Blackstone has suffered severe mark-to-market losses on investment funds that focus on energy and distressed debt, as the coronavirus pandemic and a global oil rout wiped out 92 per cent of the performance fees previously booked by its $140bn credit business.
“The current crisis is much more formidable than the global financial crisis,” acknowledged Stephen Schwarzman, Blackstone’s billionaire founder, adding that “a return to work and normal life…may be a long and gradual process.”
The world’s largest alternative asset manager recorded investment losses of 22 per cent in its private equity business, which manages $175bn of capital, denting the incomes of executives whose pay is tied to the profits on their deals.
The setback wiped $1bn off the pot of “accrued performance revenues” that Blackstone had booked based on its valuation in December.
Private equity firms typically receive a share of the profits on every investment, and the lower number amounts to an acknowledgment that Blackstone is currently laying claim to a slice of a smaller pie.
The $1bn does not include any reduction in the so-called “carried interest” that Blackstone executives are due to receive personally — entitlements that are also now likely to be worth less.
Performance revenues at Blackstone’s credit arm fared even worse. The unit, which accounts for about one-tenth of the firm’s revenues and has become corporate America’s first call for a swath of activities that investment banks once regarded as their core business, ended the quarter with just $6m of accrued performance revenue.
That compares with an amount of $237m in December, of which the funds paid out just $12m in the past quarter — showing that 92 per cent of the credit funds’ accrued performance revenue has vanished in the past three months.
For much of last year, Blackstone battled to contain the fallout from departures at the its credit unit. Last summer the group had to offer financial sweeteners to investors after the clock started ticking on a “key man” clause, which allows them to withdraw funds if enough named executives leave.
“Clearly now you have more of a hole to dig out of,” said Devin Ryan, an analyst at JMP Securities, of effect of the markdown on Blackstone executives. “Either you need values to snap back, or you’ve pushed out the timeline on the potential to realise some of those investments.”
Mr Schwarzman said the March numbers “reflect a point-in-time valuation, and not an estimate of the value we ultimately expect to realise,” and recalled that in previous recessions, the group has suffered staggering losses only to stage an eventual comeback.
During the last financial crisis, for example, Blackstone wrote down an investment in hotel group Hilton World by 69 per cent. “When the world eventually recovered, Hilton generated 10 times that marked down value with $14bn of profit for our investors,” Mr Schwarzman added. “Which may be the largest in private equity history.”