Blackstone Group L.P. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparative periods are the corresponding 2011 periods. The filing is by The Blackstone Group L.P. (the company name in the filing), not Blackstone Inc. Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context and reporting period
Blackstone manages private equity, real estate, hedge fund and credit investments and provides financial advisory services. Results reflect both recurring management and advisory fees and volatile performance fees and investment marks. The consolidated statements include certain Blackstone funds and CLO vehicles; substantial related assets and liabilities belong to those vehicles and are not available to, or recourse against, Blackstone generally.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $627.2 million | $1,308.3 million | $1,579.2 million | $2,461.6 million |
| Management and advisory fees, net | $488.0 million | $498.0 million | $959.7 million | $910.8 million |
| Performance fees | $135.4 million | $672.3 million | $520.2 million | $1,280.9 million |
| Income before taxes | $135.6 million | $248.8 million | $592.0 million | $366.0 million |
| Net income | $94.3 million | $184.6 million | $511.9 million | $263.0 million |
| Net income (loss) attributable to Blackstone L.P. | $(75.0) million | $86.2 million | $(16.6) million | $128.9 million |
| Basic and diluted earnings (loss) per common unit | $(0.14) | $0.18 | $(0.03) | $0.28 |
- Cash flow, six months: Operating cash flow was $346.3 million; investing cash flow was $(178.1) million; financing cash flow was $(510.3) million. Cash and cash equivalents decreased $342.2 million to $412.5 million. Distributions to unitholders were $390.3 million.
- Balance sheet, June 30: Total assets were $26.1 billion, total liabilities $15.9 billion and partners’ capital $9.0 billion. Investments were $19.4 billion. Cash held by Blackstone funds and other was $858.6 million and should not be treated as unrestricted corporate cash.
- Debt and liquidity: Reported loans payable were $12.1 billion, including $11.0 billion attributable to consolidated funds. Consolidated CLO borrowings are collateralized by fund assets and generally have no recourse to Blackstone. Blackstone’s own issued senior notes totaled $1.0 billion; it had no borrowings under its revolving facility at quarter-end. The facility was amended July 13, 2012, increasing capacity from $1.02 billion to $1.1 billion and extending maturity to July 13, 2017.
- Non-GAAP measures: Fee Related Earnings were $145.7 million for Q2 and $292.7 million for the first half; Distributable Earnings were $188.4 million and $350.5 million, respectively. These are management measures, not GAAP income or guaranteed distributions. The filing reports Economic Income of $221.7 million for Q2 and $722.0 million for the first half.
- Assets under management: AUM was $190.3 billion at June 30, up 14% from year-end 2011. Fee-earning AUM was $157.6 billion, up 15% from year-end. First-half fee-earning AUM inflows of $25.3 billion were partly offset by outflows and realizations; Harbourmaster contributed materially to credit-business growth.
Material changes versus the prior comparable period
- Q2 revenue fell 52%; first-half revenue fell 36%. Performance fees fell 80% in Q2 and 59% in the first half, chiefly reflecting lower unrealized carried interest and investment performance versus unusually strong 2011 comparisons.
- Q2 investment income was a loss of $4.8 million versus income of $128.0 million a year earlier. First-half investment income fell 66% to $84.4 million.
- Expenses declined 25% in Q2 and 23% in the first half, primarily because compensation and performance-fee compensation were lower, including reduced equity compensation after vesting of certain 2011 IPO awards. General and administrative expense increased 8% in Q2 and 9% in the first half.
- First-half GAAP net income increased 95%, despite lower revenue, partly because consolidated fund investment activities improved and related income is largely attributable to non-controlling interests. Blackstone-attributable income nevertheless declined to a loss for the half-year.
- Credit Businesses management fees rose, including the effect of Harbourmaster, acquired January 5, 2012 for approximately $232 million. Real estate base fees also increased, while performance fees across major businesses were weaker than in 2011.
Outlook, management commentary, risks and unusual items
- Management described Q2 markets as more volatile amid weaker equity indices, European sovereign-debt concerns, slower growth and reduced M&A activity. It noted generally favorable U.S. leveraged-finance conditions and healthy commercial real estate operating metrics, but emphasized that market and economic conditions materially affect results.
- Blackstone stated its intention to distribute substantially all annual Distributable Earnings, less realized investment gains and returns of capital and amounts retained for business needs. It expected the first three quarterly distributions to remain $0.10 per unit, with a variable year-end distribution; declarations remain at the general partner’s discretion.
- Performance fees and investment income are sensitive to fund valuations and market movements. A 10% decline in investment fair values was estimated to reduce management fees by $47.0 million, net performance fees by $1.14 billion and investment income by $234.9 million, based on June 30 exposures. A significant share of managed assets was classified as Level III and relies on unobservable valuation inputs.
- Some hedge fund investments face redemption limits, lockups, gates or side pockets; timing of liquidity may be uncertain. Carry is subject to clawback. Recorded potential clawback obligations were $261.0 million, including $100.2 million for Blackstone Holdings and $160.8 million for current and former personnel. Carry-fund lives with potential obligations were expected to expire from late 2012 through 2018, subject to extensions.
- Blackstone reported $1.3 billion of its own investment commitments. It also disclosed $1.2 billion of expected Tax Receivable Agreement payments over 15 years, assuming sufficient taxable income and no material tax-law changes. Proposed changes to carried-interest and partnership taxation could materially increase taxes; the effect was not quantifiable.
- Management said pending litigation was not expected to have a material impact on consolidated financial statements. Disclosed matters include private-equity antitrust litigation, an IPO disclosure action and Extended Stay-related claims seeking substantial damages. Management intends to defend the matters; outcomes remain uncertain.
- Blackstone’s disclosure controls were assessed as effective at a reasonable assurance level, and no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- How much reported debt is Blackstone’s own recourse debt versus debt of consolidated CLOs and funds, and what cash is actually available to the operating partnership.
- The composition, realization timing and valuation sensitivity of accrued performance fees, including the $1.76 billion net accrued performance-fee balance and Level III exposures.
- Whether fee-related earnings and realized performance fees can sustain distributions if market-driven carry and investment income remain weak.
- Changes in AUM, fee-earning AUM, fundraising and investor redemptions after June 30, including the reported post-quarter BAAM net inflows.
- Potential clawback payments, Tax Receivable Agreement obligations, tax-law developments and material litigation outcomes.