Stephen Schwarzman, chief executive officer and co-founder of The Blackstone Group, believes pricing in the secondaries market has been slashed to “artificially” low levels as cash-constrained investors flood the market with fund interests with very few buyers.
“[All of a sudden] there was a rush to put these up for sale just to get liquidity,” Schwarzman said during the recent Blackstone earnings call. “The problem that occurs is that you have four or five to one sellers to buyers, and that artificially drives the price way below what I think [their] value is. It’s driving values so low that fundamentally you can’t transact.”
Blackstone private equity fund interests have not been unloaded on the secondaries market, Schwarzman added.
“We have, to our knowledge, not been involved with any of those [deals] with our stuff,” he said about secondary transactions.
Blackstone reported losses of $193.6 million in its private equity portfolio for the fourth quarter of 2008, and $286.2 million decline for the full-year 2008. That’s compared to declines of $68.3 million for the third quarter of 2008 and $15.4 million in the fourth quarter of 2007.
The principal driver of the losses was fair value write-downs on the private equity investments, Schwarzman said.
“The mark downs are disappointing but they don’t necessarily represent a permanent loss of value,” he said.
Most of Blackstone’s portfolio companies are performing well and sitting on strong balance sheets, he said, adding that 60 percent of the firm’s companies do not have covenants governing their debt, and 90 percent of the companies’ debt comes due in 2012.
“We have several years to deal with the current situation before we deal with the debt maturities,” Schwarzman said.
Blackstone’s limited partners in its private equity funds have not missed any capital calls and have not asked for any relief from funding commitments, Schwarzman said.
On the real estate side, a couple of “retail investors at the small end of what we do” have asked for ways to reduce unfunded commitments, Schwarzman said. One of the investors took a big hit in the Bernard Madoff scandal, he said.
The Blackstone Group has about $13 billion in dry powder for private equity investments and is exploring opportunities to buy debt at a discount in its healthy portfolio companies amid a 20 percent decline in the value of its private equity portfolio.
Schwarzman said during the call that the belief that all private equity-backed companies are troubled is “complete garbage”. He said buying into the debt of healthy portfolio companies is a good opportunity for private equity firms with dry powder, like Blackstone.
“Given that the debt markets have really collapsed, this has presented some interesting, low-risk opportunities for the private equity community,” Schwarzman said. Credit opportunities don’t have to be in distressed, Schwarzman said, but “it can be simply stressed, healthy companies whose debt has collapsed”.