Like just about all other private equity firms, Blackstone Group LP (NYSE: BX) reported a horrible Q3, with losses of $502.5 million, or $0.44 per share. However, the firm was fairly optimistic on the overall value of its sprawling portfolio of companies. That is, the writedown was only about 7%.
As a result, some investors were naturally skeptical – and the stock price of Blackstone continued to slide.
Well, this week, the CEO of Blackstone, Stephen Schwarzman, opined on the matter at a Merrill Lynch investor conference. Basically, he was mostly rosy and thinks there are good valuations in the marketplace. But, paradoxically, he said the Blackstone equity portfolio is in good shape.
And, in general, he has a point. If you take a look at the history of private equity, the best investment periods are in tough times (such as the early 1990s and 2001).
The problem is for legacy funds that made investments at the top of the market. No doubt, Blackstone struck some mega deals during this time, such as for Hilton and it seems reasonable that these transactions will weigh heavily on returns, right?
But according to Schwarzman, about 80% of the equity portfolio is forecast to have flat or improved 2008 profits. In fact, roughly 70% of the portfolio is non-cyclical.
While this is good for Blackstone investors, at the same time, even high-quality companies are suffering sharp declines in valuations. In other words, why would Blackstone be immune?
And in light of the soft M&A and IPO markets, the lack of liquidity should put even further downward pressure on valuations. Skeptical investors have a right to be skeptical.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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