Business Context and Reporting Period
Blackstone Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023. Its four businesses are Real Estate, Private Equity, Credit & Insurance, and Hedge Fund Solutions. Revenue includes recurring management fees as well as incentive fees, carried interest and investment gains or losses, which can vary substantially with fund performance and realizations.
Financial Performance and Liquidity
| Metric | Q1 2023 | Q1 2022 or comparison |
|---|---|---|
| GAAP revenue | $1.382 billion | $5.126 billion |
| Net income attributable to Blackstone Inc. | $85.8 million | $1.217 billion |
| Diluted earnings per share | $0.11 | $1.66 |
| Segment Distributable Earnings | $1.429 billion | $2.098 billion |
| Fee Related Earnings | $1.040 billion | $1.147 billion |
| Cash flow from operating activities | $352.7 million | $2.749 billion |
| Total Assets Under Management | $991.3 billion | $974.7 billion at December 31, 2022 |
| Fee-Earning Assets Under Management | $732.0 billion | $718.4 billion at December 31, 2022 |
Management and advisory fees rose 12% to $1.658 billion; incentive fees rose 37% to $142.9 million. GAAP investment income was a loss of $495.7 million, including unrealized losses of $759.2 million on performance allocations and $491.4 million on principal investments. Interest expense was $104.4 million. A conventional profit margin is not especially informative given the large, volatile investment marks and fund-related items.
At March 31, cash and cash equivalents were $2.831 billion, down from $4.252 billion at year-end; total assets were $41.1 billion and total liabilities $22.4 billion. Loans payable totaled $12.311 billion, including $10.569 billion of operating borrowings and $1.742 billion attributable to consolidated funds. Blackstone had $10.708 billion of operating borrowings, no revolver borrowings, and access to a $4.135 billion revolving facility. Management cited $958.6 million in corporate treasury investments and $3.1 billion of liquid investments within other investments as additional liquidity sources. The company repaid $400 million of loans payable during the quarter. Cash dividends of $0.82 per share were paid with respect to Q1.
Material Changes Versus the Prior Comparable Period
- GAAP revenue fell 73% and net income attributable to Blackstone fell 93%, principally reflecting the reversal from strong investment appreciation in Q1 2022 to unrealized depreciation in Q1 2023, alongside lower realized investment income.
- Segment Distributable Earnings declined 32%; Fee Related Earnings declined 9%. Net Accrued Performance Revenues were $6.372 billion, versus $9.546 billion at March 31, 2022.
- Recurring management and advisory fees increased, supported by growth in fee-earning AUM. Total AUM increased 1.7% from year-end, with Credit & Insurance and Real Estate leading the increase; Private Equity fee-earning AUM declined.
- By segment, Distributable Earnings were $534.6 million in Real Estate, $526.0 million in Private Equity, $297.8 million in Credit & Insurance, and $70.8 million in Hedge Fund Solutions. Versus Q1 2022, Real Estate fell 58%, Private Equity rose 6%, Credit & Insurance rose 34%, and Hedge Fund Solutions fell 36%.
Outlook, Management Commentary, Risks and Contingencies
Management described Q1 markets as turbulent, citing slowing-growth concerns, stress in U.S. and European banking, elevated interest rates and muted transaction activity. It expects market uncertainty and financing constraints to weigh on realizations and deployment; sustained weakness could adversely affect earnings. It also noted that traditional U.S. office properties remain challenged, although they represent about 2% of the aggregate NAV of its global opportunistic and Core+ real estate portfolios.
- BREIT repurchase requests rose materially beginning in late 2022 and were prorated under the vehicle’s terms. In Q1, BREIT had net outflows excluding a $4.5 billion UC Investments subscription. Management said continuing or worsening conditions could weigh on flows.
- BCRED also experienced increased repurchase requests and lower inflows; Q1 net flows were minimal, with management reporting improved inflows late in the quarter and in April. A renewed deterioration could hurt flows.
- Private credit may benefit from demand for alternative financing, but higher borrowing costs could weaken some borrowers’ cash flows and credit quality. Market dislocation could also constrain asset liquidity.
- Blackstone expects a corporate alternative minimum tax liability for 2023, but reported no meaningful Q1 impact. Management said the potential impact remains subject to further Treasury guidance.
- The UC Investments strategic venture targets an 11.25% annualized net return on its $4.5 billion BREIT investment; this return is not guaranteed. Blackstone pledged BREIT holdings valued at $1.1 billion, and recorded a $203.4 million liability.
- Potential clawback obligations recorded at quarter-end were $144.6 million. A hypothetical total loss of carry-fund investments would expose performance allocations to potential clawback of $6.3 billion after tax where applicable; management views that scenario as remote. Blackstone also reported $4.8 billion of investment commitments.
- Blackstone reported no pending legal proceeding expected to have a material impact on the condensed consolidated statements. It is cooperating with an SEC inquiry regarding retention of certain electronic business communications. The filing also describes ongoing Kentucky-related litigation and appeals.
The filing does not provide specific quantitative earnings guidance. Forward-looking statements are subject to market, investment performance, fundraising, liquidity, regulatory and other risks.
Important Facts for Investors to Verify
- Whether continued valuation declines, particularly in real estate and selected principal investments, further reduce accrued performance revenues and earnings.
- BREIT and BCRED subscriptions, repurchase requests, prorations and net flows, including the effects of the UC Investments arrangement.
- The pace of fund realizations and deployment, and the resulting impact on Distributable Earnings and cash generation.
- Liquidity available to Blackstone itself versus assets and liabilities of consolidated funds, which are generally restricted to those funds and are not recourse to Blackstone’s general credit.
- Borrowing costs, borrower credit quality, the 2023 alternative minimum tax, and the status and potential exposure from clawbacks, commitments, litigation and regulatory inquiries.