Business Context and Reporting Period
Company: The Blackstone Group L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Blackstone is a leading global alternative asset manager and provider of financial advisory services. Its operations are organized into four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory. The reporting period coincides with unprecedented volatility in global financial markets, characterized by credit market freezes, declining asset values, and a slowing global economy.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $(160.3) million | $261.9 million |
| Net Income (Loss) | $(340.3) million | $(747.9) million |
| Net Loss Per Common Unit (Basic/Diluted) | $(1.27) to $(1.57) | $(2.84) to $(1.57) |
| Assets Under Management (AUM) | $116.28 billion | $116.28 billion |
| Cash and Cash Equivalents | $1.13 billion | $1.13 billion |
| Loans Payable | $986.0 million | $986.0 million |
| Adjusted Cash Flow from Operations | $(9.0) million | $148.1 million |
Note: Negative revenues and net income are primarily driven by significant unrealized losses in consolidated funds and negative performance fee allocations due to declining asset values.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues for the nine months ended September 30, 2008, decreased by 90% compared to the same period in 2007 ($261.9 million vs. $2.71 billion). This was driven by a shift from positive performance fees of $1.27 billion in 2007 to negative performance fees of $(618.5) million in 2008.
- Net Loss: The company reported a net loss of $(747.9) million for the nine months ended September 30, 2008, compared to net income of $1.79 billion in the prior year period. The loss was largely attributable to a $(576.7) million loss from fund investment activities.
- Expense Increase: Total expenses increased by 100% year-over-year to $3.39 billion. This was primarily due to a $1.64 billion increase in compensation and benefits, driven by the amortization of equity-based compensation ($1.51 billion) and the inclusion of profit-sharing arrangements previously treated as distributions.
- Assets Under Management: AUM increased 18% to $116.28 billion, driven by the acquisition of GSO Capital Partners ($15.04 billion) and new capital raises, partially offset by realizations and unrealized value declines in private equity funds.
Guidance, Outlook, and Risks
- Market Environment: Management notes that global economic growth has slowed, credit markets are stalled, and asset values have declined significantly. The S&P 500 declined 8.9% in the third quarter and an additional 16.9% in October.
- Distribution Policy: Blackstone intends to distribute substantially all of its net after-tax share of Adjusted Cash Flow from Operations. However, due to the negative Adjusted Cash Flow from Operations in the third quarter ($(9.0) million) and the full year outlook, the fourth-quarter distribution may be significantly lower than the $0.30 per unit paid in prior quarters, or potentially zero.
- Liquidity: The company maintains $1.13 billion in cash and $1.29 billion in liquid investments. It has a $1.0 billion revolving credit facility with $845.0 million outstanding as of September 30, 2008.
- Key Risks:
- Valuation Risk: A significant portion of investments (Level III) relies on management judgment. A 10% decline in fair value would reduce annual management fees by $41.3 million and performance fees by $251.0 million.
- Clawback Obligations: If all carry fund investments were deemed worthless, the potential cash clawback obligation would be $1.33 billion (after-tax), though management views this as remote.
- Legal Proceedings: Pending litigation includes a class action regarding the IPO prospectus and a dispute with Alliance Data Systems regarding a terminated merger agreement involving a potential $170 million fee.
Investor Verification Checklist
- Performance Fee Volatility: Verify the magnitude of negative performance fee allocations and their impact on future revenue stability as asset values recover or decline further.
- Equity Compensation Impact: Review the $2.50 billion equity-based compensation expense for the nine-month period and its effect on future cash flow and net income.
- Level III Valuations: Assess the sensitivity of the $2.27 billion in Level III investments to changes in valuation assumptions, given the lack of observable market prices.
- Distribution Sustainability: Monitor the Adjusted Cash Flow from Operations metric to determine the likelihood and size of future quarterly distributions to unitholders.
- Debt Covenants: Confirm continued compliance with the $1.0 billion credit facility covenants, specifically the minimum fee-generating assets under management requirement.