Blackstone posts loss, financing still difficult

PHILADELPHIA/NEW YORK (Reuters) - Blackstone Group LP (BX.N) posted a second-quarter loss as tight credit markets curtailed buyouts, but the private equity firm said on Wednesday the choppy economic environment offered some investment opportunities.

Blackstone posted a net loss of $156.5 million, or 60 cents per share, compared with a year-ago profit of $774.4 million, or 20 cents a share.

"These are some of the most difficult time I've seen in my 33 years," Blackstone President and Chief Operating Officer Tony James said on a conference call. "The headwinds today make this a more challenging fund-raising environment."

Blackstone has suffered along with the rest of the private equity industry as last summer's credit crunch froze the debt markets for large leveraged buyouts. Blackstone has taken part in some of the largest leveraged buyouts ever, such as the $23 billion purchase of Equity Office Properties Trust.

Excluding the huge payouts associated with its initial public offering in June 2007, Blackstone earned $99.9 million, or 15 cents a share. That exceeded analysts' forecasts, on average, of 8 cents a share, according to Reuters Estimates. In the year-ago quarter, Blackstone earned $735.6 million, or 58 cents a share.

Blackstone's results topped investors' expectations, pushing the stock up 59 cents, or 3.3 percent, to close at $18.75 on the New York Stock Exchange. The stock initially listed at $31.

"The results reflect the dire environment that these guys are trying to perform in," said Michael Holland, chairman of private investment firm Holland & Co and a former Blackstone partner.

"The stock has been decimated. So when the results are a little less crummy than expected, that gets reflected in the stock. Most of the factors of the bad environment have been baked into the stock already," Holland said.

Blackstone's net loss was largely due to accounting rules that require the company to adjust the value of its investments every quarter, known as the "carrying value." This assumes its assets are all being sold today, and hurts the company when markets are low.

"There's no sugar-coating that they lost more than $400 million in the first six months of this year, compared with making $1.9 billion in the first six months of last year. There's no getting around that," said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners.

"But they did a good job of explaining how the current dislocations in the market are opening up good opportunities and how they are making diverse investments. Their business is so diversified now and they have liquidity," Sonenshine said.

ECONOMY TO REMAIN ROCKY

Financing leverage buyouts larger than $5 billion is difficult under current market conditions, Blackstone's James said. That marks a great contrast to the mega-deals of $20 billion and larger seen in 2006 and 2007.

"Lenders continue to severely restrict commitments to new debt, limiting industry-wide leveraged acquisition activity levels in both corporate and real estate markets," the company said in a statement.

Blackstone said slowing global economic growth and surging commodity prices hurt market conditions overall in the second quarter, and U.S. and European economic indicators continue to indicate a slowdown. The economic weakness could continue through 2009, and possibly into early 2010, the company said.

OPPORTUNITIES IN ROUGH MARKETS

Despite weakness in its main private equity business, Blackstone saw 34-percent jump in hedge fund revenues, largely due to its recent acquisition of GSO Capital.

"For GSO, this is a fantastic period," James said.

Blackstone has "ambitious plans" to expand the operations of GSO, which specializes in debt investments and recently provided some funding for the purchase of The Weather Channel by NBC Universal, Blackstone and rival private equity firm Bain Capital.

Separately, hedge fund company Och-Ziff Capital Management Group LLC (OZM.N) reported a quarterly net loss due to IPO-related costs, but economic income rose, helped by strong revenue growth. Shares of Och-Ziff rose 51 cents, or 3 percent, to close at $17.60 on the NYSE.

Blackstone said it has continued to see asset investments by its clients, and has been hiring as it creates new products. It said its balance sheet "remains strong."

Blackstone Chief Executive Stephen Schwarzman said in a statement there was an increasing number of attractive investment opportunities. The company committed $2.4 billion of new equity in private equity from April through July and also bought about $8 billion in leveraged loans.

Blackstone was the first major U.S. buyout firm to go public. It will be joined later this year by Kohlberg Kravis Roberts & Co KKR.UL, which recently said it plans to brave the turbulent equity markets and list on the New York Stock Exchange.

(Reporting by Megan Davies and Jessica Hall; editing by Gerald E. McCormick, John Wallace, Jeffrey Benkoe and Phil Berlowitz)