* Adjusted economic net income 55 cts/unit, tops view
* Total assets under management up 30 pct to record $205 bln
* Announces quarterly distribution of 10 cents/unit
By Greg Roumeliotis
NEW YORK, Oct 18 (Reuters) - Blackstone Group LP, the world's largest alternative asset manager, said on Thursday third-quarter earnings were its third best since going public in 2007, as its funds appreciated in value and performance fees soared.
The New York-based manager of private equity, real estate, credit and hedge fund assets beat analysts' profit estimates as the value of its holdings jumped on a buoyant stock market, while the firm raked in more fees from exiting investments.
Blackstone has benefited as long-term investors such as pension funds look for more attractive yields in alternative assets to escape poor returns in more liquid securities, such as government bonds and high-grade debt.
"We are in the midst of a mega-cycle where Blackstone stands out as having significant experience across the illiquid asset classes, where the returns are substantially greater historically," Blackstone Chief Executive Stephen Schwarzman told analysts on a conference call.
In its 27-year history, Blackstone has generated net annual returns of 23 percent on realized investments in private equity and 28 percent in its global real estate business, Schwarzman said.
The firm reported that adjusted third-quarter economic net income, a measure of profitability using mark-to-market valuation of its portfolio, swung to a profit of 55 cents per unit from a loss of 34 cents per unit a year earlier.
Analysts expected Blackstone to return to profitability but in a Thomson Reuters poll, the consensus view was for 42 cents per unit.
The stock jumped 3.6 percent to $15.58 in afternoon trading and hit a six-month high earlier in the session.
"The growth story in assets under management and the strong returns are dynamics that are ultimately going to drive realizations down the road," said Sandler O'Neill & Partners LP analyst Michael Kim.
Underpinning the robust performance was a strong appreciation in the value of Blackstone's assets. Its private equity portfolio was up 7.1 percent for the quarter while its real estate holdings gained 4.9 percent.
This allowed Blackstone to mark up the performance fees it expects to receive when it exits investments. Carried interest - its cut of fund profits - originating from actual sales of investments was $83.8 million in the third quarter, its highest since the first quarter of 2011.
A bleak spot was in the performance of the financial advisory business. Revenues were down 29 percent from the same quarter last year, mainly due to delays in deal closings, although the backlog of deals the firm is advising on remained healthy, Blackstone said.
Blackstone, which was founded by Schwarzman and Peter Peterson in 1985, is still best known for its private equity business, which accounts now for just one-quarter of its assets under management. That compares with real estate, which made up close to half of its profit in the third quarter.
The firm has been behind some of the largest leveraged buyouts that preceded the financial crisis of 2008.
Its role - and that of many large buyout firms involved in such major deals - is now in the spotlight following the release last week of the unredacted version of a legal complaint alleging collusion between buyout firms.
The complaint was brought against them by shareholders of some of the companies that were taken private.
The complaint included as evidence email correspondence between titans of private equity, including one from Blackstone President Tony James, who wrote to KKR & Co co-founder George Roberts: "We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money."
In a conference call with journalists Thursday to discuss earnings, James said the complaint had no merit, and that while cooperation between buyout firms was needed for large deals, the relationship between them was highly competitive.
"The lawsuit is a complete fabrication and a bunch of malarkey. When it comes to big deals. it's not only perfectly permissible for our firms to team up, but it's a requirement," James said.
"I suspect there is some political motivation lurching in here cause we have a private equity guy running for president (of the United States)," James added, referring to the candidacy of Bain Capital LLC co-founder, Mitt Romney.
James is backing the re-election bid of U.S. President Barack Obama, while Schwarzman is a staunch Romney supporter.
Blackstone, which has investments in The Weather Channel, Pinnacle Foods and SeaWorld Parks & Entertainment, said distributable earnings, reflecting actual cash available to pay dividends, rose to $189.6 million from $125.7 million a year ago.
Assets under management totaled a record $205 billion at the end of September, up 30 percent from a year earlier. F ee-earning assets under management were up 27 percent year on year to a record $169 billion.
Blackstone said in September it had raised just over $2.5 billion for its first energy-focused private equity fund, as it seeks to ride a wave of energy deals in the United States.
Earlier this month, Blackstone said it raised $13.3 billion for its latest real estate fund, the largest private real estate fund ever. The firm is now fundraising for a real estate debt fund, which has a target of $3 billion and has received a very strong reception from investors, James said.
Blackstone's credit arm closed three new funds during the quarter totaling $2 billion and is now in the market with its new rescue lending fund which its expects to comfortably exceed the $3.25 billion size of its first such fund, James said.
James said the firm had also raised $1.4 billion for tactical opportunities. Across its business, Blackstone had $36 billion of available capital to spend at the end of the third quarter, $16.4 billion of which was in private equity.
Real estate has proved to be a great money-spinner for Blackstone, growing so big it often faces no competition from private equity rivals such as Apollo Global Management LLC , Carlyle Group LP and KKR for some properties.
Since the fourth quarter of 2009, when the market bottomed, Blackstone has invested $17.6 billion across its real estate funds, making it the largest purchaser of real estate in the world, Schwarzman said on the call with analysts.
As an example of Blackstone's profitability in real estate, Schwarzman mentioned the announced sale this week of its Sunwest senior housing communities. Blackstone made 2.4 times its $225 million investment in just two years - some 40 percent over the latest mark-to-market valuation of Sunwest, he said.
Blackstone also declared a quarterly distribution of 10 cents per common unit on Thursday.
Blackstone is the first of the major publicly listed alternative asset managers to report quarterly results. KKR is scheduled to post its results on Oct. 26.