At first glance, it is enough to cause some queasiness. Blackstone will start booking profits from private equity investments the moment it makes them. And that is not just from the deal fees it charges. It is the more meaningful profit from “carried interest” – Blackstone’s 20 per cent share of the profits generated from its investments.

Under new accounting standard SFAS 159, Blackstone can calculate an option value for the future carry it might generate on any deal. That is booked upfront. As the investment matures, the option value is updated. The final adjustment comes at exit and adjustments can be positive or negative. Such treatment is different from historical convention where private equity groups book profits from carry when it is actually realised. That said, Blackstone’s approach has some logic. Each investment does have option value. It makes little sense for Blackstone to be too aggressive on that value, as it would simply have to take losses later. And it is following the spirit of the new rule which is meant – for better or worse – to “mitigate volatility” in reported earnings. Blackstone’s cash flow will be more lumpy, but more certain, because the carry will be based on actual exits.

The problem for investors is that carry is Blackstone’s biggest source of earnings. Internal calculations will remain pretty opaque. And there is a lack of detailed information to facilitate investors’ own estimates for carry, such as updated net asset values for investments, the amount of leverage and a fund’s progress in its lifecycle of investments versus exits.

Underlying management and deal fees are pretty transparent. When it comes to carry, however, Blackstone will be more of a black box. If, say, Goldman Sachs suffers from a valuation discount on that basis, Blackstone should expect similar treatment.

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