Blackstone Numbers

I just looked over the Blackstone numbers and although I am no genius in understanding their business model, it looks like they took some hits in their portfolio values and more will come in 2009. This is how the FT presented the story:

Blackstone reveals $827m quarterly loss
By Henny Sender in New York, Published: February 28 2009 02:00 | Last updated: February 28 2009 02:00

Blackstone yesterday revealed a fourth-quarter loss of $827m, reflecting extensive markdowns in the value of its private equity and real estate investments, and told investors it would not pay them a dividend for the quarter...

"Last year was the year investment banks and hedge funds were undressed," says the co-founder of one of Blackstone's peers. "This year, it is the turn of private equity."

Blackstone said its corporate portfolio lost almost $4bn in value for the year, a 29 per cent decline. The value of its property holdings plunged 40 per cent.
Neither the earnings announcement nor remarks on conference calls gave investors reason to believe that earnings growth was likely to pick up soon, given the dramatic downturn in the global economy.

Tony James, Blackstone president, referred to current economic conditions as a depression.

Fascinating to me is Blackstone is a "manager" of the assets they bought hence, their "fee" income will decline if those "assets" they have in their portfolio fail to perform but Blackstone itself seems to have structured itself as a fee earning company while all of the "assets" are off the Blackstone balance sheet.

So, if I have it correctly, Blackstone gets investors together, does a major leveraged buyout (when money was available), pays itself handsome transaction fees, might put a little skin in the game up front, then does a "management contract" with the entity they arranged the buyout of, thus earning more fees, but allows the bought asset to operate "off the books" of Blackstone. I guess it is kind of like the hotel model. Some investors put up some cash and borrow more money and build a hotel then hire a "brand" company to come in and manage the property. The "brand" in this case is Blackstone, carrying a management fee for managing the bought business (hiring CEO and upper management etc.) but the "investors" are "holding" the asset off the Blackstone books.

I am more than fuzzy on where the now $94 billion of assets under management reside. They took something like over $4 billion in write-downs in the 4th quarter with total assets under management declining like $8 billion for the year. But where are these assets?

Interestingly, "fee earning assets" increased by nearly the same amount. So how does this figure? In addition, it looks to me like the "partners" of Blackstone pulled nearly all of their own equity out of their real estate portfolio so Limited Partner Capital Deployed fell from nearly $15 billion to about $5.5 billion.

Well during the buyout hey day I wrote about how these "private equity" funds were literally robbing the banks of the corporate entities they took over, stealing all the cash through all kinds of "fee" transactions, bizarre payouts, "commissions", funding payouts etc. all the while leveraging them to the hilt. I had no idea they were so creative in removing these entities from any liability of Blackstone itself. So, I guess if there are bankruptcies in their assets under management they will figure out how to earn "fees" managing the bankruptcy, financing the bankruptcy, taking huge chunks of assets for pennies and eventually making a killing again when / if the companies emerge from bankruptcy and get floated back on the market. Gotta hand it to these guys.