Blackstone Group L.P. — Q1 2016 Form 10-Q
Business context and reporting period
Blackstone reported the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Its alternative asset management business comprises Private Equity, Real Estate, Hedge Fund Solutions and Credit. The Financial Advisory business was spun off on October 1, 2015; therefore, the prior-year comparison includes historical Financial Advisory results, while 2016 does not. Unless noted otherwise, dollar amounts below are in millions.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 / prior date | Change |
|---|---|---|---|
| Total revenue | $932.4 | $2,512.4 | Down 63% |
| Management and advisory fees, net | $608.9 | $616.8 | Down 1% |
| Performance fees | $314.5 | $1,673.1 | Down 81% |
| Expenses | $617.7 | $1,142.6 | Down 46% |
| Income before taxes | $333.8 | $1,463.3 | Down 77% |
| Net income | $314.9 | $1,364.0 | Down 77% |
| Net income attributable to Blackstone L.P. | $150.0 | $629.4 | Down 76% |
| Basic/diluted net income per common unit | $0.23 / $0.23 | $1.01 / $1.00 | Lower |
| Distributions declared per common unit | $0.61 | $0.78 | Lower |
| Operating cash flow | $208.5 | $479.3 | Down 56% |
- Performance-fee contraction drove the revenue decline: realized carried interest was $230.9 million versus $1,207.6 million, while unrealized carried interest was $47.6 million versus $373.8 million. Investment income was a loss of $8.5 million, compared with income of $206.2 million.
- Fee-Related Earnings, a non-GAAP measure, were $219.5 million; Distributable Earnings, also non-GAAP, were $388.0 million. Segment Economic Income was $387.4 million versus $1,631.8 million.
- Segment Economic Income was $231.4 million in Real Estate, $92.2 million in Private Equity, $36.4 million in Hedge Fund Solutions and $27.5 million in Credit. Each was below its prior-year comparable result.
- Assets under management were $343.7 billion, up 2% from year-end 2015; fee-earning assets under management were $244.5 billion, down 0.7%. Limited partner capital invested was $6.5 billion, up 37% year over year.
- At March 31, 2016, cash and cash equivalents were $1.37 billion, total assets $22.05 billion, total liabilities $10.14 billion and partners’ capital $11.73 billion. Cash declined $464.8 million from year-end.
- Loans payable totaled $6.36 billion, versus $6.12 billion at year-end. This consolidated balance includes approximately $3.55 billion of borrowings of consolidated funds, whose creditors generally have no recourse to Blackstone’s general credit. Blackstone’s own issued notes had $2.83 billion principal outstanding; it had no borrowings under its $1.1 billion revolving facility.
- Interest expense was $37.4 million, up from $31.4 million. The filing reports a 5.7% effective tax rate, compared with 6.8%.
Material changes and management commentary
- Lower fund appreciation and realizations sharply reduced performance fees, especially in Private Equity and Real Estate. Management cited BCP V net returns of 4.3% in Q1 2016 versus 7.3% a year earlier, and appreciation in BREP opportunistic funds of 1.8% versus 8.2%.
- Management described Q1 markets as highly volatile, with weak early-year risk appetite and liquidity, followed by a recovery in March. It noted depressed commodity prices and material energy and metals/mining defaults; the broader 2016 economic outlook was described as moderate.
- Hedge Fund Solutions performance was pressured by volatile equity markets and short squeezes. Its BAAM Principal Solutions Composite returned negative 3% net for the quarter; 99% of relevant fee-earning assets were below high-water marks or benchmarks at March 31.
- Credit faced volatility and depressed energy prices, with negative investment marks, but management said market dislocation supported rescue-lending and mezzanine opportunities. The segment deployed $568.7 million in Q1.
- Blackstone held first close for Blackstone Core Equity Partners during Q1 and said it expected to begin investing from BCP VII in Q2 2016.
Liquidity, outlook, risks and contingencies
- Management said liquidity sources include operating cash flow, realizations, liquid investments and the undrawn revolving facility. It considered available sources sufficient for working capital and commitments, while cautioning that realizations and capital calls can vary materially.
- Blackstone’s stated distribution policy was to distribute approximately 85% of its share of Distributable Earnings, subject to general partner discretion and business, legal, tax, debt and clawback needs. The filing also states that $0.28 per common unit was paid in respect of Q1 2016; this is distinct from the $0.61 declared-per-unit figure in the statement of operations.
- Blackstone had $2.2 billion of investment commitments at March 31. Expected future tax receivable agreement payments were estimated at approximately $1.1 billion over 15 years, subject to actual tax savings and taxable income.
- Recorded clawback obligations were $6.3 million. In the hypothetical scenario that all carry-fund investments were worthless, potential after-tax clawback was estimated at $4.6 billion; management viewed that scenario as remote. Personnel had $576.8 million in segregated accounts for potential clawbacks.
- Key exposures include market and valuation volatility, fund performance and fundraising, investor redemptions or failure to meet capital calls, foreign exchange, credit and interest rates, and potential tax-law changes affecting carried interest or partnership tax treatment. A 10% fall in investment fair values was estimated to reduce performance fees net of related compensation by $1.28 billion and investment income by $242.1 million, using the filing’s stated measurement basis.
- The filing provides no specific full-year earnings guidance. Management cautioned that actual results may differ from forward-looking statements. It said pending legal matters were not expected to materially affect the financial statements, while acknowledging uncertain outcomes. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- Blackstone said forthcoming revenue-recognition guidance could materially delay recognition of carried interest and performance fees if treated as variable consideration. No subsequent event requiring financial-statement recognition or disclosure was reported.
Important facts for investors to verify
- How much of the sharp year-over-year revenue and earnings decline reflects unusually strong Q1 2015 performance fees, versus any sustained change in fund performance or realizations.
- Whether fee-earning AUM, fundraising, investment deployment and management-fee growth offset the impact of fund realizations, outflows and market depreciation.
- The composition and recourse status of reported debt, particularly consolidated CLO and fund borrowings, and the liquidity available after Blackstone’s own commitments and distributions.
- The sensitivity of unrealized carried interest and other Level III valuations to market conditions, and the potential timing and scale of future fee realizations or clawbacks.
- The distinction between the $0.61 declared distribution figure and the $0.28 distribution stated as paid in respect of Q1, as well as the basis for future distributions.
- Potential tax legislation and the future financial-statement impact of revenue-recognition changes on carried interest and performance fees.