Business Context and Reporting Period
Company: The Blackstone Group L.P. (Blackstone)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: Blackstone is a leading global manager of private capital and provider of financial advisory services. As of December 31, 2009, the firm managed $98.2 billion in assets under management (AUM). The business is organized into four segments: Private Equity, Real Estate, Credit and Marketable Alternatives, and Financial Advisory. The reporting period reflects a year of market recovery following the 2008 financial crisis, characterized by improved equity and credit markets, though real estate fundamentals remained under pressure.
Key Financial Metrics
| Metric (in millions) | 2009 | 2008 | 2007 |
|---|---|---|---|
| Total Revenues | $1,773.7 | $(349.4) | $3,050.1 |
| Net Income (Loss) Attributable to Blackstone | $(715.3) | $(1,163.0) | $(335.5) |
| Adjusted Cash Flow from Operations | $526.2 | $128.8 | $1,516.6 |
| Assets Under Management (AUM) | $98.2 billion | $94.6 billion | $102.4 billion |
| Fee-Earning AUM | $96.1 billion | $91.0 billion | $83.2 billion |
| Cash and Cash Equivalents | $952.1 million | Not specified | Not specified |
| Total Debt Outstanding | $652.0 million | Not specified | Not specified |
Note: Net Income includes significant non-cash charges related to the amortization of intangible assets and equity-based compensation. Adjusted Cash Flow from Operations is a non-GAAP measure used by management to assess liquidity.
Material Changes vs. Prior Period
- Revenue Recovery: Total revenues rebounded to $1.77 billion in 2009 from a loss of $349 million in 2008. This $2.1 billion improvement was driven primarily by a $1.5 billion increase in Performance Fees and Allocations and a $663 million increase in Investment Income.
- Performance Fees: Performance fees turned positive ($221 million) in 2009 after a significant negative adjustment in 2008 ($1.25 billion loss) due to unrealized valuation declines in Private Equity and Real Estate funds. The 2009 improvement was driven by a net internal rate of return (IRR) of 9% for Private Equity funds (vs. -30% in 2008) and improved returns in Credit and Marketable Alternatives.
- Asset Growth: Fee-Earning AUM increased 6% to $96.1 billion, driven by market appreciation in funds of hedge funds and credit platform funds, partially offset by depreciation in Real Estate assets.
- Debt Issuance: In August 2009, Blackstone issued $600 million of 10-year senior notes at 6.625% to fund growth strategies and general corporate purposes.
- Segment Performance:
- Private Equity: Economic Net Income (ENI) improved to $490 million from a loss of $393 million in 2008.
- Real Estate: ENI improved to a loss of $118 million from a loss of $851 million in 2008, though the segment still faced significant unrealized valuation reductions.
- Credit and Marketable Alternatives: ENI turned positive at $265 million from a loss of $195 million in 2008, driven by improved market conditions and the integration of GSO Capital Partners.
- Financial Advisory: ENI declined to $86 million from $109 million in 2008, primarily due to a decrease in fund placement fees, partially offset by growth in restructuring advisory fees.
Guidance, Outlook, and Risks
Guidance: Blackstone does not provide specific financial guidance regarding expected quarterly or annual operating results due to the high variability of its revenue streams, particularly carried interest and transaction fees.
Management Commentary:
- Management highlighted the successful stabilization of the business, evidenced by credit rating upgrades (A+/F1 from Fitch, A from S&P).
- The firm grew fee-earning assets by over 5% in 2009 despite a difficult fundraising environment.
- Going forward, the firm intends to use "Distributable Earnings" (a non-GAAP measure) rather than Adjusted Cash Flow from Operations to determine distributions to unitholders.
- The priority distribution policy for public unitholders (up to $1.20 per unit) ended on December 31, 2009; future distributions will be made on a pro rata basis among all unitholders.
Risks and Contingencies:
- Market Conditions: Continued volatility in global financial markets could adversely affect investment performance, fundraising, and the ability to exit investments.
- Clawback Obligations: The firm has recorded a contingent repayment obligation for carried interest that would be due if carry funds were liquidated at current fair values. While no cash clawback has been required historically, future fund performance could trigger these obligations.
- Regulatory and Tax Risks: Potential legislative changes regarding the taxation of carried interest (treating it as ordinary income) or the classification of the firm as a corporation could materially increase tax liabilities.
- Liquidity: The firm relies on cash flows from operations, realizations, and its $850 million revolving credit facility (maturing May 2010) to meet capital commitments and distribution obligations.
Key Facts for Investor Verification
- Net Loss vs. Cash Flow: Verify the distinction between the reported Net Loss of $(715) million and the positive Adjusted Cash Flow from Operations of $526 million, noting the impact of non-cash intangible amortization and equity compensation.
- Carried Interest Volatility: Assess the sensitivity of future earnings to the realization of gains in Private Equity and Real Estate funds, which are currently below their preferred return thresholds in some cases (e.g., BCP V, BREP V).
- Debt Maturity: Confirm the status of the $850 million revolving credit facility maturing in May 2010 and the $600 million senior notes maturing in 2019.
- Distribution Policy Change: Note the shift from a priority distribution structure for public unitholders to a pro rata structure effective January 1, 2010, which may alter the per-unit distribution amounts for public investors.
- Real Estate Valuations: Monitor the recovery of Real Estate fund valuations, which remain significantly below cost basis for several funds (e.g., BREP V, BREP VI) and are a key driver of future performance fee reversals or accruals.