Blackstone Inc. (then The Blackstone Group L.P.) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also provides unaudited quarterly data, including fourth-quarter results. Blackstone is a global alternative asset manager operating across Real Estate, Private Equity, Hedge Fund Solutions and Credit, with capital markets services. Total assets under management (AUM) were $472.2 billion at year-end.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Total revenue | $6.83 billion | $7.15 billion | Down 4% |
| Management and advisory fees, net | $3.03 billion | $2.75 billion | Up 10% |
| Investment income | $2.90 billion | $4.14 billion | Down 30%; realized performance allocations were lower |
| Total expenses | $3.51 billion | $3.75 billion | Down 6% |
| Net income | $3.26 billion | $3.37 billion | Down 3% |
| Net income attributable to Blackstone | $1.54 billion | $1.47 billion | Up 5%; diluted EPS was $2.26 versus $2.21 |
| Segment Distributable Earnings | $2.83 billion | $4.12 billion | Down 31%; non-GAAP measure that excludes unrealized activity |
| Operating cash flow | $45.7 million | $(1.63) billion | Reported consolidated cash flow; materially affected by investment purchases and sales and fund consolidation changes |
| Cash and cash equivalents | $2.21 billion | $1.99 billion | Excludes cash held by funds |
| Corporate senior notes | $3.47 billion | $3.51 billion | No borrowings on the $1.6 billion revolver at year-end |
At December 31, 2018, Blackstone also reported $2.5 billion in corporate treasury investments and $1.9 billion invested in Blackstone funds and other investments. Consolidated total assets and liabilities were $28.9 billion and $15.2 billion, respectively; the year-over-year reduction largely reflected deconsolidation of CLOs and other fund entities. CLO and fund borrowings are not equivalent to corporate debt and generally have no recourse to Blackstone’s general credit.
Material changes and business developments
- Fee-earning AUM rose 2% to $342.5 billion, while total AUM rose 9% to $472.2 billion. Credit fee-earning AUM fell 13% to $97.0 billion, partly reflecting the end of the FS Investments sub-advisory relationship; Real Estate and Private Equity fee-earning AUM grew.
- Fundraising and commitments supported $112.9 billion of dry powder, up from $94.8 billion. Limited partner capital invested was $40.9 billion, down from $46.2 billion.
- Real Estate Segment Distributable Earnings declined 35% to $1.37 billion, and Private Equity declined 28% to $870 million, primarily on lower realizations after strong 2017 comparables. Hedge Fund Solutions declined 25% to $321 million; Credit declined 33% to $266 million.
- The firm received $580.9 million in connection with ending its FS Investments sub-advisory relationship. It was reported as other revenue but excluded from Fee Related Earnings and Distributable Earnings; a portion of after-tax proceeds supported additional distributions.
- Blackstone closed its acquisition of Clarus Ventures in November 2018, launching Blackstone Life Sciences. It also amended and extended its $1.6 billion revolving credit facility to September 2023.
Fourth-quarter results, outlook and risks
Fourth-quarter revenue was $505.0 million, compared with $1.93 billion in the third quarter. Blackstone reported a $49.4 million pretax loss, a $78.7 million net loss and a $10.9 million net loss attributable to the partnership; diluted loss per common unit was $0.02. The quarter’s results underscore the effects of volatile investment valuations and the timing of performance-related income.
Management described slowing global growth, late-2018 market volatility, trade tensions, Brexit uncertainty, rising financing costs and weaker credit availability as risks to investment marks, deployment, exits and realizations. It expected moderate but slowing economic growth and did not provide quarterly or annual earnings guidance, citing substantial variability in realization-driven revenues and cash flows. Management noted that Real Estate portfolio operating trends remained generally stable, but elevated asset prices made opportunistic deployment challenging. Credit investments were described as largely floating-rate, short-duration and/or held to maturity, which management said provided some insulation from rate increases.
- Liquidity and distributions: The firm intended to distribute approximately 85% of its share of Distributable Earnings, but distributions remain at the general partner’s discretion and depend on liquidity, commitments, taxes and other needs. Distributions earned for 2018 totaled $2.15 per common unit; the separate calendar-year declared amount was $2.42 per unit.
- Clawbacks: Recorded potential clawback obligations were $29.5 million at year-end. The filing estimates that as much as $7.0 billion of previously received performance allocations could be subject to clawback in an extreme scenario in which all carry-fund investments were worthless; management considers this remote.
- Valuation and market exposure: Illiquid investments require judgment-based valuations. The filing estimates that a 10% fall in investment fair values would reduce performance revenues net of related compensation by about $1.48 billion, based on year-end 2018 exposures.
- Other risks and contingencies: Risks include leverage at portfolio companies and funds, investor redemptions and fundraising, competition and fee pressure, conflicts of interest, regulation, cybersecurity, tax changes and foreign exchange exposure. Blackstone said it was not party to pending legal proceedings expected to materially affect its consolidated financial statements; a Kentucky derivative suit involving a BAAM-managed fund was being contested.
Most important facts for investors to verify
- Reconcile GAAP net income and EPS with Segment Distributable Earnings and cash distributions; these measures differ materially and are affected by non-controlling interests and timing.
- Check the underlying cash-flow statement and distinguish Blackstone corporate liquidity from cash and debt held by consolidated funds and CLOs.
- Assess whether the FS Investments-related payment was nonrecurring and how its ending affects Credit fee revenue and AUM.
- Review realization levels, performance-fee eligibility and valuation assumptions, particularly following fourth-quarter market declines.
- Review the detailed notes for clawback exposure, $2.6 billion of Blackstone operating-entity capital commitments, the tax receivable agreement, and the terms and dilution potential of equity compensation.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2018.