Blackstone Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Comparisons are with the corresponding 2022 periods unless otherwise stated. Amounts are U.S. dollars.
Business context
Blackstone is a global alternative asset manager operating across Real Estate, Private Equity, Credit & Insurance, and Hedge Fund Solutions. Revenue includes recurring management and advisory fees, incentive fees, investment gains and carried interest; investment-related earnings can fluctuate substantially with fund valuations and realizations.
Financial and operating highlights
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| GAAP revenue | $2.815bn | $629m | $4.197bn | $5.756bn |
| Net income attributable to Blackstone Inc. | $601m | $(29)m | $687m | $1.187bn |
| Diluted earnings per share | $0.79 | $(0.04) | $0.91 | $1.61 |
| Management and advisory fees, net | $1.709bn | $1.561bn | $3.368bn | $3.037bn |
| Fee Related Earnings | $1.144bn | $1.021bn | $2.184bn | $2.167bn |
| Distributable Earnings | $1.212bn | $1.986bn | $2.461bn | $3.924bn |
| Segment Distributable Earnings | $1.346bn | $2.344bn | $2.776bn | $4.442bn |
Q2 GAAP revenue included $835m of investment income, compared with a $1.249bn investment loss a year earlier. GAAP results include volatile realized and unrealized fund-related items and consolidation effects; Blackstone’s non-GAAP distributable measures exclude unrealized activity. The filing does not present a single directly comparable operating-margin measure.
- Assets under management: Total AUM was $1.001tn at June 30, up $26.7bn from year-end 2022. Fee-Earning AUM was $731.1bn, up $12.8bn from year-end. Net accrued performance revenues were $6.47bn, down from $7.48bn at June 30, 2022.
- Cash flow: Operating cash flow was $2.08bn for the first half, versus $4.64bn in 2022. Financing cash outflow was $2.94bn; cash and cash equivalents plus cash held by funds declined by $998m to $3.50bn.
- Liquidity: Blackstone reported $3.28bn of cash and cash equivalents, $707m of corporate treasury investments, and $3.4bn of liquid investments within Other Investments. Its $4.135bn revolving facility was undrawn.
- Debt: Loans payable totaled $12.30bn, including $10.59bn of operating borrowings and $1.71bn attributable to consolidated funds. The fund borrowings are generally non-recourse to Blackstone. Operating borrowings had a reported fair value of $8.71bn; the filing lists $10.72bn of operating principal obligations.
- Capital returns: Blackstone repurchased 2.0m shares for $176m in the first half; $932m remained authorized. It paid a Q2 dividend of $0.79 per share. Its stated policy targets quarterly dividends of approximately 85% of Blackstone’s share of Distributable Earnings, subject to board discretion and business needs.
Material changes versus prior periods
- Q2 GAAP revenue and attributable earnings recovered from the prior-year quarter’s large unrealized investment losses. Realized investment income was lower year over year, while unrealized results improved substantially.
- First-half GAAP revenue fell 27% and attributable net income fell 42%, principally reflecting lower realized investment gains. Management and advisory fees rose 11% for the half, while Fee Related Earnings were broadly stable.
- Segment Distributable Earnings declined 43% for the first half. Real Estate was the largest contributor to the decline: its first-half segment earnings fell 61%, primarily because realized performance revenues were much lower than in 2022. Private Equity and Credit & Insurance segment earnings increased 13% and 16%, respectively.
- Fee-Earning AUM growth reflected inflows and market appreciation, led by Credit & Insurance; Hedge Fund Solutions AUM declined from year-end, amid outflows and realizations.
Outlook, commentary, risks and unusual items
- Management described markets as more supportive in Q2 as inflation eased and volatility declined, but noted elevated interest rates, economic uncertainty, constrained financing and subdued transaction activity. It expects real estate realizations to remain pressured for a period, while expressing a view that realizations should re-accelerate over time. No specific company-wide earnings guidance was provided.
- Real Estate faces divergent sector conditions: management said traditional U.S. office remains particularly challenged, though it represents less than 2% of the stated global opportunistic and Core+ real estate portfolio NAV. BREIT continued to have net outflows in Q2, although repurchase requests in June and July were materially below their January peak.
- Private Equity fundraising and realizations remained challenging. In Credit & Insurance, floating-rate portfolios and demand for private credit supported activity, but high borrowing costs could pressure borrower cash flows and credit quality, increase defaults and impair asset liquidity.
- A strategic venture with UC Investments involved a $4.5bn BREIT share subscription. UC Investments has an 11.25% target annualized net return, not guaranteed; Blackstone pledged $1.1bn of BREIT holdings. Blackstone recorded a $221.5m liability related to the arrangement.
- Blackstone expects a corporate alternative minimum tax liability for 2023, but reported no meaningful CAMT impact in the first-half tax provision; further guidance may affect the assessment.
- Recorded potential clawback liability was $199m. A remote, severe scenario in which all carry-fund investments were worthless would expose $6.4bn of performance allocations to potential clawback after tax where applicable; $1.1bn was held in segregated accounts for possible personnel obligations. Blackstone also reported $4.6bn of investment commitments.
- Blackstone is cooperating with an SEC inquiry concerning retention of certain electronic business communications. Kentucky-related litigation continues; management said it believes the claims are without merit. The filing states no pending legal proceeding is currently expected to materially affect the consolidated financial statements.
- Valuations depend in part on judgment: $4.53bn of financial assets were classified as Level III at June 30. Blackstone noted that estimates and assumptions, including discount rates, exit multiples and capitalization rates, can materially affect fair values and related earnings.
Important facts for investors to verify
- How much of reported earnings and accrued performance revenues can be realized in cash, and how sensitive they are to valuation assumptions and exit conditions.
- BREIT and other perpetual-capital vehicle subscription, redemption and repurchase trends, including whether net outflows persist.
- Credit portfolio borrower performance, non-accruals, defaults and liquidity under sustained higher interest rates.
- The timing and funding of Blackstone’s $4.6bn investment commitments, debt maturities, dividends and tax receivable agreement payments.
- Potential effects of CAMT guidance, clawbacks, litigation and the SEC communications inquiry.