Blackstone warns of challenging conditions

Blackstone, the private equity giant, gave warning today of “more challenging financing conditions” as it said it had frozen all deals within the US and European credit markets.

The group, which floated in June and has $92 billion (£47 billion) of assets under management, revealed a threefold surge in profits in its debut quarter as a public company.

It unveiled second-quarter net income of $774.4 million, compared with $224.1 million a year earlier. Revenue nearly tripled to $975.3 million, powered by the group’s private equity and real estate divisions.

Stephen Schwarzman, the chairman and chief executive, said: “In the face of current market volatility and challenges, we remain confident about delivering superior long-term returns for the investors in our funds.”

However, the company suggested in a statement that although its “operating environment was fundamentally positive”, the landscape had changed sharply in the final days of the quarter.

It said: “Concerns over weakness in the US housing market and sub-prime mortgage market, coupled with a large volume of debt financing backlog related to leveraged equity transactions, served to create more challenging financing conditions.”

But Hamilton James, Blackstone’s president, said the group has a “huge” pipeline of deals in India and is considering various transactions in Japan to boost its presence in Asia.

Kohlberg Kravis Roberts, the private equity group, yesterday admitted that it had received a demand for documents from the antitrust division of America’s Department of Justice. The request is part of the Department’s inquiry into whether private equity firms colluded over price in various buyouts. It emerged in October that the DoJ was investigating if private equity firms were behaving anti-competitively. The DoJ is also seeking to acer-tain whether competing firms withdrew from auctions to help a rival firm buy a target company at a lower price.

Credit crunch could hit KKR's buy-out returns

Global private equity giant KKR has warned that the continuing credit crunch may lead to higher costs and reduced returns for its leveraged buy-outs.

KKR, best known in the UK for its £11.1bn acquisition of pharmacy retailer Alliance Boots, is concerned that its declining ability to issue high-yield debt via the capital markets will have significant impacts on its business. The comments, made in a regulatory filing ahead of its impending stock market flotation in New York, have implications for the entire private equity industry, which has prospered on the availability of cheap debt and willing bankers.

In its latest document, KKR clearly comments on the situation, over which it admits it has little control.

The cost of financing leveraged buy-out transactions by issuing high-yield debt securities in the public capital markets has increased significantly.

"If conditions in the debt markets do not become more favourable to us in the near term, we may need to rely on financing commitments provided directly by investment banks or other sources in order to consummate pending transactions or finance future transactions."

The filing admits that such financing may lead to higher costs and more restrictive terms than the private equity house had previously been able to take advantage of.

In the last four weeks, a number of private equity transactions have seen banking terms tightened to securitise, or sell on, the debt.

KKR has experienced this at first hand, with the raft of banks involved in syndicating the £9bn debt pile being used to part-fund the Alliance Boots deal due in part to weak banking covenants. The private equity firm also said that were the recent market blip to become a prolonged downturn, its business could be hit in other ways, with profits affected by fixed costs and the fact that it may not be able to scale back other costs quickly enough.

The warnings come as KKR attempts to convince investors to plough $1.25bn (£621m) into the firm as part of its plan to become a full-service investment house, with eventual plans to largely bypass investment banks all together.

The revised filing, lodged with the US Securities and Exchange Commission yesterday, also highlighted that KKR had been drawn into the US Department of Justice's probe into whether or not private equity firms had been acting in collusion on so-called club deals where one or more works together to make a joint bid for a target company.
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