Blackstone Inc. (The Blackstone Group L.P.) — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request identifies 2014 Q4, this is an annual filing; quarterly figures are included where available. The company was a global alternative asset manager and financial advisory firm, organized across Private Equity, Real Estate, Hedge Fund Solutions, Credit and Financial Advisory.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $7.485 billion | $6.613 billion | +13% |
| Management and advisory fees, net | $2.497 billion | $2.194 billion | +14% |
| Performance fees | $4.374 billion | $3.544 billion | +23% |
| Investment income | $534 million | $800 million | −33% |
| Total expenses | $3.856 billion | $3.867 billion | Approximately flat |
| Income before taxes | $3.987 billion | $3.149 billion | +27% |
| Net income attributable to Blackstone L.P. | $1.585 billion | $1.171 billion | +35% |
| Basic / diluted earnings per common unit | $2.60 / $2.58 | $2.00 / $1.98 | Higher |
| Operating cash flow | $1.655 billion | $3.548 billion | −53% |
Cash flow from investing activities was a $24 million outflow and financing activities used $1.050 billion. The filing does not present a conventional operating-margin measure as a central performance indicator; Blackstone emphasizes non-GAAP measures including Fee Related Earnings, Distributable Earnings and Economic Income.
- Non-GAAP operating/liquidity measures: Fee Related Earnings were $1.0 billion; Distributable Earnings were $3.1 billion. Total Fee Related Revenues were $2.7 billion, with related expenses of $1.7 billion.
- Assets under management: Total AUM reached $290.4 billion, up 9%; fee-earning AUM was $216.7 billion, up 9%. Gross organic capital inflows were reported at $57 billion, and funds invested a record $26.4 billion including co-investments.
- Balance sheet: Total assets were $31.511 billion, total liabilities $14.177 billion and partners’ capital $14.892 billion. These consolidated balances include investment funds and CLO vehicles; substantial fund liabilities are not recourse to Blackstone.
- Corporate debt and liquidity: Blackstone-issued notes totaled approximately $2.135 billion. It reported $1.412 billion cash, $1.8 billion in cash held by funds and other, $1.8 billion in Treasury Cash Management Strategies, $175.8 million in liquid Blackstone funds and $2.3 billion in illiquid Blackstone funds. The $1.1 billion revolving facility was essentially undrawn, apart from a $0.7 million letter of credit. Management described the balance sheet as having no net debt.
- Distributions: Common unitholders received $2.12 per unit for 2014, including $0.78 paid in February 2015 for Q4. The selected-data table shows $1.92 declared during calendar 2014 because the Q4 distribution was declared in 2015. The stated policy was to distribute approximately 85% of Blackstone L.P.’s share of Distributable Earnings, subject to the general partner’s discretion.
Material changes versus the prior comparable period
- Revenue and attributable net income increased, driven mainly by higher carried interest realizations and Private Equity performance. Realized carried interest rose to $2.450 billion from $944 million, while unrealized carried interest declined to $1.705 billion from $2.158 billion.
- Private Equity performance fees increased substantially, including results from BCP V and BCP VI. Real Estate revenue fell 7% as investment income and performance fees declined from 2013’s stronger appreciation, partly offset by higher management fees.
- Credit revenue fell 16%, primarily due to lower performance fees amid weaker returns in hedge fund strategies and rescue lending. Hedge Fund Solutions revenue was approximately flat: higher management fees offset lower performance fees.
- Operating cash flow declined to $1.655 billion from $3.548 billion despite higher reported net income. The filing’s cash flow reconciliation includes substantial non-cash performance fees, fund investment activity and changes in working-capital items.
- Total AUM growth slowed to 9% from 26% in 2013, as record realizations and market appreciation were offset by fund outflows. Fee-earning AUM also grew 9%, versus 18% in 2013.
Outlook, commentary, risks and unusual items
- Outlook: Blackstone did not provide quarterly or annual earnings guidance, citing highly variable revenues, carried interest timing and market-dependent advisory activity. Management expected the proposed advisory-business spin-off to close in 2015; the transaction remained subject to conditions and approvals.
- Market backdrop: Management described generally positive but more volatile markets in 2014, with late-year widening of high-yield spreads and stress in energy-related credit. It highlighted interest-rate, currency, financing, real estate and emerging-market risks.
- Earnings quality and valuation: Performance fees include unrealized carried interest based on fair-value estimates; $4.552 billion of net accrued performance fees was reported at year-end. Many private investments are Level III, relying on significant management judgment. Realizations may differ materially from reported carrying values.
- Clawbacks and commitments: Recorded clawback obligations were $3.9 million at year-end, but obligations can change with fund performance and may require repayment of previously distributed carry. Blackstone and general partners had $1.415 billion of remaining capital commitments; unfunded calls and investment needs are liquidity considerations.
- Unusual items: The proposed spin-off generated transaction-related costs. A 2014 change to Deferred Compensation Plan terms reduced fourth-quarter compensation expense by $102.6 million relative to the prior plan. Blackstone also issued $500 million of 5.0% senior notes due 2044.
- Legal and regulatory: The filing said no pending proceeding was expected to materially affect consolidated statements, while noting adverse outcomes could affect a particular period. A private-equity antitrust class action settlement was substantially covered by insurance and was awaiting final court approval as of the filing. Risks include regulatory scrutiny, tax-law changes affecting carried interest or partnership status, cybersecurity and conflicts of interest.
- Audit and controls: Deloitte issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2014.
Investor facts to verify
- Separate realized performance fees and cash realizations from unrealized carry and other fair-value gains when assessing sustainable earnings and cash generation.
- Reconcile $1.655 billion of operating cash flow with $3.1 billion of Distributable Earnings and review the full non-GAAP reconciliations and cash-flow drivers.
- Distinguish Blackstone corporate borrowings from consolidated fund and CLO debt, and confirm which cash and investments are available to the corporate parent.
- Review the composition, valuation assumptions, liquidity restrictions and subsequent realizations for the $4.552 billion net accrued performance-fee balance and Level III assets.
- Track the advisory spin-off’s completion, terms, costs, tax treatment and effect on retained businesses and common-unit distributions.
- Review the tax receivable agreement’s expected payments—estimated at $1.2 billion over 15 years under stated assumptions—and potential carried-interest tax changes.