Blackstone profits hit by rising rates and stock market sell-off

Blackstone Group’s profits declined as tightening financial conditions and plunging stock market valuations caused the world’s largest alternative asset manager to dramatically slow its sale of investments.

In third-quarter results released on Thursday, Blackstone sold just $15bn in assets, half the amount the company sold in the previous quarter, cutting into the earnings it generated from selling investments for a profit.

As a result of the slowing asset sales, Blackstone’s distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — fell 16 per cent from this time a year ago to $1.4bn, or $1.06 a share. The results, however, beat analyst forecasts polled by Bloomberg.

The New York-based group also marked down the value of its sprawling investment portfolio as it adjusts valuations to reflect a sharp decline in global equity prices because of rising interest rates and a slowing economy.

Blackstone marked down the value of its flagship corporate private equity and real estate funds, cutting into the overall value of its unsold investments. Its private equity funds shed 0.3 per cent while its real estate and “secondaries” — funds designed to buy interests in existing private capital funds — declined 0.6 per cent and 2.3 per cent, respectively.

Blackstone’s financial results were buoyed by rising management fees because of continued inflows of new assets to many of its largest strategies, including private equity as well as large credit and real estate funds it has created for wealthy investors.

Fee-related earnings, a proxy for the cash Blackstone earns from base management fees, rose 51 per cent in the quarter to a record $1.2bn, surpassing analyst estimates polled by Bloomberg.

Blackstone reported a $2.3mn net profit, which accounted for unrealised investment losses attributable to its stockholders stemming from the markdowns.

“We protected client capital during a period of extreme market turbulence as we have through many challenging cycles in our history,” said Stephen Schwarzman, chief executive of Blackstone, in a press release.

A total of $45bn in new investor money flowed into the New York-based investment group, putting its assets under management at a record $951bn, a 30 per cent increase from this time a year ago.

Earlier in October, Blackstone struck a strategic partnership with Bermuda-based insurer Resolution Life to manage up to $60bn in credit, real estate and asset-backed assets on behalf of its life insurance and annuity policyholders.

The biggest source of Blackstone’s asset growth in recent years has come from wealthy investors who have piled into private real estate and credit-orientated investment funds built by the company to generate yield.

Those retail investor flows continued for Blackstone as it drew $6.6bn in net new money from wealthy investors who bought into the group’s perpetual funds — funds without a maturity or end date.

However, existing investors redeemed $3.7bn from those funds during the quarter, Blackstone president Jonathan Gray said on a call with analysts after results were announced. Those redemptions in recent quarters have alarmed analysts.

Blackstone is in the process of raising money for a new flagship private equity fund. During the quarter, it raised $14.5bn in new private equity fund commitments, including over $5bn for its newest fund.

Though money continues to pour into Blackstone, investors are closely scrutinising whether the flood of money will slow.

Blackstone shares have fallen more than 30 per cent this year amid concerns that falling equity markets will slow new investor commitments to its funds.

“[It’s] harder out there,” Gray said on the conference call. “Investors are more capital-constrained. I think it will be tougher for any groups to raise capital, and that will be until markets get better.”

Blackstone shares were down 1.2 per cent in morning trading New York on Thursday.

This article has been amended to reflect that Blackstone drew in $6.6bn in net new money for its perpetual funds from wealthy investors and that existing investors redeemed $3.7bn from those funds.