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The world’s largest private-equity firm Blackstone Group (NYSE:BX) announced a 24 percent drop in first-quarter profit Thursday morning due to slower gains in the value of its holdings, which hurt performance fees.
Economic net income — a measure of earnings excluding some costs related to the firm’s 2007 initial public offering — dropped to $432.3 million, or 39 cents a share, from $571 million, or 51 cents, in the year-ago period. Analysts has expected earnings of 40 cents a share.
Fund holdings appreciated at a slower pace compared to the previous year, causing performance fees to decline 37 percent to $384.8 million. Blackstone’s Chief Executive Officer Stephen Schwarzman has led a push to reduce reliance on buyouts through the expansion of the firm’s fund-of-hedge-funds businesses and its advisory group, which counsels companies on mergers and restructurings. Schwarzman has opposed carried interest, which is raising the tax on the share of profits given to private-equity managers, and has endorsed a flat tax as part of comprehensive reform of the U.S. tax code.
According to Goldman Sachs analyst Marc Irizarry, the firm is expected to see growth in credit and real estate following strong performance by both during the quarter. He asserts that the investment thesis depends on the firm’s ability to gather assets.
Blackstone Group’s assets under management increased 27 percent from a year earlier to $190 billion. The firm’s credit investment arm — GSO Capital Partners LP — completed raising $4 billion during the quarter for its second fund, which is twice the amount of commitments for its first.
Given the firm’s large size and reach across the markets, Blackstone is perceived as a leader in the buyout industry. Private-equity firms collect money from investors, including pension plans and endowments with a mandate. The firms use the money to buy companies within five to six years, overhaul then sell them, and return funds with a profit after about ten years. By using debt to finance the transactions and amplify returns, 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 New York-based firm KKR & Co. (NYSE:KKR) is scheduled to report results next week, while the private-equity firm Carlyle Group — preparing to go public next month — oversees about $147 billion.
The value of private-equity investments fell 41 percent to $53.3 billion worldwide, while leveraged buyout increased 7 percent to $22.1 billion.
Private equity has been a topic of debate in the media. Republican presidential front-runner and former governor of Massachusetts Mitt Romney was also the chief executive of Bain Capital LLC, a private-equity firm based in Boston. Opponents of Romney have accused him of improving his self-image at the expense of corporations and their employees.
Blackstone is politically diverse. Schwarzman — the 66th-richest American — endorsed Romney last year, while Blackstone President Tony James has agreed to hold a fundraiser for President Barack Obama this spring.
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