Blackstone's Big Europe Bet

Blackstone(BX) reported a quarterly loss Thursday of $342 million, a signal the deteriorating deal and market environment is taking a toll on the firm. On a GAAP basis, the private equity firm reported a $274.6 million loss, its worst since the financial crisis.

It was a similar result as investment banks like Goldman Sachs(GS), which on Tuesday reported its second ever quarterly loss as a public company. Last week, JPMorgan Chase(JPM), reported its worst investment bank earnings since the crisis.

A deteriorating sovereign debt and bank capital situation in Europe escalated, causing pain for investors around the world, including Blackstone. In the third quarter, the S&P 500 index fell 14% and the MSCI World Index dropped 17%. Meanwhile, the VIX, a gauge of general risk aversion almost doubled during the quarter.

It's not surprising on Blackstone's conference call that its chief executive Steven Schwarzman sought to explain just how bad Europe had been from July through September. "For months of the quarter, the primary investor concern remained Europe's escalating debt crisis," said Schwarzman. He also made it a point to stress the big surprise of the day - the billions that flowed into Blackstone during a quarter when markets at times seemed moments from a Lehman Brothers collapse. "In the third quarter, we have fee earning net inflows in every one of our businesses, going to say that one again because it's highly unusual," said Schwartzman.

Investors looking for company buyout earnings higher than bond yields or stocks, pumped money into Blackstone, which announced fee-earning private equity assets under management increased 52% to $37 billion. Overall, across its divisions, assets under management rose to $157.7 billion, from $119.1 billion. In addition, the company reported it's sitting ! on $16.9 billion in "dry-powder" -- meaning unused cash for new buyout investments.

As a result, in spite of its worst earnings since the fourth quarter of 2008 - and a loss of 31 cents a share that exceeded analysts' estimate of a 1 cent loss, Blackstone's stock rose over 1.5% to $13.45.

What is highly unusual in Blackstone's quarter is where the world's largest private equity fund has been plowing its cash stockpile - chiefly Europe. This quarter, Schwarzman said that the firm committed nearly $6.2 billion of capital, its highest quarterly investment level since 2007. "We have record levels of dry powder to put to work over the next several years in private equity given our recent success in fund raising. We believe the environment will continue to present many attractive opportunities." Though Schwarzman pointed to investments in energy, Asia and particularly India, Blackstone's investments this quarter demonstrate a European focus.

With investments in European hotels chain Mint, German camera maker Leica, outdoor apparel seller Jack Wolfskin, leveraged European credit manager Harbourmaster and bankrupt Eurozone mortgage manager German Level One, the company's appears to be doubling down on the crisis-stricken continent in search of attractive opportunities.

Though Blackstone's $3 billion buyout of medical data provider Emdeon was its biggest purchase of the quarter, its reported that the firm spent $995 million on Jack Wolfskin, $950 million on Mint, nearly $300 million for German Level One and took on more than $15 billion in debt with Harbourmaster.

On the analyst call, Schwarzman called his debt management business called GSO, and which bought Harbourmaster, "one of our fastest growing businesses." He added, "We believe there is a significant growth opportunity within this asset class given the capital constraints at the banks... We anticipate launching several new! funds a nd strategies in that region."

Schwarzman said on the earnings call that it's Blackstone's long-term investing horizon that's made it and private equity attractive safe harbor for long term investment returns as markets deteriorated. "It is exactly in times of uncertainty such as this that the diversity and stability of our business model is most apparent," said Schwarzman.

It's possible a signal that the private equity model makes it a more likely investor in Europe than stock or bond investors. In explaining how Blackstone sees its Jack Wolfskin and Leica investments growing, Steve Schwarzman pointed to international expansion and highlighted Asia. European investments, though opportunistic may also be a proxy for emerging market growth. For now, the surprise of Blackstone's earnings is its European bet.