Jason Kelly
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Nov. 12 (Bloomberg) — Blackstone Group LP, manager of the world’s biggest leveraged buyout fund, reported third-quarter profit that missed analysts’ estimates as real estate fees fell, sending its shares down the most since going public in June.

Profit excluding some costs dropped to $234 million, or 21 cents a share, from $239.1 million a year earlier, when the New York-based firm was a private partnership led by co-founder Stephen Schwarzman. The average estimate of seven analysts surveyed by Bloomberg was 30 cents a share.

Real estate revenue fell 44 percent from a year earlier, when results were helped by the $26.6 billion acquisition of CarrAmerica Realty Corp., Blackstone said today in a statement. LBO financing seized up in late June as investors, scared by rising subprime-mortgage defaults, stopped buying the debt used to fund corporate and real estate deals.

“Valuations are getting affected by the problems in the financial markets,” said Kevin Shacknofsky, manager of the $1.4 billion Alpine Dynamic Dividend Fund, which includes Blackstone shares, in Purchase, New York.

Schwarzman, Blackstone’s 60-year-old chairman, raised $7.5 billion by selling stock to the public and China’s State Investment Co. at the peak of the LBO boom. While the shares jumped 13 percent on the first day of trading, they have fallen 35 percent since as the LBO debt market fell apart.

Blackstone shares fell $2.02, or 8.3 percent, to $22.26 at 4 p.m. in New York Stock Exchange composite trading, the biggest drop since its June 22 initial public offering. They had fallen to as low as $21.55 earlier in the day.

Net Loss

The firm had a net loss of $113.2 million, or 44 cents a share, including costs of $802.6 million, mostly from compensation related to the IPO. That compared with a loss of $165.5 million, or 65 cents, a year earlier. Blackstone said at the time of its IPO that it may continue to have net losses “for a number of years” because of the cost of buying stakes from executives.

Revenue rose to $526.7 million from $461.5 million, bolstered by a gain in the private-equity unit, the firm’s largest, which rose 42 percent to $227.3 million. Revenue in the firm’s hedge-fund business rose 88 percent to $124.9 million, and financial advisory had a 60 percent gain to $84.3 million.

Blackstone said in August it closed its fifth and largest buyout fund at $21.7 billion. Acquisitions this year included Equity Office Properties Trust, at the time the largest leveraged buyout in history, and Hilton Hotels Corp., announced on July 3, just as investors began rejecting sales of LBO debt.

Deal Slowdown

The declines in credit markets have curtailed deals by Blackstone and competitors such as Kohlberg Kravis Roberts & Co. Private-equity firms announced a record $625.5 billion in LBOs through the first week in July, capped by Blackstone’s purchase of Hilton for $20 billion. There have been $119.8 billion in deals announced since, according to data compiled by Bloomberg.

“While it will be difficult to structure very large leveraged transactions in corporate private equity and real estate until the credit markets improve, pricing of assets is more favorable,” Schwarzman said today in the statement.

Banks including Citigroup Inc., JPMorgan Chase & Co. and Credit Suisse Group are selling an estimated $300 billion of bonds and loans they committed for the record number of LBOs announced this year, according to Bank of America Corp. estimates. Blackstone President Tony James said today that banks have sold about 40 percent of that debt.

“The banks have made very good progress,” James, 56, said on a conference call with reporters, warning that subsequent writedowns related to mortgages have killed the banks’ appetite for new commitments. “The mortgage black hole is worse than anyone thought — deeper, darker, scarier. The banks don’t have a clear picture on how this will play out.”

`Credit Dislocation’

Blackstone diversified into hedge funds and real-estate investments to increase profits. Assets grew to $98.2 billion at the end of the third period from $62.7 billion a year earlier, Blackstone said today.

Few new deals are in the works, potentially crimping the fees and profits Blackstone will generate from selling businesses, James said.

“The credit dislocation makes it hard to set up big new deals,” he said. “Those factors don’t make it an optimal time to be harvesting our assets either. Until the markets stabilize, I don’t see a dramatic change in this pattern.”

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net
Last Updated: November 12, 2007 16:38 EST

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