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Happy Days Again -- For Blackstone, Anyway

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But a good quarter doesn't translate to a private-equity rebirth.

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A strong IPO market is good news for private equity, and the new issues market will remain strong into next year, the president and chief operating officer of Blackstone Group (BX) believes.

"We believe the IPO window will be open at least through the early part of next year," Tony James said Friday on a conference call to discuss Blackstone's third-quarter earnings. "…As long as private equity is offering quality companies with quality management…those deals will be fine."

James said Blackstone has $27 billion available to invest.

Last month, Stephen Schwarzman, Blackstone's chief executive officer, said the group may launch as many as eight IPOs in the coming months. Successful deals would boost Blackstone's profit.

Typically, only strong companies go public during tough times. Solid deals this year include Duoyuan Global (DGW), a water-treatment company; Changyou.com Limited (CYOU), online games; Mead Johnson (MJN), baby food; and Solar Winds (SWI), software. Just today, shares of Ancestry.com (ACOM) were up slightly in their debut from their initial $13.50 price.

Private-equity firms acquire undervalued or underperforming companies -- public or private -- that offer solid growth potential. The private-equity firm typically provides capital and new managers to turn the company around. Ideally, after several years, the private-equity firm then sells the acquired company to another firm or to the public through an IPO at a higher price. In general, about 80% of the profits go to the limited partner investors of the funds.

Blackstone Group, the world's largest private-equity company, reported its second straight profitable quarter Friday. That's encouraging news after a two-year slump in the sector thanks to the economic downturn and worldwide credit crunch. But it's probably not enough to declare that happy days are here again.

Indeed, the hedge fund and private-equity firm Fortress Investment Group (FIG) reported on Friday that its loss widened and its revenues fell by 22%. Its shares fell nearly 7% in afternoon trading.

Blackstone fared much better, earning $273.3 million, or $0.25 a share in the third quarter, compared with a loss of $505.5 million, or $0.45 for the same period a year ago. Analysts expected the company to earn $0.15 a share.

In mid-day trading Blackstone Group's stock gained 7.2% to $14.87. But that's still less than half the IPO offering price of $31 a share when the company went public in June 2007.

"The picture overall is one of increasing activity both in deal and exit strategy," James said on the conference call. "…Our pipeline of deals is growing substantially."

Last month, Blackstone Group agreed to buy Anheuser-Busch InBev's (BUD) amusement-park business for about $2.7 billion. On Thursday, TPG agreed to buy IMS Health (RX), a provider of sales-management and market-research services to the drug and health-care industries, for about $5.2 billion.

Banks are again starting to lend to private-equity firms, suggesting the foundation of a comeback in the sector. But a survey of private-equity firms conducted by RSM McGladrey and McGladrey Capital Markets found private equity firms continued to cut staff, freeze salaries, and build working capital in the fourth quarter. Respondents said major concerns were a weak economy and potential defaults.

The survey included about 100 senior-level private equity executives, including buyout funds (74%), mezzanine funds (13%), and venture funds (12%).


No positions in stocks mentioned.
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