Credit crunch: Blackstone smells opportunity

President Tony James says the private equity firm has an eye on debt that has been oversold in the market.

By Grace Wong, staff writer

NEW YORK ( -- The debt markets may be creating trouble for some leveraged buyout deals, but private equity titan Blackstone is sniffing out opportunities.

The private equity firm is keeping an eye on the debt of buyout deals that have come under financing pressure, Blackstone President and Chief Operating Officer Tony James said Monday.

"We're starting to look directly at debt securities that are trading at distressed levels" but which aren't distressed at all, he told analysts.

Problems stemming from the subprime mortgage crisis have erupted into a full-blown credit crisis. Several private equity deals have hit snags as financing markets have closed their doors on corporate loan and bond deals.

Debt markets are likely to keep shunning financing deals for leveraged buyouts for some time, James said. The idea that it'll be "business as usual" in the debt markets after Labor Day is "way too optimistic," he said. "It will take a while to work through [the backlog of deals]."

But the problems in the corporate debt market have been triggered by an imbalance between supply and demand, rather than problems arising from credit fundamentals, James said.

He acknowledged that Blackstone will also feel the impact of a more challenging deal environment, saying the company's near-term results are likely to be pressured.

But few of its buyout deals have been hung up by the turbulence in the credit markets, and its agreement to buy Hilton Hotels (Charts, Fortune 500) is on track to close in the fourth quarter, he said.

The end of super cheap credit will cut down on the number of "mega deals" in the market, James said. Still, he was upbeat on the outlook for the industry, saying "the return opportunities we see in private equity are at least the best we've seen in two years."

Speaking about tax bills introduced in Congress that would increase the tax burden on publicly traded private equity firms and fund managers, James stressed that no consensus has emerged so far on any of those initiatives. However, he said he wouldn't be surprised if tax rates in general for high-income earners were to rise.

Blackstone has been behind some of the year's largest buyout deals, including the takeover of Equity Office Properties Trust in February for $39 billion. But James said the firm found the first half of the year very "frustrating" because the it was outbid for many targets.

The company lost out on some deals because rival bidders offered 10 to 15 percent more than Blackstone was prepared to offer, but now the firm's discipline is starting to pay off, James said. Competition for deals should become less intense as more players are squeezed out, and lofty deal values are already starting to correct, he said.

The comments from James came as Blackstone (Charts) reported its first set of quarterly results since going public. Shares shot up 6 percent after the firm said its profit and revenue tripled in the latest period on strength across all of its segments. In addition to private equity, Blackstone operates real estate, alternative investment and advisory segments.

Blackstone reported net income of $774.4 million for the quarter ended June 30, up from $224.1 million a year earlier. Revenue surged to $975.3 million from $324.6 million.

Blackstone has flexed its industry might time and time again. Its latest private equity fund, Blackstone Capital Partners V, is the world's largest at $21.7 billion. James said the company is already thinking about starting to raise its next fund, but declined to estimate the size of that fund.

The company made a splashy debut in June when it staged the nation's biggest initial public offering in five years. Its offering raised $4.13 billion, and shares rose as high as $38 in their first day of trading. But shares have plummeted below their offering price of $31 a share since then.

--'s David Ellis contributed to this story Top of page