Blackstone Inc. (The Blackstone Group L.P.) — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2017, with balance-sheet comparisons to December 31, 2016. Blackstone is an alternative asset manager operating in Private Equity, Real Estate, Hedge Fund Solutions and Credit. Unless noted, financial figures below are in U.S. dollars; reported statement amounts were generally in thousands.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1.941 billion | $932.4 million | +108% |
| Net income | $1.020 billion | $324.6 million | +214% |
| Net income attributable to Blackstone L.P. | $461.8 million | $159.8 million | +189% |
| Diluted net income per common unit | $0.69 | $0.23 | Up $0.46 |
| Distributions declared per common unit | $0.47 | $0.61 | Down $0.14 |
| Net cash provided by operating activities | $151.1 million | $220.2 million | Down $69.1 million |
- Performance fees were $1.063 billion, versus $314.5 million a year earlier. Realized carried interest rose to $1.111 billion, while unrealized carried interest was a negative $154.7 million.
- Management and advisory fees, net, increased 5% to $642.1 million. Investment income was $211.2 million, versus an $8.5 million loss in Q1 2016.
- Total expenses rose 50% to $929.7 million, mainly because performance-fee compensation increased by $301.6 million. General, administrative and other expense declined 14% to $106.0 million; interest expense was $40.2 million.
- Economic Income, Blackstone’s segment measure, was $1.005 billion, up from $387.4 million. Fee Related Earnings were $290.7 million and Distributable Earnings were $1.2 billion; both are non-GAAP measures.
- Reported assets were $28.34 billion and liabilities $15.23 billion at March 31. Cash and cash equivalents were $2.304 billion. Loans payable totaled $9.797 billion, up $930.6 million from year-end, primarily reflecting new CLO vehicles.
- Debt requires careful interpretation: $3.411 billion was the carrying value of Blackstone-issued senior notes; consolidated CLO/fund borrowings are also included in loans payable and generally are collateralized by fund assets, with no recourse to Blackstone’s general credit. Blackstone reported $2.7 billion in corporate treasury investments, $1.9 billion in Blackstone Funds and other investments, and no borrowings under its $1.5 billion revolving credit facility.
- Quarter-end total Assets Under Management were $368.2 billion, up $1.6 billion from year-end; Fee-Earning AUM was $280.2 billion, up $3.1 billion. Dry powder was $94.3 billion, and limited partner capital invested during the quarter was $9.6 billion.
Material changes versus the prior comparable period
- Results improved sharply, driven chiefly by higher realized performance fees and investment income. Management attributed stronger performance fees to appreciation in real estate opportunistic funds, the BCP VI private-equity portfolio, credit strategies and a number of hedge fund strategies.
- Economic Income increased across all four segments: Private Equity to $360.7 million from $92.2 million; Real Estate to $429.3 million from $231.4 million; Hedge Fund Solutions to $115.2 million from $36.4 million; and Credit to $99.7 million from $27.5 million.
- Fee-Earning AUM growth reflected $11.9 billion of inflows and $2.6 billion of market appreciation, offset by $8.2 billion of realizations and $3.2 billion of outflows. Total AUM rose slightly despite $16.6 billion of realizations and $5.0 billion of outflows, due to inflows and market appreciation.
- Operating cash flow was lower year over year despite higher net income; the cash-flow statement includes substantial investment purchases and sales and working-capital movements. Cash and cash equivalents nevertheless increased by $466.4 million during the quarter.
Outlook, commentary, risks and unusual items
- Management described Q1 markets as generally supportive, with rising equity markets and improving global activity, but emphasized uncertainty around geopolitical conditions, European populism, U.S. tax and regulatory changes, and the timing and scale of potential reforms. It gave no specific company-wide earnings guidance in the supplied filing text.
- Management cited high asset prices and a challenging new-investment environment in Private Equity; decelerating growth in some real estate geographies and sectors, notably retail; and risks to Credit from market pressure, volatility and depressed energy prices. Hedge Fund Solutions could be affected by falling asset prices or investor withdrawals.
- BAAM’s Principal Solutions Composite returned 2.7% gross and 2.5% net for the quarter. Management reported that 84% of eligible Hedge Fund Solutions fee-earning AUM was above its high-water mark or benchmark at quarter-end. BAAM had $229.2 million of net outflows from April 1 through May 1, 2017.
- Management’s distribution policy targets approximately 85% of Blackstone’s share of Distributable Earnings, subject to the general partner’s discretion and business, legal, tax and liquidity needs. The filing also says $0.87 per common unit was paid during Q1; this is distinct from the $0.47 per-unit distribution declared for the quarter.
- Blackstone reported $2.4 billion of its own investment commitments and $359 million of signed commitments by consolidated funds. The filing describes potential clawbacks: recorded total obligations were $2.2 million, while a hypothetical scenario in which all carry-fund investments became worthless could produce $5.4 billion of potential clawback, including $4.9 billion potentially attributable to Blackstone Holdings if personnel defaulted. Management characterized that scenario as remote; $658.2 million was held in segregated accounts for personnel clawback obligations.
- Other disclosed exposures include $144.8 million of guarantees for certain employee loans and $814.9 million maximum exposure to loss related to non-consolidated VIEs, including potential clawback. Management said it did not expect current legal proceedings to materially affect consolidated results, while acknowledging possible adverse outcomes. No subsequent event requiring recognition or disclosure was reported.
- Valuations involve judgment: $936.5 million of financial assets were classified as Level III at quarter-end, and substantial portions of reported AUM in Private Equity, Real Estate and Credit were classified as Level III investments. Some underlying fund investments have redemption restrictions or uncertain liquidity.
- Blackstone said adoption of new revenue guidance in 2018 would reclassify capital-allocation-based carried interest to investment income without changing net income; recognition of contractual incentive fees would be delayed, with no material impact expected. The company was still evaluating effects on other revenue streams.
Important facts for investors to verify
- How much of the earnings increase reflects realized, recurring fee revenue versus volatile performance fees, investment gains and unrealized valuations.
- The distinction between Blackstone corporate debt and consolidated fund/CLO liabilities, including the limited recourse of fund creditors and the collateral supporting those borrowings.
- The sustainability of AUM and fee-earning AUM growth, given fund realizations, investor withdrawals, fundraising and the significant market contribution to reported AUM.
- The basis and sensitivity of Level III valuations, accrued performance fees and potential clawback obligations, including fund-specific terms and liquidity restrictions.
- The declared-versus-paid distribution timing, the non-GAAP basis of Distributable Earnings, and the general partner’s discretion to change distributions.
- Potential effects of tax-law changes, including carried-interest proposals and partnership-level tax rules, on Blackstone, its unitholders and distributions.