Business Context and Reporting Period
This Form 10-Q covers The Blackstone Group L.P. for the quarterly period ended September 30, 2009. Blackstone is a leading global alternative asset manager and provider of financial advisory services, operating through four segments: Corporate Private Equity, Real Estate, Credit and Marketable Alternatives, and Financial Advisory. The filing reflects the company's performance during a period of improving global equity and debt markets, though real estate fundamentals continued to decline.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Revenues | $597.0 million | $1,048.4 million |
| Net Income (Loss) Attributable to Blackstone | $(176.2) million | $(572.0) million |
| Net Loss Per Common Unit (Basic/Diluted) | $(0.61) / $(0.91) | $(2.05) / $(2.95) |
| Cash and Cash Equivalents | $486.5 million | $486.5 million (End of Period) |
| Loans Payable | $673.4 million | $673.4 million (End of Period) |
| Assets Under Management | $97.6 billion | $97.6 billion (End of Period) |
| Adjusted Cash Flows from Operations | $131.9 million | $309.0 million |
Material Changes vs. Prior Period
- Revenue Improvement: Total revenues for the three months ended September 30, 2009, were $597.0 million, a significant improvement from a loss of $160.3 million in the same period in 2008. This was driven by a swing in Performance Fees and Allocations from a negative $416.1 million in 2008 to a positive $154.0 million in 2009, and Investment Income turning positive ($64.8 million) from a loss of $199.5 million.
- Expense Reduction: Total expenses decreased by 3% to $1.1 billion for the quarter, primarily due to a $10.9 million decrease in Compensation and Benefits and a 91% drop in Fund Expenses.
- Net Loss Narrowing: Net loss attributable to The Blackstone Group L.P. narrowed to $(176.2) million for the quarter compared to $(340.3) million in the prior year quarter, representing a 48% improvement.
- Assets Under Management: AUM decreased 16% to $97.6 billion from $116.3 billion in the prior year, primarily due to net depreciation in the fair value of real estate and private equity portfolio investments.
Guidance, Outlook, and Risks
- Outlook: Management notes that global equity and debt markets continued to move higher in Q3 2009, with credit spreads tightening. While real estate fundamentals declined, initial signs of stabilization were observed in office leasing and hotel occupancy. The company expects to use Adjusted Cash Flows from Operations to fund distributions to unitholders.
- Distributions: A quarterly distribution of $0.30 per common unit was declared, payable December 11, 2009. The company intends to distribute substantially all of its net after-tax share of annual Adjusted Cash Flows from Operations.
- Capital Structure: On August 20, 2009, the company issued $600 million of senior notes due 2019 at 6.625%. It also maintains an $850 million committed revolving credit facility with no outstanding borrowings as of September 30, 2009.
- Risks:
- Regulatory: Potential legislation in the U.S. and EU could tax carried interest as ordinary income or ban the use of placement agents for public pension funds, materially affecting the business.
- Market Risk: A 10% decline in the fair value of investments would decrease management fees by $34.5 million annually and performance fees by $142.6 million.
- Clawback Obligations: The company has a potential clawback obligation of $500.4 million related to carried interest previously distributed, though no cash payment is currently due.
Investor Verification Checklist
- Performance Fee Volatility: Verify the sustainability of the swing from negative to positive performance fees, which is heavily dependent on the fair value of underlying portfolio investments.
- Real Estate Valuations: Review the specific valuation methodologies used for real estate assets, which saw significant depreciation in prior periods and remain a key risk factor.
- Clawback Liability: Assess the $500.4 million accrual for potential repayment of performance fees and the conditions under which this liability would become realized.
- Tax Legislation Impact: Monitor pending U.S. and EU legislation regarding the taxation of carried interest and the registration of private investment vehicles, which could materially increase tax liabilities.
- Liquidity vs. Commitments: Confirm that the $486.5 million in cash and $1 billion in liquid debt strategies are sufficient to meet the $1.37 billion in remaining capital commitments to funds.