Blackstone Expects the Return of the Mega-Buyout

The Blackstone Group (BX), one of the world's largest alternative asset management firms, reported solid quarterly earnings Friday that beat analysts' estimates, though its stock price hardly budged. In the quarter, Blackstone earned $360.4 million, compared to a loss of $82 million in the same period a year ago.

The conference call included lots of detail and the insights of President Tony James and CEO Stephen Schwarzman. When they talk, it's definitely worth paying attention.

Here's a look at some of the main takeaways from the Blackstone conference call:

The Economy: A double-dip recession looks remote, according to Blackstone leadership. If anything, emerging economies are growing nicely and the U.S. is getting back on track. The upshot is that Blackstone's private equity portfolio posted a net return of 16% in the first quarter. In fact, the expectation is that nearly all the Blackstone portfolio companies will show revenue and EBITDA growth in 2010.

However, Blackstone has focused more than 60% of its Q1 private-equity investments in emerging markets and the firm considers India particularly attractive.

Fundraising and Fees: It's getting much easier to raise capital as major investors look for stronger returns, which often come from alternative investments. Blackstone is currently raising a $12.5 billion global buyout fund; its prior fund was $21 billion.

But there is still pressure on management fees and the carried interest. Just look at Apollo Management, which recently agreed to a $125 million reduction on its fees with CalPERS.

Financial Reform: Ironically, the proposed overhaul of the financial system may benefit private equity firms. The reason is that major banks may be forced to unload their alternative-investment operations. With lots of cash and public stock, Blackstone will be positioned to benefit.

IPOs: Blackstone expects to have eight to ten IPOs over the next year. But the firm agrees that the market is still choppy and that it will need to get the timing right. Unfortunately, as seen this week, investors are still not bullish on the IPO market.

Expect Mega Deals: Yes, get ready for the return of deals of $10 billion to $15 billion in size. A key is that credit markets have boomed. For example, over the past year, junk bond yields have gone from 19% to 9%. What's more, deal valuations have gone from 2 to 2 1/2 times cash flows to 5 1/2-6 times cash flows.

And Goldman Sachs (GS): While not commenting on the SEC's charges against the firm, Schwarzman was clear in his support of Goldman as highly ethical and a great client.