Blackstone Q1 2011 10-Q Summary
Reporting period: Three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are against December 31, 2010. The registrant was The Blackstone Group L.P. (the historical partnership entity). Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Blackstone manages private equity, real estate, hedge fund solutions and credit funds, and provides financial advisory services. In January 2011, it split its former Credit and Marketable Alternatives segment into Hedge Fund Solutions and Credit Businesses; comparative segment results were recast. In January, the investment period for its sixth general private equity fund, BCP VI, began.
Management described improving U.S. economic indicators and corporate earnings, stronger credit markets, and a continuing recovery in commercial real estate. It also cited late-quarter caution tied to geopolitical volatility, inflation concerns in emerging markets and expectations of monetary tightening.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $1,153.3 | $701.2; up 64% |
| Management and advisory fees | $412.7 | $354.8; up 16% |
| Performance fees, including unrealized | $608.6 | $185.8 |
| Investment income | $120.2 | $154.9; down 22% |
| Total expenses | $990.9 | $1,100.7; down 10% |
| Income before taxes | $117.2 | Loss of $227.7 |
| Net income (loss) attributable to Blackstone L.P. | $42.7 | Loss of $121.4 |
| Net income per common unit | $0.10 basic; $0.09 diluted | Loss of $0.36 basic and diluted |
| Segment Economic Net Income (ENI), a non-GAAP management measure | $654.3 | $385.1; up about 70% |
| Net Fee Related Earnings from Operations, non-GAAP | $93.2 | $98.7 |
| Distributable Earnings, non-GAAP | $196.5 | $148.7 |
| Cash provided by operating activities | $441.5 | $20.5 |
The filing does not present a single conventional consolidated operating margin; reported earnings are affected by fund consolidation, non-controlling interests, unrealized performance fees and other valuation items.
- Drivers: Revenue growth reflected higher performance fees—especially from real estate—and increased management fees. Unrealized performance fees were $512.4 million of the $608.6 million total, making results sensitive to valuations. Compensation and benefits fell to $836.6 million from $987.3 million, partly because certain equity awards had vested in 2010; general and administrative costs increased 22% to $129.4 million.
- Segments: Q1 ENI was $175.5 million in Private Equity (down 9%); $361.0 million in Real Estate (versus $89.3 million); $58.1 million in Hedge Fund Solutions (up 10%); $60.5 million in Credit Businesses (up 45%); and a loss of $0.9 million in Financial Advisory (versus income of $8.2 million).
- Assets under management: Total AUM reached $150.0 billion, up 17% from year-end 2010; fee-earning AUM was $124.0 billion, up 13%. Inflows, including commitments, were $21.2 billion for AUM and $18.0 billion for fee-earning AUM. BCP VI was the main private-equity inflow driver.
- Balance sheet: Total assets were $19.25 billion and total liabilities $10.82 billion at March 31. Cash and cash equivalents were $455.8 million, down from $588.6 million at year-end; investments were $12.68 billion. Partners’ capital was $7.76 billion.
- Debt and liquidity: Reported loans payable were $7.33 billion, including $6.30 billion of consolidated fund liabilities, primarily CLO debt that has no recourse to Blackstone’s general credit. Blackstone also had $1.0 billion of senior notes outstanding and no borrowings under its $1.02 billion revolving facility. Management reported $976.1 million in Treasury cash-management strategies, $254.0 million in liquid Blackstone Funds and $1.7 billion in illiquid Blackstone Funds, in addition to cash; these fund investments are not all equivalent to unrestricted corporate cash.
- Distributions and cash use: Operating cash flow was $441.5 million, while financing activities used $568.9 million, including $372.0 million of distributions to unitholders. Cash decreased $132.8 million during the quarter to $455.8 million.
Material changes, outlook and risks
- Consolidated Blackstone Fund investments generated net losses of $64.8 million, compared with gains of $161.2 million in Q1 2010; the related consolidated fund investment-activity line was a loss of $45.2 million. This contrasts with strong reported performance fees and illustrates the different effects of fund consolidation and non-controlling interests.
- Blackstone’s April 8, 2011 amendment extended the $1.02 billion revolving facility’s maturity from March 2013 to April 2016. The facility includes quarterly financial covenants, including a maximum net leverage ratio and a minimum fee-generating AUM requirement.
- Management stated an intention to distribute substantially all of Blackstone’s net after-tax annual share of Distributable Earnings, excluding realized investment gains and amounts retained for business needs. It said first-three-quarter distributions would remain $0.10 per unit; distributions remain subject to general-partner discretion. The filing gives no earnings or AUM forecast.
- Blackstone had $1.2 billion of investment commitments. It recorded $258.6 million in potential carried-interest clawback obligations; actual payment generally depends on cumulative fund results and fund terms. Personnel held a separate $509.7 million in segregated accounts for potential clawbacks. Tax receivable agreement payments were estimated at $1.21 billion over 15 years, conditional on tax savings being realized.
- Valuations are a key uncertainty: $1.78 billion of reported financial assets were classified as Level III, requiring significant unobservable inputs and judgment. Certain hedge-fund investments face redemption restrictions, gates or side-pocketing. A 10% decline in investment fair values was estimated to reduce management fees by $44.4 million, net performance fees by $503.6 million and investment income by $214.4 million, based on the filing’s sensitivity analysis.
- Market risks include fund performance and fundraising, foreign-exchange movements, interest rates, credit and counterparties. A 10% adverse currency move was estimated to reduce management fees by $9.2 million, net performance fees by $94.6 million and investment income by $30.1 million. The filing notes that capital-call failures could materially affect funds, although Blackstone reported no meaningful history of such failures.
- Legal matters included a private-equity antitrust class action and an IPO-related securities class action. In February 2011, the Second Circuit reversed dismissal of the IPO case at the pleading stage; Blackstone said it believed the suits were without merit and intended to defend them. Management said no current proceeding was expected to have a material financial-statement impact.
- Management warned that proposed changes to the tax treatment of carried interest or publicly traded partnerships could increase Blackstone’s tax burden; the impact could not be meaningfully quantified. It also noted that volatile markets and fewer realizations could reduce revenues and cash flows.
Important facts for investors to verify
- How much of performance-fee growth and reported earnings is unrealized, and whether fund valuations and carried-interest accruals are sustained or realized.
- Whether AUM inflows, fee-earning AUM growth and fundraising translate into recurring fee revenue, particularly after the BCP VI investment period begins.
- The distinction between Blackstone operating-company debt and non-recourse consolidated fund/CLO liabilities, and the liquidity available to the operating business after commitments and distributions.
- The status and potential outcomes of the IPO securities and private-equity antitrust litigation, clawback obligations, and tax receivable agreement payments.
- How the discretionary distribution policy, $0.10 quarterly payments and potential cash retention evolve as investment commitments are funded.