Business Context and Reporting Period
This Form 10-Q covers The Blackstone Group L.P. for the quarterly period ended June 30, 2009. Blackstone is a leading global alternative asset manager and financial advisory firm operating through four segments: Corporate Private Equity, Real Estate, Credit and Marketable Alternatives, and Financial Advisory. The filing reflects the impact of the global financial crisis, including significant unrealized losses in consolidated funds and a shift in market conditions that affected fee-earning assets and investment valuations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $406.4 million | $451.3 million |
| Net Income (Loss) Attributable to Blackstone | $(164.3) million | $(395.9) million |
| Net Loss Per Common Unit (Basic/Diluted) | $(0.60) | $(1.44) |
| Cash and Cash Equivalents | $784.6 million | $784.6 million |
| Total Assets | $7.70 billion | $7.70 billion |
| Loans Payable | $78.0 million | $78.0 million |
| Fee-Earning Assets Under Management | $93.5 billion | $93.5 billion |
Material Changes vs. Prior Period
- Revenues: Total revenues increased 15% ($52.5 million) for the quarter and 7% ($29.4 million) for the six months compared to the prior year periods. This was driven by a significant improvement in Performance Fees and Allocations, which turned from a loss of $(13.7) million in Q2 2008 to a gain of $71.2 million in Q2 2009.
- Expenses: Total expenses decreased 10% ($112.4 million) for the quarter and 13% ($287.6 million) for the six months. The reduction was primarily due to lower equity-based compensation amortization and reversals of prior period carried interest allocations.
- Investment Performance: Net Gains (Losses) from Fund Investment Activities decreased significantly to $58.3 million for the quarter (down from $189.7 million in Q2 2008) due to unrealized losses in real estate funds and the liquidation of proprietary hedge funds.
- Assets Under Management (AUM): Total AUM declined 22% to $93.5 billion, primarily due to net depreciation in the fair value of portfolio investments and redemptions in funds of hedge funds.
Guidance, Outlook, and Risks
- Outlook: Management notes that while global equity and debt markets recovered in Q2 2009, the macro-economic backdrop remains challenged. Commercial real estate trends worsened, and bank lending appetite remains low, keeping leveraged transaction volumes low.
- Liquidity: Blackstone maintains strong liquidity with $784.6 million in cash and $432.6 million in liquid fund investments. On May 11, 2009, the company entered into a new $850 million committed revolving credit facility with no outstanding borrowings as of June 30, 2009.
- Distributions: A quarterly distribution of $0.30 per common unit was declared, payable September 11, 2009. The company intends to distribute substantially all of its net after-tax Adjusted Cash Flows from Operations.
- Risks:
- Market Risk: A 10% decline in the fair value of investments would decrease management fees by $32.6 million annually and performance fees by $112.6 million.
- Regulatory Risk: Potential bans on placement agents by public pension funds (e.g., New York, Illinois, New Mexico) and proposed SEC rules could materially adversely affect the Fund Placement business.
- Clawback Obligations: Significant contingent obligations exist for carried interest repayments if fund performance declines further, though no cash clawback was due as of June 30, 2009.
Investor Verification Checklist
- Valuation Methodologies: Verify the assumptions used for Level III fair value measurements, which comprise the majority of investments (93% in Private Equity, 92% in Real Estate), as these rely heavily on management judgment.
- Carried Interest Reversals: Review the magnitude of reversals of prior period carried interest allocations, which significantly impacted compensation expenses and performance fees in the Real Estate segment.
- Capital Commitments: Assess the $1.36 billion in remaining capital commitments to funds and the company's ability to fund these calls given current market conditions.
- Regulatory Impact: Monitor developments regarding the proposed SEC rule banning placement agents and state-level bans, as these directly threaten the Financial Advisory segment's revenue.
- Debt Covenants: Confirm continued compliance with loan covenants, particularly given the volatility in asset valuations.