Blackstone Inc. quarterly report, Q2 FY2013

Blackstone Group L.P. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013. The filing is for The Blackstone Group L.P. (a publicly traded partnership), not a corporation. Blackstone manages alternative investment funds and provides financial advisory services across private equity, real estate, hedge fund solutions, credit and financial advisory.

Financial performance and position

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Total revenue	$1.440 billion	$627 million	$2.687 billion	$1.579 billion
Net income attributable to Blackstone	$211 million	Loss of $75 million	$379 million	Loss of $17 million
Basic and diluted earnings (loss) per common unit	$0.36	$(0.14)	$0.65	$(0.03)
Distributions declared per common unit	$0.30	$0.10	$0.72	$0.32

• Q2 revenue increased 130%; first-half revenue rose 70%. Performance fees were $717 million for Q2 and $1.318 billion for the first half, primarily reflecting stronger fund performance. Q2 included $457 million of unrealized carried interest, so reported performance-fee revenue is not equivalent to cash collected.
• Management and advisory fees increased 19% in Q2 to $579 million and 11% in the first half to $1.061 billion. Investment income was $132 million in Q2, versus a loss of $5 million in Q2 2012.
• Q2 expenses rose 24% to $915 million, mainly from performance-fee compensation; first-half expenses rose 15% to $1.750 billion. GAAP income before taxes was $567 million in Q2 and $1.045 billion for the first half. The effective tax rates were 9.9% and 10.2%, respectively.
• Management’s non-GAAP measures: Fee Related Earnings were $168 million in Q2 and $306 million for the first half; Distributable Earnings were $338 million and $729 million, respectively. Blackstone changed its Distributable Earnings definition in Q2 to exclude equity-based award expense and conformed prior periods.
• Assets under management were $229.6 billion at June 30, up 5% from March 31 and 9% from December 31, 2012. Fee-earning AUM was $176.3 billion, up 3% for the quarter and 5% year to date.
• Six-month operating cash flow was $1.341 billion, versus $346 million in 2012. Cash and cash equivalents were $661 million at June 30, down from $710 million at year-end; cash decreased $49 million during the half after distributions and other financing outflows.
• Consolidated loans payable were $11.364 billion, down from $13.051 billion at year-end. This includes substantial CLO and fund obligations; Blackstone states that consolidated fund assets are restricted to those funds and their liabilities generally have no recourse to Blackstone’s general credit. Blackstone-issued notes had $1.635 billion principal outstanding. The $1.1 billion revolving facility was undrawn.
• Total assets were $27.743 billion and total liabilities $15.742 billion at June 30. Changes from year-end largely reflected deconsolidation of certain CLO vehicles and debt repayments, rather than solely changes in Blackstone’s own operating balance sheet.

Material changes and management commentary

• Strong public holdings and private investments in hospitality/leisure and energy supported private-equity results; real estate carry funds benefited from improving operating fundamentals. Credit and hedge-fund solutions also recorded stronger performance fees. Real Estate generated the largest segment Economic Income in Q2, at $371 million; segment Economic Income is a non-GAAP measure.
• Performance fees and investment income drove much of the earnings improvement, making results sensitive to fund valuations, realization timing and market conditions. The filing reported $2.529 billion of net accrued performance fees at June 30, compared with $1.756 billion a year earlier.
• The company described financial markets as mixed and noted market volatility, higher U.S. Treasury yields, weak GDP growth and elevated unemployment. It stated that market and economic conditions can affect fund performance, fundraising, realizations, management fees and advisory activity. No specific earnings or revenue guidance was provided.
• Blackstone reported $1.4 billion of its own investment and funding commitments. Separately, it recorded a $175 million potential carried-interest clawback obligation; actual repayment generally depends on fund results and fund terms. Segregated accounts held $438 million for potential personnel clawbacks.
• Valuation and liquidity risks include significant Level III estimates and redemption restrictions or side pockets in some fund investments. At June 30, the filing’s stated maximum exposure to loss for non-consolidated VIEs was $712 million, including potential clawback exposure.
• Subsequent events and legal matters: Blackstone acquired Credit Suisse’s Strategic Partners secondary private-equity business on August 2, adding approximately $10 billion of AUM. A separate Extended Stay Hotels litigation settlement for $10 million was approved in July and the claims against Blackstone were dismissed. The filing also described ongoing private-equity antitrust litigation and an IPO-related class action; management said it intended to defend the suits and considered them without merit.
• Management said disclosure controls were effective at a reasonable-assurance level and reported completion of a new general-ledger and consolidation system implementation during the quarter, not in response to a control deficiency.

Important facts for investors to verify

• How much of reported performance-fee growth converts into realized, distributable cash, and how sensitive accrued carried interest is to subsequent valuation changes.
• The composition and recourse status of consolidated debt, particularly CLO and fund obligations, versus Blackstone’s own $1.635 billion of issued notes.
• The timing and funding needs of the $1.394 billion remaining company capital commitments, alongside distributions and potential clawbacks.
• Whether AUM growth and fee-earning AUM translate into sustained recurring fee revenue, considering fund realizations, redemptions and liquidity restrictions.
• Potential outcomes of the disclosed litigation and tax-policy changes, including proposals concerning carried-interest taxation and partnership status.
• The assumptions underlying Level III valuations and the stated non-GAAP measures, including Economic Income, Fee Related Earnings and Distributable Earnings.