Blackstone Inc. (The Blackstone Group Inc.) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. On July 1, 2019, the publicly traded partnership converted to a Delaware corporation; reported results cover the partnership before conversion and the corporation afterward.
Business context and key financial metrics
Blackstone is a global alternative asset manager operating Real Estate, Private Equity, Hedge Fund Solutions and Credit businesses. At year-end, it managed $571.1 billion of total assets under management (AUM) and employed approximately 2,905 people.
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $7.338 billion | $6.833 billion | +7% |
| Management and advisory fees, net | $3.472 billion | $3.028 billion | +15% |
| Total investment income | $3.474 billion | $2.904 billion | +20% |
| Total expenses | $3.965 billion | $3.512 billion | +13% |
| GAAP net income | $3.866 billion | $3.264 billion | +18% |
| Net income attributable to Blackstone Inc. | $2.050 billion | $1.542 billion | +33% |
| Diluted earnings per Class A share | $3.03 | $2.26 | Up from $2.26 |
| Operating cash flow | $1.963 billion | $45.7 million | Higher |
Fourth-quarter figures reported in the filing: revenue was $2.091 billion, GAAP net income was $978.4 million, and net income attributable to Blackstone Inc. was $483.1 million. Fee-related earnings (FRE) and distributable earnings are non-GAAP measures; they are not substitutes for GAAP results.
- Non-GAAP earnings: Distributable earnings were $3.069 billion, up 9% from $2.826 billion. FRE was $1.789 billion, versus $1.456 billion, while net realizations were $1.281 billion, versus $1.370 billion.
- Segment distributable earnings: Real Estate $1.502 billion (+10%); Private Equity $847 million (-3%); Hedge Fund Solutions $450 million (+40%); Credit $270 million (+2%).
- Cash flow: Investing activities used $60.3 million and financing activities used $1.921 billion. Cash and cash equivalents plus cash held by funds and other entities decreased $21.5 million during the year.
- Liquidity and debt: Blackstone reported $2.172 billion in cash and cash equivalents and $2.420 billion in corporate treasury investments. It had $4.682 billion of senior-note principal outstanding and a $1.6 billion revolving credit facility with no borrowings outstanding. Consolidated loans payable of $11.081 billion also include $6.480 billion of CLO debt; CLO assets and liabilities are not generally available to, or recourse against, Blackstone.
- Balance sheet: Total assets were $32.586 billion and total liabilities $17.482 billion. These figures include consolidated funds and should not be read as wholly corporate resources or obligations.
- AUM and fundraising capacity: Total AUM rose 21% to $571.1 billion; fee-earning AUM increased 19% to $408.1 billion. Dry powder available for investment rose to $151.1 billion from $112.9 billion.
- Dividends and repurchases: Dividends paid in respect of 2019 totaled $1.95 per Class A share; the board’s stated policy targeted quarterly dividends of approximately 85% of the company’s share of distributable earnings, at its discretion. Blackstone repurchased 12.8 million shares during 2019 for $561.9 million; $781.2 million remained under the authorized program at year-end.
Material changes versus the prior year
- Management and advisory fees increased, supported by AUM growth and new fund launches. Total AUM inflows were $134.4 billion, and market activity added $33.5 billion; realizations and outflows were $40.2 billion and $28.8 billion, respectively.
- Investment income increased, mainly on stronger Real Estate, Credit and Hedge Fund Solutions performance. Private Equity investment income declined; corporate private equity carrying value increased 9.3%, compared with 19.1% in 2018.
- Realized performance allocations decreased 7% to $1.739 billion, while unrealized performance allocations increased to $1.126 billion from $561 million. Results therefore remained meaningfully exposed to valuation changes and realization timing.
- Expenses grew faster than revenue, including compensation and general and administrative costs. The 2018 comparison included $580.9 million received upon conclusion of the FS Investments sub-advisory relationship, contributing to lower 2019 “Other” revenue.
- The conversion to a corporation changed the tax profile and financial presentation. Blackstone recorded a $394.8 million estimated tax benefit related to the conversion, net of a valuation allowance; this contributed to the reported 2019 tax benefit and -1.3% effective tax rate. Management expects higher corporate taxes over time than under the partnership structure.
Outlook, management commentary, risks and unusual items
- Management provided no quarterly or annual earnings guidance. It described 2019 markets as generally rising, but noted high asset prices and competition made capital deployment challenging. Blackstone nevertheless deployed record capital in Real Estate and $26.6 billion across Private Equity.
- The filing, signed February 28, 2020, identified the novel coronavirus outbreak as a rapidly evolving material uncertainty, with potential effects on markets, economic activity, supply chains and sectors including travel, hospitality and entertainment. The ultimate impact was not estimable.
- Other risks include volatile performance revenues and realization timing; declines in fund valuations; leverage, refinancing and credit-market conditions; concentration and illiquidity; regulatory, tax and ESG developments; key-person retention; cybersecurity; and conflicts of interest. A 10% decline in fund investment fair values was estimated to reduce performance revenues, net of related compensation, by about $1.660 billion at year-end 2019; this is a sensitivity estimate, not a forecast.
- Potential carried-interest clawback obligations recorded at year-end were $126.9 million. The filing also describes a remote, extreme scenario in which all carry-fund investments are deemed worthless: up to $7.2 billion of after-tax performance allocations could be subject to clawback, with Blackstone Holdings potentially responsible for $6.6 billion if personnel failed to meet their share.
- Blackstone said it did not expect pending legal proceedings to materially affect consolidated financial statements. The Mayberry derivative litigation involving the Kentucky Retirement System remained pending; Blackstone stated it believed the suit lacked merit and intended to defend it.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included valuation of investments used to calculate performance allocations and income-tax accounting for the conversion.
Important facts for investors to verify
- Reconcile GAAP net income with distributable earnings and FRE, and assess how much reported revenue and earnings depended on unrealized valuations versus realized proceeds.
- Review the conversion-related tax benefit, valuation allowance, future corporate tax burden and tax-receivable-agreement payments; the filing’s estimated future tax-receivable payments were $672.9 million, subject to assumptions.
- Distinguish corporate liquidity and debt from consolidated CLO and fund balances; confirm note maturities, revolving-facility availability and capital commitments.
- Track fundraising, fee-earning AUM, redemptions, realizations and performance by segment, particularly Private Equity realization trends and energy-related exposures.
- Monitor valuation judgments, clawback exposure, the Mayberry litigation and developments in the coronavirus-related market risk identified after year-end.