Business Context and Reporting Period
This Form 10-Q covers The Blackstone Group L.P. for the quarterly period ended June 30, 2008. Blackstone is a leading global alternative asset manager and financial advisory firm operating through four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory. The reporting period reflects the impact of the March 2008 acquisition of GSO Capital Partners LP and challenging global market conditions characterized by reduced liquidity and declining asset values.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $353.7 million | $422.2 million |
| Net Income (Loss) | $(156.5) million | $(407.5) million |
| Net Loss Per Common Unit (Basic/Diluted) | $(0.60) | $(1.57) |
| Assets Under Management (AUM) | $119.4 billion | $119.4 billion |
| Cash and Cash Equivalents | $217.7 million | $217.7 million |
| Loans Payable | $378.1 million | $378.1 million |
| Adjusted Cash Flow from Operations | $719.3 million | $1,555.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 63% ($598.5 million) for the quarter and 81% ($1.76 billion) for the six months compared to the prior year periods. This was primarily driven by a collapse in Performance Fees and Allocations, which turned negative due to unrealized losses in portfolio assets.
- Expense Surge: Total expenses increased 144% for the quarter and 248% for the six months. The primary driver was a 198% increase in Compensation and Benefits, largely due to the amortization of equity-based compensation ($569.4 million for the quarter) and the inclusion of profit-sharing arrangements previously treated as distributions.
- Investment Performance: Net Gains from Fund Investment Activities dropped 92% for the quarter and 100% for the six months. The Corporate Private Equity segment saw a 5% decline in portfolio value (vs. 15% increase in 2007), heavily impacted by the decline in Deutsche Telekom AG shares. The Real Estate segment saw a 3% portfolio depreciation.
- Acquisition Impact: The acquisition of GSO Capital Partners LP in March 2008 added $12.6 billion to AUM and contributed to revenue growth in the Marketable Alternative Asset Management segment, partially offsetting declines in other areas.
Guidance, Outlook, and Risks
- Market Environment: Management notes that global economic growth has slowed, with high market volatility and reduced liquidity persisting. Credit spreads widened in July 2008, and lenders are severely restricting commitments, limiting leveraged acquisition activity.
- Outlook: Blackstone expects to continue making quarterly cash distributions to unitholders, funded by operating cash flows, realizations, or borrowings. The company maintains a $1.0 billion revolving credit facility (maturity May 2009) and a $500 million unit repurchase program.
- Key Risks:
- Valuation Risk: A significant portion of assets (Level III) relies on management judgment for fair value. A 10% decline in fair value would reduce annual management fees by $47.9 million and performance fees by $432.8 million.
- Clawback Obligations: While no actual clawback obligation existed as of June 30, 2008, a hypothetical scenario where all carry fund investments became worthless could result in a $1.59 billion clawback obligation.
- Tax Legislation: Proposed U.S. legislation could treat carried interest as ordinary income and require Blackstone to hold interests through taxable subsidiaries, materially increasing tax liabilities.
- Litigation: Pending antitrust lawsuits and a dispute with Alliance Data Systems regarding a terminated merger agreement (seeking $170 million in fees) pose potential liabilities.
Investor Verification Checklist
- Equity Compensation Amortization: Verify the impact of the $1.72 billion equity-based compensation expense recorded in the first half of 2008 on future earnings, as this is a non-cash charge that significantly distorts GAAP net income.
- Level III Asset Valuations: Scrutinize the valuation methodologies for the $2.46 billion in Level III assets, which rely on unobservable inputs and management judgment, particularly given the market downturn.
- Deutsche Telekom Exposure: Assess the specific impact of the Deutsche Telekom AG share price decline on the Corporate Private Equity segment's performance fees and the likelihood of future clawbacks.
- Liquidity vs. GAAP Cash Flow: Distinguish between GAAP operating cash flow (which includes fund-level flows) and Adjusted Cash Flow from Operations ($1.56 billion for six months) to understand actual cash available for distributions.
- Legal Contingencies: Monitor the status of the Alliance Data Systems lawsuit and the antitrust class actions for potential material financial impact.