Woe is Private Equity

Blackstone Group, the world's largest public private-equity firm, posted a sizable quarterly loss today, shocking even the most pessimistic analysts' estimates.  The company posted a net loss of $340.3 million, compared with a profit of $234 million a year earlier.  I must admit that the only thing shocking about Blackstone's loss is that it isn't significantly higher.  According to Bloomberg's report on the earnings announcement, the company wrote down its corporate holdings by about 7.5% and its real estate investments by 9%.  Since the beginning of the year, the firm has reduced the value of about a third of the 40 companies it owns.  Seriously?  It has written down the value of ONLY one third of its portfolio?  I admit I haven't a clue as to what assets Blackstone owns, but I can throw out a few thoughts that might put it in perspective: 

• S&P and Dow down over 35% YTD
• Commercial real estate prices down at least 15-20%, although nobody even knows because NOTHING IS TRADING
• All LBO debt getting marked at around 70 cents on the dollar, although even this is highly suspect as very little is trading
• Zero financing available for any new deals

So really, are we sure that we only want to mark down that commercial real estate by 9% and the corporate portfolio by a mere 7.5%, or are we going to put the crack pipe down and start talking some real numbers?  If that weren't enough, as I mentioned in my last mockery of Blackstone back in May, the company expects to post net losses during the next five years due to vesting expenses.  Why anyone is willing to subsidize insane compensation costs just for a "piece of the private equity pie" is beyond me and yet people buy this stock.  Who are these people?  Even at $7.55 a share, who on earth thinks this is a good business model anymore and that the company's biggest losses are behind them?

The Wall Street Journal had a great story about Blackstone Group's LBO of Hilton Hotels completed roughly a year ago.  It is certainly worth a read for anyone who has forgotten how preposterous the private equity boom period became.  Blackstone put in $6 billion of equity, its largest investment to date, and financed the balance of the $26 billion takeover with debt.  Blackstone paid 13 times estimated 2008 pre-tax cash flow for the company (translation: steep.)  Mind you, this was five years into an economic boom that was already looking tired when the deal was done.  Currently, the hotel chain's closest rival, Starwood, trades at about seven times before-tax cash flow.  The best part, the part you're really going to love as a US taxpayer, is that $4 billion of Hilton's LBO debt now sits on the Fed's balance sheet and we own it.  Apparently the Hilton LBO debt is part of the $30 billion in illiquid assets that the Fed guaranteed for JP Morgan when JP bought Bear.  The funny thing is that Lehman also held some of the Hilton LBO debt when it went bankrupt.  No doubt the bankruptcy court is working on finding a bid for the garbage so that Lehman creditors can be repaid.  Maybe the Fed can buy it and add it to the kitty.

At least the backlash against the private equity community is in full swing.  President-elect Obama will more than likely try to increase taxes on private equity investors from the long term capital gains tax rate to the ordinary income rate.  But not to worry, these guys won't see capital gains again for a really long time.    

Blackstone Posts Loss That Confounds Analysts

Blackstone Group, the publicly traded asset manager widely known for its buyout business, reported a loss of $66.5 million attributable to declining fees in every single one of its businesses. The first-quarter loss, which excluded some compensation costs, was $.06 a share, compared to average estimates of $.12 a share profit that analysts had been expecting. Profits? From a private equity firm? Did the analysts' Wall Street Journal subscriptions expire in December? Blackstone completed exactly one leveraged buyout in the quarter for $1.2 billion, compared to $42 billion in deals the previous year. Furthermore, revenues declined by 94% in its real estate business and its buyout funds. The hedge-fund unit was the real performer with a revenue drop of only 81%. Those guys should expect a big fat bonus. Speaking of compensation, Blackstone's net loss was actually $251 million including costs related to the vesting of executives' ownership stakes as part of the initial public offering in June. Let's see, really lousy asset management performance, yet really high compensation costs. I'm sure if performance turned around, compensation would increase even more. Very interesting negative and positive correlation between compensation and performance. The company expects to post net losses during the next FIVE YEARS due to vesting expenses. Anyone who still wants to buy the stock after reading the last sentence may be interested in investing in a partially completed condo project I'm working on in Las Vegas. Please call me.

Blackstone loses $170m, Schwartzman regrets expensive birthday party

Actually only the first half of the headline is true.  Blackstone Group really did lose $170 million last quarter but I doubt if Steve Schwartzman regrets spending $3 million on his 60th birthday party, the highly publicized event on 2/13/2007 that curiously marked the end of the private equity boom.  Why do the earnings of the private equity group even matter?  Because its lousy earnings are a proxy for all private equity earnings.  Lousy earnings coupled with an impossibly difficult deal environment translate into fewer deals which lead to less business for Wall Street.  Less business for brokers means less fee revenue to help offset all the write-downs they have to take on their inventory.  This does not bode well for the quick recovery in bank earnings that most chipper analysts were expecting due to the fed interest rate cuts...