Blackstone Group L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. The registrant was The Blackstone Group L.P. at the time of filing.
Business context
Blackstone managed private equity, real estate, hedge fund solutions and credit businesses, and also reported a Financial Advisory segment. On October 1, 2015, it completed the spin-off of most Financial Advisory operations into PJT Partners; capital markets services remained with Blackstone. Results for the period include the spun-off operations.
Financial highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| GAAP total revenues | $11.6 million | $1.679 billion | $3.749 billion | $5.464 billion |
| Net income (loss) attributable to Blackstone | $(254.7) million | $250.5 million | $508.9 million | $1.033 billion |
| Net income (loss) per common unit, diluted | $(0.40) | $0.41 | $0.80 | $1.69 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $1.383 billion | $2.068 billion |
- Q3 GAAP performance fees were negative $638.1 million, including a $1.056 billion unrealized carried-interest reversal; Q3 2014 performance fees were positive $890.1 million. Net unrealized investment loss was $179.3 million. This volatility drove the sharp reported revenue and earnings decline.
- Management and advisory fees, net increased 10% to $703.6 million in Q3 and 3% to $1.894 billion for the first nine months. Nine-month performance fees fell 48% to $1.603 billion and investment income fell 65% to $183.7 million.
- Q3 expenses were $477.0 million, down 55%, mainly because performance-fee compensation and IPO-related equity compensation declined. Nine-month expenses were $2.534 billion, down 16%. Q3 GAAP margin is not meaningful given the near-zero revenue total and unrealized fee reversals.
- Management’s non-GAAP measures: Q3 Fee Related Earnings (FRE) were $265.7 million and Distributable Earnings (DE) were $691.5 million; nine-month FRE was $624.7 million and DE was $3.0 billion. Segment Economic Income was a loss of $388.9 million in Q3 versus income of $837.9 million a year earlier, and $1.772 billion for nine months versus $3.014 billion.
- Assets under management at September 30 were $333.9 billion, up 15% from year-end; fee-earning AUM was $240.9 billion, up 11%. Q3 market depreciation and realizations offset inflows; total AUM was nearly flat versus June 30.
- Cash and cash equivalents were $1.380 billion. Blackstone also reported $2.6 billion in Treasury Cash Management Strategies, $172.1 million in liquid Blackstone Funds and $2.1 billion in illiquid Blackstone Funds. It had no borrowings on its $1.1 billion revolver.
- Consolidated loans payable were $6.159 billion, including $3.351 billion associated with consolidated funds/CLOs. Blackstone’s own bond borrowings were approximately $2.8 billion. Fund/CLO debt is generally collateralized by fund assets and is nonrecourse to Blackstone’s general credit; do not equate consolidated debt with corporate recourse debt.
- Total assets were $23.619 billion and total liabilities $10.948 billion at quarter-end. Their declines from year-end primarily reflected deconsolidation of funds after adoption of revised consolidation guidance, not solely changes in the operating business.
Changes, outlook and risks
- Management attributed weaker performance-related results to Q3 global market volatility, public-market declines and lower fund valuations. The S&P 500 fell 7% during the quarter; high-yield spreads widened and issuance declined, while global M&A activity remained strong.
- Blackstone stated an intention to distribute approximately 85% of its share of DE quarterly, subject to the general partner’s discretion and cash, investment, tax, debt and clawback needs. Q3 distributions declared were $0.74 per common unit; nine-month declared distributions were $2.41 per unit. The filing also reports $0.49 per unit paid in respect of Q3, with distributions paid after the earning quarter.
- Liquidity depends partly on realizations and carried-interest/incentive-fee receipts, which can vary substantially. Management said available liquidity was expected to be sufficient, while warning that prolonged weak realizations alongside significant fund capital calls could adversely affect cash resources.
- Blackstone had $2.2 billion of investment commitments. Potential clawback obligations recorded at September 30 were $1.2 million; $551.6 million was held in segregated accounts for possible personnel clawbacks. The firm also disclosed approximately $1.3 billion of expected future tax-receivable-agreement payments over 15 years, assuming tax benefits are realized.
- On October 7, 2015, three private-equity fund advisers settled SEC matters without admitting or denying wrongdoing. They agreed to pay $26.2 million in disgorgement, $2.7 million in prejudgment interest and a $10.0 million civil penalty, concerning disclosures of certain monitoring-fee terminations and pre-2011 legal-fee discounts. The filing says management did not expect pending legal matters to materially affect the financial statements, while noting outcomes are uncertain.
- Risks include market and valuation volatility, meaningful Level III exposure, fund investor capital-call and redemption behavior, foreign exchange and credit conditions, and possible tax-law changes affecting carried interest or partnership tax treatment. The filing provided no specific earnings or AUM guidance.
- Adoption of revised consolidation guidance deconsolidated certain funds effective January 1, 2015, reducing reported assets and liabilities by approximately $8.0 billion and $4.7 billion, respectively, with no impact on Blackstone-attributable net income. Revised CLO measurement guidance also changed presentation and fair-value classification.
Important facts for investors to verify
- Separate recurring fee earnings and cash realizations from volatile, unrealized carried-interest and investment marks; reconcile GAAP results to FRE and DE.
- Review fund-level performance and valuation assumptions, especially public holdings and Level III assets, and assess how market changes could affect future fees and clawbacks.
- Distinguish Blackstone corporate debt and liquidity from consolidated fund/CLO assets and nonrecourse obligations; confirm the status of the revolver and capital commitments.
- Assess the post-spin-off business mix, including the retained capital markets operation, and the effect of removing most Financial Advisory operations.
- Track the SEC settlement payments, tax-receivable-agreement obligations, and any future regulatory, litigation or carried-interest tax developments.