Business Context and Reporting Period
Company: The Blackstone Group L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Blackstone is a leading global manager of private capital and provider of financial advisory services. Its operations are organized into four segments: Private Equity, Real Estate, Credit and Marketable Alternatives, and Financial Advisory. The company manages private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, and collateralized loan obligation (CLO) vehicles.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $701,239 | $44,914 |
| Total Expenses | $1,100,714 | $922,358 |
| Net Income (Loss) | $(237,306) | $(929,938) |
| Net Loss Attributable to Blackstone Group L.P. | $(121,377) | $(231,574) |
| Net Loss Per Common Unit (Basic & Diluted) | $(0.36) | $(0.84) / $(1.14) |
| Cash and Cash Equivalents | $627,257 | $776,303 |
| Total Assets | $13,486,317 | $9,409,024 |
| Total Liabilities | $6,490,396 | $2,865,491 |
| Loans Payable | $3,973,091 | $657,623 |
| Net Cash Provided by Operating Activities | $20,500 | $555,882 |
Note: Q1 2009 Net Loss Per Unit is presented with two classes of equity (Priority and Non-Priority) as the priority distribution structure expired in December 2009.
Material Changes vs. Prior Period
- Revenue Surge: Total revenues increased by $656.3 million (1,461%) compared to Q1 2009. This was primarily driven by a $400.1 million increase in Performance Fees and Allocations and a $237.4 million increase in Investment Income (Loss), reflecting improved fund performance across Private Equity, Real Estate, and Credit segments.
- Expense Increase: Total expenses rose by $178.4 million (19%), largely due to a $174.9 million increase in Compensation and Benefits. This increase was driven by positive performance fee-related compensation in 2010 compared to significant reversals of prior period carried interest in 2009.
- Balance Sheet Expansion: Total assets increased by $4.1 billion and liabilities by $3.6 billion. The primary driver was the consolidation of certain CLO vehicles effective January 1, 2010, due to revised Variable Interest Entity (VIE) accounting rules. This added approximately $3.7 billion in assets and $3.3 billion in liabilities.
- Improved Fund Returns: Private Equity funds achieved a net IRR of 15% in Q1 2010 (vs. -5% in Q1 2009). Real Estate carry funds achieved a net IRR of 10% (vs. -17% in Q1 2009).
Guidance, Outlook, and Risks
- Subsequent Event: On April 1, 2010, Blackstone acquired management agreements for certain CDO and CLO vehicles previously managed by Callidus Capital Management. This is expected to increase consolidated assets by approximately $3.0 billion and liabilities by $2.8 billion.
- Liquidity: The company maintains a $1.07 billion revolving credit facility (undrawn as of March 31, 2010) and $600 million in senior notes outstanding. Cash and liquid investments totaled approximately $1.75 billion against $600 million in borrowings.
- Distributions: Blackstone intends to distribute substantially all of its annual Distributable Earnings to unitholders. Q1 2010 Distributable Earnings were $148.7 million.
- Risks:
- Market Risk: A 10% decline in the fair value of investments would decrease annual management fees by $38.5 million and performance fees (net of compensation) by $184.3 million.
- Clawback Obligations: While no cash clawback was due as of March 31, 2010, a potential clawback liability of $483.6 million was recorded for financial reporting purposes based on unrealized fund values.
- Tax Legislation: Potential changes in U.S. tax laws regarding the treatment of carried interest as ordinary income could materially increase tax liability.
Investor Verification Checklist
- Accounting Changes: Verify the impact of the new VIE consolidation rules adopted January 1, 2010, which significantly altered the balance sheet by consolidating CLO vehicles.
- Unrealized Gains: Assess the sustainability of the revenue spike, which was heavily driven by unrealized performance fees and investment income ($131.8M and $149.2M respectively) rather than realized cash flows.
- Clawback Liability: Review the $483.6 million accrued clawback obligation in "Due to Affiliates" and the conditions under which this might become a cash outflow.
- Segment Performance: Confirm the recovery in Private Equity and Real Estate fund valuations (BCP IV, BCP V, BREP VI) that drove the reversal of prior period losses.
- Debt Structure: Monitor the $3.97 billion in Loans Payable, noting that the majority relates to consolidated CLO vehicles rather than corporate debt.