Blackstone Group L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are with December 31, 2013. The filing is by The Blackstone Group L.P. (not Blackstone Inc.). Amounts below are in U.S. dollars; financial-statement figures are consolidated and include certain investment funds.
Business context and key financial metrics
Blackstone manages private capital and provides financial advisory services across Private Equity, Real Estate, Hedge Fund Solutions, Credit and Financial Advisory. Fund assets and liabilities included through consolidation generally are not available to Blackstone to use and do not have recourse to its general credit.
| Metric | Q1 2014 | Q1 2013 or prior date | Change |
|---|---|---|---|
| Total revenue | $1,526.7 million | $1,246.5 million | Up 22% |
| Income before taxes | $709.0 million | $478.6 million | Up 48% |
| Net income | $654.9 million | $427.6 million | Up 53% |
| Net income attributable to Blackstone L.P. | $265.6 million | $167.6 million | Up 58% |
| Net income per common unit, diluted | $0.44 | $0.29 | Up $0.15 |
| Distributions declared per common unit | $0.58 | $0.42 | Up $0.16 |
| Operating cash flow | $980.3 million | $1,104.3 million | Down $124.0 million |
| Cash and cash equivalents | $787.5 million | $832.0 million at Dec. 31, 2013 | Down $44.5 million |
| Total assets / total liabilities | $30.0 billion / $15.3 billion | $29.7 billion / $15.3 billion at Dec. 31, 2013 | Assets up slightly; liabilities down slightly |
| Loans payable | $10.0 billion | $10.5 billion at Dec. 31, 2013 | Down $479.2 million |
Consolidated net income was 42.9% of revenue, compared with 34.3% in Q1 2013; income before taxes was 46.4% of revenue versus 38.4%. These consolidated ratios reflect fund consolidation and should not be read as standalone operating margins.
Management reported $203.6 billion in fee-earning AUM, up 3% from year-end, and total AUM of $271.7 billion, up 2%. Limited partner capital invested was $4.5 billion, up 150% year over year. Segment Economic Income, a non-GAAP measure, was $825.2 million versus $638.3 million.
Material changes and management commentary
- Revenue growth reflected a $171.0 million increase in performance fees and a $91.0 million increase in net management and advisory fees. Performance fees included $330.4 million of unrealized carried interest and $333.6 million of realized carried interest.
- Private Equity segment revenue rose 115% to $484.2 million and Economic Income rose 209% to $319.2 million, driven largely by fund appreciation and realizations. Real Estate revenue fell 4% to $544.4 million and Economic Income fell 9% to $320.9 million, as lower investment income and performance fees outweighed higher management fees.
- Hedge Fund Solutions revenue rose 16% to $194.0 million and Economic Income rose 21% to $113.9 million. Credit revenue declined 7% to $213.0 million and Economic Income declined 18% to $81.0 million, mainly because of lower performance fees. Financial Advisory revenue rose 7% to $73.2 million; the segment reported a $9.8 million Economic loss.
- Total expenses rose 6% to $887.9 million. Compensation and benefits increased 5% to $722.6 million; general, administrative and other expenses increased 24% to $135.6 million, including a non-recurring Credit-segment placement fee expense.
- Management described Q1 markets as mixed, with higher equity volatility, continued improvement in real estate fundamentals, and supportive equity and credit markets. It cited strong private-equity performance and realizations, while noting that results and cash flows vary with markets and the timing of realizations.
Liquidity, debt, outlook and risks
- At March 31, Blackstone reported $787.5 million of cash, $965.5 million in Treasury Cash Management Strategies, $146.9 million in liquid Blackstone Funds and no borrowings under its $1.1 billion revolving credit facility. It also reported $2.5 billion invested in illiquid Blackstone Funds and $243.7 million in other investments.
- Reported loans payable of $10.0 billion include substantial fund and CLO borrowings. CLO borrowings outstanding were $9.3 billion; senior secured CLO notes carried a weighted-average rate of 1.05%. The filing states that CLO obligations are collateralized by their respective vehicles’ assets and are not recourse to Blackstone’s general credit. Blackstone-issued notes had $1.6 billion principal outstanding at March 31.
- On April 7, 2014, a subsidiary issued $500 million of 5.000% senior notes due June 15, 2044. This subsequent issuance was not included in March 31 cash and debt balances.
- Blackstone reported $1.4 billion of its own investment commitments and $4.1 million of recorded carried-interest clawback obligations. It also disclosed a $1.2 billion estimated aggregate future tax-receivable-agreement payment, subject to tax savings actually being realized, and $835.8 million of operating lease obligations.
- No earnings guidance was provided in the supplied filing text. Management said it expects available liquidity sources to be sufficient for working-capital requirements, while warning that prolonged periods with few realizations and substantial fund capital calls could adversely affect liquidity.
- Risks include sensitivity of fees and investment income to markets, fair-value estimates using significant unobservable inputs, redemption restrictions and side pockets, investor failure to meet capital calls, and potential changes to taxation of carried interest or publicly traded partnerships. Blackstone disclosed a pending private-equity antitrust class action; it said it considered the suit without merit and intended to defend it. Management did not expect current proceedings to materially affect the consolidated financial statements, but adverse outcomes could affect a particular period.
Important facts for investors to verify
- Reconcile the $0.58 distribution declared per unit in the financial statements with management’s statement that a $0.35 distribution was paid in respect of Q1; confirm declaration, payment and measurement timing.
- Separate Blackstone’s operating debt and liquidity from consolidated fund and CLO balances, which largely represent client assets and liabilities and generally are nonrecourse.
- Assess the quality and reversibility of performance-fee revenue, particularly unrealized carried interest, and the related compensation and potential clawbacks.
- Review the assumptions underlying Level III valuations and the liquidity restrictions on investments measured using NAV.
- Track the April 2014 note issuance, capital commitments, tax-receivable-agreement payments, carried-interest tax proposals and status of the antitrust litigation.
- Interpret AUM, Economic Income, Fee Related Earnings and Distributable Earnings with their disclosed definitions; these measures are not GAAP and may not be comparable across firms.