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Blackstone writes down a third of its private investments

The New York-based private equity firm said one-third of the private companies in its private equity portfolio faced write-downs of some kind, as president Tony James revealed a $68m Q3 private equity loss.

The Blackstone Group has written down a third of its private corporate investments within its private equity portfolio, president and chief operating officer Tony James said today.

Speaking as the New York-based firm reported a total $509 million loss in the three months to the end of September, James said Blackstone’s private equity portfolio had lost 7.5 percent of its overall value owing to the current market turmoil.

However James said during a conference call with journalists that a third of the firm’s private corporate assets – excluding investments in public corporations – had faced some form of write-down. He added that around two-thirds of the portfolio had been “written-up or [remained] flat”. James declined to name specific asset write-downs.

During the same period last year, Blackstone – which went public in June 2007 – earned $227.3 million profit from its private equity portfolio, compared to $92.4 million for the second quarter of 2008. During the three months to the end of September, private equity lost $68.3 million.

The financial market volatility impacted the firm, James said, but he insisted the current market environment was ideal for investors. The best private equity and real estate returns could be gained during “market meltdowns”, he said, when asset prices were depressed. “We expect this current market meltdown to be no different.”

Blackstone’s existing portfolio companies, though, were preparing themselves for a “severe recession”, with the chief executive officers of those companies last month having been recalled to a Blackstone summit in an effort to update contingency plans first drawn-up in late 2006. “We asked them to go back to the drawing board [and prepare for] a much more severe recession,” James added.

During the call, James stressed Blackstone’s private equity and real estate funds were closed funds, with LPs locked into the life of the vehicle. He said fundraising was difficult for all GPs, as investors struggled with the denominator effect and declining distributions from existing investments. Blackstone, he added, was not expecting to be affected by LP defaults, saying: “We don’t expect anyone having any trouble making their capital calls.”

Capital from limited partners deployed totaled $1.5 billion in the third quarter, a decrease from $2.3 billion for the same period last year.

James said Blackstone had a $13 billion real estate “war chest” of uninvested capital which it was preparing to deploy during the downturn. He expected real estate prices to come down further, forcing over-leveraged buyers to sell at discounted prices. As debt matured over the coming years, James said, investment opportunities would be some of the most attractive since the RTC in the 1980s and 1990s.

Blackstone chief executive Stephen Schwarzman said during the call that the firm was facing a “remarkable period of buying assets at low prices in almost all the asset classes we invest in throughout the firm”.