Blackstone Group L.P. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Blackstone was then organized as a publicly traded partnership and managed private equity, real estate, hedge fund solutions and credit businesses. The historical Financial Advisory business had been spun off effective October 1, 2015, affecting period comparisons.
Financial and operating results
Amounts are in U.S. dollars; financial statement figures are reported in thousands and shown here in millions unless stated otherwise.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $1,192 | $1,225 | $2,125 | $3,738 |
| Net income | $463 | $350 | $788 | $1,714 |
| Net income attributable to Blackstone L.P. | $199 | $134 | $358 | $764 |
| Income before taxes | $511 | $393 | $844 | $1,856 |
| Performance fees | $449 | $568 | $764 | $2,241 |
| Operating cash flow | Not stated by quarter | $247 | $1,600 |
- Margins and taxes: GAAP effective tax rates were 9.3% in Q2 2016 and 6.7% in the first half, versus 11.0% and 7.7%, respectively, in 2015. Blackstone uses non-GAAP segment measures, including Economic Income and Fee Related Earnings; these are not equivalent to GAAP income.
- Fee earnings and distributions: Fee Related Earnings were $226.1 million in Q2 and $445.6 million in the first half. Distributable Earnings were $503.5 million in Q2. The filing text reports first-half Distributable Earnings as “$891.4 billion”; the scale is unclear and should be verified. Distributions declared were $0.28 per unit for Q2 and $0.89 per unit for the first half. Separately, the filing says $0.36 per unit was paid with respect to Q2.
- Assets under management: Total AUM was $356.3 billion at June 30, up 4% from March 31 and 6% from December 31. Fee-earning AUM was $266.0 billion, up 9% quarter over quarter and 8% since year-end. Dry powder was $98.5 billion; first-half limited partner capital invested was $10.3 billion.
- Balance sheet and liquidity: Total assets were $23.0 billion and total liabilities $10.9 billion at June 30. Cash and cash equivalents were $1.50 billion. Management reported about $2.0 billion in Treasury Cash Management Strategies investments, $2.2 billion in Blackstone Fund and other investments, a $1.1 billion undrawn revolving facility, and no revolver borrowings.
- Debt: Loans payable totaled $6.74 billion, including $2.80 billion of Blackstone-issued notes and approximately $4.37 billion of consolidated fund/CLO borrowings. The company said the increase in loans payable since year-end was primarily from consolidated funds. Consolidated fund assets and liabilities generally have no recourse to Blackstone’s general credit.
Material changes versus the prior comparable period
- Q2 revenue fell 3% year over year, while net income attributable to Blackstone rose 48%. Lower performance fees were partly offset by higher management fees and investment income.
- First-half revenue fell 43% and net income attributable to Blackstone fell 53%, principally reflecting much lower performance fees and investment income than in the unusually strong first half of 2015. Compensation expense also declined, including because IPO-related awards had been fully vested and expensed by June 30, 2015.
- Management and advisory fees rose 6% in Q2 and 2% in the first half. First-half performance fees declined 66%; first-half investment income declined 63%.
- Operating cash flow decreased to $247 million from $1.60 billion in the first half. Cash and cash equivalents declined $342 million from year-end; cash distributions to unitholders were $1.08 billion.
- First-half segment Economic Income was $928 million versus $2.16 billion in 2015. Q2 Economic Income was $541 million versus $529 million; real estate and credit improved, while private equity and hedge fund solutions declined.
Outlook, commentary and risks
- Management described global markets as volatile, citing the U.K.’s Brexit vote late in June, currency movements, low interest rates and continuing economic uncertainty. Its cited forecasts were 3.1% global and 2.2% U.S. economic growth for 2016; these were forecasts, not company guidance.
- Management said portfolio fundamentals remained generally solid but growth was moderating in some areas. It warned that deteriorating markets could reduce investment values, performance fees, investment income and fundraising or deployment opportunities. Credit results benefited in Q2 from a rebound in energy and commodity investments; renewed pressure or depressed energy prices could adversely affect results.
- Hedge Fund Solutions faced investor outflows and high-water-mark headwinds: only an estimated 10% of BAAM incentive-fee-eligible AUM was above its high-water mark or benchmark at June 30, versus 93% a year earlier. The filing reported $846.9 million of BAAM net inflows from July 1 through August 1.
- Carried interest is subject to clawback. Recorded clawback obligations were $5.1 million; the hypothetical amount subject to clawback if all carry-fund investments were worthless was $4.8 billion after tax where applicable, a scenario management considered remote. Blackstone also disclosed $2.3 billion of its investment commitments and $144.5 million of guarantees for certain employee loans.
- Other risks include valuation uncertainty for illiquid investments, foreign-exchange and market exposure, investor capital-call failures, and potential tax-law changes affecting carried interest or partnership tax status. Management noted that a proposed revenue-recognition standard could significantly delay recognition of performance fees and carried interest; it had not yet determined the impact.
- Management stated that it had no pending legal proceeding expected to have a material impact on the consolidated financial statements. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the first-half Distributable Earnings figure: the filing text says “$891.4 billion,” which appears inconsistent with the surrounding figures; verify the intended unit and reconciliation.
- Distinguish GAAP consolidated results from segment Economic Income, Fee Related Earnings and Distributable Earnings, and assess how fund consolidation and non-controlling interests affect each measure.
- Review performance-fee realization, accrued fees, fund valuations and the sensitivity of earnings to market declines; substantial reported AUM is not necessarily fee-earning or liquid.
- Check the composition and recourse of the $6.74 billion in loans payable, liquidity available outside consolidated funds, and timing of Blackstone’s $2.3 billion investment commitments and tax-receivable-agreement payments.
- Reconcile distributions declared with distributions paid, and monitor the effect of investor outflows, high-water marks, Brexit-related uncertainty and energy-market volatility on subsequent results.