Blackstone Group L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. The filing entity is The Blackstone Group L.P. (a partnership). Unless noted, amounts below are U.S. dollars.
Business context and reporting period
Blackstone manages private equity, real estate, hedge fund solutions and credit funds, and provides financial advisory services. In January 2011, it split its former Credit and Marketable Alternatives segment into Hedge Fund Solutions and Credit Businesses. The third quarter was marked by sharp market declines: the MSCI World Index fell 17%, volatility rose and credit spreads widened. Management said real estate operating fundamentals were generally stable, though market volatility slowed dispositions.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $(124.1) million | $784.0 million | $2,337.5 million | $2,035.3 million |
| Net loss attributable to Blackstone | $(274.6) million | $(44.4) million | $(145.6) million | $(359.1) million |
| Loss per common unit, basic and diluted | $(0.56) | $(0.12) | $(0.31) | $(1.02) |
| Management and advisory fees | $425.2 million | $362.5 million | $1,336.0 million | $1,123.4 million |
| Performance fees, total | $(456.3) million | $266.0 million | $824.6 million | $484.2 million |
| Investment income (loss), total | $(100.4) million | $141.0 million | $147.8 million | $401.2 million |
- The quarter’s negative revenues chiefly reflected unrealized performance-fee reversals and investment losses amid market declines. GAAP revenue-based margins are not meaningful for the quarter because reported revenue was negative.
- For the nine months, consolidated GAAP revenue rose 15% and net loss attributable to Blackstone narrowed from the prior-year period. Results remain sensitive to fair-value movements and consolidation of investment funds.
- Blackstone’s non-GAAP Economic Net Income (ENI) was a loss of $380.2 million in Q3 versus income of $368.1 million a year earlier; nine-month ENI was $1,084.9 million versus $974.7 million. Nine-month Distributable Earnings were $501.2 million versus $462.6 million; Q3 Distributable Earnings were $120.1 million versus $166.3 million. These measures are not GAAP earnings.
- Fee-earning assets under management were $132.9 billion at September 30, up 21% from year-end 2010; total AUM was $157.7 billion, up 23% from year-end. During Q3, total AUM declined 1% as market depreciation outweighed inflows.
- Nine-month cash from operations was $758.4 million, compared with $316.1 million in 2010. Investing activities used $49.4 million and financing activities used $704.7 million. Cash and cash equivalents increased $4.4 million to $593.0 million.
- At September 30, total assets were $22.1 billion, total liabilities $13.5 billion and partners’ capital $7.8 billion. Loans payable were $9.4 billion, including $8.35 billion attributable to consolidated funds and CLO vehicles.
- Liquidity included $593.0 million cash, $1.1 billion in Treasury cash-management investments, $183.1 million invested in liquid Blackstone funds and an undrawn $1.02 billion revolving facility maturing in 2016. Blackstone’s $1.0 billion of issued senior notes carry coupons of 5.875% and 6.625%. CLO debt is generally collateralized by CLO assets and is nonrecourse to Blackstone.
Material changes versus comparable periods
- Q3 management and advisory fees increased 17%, while total performance fees swung from $266.0 million of income to a $456.3 million loss. Unrealized performance fees alone were $(462.9) million, compared with $199.8 million in Q3 2010.
- Nine-month revenues increased 15%, helped by higher management fees and performance fees, particularly in real estate. The real estate segment reported nine-month ENI of $748.9 million versus $358.7 million.
- Q3 segment ENI deteriorated across private equity, real estate and credit businesses; private equity recorded $(319.5) million and real estate $(65.7) million. Hedge Fund Solutions reported $16.5 million, while Financial Advisory reported $5.6 million.
- Expenses declined year over year—20% for the first nine months—largely due to lower compensation expense, including lower equity-based compensation. Interest expense increased to $41.8 million for the nine months, from $26.6 million.
- Assets increased $3.2 billion from December 31, 2010, principally from investments; liabilities rose $2.9 billion, principally from loans payable. Consolidated CLO debt and assets increased, but the filing states these fund liabilities have no recourse to Blackstone’s general credit.
Outlook, commentary, risks and unusual items
- Outlook and distributions: No formal earnings guidance is provided. Blackstone said its intent was to distribute substantially all of its net after-tax annual Distributable Earnings, less realized investment gains and amounts retained for business needs. First-three-quarter distributions remained $0.10 per unit; the Q4 2011 distribution was expected to reflect the remaining annual amount, subject to general partner discretion.
- Market and valuation risk: Performance-fee and investment-income results can fluctuate sharply with fund valuations. Management reported that 74% to 96% of AUM, excluding undrawn commitments and CLO capital raised, was classified as Level III across the listed investment segments. Many hedge-fund investments face redemption limits, gates, side pockets or liquidation timelines that cannot be estimated.
- Commitments and clawbacks: Blackstone had $1.4 billion of its own investment commitments outstanding. The recorded potential carried-interest clawback obligation was $262.0 million; $492.8 million was held in segregated accounts for personnel clawbacks. These obligations depend on fund performance and timing of realizations.
- Tax exposure: The filing discusses proposed U.S. legislation that could change the tax treatment of carried interest or require restructuring, potentially increasing Blackstone’s tax burden; the impact could not be quantified. The tax receivable agreement liability to certain non-controlling holders was $1.3 billion.
- Legal matters: Blackstone disclosed ongoing litigation, including the Landmen IPO-related case, reinstated by the Second Circuit in 2011, and claims connected with the 2007 sale of Extended Stay Hotels. The latter suits seek $2.1 billion in compensatory damages and, in two actions, $6.3 billion in punitive damages. Management said it considered the claims without merit and intended to defend them; it did not expect current proceedings to materially affect consolidated results.
- Other developments: GSO acquired four CLO management agreements for net consideration of $23.4 million. A subsequent agreement to acquire Harbourmaster Capital was expected to close in early 2012, subject to approvals. A November 2011 partnership amendment made 7.7 million CIC units purchased after the IPO voting units; CIC’s 101.3 million IPO-era units remained non-voting.
Important facts for investors to verify
- How much reported performance-fee and investment-income volatility is unrealized, and how sensitive future results are to fund marks and market conditions.
- The composition and liquidity of Blackstone’s own investments, including Level III valuations and hedge-fund assets subject to redemption restrictions.
- The distinction between Blackstone’s corporate debt and consolidated fund/CLO borrowings, including the nonrecourse status of fund liabilities.
- Future cash needs for the $1.4 billion investment commitments, tax receivable agreement payments and any carried-interest clawbacks.
- Whether Distributable Earnings and the stated distribution intent translate into actual distributions; amounts remain discretionary and differ from GAAP income.
- Developments in the disclosed litigation, proposed carried-interest tax legislation and the Harbourmaster acquisition.