Blackstone Group L.P. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. The registrant was The Blackstone Group L.P. (the predecessor partnership to Blackstone Inc.). Blackstone manages private equity, real estate, hedge fund and credit strategies, and provides financial advisory services.
Financial results and liquidity
Unless otherwise indicated, amounts below are U.S. dollars. “Q2” means the three months ended June 30; “first half” means the six months ended June 30.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $1.23bn | $2.26bn | $3.74bn | $3.78bn |
| Income before taxes | $393m | $1.31bn | $1.86bn | $2.02bn |
| Net income attributable to Blackstone | $134m | $517m | $764m | $783m |
| Net income per common unit, diluted | $0.21 | $0.85 | $1.21 | $1.29 |
| Operating cash flow | Not separately stated | Not separately stated | $1.60bn | $1.84bn |
- Revenue mix and volatility: Q2 performance fees were $568m, down 59%, including a $442m unrealized carried-interest reversal versus $661m of unrealized carried interest in Q2 2014. Realized carried interest rose 46% to $937m. Investment income fell 75% to $57m. First-half performance fees increased 3% to $2.24bn, while investment income declined 33% to $263m.
- Expenses and tax: Q2 expenses decreased 16% to $914m, mainly because lower performance fees reduced performance-fee compensation. First-half expenses rose 4% to $2.06bn, including higher fund expenses and interest. Effective tax rates were 11.0% for Q2 and 7.7% for the first half.
- Management measures: Fee Related Earnings were $178m in Q2 and $359m in the first half; Distributable Earnings were $1.0bn and $2.3bn, respectively. These are non-GAAP measures. Segment Economic Income was $529m in Q2 versus $1.35bn, and $2.16bn in the first half versus $2.18bn.
- Assets under management: Fee-earning AUM reached $239.3bn, up 10% from year-end 2014; total AUM reached $332.7bn, up 15%. First-half fee-earning inflows were $42.7bn, while total AUM inflows were $61.7bn; realizations and outflows partly offset inflows.
- Balance sheet at June 30: Cash and cash equivalents were $2.16bn; total assets $24.68bn; total liabilities $10.77bn; partners’ capital $13.72bn. Loans payable were $5.84bn, including $3.03bn related to consolidated funds/CLOs. Blackstone’s issued notes had approximately $2.82bn carrying value; there were no borrowings under its $1.1bn revolving facility.
- Cash distributions: Cash flow from financing was an $838m outflow in the first half, including $2.05bn of distributions to unitholders. The income statement reports $1.67 per common unit of distributions declared for the first half.
Material changes and business drivers
- Q2 revenue fell 46% and attributable net income fell 74%, chiefly reflecting weaker unrealized carried interest and investment income compared with a particularly strong prior-year quarter. The first-half revenue and attributable income declines were much smaller.
- Private Equity reported record quarterly realized performance fees of $547m, but Q2 segment Economic Income fell 74% year over year amid lower unrealized performance fees and investment income. Real Estate Q2 revenue declined 58%, principally on lower carried interest and investment income. Financial Advisory revenue declined 33% in Q2 and 13% in the first half; management cited deal timing and smaller fund-placement transactions. Credit and Hedge Fund Solutions had higher Q2 segment Economic Income.
- Management reported strong fundraising and AUM growth, including $14.8bn raised for BREP VIII during the first half. Limited Partner Capital Invested was $4.8bn in Q2, down 11%, and $9.6bn in the first half, down 3%, as the pace of new investments eased.
- Reported assets and liabilities fell from year-end largely due to adoption of revised consolidation guidance, which deconsolidated certain funds effective January 1, 2015. Adoption reduced consolidated assets and liabilities by $8.0bn and $4.7bn, respectively, and did not affect net income attributable to Blackstone.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no quantified company-wide earnings or revenue guidance. Management described U.S. economic fundamentals as generally strong and real estate investment conditions as supportive, while noting market volatility, Greece-related concerns, weaker European credit conditions and a downturn in Chinese equities. The Federal Reserve was widely expected to raise rates as early as September 2015.
- Planned advisory-business separation: Blackstone expected its spin-off and combination of financial advisory, restructuring and Park Hill placement businesses with PJT Partners to close near the end of Q3 or beginning of Q4 2015. Blackstone’s capital markets business was to remain with Blackstone.
- SEC matter: The SEC had informally requested additional information about historical monitoring-fee termination practices and pre-2011 vendor-discount practices. Blackstone said it was discussing a potential resolution. It had modified monitoring-fee practices in 2014 and changed the vendor-discount practices in 2011.
- Performance-fee recognition: Carried interest and incentive fees depend on fund performance, realizations and valuation estimates and can reverse. Blackstone warned that forthcoming revenue-recognition rules could materially delay recognition if carried interest and performance fees are treated as variable consideration.
- Valuation, clawback and liquidity: A significant portion of fund investments relies on Level III estimates. Potential clawback obligations recorded at June 30 were $3.5m; $542m was held in segregated personnel accounts for possible clawbacks. Blackstone also reported $2.3bn of its own investment commitments and a maximum $1.10bn exposure to loss relating to non-consolidated VIEs, including potential clawback exposure.
- Tax and market risks: Possible changes to carried-interest taxation or publicly traded partnership rules could increase taxes or require restructuring; the potential impact was not quantifiable. Results and cash flows are sensitive to investment values, fundraising, realizations, currency movements, interest rates and investor capital calls.
- Accounting and fair value: Revised CLO measurement guidance changed how consolidated CLO liabilities were valued and classified; management said adoption had no material impact. Estimates for private investments and real estate require significant judgment, and fund assets and liabilities generally have no recourse to Blackstone’s general credit.
Important facts for investors to verify
- Reconcile Q2 distributions: the financial statements show $0.89 declared per unit for Q2, while the MD&A says $0.74 was paid in respect of Q2; confirm declaration, payment and earnings-period timing.
- Review the quality and sustainability of earnings: separate realized fees and gains from unrealized carried-interest and investment marks, and assess the effect of reversals.
- Check the $239.3bn fee-earning AUM and $332.7bn total AUM definitions, fundraising, withdrawals, realizations and the impact on recurring fee revenue.
- Distinguish Blackstone’s own $2.82bn issued-note debt from consolidated fund/CLO borrowings and confirm liquidity, capital commitments and revolver availability.
- Follow the SEC discussions, the PJT transaction, potential carried-interest tax changes, and the valuation and clawback exposures described in the filing.