UPDATE 4-Blackstone profit triples, stock pares gains

(Adds analyst's quote, background, KKR)

By Michael Flaherty and Jeffrey Goldfarb

NEW YORK/LONDON, Aug 13 (Reuters) - Private equity firm Blackstone Group (BX.N) said on Monday second-quarter net income more than tripled on fees and profits from its leveraged buyouts.

The results initially led to an 8 percent rise in Blackstone's shares, but the stock pared gains after a broad stock market sell-off and a warning from rival Kohlberg Kravis Roberts & Co.

Blackstone shares -- technically called units because of its partnership structure -- closed up 1.7 percent at $25.71. The private equity firm debuted on the New York Stock Exchange in June at $31 per share.

Blackstone said net income climbed to $774.4 million from $224.1 million a year earlier in its first quarterly earnings report as a public company. Excluding amortization, goodwill and other noncash charges, earnings rose to 46 cents a unit from 11 cents.

Analysts on average had expected 40 cents, according to Reuters Estimates. Revenue also tripled to $975.3 million, but missed Wall Street expectations of $991.54 million.

Blackstone's results come amidst worries about the private equity industry, which has been paralyzed by problems in the credit markets.

But the favorable U.S. economic environment in the first half of the year and the firm's broad range of businesses -- from hedge fund investing to asset management to corporate advisory -- allowed it to report a quarterly performance that initially pleased investors.

"I think Blackstone's numbers will alleviate some of the concerns that the LBO cycle is over," said James Ellman, president of Seacliff Capital, a fund that manages $200 million and invests mainly in financial services stocks.

Ellman added that the leveraged buyout business is harder now than it was three months ago, and that Blackstone's outlook is not as bright as it would have been a year ago.

Ellman said the paring of gains in Blackstone's stock on Monday was due mainly to a broad weakening in financial services shares. Shares of Goldman Sachs fell nearly 2 percent to $177.50.

Shares of private equity and hedge fund company Fortress Group (FIG.N) rose 7.7 percent to $20.57 on Monday, trading up as much as 10 percent earlier in the day.

Also on Monday, private equity firm KKR said in a regulatory filing that current difficulties in the debt markets could hurt its returns and overall income. To read more please click on [ID:N13364978].

TOUGHER DEAL CLIMATE

Blackstone President Hamilton James expressed sentiments similar to those of KKR.

James said on a conference call with analysts on Monday that Blackstone was finding it more difficult to locate new deals as credit markets tighten, which will affect near-term results.

He also said Blackstone was prowling credit markets for opportunities because it may be able to find better returns by buying discounted debt on leveraged buyouts than it could by acquiring the equity.

A symbol of American super-wealth amid a global mergers and acquisitions boom, Blackstone raised net proceeds of about $7.5 billion from its initial public offering in late June and from a stake purchased by the Chinese government. But deal activity has slowed considerably since then.

Blackstone Chairman Stephen Schwarzman said in a statement that challenging financial conditions that started in the last week of the second quarter continued to weigh on the company. He cited turmoil in the U.S. housing market, stalled leveraged buyouts of corporations and escalating defaults with risky subprime mortgages.

Corporate private equity revenue increased to $426.1 million from $125.6 million, driven by a rise in performance fees and carried interest allocations. Carried interest refers to the profit a buyout firm earns from the sale of a company.

"By segment, results in the private equity segments were a bit below our expectations ... and were above our expectations in the (asset management) business and the M&A Advisory business," Bank of America analyst Michael Hecht said in a research note on Monday.

Blackstone's James said despite the credit market volatility that is forcing some rivals' deals to be pulled or renegotiated, Blackstone itself is not feeling the pinch too badly.

"We have very few hung deals," he said during the conference.

He added that Blackstone sees no signs of a general slowdown in the U.S. economy.

James said Blackstone plans to look for smaller buyout deals and ones abroad rather than the mega-deals that have become popular over the last year because the financing needed for them is now too hard to obtain.

He added that Blackstone probably would not have made some of the acquisitions at the prices it did earlier this year had it not been for the covenant-light financing that was available. (Additional reporting by Tim McLaughlin in New York)