Blackstone Group L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. The filing is for The Blackstone Group L.P. (the predecessor partnership entity), not the later Blackstone Inc. Dollar figures below are rounded to millions unless otherwise stated.
Business context and reporting period
Blackstone manages private equity, real estate, hedge fund solutions and credit funds, and provides financial advisory services. Its five reporting segments are Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses and Financial Advisory. Results reflect both recurring management/advisory fees and volatile performance fees and investment gains. Consolidated statements also include certain Blackstone funds and CLOs, largely with third-party economic interests.
Management described first-quarter markets as stronger: equity and credit markets rose, volatility declined, high-yield spreads narrowed and commercial real estate conditions remained generally healthy. M&A volumes remained muted, and the economic recovery was still cautious.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior date | Change or context |
|---|---|---|---|
| Total consolidated revenue | $952.0 million | $1,153.3 million | Down 17% |
| Management and advisory fees, net | $471.7 million | $412.7 million | Up 14% |
| Performance fees | $384.8 million | $608.6 million | Down 37%; unrealized fees were $365.9 million |
| Investment income | $89.2 million | $120.2 million | Down 26% |
| Total expenses | $783.8 million | $990.9 million | Down 21%, primarily lower compensation |
| Net gains from fund investment activities | $288.1 million | $(45.2) million | Turned positive, principally due to CLO fair-value gains and consolidation effects |
| Consolidated net income | $417.6 million | $78.4 million | Increase substantially reflects fund investment gains; much was attributable to non-controlling interests |
| Net income attributable to Blackstone Group L.P. | $58.3 million | $42.7 million | Up 37%; diluted net income per unit was $0.11 vs. $0.09 |
| Economic Net Income (ENI), non-GAAP | $500.3 million | $659.7 million | Down 24% |
| Net Fee Related Earnings from Operations, non-GAAP | $138.0 million | $98.5 million | Up 40% |
| Distributable Earnings, non-GAAP | $162.1 million | $201.9 million | Down 20%; realized performance fees were markedly lower |
| Operating cash flow | $134.2 million | $441.5 million | Lower year over year |
| Cash and cash equivalents | $391.3 million | $754.7 million at Dec. 31, 2011 | Down $363.4 million during the quarter |
| Total assets / total liabilities | $26.55 billion / $16.52 billion | $21.91 billion / $12.66 billion at Dec. 31, 2011 | Increase mainly associated with Harbourmaster and consolidated CLOs |
Fee-earning assets under management were $156.3 billion, up 14% from year-end; assets under management were $190.1 billion, also up 14%. Limited partner capital invested was $2.72 billion, up 64% year over year. The filing reports no consolidated operating margin as a key measure; segment ENI is a non-GAAP measure and should not be treated as a GAAP margin.
Material changes versus the prior comparable period
- Fee growth was led by Real Estate, Credit Businesses and Hedge Fund Solutions. Real Estate base fees benefited from BREP VII; Credit Businesses fee growth reflected Harbourmaster and earlier CLO acquisitions; Private Equity fees included Blackstone Energy Partners.
- Performance fees declined across Private Equity, Real Estate and Credit Businesses, primarily reflecting lower appreciation in BREP V/VI, lower BCP IV returns and slower credit-strategy appreciation. Financial Advisory revenue rose 7%, but segment ENI fell to a $10.5 million loss as expenses grew faster.
- GAAP net income increased sharply while consolidated revenue and ENI declined. A major driver was the swing in gains from consolidated fund investment activities; most related results were attributable to non-controlling interests and do not represent earnings accruing to Blackstone unitholders.
- Investments rose $4.6 billion and loans payable rose $3.8 billion from year-end, largely due to Harbourmaster and CLO consolidation. Harbourmaster was acquired in January for approximately $232 million cash; its results were included in Credit Businesses.
Cash, debt and liquidity
- Cash provided by operations was $134.2 million; investing activities used $170.2 million, including $157.0 million net cash paid for acquisitions. Financing activities used $327.4 million, including $279.2 million of distributions to unitholders. Cash ended at $391.3 million.
- Reported loans payable were $12.69 billion, but $11.64 billion related to consolidated VIEs, principally CLO vehicles, whose assets are restricted to their own obligations and whose creditors have no recourse to Blackstone’s general credit. These fund/CLO balances should not be read as ordinary parent-company debt.
- Blackstone-issued senior notes totaled $1.0 billion: $600 million at 6.625% due 2019 and $400 million at 5.875% due 2021. No borrowings were outstanding under the $1.02 billion revolving credit facility, which matures in 2016. The company said it was in compliance with borrowing covenants.
- Blackstone reported $391.3 million cash, $586.8 million in treasury cash-management strategies, $136.1 million in liquid Blackstone funds, $1.9 billion in illiquid Blackstone funds and $140.0 million in other investments, against the $1.0 billion of issued-note borrowings. Management believed available liquidity was sufficient, while noting that realizations and capital calls can vary materially.
- Blackstone’s own remaining capital commitments to funds and other investments were $1.36 billion. Overall investment commitments were reported at $1.4 billion. Management expected commitments to be funded over time from available cash, operating cash flow and realizations.
Outlook, commentary, risks and unusual items
- No quantitative full-year earnings or revenue guidance was provided. Management said it generally expected the first three quarterly distributions to remain $0.10 per unit, subject to general-partner discretion; the annual distribution depends on realized Distributable Earnings and amounts retained for business needs.
- Key business sensitivities include market values and fund performance, fundraising and investment deployment, transaction activity, investor capital calls and the timing of realizations. Management warned that prolonged low realizations combined with substantial fund capital calls could adversely affect available capital.
- Valuation risk is meaningful: $2.52 billion of financial assets were Level III at quarter-end, and many managed assets also rely on less observable valuation inputs. Certain fund-of-hedge-funds investments faced lockups, gates, side pockets or liquidation-related withdrawal limits.
- Potential carried-interest tax changes could increase taxes, reduce cash available for distributions or require restructuring; the filing said the potential impact could not be meaningfully quantified. Tax receivable agreement payments were expected to aggregate $1.14 billion over 15 years, assuming sufficient taxable income and no material changes in tax law.
- Recorded potential carried-interest clawback obligations were $269.7 million, including $99.0 million attributed to Blackstone Holdings and $170.7 million to current and former personnel. The timing and ultimate amount depend on fund outcomes and terms. Blackstone also disclosed $1.4 billion in its own investment commitments and a $27.0 million employee-loan guarantee.
- Two notable litigation matters remained: the IPO-related investor class action was in discovery after an appellate reversal of dismissal; Extended Stay-related suits sought $2.1 billion in alleged transfers and, in two suits, $6.3 billion in punitive damages. Blackstone said it believed the claims were without merit. Management stated no currently pending proceeding was expected to have a material impact on consolidated financial statements.
- Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing also cautioned that forward-looking statements are subject to risks and need not be updated.
Most important facts for investors to verify
- How much of reported income and the CLO-related fair-value gain is economically attributable to Blackstone unitholders, versus non-controlling fund investors.
- Whether fee growth and AUM inflows persist, and how much of reported performance-fee revenue is unrealized, subject to reversal or not yet realized in cash.
- The composition and recourse status of reported debt, the increase in CLO borrowings, and parent-level liquidity after capital commitments, distributions and tax receivable payments.
- Assumptions behind Level III valuations and the liquidity, gates, side pockets and redemption terms of less-liquid fund investments.
- Progress and potential exposure from carried-interest clawbacks, tax-law proposals, the IPO and Extended Stay litigation, and Harbourmaster integration.
- Any updated distribution policy or full-year outlook: the filing gives no formal earnings guidance, and distributions remain discretionary.