After a 27% plunge in value since its IPO in June, Blackstone Group (NYSE: BX ) provided investors with good news on yesterday's fiscal Q2 report. The initial response was a 7.8% spike in the stock price. Unfortunately, the gains slipped away and the stock was up only 1% by the end of the day. With volatility in the private equity markets, it's tough for investors to have any conviction on Blackstone.
In Q2, Blackstone's revenues tripled to $975.3 million and net income more than tripled to $774.4 million. The main sources of income came from management and incentive fees, which amounted to $795.4 million in the quarter.
Of course, over the past couple of months, there's been a chill in the private equity marketplace, as credit has tightened. Major financial institutions like JPMorgan (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , and Lehman Brothers (NYSE: LEH ) were unable to syndicate billions in loans for major deals with Chrysler, ServiceMaster, and US Foodservice.
On the earnings call, Blackstone's chief operating officer, Tony James, agreed that the environment has suddenly become challenging. The upshot is that we will probably see only a trickle of mega deals.
Then again, James thinks this is a good thing. After all, in a tough market, the premier firms like Blackstone should have less competition on transactions and still have access to financing. He mentioned that his firm showed much restraint this year, as pricing on buyouts reached frothy levels.
Some of the opportunities include buying debt at discounted prices and also doing deals in Europe and in Asia. Keep in mind that Blackstone CEO Stephen Schwarzman, is in China (the government invested $3 billion in the firm prior to the IPO).
But with $88.4 billion under management, Blackstone needs mega deals to move the needle. And, with more expensive debt financing, it gets difficult for the firm to leverage its companies to pay itself large dividends, which juices returns.
There may also be nasty surprises, such as the possible unwinding of high-profile deals like TXU (NYSE: TXU ) , First Data (NYSE: FDC ) , or SLM (NYSE: SLM ) . In other words, there's a risk of more bad news to roil the markets, and that should make it tough for Blackstone's stock to get traction. So while the shares are much cheaper now, it's still a good idea to bide your time.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook
, does not own shares mentioned in this article. He is currently ranked 4,317 out of more than 60,000 in CAPS. JPMorgan Chase is an Income Investor
recommendation. The Fool has a disclosure policy.
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