Blackstone Group L.P. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; the filing also provides unaudited fourth-quarter results. The 2012 registrant was The Blackstone Group L.P. (now identified in the request as Blackstone Inc.). Unless otherwise noted, dollar figures below are in U.S. dollars.
Business context
Blackstone is a global alternative asset manager and financial advisory firm. Its five segments are Private Equity, Real Estate, Hedge Fund Solutions, Credit and Financial Advisory. Assets under management (AUM) were $210.2 billion at year-end, up 26%; fee-earning AUM was $167.9 billion, up 23%. The firm reported $34 billion of gross organic capital inflows and $18.1 billion invested or committed during 2012.
Financial results and liquidity
| Metric | FY 2012 | Prior comparable period |
|---|---|---|
| GAAP revenue | $4.019 billion | $3.253 billion in 2011, up 24% |
| Management and advisory fees, net | $2.031 billion | $1.812 billion in 2011, up 12% |
| Performance fees | $1.593 billion | $1.183 billion in 2011, up 35% |
| Investment income | $350.2 million | $213.3 million in 2011 |
| GAAP net income | $829.9 million | Net loss of $268.5 million in 2011 |
| Net income attributable to Blackstone Group L.P. | $218.6 million; $0.41 per common unit | Net loss of $168.3 million; $0.35 loss per unit in 2011 |
| Economic Income / Economic Net Income | $2.041 billion / $1.995 billion | $1.585 billion / $1.539 billion in 2011 |
| Fee Related Earnings (FRE) | $700.3 million | $546.5 million in 2011 |
| Distributable Earnings | $1.034 billion | $696.7 million in 2011 |
| Cash flow from operating activities | $583.2 million | $1.100 billion in 2011 |
Performance fees included $994.2 million of unrealized carried interest; those accruals depend on fund valuations and are not equivalent to cash realized. Fee Related Earnings and Distributable Earnings are non-GAAP measures, not substitutes for GAAP results.
Fourth quarter, unaudited: Revenue was $1.217 billion, expenses $885.7 million, income before taxes $187.2 million, net income $121.5 million, and income attributable to Blackstone Group L.P. $106.4 million, or $0.19 per common unit.
Liquidity and debt: Year-end cash and cash equivalents were $709.5 million; Blackstone separately reported $1.4 billion in Treasury cash management strategies, $135.3 million in liquid Blackstone funds and $2.0 billion invested in illiquid Blackstone funds. Blackstone had $1.635 billion of principal outstanding on its corporate senior notes and only $717,000 drawn on its $1.1 billion revolving facility. The $13.051 billion GAAP “Loans Payable” balance includes substantial consolidated fund and CLO obligations; those fund liabilities generally have no recourse to Blackstone’s general credit. Total assets were $28.932 billion, total liabilities $17.717 billion and partners’ capital $9.659 billion.
Operating cash flow declined despite higher earnings, in part reflecting working-capital and investment-related cash movements. Cash declined by $45.2 million during the year. The filing does not provide a conventional operating-company gross or operating margin; segment Economic Income is a separate management measure.
Material changes versus 2011
- Revenue growth reflected higher management fees, performance fees and investment income. Fee-earning AUM rose 23%, supported by fundraising and deployments, acquisitions and market appreciation.
- Performance fees increased, particularly in Credit and Private Equity; Real Estate performance fees decreased year over year, partly reflecting lower appreciation and a prior-year catch-up allocation.
- Expenses declined 4% to $3.261 billion, mainly because compensation expense was lower; interest expense rose 26% to $72.9 million, principally following debt issuance.
- Blackstone acquired Harbourmaster in January 2012 and Capital Trust’s investment management business in December 2012. It issued $650 million of senior notes in August.
- Assets and liabilities increased substantially in part because acquired CLO management businesses and vehicles were consolidated for GAAP purposes. This consolidation does not mean the CLO assets are available for Blackstone’s general liquidity needs.
- Distributions paid for FY 2012 were $0.72 per common unit, including a $0.42 fourth-quarter distribution paid in February 2013, versus $0.52 for FY 2011. The general partner retains discretion to reduce or suspend distributions.
Outlook, risks and unusual items
- Management gave no quarterly or annual earnings guidance, citing the variability and uncertain timing of carried interest, incentive fees and advisory transactions.
- Management described 2012 markets as improved but still volatile, with continuing economic weakness and financing constraints, especially in Europe. Results remain sensitive to asset values, realizations, fundraising, financing conditions and transaction activity.
- Valuation risk is significant: at year-end, Level III investments represented 68% of Private Equity, 95% of Real Estate, 73% of Hedge Fund Solutions and 40% of Credit AUM, excluding specified undrawn commitments and CLO capital raised. Private investment valuations rely on judgment and may not be realized at carrying value.
- Potential carried-interest clawback obligations were $267.1 million at year-end, including $101.8 million attributable to Blackstone Holdings and $165.3 million to current and former personnel. Actual payment timing depends on fund terms and performance; the firm cautions that cash may not be available if obligations are triggered.
- Expected payments under tax receivable agreements were approximately $1.2 billion over 15 years, subject to future taxable income and realized tax savings. Blackstone generally pays counterparties 85% of specified tax savings.
- Pending litigation includes an antitrust case concerning private-equity buyouts, an IPO disclosure case and claims related to the 2007 Extended Stay Hotels sale. The filing says management does not expect pending proceedings to have a material impact on consolidated financial statements, while describing substantial claims in the Extended Stay suits, including asserted damages of $2.1 billion and punitive damages of $6.3 billion.
- Other key risks include regulatory changes, competition and fee pressure, reliance on key personnel, fund redemptions and capital calls, leverage at portfolio companies, conflicts of interest, cybersecurity and changes to partnership or carried-interest taxation.
- Deloitte & Touche issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2012.
Important facts for investors to verify
- Separate realized performance fees and cash flows from unrealized carried-interest accruals; assess how sensitive results are to fund marks and future exits.
- Review the composition and fee terms of AUM and fee-earning AUM, including the contribution from acquisitions, CLOs, commitments and market appreciation.
- Distinguish corporate debt and available cash from consolidated CLO and fund balances; confirm liquidity available to the operating partnership after commitments and other obligations.
- Assess the sustainability of distributions against Distributable Earnings, cash generation, capital commitments, clawback exposure and the general partner’s discretion.
- Track tax receivable agreement payments and assumptions, potential carried-interest clawbacks, and developments in the disclosed litigation and regulatory matters.