported in its first set of annual accounts since going public last summer.
Blackstone’s revenues rose by 17 per cent to USD3.05bn, up from USD2.46bn in 2006, and its pro forma adjusted economic net income for the year amounted to USD2.12bn, up from USD1.68bn.
However, listing costs pushed its expenses to USD2.76bn, including non-cash charges of USD1.88bn, from USD553.1m the previous year. Blackstone’s net income under GAAP accounting rules fell from USD2.62bn to USD1.62bn.
Blackstone notes that as a result of a significant amount of future vesting of equity interests held by senior employees, the company will continue to show significant non-cash compensation charges that are likely to result in GAAP net losses for the next five years, but will never have any impact on cash earnings.
However, the company said its businesses had been affected by conditions in the financial markets and economic conditions in the US, western Europe, Asia and to some extent elsewhere in the world in the second half of 2007 as concerns over the weakness in the US housing market and sub-prime mortgage market led to deteriorating conditions in fixed-income markets.
‘Debt underwriting declined and the backlog resulting from pending private equity-led transactions for the industry grew to record levels,’ Blackstone reported. ‘Beginning in the second half of 2007, this backlog, coupled with other poor-performing fixed-income securities and rising credit losses, has materially hindered lenders’ willingness to fund new, large-sized acquisitions.
‘As a consequence of reduced borrowing ability, the volume of new private equity acquisitions has materially declined. Recently announced private equity-led acquisitions have mostly been smaller in size, with less leverage and less favourable terms for the debt provided. This environment has had an adverse impact on the pace of new investments, the level of transaction fees and the rate of appreciation of Blackstone’s portfolio investments.’
Chairman and chief executive Stephen A. Schwarzman says: ‘While full-year revenues, economic net income and assets under management reached record levels in 2007, the operating environment in the second half of the year presented significant challenges.
‘Declining equity and fixed-income markets negatively affected the valuations of the portfolio assets of the corporate private equity, real estate and marketable alternative asset management segments and led to lower carried interest and incentive fee revenues, but did not adversely affect our financial advisory segment.
‘Lack of available financing in the US and Europe for large leveraged transactions limited our transaction fees. Difficult market conditions in the US and Europe continue in 2008 and there is little visibility on when these conditions might improve.
‘However, despite the meltdown in the credit markets, we have made eight new private equity commitments since the credit crunch representing USD2.7bn of equity and we expect to continue to see new investment opportunities, particularly in Asia. We will remain disciplined in our approach and will opportunistically purchase well priced assets throughout the globe.’
The group’s corporate private equity business reported revenues of USD821.3m, down 18 per cent from USD999.4m in 2006, largely as a result of a decrease in performance fees and allocations resulting from a lower increase in the net carrying value of underlying funds’ portfolio investments. The net value of the underlying portfolio investments increased by 16 per cent, compared with an increase of 30 per cent in 2006.
Blackstone said it had reduced the value of its portfolio investment in Financial Guaranty Insurance Company, a monoline financial guarantor, which accounted for USD122.2m, or 69 per cent, of the decline in revenues for the year. Management fees declined USD36.4m, principally due to less capital being invested in fee-generating transactions.
The group’s real estate business reported revenues of USD1.30bn, up 48 per cent from USD878.5m in 2006, driven by growth in management fees of USD306.6m that was boosted by the acquisitions of Hilton Hotels and Equity Office Properties Trust during 2007.
