Private equity firm Blackstone (NYSE: BX) capped off a wild 2007 on a sour note. It began as a secretive private investment company making eye-popping deals, went public in June, and ended the year with a fourth-quarter loss.

The New York-based company reported a quarterly loss of $170 million, compared to a $1.18 billion profit in the same period last year. Revenue took a bashing as well, falling 73% to $345 million for the quarter from $1.28 billion last year. Not including the compensation costs of last summer's $4 billion initial public offering and other noncash charges, Blackstone would have earned $88 million in the quarter, still down sharply from the charge-adjusted $808 million profit earned in the fourth quarter last year. Then again, my reported net income might look a little different if I could strip out select items, too.

A good deal of the losses stemmed from just one of Blackstone's holdings, bond insurer FGIC. Along with rivals Ambac (NYSE: ABK) and MBIA (NYSE: MBI), FGIC has been dogpiled by a mortgage-backed bond market plagued with unprecedented writedowns.

It's a jungle out there
Blackstone, along with nearly every other financial firm reliant on the debt market, faces a tough environment. With a slowing economy, falling stock prices, and a debt market stuck in the mud, the landscape for deals going forward looks bleak at best. Recently, Blackstone announced that it has started bypassing banks to finance deals, leaving already-battered underwriters like Citigroup (NYSE: C) without a once-lucrative client.

Financing aside, it's likely that the number of companies eager to sell has dwindled, slimming Blackstone's options for lucrative deals. After a five-year bull market left many companies' shares sitting at all-time highs, management and shareholders alike were quick to cash out. Real estate tycoon Sam Zell -- who's now tackling media conglomerate Tribune (NYSE: TXA) -- sold his life's work, Equity Office Properties, to Blackstone last year, even with its shares at an all-time high before the deal was announced.

With the S&P 500 average down 12% on the year, it's unlikely you'll see as many public companies willing to take the private equity path. That trend doesn't bode well for Blackstone, which relies on an ample stream of companies willing to cash out. In what some see as an attempt to shy away from the tough road facing the private equity division, Blackstone recently completed the acquisition of hedge fund GSO Capital Partners for $945 million, a move that bolsters Blackstone's presence in traditional hedge fund assets like stocks and bonds.

Ready, aim, backfire!
Blackstone has seen a number of its proposed deals go bad this year. On New Year's Day, mortgage servicer PHH (NYSE: PHH) announced that Blackstone couldn't come up with enough cash to pull off a proposed takeover. That deal has now been called off.

One bright note, Blackstone shareholders can look forward to a fat dividend. The company announced that it would distribute a $1.20-per-share payout through at least 2009. That equates to nearly an 8% yield at today's prices.

Nice timing, guys
Since going public in June, Blackstone shares have been on a runaway decline, now down more than 60% since their debut. While the timing of the IPO -- weeks away from the start of the credit crunch -- caused many to call "bubble," it allowed Blackstone management to cash out billions before the downturn started. Blackstone CEO Steve Schwarzman took home $800 million in the IPO, while co-founder Pete Peterson pulled in $1.88 billion in cash alone after the offering.

Going forward, shareholders shouldn't expect too many more of the mammoth deals to which Blackstone had become accustomed. The 1980s underwent a private equity boom similar to the one we've seen over the past decade; it ended with a massive slowdown that left only the strongest standing. While Blackstone -- the highest-profile buyout firm of them all -- will probably survive the credit crunch, its future deals will most likely take place in a much, much more conservative business environment.

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