Blackstone Inc. (then The Blackstone Group L.P.) — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014, with comparisons to 2013. Blackstone operated alternative asset management and financial advisory businesses across Private Equity, Real Estate, Hedge Fund Solutions, Credit and Financial Advisory. Financial statements are unaudited. Unless stated otherwise, financial statement amounts below are in U.S. dollars; reported statements generally present amounts in thousands.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1.679B | $1.217B | $5.464B | $3.904B |
| Income before taxes | $633.0M | $518.4M | $2.649B | $1.564B |
| Net income | $553.9M | $460.9M | $2.432B | $1.399B |
| Net income attributable to Blackstone | $250.5M | $171.2M | $1.033B | $549.9M |
| Basic net income per common unit | $0.41 | $0.29 | $1.70 | $0.94 |
| Distributions declared per common unit | $0.55 | $0.23 | $1.48 | $0.95 |
- Revenue mix: Q3 performance fees were $890.1M, up 64%; net management and advisory fees were $640.9M, up 21%. For nine months, performance fees were $3.059B, up 64%, and management and advisory fees were $1.834B, up 15%.
- Expenses and margins: Total expenses increased 34% to $1.055B in Q3 and 20% to $3.033B for nine months, driven mainly by performance-fee compensation and higher compensation. The filing does not identify a single comparable GAAP operating-margin measure; consolidated results include fund activity and non-controlling interests.
- Cash flow: Operating activities provided $2.068B for nine months, versus $2.733B in 2013. Financing used $1.941B, including $1.780B of distributions to unitholders. Cash and cash equivalents rose to $943.5M from $832.0M at year-end 2013.
- Liquidity: Blackstone reported $943.5M cash, $1.8B in Treasury Cash Management Strategies and $161.9M in liquid Blackstone fund investments. It had no borrowings under its $1.1B revolving facility, extended to May 2019. Management said available sources were expected to cover working capital needs.
- Debt: Corporate notes had $2.135B principal outstanding, including $500M of 5.0% notes issued in April 2014 due 2044. Consolidated loans payable were $7.814B, down from $10.467B at year-end; much of this relates to consolidated CLOs and funds, whose assets are restricted and whose liabilities generally have no recourse to Blackstone’s general credit. CLO borrowings totaled $6.195B outstanding.
- Balance sheet: Total assets were $30.514B, total liabilities $14.123B and partners’ capital $13.948B at September 30. These consolidated figures include investment funds and should not be read as wholly available to the operating partnership.
- Operating measures: Fee-earning AUM was $214.8B, up 9% from year-end 2013; total AUM was $284.4B, up 7%. Fee Related Earnings were $217.3M for Q3 and $593.2M year to date; Distributable Earnings were $672.1M and $1.9B, respectively. These are non-GAAP measures.
Material changes versus prior periods
- Nine-month revenue rose 40%, income before taxes 69%, net income 74% and net income attributable to Blackstone 88%. Performance-fee growth was the principal driver, alongside higher management and advisory fees.
- Private Equity gains reflected BCP V and VI performance, exits and public offerings; BCP V crossed its preferred-return threshold in Q2. Real Estate results benefited from appreciation in BREP funds and realizations. Hedge Fund Solutions management fees grew with fee-earning AUM, while its performance fees declined year over year.
- Compensation rose with performance fees, revenue and headcount. General, administrative and other expenses increased 16% for nine months, including a non-recurring Credit-segment placement fee expense.
- Fee-earning AUM rose during the year on $37.7B of inflows and $2.2B of market appreciation, offset by $15.9B of realizations and $7.2B of outflows. Total AUM gained $18.7B, including $20.9B of market appreciation, offset by $32.6B of realizations and $7.5B of outflows.
- Loans payable fell principally because certain CLO vehicles were deconsolidated and loans were repaid. The filing also reports new fund-entity consolidations, which affect reported assets and liabilities.
Outlook, management commentary and risks
- Business environment: Management described mixed markets in Q3: equity and credit indices weakened late in the quarter amid global growth concerns, geopolitical risks and monetary-policy uncertainty. Real estate fundamentals were characterized as positive. Results and cash flows remain sensitive to markets, exits, fundraising and investment timing.
- Announced transaction: On October 10, 2014, Blackstone announced a planned 2015 spin-off and combination of its financial and strategic advisory, restructuring and Park Hill placement businesses with PJT Partners. Blackstone’s capital markets business was to remain with Blackstone. No post-quarter event requiring financial-statement recognition or disclosure was identified in the notes; the transaction is described in MD&A.
- Distribution policy: Management said its intention was to distribute substantially all quarterly net cash available, subject to a $0.12-per-unit base, but distributions remain at the general partner’s discretion and may be reduced or suspended. The filing reports both declared distributions and distributions paid; verify the applicable declaration and payment dates before comparing per-unit amounts.
- Valuation and performance-fee volatility: Significant investments use Level III inputs requiring management judgment. At September 30, $3.489B of financial assets were classified Level III in the disclosed fair-value table. Performance fees include unrealized carried interest, which can reverse with changes in fund valuations; clawback obligations may arise as fund results evolve.
- Market sensitivities: A hypothetical 10% investment-value decline was estimated to reduce annualized management fees by $86.2M, and reduce performance fees net of related compensation and investment income by $1.237B and $290.6M, respectively, at the reporting date. A 10% decline in foreign currencies versus the U.S. dollar was estimated to reduce those measures by $21.8M, $279.2M and $40.6M, respectively.
- Commitments and contingencies: Blackstone operating entities had $1.394B of remaining investment commitments; total investment commitments were reported as $1.4B. A separate $52.5M of signed commitments belonged to consolidated funds. Recorded potential carried-interest clawbacks were $4.0M, while $480.8M was held in segregated accounts for personnel clawback obligations. The filing also reports an $84.8M employee-investment loan guarantee. Management did not expect current litigation to have a material effect; a class-action settlement was preliminarily approved, subject to final court approval.
- Tax and accounting risks: Management discussed proposed changes to carried-interest and publicly traded partnership taxation that, if enacted, could increase taxes or require restructuring; impact was not quantifiable. A new revenue standard could materially delay recognition of carried interest and performance fees if treated as variable consideration. A future consolidation-entity accounting update was expected to affect CLO measurement and appropriated partners’ capital, though not materially affect income attributable to Blackstone.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- How much of reported earnings and performance-fee growth is realized cash versus unrealized fund valuation, and how sensitive it is to reversals.
- The composition and accessibility of reported cash, investments, debt and liabilities, especially amounts attributable to consolidated CLOs and funds without recourse to Blackstone.
- Current AUM flows, realizations, fund performance and redemption conditions, including the effect of foreign exchange and any changes in fundraising.
- The timing, terms, approvals and financial impact of the proposed PJT Partners transaction, including separation costs and which advisory activities remain.
- Distribution declarations versus cash payment dates, and the impact of tax-receivable agreement payments, investment commitments and clawbacks on distributable cash.
- Developments in carried-interest tax proposals, revenue-recognition implementation, contingent obligations and the class-action settlement’s final approval.