Business Context and Reporting Period
This Form 10-Q covers The Blackstone Group L.P. for the quarterly period ended September 30, 2007. Blackstone is a leading global alternative asset manager and financial advisory firm. The reporting period is significantly impacted by the company's reorganization into a holding partnership structure and its Initial Public Offering (IPO) completed on June 27, 2007. Concurrently, Blackstone deconsolidated the majority of its investment funds (corporate private equity, real estate, and mezzanine funds) from its financial statements, shifting from consolidation to the equity method of accounting for these entities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Total Revenues | $526.7 million | $2.71 billion | $461.5 million | $1.34 billion |
| Net Income (Loss) | $(113.2) million | $1.79 billion | $372.5 million | $1.08 billion |
| Net Loss Per Common Unit (Basic/Diluted) | $(0.44) | N/A (Post-IPO) | N/A | N/A |
| Assets Under Management (AUM) | $98.2 billion | $98.2 billion | $62.7 billion | $62.7 billion |
| Cash and Cash Equivalents | $610.2 million | $610.2 million | $129.4 million (Dec 31, 2006) | $84.7 million (Sep 30, 2006) |
| Loans Payable | $144.5 million | $144.5 million | $976.0 million (Dec 31, 2006) | N/A |
Note: Net Income for the nine months ended September 30, 2007, includes significant non-cash equity-based compensation expenses and intangible amortization resulting from the IPO and reorganization.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.1% for the quarter and 101.6% for the nine-month period compared to 2006. This was driven by higher management fees (due to increased AUM) and advisory fees, partially offset by a decline in performance fees in the quarter due to market volatility.
- Expense Surge: Total expenses increased 691.6% for the quarter and 359.2% for the nine-month period. This dramatic increase is primarily attributable to the recognition of $747.4 million in equity-based compensation and $55.2 million in intangible amortization for the quarter, costs that were not present or were treated differently prior to the IPO.
- Net Loss in Q3: The company reported a net loss of $113.2 million for the quarter, compared to a net income of $372.5 million in the prior year quarter. This loss is largely non-cash, driven by the aforementioned compensation and amortization charges.
- Deconsolidation Impact: "Net Gains from Fund Investment Activities" dropped significantly in the quarter ($9.9 million vs. $815.2 million in 2006) because the majority of investment funds were deconsolidated. These gains are now largely reflected in "Investment Income and Other" via the equity method.
- Liquidity: Cash and cash equivalents increased to $610.2 million from $129.4 million at year-end 2006, bolstered by $7.5 billion in proceeds from the IPO and the sale of non-voting units to Beijing Wonderful Investments.
Guidance, Outlook, and Risks
- Market Environment: Management notes considerable turbulence in the U.S. housing and sub-prime mortgage markets, leading to reduced liquidity and a slowdown in new private equity acquisitions. However, advisory business conditions remain relatively favorable outside the U.S.
- Taxation Risk: Significant uncertainty exists regarding future taxation levels. Proposed legislation in the U.S. Congress could preclude Blackstone from qualifying as a publicly traded partnership and could tax carried interest as ordinary income rather than capital gains, which would materially increase tax liabilities.
- Future Expenses: Management expects compensation and general administrative expenses to remain elevated in absolute dollars compared to 2006 due to the costs of being a public company (Sarbanes-Oxley compliance, investor relations, audits) and the ongoing amortization of intangibles and equity-based compensation.
- Capital Deployment: As of September 30, 2007, Blackstone had $9.29 billion of Limited Partner Capital committed to transactions scheduled to close in subsequent periods. Post-quarter, the company closed on the purchase of Hilton Hotels with a total equity investment of $5.65 billion.
Investor Verification Checklist
- Non-GAAP Reconciliation: Verify the reconciliation of GAAP Net Income to "Economic Net Income" (ENI) to understand the impact of non-cash equity compensation and intangible amortization on reported earnings.
- Deconsolidation Effects: Confirm how the shift from consolidation to the equity method for investment funds affects the visibility of fund-level gains and losses in future reports.
- Tax Legislation: Monitor developments in U.S. tax legislation regarding publicly traded partnerships and carried interest, as this poses a material risk to future profitability.
- Clawback Obligations: Review the disclosure regarding potential clawback obligations ($1.93 billion potential exposure if investments were deemed worthless) to understand downside risk in performance fees.
- Capital Commitments: Track the drawdown of the $1.27 billion in remaining capital commitments to Blackstone funds to assess future cash outflow requirements.