Blackstone Profit Rises as Market Buoys Real Estate, Buyouts

(Bloomberg) -- Blackstone Group LP rode a widespread market advance in the second quarter, earning 36 percent more than a year earlier. The results fell short of analysts’ estimates as a downturn in energy prices hit private equity holdings.

While the asset manager’s public holdings -- shares of companies it’s taken public -- tracked positively, private investments were “pressured by the underperformance in energy,” Credit Suisse Group AG analysts led by Craig Siegenthaler wrote in a note to clients before the results were announced. Energy was likely a “headwind,” Jefferies Group analysts led by Gerald O’Hara wrote.

Shares of New York-based Blackstone fell 1.2 percent to $34.37 as of 1:14 p.m. in New York, paring gains this year to 33 percent including reinvested dividends.

Economic net income, which reflects both realized and unrealized investment gains, was $705.4 million, or 59 cents a share, compared with $519.8 million a year earlier, Blackstone said in a statement Thursday. Analysts had expected earnings of 62 cents a share, the average of 13 estimates compiled by Bloomberg.

The firm’s real estate business, its largest by assets at $104 billion, led sales in the quarter. It sold off $4.6 billion of holdings, including shares of Hilton Worldwide Holdings Inc. and a string of Equity Office Properties assets.

Private equity, which oversees $100 billion, sold $2.8 billion in assets, including part of its holding in food-service distributor Performance Food Group Co. and its remaining stake in SeaWorld Entertainment Inc.

Infrastructure Push

While Blackstone continues to attract attention given Chief Executive Officer Steve Schwarzman’s close ties to the Trump administration, it also made significant announcements of its own in the quarter. Saudi Arabia’s Public Investment Fund agreed to anchor a $100 billion infrastructure ambition that the firm seeks to build out over the coming quarters.

President Tony James, speaking Thursday on an earnings conference call, allayed concerns that the infrastructure fund would be dependent on government spending, saying there are enough existing investment opportunities. Most of the new administration’s initiatives have yet to crystallize, including President Trump’s plans to invest as much as $1 trillion on improving U.S. infrastructure. Trump on Wednesday issued an executive order to create an advisory council for the effort.

Blackstone will begin fundraising for the infrastructure pool in autumn, James said, noting that the firm has moved about half a dozen investment professionals to the strategy. He also hinted at plans to hire outside talent for the fund, including a “world-class” operating partner who “will knock your socks off.”

Achilles’ Heel

It was a commemorative quarter for Blackstone as it celebrated its 10-year anniversary as a public company in June. The stock was little changed from its initial listing price, continuing to fuel discussions over public-market valuations of alternative-asset managers.

On the personnel front, the firm promoted Dwight Scott to president of its credit unit, GSO Capital Partners, as Blackstone deepens its bench of leadership candidates. Succession in the industry continues to be a hot-button topic as founders age and firms begin clarifying plans for transitioning to the next generation.

“We have really well-thought-out, carefully planned succession plans in all of our businesses, from the very top of the firm right on down, for every critical seat,” James said Thursday. “The Achilles’ heel of any asset management firm is succession. We’re comfortable that we have the best succession planning in the industry.”

Besting S&P

Blackstone’s distributable earnings, which reflect cash profits on asset sales and fund management fees, were $781.4 million for the three months ended June 30, compared with $494.9 million a year earlier. Blackstone said it will pay stockholders a dividend of 54 cents a share on Aug. 7.

The firm’s private equity portfolio appreciated 2.8 percent in the quarter and its real estate holdings gained 5.4 percent, both exceeding the 2.6 percent gain posted by the S&P 500 index of large U.S. companies. Peers including Carlyle Group LP, KKR & Co. and Apollo Global Management LLC are scheduled to report results in the coming weeks.

Publicly traded private equity firms must mark their holdings to the market each quarter, even though their typical strategy is to hold assets for years. That makes economic net income, which in part reflects these unrealized changes in value, merely a snapshot of assets that may have a long runway before being sold.

Overseeing $371.1 billion across private equity, real estate, credit and hedge funds, Blackstone is viewed as a bellwether for the alternative-asset industry. Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

To contact the reporter on this story: Melissa Mittelman in New York at mmittelman@bloomberg.net.

To contact the editors responsible for this story: Elizabeth Fournier at efournier5@bloomberg.net, Devin Banerjee