Blackstone Inc. (The Blackstone Group L.P.) — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2015; financial statements are unaudited. Blackstone manages alternative investment funds and provides financial advisory services across Private Equity, Real Estate, Hedge Fund Solutions, Credit and Financial Advisory. Consolidated GAAP results include certain investment funds; fund assets and liabilities are generally not available to, or recourse against, Blackstone.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $2.494 billion | $1.527 billion; up 63% |
| Performance fees | $1.671 billion | $772 million; up 116% |
| Income before taxes | $1.584 billion | $709 million; up 123% |
| Net income | $1.484 billion | $655 million; up 127% |
| Net income attributable to Blackstone L.P. | $629 million; diluted earnings $1.00 per unit | $266 million; diluted earnings $0.44 per unit |
| Operating cash flow | $635 million | $980 million |
| Cash and cash equivalents, March 31 | $1.135 billion | $1.412 billion at December 31, 2014 |
| Total assets / total liabilities, March 31 | $32.407 billion / $14.453 billion | $31.511 billion / $14.177 billion at December 31, 2014 |
| Loans payable, March 31 | $9.063 billion | $8.938 billion at December 31, 2014 |
GAAP net margin was approximately 59.5% of revenue, versus 42.9% a year earlier; this is not a measure of recurring operating profitability, given the large performance-fee and investment-gain contribution. The filing reports $614.9 million of fee-related revenues, $434.3 million of related expenses and $180.6 million of Fee Related Earnings (non-GAAP), plus $1.2 billion of Distributable Earnings (non-GAAP).
Q1 cash flows included $635 million provided by operations, $3 million provided by investing activities and $915 million used in financing activities, including $971 million of distributions to unitholders. Cash declined $277 million during the quarter. Management reported $1.1 billion of cash, $1.8 billion in Treasury Cash Management Strategies and $183 million in liquid Blackstone Funds; it also had a $1.1 billion revolving facility with no borrowings outstanding.
Loans payable include approximately $6.9 billion of consolidated CLO liabilities. Those CLO obligations are collateralized by fund assets and have no recourse to Blackstone’s general credit; Blackstone’s own issued notes totaled $2.135 billion at quarter-end. An additional $350 million of 4.450% senior notes was issued on April 27, 2015.
Material changes versus prior comparable quarter
- Revenue growth was driven principally by performance fees, especially Private Equity and Real Estate. Private Equity fund appreciation and investment exits lifted carried-interest revenue; Real Estate opportunistic funds also appreciated. Management fees, net, increased 5% to $603 million.
- Expenses rose 29% to $1.149 billion, primarily from higher compensation and benefits, which increased 33% to $963 million alongside performance-fee growth and increased headcount.
- Segment Economic Income (a non-GAAP measure) increased to $1.632 billion from $825 million. Private Equity and Real Estate improved substantially; Credit revenue fell 22% to $166 million and Hedge Fund Solutions revenue fell 5% to $185 million.
- Total AUM reached $310.5 billion, up 7% from March 31, 2014; fee-earning AUM was $223.5 billion, up about 10%. Q1 AUM growth reflected $30.4 billion of inflows and $6.9 billion of market appreciation, partly offset by $13.5 billion of realizations and $3.7 billion of outflows.
Outlook, commentary and risks
- Management described a generally constructive transaction environment, with available leveraged lending and higher year-over-year equity issuance and M&A activity. It also cited volatility, a stronger U.S. dollar, challenging conditions for lower-rated credit strategies, and regional differences in real estate and economic conditions.
- Blackstone expected first closings for its seventh global private-equity fund in Q2 2015, with approximately $17 billion of expected commitments and a $17.5 billion hard cap, excluding GP commitments and management fees. BAAM reported $1.7 billion of net inflows from April 1 to May 1, 2015.
- The planned spin-off and combination of financial advisory, restructuring and fund placement businesses with PJT Partners was expected to close in 2015; Blackstone’s capital markets business was to remain with Blackstone.
- Performance-fee revenue is highly sensitive to fund valuation and realizations; carried interest may reverse as investment values change and is subject to clawback. Net accrued performance fees were $4.910 billion, largely carried interest, and include unrealized amounts. A 10% decline in investment fair values was estimated to reduce net performance fees by about $1.597 billion and investment income by $270 million at the reporting date.
- Valuation uncertainty is material: $3.804 billion of financial assets were classified as Level III, using significant unobservable inputs. Certain hedge-fund investments had redemption restrictions or were not redeemable within three months.
- The filing cites potential tax-law changes affecting carried interest and publicly traded partnerships. New revenue-recognition guidance could materially delay recognition of carried interest and performance fees. The SEC had requested additional information about historical monitoring-fee termination practices and certain pre-2011 vendor-discount practices; Blackstone said discussions regarding a potential resolution were ongoing.
- Management said no current litigation was expected to materially affect consolidated results, position or cash flows. A previously disclosed antitrust class-action settlement became final in March 2015. Q1 controls and procedures were assessed as effective at a reasonable-assurance level.
Investor facts to verify
- How much of earnings and distributable cash depends on realized versus unrealized performance fees, and how fund marks and compensation-sharing affect future periods.
- The distinction between Blackstone’s own debt and consolidated CLO/fund liabilities, including the non-recourse status of fund obligations and actual available liquidity.
- Fundraising, deployment, realizations and redemption trends behind AUM growth, including whether the expected $17 billion fund close and advisory-business spin-off proceeded as planned.
- Developments in the SEC discussions, the tax receivable agreement obligations, potential carried-interest tax changes and any clawback exposure.
- The distribution figures and timing: the financial statements show $0.78 declared per common unit for Q1, while MD&A says $0.89 per unit was paid with respect to Q1 2015; confirm the relevant declaration and payment periods.