Blackstone Group L.P. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the periods ended September 30, 2009 unless noted. The filing is by The Blackstone Group L.P., not Blackstone Inc. Amounts below are U.S. dollars.
Business context and financial performance
Blackstone manages private equity, real estate, credit and marketable alternatives, and financial advisory businesses. Results reflect both recurring fees and volatile investment marks and performance fees. Global equity and credit markets rose in the third quarter, while management described economic indicators as mixed and the U.S. recovery as slowing.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $784.0m | $597.0m | $2,035.3m | $1,048.4m |
| Income (loss) before tax | $143.3m | $(427.0)m | $(721.3)m | $(1,926.2)m |
| Net income (loss) | $147.5m | $(479.5)m | $(746.1)m | $(2,007.3)m |
| Net income (loss) attributable to Blackstone L.P. | $(44.4)m | $(176.2)m | $(359.1)m | $(572.0)m |
| Net loss per common unit | $(0.12) | Not directly comparable* | $(1.02) | Not directly comparable* |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $316.1m | $(94.5)m |
*The 2009 per-unit figures used separate priority-distribution and non-priority classes; the filing reports one class for 2010 following expiration of the distribution priority.
- Q3 revenue rose 31%, led by performance fees and allocations ($266.0m, up 73%), investment income ($141.0m, up 118%), and higher gains from fund investment activities ($285.1m versus $73.8m). Management and advisory fees were slightly lower at $362.5m.
- Nine-month revenue nearly doubled, principally as performance fees and investment income recovered from weak 2009 comparisons. Nine-month expenses rose 3% to $3.154bn; Q3 expenses fell 16% to $925.8m, largely due to lower base compensation and equity-based compensation expense.
- Segment Economic Net Income (ENI), a non-GAAP measure excluding specified items, was $368.1m in Q3 versus $278.4m and $974.7m for nine months versus $357.9m. Q3 segment ENI included $148.0m from Real Estate, $111.9m from Private Equity, $104.3m from Credit and Marketable Alternatives, and $3.9m from Financial Advisory.
- Distributable Earnings, a non-GAAP measure, were $166.3m for Q3 and $462.6m for nine months, versus $99.5m and $266.1m, respectively. Net Fee Related Earnings from Operations were $112.9m and $319.6m. These measures are not GAAP net income and do not determine distributions automatically.
Balance sheet, liquidity, and debt
- At September 30, total assets were $17.741bn, total liabilities $10.085bn, and partners’ capital $7.068bn. Cash and cash equivalents were $1.016bn. Blackstone also reported $980.5m in Treasury cash management investments, including $287.4m in reverse repurchase agreements.
- Loans payable were $6.736bn, up from $657.6m at year-end 2009. Much of the increase reflects consolidation of CDO/CLO vehicles: their debt is collateralized by their own assets and the filing says there is no recourse to Blackstone. Consolidated fund assets and liabilities therefore materially affect reported totals.
- Blackstone issued $400m of 5.875% senior notes due 2021 in September; it had previously issued $600m of 6.625% notes due 2019. The $1.07bn revolving facility, maturing in 2013, had no borrowings outstanding at quarter-end.
- Management reported $1.4bn of Blackstone investment commitments outstanding. Nine-month distributions to unitholders were $489.3m. Management stated that available liquidity was expected to be sufficient for working capital needs, while noting that realizations and capital calls can vary substantially.
Material changes, outlook, and risks
- Fee-earning AUM reached $104.3bn, up 8% year over year; total AUM was $119.1bn, up 22%. Growth included market appreciation, inflows, and acquired CDO/CLO management agreements. The AUM measures are company-defined and may not be comparable with other managers’ measures.
- Revised VIE consolidation guidance and acquisitions of CDO/CLO management agreements drove significant balance-sheet growth and affect period comparability. Management stated the acquisitions had no material impact on the statements of operations or cash flows at acquisition.
- Management gave no specific earnings or AUM guidance in the provided filing text. It described financial advisory revenue as transactional and subject to significant period-to-period fluctuation. The distribution policy is discretionary; the general partner may retain funds or change the policy.
- Valuations and earnings are sensitive to markets, fund performance, and foreign exchange. A 10% decline in investment fair values was estimated to reduce annual management fees by $44.3m, performance fees net of related compensation by $219.2m, and investment income by $183.7m. Much of the reported AUM in private equity, real estate, and credit was classified as Level III fair value.
- Potential clawback obligations were $392.0m at quarter-end, down from $485.3m at year-end 2009; $19.3m was paid during the first nine months of 2010. Carried interest remains subject to fund-life clawbacks, and hedge-fund investments may face redemption limits or side pockets.
- Management identified proposed changes to the U.S. tax treatment of carried interest as a possible material risk but said the impact could not be meaningfully quantified. It reported no pending litigation expected to have a material financial-statement impact; certain private-equity antitrust and IPO-related class actions remained in litigation, with the IPO case on appeal after dismissal.
- On October 1, 2010, Blackstone purchased a 40% interest in Pátria, a Latin American alternative asset manager reported to have $3.2bn of AUM. This occurred after quarter-end.
Important facts for investors to verify
- How much reported debt and asset growth comes from consolidated CDO/CLO vehicles, and the extent to which those obligations are nonrecourse to Blackstone.
- How much of reported performance-fee and investment income is realized cash versus unrealized fair-value gains, including the sensitivity of Level III valuations.
- The sustainability of recurring fee earnings and AUM inflows, particularly across credit, real estate, and financial advisory.
- The potential cash needs from $1.4bn of investment commitments, tax receivable agreement payments, and clawbacks, alongside the discretionary distribution policy.
- Any developments in carried-interest tax legislation, pending litigation, and the post-quarter Pátria investment.