Blackstone Group L.P. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. The filing is by The Blackstone Group L.P. (not Blackstone Inc.). The 10-K covers the full year, with selected fourth-quarter results noted below.
Business context and reporting period
Blackstone was a global alternative asset manager with four segments: Private Equity, Real Estate, Hedge Fund Solutions and Credit. It reported $336.4 billion of total assets under management (AUM) at year-end. On October 1, 2015, Blackstone spun off its financial and strategic advisory, restructuring and reorganization advisory, and Park Hill fund placement businesses, combining them with PJT Partners. Capital markets services remained with Blackstone and was recast into Private Equity; comparative segment results were adjusted accordingly.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $4.65 billion | $7.48 billion | Down 38% |
| Management and advisory fees, net | $2.54 billion | $2.50 billion | Up 2% |
| Performance fees | $1.80 billion | $4.37 billion | Down 59% |
| Investment income | $204.6 million | $534.0 million | Down 62% |
| Total expenses | $3.09 billion | $3.86 billion | Down 20% |
| Income before taxes | $1.81 billion | $3.99 billion | Down 54% |
| Net income | $1.62 billion | $3.70 billion | Down 56% |
| Net income attributable to Blackstone Group L.P. | $709.8 million | $1.58 billion | Down 55% |
| Basic / diluted earnings per common unit | $1.12 / $1.04 | $2.60 / $2.58 | Lower |
- Cash flow: Net cash provided by operating activities was $2.40 billion, versus $1.65 billion in 2014. Cash and cash equivalents ended the year at $1.84 billion. Cash flow is affected by consolidated fund activity and timing of investment realizations, so it is not a simple proxy for recurring firm earnings.
- Liquidity and debt: Blackstone reported $4.2 billion in cash, corporate treasury and liquid investments, and a $1.1 billion undrawn revolving credit facility. Corporate senior notes totaled about $2.8 billion; the revolver had no borrowings outstanding, though the credit table reports $6.1 million of letters of credit. Consolidated loans payable were $6.12 billion and include fund and CLO obligations, which generally are not recourse to Blackstone.
- Non-GAAP measures: Fee Related Earnings were $935.6 million and Distributable Earnings were $3.8 billion. These measures are not GAAP net income and are intended to capture recurring fee earnings and realized earnings, respectively.
- Assets and activity: Fee-earning AUM rose 14% to $246.1 billion; total AUM increased 16% to $336.4 billion. Gross AUM inflows were $93.6 billion, realizations were $42.7 billion, and limited partner capital invested was $30.5 billion. Firmwide realizations were described as approximately $43 billion, compared with a record $45 billion in 2014.
- Distributions: Distributions declared per common unit were $2.90 for 2015. Cash distributions paid during calendar 2015 totaled $2.73 per unit; the fourth-quarter distribution of $0.61 was paid in February 2016. Blackstone’s stated intention was to distribute approximately 85% of its share of Distributable Earnings, subject to general partner discretion and cash needs.
The filing does not provide a conventional consolidated operating-margin measure; its segment results and key earnings indicators include non-GAAP measures and performance-related items.
Material changes versus the prior comparable period
- Lower performance fees and investment income drove most of the revenue and earnings decline. Unrealized carried interest fell sharply, reflecting weaker public-market marks and lower appreciation, particularly in lodging, energy and credit.
- Management and advisory fees were broadly stable overall, supported by AUM growth, but transaction and other fees fell in Private Equity, partly due to transaction timing and elimination of monitoring-fee termination payments.
- Operating cash flow increased year over year despite lower GAAP net income. Distributions declared per common unit increased from $1.92 to $2.90.
- Total assets fell from $31.5 billion to $22.5 billion, principally reflecting adoption of new consolidation guidance that deconsolidated certain funds. The change had no impact on net income attributable to Blackstone L.P.; it reduced reported consolidated assets and liabilities.
- Blackstone issued $350 million of 4.45% senior notes due 2045 and €300 million of 2.0% notes due 2025.
Outlook, commentary, risks and unusual items
- Outlook: Blackstone gave no earnings guidance, citing the substantial variability of revenue, net income and cash flow, especially from performance fees and realizations. Management said 2015 markets were volatile, with weaker equity and credit markets, widening high-yield spreads and falling commodity prices; continued weakness could pressure marks, fundraising, exits and earnings.
- Credit and energy exposure: The Credit segment reported negative 2015 returns in its significant strategies: hedge fund strategies -5.8%, mezzanine -2.2% and rescue lending -8.8%. Management identified energy weakness, credit-market declines, event-driven underperformance and year-end selling as pressures.
- Key risks: Earnings depend on fund performance, realizations and investor fundraising; illiquid and Level III valuations involve judgment and may not be realized at carrying value. Other disclosed risks include leverage at portfolio companies and funds, clawbacks, redemption and capital-call risk, competition, regulatory change, conflicts of interest, key-person retention, cybersecurity and potential changes to partnership and carried-interest taxation.
- Clawbacks: Recorded potential clawback obligations were $3.4 million at year-end. In a remote stress scenario where all carry-fund investments were worthless, potential clawbacks were estimated at $4.4 billion after tax where applicable. The filing also reports $582.7 million held in segregated accounts for personnel clawback obligations.
- SEC settlement: In October 2015, three private-equity fund advisers settled SEC matters concerning disclosure of historical monitoring-fee termination practices and vendor discounts, without admitting or denying wrongdoing. They agreed to pay $26.2 million in disgorgement, $2.7 million in prejudgment interest and a $10 million civil penalty.
- Other unusual items: The spin-off involved transaction costs and a $311.8 million non-cash transfer of net assets in the cash-flow disclosures. An $82.7 million reversal of a tax receivable agreement liability was primarily attributable to the spin-off. The auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP earnings with Fee Related Earnings and Distributable Earnings, including the effect of realized versus unrealized performance fees and related compensation.
- Review the quality and realizability of accrued performance fees ($3.25 billion net of performance-fee compensation) and the sensitivity of fund marks to public markets, credit spreads, energy prices and foreign exchange.
- Distinguish Blackstone corporate debt and liquidity from debt and cash of consolidated funds and CLOs; confirm revolver availability, covenants and capital commitments.
- Assess the sustainability of distributions against realized earnings, future investment commitments, tax receivable agreement payments and possible clawbacks.
- Track post-spin-off results and confirm the continuing contribution of capital markets services and the effect of advisory-business separation on expenses and earnings.
- Monitor the SEC settlement’s implementation, regulatory developments and any changes to fee offsets, expense allocation or carried-interest taxation.