Blackstone redirects focus to Asia, PIPEs

The Blackstone Group’s third quarter was “a little bit like A Tale of Two Cities”, its president, Tony James, said on the firm’s earnings call today.

Invoking Dickens’ famous “It was the best of times; it was the worst of times” line, James said the credit crunch has made it hard to set up mega deals as well as harvest existing assets, but it has also pushed Blackstone to pursue other types of investment activity that have proven profitable.

The firm has redirected capital once earmarked for mega buyouts to other regions, mainly China and India, and toward other types of deals such as minority investments through private investment in public equities, or PIPEs, he said.

The liquidity crisis has also forced Blackstone to move down-market: its average deal size out of the $21.7 billion Blackstone Capital Partners V includes an equity component of $500 million. That contrasts sharply to its activities before June, when the firm regularly closed multi-billion dollar deals such as its $3.3 billion acquisition of Pharmaceutical Technologies and its $2.16 billion buyout of Pinnacle Foods. This year the firm also completed its largest deal ever, the $39 billion buyout of Equity Office Properties.

But the shift down market will ultimately improve Blackstone’s returns, James said.

“Deal flow is up significantly and prices are down, so that bodes well both for activity levels and future returns,” he said.

Blackstone will also continue to make debt plays, which the firm mentioned as a new area

Tony James

of focus when it reported second quarter earnings. Since then, the backlog of leveraged buyout-related debt has cleared considerably, James said, although the subprime mortgage crisis is still a major problem.

“The mortgage black hole is … deeper, darker and scarier than what the banks thought,” James said.

Blackstone reported a year over year increase in revenues for the quarter, bringing in $526.7 million (€361.9 million) versus $461.5 million in the third quarter of 2006. Private equity revenues increased from $159.6 million to $227.3 million.

The firm recorded a net loss, however, of $113.2 million, compared to a net income of $372.5 million during the same quarter last year. The firm attributed $802.6 million of the loss to non-cash charges associated with its June initial public offering.

Blackstone's stock currently trades at $22.72 per share, down from its IPO price of $31.00.