Blackstone Sees Opportunity in Volatility

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Stephen Schwarzman, chief of Blackstone.Credit Alex Wong/Getty Images

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Updated, 6:08 p.m. |
A bout of market volatility rattled traders’ nerves on Wednesday. But the Blackstone Group is looking for ways to profit from the turmoil.

Blackstone, the largest firm that invests in private equity, offered that investment outlook on Thursday while reporting higher profit for the third quarter. The firm said its economic net income — a measure of profit that includes unrealized investment gains — was $758.4 million, 18 percent higher than in the third quarter of 2013.

Still, the profit amounted to 66 cents a share, falling short of analysts’ expectation of 72 cents a share, according to a survey by Thomson Reuters.

Shares of Blackstone fell 0.6 percent to close at $28.87 on Thursday.

Distributable earnings, a measure that reflects cash generated by the business, more than doubled, to $672.1 million, in the quarter, Blackstone said. Underlying that surge was $10 billion in sales of the firm’s investments.

As stock markets have risen in recent years, private equity firms like Blackstone have seized the opportunity to sell their portfolio companies to public investors, reaping large profits. But when it comes to making new investments, Blackstone and its rivals have been frustrated by the persistently lofty valuations of stocks and other assets.

On Thursday, Blackstone suggested that the streak of high prices might be eroding, creating new opportunities.

The firm said it was sitting on $42.3 billion of capital it had yet to spend, known in the industry as dry powder. Of that amount, $18 billion is for private equity and $13.1 billion is for real estate, Blackstone said.

“We are uniquely positioned to take advantage of market volatility across all of our businesses,” Stephen A. Schwarzman, the chairman and chief executive, said in a conference call with analysts. “With one of the largest pools of dry powder capital, we can and will move quickly to respond to market dislocations. These types of investment environments end up becoming some of our best vintages.”

Even with all that capital on hand, Blackstone continued to attract more. The firm said it raised $13 billion of fresh capital in the quarter, helping push its assets under management to $284 billion.

Private equity firms usually use nonstandard metrics to report their results. According to generally accepted accounting principles, Blackstone’s earnings rose 46 percent, to $250.5 million, from the period a year earlier. The firm said it would pay a dividend of 44 cents.

The quarterly results were marred by a decline in investment income, which reflects Blackstone’s realized and unrealized gains on principal investments, including stakes in its funds. This measure fell 19 percent to $80.8 million over all, Blackstone said. In its private equity business, in particular, investment income fell 78 percent to $7.7 million.

In addition, Blackstone said its taxes increased by more than five times to $79.5 million in the quarter, largely because of sales in its credit and real estate businesses.

Choppy markets present opportunities in a range of areas, including real estate and credit, Hamilton E. James, Blackstone’s president, said on Thursday. But for the type of deal that is Blackstone’s signature — taking public companies private — prices continue to look high.

“Values haven’t changed all that much in the last week. Psychology has changed a lot, but levels haven’t really changed that much,” Mr. James said in a conference call with reporters. “If it starts to fall a lot more, you’ll start to see more public to privates.”