Blackstone Group L.P. — Q2 2010 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010; filed August 6, 2010. The registrant was The Blackstone Group L.P., a Delaware limited partnership. Unless noted, figures below are in U.S. dollars and rounded to millions.
Business context and reporting period
Blackstone managed private equity, real estate, credit and marketable alternatives, and financial advisory businesses. Results are sensitive to markets, realizations, fund performance, and advisory transaction volumes. The second quarter saw weaker global equity markets and greater risk aversion amid economic-recovery concerns, European sovereign-debt issues, and regulatory uncertainty. Blackstone reported improving real estate fundamentals but market declines and outflows in equity and credit funds.
Financial and operating highlights
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $550.1m | $406.4m | $1,251.3m | $451.3m |
| Net income (loss) | $(656.3)m | $(597.9)m | $(893.6)m | $(1,527.8)m |
| Net income (loss) attributable to Blackstone | $(193.3)m | $(164.3)m | $(314.7)m | $(395.9)m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $26.8m | $692.6m |
| Economic Net Income (non-GAAP) | $221.5m | $172.8m | $606.6m | $79.6m |
| Distributable Earnings (non-GAAP) | $147.6m | $89.6m | $296.3m | $166.6m |
- Q2 revenue increased 35%; six-month revenue rose 177%. Management and advisory fees increased 19% for the quarter and 12% year to date. Six-month performance fees and allocations improved to $218.3m from a loss of $143.1m.
- Q2 performance fees and allocations were $32.5m, down from $71.2m a year earlier, as private-equity funds reversed prior accruals; stronger real estate performance partly offset the decline. Investment income was $105.3m for the quarter versus a $10.9m loss in Q2 2009.
- Expenses were $1,127.8m in Q2 and $2,228.5m for six months. Compensation and benefits were $989.7m and $1,977.0m, respectively. Equity-based compensation expense was $743.8m for Q2 and $1.5bn for six months, a major contributor to GAAP losses.
- GAAP loss before taxes was $636.9m in Q2 and $864.6m for six months. The filing’s adjusted ENI and Distributable Earnings are not GAAP profit measures; ENI excludes specified IPO- and acquisition-related charges, including substantial equity compensation.
- At June 30, cash was $506.7m, down from $952.1m at year-end. For six months, cash fell $445.4m after $26.8m operating cash flow, $40.3m investing outflow, and $431.9m financing outflow. Financing included $379.3m of distributions to unitholders.
- Assets were $16.5bn and liabilities $9.3bn at June 30, versus $9.4bn and $2.9bn at December 31, 2009. The increase largely reflects consolidation of CLO vehicles, not a comparable increase in Blackstone operating assets or direct debt. Consolidated investments were $10.5bn, including $7.5bn attributed to consolidated funds.
- Loans payable totaled $6.35bn, principally reflecting consolidated CLO obligations. Blackstone had no borrowings on its $1.07bn revolving facility; it had approximately $600m of corporate senior notes outstanding, issued at 6.625% and maturing in 2019. CLO debt is collateralized by CLO assets, with no recourse to the Partnership for consolidated VIE liabilities.
- Fee-earning AUM was $101.4bn, up 8% year over year; total AUM was $111.1bn, up 19%. The filing attributes growth in part to inflows, market appreciation over the year, and the acquisition of CLO management agreements.
Material changes versus comparable periods
- Six-month GAAP net loss narrowed by $634.2m year over year, while the quarter’s net loss widened by $58.4m. The comparison reflects volatile investment valuations, performance-fee accruals, and substantial non-cash equity compensation.
- Six-month operating cash flow declined to $26.8m from $692.6m. Blackstone attributed cash and balance-sheet movements in part to fund activity and consolidation; cash alone fell by $445.4m during the period.
- Adoption of revised variable-interest-entity consolidation guidance and the April 1 acquisition of management agreements for eight CDO/CLO vehicles materially expanded reported fund assets and liabilities. The filing states the related April acquisition had no material effect on the statements of operations or cash flows.
- Segment ENI for six months increased to $606.6m from $79.6m. Real estate recovered from a prior-year loss, while financial advisory and credit also reported higher six-month ENI; private-equity quarterly ENI fell to $18.7m from $123.8m.
Outlook, commentary, risks, and unusual items
- No specific full-year earnings or revenue guidance is provided. Management said financial advisory pipelines remained strong and noted $1.6bn of net inflows to credit and marketable alternatives fee-earning AUM from July 1 through August 1. These are not formal earnings forecasts.
- Management’s stated distribution intention was to distribute substantially all annual Distributable Earnings after reserves and other needs, but declarations and amounts remain at the general partner’s discretion. It expected the first three quarterly distributions to be based mainly on anticipated annualized net fee-related earnings, with realized performance and investment income considered in the fourth quarter.
- Liquidity included $506.7m cash, $813.2m in Treasury cash-management strategies, $273.8m in liquid Blackstone funds, and access to the undrawn $1.07bn revolving facility. Blackstone reported $1.34bn of remaining operating-entity commitments to funds and other investments; capital calls, realizations, and distributions can vary substantially.
- Market sensitivity: a 10% decline in investment fair values was estimated to reduce annual management fees by $38.9m, net performance fees by $169.8m, and investment income by $171.2m. A 10% decline in foreign exchange rates was estimated to reduce annual management fees by $9.1m, net performance fees by $35.6m, and investment income by $27.7m.
- Valuation risk is significant: a substantial portion of segment AUM was classified as Level III, relying on unobservable inputs and management judgment. Some hedge-fund investments also face redemption restrictions, gates, side pockets, or liquidation schedules.
- Accrued potential carried-interest clawbacks were $478.0m at June 30, including $218.1m attributable to Blackstone Holdings and $259.9m to current and former personnel. $15.7m was due September 30, 2010. Clawback amounts are contingent and depend on fund outcomes and governing terms.
- Potential U.S. legislation could change the tax treatment of carried interest and publicly traded partnerships, potentially increasing Blackstone’s and unitholders’ tax burdens. The filing said the timing and final form of any legislation were uncertain.
- Management reported no pending litigation expected to materially affect consolidated financial statements. It described an antitrust case and an appeal of a dismissed IPO-related class action; Blackstone said it intended to defend the suits vigorously. Management also said disclosure controls were effective and no material change in internal controls occurred in the quarter.
Important facts for investors to verify
- Reconcile the large GAAP losses with ENI and Distributable Earnings, including the scale, cash impact, and future vesting expense of equity-based awards.
- Separate Blackstone operating-company debt and liquidity from consolidated CLO debt, assets, and fund-level cash; confirm the CLO obligations’ nonrecourse and collateral arrangements.
- Assess the quality and liquidity of Level III valuations, redemption restrictions, and the sensitivity of fees and investment income to market declines.
- Track fund realizations, fee-earning AUM flows, incentive-fee eligibility, and the potential variability of future distributions.
- Monitor carried-interest clawbacks, remaining capital commitments, tax-law developments, and the status of disclosed litigation.