Blackstone acts to make portfolio recession-proof

Blackstone, the private equity giant whose flotation last June marked the peak of the industry's boom, warned that challenging conditions will last into 2009 as it posted a slump in revenues and profits.

Stephen Schwarzman, the founder and chief executive, said the US is "clearly in the middle of a severe financial crisis", and he said that Blackstone was reshuffling its portfolio of companies to reflect expectations that the country is in a recession.

The company – whose wide-ranging portfolio of investee companies includes CenterParcs, the Nielsen media research group and Orangina – has been selling its economically sensitive investments in favour of buying defensive firms such as healthcare and food producers. It has also replaced the chief executives of 12 of its 55 investee companies to equip them for a downturn.

"Down cycles are not fun, but they form the basis of enormous future profits at Blackstone," Mr Schwarzman said. "It is typically during these disruptive periods that we make our best-performing investments."

Blackstone said revenues at the private equity division were negative in the final three months of last year, compared to $533m (£266m) in the fourth quarter of 2006, because it had to write down its investment in Financial Guaranty Insurance Company by $122.2m (£61m). FGIC is a bond insurance company, whose creditworthiness has been called into question because it guarantees billions of dollars of mortgage-related bonds. Revenues from Blackstone's property investment business also fell sharply, by 75 per cent. The company also revealed it is yet to invest a penny of the $1.4bn fund it raised in December to buy up distressed credit market securities. The reason, it explained, is that it has been expecting the credit markets to continue deteriorating, although chief operating officer, Tony James, said that it could begin to deploy the money within the next three months.

Many credit securities, including the debt that companies like Blackstone have traditionally used to finance leveraged buy-outs, have collapsed in value since the credit crisis began last summer. Several private equity firms, faced with restricted funding for their traditional activity of leveraged buy-outs, have raised money instead to buy leveraged loans.

"The temptation is growing," Mr James said, partly because banks were offering to lend money to buyers of the distressed debt on their books. However, he added that he saw the credit crisis persisting into next year.

Blackstone shares rose 2.9 per cent to $15, but they are still less than half the $31 apiece at which they floated last June.