Blackstone Unravels

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It's been a short, strange, and embarrassing existence as a public company for The Blackstone Group (NYSE: BX  ) .

Nice timing
Since going public last June, shares have fallen nearly 80%, leaving its founders and top managers looking as if they cashed out ungodly amounts of wealth onto gullible public markets. Its co-founder, Steve Schwarzman, issued a mea culpa for spending $3 million on a birthday party during the peak of Wall Street's leveraged-buyout bonanza. That ill-advised celebration left him portrayed as an infamous "Wall Street fat cat" who's now blamed for helping to ravage the economy.

What goes up ...
Nothing seems to be going right these days. Blackstone issued third-quarter earnings that were about as grim as anyone expected. GAAP losses were $340 million, or $1.27 per share. Analysts were looking for a profit of $0.01 per share. Revenue came in at negative $160 million. A showing like that sure doesn't start the road to profits out on the right foot.

Shareholders' dividends -- a $0.30-per-share quarterly distribution that equates to a 16% yield at today's prices -- was kept alive this quarter, but Blackstone warned that it could be cut, possibly to zero, if market conditions don't improve. That fear alone probably accounts for the bulk of what drove shares down 12% yesterday.

What's next?
You'll remember that back in February, Blackstone announced a plan to help navigate around the credit crisis. It planned on bypassing embattled banks such as Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) to fund acquisitions and instead opted to go straight to investors to raise capital.

That worked for a while, but now nearly everyone's appetite for private equity seems to be dwindling. The Wall Street Journal reports that big investors such as pension funds are opting out of private equity and in some cases are trying to unload existing investments. The fallout could be pretty frustrating, since chaos in the financial markets will keep creating bargain buying opportunities that Blackstone may not be able to exploit, simply because it might not be able to raise enough cash.

Going forward, I'd keep an eye on one thing: a suspension of the dividend. Such a development could be what justifies selling shares, even if you're sitting on a serious loss. Blackstone has hinted that its compensation structure could mean posting GAAP losses for five years. If that dividend vanishes, shareholders are well justified to ask, "What's left for me?"

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2008, at 2:14 AM, dividendgrowth wrote:

    Since private equities represent the ultimate symbol of leveraged greed, I don't know how private equities can survive the twin threat of deflation and democratic administration.

  • Report this Comment On November 09, 2008, at 4:18 PM, SteveTheInvestor wrote:

    They don't just look "as if they cashed out ungodly amounts of wealth onto gullible public markets." It's not just an appearance. That's exactly what they did. Personally, I hope these firms just dry up and blow away. Of course, those who run these firms already have their vast fortunes tucked safely away and will live like royalty. Hopefully though, we can provide some serious regulation in the future. I view them as parasites that need to be stepped on.

  • Report this Comment On November 10, 2008, at 3:54 PM, JGBFool wrote:

    BX shares seemed to me like a bad idea even at the IPO.

    First, they weren't selling voting shares of the actual Blackstone private investment group nor investments in the managed funds under its control, they were selling non-voting "units" of Blackstone Holdings, the money management part of the company, to be run as a "master limited partnership". There was no independent compensation committee to determine executive pay.

    Additionally, the IPO was offered at a time when the signs that "cheap debt" was soon to be a thing of the past, but people who bought into the IPO were pretty much paying for the past performance of the money management division which occurred in the peak of the "cheap debt" era.

    I've made some bad stock purchases in the last few years, but I'm glad BX wasn't one of them.

  • Report this Comment On November 11, 2008, at 12:53 PM, reckma wrote:

    First of all, instead of bashing "private equity" generally, think for a minute about what this industry provides to our market, including; superior returns for your pension fund, a liquid market for healthy businesses providing an incentive for entrepreneurs to continue to compete, and significant operating expertise to otherwise small businesses, which helps everyone in the end (consumers, employees, and businesss owners).

    Next, lets comment about this article. This is the epitome of irresponsible reporting. I implore anyone to read the transcript of the earnings call instead of taking Morgan Housel at his/her word. There was no mention of a dividend being in jeopardy, in fact, management reiterated their confidence in the dividend going forward through 2009. I, as a busy investor, don't have time to do all of this research on my own and I wish that I could trust someone to report the facts and not try and BS a column to fill space or drive trading volume.

  • Report this Comment On November 11, 2008, at 11:45 PM, cmfhousel wrote:


    Thanks for your comments. Here's the source for the dividend being in jeopardy:

    "Blackstone said in a statement that unless market conditions improve markedly, its fourth-quarter payout might be "significantly lower" than the 30 cents a unit it pays now, or it might have "no distribution at all.""

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