Blackstone Group L.P. — Q2 2014 Form 10-Q
Business and period: The filing is for the quarter and six months ended June 30, 2014. Blackstone manages private equity, real estate, hedge fund solutions and credit funds, and provides financial advisory services. The 2014 registrant was The Blackstone Group L.P.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $2.258 billion | $1.440 billion | $3.785 billion | $2.687 billion |
| Net income | $1.223 billion | $511 million | $1.878 billion | $938 million |
| Net income attributable to Blackstone L.P. | $517 million | $211 million | $783 million | $379 million |
| Net income per common unit, diluted | $0.85 | $0.36 | $1.29 | $0.65 |
| Distributions declared per common unit | $0.35 | $0.30 | $0.93 | $0.72 |
- Revenue mix and earnings quality: Q2 performance fees were $1.396 billion, versus $717 million a year earlier, including $661 million of unrealized carried interest. Management and advisory fees were $620 million, up 7%. Higher realized and unrealized fund performance drove much of the earnings increase.
- Costs and segment results: Q2 total expenses rose 19% to $1.090 billion, including compensation and benefits of $918 million, up 20% as performance-fee compensation increased. Segment Economic Income, a non-GAAP measure, was $1.351 billion, compared with $719 million. Private Equity and Real Estate were the largest contributors; Financial Advisory revenue was slightly lower year over year.
- Cash flow: For the first six months, operating activities provided $1.843 billion; investing activities used $7.8 million; financing activities used $1.445 billion. Cash and cash equivalents ended June at $1.223 billion, up from $832 million at year-end 2013.
- Balance sheet and debt: Total assets were $30.059 billion and total liabilities $14.249 billion at June 30. Loans payable were $8.989 billion, down from $10.467 billion at year-end. This consolidated total includes CLO and fund borrowings; fund assets are restricted to fund obligations and those liabilities generally have no recourse to Blackstone’s general credit. Blackstone-issued notes had $2.135 billion principal outstanding, including a new $500 million 5.0% note due 2044. The $1.1 billion revolving facility was extended to 2019 and had no borrowings outstanding.
- Liquidity and commitments: Management reported $1.2 billion cash, $1.3 billion in Treasury Cash Management Strategies, and additional investments in liquid and illiquid Blackstone funds. Blackstone’s investment commitments were $1.5 billion. Management stated that available liquidity was expected to be sufficient for working capital and commitments.
- Assets under management: Total AUM was $278.9 billion and fee-earning AUM $209.9 billion at June 30. From year-end, these were up 5% and 6%, respectively. Growth reflected fundraising and market appreciation, partly offset by realizations and investor outflows.
Material changes and management commentary
- Compared with Q2 2013, revenue increased 57% and net income doubled. Performance fees, investment income and management fees all increased; higher performance-fee compensation and operating costs partially offset the gains.
- Private Equity gains reflected strong public holdings and private investments; BCP V crossed its preferred return threshold. Real Estate benefited from appreciation and improved property fundamentals. Hedge Fund Solutions management fees grew with fee-earning AUM, while Credit six-month revenue was broadly flat as lower performance fees offset higher management fees.
- Management described Q2 market conditions as supportive: equity and debt markets rose, volatility declined, M&A and issuance activity improved, and real-estate fundamentals continued to strengthen. These conditions may not persist; realized fees and investment gains can vary substantially with markets and fund exits.
- No company-wide earnings or revenue guidance is provided in the supplied filing text. Blackstone said it intended to distribute substantially all net cash available for distribution, subject to a $0.12-per-unit base quarterly distribution and the general partner’s discretion to change or eliminate distributions.
Risks, contingencies and unusual items
- Valuation and performance-fee volatility: Private and real-estate holdings and other investments include Level III fair-value estimates requiring significant judgment. A hypothetical 10% decline in investment fair values was estimated to reduce annualized management fees by $80 million, performance fees net of related compensation by $1.219 billion, and investment income by $283 million.
- Liquidity and commitments: Fundraising, realizations, capital calls and investor withdrawals affect cash availability. Blackstone noted that prolonged periods with few realizations alongside substantial capital calls could adversely affect liquidity.
- Clawbacks and guarantees: Recorded potential carried-interest clawback obligations were $4.1 million. A further $443 million was held in segregated accounts for possible personnel clawbacks. The filing also reports a $65.5 million guarantee of certain employee loans for fund investments.
- Tax exposure: Expected future tax-receivable-agreement payments were estimated at about $1.2 billion over 15 years, subject to tax savings being realized. Proposed changes to carried-interest and publicly traded partnership taxation could materially increase taxes or require restructuring; the eventual impact was uncertain.
- Litigation: A settlement agreement in the private-equity antitrust class action was entered into on July 28, 2014, after quarter-end. The payment was substantially covered by insurance and was not expected to materially affect financial condition or results; court approval remained pending.
- Accounting change: A new revenue-recognition standard could materially delay recognition of carried interest and performance fees if they are treated as variable consideration subject to the standard’s constraint.
Investor verification points
- Assess how much reported profit and distributable earnings depended on unrealized carried interest, fund marks and market appreciation, versus realized proceeds and recurring management fees.
- Review the distinction between Blackstone’s own debt and consolidated CLO/fund borrowings, including the non-recourse and restricted-asset disclosures.
- Verify the timing and funding of the $1.5 billion investment commitments, liquidity reserves, and tax-receivable-agreement obligations.
- Monitor fund fundraising, realizations, redemption outflows, clawback exposure and the sustainability of distributions; the filing’s distribution policy remains discretionary.
- Check subsequent court approval and final settlement terms for the antitrust matter, and developments in carried-interest tax legislation and revenue-recognition implementation.