Blackstone Inc. (then The Blackstone Group L.P.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The filing reports the historical partnership entity. Unless otherwise noted, amounts below are in U.S. dollars and rounded to millions.
Business context
Blackstone manages private equity, real estate, hedge fund solutions and credit funds, and provides financial advisory services. Consolidated results include certain funds and CLO vehicles; much of their assets and liabilities belong to third-party investors and are not available to satisfy Blackstone’s general obligations. Segment results and measures such as Economic Income and Distributable Earnings are non-GAAP or supplemental measures and are not directly interchangeable with consolidated GAAP results.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,246.5 | $952.0 | +31% |
| Expenses | $835.1 | $783.8 | +7% |
| Income before taxes | $478.6 | $456.4 | +5% |
| Net income | $427.6 | $417.6 | +2% |
| Net income attributable to Blackstone | $167.6 | $58.3 | +187% |
| Diluted net income per common unit | $0.29 | $0.11 | Up |
| Distributions declared per common unit | $0.42 | $0.22 | Up |
| Operating cash flow | $1,104.3 | $134.2 | Up |
| Investing cash flow | $(1.5) | $(170.2) | — |
| Financing cash flow | $(997.0) | $(327.4) | — |
Management and advisory fees rose 2% to $482.1 million. Performance fees increased 56% to $601.1 million, while investment income grew 67% to $148.6 million. These gains were partly offset by consolidated fund investment gains falling to $67.2 million from $288.1 million. Performance-fee compensation increased, but ordinary compensation and general, administrative and other expenses declined. The reported net-income margin was approximately 34% versus 44%; the comparison is affected by fund consolidation and non-controlling interests.
- Segment Economic Income: $638.3 million, up 28% from $500.3 million. Real estate contributed $352.9 million, private equity $103.2 million, hedge fund solutions $93.9 million, credit $98.5 million, and financial advisory a loss of $10.2 million.
- Assets under management: $218.2 billion at quarter-end, up 4% from year-end, including $7.0 billion of market appreciation and $8.5 billion of inflows, partly offset by realizations and outflows.
- Fee-earning AUM: $170.9 billion, up 2% from year-end. Limited partner capital invested was $1.8 billion, down 34% year over year, primarily reflecting timing of investment closings.
- Supplemental earnings: Fee Related Earnings were $137.7 million versus $146.9 million; Distributable Earnings were $378.8 million versus $162.1 million; Economic Net Income was $628.3 million versus $491.2 million. These are non-GAAP measures.
- Profitability and tax: GAAP effective tax rate was 10.7%, compared with 8.5%. The filing does not provide a consolidated GAAP operating-margin measure.
Balance sheet, debt and liquidity
- Total assets were $28.0 billion, down from $28.9 billion at year-end; total liabilities were $16.6 billion, down from $17.7 billion. Partners’ capital was $9.7 billion.
- Cash and cash equivalents were $815.3 million. Management also identified $1.3 billion in Treasury cash-management investments, $142.5 million in liquid Blackstone Fund investments, $2.1 billion in illiquid fund investments and $142.2 million in other investments.
- Reported loans payable were $11.9 billion, down from $13.1 billion, primarily due to CLO deconsolidations and repayments. These balances include fund/CLO obligations; the filing states that consolidated fund assets are restricted to fund obligations and those liabilities generally have no recourse to Blackstone’s general credit.
- Blackstone had approximately $1.6 billion of issued senior notes and no borrowings under its $1.1 billion revolving credit facility. Its own remaining capital commitments to funds and other investments were $1.2 billion.
- Operating cash flow was unusually strong versus the prior-year quarter and reflected investment sales and paydowns, including activity of consolidated funds; it should not be read as recurring fee-business cash generation alone. Cash ended the quarter at $815.3 million, up from $709.5 million.
Changes, outlook, risks and unusual items
- Higher performance fees and investment income drove revenue growth. Realized carried interest rose to $294.2 million from $13.6 million, while unrealized carried interest declined to $177.3 million from $298.8 million, illustrating the variability of fee recognition and realizations.
- Management described Q1 markets as favorable, citing rising equity and credit markets, improved real estate fundamentals and strong capital markets. It stated that available liquidity was expected to be sufficient for working-capital needs. The filing provides no specific earnings or AUM guidance.
- Blackstone stated an intention to distribute substantially all quarterly net cash available for distribution, subject to a $0.12-per-unit base distribution and the general partner’s discretion. Distributions may be reduced or suspended; Q1 distributions declared were $0.42 per unit.
- On April 22, 2013, Blackstone announced an agreement to acquire Credit Suisse’s Strategic Partners secondary private equity business, which had $9 billion in AUM at December 31, 2012. Closing was expected by the end of Q3 2013, subject to customary conditions.
- Material risks include volatile and partly unrealized performance fees, subjective Level III valuations, fund-investment liquidity restrictions, reliance on investors funding capital calls, market and foreign-exchange exposure, and potential carried-interest tax changes. A 10% decline in investment values was estimated to reduce management fees by $54.1 million, net performance fees by $1.10 billion, and investment income by $263.5 million.
- Potential clawback obligations were $249.2 million. The filing also reports $1.2 billion of Blackstone investment commitments and $1.2 billion of expected future tax-receivable-agreement payments, subject to actual tax savings. Management said it did not expect pending litigation to have a material financial-statement impact; disclosed matters include private-equity antitrust, IPO-disclosure and Extended Stay-related litigation.
- Fair-value gains and losses, consolidation/deconsolidation of CLOs, non-controlling-interest allocations and equity-based compensation affect reported comparisons. The 2012 comparative statements included an immaterial reclassification that did not affect Blackstone-attributable net income or earnings per unit.
Most important facts for investors to verify
- How much Q1 Distributable Earnings came from realized carried interest and whether realizations can support future distributions.
- The distinction between Blackstone’s own debt and consolidated, largely nonrecourse fund/CLO obligations, including the effect of further CLO deconsolidations.
- The assumptions and liquidity limits underlying Level III valuations, accrued performance fees and fund investments.
- Remaining capital commitments, clawback exposure and tax-receivable-agreement payments, and how these affect cash available for distributions.
- Strategic Partners acquisition closing, final terms and any resulting financing or integration commitments.