Blackstone Second-Quarter Profit Jumps 89% on Buyout Returns

Jul 17, 2014 4:43 pm ET

(Updates with Hilton profit in eighth paragraph.)

July 17 (Bloomberg) -- Blackstone Group LP, the world’s biggest manager of alternatives to stocks and bonds, said second-quarter profit surged 89 percent as rising markets boosted the value of holdings and the firm began collecting profits from its biggest buyout fund.

Economic net income, a measure of earnings excluding some costs tied to the firm’s 2007 initial public offering, rose to $1.33 billion, or $1.15 a share, from $703.2 million, or 62 cents, a year earlier, New York-based Blackstone said today in a statement. Analysts had expected earnings of 72 cents a share, according to the average of 15 estimates in a Bloomberg survey.

Blackstone, under Chief Executive Officer Stephen Schwarzman, has been the most successful leveraged-buyout firm to expand beyond takeovers and into real estate, credit and hedge funds. After striking fewer deals in 2013 than the firm wanted to, Blackstone has been the most active alternative-asset manager this year, committing and deploying more than $8 billion of equity to transactions, according to Credit Suisse Group AG research.

“Blackstone reported a strong quarter which exceeded expectations across all major categories,” Jason Weyeneth, an analyst at Sterne Agee & Leach Inc. in New York, said today. “Despite a strong run leading into today’s print, we expect these results to fuel further upside,” Weyeneth said of the company’s stock.

SeaWorld, Merlin

Blackstone rose 0.5 percent to $34.14 at the close of trading in New York, and has gained 8.4 percent this year. The stock more than doubled in 2013 as the firm prepared holdings such as Hilton and SeaWorld for profitable exits.

The firm has taken advantage of record markets to sell stakes in companies, including Hilton Worldwide Holdings Inc., SeaWorld Entertainment Inc. and Merlin Entertainments Plc, giving Blackstone its most profitable first half of the year ever.

Its outlook for collecting earnings in cash was boosted by the performance of the $21.7 billion Blackstone Capital Partners V fund, which was raised from 2005 to 2007 and is the largest buyout pool ever. The fund, which suffered from years of sluggish performance during the financial crisis, crossed an 8 percent internal rate of return threshold in the second quarter, enabling Blackstone to collect performance fees at an accelerated rate.

Hilton Profit

Hilton, a major holding in the BCP V fund, is set to produce the biggest private-equity gains in the industry. Blackstone plowed $6.5 billion of equity from two funds into the deal, which suffered as international travel shrank during the global financial crisis and recession. As occupancy rates and room prices have rebounded, the equity portion has swelled to more than $18 billion.

Blackstone is seen as a bellwether for the buyout industry given its size and reach across markets. KKR & Co., the New York-based firm run by cousins Henry Kravis and George Roberts, is set to report second-quarter results next week, followed by Carlyle Group LP on July 30.

Blackstone’s private-equity portfolio appreciated 8.4 percent in the second quarter, compared with the 4.7 percent advance in the Standard & Poor’s 500 Index of large U.S. companies. Carlyle, which discloses its quarterly fund performance before its earnings, said its private-equity funds gained 5 percent during the same period.

Buyout Economics

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, overhaul and then sell them. The funds are returned with a profit to investors in the cycle, which lasts about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.

By selling assets, Blackstone earned $771 million in distributable earnings, more than double the cash available to shareholders in the second quarter last year. The firm said it will pay stockholders 55 cents a share on Aug. 4.

Blackstone continued to grow, with new fundraising boosting assets under management to an industry record $278.9 billion from $271.7 billion at the end of the first quarter. Executives at the firm’s investor day last month said they plan to begin raising new global buyout and real estate funds next year.

Blackstone’s economic net income, or ENI, differs from U.S. generally accepted accounting principles. Under those standards, known as GAAP, Blackstone had net income of $517 million, compared with $211 million a year earlier.

Different Deals

Worldwide, the value of private-equity deals announced in the second quarter rose 62 percent to $168 billion from the same period last year, according to data compiled by Bloomberg. The number of deals rose 8.7 percent to 1,831 in the same period, the data show.

Blackstone has been more selective in choosing buyouts as rallying stock markets have made potential investments more expensive. President Tony James said today on a conference call with investors and analysts that the firm is choosing to do more growth-equity investments and deals in which it’s building assets such as power plants, wind farms or oil pipelines.

“There’s a lot of stuff going for too high a price, driven by too much leverage,” James said. “Our job is not to chase those. We’re finding a lot of good opportunities in companies that need capital to grow.”