Blackstone Group L.P. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The filing reports the predecessor limited partnership, organized around Private Equity, Real Estate, Hedge Fund Solutions and Credit. Financial statements are unaudited. Unless noted, amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.432B | $11.6M | $3.556B | $3.749B |
| Net income (loss) | $691.6M | ($483.9M) | $1.479B | $1.230B |
| Net income attributable to Blackstone | $312.9M | ($254.7M) | $671.3M | $508.9M |
| Basic earnings (loss) per common unit | $0.48 | ($0.40) | $1.04 | $0.81 |
| Distributions declared per common unit | $0.36 | $0.74 | $1.25 | $2.41 |
- Q3 revenue swung sharply from the prior-year quarter largely because unrealized carried-interest revenue changed from a $1.056B loss to a $106.2M gain; total performance fees were $671.0M versus a $638.1M loss. Realized carried interest was $504.0M, up 16%.
- For the first nine months, revenue fell 5%, while net income attributable to Blackstone rose 32%. Realized carried interest declined 59% to $1.059B; unrealized carried interest improved to a $242.1M gain from a $1.124B loss.
- Q3 expenses rose 62% to $773.8M, mainly due to higher performance-fee compensation. Nine-month expenses fell 17% to $2.104B, principally because IPO-related equity compensation had been fully expensed by June 2015.
- Fee-Earning Assets Under Management were $267.8B, up 9% from year-end 2015; total AUM was $361.0B, up 7%. Dry powder available for investment was $102.2B. Nine-month Limited Partner Capital Invested was $14.4B, down from $15.7B.
- Segment Economic Income for the first nine months was $1.636B: Real Estate $806.0M, Private Equity $355.9M, Credit $284.6M and Hedge Fund Solutions $189.8M. Economic Income is a non-GAAP segment measure, not consolidated net income.
Cash flow, balance sheet and liquidity
- At September 30, cash and cash equivalents were $1.782B, total assets $24.414B, total liabilities $12.059B and partners’ capital $12.160B. Cash declined $55.4M from year-end 2015.
- Nine-month operating cash flow was $662.3M, down from $1.383B; investing cash outflow was $12.6M and financing cash outflow was $705.1M. Distributions to unitholders were $1.509B.
- Reported loans payable were $7.245B, versus $6.117B at year-end. This includes $4.443B of consolidated fund/CLO loans, which the filing says are secured by fund assets and have no recourse to Blackstone’s general credit. Blackstone-issued notes had a carrying value of $2.801B.
- Management cited $1.8B cash, $2.1B in Treasury Cash Management Strategies and $2.2B in fund and other investments, alongside $2.8B of Blackstone-issued borrowings. The $1.5B revolving credit facility was undrawn at quarter-end.
- On August 31, the revolver was increased from $1.1B to $1.5B and extended to August 2021. After quarter-end, on October 5, Blackstone issued €600M of 1.0% senior notes due 2026; these are not included in September 30 balances.
Changes, outlook and risks
- Year-over-year comparisons are affected by the October 2015 spin-off of the historical Financial Advisory operations; the retained capital-markets services business is in Private Equity. The filing also attributes lower management/advisory fees partly to the spin-off.
- Management described markets as recovering during Q3 after Brexit-related early-quarter volatility, but noted ongoing uncertainty, elevated corporate defaults—especially in energy—and a challenging environment for some new investments. It reported a rebound in energy and distressed-credit investments, positive real estate fund appreciation, and Q3 appreciation in opportunistic real estate funds of 3.7%.
- No specific company-wide financial guidance is provided. Management said liquidity sources were expected to be sufficient for working-capital needs, while warning that realizations and performance-fee cash receipts can vary significantly and that prolonged weak realizations alongside capital calls could constrain available capital.
- Key risks include market and valuation volatility, investment-fund performance and fundraising, investor redemptions in eligible strategies, foreign exchange, credit exposure, and subjective Level III valuations. At quarter-end, 72% of Private Equity, 83% of Real Estate and 50% of Credit AUM (excluding specified undrawn commitments and CLO capital raised) was classified as Level III.
- Potential clawback liability recorded was $3.4M. In a hypothetical scenario in which all carry-fund investments were worthless, potential carried-interest clawback was estimated at $5.0B after tax, which management characterized as remote; $611.6M was held in personnel segregated accounts for possible clawbacks.
- Blackstone reported $2.4B of its own investment commitments and $73.1M of signed commitments by consolidated funds. Expected future tax-receivable-agreement payments were estimated at approximately $1.2B over 15 years, assuming sufficient taxable income and no material tax-law changes. Management said no pending legal proceeding was expected to materially affect the financial statements.
- Carried-interest taxation proposals and other potential tax-law changes could increase taxes or require restructuring; the filing says the effects cannot be meaningfully quantified. The new revenue-recognition standard could also delay recognition of carried interest and performance fees if they are treated as variable consideration.
Important facts for investors to verify
- Separate recurring management-fee earnings from volatile realized and unrealized performance fees; review the non-GAAP Fee Related Earnings and Distributable Earnings reconciliations before drawing conclusions from GAAP revenue or net income.
- Confirm the composition of reported debt: fund/CLO borrowings are consolidated but described as non-recourse, unlike Blackstone-issued notes and the corporate revolver.
- Track realizations, carried-interest conversion to cash, fund performance and AUM flows—particularly Hedge Fund Solutions outflows and the effects of fund investment-period expirations.
- Review Level III valuation assumptions, unrecognized performance-fee balances, clawback exposures, capital commitments and tax-receivable-agreement payments.
- Reconcile the statements’ Q3 declared distribution of $0.36 per unit with management’s discussion stating a $0.41-per-unit Q3 distribution was paid; the filing text does not clearly explain the difference.