Blackstone Group L.P. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The filing is for The Blackstone Group L.P. (the predecessor limited partnership), not a corporation. Blackstone manages alternative investment funds and provides financial advisory services across private equity, real estate, hedge fund solutions, credit and financial advisory.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $1.217bn | $1.223bn | $3.904bn | $2.802bn |
| Net income attributable to Blackstone | $171.2m | $128.8m | $549.9m | $112.2m |
| Diluted net income per common unit | $0.29 | $0.24 | $0.93 | $0.21 |
| Distributions declared per common unit | $0.23 | $0.10 | $0.95 | $0.42 |
| Fee-earning AUM (September 30) | $188.6bn | — | $188.6bn | $167.9bn at Dec. 31, 2012 |
| Total AUM (September 30) | $248.1bn | — | $248.1bn | $210.2bn at Dec. 31, 2012 |
For Q3, performance fees declined 10% to $541.3m, while management and advisory fees rose 13% to $531.1m. Total expenses fell 8% to $786.4m. For the first nine months, revenue increased 39%, primarily from higher performance fees and investment income; expenses rose 7%, including increased performance-fee compensation. The filing does not present a single consolidated margin measure as a key performance indicator.
Cash flow and liquidity: Nine-month operating cash flow was $2.733bn, investing cash outflow $158.9m and financing cash outflow $2.394bn; cash and cash equivalents ended at $888.9m, up from $709.5m at year-end 2012. Blackstone also reported about $1.1bn in Treasury Cash Management Strategies investments and $151.1m in liquid Blackstone Fund investments. Its $1.1bn revolving credit facility was undrawn.
Debt and balance sheet: At September 30, total assets were $28.0bn, total liabilities $15.5bn and partners’ capital $10.4bn. Loans payable were $10.8bn, down from $13.1bn at year-end, mainly reflecting CLO deconsolidations and repayments. Approximately $9.1bn of loans payable related to consolidated funds, whose assets are restricted to those funds and whose liabilities generally have no recourse to Blackstone. Blackstone-issued notes had carrying values totaling approximately $1.67bn. These amounts should not be treated as equivalent measures of parent-company debt.
Non-GAAP measures: Fee Related Earnings were $178.6m for Q3 and $484.8m for the nine months; Distributable Earnings were $312.7m and $1.042bn, respectively. These are supplemental measures, not GAAP net income.
Material changes versus comparable periods
- Q3 revenue was essentially flat year over year: stronger real estate performance fees and higher management/advisory fees were offset by lower private-equity and credit performance fees and investment income.
- Nine-month revenue and Blackstone-attributable net income rose substantially, reflecting realized and unrealized performance fees, investment gains, and higher advisory and management fees.
- Real estate was a major performance-fee contributor: Q3 segment performance fees rose 63% to $440.5m. Private equity segment revenue fell 54% in Q3, mainly due to lower unrealized performance fees.
- AUM increased year over year: fee-earning AUM rose 12% from December 2012 and total AUM rose 18%. Strategic Partners Fund Solutions was acquired on August 5, 2013 and contributed to private-equity inflows.
Outlook, commentary and risks
- No quantified earnings or revenue guidance is provided. Management described improving equity and real-estate markets as supportive, while noting political dysfunction and economic conditions as market overhangs.
- Management said capital deployment was slower in private equity and credit than in the prior-year period, citing limited suitable opportunities and a more challenging investment environment. Performance-fee and realization income remain sensitive to investment valuations, exits and fund-specific hurdles.
- Blackstone intends to distribute substantially all quarterly net cash available for distribution, subject to a stated $0.12-per-unit base distribution. The general partner retains sole discretion to change or suspend distributions; actual distributions may vary with realizations, commitments and liquidity needs.
- Investment and valuation risks include illiquid assets and management estimates. At September 30, $3.28bn of fair-value assets were classified as Level III, requiring significant unobservable inputs. Fund redemption gates, lockups and side pockets may also constrain liquidity.
- Potential carried-interest clawback obligations totaled $157.7m, including $98.6m attributable to Blackstone Holdings. Blackstone also reported $1.5bn of its own remaining investment commitments and a $1.2bn estimate of future tax-receivable-agreement payments over 15 years, subject to assumptions about tax law and taxable income.
- Litigation: a separate IPO-related class action settlement provided for an $85m payment covered by insurance, pending court approval. Blackstone said it intended to vigorously defend the private-equity antitrust litigation; management did not expect current proceedings to materially affect the consolidated financial statements.
- Blackstone reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported performance and distributable earnings reflects realized cash versus unrealized, valuation-sensitive carried interest and incentive fees.
- The composition and recourse status of reported loans payable, distinguishing Blackstone-issued notes from fund and CLO obligations.
- Whether AUM growth translates into durable fee revenue, given fund realizations, withdrawals and changes in fee-earning capital.
- Distribution capacity after funding the $1.5bn of investment commitments, tax-receivable payments and possible clawbacks; distributions remain discretionary.
- Fair-value assumptions for Level III assets, fund liquidity restrictions, and developments in the disclosed litigation and tax risks.