Blackstone Group L.P. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Blackstone is an alternative asset manager with Private Equity, Real Estate, Hedge Fund Solutions and Credit segments. Unless stated otherwise, financial figures below are in U.S. dollars and rounded.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1.93B | $1.74B | $6.33B | $5.19B |
| Income before taxes | $976M | $894M | $3.56B | $2.72B |
| Net income | $949M | $835M | $3.34B | $2.57B |
| Net income attributable to Blackstone L.P. | $443M | $378M | $1.55B | $1.17B |
| Diluted net income per common unit | $0.64 | $0.55 | $2.27 | $1.73 |
- Q3 revenue increased 11% year over year and Blackstone-attributable net income increased 17%. For nine months, revenue increased 22% and attributable net income increased 33%.
- Management and advisory fees rose 14% in Q3 and 10% for the nine months. Investment income rose 7% and 9%, respectively. Incentive fees fell 72% in Q3 and 66% for the nine months.
- Nine-month “Other” revenue was $625M versus a $99M loss in the prior year, principally reflecting a $580.9M payment associated with ending the FS Investments sub-advisory relationship, as well as foreign-exchange gains. This payment is a material, nonrecurring item.
- Economic Income, Blackstone’s non-GAAP segment measure, was $924M in Q3, up 9%, and $2.84B for nine months, up 11%. Q3 Private Equity Economic Income rose to $444M from $165M; Real Estate declined to $346M from $499M. These results exclude certain consolidation and transaction-related effects and are not GAAP net income.
Assets under management, cash flow and balance sheet
- Total AUM was $456.7B at September 30, up 5% from $434.1B at year-end 2017. Fee-earning AUM was $342.3B, up 2% from $335.3B. Dry powder was $94.8B, compared with $91.9B a year earlier.
- Nine-month limited partner capital invested was $26.7B versus $27.6B in 2017. Fee-earning AUM growth reflected $54.0B of inflows, offset by $35.2B of outflows and $15.5B of realizations; the FS Investments relationship ending contributed to outflows.
- Operating cash flow was negative $1.34B for the nine months, compared with negative $1.23B in 2017. Investing cash flow was negative $9M; financing cash flow was negative $251M, including $2.26B of distributions to unitholders. Cash and cash equivalents were $1.94B at quarter-end; cash, fund cash and restricted cash combined were $2.35B.
- Total assets were $30.46B and total liabilities $15.75B. Loans payable were $10.16B, down from $14.82B at year-end, primarily reflecting fund deconsolidations. This consolidated debt includes $6.86B of CLO and fund-vehicle obligations; those liabilities are collateralized by fund assets and, according to the filing, do not have recourse to Blackstone’s general credit. Blackstone’s own senior notes had $3.54B principal outstanding.
- Corporate liquidity included $1.94B of cash and $3.5B of corporate treasury investments. Blackstone had an undrawn $1.6B revolving credit facility, extended to September 2023. Management said available liquidity was expected to be sufficient for working capital and commitments.
Material changes, outlook and risks
- Private Equity performance income strengthened, while Real Estate performance revenues declined as appreciation in opportunistic real estate funds slowed. Hedge Fund Solutions performance revenues also weakened; Credit Q3 performance revenues were sharply lower, partly due to the FS Investments exit.
- During 2018 Blackstone diluted its ownership in certain CLO and other vehicles and deconsolidated them. This reduced reported assets by $8.9B and liabilities by $8.7B; Blackstone said it continues to earn fees and performance allocations from those vehicles. The change affects balance-sheet comparability and reported cash-flow movements.
- Management described continued U.S. economic growth but cited rising rates, trade tensions, emerging-market weakness and geopolitical uncertainty. It noted that global markets fell sharply after quarter-end in October. Higher rates, a stronger dollar, inflation, tariffs, weaker asset values, reduced realizations and investor withdrawals could pressure results; rates could also raise financing costs for Blackstone and portfolio companies.
- Management expected over time to replace and ultimately exceed revenue and earnings associated with the ended FS Investments relationship. It also announced an agreement to acquire Clarus Ventures, expected to close in Q4 2018 subject to customary conditions. No quantified earnings guidance is provided in the supplied filing text.
- Blackstone intended to distribute part of the after-tax FS exit payment as an incremental $0.30 per common unit and Blackstone Holdings unit over three quarters; $0.10 per unit had been distributed in August and November. Its stated general policy was to distribute approximately 85% of its share of Distributable Earnings, subject to the general partner’s discretion.
- The April 2018 unit-repurchase authorization was up to $1.0B. Blackstone repurchased 8.2M units for $290M in the first nine months; $709.9M remained available at September 30.
- Reported potential clawback obligations were $2.8M. A hypothetical scenario in which all carry-fund investments became worthless could expose Blackstone and personnel to $6.9B of after-tax clawbacks, including $6.3B potentially attributable to Blackstone Holdings if personnel default; management characterized this scenario as remote. Blackstone also disclosed $2.5B of investment commitments and expected future tax-receivable-agreement payments of about $786M over 15 years, subject to tax savings realized.
- Management did not expect pending litigation to have a material impact, while noting that an adverse outcome could materially affect a particular period. The filing also identifies uncertainty from potential tax-law changes, including carried-interest proposals. Revenue-accounting adoption changed incentive-fee presentation and timing; prior-year comparisons were retrospectively adjusted.
Important facts for investors to verify
- How much of 2018 revenue and earnings growth reflects the one-time $580.9M FS Investments payment, and what recurring earnings remain after that relationship ended.
- How sensitive accrued performance allocations and future realizations are to valuation assumptions and market declines; accrued performance allocations were $6.72B at quarter-end and are not equivalent to realized cash.
- The distinction between Blackstone corporate debt and fund/CLO debt, and the extent to which fund liabilities are non-recourse in practice.
- Whether AUM inflows, fundraising and investment performance can offset realizations, redemptions, foreign-exchange effects and the loss of FS-related assets.
- The cash available after corporate commitments, distributions, unit repurchases, taxes and potential clawbacks; consolidated cash includes amounts held by funds that are not necessarily available for general corporate use.