UPDATE 5-Blackstone earnings fall 86pct in tough market

(Adds analyst comment, paragraphs 3,9)

By Megan Davies

NEW YORK, March 10 (Reuters) - U.S. private equity and real estate company Blackstone Group LP (BX.N) posted a worse than expected 86 percent decline in earnings on Monday, citing tough market conditions and a write-down of bond insurer FGIC, and said it would probably be 2009 before conditions improve.

But the company's shares closed nearly 3 percent higher in a declining market on relief that Blackstone's problems weren't deeper than some had feared.

"If anything, they had a major business (FGIC) that they wrote down to pennies and they still produced positive results, and they paid their 30 cent cash distribution. It could have been much worse." Matthew Fischer, analyst at Deutsche Bank, said.

Under a measure known as economic net income (ENI), Blackstone earned a fourth-quarter profit of $128.2 million, or 8 cents a share, compared with $894.9 million, or 72 cents, a year ago. Analysts expected it to report 16 cents ENI a share according to Reuters Estimates.

ENI refers to net income excluding income taxes, noncash charges related to vesting of equity-based compensation and amortization of intangible assets. Blackstone prefers to focus on ENI because of the huge payouts associated with its more than $4 billion initial public offering in June.

On a basis of generally accepted accounting principles, Blackstone posted a net loss of $170 million, compared with net income of $1.18 billion a year earlier.

Blackstone said ENI was hit by writing down the value of its portfolio investment in Financial Guaranty Insurance Co, which was hit by turmoil in the credit markets, to "a few cents on the dollar". It reduced the value of its investment in FGIC by $122.2 million.

The company's shares started Monday down more than 4 percent but ended up 2.88 percent at $15.

"We think they are going to get through this," said Fischer. He said there would be a few quarters which would be rough going but the company was still paying out a cash distribution.

Blackstone said it would pay $1.20-per-share cash distribution each year to investors through 2009.

It said it would likely report GAAP losses for the next five years because of noncash compensation charges resulting from the IPO but these wouldn't impact cash earnings.

The company also gave greater clarity about its earnings, saying that in a "normal" year its ENI per share could be between 60 cents a share and $2.50 a share.

Blackstone's Chief Operating Officer Hamilton James said on a conference call that he saw the tough market conditions persisting for most of 2008, possibly getting worse in the short term, and said it would probably be 2009 before there is much improvement.

"Credit market problems persist and if anything have got worse," James said. "It's pretty clear that the basic economy is shrinking.

That would cause Blackstone to hold back on selling investments, he said. But, while credit was "almost nonexistent for large leveraged transactions," James said Blackstone was still finding investment opportunities and that it was making $4 billion to $5 billion of new equity investments a year.

It is looking at deals such as minority investments in companies that need capital to grow, strategic acquisitions for some of its portfolio companies and investments in companies in Asia and other emerging markets.

In addition, the firm said it sees an increase in its M&A advisory business, which is currently advising Microsoft Corp (MSFT.O) on its pursuit of Yahoo Inc (YHOO.O).

Blackstone's assets under management rose 47 percent on the previous year to $102.43 billion, of which its real estate assets doubled to $26 billion.

The company changed the private equity landscape by going public in June. But since the IPO, Blackstone's shares have lost about half their initial offering price of $31. (Additional reporting by Jonathan Keehner, editing by Phil Berlowitz, Leslie Gevirtz)