Blackstone Group L.P. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. The filing is for The Blackstone Group L.P., a global alternative asset manager, rather than a quarterly report. Its four segments are Private Equity, Real Estate, Hedge Fund Solutions and Credit.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $7.12 billion | $5.13 billion | Up 39% |
| Management and advisory fees, net | $2.73 billion | $2.44 billion | Up 12% |
| Performance fees | $3.71 billion | $2.18 billion | Up 70% |
| Total expenses | $3.73 billion | $2.93 billion | Up 27% |
| Income before taxes | $4.12 billion | $2.38 billion | Up 73% |
| Net income | $3.37 billion | $2.25 billion | Up 50% |
| Net income attributable to Blackstone L.P. | $1.47 billion | $1.04 billion | Up 42% |
| Basic / diluted net income per common unit | $2.21 / $2.21 | $1.60 / $1.56 |
Revenue growth was led by higher realized carried interest and investment appreciation, particularly in Real Estate and Private Equity. Expenses rose with performance-fee compensation, compensation and newly launched CLO-related fund expenses. The filing does not provide a single conventional operating-margin measure; segment Economic Income is a non-GAAP measure.
- Assets under management: Total AUM reached $434.1 billion, up 18%; fee-earning AUM was $335.3 billion, up 21%. Record capital inflows were $108.0 billion, while realizations reached a record $55.2 billion.
- Segment AUM at year-end: Private Equity $105.6 billion; Real Estate $115.3 billion; Hedge Fund Solutions $75.1 billion; Credit $138.1 billion.
- Segment Economic Income: Private Equity $999 million; Real Estate $1.72 billion; Hedge Fund Solutions $395 million; Credit $367 million. Economic Income is a non-GAAP segment measure and is not equivalent to GAAP income attributable to common unitholders.
- Cash flow: GAAP net cash used in operating activities was $2.45 billion, compared with $541 million used in 2016. The statement includes substantial investment purchases and sales and cash flows from consolidated funds, so it is not a simple measure of recurring operating cash generation.
- Liquidity: Blackstone reported $2.0 billion of cash and cash equivalents, $3.1 billion of corporate treasury investments and a $1.5 billion undrawn revolving facility at year-end. Management described the firm as having no net debt. A further $1.9 billion of investments in Blackstone funds and other investments was reported, but these should not be assumed to be equivalent to cash available for corporate use.
- Debt: Corporate senior notes had a carrying value of $3.51 billion; the revolver had no material borrowing outstanding. Separately, consolidated CLO vehicles reported $11.3 billion of loans payable; the filing says CLO assets and liabilities are generally nonrecourse to Blackstone. The weighted-average maturity of corporate notes was 14.9 years.
- Distributions: Common unitholder distributions paid in respect of FY 2017 totaled $2.70 per unit. The stated policy targets quarterly distributions of approximately 85% of Blackstone L.P.’s share of Distributable Earnings, but payment remains at the general partner’s discretion.
Material changes versus FY 2016
- Performance fees rose $1.53 billion, with stronger appreciation and realizations in Real Estate and Private Equity and improved Hedge Fund Solutions performance. Real Estate opportunistic-fund carrying values increased 19.4%, versus 11.1% in 2016; corporate private equity carrying values increased 17.6%, versus 10.7%.
- Management and advisory fees increased $286 million, reflecting growth in fee-earning assets and the end of fee holidays for certain funds. Investment income increased $322 million.
- GAAP total assets grew to $34.4 billion from $26.4 billion, principally because more CLO vehicles were consolidated. Total liabilities rose to $20.7 billion from $13.9 billion, also principally due to consolidated CLO debt; these changes should not be read as equivalent increases in corporate borrowings.
- The effective tax rate increased to 18.1% from 5.6%. A one-time tax-reform-related remeasurement reduced the tax receivable agreement liability by $403.9 million, while remeasurement of deferred tax assets generated $500.6 million of tax expense.
- Blackstone issued $300 million of 3.150% notes due 2027 and $300 million of 4.000% notes due 2047, using the proceeds to repurchase its 6.625% notes due 2019. The refinancing generated a $32.9 million loss on debt extinguishment.
- Harvest was acquired in 2017. Blackstone also launched Blackstone Insurance Solutions and continued expanding retail-oriented products, including BREIT.
Outlook, commentary, risks and unusual items
- Blackstone provides no quarterly or annual earnings guidance, citing the variability and timing of realizations, carried interest, fund valuations and market conditions.
- Management described the 2017 investment environment as strong but competitive, with high asset prices making new investments challenging. It expected interest rates to rise in 2018, potentially increasing financing costs; management noted that improving economic fundamentals could partly offset this pressure.
- GSO’s sub-advisory relationship with FS Investments’ funds, representing $20.0 billion of AUM at year-end, was scheduled to end April 9, 2018. Blackstone planned to build an internal direct-lending platform and expected it eventually to replace and exceed the relationship’s revenue and earnings. Blackstone expected $582.5 million of proceeds from FS Investments as part of the transition; achieving the replacement target was uncertain.
- Key risks include volatile markets and performance-fee revenue; illiquid investments and subjective fair values; leverage and refinancing exposure in fund portfolio companies; fundraising, redemptions and fee pressure; regulatory, litigation, cybersecurity and tax risks; and dependence on key personnel. Fee-earning AUM and total AUM use Blackstone-defined methodologies and may not be comparable with other managers.
- Carried interest is subject to fund-level clawbacks. The recorded year-end clawback obligation was $2.2 million; in a hypothetical scenario where all carry-fund investments were worthless, potential clawback was estimated at $6.2 billion after tax, including up to $5.7 billion potentially attributable to Blackstone Holdings if personnel failed to pay their shares. Management considered this scenario remote. The filing also reports $655.9 million held in segregated accounts for potential personnel clawbacks.
- The filing reports no pending judicial, administrative or arbitration proceeding expected to have a material impact on consolidated financial statements, while noting that an adverse outcome in certain matters could materially affect a particular period. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP results with non-GAAP Fee Related Earnings, Distributable Earnings and Economic Income; confirm which measures best reflect recurring earnings and cash available for distributions.
- Assess the sustainability and cash realization of performance fees, including the $3.35 billion of net accrued performance fees, which were principally unrealized and not guaranteed to be realized.
- Separate corporate debt and liquidity from debt and cash held in consolidated CLOs and other funds, and verify the restrictions and recourse applicable to those balances.
- Track execution of the FS Investments transition and the growth, profitability and AUM of the replacement direct-lending platform after April 9, 2018.
- Review the effects of U.S. tax reform on taxes, deferred tax assets, carried-interest treatment, tax receivable agreement payments and future distributions.
- Review fund valuation assumptions, realization proceeds, investor flows and any changes to carried-interest clawback exposure; reported fund returns are not returns on Blackstone common units.