Business Context and Reporting Period
Company: The Blackstone Group L.P.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Business Overview: Blackstone is a leading global alternative asset manager and provider of financial advisory services. Its operations are organized into four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory. The company consolidates certain investment funds (Blackstone Funds) which significantly impacts reported assets and liabilities, though the majority economic interest in these funds is attributed to non-controlling interests.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $47,131 | $68,523 |
| Net Income (Loss) | $(929,938) | $(1,254,157) |
| Net Loss Attributable to Blackstone Group L.P. | $(231,574) | $(250,993) |
| Net Loss Per Common Unit (Basic & Diluted) | $(0.84) | $(0.95) |
| Cash and Cash Equivalents | $776,303 | $503,737 |
| Total Assets | $7,674,509 | $9,262,187 |
| Loans Payable | $81,874 | $387,000 |
| Net Cash Provided by Operating Activities | $555,882 | $115,154 |
Note: Financial results are heavily influenced by the consolidation of Blackstone Funds, which are reported at fair value. Net losses are largely driven by unrealized depreciation in fund investments and significant equity-based compensation expenses.
Material Changes vs. Prior Period
- Revenues: Total revenues decreased 31% to $47.1 million. While Management and Advisory Fees increased 10% to $341.2 million (driven by advisory fees), Performance Fees and Allocations turned negative at $(214.2) million due to depreciation in real estate fund valuations. Investment Income (Loss) worsened to $(79.8) million.
- Expenses: Total expenses decreased 16% to $924.6 million. This was primarily due to a $164.8 million reduction in Compensation and Benefits, driven by a decline in the amortization of equity-based compensation expense.
- Net Loss: The consolidated net loss improved by 26% to $(930.0) million, and the loss attributable to Blackstone Group L.P. improved by 8% to $(231.6) million. This improvement is largely attributed to a reduction in unrealized losses from fund investment activities compared to Q1 2008.
- Liquidity: Cash and cash equivalents increased by $272.6 million to $776.3 million. The company repaid significant debt, reducing Loans Payable from $387.0 million to $81.9 million.
- Assets Under Management (AUM): Total AUM decreased 18% to $92.5 billion, primarily due to a net depreciation of $26.8 billion in portfolio investments, partially offset by capital inflows.
Guidance, Outlook, and Risks
- Business Environment: Management notes that global economies weakened further in Q1 2009, with developed nations in recession. Credit trends worsened, and commercial mortgage-backed securities markets remained mostly closed. Real estate fundamentals deteriorated, particularly in office and lodging sectors.
- Outlook: The duration of current economic conditions is unknown. Management expects Adjusted Cash Flows from Operations to be the primary source for distributions. A quarterly distribution of $0.30 per common unit was declared, totaling approximately $82 million, which exceeds the Adjusted Cash Flow from Operations of $74.8 million for the quarter.
- Liquidity Strategy: Blackstone entered into a new $850 million revolving credit facility effective May 11, 2009. The company maintains a strong cash position and does not anticipate approaching significant leverage levels in the foreseeable future.
- Risks and Contingencies:
- Clawback Obligations: If all carry fund investments were deemed worthless, potential clawback obligations could reach $1.4 billion (after-tax), though management views this as remote.
- Valuation Risk: A significant portion of investments (Level III) relies on unobservable inputs and management judgment. A 10% decline in fair value would reduce annual management fees by $33.0 million and performance fees by $94.5 million.
- Legal Proceedings: The company is defending against antitrust litigation and a lawsuit regarding the failed acquisition of Alliance Data Systems (ADS), where a Delaware court dismissed the complaint in January 2009 (currently under appeal).
- Regulatory Risk: Investigations into placement agents by the New York Attorney General and potential bans on intermediaries by state pension funds could adversely affect the fund placement business.
Investor Verification Checklist
- Non-GAAP Measures: Verify the reconciliation of "Adjusted Cash Flows from Operations" ($74.8 million) to GAAP Net Cash Provided by Operating Activities ($555.9 million) to understand the impact of fund consolidation.
- Performance Fees: Review the significant negative performance fees ($(214.2) million) and the specific impact of real estate fund depreciation on these figures.
- Equity Compensation: Confirm the $738.0 million equity-based compensation expense and the $8.6 billion of unrecognized future compensation expense.
- Debt Structure: Verify the terms of the new $850 million credit facility and the status of the $1.4 billion in unfunded commitments to funds.
- Clawback Exposure: Assess the $455.8 million accrual for potential repayment of previously received performance fees and the conditions triggering these obligations.