DealBook: Blackstone Profit Soars as Huge Fund Crosses Performance Threshold

Photo Stephen A. Schwarzman, the chairman and chief executive of the Blackstone Group.Credit Brendan Mcdermid/Reuters Related Links

At a heady time for the private equity industry, the Blackstone Group is raking in profit.

Blackstone, the biggest firm in the business of leveraged buyouts, reported on Thursday that its second-quarter profit – measured as economic net income, which includes unrealized investment gains – rose 89 percent, to $1.3 billion, from the period a year earlier. Driving the surge in profit, the firm's largest buyout fund crossed a critical threshold to allow Blackstone to start collecting profit from it.

The earnings amounted to $1.15 a share, far exceeding the 71 cents a share expected by analysts surveyed by Thomson Reuters.

Blackstone grew even larger in the quarter, with its assets under management rising to $279 billion, a 21 percent increase from the period a year earlier. The firm said it had returned $50 billion to its investors over the last 12 months.

Distributable earnings, a measure of the cash generated by the business and eligible to be given to shareholders, more than doubled, to $770.8 million, from $338.5 million in the second quarter of 2013. The firm's performance fees, which it gets from making profit on investments, soared.

The robust results can partially be explained by a particular feature of Blackstone's business model. Many private equity firms, including Blackstone, promise the investors in their funds that they won't start collecting profit until the funds cross a certain threshold for investment performance.

Blackstone's fifth private equity fund, a $21.7 billion war chest dating to 2005, which stands as the largest such fund ever raised, finally crossed that threshold in the second quarter.

That means it has entered a catch-up period, taking 80 cents on every dollar earned until it makes up the profit that had been deferred in the years since the financial crisis. Then it will switch to collecting the standard 20 percent of profits.

Blackstone said on Thursday that the fund generated $509 million of performance fees during the second quarter, accounting for a big slice of the total $1.4 billion of performance fees the firm earned. In the second quarter of 2013, Blackstone reported $719 million of performance fees.

"Blackstone's second-quarter results marked one of our best ever," Stephen A. Schwarzman, the chairman and chief executive, said in a statement. "As more of our assets under management have seasoned, we've been increasingly active in harvesting the value we've created over several years."

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