Blackstone Profit Jumps 23%, PE Compensation Up Nearly 10% – Updated

Blackstone’s third quarter earnings are out and the private equity firm is reporting a 23% rise in profit.

Economic net income was $339 million, up from $275 million in 2009. Total segment revenue was $792.2 million, up 31% from $603.8 million in the third quarter of 2009, Blackstone said in a statement.

Private equity revenue dropped 5.2% to $214.9 million in the third quarter from $226.9 million in the same time period in 2009. Blackstone said the drop was driven by a slide in performance fees and allocations which were $90.3 million in third quarter, off nearly 19% from $110.9 million for the period ended Sept. 30, 2009. The net return of Blackstone’s contributed PE funds was 5.1%, up from 3.1% in the third quarter of 2009.

Total third quarter compensation for private equity was $76.6 million, up 9.5% from $69.9 million in 2009. Compensation more than doubled from the second quarter when it was $36.4 million.

Advisory revenues were down for the quarter. Revenue for the business was $87.7 million, off 9.8% from $97.3 million in 2009. The drop was driven by a decrease in fees from its financial and strategic advisory business, Blackstone said. Last year, significant transactions closed in third quarter, the firm said.

Blackstone hosted two calls today—one for media and one for analysts—to discuss its earnings. Here is what I’ve gleaned:

Blackstone, the basic company, is at 4.5x debt to cash flow with new deals set up at 6x, said Tony James, the firm’s COO. “So there is no issue of refinancing,” he said. Also, only one-third of Blackstone’s debt comes due in the next five years, while two-thirds of the debt is out beyond the five year period, he said.

Blackstone’s PE funds invested $700 million during third quarter. The New York buyout shop expects to begin investing its sixth fund, which raised $13.5 billion, this quarter. Its last fund, which raised $21 billion, is fully invested, James said.

State pension funds represent about 50% of Blackstone’s investors, said Stephen Schwarzman, Blackstone’s CEO. State funds will be “winnowing down,” in some cases severely, the number of GPs or firms they do business with, Schwarzman said. “We had some telling us they had 120 relationships that will go to 30,” he said. “There will be a lot of left-outs in this area.” (Update: Schwarzman’s comment regarding state pension funds representing 50% of Blackstone’s investors refers to funds raised for private equity, a spokeswoman says. The 50% is not representative of the total LP base with regard to either institutions or total funds raised across the firm, the spokeswoman said.)

Rival KKR is currently in the process of hiring nine members of Goldman Sachs’s famed proprietary trading desk to form a new hedge fund. Some believe that KRR is trying to keep up with Blackstone, which already has four distinct operations (buyouts, real estate investing, hedge funds and advisory services). “We are as a firm a lot more advanced than a lot of our competitors,” Schwarzman said.

Becuase of the Dodd-Frank Act, which limits bank involvement in riskier investments, and the Volcker Rule, Schwarzman expects more spinouts, he said. “Talent will shake loose because people can’t get paid the same.” Blackstone may do some hiring but is keeping a “rigid criteria” for “top notch talent,” he said.

(Note: Story is updated in 9th paragraph. -Ed.)