Blackstone Results: Dripping in Positivity

The Blackstone Group’s first quarter earnings beat analyst’s estimates financially and beat the public’s expectations. In short, the media call this morning was sickeningly positive. Life appears to be good for Blackstone Group.

The company earned $360 million in Q1, up over its $82 million loss in Q1 last year.

In the media call, Blackstone President Tony James said fundraising is heating up, Blackstone is preparing between 8 and 10 companies for IPO (but “don’t take that as gospel”), and, frankly, Blackstone itself isn’t worried about too much these days. Even in terms of bank investing, Blackstone may have abandoned hope on finding a big bank buyout with FDIC rules remaining strict, but the firm has regrouped with a new, smaller roll-up strategy instead. Here are the highlights (comments paraphrased):

On Fundraising:

Tony James: Fundraising went from dead to wounded to healthy. We’re in the middle part of that cycle and I think it’s certainly much better than it was a year ago. We’re seeing investors recommitting to alternatives. A large percentage of investors are increasing allocations to alternatives. We’re not aware of any investors cutting back their allocations to alternatives. It’s going to get healthy again because, if you look at the investors’ return assumptions of 8.5%, those aren’t achievable if they don’t increase allocations to higher-yielding asset classes like alternatives.

On LP Pressures:

There are fee pressures out there. You have the big gorillas who want to set up their investments in separately managed account structure. The biggest area of discussion is deal fees and it used to be that the sponsor kept those. That shifted to a split of 50-50. Now the rule of thumb is 80-20 and its getting worse over time. Investors want 100% of that now. With general management fees, we don’t see a lot of pressure.

On Park Hill (the firm’s placement agent business):

We went from $5 million to $16 million in profits this quarter. It’s not huge but it is a triple in revenues.

On Bank Investing:

We’ve backed two management groups, one focused on large regional targets, and one focused on small community banks. The level of activity and our confidence about putting money out in the larger space is not very high right now. The PE industry is at a disadvantage in terms of FDIC rules. Strategic banks are in the market now, too, so they all have synergies. We’re not all that confident that that opportunity will bear fruition. We haven’t given up on it yet though.

With the smaller size strategy, there are a lot of targets not big enough for strategics but they do need help, so we’re more optimistic that we’ll find things to do in that space. The firm is waiting on a license before it begins making bids on that strategy.

Blackstone has a $1 billion capital pool, which the firm has allocated 25% of its own capital to and LPs have put up the rest.

On What Worries Blackstone:

I worry more about the world than our business. We’re at the beginnings of an upswing with much more upside and than downside. I worry a lot about things like Israel and Iran, or the stability of Pakistan, or what happens to the Euro with Greece Portugal and Spain.

On IPOs:

We’ve got a number of companies that are in various stages of preparing for IPOs that will play out in early 2011. The number is around 8-10 that are in various stages but don’t take that number as Gospel. The IPOs we did last year and this year are up 45% on average, have performed well.