We're maintaining our fair value estimate for The Blackstone Group following the release of first-quarter earnings by the firm. The company continues to struggle with the disruption in the credit and equity markets as well as the dramatic slowdown in major economies around the globe.
With lenders continuing to severely restrict access to debt, it has been near impossible for Blackstone to initiate any kind of leveraged buyouts in either its corporate private-equity or real estate segments. It has also been more difficult (and more expensive) to roll over debt that had been used to complete past deals, given that credit standards and costs are significantly higher.
With the equity markets continuing to be less than receptive to new offerings (especially those that Blackstone would like to eventually take public), and the credit markets still far too expensive for debt-driven deals, we don't envision Blackstone finding a near-term solution to the problems plaguing its primary business model.
Although the firm does have capital ready to invest right now, management remains cautious about investing in beaten-down companies, preferring to wait until things improve a little before committing its resources to new deals. In the meantime, Blackstone expects to use some of this capital to either buy up debt of its portfolio companies (much of which is currently trading at a steep discount) or support its companies' efforts to buy other firms.
Against this backdrop, Blackstone reported a steep drop in revenues and operating income during the first quarter compared with the prior year's period; though it should be noted that the results for the first quarter of this year were significantly better than those reported for the fourth quarter of 2008. Management and advisory fees actually increased 10% year over year, despite the fact that assets under management (AuM) declined close to 20% since the end of the first quarter of last year.
Using the firm's weighted-average fee-earning AuM, which declined less than 2% year over year as a result of much smaller declines in Blackstone's corporate private-equity and real estate holdings, its easier to see where the improvement in management fees came from--especially given that the fee-realisation rate on these assets increased 4 basis points as well during the last year. Excluding these adjustments, management fees would have been flat year over year, with total revenues down 79% (versus a reported decline of 31%) for the first quarter of 2009.
As for profitability, operating income declined 36% year over year as the company has been unable to cut costs as quickly as its revenues have been declining. Given such dire operating results, and a complete lack of visibility into the timing of any sort of improvement in the conditions necessary for Blackstone's business model to work again, we were surprised to see the company resume the payment of its quarterly dividend.
