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Blackstone shares drop as profits plummet

Despite fourth quarter losses the firm is confident present market conditions will play to its strengths.

The Blackstone Group’s share price dipped to a new low of $13.82 (€9) per share today as it reported it had made a fourth quarter loss of $170 million, according to its annual results.

Blackstone chairman and chief executive Stephen Schwarzman said it would be foolish for investors to focus on a particular quarter when investing in private equity and real estate.

The firm said in a statement it is likely to have accounting standard GAAP net losses for the next five years because of significant equity interests held by senior managing directors and other employees which is subject to future vesting, minimum retained ownership interests and transfer restrictions.

The firm’s annual GAAP profits were down from $2.27 billion in the year ending 2006 to $1.62 billion in 2007. But pro forma adjusted economic net income after taxes was up to $1.82 billion from $1.43 billion in the previous year.

Real estate played a key part in that, Schwarzman said, with 2007 revenues up almost 50 percent over the previous year to $1.30 billion from $878.5 million. The increase was largely driven by a growth in management fees, primarily related to the 2007 mega-buyouts of Hilton Hotels and Equity Office Properties Trust.

Real estate revenue slumped 75% for the fourth quarter from $460.9 million to $113.5 million on the back of a decline in performance fees and allocations. But Blackstone said management fees had increased during the same period by $88.8 million.

The firm’s corporate private equity revenues were down to $821.3 million from $999.4 million in 2006, after the write-down on its investment in monoline insurer Financial Guaranty Insurance Company. Financial Guaranty Insurance Company accounted for a decline of $122.2 million of these revenues.

The firm also reported economic net income (which excludes these payments) of $128.2 million, which was 14 percent of income in the same quarter the previous year.

Schwarzman said: “We think this environment creates enormous future opportunities for firms like ours to buy assets cheaper as assets are re-pricing lower as investors flee. I predict this cycle to be no different.”

Given the illiquidity of limited partners’ investments the firm was sheltered from general investor demands to withdraw capital across the markets, he said. “One of the great things about private equity is there is no conceivable run on the bank,” he said.

Blackstone president Tony James said: “This is less than an ideal time to sell assets and fortunately we don’t have to. The flip-side is gains will be modest until market conditions have stabilized. “