Updated, 1:34 p.m. | At a heady time for the private equity industry, the Blackstone Group is raking in profit.
Blackstone, the biggest firm in the business of leveraged buyouts, reported on Thursday that its second-quarter profit — measured as economic net income, which includes unrealized investment gains — rose 89 percent, to $1.3 billion, from the period a year earlier. Driving the surge in profit, the firm’s largest buyout fund crossed a critical threshold to allow Blackstone to start collecting profit from it.
The earnings amounted to $1.15 a share, far exceeding the 71 cents a share expected by analysts surveyed by Thomson Reuters.
Blackstone grew even larger in the quarter; its assets under management rose to $279 billion, a 21 percent increase from the period a year earlier. The firm said it had returned $50 billion to its investors over the last 12 months.
Distributable earnings, a measure of the cash generated by the business and eligible to be given to shareholders, more than doubled, to $770.8 million, from $338.5 million in the second quarter of 2013. The firm’s performance fees, which it gets from making profit on investments, soared.
The robust results can partly be explained by a particular feature of Blackstone’s business model. Many private equity firms, including Blackstone, promise the investors in their funds that they won’t start collecting profit until the funds cross a certain threshold for investment performance.
Blackstone’s fifth private equity fund, a $21.7 billion war chest dating to 2005, which stands as the largest such fund ever raised, finally crossed that threshold in the second quarter.
That means it has entered a catch-up period, taking 80 cents on every dollar earned until it makes up the profit that had been deferred in the years since the financial crisis. Then it will switch to collecting the standard 20 percent of profits.
Blackstone said on Thursday that the fund generated $509 million of performance fees in the second quarter, accounting for a big slice of the total $1.4 billion of performance fees the firm earned. In the second quarter of 2013, Blackstone reported $719 million of performance fees.
With interest rates low since the financial crisis, private equity firms have been able to refinance the debt of their portfolio companies and get them into stronger financial shape. More recently, with stock markets soaring, the firms have achieved big profits by selling these companies to the investing public or to other companies.
In the recent quarter, Blackstone demonstrated this trend in particularly grand fashion. Its huge fund, which appreciated 10.5 percent in the three-month period, is emblematic of Blackstone’s ambitions and was responsible for some of the firm’s most prominent deals.
The fund, along with Blackstone’s real estate division, bought the hotel chain Hilton Worldwide Holdings for $26 billion in 2007, a deal that soon was challenged by the economic recession. But after restructuring Hilton’s debt and helping it expand, Blackstone finally took Hilton public late last year, recording a huge gain.
The big fund also bought SeaWorld Entertainment, the theme park operator, for about $2.3 billion in 2009. By the time SeaWorld went public last year, Blackstone had more than doubled its investment.
But Blackstone was unable to access much of this profit until the recent quarter. As the big fund crossed the hurdle, Blackstone completed several large sales of shares of its portfolio companies, including a $518 million sale of SeaWorld stock in April.
In June, just before the quarter ended, Blackstone sold Hilton shares for the first time, raising $2 billion. It also took out a loan against part of its Hilton position as a way to access more cash, Blackstone executives said on Thursday.
Stephen A. Schwarzman, the chairman and chief executive of Blackstone, disclosed that the firm had recorded a total gain of nearly $12 billion on its Hilton investment, “which we believe is the largest private equity gain in history.”
Blackstone may have difficulty replicating such results in the future. Devin Ryan, an analyst at JMP Securities, predicted that the infusion of profit from the big fund would last for “the next few quarters” before tapering off.
“There is some lumpiness in this business,” he said. “You have specific fund events that create some of that quarter-to-quarter volatility.”
More urgent for Blackstone is the challenge of finding new investment opportunities at reasonable prices. Stocks are near record highs, and competitive auctions are making acquisitions even more expensive, private equity executives say.
Blackstone’s response has been to focus on deals that are atypical for a buyout firm. Those include buying minority stakes in Kronos, a human resources software maker, and in the fashion house Versace. Its $5.4 billion acquisition in April of the Gates Corporation, an industrial manufacturer, was its only leveraged buyout in the quarter.
“We’re finding, obviously, interesting things to do,” Hamilton E. James, the president and chief operating officer of Blackstone, said on Thursday. “But it’s a lot of work, and it’s a lot of off-the-run stuff.”