Business Context and Reporting Period
Blackstone Group L.P. (the registrant in this 2018 filing) is an alternative asset manager operating in Private Equity, Real Estate, Hedge Fund Solutions and Credit. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods unless noted. Figures below are in U.S. dollars.
Financial and Operating Highlights
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Total revenue | $2.633 billion, up 71% | $4.402 billion, up 28% |
| Net income | $1.551 billion | $2.393 billion |
| Net income attributable to Blackstone | $742 million, up 120% | $1.110 billion, up 41% |
| Net income per common unit | $1.09 basic and diluted | $1.64 basic; $1.63 diluted |
| Total expenses | $1.016 billion, up 15% | $1.999 billion, up 11% |
| Income before taxes | $1.690 billion | $2.587 billion |
| Effective tax rate | 8.2% | 7.5% |
- Reported revenue included a one-time $580.9 million payment after Blackstone ended its investment sub-advisory relationship with FS Investments. Management classified this as a transaction-related item, excluded it from Economic Income, Fee Related Earnings and Distributable Earnings, and said it intended to distribute part of the after-tax proceeds.
- Management and advisory fees, net rose 4% in Q2 and 9% year to date. Incentive fees fell 52% and 63%, respectively. Investment income rose 42% in Q2 and 10% year to date; results reflected both realized and unrealized performance allocations and principal investment gains.
- Economic Income, a non-GAAP segment measure, was $1.105 billion in Q2 versus $720 million in Q2 2017, and $1.914 billion for the first half versus $1.707 billion. These measures are not equivalent to GAAP income.
- Fee-earning assets under management were $333.0 billion at June 30, down from $344.7 billion at March 31 and $335.3 billion at December 31, 2017. Total AUM was $439.4 billion, down from $449.6 billion at March 31 but up from $434.1 billion at year-end. Credit AUM outflows were chiefly associated with the FS Investments relationship ending.
- Cash and cash equivalents were $1.710 billion at June 30, versus $1.992 billion at December 31. Cash used in operating activities was $2.661 billion for the first half; financing activities provided $720 million, while investing activities used $9 million. Combined cash, cash held by funds and restricted cash was $1.999 billion, down from $3.936 billion at year-end.
- Loans payable totaled $10.195 billion, including $6.707 billion attributable to consolidated funds. Blackstone’s own senior notes had carrying value of $3.488 billion; the company reported no borrowings on its $1.5 billion revolving credit facility. The filing states that consolidated fund and CLO liabilities generally have no recourse to Blackstone’s general credit.
- Distributions declared were $0.35 per common unit for Q2 and $1.20 per unit for the first half. Separately, management reported a $0.58-per-unit distribution paid in respect of Q2 and an intended incremental $0.30 per unit from the FS payment over Q2–Q4 2018; $0.10 per unit was distributed on August 6.
The filing does not provide a conventional operating-margin measure; reported earnings include volatile performance-related items and fund consolidation effects.
Material Changes and Unusual Items
- Private Equity results benefited from stronger performance allocations and principal investment appreciation. Real Estate performance revenues declined, with lower appreciation in opportunistic funds. Credit performance revenues improved in Q2, while fee income was affected by the FS relationship ending. Hedge Fund Solutions had lower first-half performance revenues and principal investment income.
- Blackstone deconsolidated certain CLOs and other fund entities after dilution of its ownership meant it was no longer their primary beneficiary. This reduced reported assets by $8.9 billion and liabilities by $8.7 billion; Blackstone said it would continue to receive fees and performance allocations from these vehicles.
- Blackstone adopted new revenue-recognition guidance retrospectively. It changed the presentation and timing of incentive-fee revenue versus the former accounting treatment; the filing reports comparative-period impacts. The accounting change for performance allocations changed presentation, but management said it did not change their timing or amount.
- A new $1.0 billion unit-repurchase authorization was approved in April. Blackstone repurchased 2.2 million common units for $71.7 million through June 30, leaving $928.3 million available.
Outlook, Commentary and Risks
- Management described continued economic strength but highlighted trade tensions, rising interest rates, a stronger U.S. dollar, uneven global growth and market volatility. It noted possible adverse effects on asset values, financing costs, portfolio-company margins, realizations and fundraising.
- Management expected to replace and ultimately overtake the prior revenue and earnings associated with the FS Investments sub-advisory relationship, but did not provide a quantified timeline or forecast.
- Blackstone cited approximately $2.4 billion of its own investment commitments and $88.3 billion of dry powder available for investment across segments. It said existing liquidity sources should be more than sufficient for working-capital needs, while noting that realizations and performance-related cash flows can vary substantially.
- Performance allocations are subject to clawback. Recorded obligations were $2.2 million; in the remote stress scenario that all carry-fund investments became worthless, potential clawback was estimated at $6.5 billion after tax where applicable. Management said this scenario was remote.
- The filing reports substantial reliance on valuation judgments for less-observable assets: $1.2 billion of investments were classified as Level III. Market-risk sensitivities include an estimated $1.399 billion decline in net performance revenues from a 10% decline in investment fair values.
- Management reported no pending legal proceeding expected to materially affect the consolidated financial statements, while cautioning that adverse outcomes in proceedings could affect results in a particular period. Forward-looking statements are subject to risks and are not guarantees.
Important Facts for Investors to Verify
- Separate recurring fee earnings from the $580.9 million FS Investments termination payment and assess the actual ongoing effect of the lost relationship on fees, AUM and performance revenues.
- Reconcile the different reported Q2 distribution figures, the declared-per-unit data and the planned incremental distribution from the termination proceeds.
- Review the cash-flow statement and cash balances, distinguishing Blackstone’s available corporate liquidity from cash and debt held within consolidated funds and CLOs.
- Track AUM flows and performance by segment, particularly Credit outflows and Real Estate appreciation, and examine how much reported income is unrealized or performance-dependent.
- Assess Level III valuation assumptions, market sensitivity, investment commitments, tax receivable agreement payments and potential clawback exposure.
- Consider the filing’s accounting-policy changes when comparing 2018 results with prior periods, and consult the full filing for non-GAAP reconciliations and fund-level disclosures.