Blackstone sees tough market for realisations

The firm’s $48bn PE business is unlikely to see a ‘wave’ of realisations given market conditions, president Tony James admitted, as Q2 net income fell by 75% from last year's figure.

An out of sorts public market and a lack of M&A activity has created a difficult environment for The Blackstone Group’s private equity business to realise investments, firm president Tony James said in an earnings call Thursday. 

“There are always some realistions that percolate along. But I don’t think you should expect a big wave of realisations in the private equity side when the stock markets are weak, IPOs are hard and there’s no M&A market to speak of,” James said. “One of the most powerful things about our business model is … our investors can’t force redemptions at the most awkward time, which tends to be their kneejerk reaction.”

“I don’t … know any objective observer that would look at today and say it’s a good time.”

I don't think you should expect a big wave of realisations in the private equity side.

Tony James

Blackstone returned $403 million to its private equity investors in the quarter and generated $500 million in commitments for its new energy fund, targeting $3 billion. The firm’s private equity portfolio carrying value fell by 4.2 percent during the quarter, results James attributed to lower stock prices in its holdings – “which accounted for about three quarters of the drop” – and currency translation adjustments due to the strong dollar. 

Blackstone’s overall economic net income (ENI) growth fell dramatically in the second quarter of 2012 compared to the same period last year, according to its earnings report. The firm posted $212 million in ENI for the quarter, a sharp drop from the $804 million it generated last in the second quarter of 2011. 

“This decline stemmed from a drop in unrealised performance fees, due to this year’s deteriorating stock and bonds market around the world, as well as the weak Euro in the second quarter,” James said.  

There were, however, some bright spots in the report. Blackstone’s credit business saw a strong surge in fee-earning assets under management, largely due to the acquisition of Harbourmaster as well as organic fundraising – the firm hit its $4 billion cap for its second mezzanine fund. 

“Credit is our fastest growing business. And the markets that they play in are just gargantuan in comparison to the size of leveraged buyouts or whatnot,” James said. “There’s nothing like a historic meltdown to create a lot of distressed creditors to pick amongst.”

Another element of the firm’s business that has grown significantly over the last year has been managed accounts. The California Public Employees’ Retirement System committed $500 million to a managed account operated by Blackstone in May, just months after the New Jersey Division of Investments committed to a customised account through Blackstone Tactical Opportunities.

“The discussions about separately managed accounts are daily and across the board,” he said. “Since New Jersey, we’ve signed up a number of them. However, none of them of the scale of New Jersey, you know I wish we could sign up $2 billion accounts regularly.”

Signing up a couple hundred million dollars is not something that gets my blood going.

Tony James

Most of the accounts are in the several hundred million dollar range, James said, though he was unsure of how many accounts Blackstone has acquired because: “With an almost $200 billion AUM business, signing up a couple hundred million dollars is not something that gets my blood going.”

“All of our LPs are extremely important to us, I don’t want to imply they’re not. We just don’t track it regularly at the senior management level.”

Although many sources have cited favorable fee structures for LPs as one benefit for managed accounts such as those offered by Blackstone, James declined to say whether that was actually the case. 

“Depending on the investment strategy, the fees can be very similar – some of them are similar to long-only accounts, or long-only fees, which we consider to be lower than the typical alternative. Some of them can be the same as a fund that’s a parallel vehicle,” James said. “And in some cases, because they’re asking us to do more esoteric things, they’re actually above the typical fund fees. So it’s very hard to generalise on that.”