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Blackstone takes a hit, emphasizes marks are unrealized

On the firm's Q1 earnings call, executives emphasized that valuations have already gained back some ground, and warned of the possibility of increased taxes.

Blackstone’s valuation dips shouldn’t be taken at face value, executives said on the firm’s Q1 2020 earnings call Thursday.

“We were not immune to the market backdrop. In terms of portfolio marks, they are just that – unrealized marks,” said Blackstone chief executive Steve Schwarzman. “They reflect a point-in-time valuation and not an estimate of the value we ultimately expect to realize.”

Chief financial officer Michael Chae added that “we can’t underscore enough that the decline reflects unrealized marks taken at a point in time of severe dislocation,” and that public stocks in corporate private equity have already rebounded, to a degree.

Unrealized depreciation in the firm’s corporate private equity portfolio in Q1 2020 was $2.2 billion, down 21.6 percent from $3.8 billion in Q1 2019.

Chae pointed to fund performance during and after the 2008 global financial crisis: “Our flagship funds at the time, BCP V, BREP V and BREP VI, representing $38 billion in total capital values, declined to a range of 0.5 to 0.9 times invested capital,” Chae said. “Far more severe than the situation today, where all of our flagship BCP and BREP funds still reflect meaningful gains.”

But all three funds bounced back from their global financial crisis lows, eventually achieving 1.9 to 2.5 times invested capital – on par with or better than the firm’s historical average.

The firm also warned that it expects tax rates could increase in response to the measures the government has taken to combat covid-19.

“One of the things we’ve been talking about [is] that tax rates could very well go up in response, given the large costs here,” said president and chief operating officer Jonathan Gray, referencing the increase in government deficit due to measures like the Paycheck Protection Program. “That’s something you have to think about in terms of geographic impact.”

The firm is also anticipating these market conditions to continue into next year.

“We’re assuming that 2020, for most of the impacted businesses, is going to be a very tough year,” Gray said, adding that he expects businesses to re-open in the second half of the year “but revenue levels are going to be down pretty significantly.”

Despite some changes to its operational environment, Blackstone is sitting on a large amount of liquidity, with over $4 billion of cash and liquid investments, and $152 billion in dry powder – more than any other firm at the moment.

“Long-term fund structures enable the firm to focus on executing our operating plans, invest additional capital when needed, and wait for the world to heal,” Chae said.