Blackstone Group L.P. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed February 24, 2017. The filing is for The Blackstone Group L.P., not a company named Blackstone Inc. Blackstone is a global alternative asset manager with four segments: Private Equity, Real Estate, Hedge Fund Solutions and Credit.
Business context and operating scale
- Total assets under management (AUM) reached $366.6 billion, up 9% year over year; fee-earning AUM rose 13% to $277.1 billion.
- Gross organic capital inflows were about $70 billion. Realizations were $39.3 billion, and Blackstone reported $23 billion of capital deployed during the year.
- Year-end segment AUM: Private Equity $100.2 billion; Real Estate $102.0 billion; Hedge Fund Solutions $71.1 billion; Credit $93.3 billion.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Consolidated revenue | $5.13 billion | $4.65 billion | Up 10% |
| Income before taxes | $2.38 billion | $1.81 billion | Up 31% |
| Consolidated net income | $2.25 billion | $1.62 billion | Up 38% |
| Net income attributable to Blackstone Group L.P. | $1.04 billion | $709.8 million | Up 46% |
| Basic / diluted earnings per common unit | $1.60 / $1.56 | $1.12 / $1.04 | Higher |
| Fee Related Earnings (non-GAAP) | $1.00 billion | $935.6 million | Up 7% |
| Distributable Earnings (non-GAAP) | $2.18 billion | $3.84 billion | Down 43% |
| Adjusted EBITDA (non-GAAP) | $2.57 billion | $4.14 billion | Down 38% |
Total performance-fee revenue was $2.18 billion, up 21%, but included a sharp reversal in unrealized carried interest: $481 million in 2016 versus negative $1.60 billion in 2015. Realized carried interest fell 54% to $1.47 billion. The GAAP effective tax rate was 5.6%, compared with 10.5% in 2015; much of the income is passed through to unitholders and non-controlling interest holders.
GAAP operating cash flow was negative $541 million, compared with positive $2.40 billion in 2015. The filing’s cash flows include substantial fund investment purchases and proceeds from investment sales, so this measure is not directly comparable to recurring fee earnings.
Liquidity, debt and distributions
- At year-end, Blackstone reported $1.84 billion of cash and cash equivalents and $2.52 billion of corporate treasury investments. It also held $2.2 billion in Blackstone funds and other investments.
- Corporate senior-note borrowings were about $3.4 billion. The $1.5 billion revolving facility, maturing in 2021, was essentially undrawn apart from a small amount of letters of credit. Management described the firm as having no net debt, using its liquidity measure.
- Consolidated loans payable were $8.87 billion, including $5.47 billion attributable to consolidated funds and CLOs. Fund and CLO obligations are generally limited to those entities’ assets and are not recourse to Blackstone’s general credit.
- Distributions paid in respect of FY 2016 totaled $1.52 per common unit, versus $2.73 in FY 2015. The stated policy targets approximately 85% of Blackstone’s share of Distributable Earnings, but distributions remain discretionary and may be reduced or suspended.
Changes versus the prior comparable period
- Revenue and attributable net income improved from 2015, but results remain far below 2014, when performance fees and investment gains were unusually strong.
- Fee-related earnings increased, supported by growth in fee-earning AUM, while Distributable Earnings declined as realized performance fees and realized investment income fell from 2015 levels.
- Credit rebounded from a difficult 2015, particularly in energy and distressed strategies. Real Estate segment economic income rose 27%; Private Equity economic income fell 12%, and Hedge Fund Solutions was broadly flat.
- Management and advisory fees, net, fell 4% to $2.44 billion, partly reflecting the 2015 spin-off of financial advisory and fund-placement operations to PJT Partners. The 2015 comparison also included an $82.7 million reversal of a tax receivable agreement liability that did not recur in 2016.
Outlook, risks and unusual items
- Blackstone provided no quarterly or annual operating guidance, citing the variability and timing of realizations, carried interest and incentive fees. Management described fundraising as strong but noted high asset prices and challenging investment conditions in some markets.
- Results depend materially on investment valuations and realizations. Many assets are illiquid and valued using significant management judgment; unrealized performance fees may not ultimately be realized.
- Key exposures include market and interest-rate volatility, credit and commodity risk, leverage at portfolio companies, fundraising competition, investor redemptions, regulatory change, tax reform and retention of key personnel.
- No clawback obligation was recorded at December 31, 2016. In a hypothetical scenario where all carry-fund investments were worthless, potential clawback was estimated at $5.0 billion after tax, including up to $4.7 billion potentially payable by Blackstone Holdings if personnel failed to meet their shares; management viewed this scenario as remote. $612.3 million was held in segregated accounts for personnel clawback obligations.
- The filing reported no pending legal proceeding expected to materially affect consolidated financial statements, while noting that adverse outcomes in some matters could affect results in a particular period. Deloitte issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP earnings with Fee Related Earnings and Distributable Earnings, and assess how much performance-fee income was realized in cash.
- Track the conversion of $3.47 billion in net accrued performance fees into realizations, including any changes in fund valuations or preferred-return thresholds.
- Review fundraising, redemptions and fee-earning AUM by segment, particularly Hedge Fund Solutions outflows and Credit performance following the energy rebound.
- Separate Blackstone corporate debt and liquidity from consolidated fund/CLO obligations, and monitor capital commitments, tax receivable agreement payments and potential clawbacks.