Blackstone Group L.P. — Third Quarter 2012 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2012, compared with the same 2011 periods. Blackstone managed private equity, real estate, hedge fund solutions and credit funds, and provided financial advisory services. The 2012 legal registrant was The Blackstone Group L.P.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1.223bn | $(124.1)m | $2.802bn | $2.337bn |
| Net income (loss) attributable to Blackstone | $128.8m | $(274.6)m | $112.2m | $(145.6)m |
| Basic and diluted earnings (loss) per common unit | $0.24 | $(0.56) | $0.21 | $(0.31) |
| Fee Related Earnings (non-GAAP) | $135.1m | $112.9m | $427.7m | $380.4m |
| Distributable Earnings (non-GAAP) | $189.6m | $125.7m | $540.2m | $518.5m |
- Revenue drivers: Q3 performance fees were $603.1m, versus negative $456.3m a year earlier; investment income was $138.2m, versus a $100.4m loss. Nine-month revenue rose 20%, led by performance fees (+$298.8m), management and advisory fees (+$92.9m), and investment income (+$74.8m).
- Expenses and earnings quality: Q3 expenses rose 57% to $851.4m, mainly from $300.5m more performance-fee compensation. Nine-month expenses fell 6% to $2.375bn, largely because 2011 included higher equity-based compensation. Much of the period-to-period earnings swing reflects unrealized fund marks and related compensation, not solely realized cash income.
- Cash flow: Operating cash flow was $356.4m for the first nine months, down from $758.4m in 2011. Investing cash outflow was $181.6m; financing cash outflow was $96.0m. Cash and cash equivalents ended at $833.5m, up from $754.7m at year-end 2011.
- Balance sheet: Total assets were $27.80bn and total liabilities $16.96bn at September 30, versus $21.91bn and $12.66bn at December 31, 2011. Investments increased to $20.77bn from $15.13bn; partners’ capital was $9.39bn.
- Liquidity and debt: Management cited $833.5m cash, $1.29bn in treasury cash-management investments, and $143.2m in liquid Blackstone Fund investments. Blackstone had no borrowings under its $1.1bn revolver. It issued $400m of 4.75% notes due 2023 and $250m of 6.25% notes due 2042 in August. Consolidated loans payable were $12.88bn, including substantial fund/CLO borrowings; the filing states consolidated fund liabilities generally have no recourse to Blackstone’s general credit.
- Assets under management: Total AUM reached $204.6bn, up 23% from year-end 2011; fee-earning AUM was $168.6bn, also up 23%. Growth reflected inflows, market appreciation and the Harbourmaster acquisition.
Material changes and management commentary
- Management attributed the sharp Q3 improvement over 2011 to stronger investment appreciation amid a broad rally in risk assets. The filing notes central-bank liquidity support, better credit markets, but subdued M&A activity and continued macroeconomic uncertainty.
- Real Estate and Credit fee-earning AUM expanded substantially year over year; Financial Advisory revenue declined 11% for the first nine months, reflecting weaker M&A and fund-placement activity, partly offset by restructuring work.
- Blackstone acquired European loan manager Harbourmaster on January 5, 2012 for approximately $232m in cash. Its results are included in the Credit segment.
- Blackstone’s current intention was to distribute substantially all annual Distributable Earnings, less realized investment gains and returns of capital, subject to reserves and the general partner’s discretion. Management expected the first three quarterly distributions in a year to remain $0.10 per unit; no specific full-year earnings guidance was provided.
Risks, contingencies and unusual items
- Performance fees and investment income depend on investment valuations and realizations. A significant share of managed assets is Level III, requiring unobservable inputs and judgment; redemptions in some underlying funds are restricted or cannot be timed reliably.
- Reported consolidated CLO assets and liabilities are large, but the filing says those assets are restricted to the relevant funds and CLO creditors generally have no recourse to Blackstone. Investors should distinguish these balances from operating-company debt.
- Recorded potential carried-interest clawbacks totaled $255.8m; $154.3m related to current and former personnel. The filing also reports $415.3m held in segregated personnel accounts for potential clawbacks. Actual obligations depend on fund outcomes and terms.
- Blackstone reported $1.3bn of its own investment commitments. It also disclosed a $47.8m guarantee of certain employee fund-investment loans and $5.0m of investments at risk under guarantees by consolidated real estate funds.
- Expected future payments under tax receivable agreements were estimated at $1.2bn over 15 years, assuming sufficient taxable income and no material tax-law changes. Proposed carried-interest tax changes could increase taxes or require restructuring; the ultimate effect was uncertain.
- Material legal matters described include the Dahl antitrust litigation, the Landmen IPO-disclosure case, and Extended Stay-related litigation seeking $2.1bn in compensatory and $6.3bn in punitive damages. Blackstone said it intended to defend the claims and did not expect current proceedings to materially affect its financial statements.
- Management described the U.S. outlook as uncertain, citing the fiscal cliff, persistent unemployment and slower emerging-market growth; the filing cautions that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- How much of earnings and performance-fee revenue is realized and cash-convertible, versus unrealized and subject to reversal.
- The composition and recourse status of reported loans payable, particularly fund and CLO borrowings, and the liquidity available to operating entities.
- Whether AUM growth, fee-earning AUM, inflows and post-quarter BAAM inflows persist, and whether advisory activity recovers.
- Potential clawback exposure, remaining investment commitments, tax receivable agreement payments and the progress or potential cost of disclosed litigation.
- The assumptions behind Level III valuations and the sensitivity of carried interest, fund marks and distributions to market changes.
- The filing reports disclosure controls as effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.