Blackstone Group President and Chief Operating Officer Hamilton James said on Monday that the subprime mess that has hit Wall Street banks appears to be getting worse.
"The subprime black hole is appearing deeper, darker and scarier than they thought," James said, referring to investment banks. James spoke on a conference call with media after its earnings were released on Monday. Blackstone swung to a loss in the quarter.
But James added that Blackstone is starting to "go long" the subprime market, after a successful bet against the sector that played out over the last 18 months. Blackstone invests in the industry through its hedge fund operation. Its private equity portfolio has only a tiny sliver tied to the residential mortgage industry, James said.
James also said investment bankers expect the Federal Reserve to cut interest rates again, as Wall Street has seen the credit market crisis clog balance sheets with hundreds of billions of dollars in leveraged buyout debt.
That backlog will take around six months to play out, James said, with banks having worked through what Blackstone estimates is around 40 percent of the leveraged loan backlog.
On Monday, Blackstone posted a quarterly loss on charges related to its initial public offering and said real estate revenue fell 44 percent as subprime mortgage woes spread to commercial lending.
Three of four divisions reported higher revenue during the quarter, but shares fell. It was Blackstone's second earnings announcement since going public in June.
The net loss was $113.2 million, or 44 cents a share. That compares with net income of $372.5 million a year earlier.
The loss includes $802.6 million of non-cash charges associated with compensation arising from IPO unit awards and the amortization of intangibles, Blackstone said.
Overall revenue rose to $526.7 million from $461.5 million.
Corporate Private Equity revenue rose to $227.3 million from $159.6 million in the year ago period, Blackstone said.
"While it will be difficult to structure very large leveraged transactions in corporate private equity and real estate until the credit markets improve, pricing of assets is more favorable," said Stephen Schwarzman, chairman and chief executive of Blackstone.
Real Estate revenue fell to $109.1 million from $196.1 million. Blackstone said weakness in the sub-prime residential lending area spread to general commercial real estate lending.
The firm's real estate and private equity division closed the purchase of Hilton Hotels last month. Total equity invested in the deal was $5.65 billion, Blackstone said.
Its asset management group saw revenue rise 88 percent to $124.9 million. That group includes its hedge fund investing operation. Blackstone's M&A advisory group saw revenue rise to $84.3 million from $52.6 million.
When Blackstone priced its IPO in June, it became the first major U.S. private equity firm to take part of its general partnership public.
The firm clearly stated that most of the money raised in the IPO would go to employees, including $2.3 billion to Schwarzman and co-founder Peter Peterson.