Business Context and Reporting Period
Company: The Blackstone Group L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Blackstone is a leading global alternative asset manager and financial advisory firm. Its operations are organized into four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory. The reporting period reflects the impact of the company's 2007 reorganization and IPO, as well as the March 2008 acquisition of GSO Capital Partners LP.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $68.5 million | $1,226.4 million |
| Net Income (Loss) | $(251.0) million | $1,132.1 million |
| Net Loss Per Common Unit (Basic/Diluted) | $(0.97) | N/A (Profit) |
| Total Assets | $13.22 billion | $13.17 billion (Dec 31, 2007) |
| Cash and Cash Equivalents | $672.7 million | $868.6 million (Dec 31, 2007) |
| Loans Payable | $451.7 million | $130.4 million (Dec 31, 2007) |
| Assets Under Management (AUM) | $113.53 billion | $83.14 billion |
Note: The significant increase in expenses and net loss in Q1 2008 is primarily driven by non-cash equity-based compensation charges ($914.7 million) and amortization of intangibles ($33.5 million) resulting from the 2007 IPO and reorganization.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 94% ($1.16 billion) compared to Q1 2007. This was driven by a $851.2 million drop in Performance Fees and Allocations and a $168.7 million decline in Investment Income, largely due to market declines and a specific valuation decrease in the Deutsche Telekom AG investment.
- Expense Surge: Total expenses increased by 538% to $1.10 billion. The primary driver was a $897.9 million increase in Compensation and Benefits, largely attributable to the recognition of non-cash equity-based compensation expense which was not present in the same form in the prior period.
- Investment Losses: Net Gains (Losses) from Fund Investment Activities swung from a $3.04 billion gain in Q1 2007 to a $215.6 million loss in Q1 2008, reflecting broader market downturns and deconsolidation adjustments.
- AUM Growth: Despite the net loss, Assets Under Management increased 37% to $113.53 billion, fueled by the acquisition of GSO ($11.49 billion) and capital inflows into funds of hedge funds and real estate.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the financial results to the "Business Environment," noting accelerated declines in fixed income and equity markets, reduced liquidity, and restricted lending in Q1 2008. The company emphasizes that its historical financial statements prior to the IPO did not include non-cash charges for equity-based compensation, making year-over-year comparisons difficult.
Outlook: Blackstone expects to record significant net losses for a number of years due to the amortization of finite-lived intangible assets and non-cash equity-based compensation. The company intends to use leverage opportunistically but does not anticipate approaching significant leverage levels in the near term.
Risks and Contingencies:
- Market Risk: A 10% decline in the fair value of investments would decrease management fees by $44.9 million annually and performance fees by $384.3 million.
- Legal Proceedings: Blackstone is facing a lawsuit from Alliance Data Systems (ADS) seeking a $170 million business interruption fee following the termination of a merger agreement due to regulatory (OCC) approval issues. Blackstone intends to defend vigorously. Additionally, there are antitrust class-action lawsuits and securities class actions regarding the IPO prospectus.
- Clawback Obligations: While no clawback obligation existed as of March 31, 2008, potential clawback of carried interest could reach $1.67 billion if all carry fund investments were deemed worthless.
Investor Verification Checklist
- Non-Cash Expense Impact: Verify the sustainability of operations by analyzing "Economic Net Income" (ENI) or cash flow from operations, as GAAP net loss is heavily distorted by $914.7 million in non-cash equity compensation.
- Deutsche Telekom Valuation: Assess the specific impact of the Deutsche Telekom AG investment decline on the Corporate Private Equity segment's performance fees and investment income.
- GSO Integration: Monitor the integration of GSO Capital Partners LP and the realization of the contingent consideration (up to $310 million) tied to future earnings targets.
- Liquidity Position: Review the $1.0 billion revolving credit facility renewed in May 2008 and the company's ability to meet capital commitments ($993.6 million remaining) amidst market volatility.
- Legal Exposure: Track the status of the ADS lawsuit and the potential liability of the $170 million business interruption fee.