Business Context and Reporting Period
Company: The Blackstone Group L.P. (Blackstone)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Overview: Blackstone is a leading global alternative asset manager and financial advisory firm. As of December 31, 2008, the firm managed $94.56 billion in assets under management (AUM). The business is organized into four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management (including funds of hedge funds, credit-oriented funds, and CLOs), and Financial Advisory. The reporting period was significantly impacted by the global financial crisis, which caused severe market dislocations, a freeze in credit markets, and a sharp decline in the valuation of portfolio assets.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $(349.4) million | $3,050.1 million |
| Net Income (Loss) | $(1,163.0) million | $1,623.2 million |
| Net Loss Per Common Unit (Basic/Diluted) | $(4.36) | $(1.29) (Post-IPO period) |
| Adjusted Cash Flow from Operations | $128.8 million | $1,516.6 million |
| Assets Under Management (AUM) | $94.56 billion | $102.43 billion |
| Fee-Earning Assets Under Management | $91.04 billion | $83.15 billion |
| Cash and Cash Equivalents | $503.7 million | $868.6 million |
| Debt (Revolving Credit Facility) | $250.0 million | $130.4 million |
Note: The significant decline in Total Revenues and Net Income in 2008 was driven primarily by negative performance fees and allocations (carried interest) totaling $(1.25) billion, compared to $1.13 billion in 2007, due to the depreciation of portfolio asset values.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues swung from a $3.05 billion gain in 2007 to a $(349.4) million loss in 2008. This was primarily due to a $(2.37) billion decrease in Performance Fees and Allocations and a $(935.9) million decrease in Investment Income.
- Expense Increase: Total expenses rose 59% to $4.39 billion in 2008 from $2.76 billion in 2007. This increase was largely attributable to a $1.60 billion rise in Compensation and Benefits, driven by the amortization of equity-based compensation ($1.53 billion) and the inclusion of performance payment arrangements for senior managing directors.
- Asset Valuation: AUM decreased by 8% to $94.56 billion, reflecting a net depreciation in the fair value of portfolio investments of $27.19 billion. Real Estate and Corporate Private Equity funds saw net depreciations of approximately 39% and 32%, respectively.
- Capital Deployment: Limited Partner Capital Invested dropped 56% to $6.55 billion in 2008 from $14.77 billion in 2007, reflecting a significant reduction in transaction volume due to credit market constraints.
Guidance, Outlook, and Risks
- Guidance: Blackstone does not provide guidance regarding expected quarterly or annual operating results due to the high variability of revenue, net income, and cash flow.
- Distributions: The firm paid $0.90 per common unit for the first three quarters of 2008. However, no distribution was paid for the fourth quarter of 2008 because Adjusted Cash Flow from Operations ($128.8 million) was insufficient to cover the priority distribution requirements for common unitholders.
- Liquidity: The firm maintained $503.7 million in cash and a $1.0 billion revolving credit facility (with $250 million drawn). Management anticipates that current sources of liquidity are sufficient to fund working capital and capital commitments, though the firm is engaged in discussions to renew its credit facility.
- Key Risks:
- Market Conditions: Continued deterioration in global financial markets could further reduce asset values, impair realization events, and hinder the ability to raise new capital.
- Clawback Obligations: The firm has recorded a contingent repayment obligation for carried interest previously distributed but may not have sufficient cash to pay back these obligations if triggered by poor long-term fund performance.
- Tax Legislation: Proposed legislation could treat carried interest as ordinary income or preclude the firm from qualifying as a partnership for tax purposes, materially increasing tax liability.
- Key Personnel: The firm's success depends heavily on the continued service of its co-founder and senior managing directors.
Investor Verification Checklist
- Carried Interest Volatility: Verify the extent to which future earnings depend on the realization of gains in illiquid funds, which are currently depressed in value.
- Liquidity Position: Confirm the status of the $1.0 billion revolving credit facility renewal and the firm's ability to meet capital calls without diluting unitholders.
- Clawback Exposure: Assess the magnitude of the recorded contingent clawback obligations and the firm's cash reserves to meet potential future repayments.
- Fee Structure Sustainability: Evaluate the impact of potential fee concessions from investors due to poor fund performance and the competitive landscape.
- Tax Status: Monitor legislative developments regarding the taxation of publicly traded partnerships and carried interest.