Dividend Promise Lifts Blackstone

Recently, shares of private equity investor Blackstone Group (NYSE:BX) soared to a one-day gain of more than 25%. The lift followed the release of quarterly results that revealed serious losses resulting largely from writedowns in the value of the company's portfolio. Blackstone also announced that it will skip the Q4 dividend, which had been tracking at a rate of about 30 cents per share, or a total of 90 cents per unit for the full year 2008.

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Normally, such an onslaught of bad news would have resulted in the stock price being pummeled. So why the sharp jump in price?

Management Promises Dividend Reinstatement
Despite the financial hammering the company took in 2008, investors apparently are prepared to take management at its word regarding the prospects for this year. Chief Operating Officer Tony James declared that adjusted cashflow in 2009 would be more than sufficient to allow the company to reinstate the full annual distribution of $1.20 per share to shareholders. Given the March 3 closing price of $5.69, that amounts to a promised yield in excess of 21%.

Deal Volume Collapses As Credit Dries Up
While it's understandable that investors gained considerable comfort from such confident assertions by management regarding the dividend, investors will still have to temper their enthusiasm given the tough environment that the company now faces.

As a result of the credit crunch, the private-equity deal pipeline has virtually shut down. One of the leveraged buyout (LBO) masters of the universe, the company only managed to place $9.2 billion into new deals in 2008, compared to the $169 billion it managed to place in 2006 and 2007. According to data compiled by Bloomberg, the total private equity market shrank by 60% last year to $211 billion.

More Writedowns Possible
Another remaining concern is the relative health of the company's existing investment book. The recent quarterly loss included a writedown in the value of its private-equity assets. Reuters recently reported that in aggregate, the value of the company's funds was written down by 31%.

Rival LBO master Kohlberg Kravis Roberts & Co. has also been busy writing down the carrying value of its investments. Among the company's publicly traded units, KKR Private Equity Investors (OTC:KPEQF) reported a 50 percent drop in the value of its portfolio, and KKR Financial Holdings(NYSE:KFN), a KKR-managed fund that specializes in investing in corporate debt, reported a $1.2 billion loss during Q4 2008. The loss was due in part to a $454 million impairment charge. Other private equity investments held by KKR were reportedly written off entirely. (Read more about these charges in Impairment Charges: The Good, The Bad And The Ugly.)

All this suggests that Blackstone's book could not be immune to further writedowns.

Fee Business Still Profitable
One bright spot continues to be the company's fee-based business. For 2008, Blackstone still managed to earn more than $1.4 billion in management and advisory fees, down just over 5% from the previous year. This side of the business should benefit this year from Blackstone's current advisory role in helping American International Group (NYSE:AIG) dispose of certain assets and possibly effect a restructuring. Experience gained here could well be applied to future government-operated distressed situations.

The Bottom Line
While further asset writedowns could have a bearing on share value, they wouldn't impact cash flow. If the fee business holds up reasonably well this year, that would generate sufficent cash flow for the company to meet its stated dividend obligation. Moreover, with more than $767 million in cash on hand (net debt) at the end of January, ample funds are still available to meet the roughly $330 million payout requirement.

Find out whether this pricey investment is for you and how you can invest; read Private Equity Opens Up For The Little Investor.