Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, for The Blackstone Group L.P. (Blackstone). The reporting period is significantly impacted by three major corporate events: the reorganization of the company into a holding partnership structure on June 18, 2007; the completion of its Initial Public Offering (IPO) on June 27, 2007; and the deconsolidation of most Blackstone Funds effective June 27, 2007 (with certain funds of hedge funds deconsolidating July 1, 2007). Blackstone is a leading global alternative asset manager operating through four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $975.3 million | $2.20 billion |
| Net Income | $774.4 million | $1.91 billion |
| Net Gains from Fund Investment Activities | $601.7 million | $1.20 billion |
| Total Assets | $18.78 billion | (Balance Sheet Item) |
| Cash and Cash Equivalents | $1.43 billion | (Balance Sheet Item) |
| Loans Payable | $176.9 million | (Balance Sheet Item) |
| Assets Under Management (AUM) | $91.8 billion | $91.8 billion |
Segment Performance (Six Months Ended June 30, 2007 - Economic Net Income):
- Corporate Private Equity: $579.5 million
- Real Estate: $1.05 billion
- Marketable Alternative Asset Management: $219.6 million
- Financial Advisory: $140.7 million
Material Changes vs. Prior Period
Financial results for the six months ended June 30, 2007, are not directly comparable to the prior year due to the reorganization, IPO, and deconsolidation of funds.
- Revenue Growth: Total revenues increased 150.2% to $2.20 billion for the six months ended June 30, 2007, compared to $880.1 million in the prior year period. This was driven by a $802.8 million increase in performance fees and allocations and a $236.4 million increase in management fees.
- Net Income: Net income rose 168% to $1.91 billion from $711.2 million in the prior year period.
- Deconsolidation Impact: The deconsolidation of Blackstone Funds significantly reduced the reported asset base. Investments at fair value dropped from $31.3 billion at December 31, 2006, to $10.8 billion at June 30, 2007. Total assets decreased from $33.9 billion to $18.8 billion.
- Compensation: Compensation and benefits expenses increased 289% to $424.8 million for the six-month period, largely due to the inclusion of equity-based compensation ($236.2 million) and profit-sharing arrangements following the IPO.
Guidance, Outlook, and Risks
Management Commentary: Management highlights strong year-over-year revenue growth across all segments, driven by favorable global economic conditions and robust merger and acquisition activity. However, management notes a significant shift in credit market conditions beginning in the last week of June 2007, characterized by tighter lending standards and higher interest rates, which may adversely impact future private equity transaction volumes.
Outlook: Blackstone expects to use IPO proceeds and operating cash flows to fund general partner commitments, operating expenses, and distributions to unitholders. The company anticipates recording significant net losses in future years due to the amortization of finite-lived intangible assets ($722 million) and non-cash equity-based compensation.
Risks and Contingencies:
- Credit Market Conditions: Deterioration in the sub-prime mortgage market and institutional loan markets could reduce financing availability for private equity transactions.
- Tax Legislation: Proposed U.S. legislation could tax carried interest as ordinary income and alter the partnership tax status, materially increasing tax liabilities.
- Clawback Obligations: While no clawback obligation existed as of June 30, 2007, potential clawback on carried interest could reach $1.9 billion if all investments were deemed worthless.
- Tax Receivable Agreement: Blackstone has entered into an agreement to pay 85% of tax savings realized from basis step-ups to predecessor owners, with estimated future payments of $1.35 billion over 15 years.
Investor Verification Checklist
- Deconsolidation Effects: Verify the impact of deconsolidating Blackstone Funds on future revenue recognition and asset reporting, as segment data excludes consolidated fund results.
- Non-GAAP Measures: Review the reconciliation of "Economic Net Income" (ENI) to GAAP Net Income, noting the exclusion of non-cash equity compensation and intangible amortization.
- Equity Compensation: Assess the magnitude of future non-cash compensation expenses related to the 827.5 million Blackstone Holdings Partnership Units and deferred restricted common units granted during the reorganization.
- Credit Exposure: Monitor the company's exposure to the tightening credit markets and the potential delay or cancellation of pending private equity transactions.
- Tax Receivable Agreement: Evaluate the long-term cash flow impact of the $1.35 billion payment obligation to predecessor owners under the Tax Receivable Agreement.