Several economic gurus have seized on the recent rebound in equities to offer a generally upbeat view on a broader recovery, waxing poetic about the emergence of “green shoots” and their general feeling that a bottom in the U.S. economy may have been reached.
But Hamilton “Tony” James, who as president of The
Blackstone Group presides over more than $17 billion of investments in industries ranging from health care and business services to media and financial services, has a grimmer outlook.
“I don't know why we're hesitant to call this [a] depression,” he told investors in the private-equity giant's five buyout funds, who gathered in New York in May for a report on their investments.
Mr. James likely sent chills down some of his limited partners' spines with his generally sober view, which contrasted with the more upbeat view expressed at the meeting by
Blackstone co-founder and chief executive Stephen Schwarzman.
About 25% of the chief financial officers at Blackstone-owned firms expect sales to grow this year, Mr. Schwarzman said.
Mr. James replied that there was “a lot of wishful thinking” in some of those responses. And when Mr. James spoke of an economic depression, not a
recession, Mr. Schwarzman commented that business leaders are supposed to exude cheerful optimism to help restore consumer and investor confidence.
Peter Rose, a spokesman for New York-based Blackstone, declined to comment.
On the company's first-quarter earnings call May 6, when
Blackstone reported a loss of $93 million following a fourth-quarter-2008 deficit of $827 million, Mr. Schwarzman told analysts that he saw “greater stability and improvement of global asset values in both debt and equity.”
Blackstone reduced the carrying value of its real estate and private-equity investments by about 19% and 3%, respectively, in the first three months of 2009, after cutting 30% and 20%, respectively, in the fourth quarter of 2008.
“As Steve said, the rate of decline appears to be abating somewhat, but the decline itself is still going on,” Mr. James said during the earnings call. “And so, in other words, things are still getting worse. I don't consider that green shoots; I consider that the continuation of winter.”
Mr. James is “intellectually honest,” said Orin Kramer, a general partner of
hedge fund Boston Provident Partners LP in New York and chairman of the New Jersey State Investment Council in Trenton, which oversees public-pension in- vestments in the state.
Mr. Kramer, who didn't attend the limited partners' conference, said he knows through personal discussions that Mr. James believes unemployment will deteriorate beyond levels that most economists forecast, though Mr. James doesn't think it will come close to the 37% non-farm unemployment levels of the Great Depression.
At the limited partners' meeting, Mr. James and other executives spoke of opportunity in the continuing hard times — not surprising considering that they were speaking to the people who helped fund the $21.1 billion
Blackstone Capital Partners V LP. The firm is now raising its sixth buyout fund and has about $8.6 billion of commitments, including at least $500 million from Blackstone.
Blackstone will be cautious and expects a slow recovery but will take advantage of hard times by repurchasing expensive debt held by its portfolio companies, investing in underpriced midsize companies, expanding its Asian portfolio, cautiously venturing into undercapitalized financial firms that have government guarantees and buying distressed corporate debt at prices that reflect forced selling, the limited partners were told.
The firm late last month was part of the investor group that purchased Miami Lakes, Fla.-based Bank-United FSB from the Federal De-posit Insurance Corp. at a steep discount and with government guarantees against billions of dollars of future losses.
Chinh Chu, a senior managing director in Blackstone's corporate-private-equity group, told the limited partners that the firm passed on making investments in more than 50 banks last year.
He forecast more credit losses in banking but said loss-sharing deals with the government that don't require leverage can be profitable.
Blackstone expects to bid on some of them and also is interested in investing in asset management firms, Mr. Chu said.
E-mail Jed Horowitz at [email protected].
