Blackstone Group L.P. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; this is an annual filing, not a standalone fourth-quarter report. The filing is by The Blackstone Group L.P., the predecessor name to the company identified in the request. Blackstone manages alternative-investment funds and provides financial-advisory services across five segments: Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses and Financial Advisory.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Total revenue | $3.253 billion | $3.119 billion | Up 4%; management and advisory fees rose 14% to $1.812 billion, while performance fees increased 26% to $1.183 billion. |
| GAAP net loss | $268.5 million | $607.3 million | Loss attributable to Blackstone L.P. was $168.3 million, or $0.35 per common unit, versus $370.0 million, or $1.02 per unit. |
| Operating cash flow | $1.100 billion | $(371.9) million | Cash flow benefited from changes in operating assets and liabilities and fund-related activity; consolidated fund flows affect comparability. |
| Net Fee Related Earnings from Operations | $502.1 million | $442.3 million | Up 14%; a company-defined non-GAAP measure. |
| Distributable Earnings | $696.7 million | $701.8 million | Down slightly; a non-GAAP measure used as a starting point for distributions. |
| Assets under management | $166.2 billion | $128.1 billion | Up 30%; fee-earning AUM was $136.8 billion, up 25%. |
| Cash and liquidity | $754.7 million cash | $588.6 million cash | Also reported $644.5 million in Treasury cash-management strategies and $180.4 million in liquid Blackstone funds. |
| Debt and credit availability | $1.0 billion principal of senior notes; $1.02 billion revolver undrawn | — | Notes carry coupons of 6.625% and 5.875%; revolver maturity was extended to April 2016. |
GAAP expenses were $3.388 billion, down 18%, mainly because compensation and benefits fell $871.8 million, including lower equity-based compensation expense. The tax provision was $345.7 million despite pretax income of $77.3 million, producing the consolidated net loss. Net cash used in investing activities was $59.9 million; net cash used in financing activities was $873.5 million. Cash increased $166.1 million during the year.
Reported balance-sheet totals include consolidated investment funds: assets were $21.9 billion, liabilities $12.7 billion and partners’ capital $8.7 billion. Consolidated loans payable of $8.9 billion largely relate to funds and CLO vehicles; the filing states those fund liabilities generally have no recourse to Blackstone’s general credit. Do not treat that amount as equivalent to Blackstone corporate borrowings.
Material changes versus the prior year
- Performance-fee revenue rose to $1.183 billion, including $953.7 million of unrealized performance fees. Realized performance fees declined to $229.0 million from $366.7 million.
- Real Estate was the principal earnings contributor: segment Economic Net Income (ENI) rose 57% to $1.002 billion, with substantial unrealized performance-fee growth. Private Equity ENI fell 50% to $241.1 million; Hedge Fund Solutions fell 29% to $140.8 million; Credit Businesses fell 18% to $141.6 million; Financial Advisory fell 29% to $59.6 million.
- Fundraising and investment activity expanded: AUM inflows were $49.5 billion and limited-partner capital invested was $13.5 billion, up 84%. AUM also benefited from $5.1 billion of market appreciation, while fee-earning AUM experienced $1.8 billion of market depreciation.
- Financial Advisory revenue declined 10%, reflecting lower restructuring activity and a modest reduction in transaction activity, partly offset by improved fund-placement revenue.
- GAAP net loss narrowed, while operating cash flow improved substantially. The comparison is affected by large non-cash equity-compensation charges and consolidated fund activity.
Outlook, risks and unusual items
- Blackstone provides no quarterly or annual operating guidance, citing the volatility and timing uncertainty of carried interest, realizations, advisory engagements and market valuations. Management described 2011 markets as volatile amid economic, political and regulatory uncertainty, particularly in the second half.
- Fundraising progress included the close of BCP VI and the start of BREP VII investment activity. In January 2012, Blackstone acquired Harbourmaster for approximately $154.5 million in cash; the filing did not provide completed purchase-accounting or pro forma earnings figures.
- The $197.8 million reversal of a tax-receivable-agreement liability was a non-recurring benefit related to a New York City tax-sourcing change. The filing estimated $1.112 billion of future tax-receivable-agreement payments, subject to tax savings actually realized and other assumptions.
- Potential carried-interest clawback obligations were $266.3 million at year-end, including $98.9 million attributable to Blackstone Holdings and $167.4 million to current and former personnel. Some obligations could become payable as funds wind down or after specified real-estate fund losses.
- Key risks include market-driven declines in fund performance and AUM, illiquid and judgment-based valuations, leverage at portfolio companies and funds, investor redemptions or failed capital calls, competition and regulatory and tax changes. Blackstone highlighted European sovereign-debt uncertainty and continued constraints in financing markets.
- Litigation includes claims concerning private-equity buyout practices and lawsuits related to the 2007 sale of Extended Stay Hotels, including claims seeking $2.1 billion and, in related claims, $6.3 billion in punitive damages. Blackstone said it would defend the cases and did not expect pending proceedings to materially affect its consolidated financial statements.
- For FY 2011, Blackstone reported three quarterly common-unit distributions of $0.10 each and declared a further $0.22 distribution for the fourth quarter, payable in March 2012. The general partner retains discretion over distributions. The filing’s distribution disclosures use different declaration and fiscal-period conventions; verify the applicable dates and amounts.
Most important facts for investors to verify
- How much of performance-fee revenue and reported fund appreciation is unrealized, and how sensitive are valuations to market conditions? Real Estate drove much of the increase.
- What cash is available to the operating partnership versus consolidated funds, and what are the terms, covenants and maturity profile of corporate debt and the undrawn revolver?
- How could the $266.3 million recorded clawback exposure, potential additional employee-related obligations, and the estimated tax-receivable-agreement payments affect future liquidity?
- Confirm the timing and amount of FY 2011 distributions, including the distinction between distributions paid, declared and attributable to the fiscal year.
- Track the Extended Stay and buyout-practices litigation, regulatory changes, and the Harbourmaster acquisition’s final accounting and contribution to results.