Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number: 001-33551

 

 

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8875684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

   Accelerated filer  ¨

Non-accelerated filer  ¨

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the Registrant’s voting common units representing limited partner interests outstanding as of April 30, 2009 was 155,888,515. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of April 30, 2009 was 109,083,468.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

PART I

  

FINANCIAL INFORMATION

  

ITEM 1.

  

FINANCIAL STATEMENTS

   1
  

Unaudited Condensed Consolidated Financial Statements — March 31, 2009 and 2008:

  
  

Condensed Consolidated Statements of Financial Condition as of March 31, 2009 and December 31, 2008

   1
  

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008

   2
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Three Months Ended March 31, 2009

   3
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008

   5
  

Notes to Condensed Consolidated Financial Statements

   7

ITEM 1A.

  

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

   33

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   35

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   61

ITEM 4T.

  

CONTROLS AND PROCEDURES

   63

PART II

  

OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

   64

ITEM 1A.

  

RISK FACTORS

   65

ITEM 2.

  

UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

   65

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

   66

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   66

ITEM 5.

  

OTHER INFORMATION

   66

ITEM 6.

  

EXHIBITS

   67

SIGNATURES

   68

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2008 and in this report, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this

 

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report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

 

In this report, references to “Blackstone,” “we,” “us” or “our” refer to The Blackstone Group L.P. and its consolidated subsidiaries. Unless the context otherwise requires, references in this report to the ownership of our founder, Mr. Stephen A. Schwarzman, and other Blackstone personnel include the ownership of personal planning vehicles and family members of these individuals.

 

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Table of Contents

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     March 31,
2009
    December 31,
2008
 

Assets

    

Cash and Cash Equivalents

   $ 776,303     $ 503,737  

Cash Held by Blackstone Funds and Other

     67,505       907,324  

Investments

     2,397,134       2,830,942  

Accounts Receivable

     248,689       312,067  

Due from Brokers

     970       48,506  

Investment Subscriptions Paid in Advance

     —         1,916  

Due from Affiliates

     429,869       861,434  

Intangible Assets, Net

     1,038,013       1,077,526  

Goodwill

     1,703,602       1,703,602  

Other Assets

     167,098       169,555  

Deferred Tax Assets

     845,326       845,578  
                

Total Assets

   $ 7,674,509     $ 9,262,187  
                

Liabilities and Partners’ Capital

    

Loans Payable

   $ 81,874     $ 387,000  

Amounts Due to Non-Controlling Interest Holders

     247,879       1,103,423  

Securities Sold, Not Yet Purchased

     690       894  

Due to Affiliates

     1,273,422       1,285,577  

Accrued Compensation and Benefits

     265,419       413,459  

Accounts Payable, Accrued Expenses and Other Liabilities

     208,681       180,259  
                

Total Liabilities

     2,077,965       3,370,612  
                

Commitments and Contingencies

    

Redeemable Non-Controlling Interests in Consolidated Entities

     432,585       362,462  
                

Partners’ Capital

    

Partners’ Capital (common units: 277,375,119 issued and 272,107,151 outstanding as of March 31, 2009; 273,891,358 issued and 272,998,484 outstanding as of December 31, 2008)

     3,433,752       3,509,448  

Accumulated Other Comprehensive Loss

     (2,906 )     (291 )

Non-Controlling Interests in Consolidated Entities

     84,683       198,197  

Non-Controlling Interests in Blackstone Holdings

     1,648,430       1,821,759  
                

Total Partners’ Capital

     5,163,959       5,529,113  
                

Total Liabilities and Partners’ Capital

   $ 7,674,509     $ 9,262,187  
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands, Except Unit and Per Unit Data)

 

     Three Months Ended March 31,  
     2009     2008  

Revenues

    

Management and Advisory Fees

   $ 341,172     $ 309,409  

Performance Fees and Allocations

     (214,248 )     (188,687 )

Investment Income (Loss) and Other

     (79,793 )     (52,199 )
                

Total Revenues

     47,131       68,523  
                

Expenses

    

Compensation and Benefits

     812,347       977,147  

Interest

     1,399       2,743  

General, Administrative and Other

     107,817       95,221  

Fund Expenses

     3,012       22,952  
                

Total Expenses

     924,575       1,098,063  
                

Other Income (Loss)

    

Net Gains (Losses) from Fund Investment Activities

     (34,763 )     (215,636 )
                

Income (Loss) Before Provision for Taxes

     (912,207 )     (1,245,176 )

Provision for Taxes

     17,731       8,981  
                

Net Income (Loss)

     (929,938 )     (1,254,157 )

Net Income (Loss) Attributable to Redeemable Non-Controlling Interests in Consolidated Entities

     2,596       (184,194 )

Net Income (Loss) Attributable to Non-Controlling Interests in Consolidated Entities

     (41,031 )     (14,916 )

Net Income (Loss) Attributable to Non-Controlling Interests in Blackstone Holdings

     (659,929 )     (804,054 )
                

Net Income (Loss) Attributable to The Blackstone Group L.P.

   $ (231,574 )   $ (250,993 )
                

Net Loss Attributable to The Blackstone Group L.P.

    

Per Common Unit — Basic and Diluted

    

Common Units Entitled to Priority Distributions

   $ (0.84 )   $ (0.95 )
                

Common Units Not Entitled to Priority Distributions

   $ (1.14 )  
          

Weighted-Average Common Units Outstanding — Basic and Diluted

    

Common Units Entitled to Priority Distributions

     273,624,497       263,147,120  
                

Common Units Not Entitled to Priority Distributions

     1,627,540       N/A  
                

Revenues Earned from Affiliates

    

Management and Advisory Fees

   $ 20,284     $ 28,407  
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

    The Blackstone Group L.P. Unitholders     Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income
(Loss)
 
    Common
Units
    Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
           

Balance at December 31, 2008

  272,998,484     $ 3,509,448     $ (291 )   $ 198,197     $ 1,821,759     $ 5,529,113     $ 362,462    

Net Loss

  —         (231,574 )     —         (41,031 )     (659,929 )     (932,534 )     2,596     $ (929,938 )

Currency Translation Adjustment

  —         —         (2,615 )     —         —         (2,615 )     —         (2,615 )

Certain Partners Allocations of Blackstone Profit Sharing Arrangements

  —         —         —         (91,707 )     —         (91,707 )     —         —    

Capital Contributions

  —         —         —         10,186       —         10,186       95,959       —    

Capital Distributions

  —         —         —         (8,957 )     —         (8,957 )     (30,658 )     —    

Loss Attributable to Consolidated Blackstone Funds in Liquidation

  —         —         —         —         —         —         2,226       —    

Purchase of Interests from Certain Non-Controlling Interest Holders

  —         (2,479 )     —         —         —         (2,479 )     —         —    

Repurchase of Common Units

  (4,375,094 )     (27,008 )     —         —         —         (27,008 )     —         —    

Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non-Controlling Interest Holders

  —         1,469       —         —         —         1,469       —         —    

Transfer of Non-Controlling Interests in Consolidated Entities

  —         —         —         17,995       (17,995 )     —         —         —    

Equity-Based Compensation

  —         177,742       —         —         535,837       713,579       —         —    

Net Delivery of Vested Common Units

  250,286       (926 )     —         —         —         (926 )     —         —    

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

  3,233,475       7,080       —         —         (7,080 )     —         —         —    

Allocation of Taxes Attributable to Non-Controlling Interests in Blackstone Holdings

  —         —         —         —         (24,162 )     (24,162 )     —         —    
                                                             

Balance at March 31, 2009

  272,107,151     $ 3,433,752     $ (2,906 )   $ 84,683     $ 1,648,430     $ 5,163,959     $ 432,585     $ (932,553 )
                                                             

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

    The Blackstone Group L.P. Unitholders   Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income
(Loss)
 
    Common
Units
  Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
         

Balance at December 31, 2007

  259,826,700   $ 4,226,500     $ 345   $ 515,888     $ 3,079,556     $ 7,822,289     $ 2,438,266    

Net Loss

  —       (250,993 )     —       (14,916 )     (804,054 )     (1,069,963 )     (184,194 )   $ (1,254,157 )

Currency Translation Adjustment

  —       —         512     1,256       —         1,768       —         1,768  

Certain Partners Allocations of Blackstone Profit Sharing Arrangements

  —       —         —       (119,229 )     —         (119,229 )     —         —    

Capital Contributions

  —       —         —       3,786       12,577       16,363       98,648       —    

Capital Distributions

  —       —         —       (82,629 )     —         (82,629 )     (25,372 )     —    

Acquisition of Consolidated Blackstone Funds

  —       —         —       102,874       —         102,874       90,188       —    

Purchase of Interests from Certain Non-Controlling Interest Holders

  —       (44,072 )     —       —         (35,556 )     (79,628 )     —         —    

Adjustment to Pre-IPO Reorganization Purchase Price

  —       —         —       —         82,028       82,028       —         —    

Distribution

  —       —         —       —         (34,703 )     (34,703 )     —         —    

Equity-Based Compensation

  —       213,084       —       —         693,623       906,707       —         —    

Net Delivery of Vested Common Units

  181,834     —         —       —         —         —         —         —    
                                                         

Balance at March 31, 2008

  260,008,534   $ 4,144,519     $ 857   $ 407,030     $ 2,993,471     $ 7,545,877     $ 2,417,536     $ (1,252,389 )
                                                         

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended
March 31,
 
     2009     2008  

Operating Activities

    

Net Income (Loss)

   $ (929,938 )   $ (1,254,157 )

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:

    

Blackstone Funds Related:

    

Unrealized Depreciation (Appreciation) on Investments Allocable to Non-Controlling Interests in Consolidated Entities

     13,235       209,980  

Net Realized (Gains) Losses on Investments

     53,190       256  

Changes in Unrealized (Gains) Losses on Investments Allocable to Blackstone Group

     78,218       62,823  

Non-Cash Performance Fees and Allocations

     101,770       76,279  

Equity-Based Compensation Expense

     738,045       914,671  

Intangible Amortization

     39,513       33,528  

Other Non-Cash Amounts Included in Net Income

     6,006       3,845  

Cash Flows Due to Changes in Operating Assets and Liabilities:

    

Cash Held by Blackstone Funds and Other

     839,819       46,183  

Due from Brokers

     47,536       247,304  

Accounts Receivable

     83,605       (9,139 )

Due from Affiliates

     431,312       210,742  

Other Assets

     5,919       (29,122 )

Accrued Compensation and Benefits

     (172,510 )     (46,299 )

Accounts Payable, Accrued Expenses and Other Liabilities

     (826,317 )     (58,082 )

Due to Affiliates

     (212,332 )     14,261  

Amounts Due to Non-Controlling Interest Holders

     (14,314 )     (59,485 )

Blackstone Funds Related:

    

Investments Purchased

     (181,552 )     (10,013,010 )

Cash Proceeds from Sale of Investments

     454,677       9,764,576  
                

Net Cash Provided by Operating Activities

     555,882       115,154  
                

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (4,482 )     (7,219 )

Cash Paid for Acquisition, Net of Cash Acquired

     —         (336,571 )

Changes in Restricted Cash

     2,438       (45,128 )
                

Net Cash Used in Investing Activities

     (2,044 )     (388,918 )
                

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

     (40,432 )     (183,353 )

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     94,674       96,523  

Purchase of Interests from Certain Non-Controlling Interest Holders

     (2,479 )     (79,627 )

Net Settlement of Vested Common Units and Repurchase of Common Units

     (27,934 )     —    

Proceeds from Loans Payable

     819       285,781  

continued...

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)—(Continued)

(Dollars in Thousands)

     Three Months Ended
March 31,
 
     2009     2008  

Repayment of Loans Payable

     (305,920 )     (41,610 )
                

Net Cash Provided by (Used in) Financing Activities

     (281,272 )     77,714  
                

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     —         90  
                

Net Increase (Decrease) in Cash and Cash Equivalents

   $ 272,566     $ (195,960 )

Cash and Cash Equivalents, Beginning of Period

     503,737       868,629  
                

Cash and Cash Equivalents, End of Period

   $ 776,303     $ 672,669  
                

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 653     $ 2,931  
                

Payments for Income Taxes

   $ 9,594     $ 11,845  
                

Supplemental Disclosure of Non-Cash Financing Activities

    

Reduction of Due to LP Account to Fund Sidepocket Investment

   $ (2,442 )   $ —    
                

Contributions Related to Transfers by Affiliated Partners

   $ 2,442     $ —    
                

In-kind Redemption of Capital

   $ (907,373 )   $ —    
                

In-kind Contribution of Capital

   $ 907,373     $ —    
                

Transfer of Interests to Non-Controlling Interest Holders

   $ 15,069     $ —    
                

Settlement of Vested Common Units

   $ 922     $ —    
                

Conversion of Blackstone Holdings Units to Common Units

   $ 7,080     $ —    
                

Exchange of Founders and Senior Managing Directors’ Interests in Blackstone Holdings:

    

Deferred Tax Asset

   $ 9,789     $ 4,440  
                

Due to Affiliates

   $ (8,321 )   $ (3,774 )
                

Partners’ Capital

   $ 1,468     $ 666  
                

Acquisition of GSO Capital Partners LP:

    

Fair Value of Assets Acquired

   $ —       $ 1,018,747  

Cash Paid for Acquisition

     —         (356,972 )

Fair Value of Non-Controlling Interests in Consolidated Entities and Liabilities Assumed

     —         (381,375 )
                

Acquisition of GSO Capital Partners LP — Units Issued

   $ —       $ 280,400  
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

The Blackstone Group L.P. (the “Partnership”), together with its consolidated subsidiaries (collectively, “Blackstone”), is a leading global alternative asset manager and provider of financial advisory services. The alternative asset management businesses include the management of corporate private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation (“CLO”) vehicles and publicly traded closed-end mutual funds and related entities that invest in such funds, collectively referred to as the “Blackstone Funds”. “Carry Funds” refers to the corporate private equity funds, real estate funds and certain of the credit-oriented funds that are managed by Blackstone. Blackstone also provides various financial advisory services, including corporate and mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Certain of the Blackstone Funds are included in the condensed consolidated financial statements of the Partnership. Consequently, the condensed consolidated financial statements of the Partnership reflect the assets, liabilities, revenues, expenses and cash flows of these consolidated Blackstone Funds on a gross basis. The majority economic ownership interests in these funds are reflected as Non-Controlling Interests in Consolidated Entities and Redeemable Non-Controlling Interests in Consolidated Entities in the condensed consolidated financial statements. The consolidation of these Blackstone Funds has no net effect on the Partnership’s Net Income (Loss) or Partners’ Capital.

The Partnership’s interest in Blackstone Holdings is within the scope of the Emerging Issues Task Force (“EITF”) Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”). Although the Partnership has a minority economic interest in Blackstone Holdings, it has a majority voting interest and controls the management of Blackstone Holdings. Additionally, although the Blackstone Holdings’ limited partners hold a majority economic interest in Blackstone Holdings, they do not have the right to dissolve the partnership or have substantive kick-out rights or participating rights that would overcome the presumption of control by the Partnership. Accordingly, the Partnership consolidates Blackstone Holdings and records non-controlling interests for the economic interests of limited partners of the Blackstone Holdings partnerships.

On January 1, 2009, in order to simplify Blackstone’s structure and ease the related administrative burden and costs, Blackstone effected an internal restructuring to reduce the number of holding partnerships from five to four by causing Blackstone Holdings III L.P. to transfer all of its assets and liabilities to Blackstone Holdings IV L.P. In connection therewith, Blackstone Holdings IV L.P. was renamed Blackstone Holdings III L.P. and Blackstone Holdings V L.P. was renamed Blackstone Holdings IV L.P. The economic interests of the Partnership

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

in Blackstone’s business remain entirely unaffected. “Blackstone Holdings” refers to the five holding partnerships prior to the January 2009 reorganization and the four holdings partnerships subsequent to the January 2009 reorganization.

Certain prior period financial statement balances have been reclassified to conform to the current presentation.

Acquisition of GSO Capital Partners LP — On March 3, 2008, the Partnership acquired GSO Capital Partners LP and certain of its affiliates (“GSO”). GSO is an alternative asset manager specializing in the credit markets. GSO manages various multi-strategy credit hedge funds, mezzanine funds, senior debt funds and various CLO vehicles. GSO’s results have been included in the Marketable Alternative Asset Management segment from the date of acquisition.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments, At Fair Value — The Blackstone Funds are, for GAAP purposes, investment companies under the AICPA Audit and Accounting Guide Investment Companies that reflect their investments, including majority-owned and controlled investments (the “Portfolio Companies”) as well as Securities Sold, Not Yet Purchased at fair value. The Partnership has retained the specialized accounting for the Blackstone Funds pursuant to EITF Issue No. 85-12, Retention of Specialized Accounting for Investments in Consolidation (“EITF 85-12”). Thus, such consolidated funds’ investments are reflected on the Condensed Consolidated Statements of Financial Condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price).

The fair value of the Partnership’s Investments and Securities Sold, Not Yet Purchased are based on observable market prices when available. Such prices are based on the last sales price on the measurement date, or, if no sales occurred on such date, at the close of business “bid” price and if sold short, at the “ask” price or at the “mid” price depending on the facts and circumstances. Futures and options contracts are valued based on closing market prices. Forward and swap contracts are valued based on market rates or prices obtained from recognized financial data service providers.

A significant number of the investments, including our carry fund investments, have been valued by the Partnership, in the absence of observable market prices, using the valuation methodologies described below. Additional information regarding these investments is provided in Note 4 to the condensed consolidated financial statements. For some investments, little market activity may exist; management’s determination of fair value is then based on the best information available in the circumstances and may incorporate management’s own assumptions, including appropriate risk adjustments for nonperformance and liquidity risks. The Partnership estimates the fair value of investments when market prices are not observable as follows:

Corporate private equity, real estate and debt investments — For investments for which observable market prices do not exist, such investments are reported at fair value as determined by the Partnership. Fair value is determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and balance sheets, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. With respect to real estate investments, in determining fair values management considers projected operating cash flows and balance sheets, sales of

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of private investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may also be derived by reference to observable valuation measures for comparable companies or assets (e.g., multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables and, in some instances, by reference to option pricing models or other similar methods. Corporate private equity and real estate investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value. These valuation methodologies involve a significant degree of management judgment.

Funds of hedge funds Blackstone Funds’ direct investments in hedge funds (“Investee Funds”) are stated at fair value, based on the information provided by the Investee Funds which reflects the Partnership’s share of the fair value of the net assets of the investment fund. If the Partnership determines, based on its own due diligence and investment procedures, that the valuation for any Investee Fund based on information provided by the Investee Fund’s management does not represent fair value, the Partnership will estimate the fair value of the Investee Fund in good faith and in a manner that it reasonably chooses, in accordance with its valuation policies.

In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments and various relationships between investments.

Certain Blackstone Funds sell securities that they do not own, and will therefore be obligated to purchase such securities at a future date. The value of an open short position is recorded as a liability, and the fund records unrealized appreciation or depreciation to the extent of the difference between the proceeds received and the value of the open short position. The applicable Blackstone Fund records a realized gain or loss when a short position is closed. By entering into short sales, the applicable Blackstone Fund bears the market risk of increases in value of the security sold short. The unrealized appreciation or depreciation as well as the realized gain or loss associated with short positions is included in the Condensed Consolidated Statements of Operations as Net Gains (Losses) from Fund Investment Activities.

Securities transactions are recorded on a trade date basis.

Recent Accounting Developments — In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets, liabilities, contractual contingencies and contingent consideration obtained in the transaction (whether for a full or partial acquisition); establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Partnership obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Partnership had no such transactions for the quarter ended March 31, 2009.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 requires reporting entities to present non-controlling (minority) interests as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and non-controlling interests. SFAS No. 160 applies prospectively as of January 1, 2009, except for the presentation and disclosure requirements which are applied retrospectively for all periods presented. The Partnership adopted SFAS No. 160 effective January 1, 2009 and as a result, (a) with respect to the Condensed Consolidated Statements of Financial Condition, the Redeemable Non-Controlling Interests in Consolidated Entities was renamed as such and remained classified as mezzanine equity and the non-redeemable Non-Controlling Interests in Consolidated Entities and Non-Controlling Interests in Blackstone Holdings have been reclassified as a component of Partners’ Capital, (b) with respect to the Condensed Consolidated Statements of Operations, Net Income (Loss) is now presented before non-controlling interests, the three categories of non-controlling interests discussed in (a) above are now presented separately, and the Condensed Consolidated Statement of Operations now nets to Net Income (Loss) Attributable to The Blackstone Group L.P., (c) with respect to the Condensed Consolidated Statement of Changes in Partners’ Capital, roll forward columns have now been added for each component of non-controlling interests discussed in (a) above.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand how those instruments and activities are accounted for; how and why they are used; and their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 on January 1, 2009 did not have a material impact on the Partnership’s consolidated financial statements.

In March 2008, the EITF reached a consensus on Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128, Earnings Per Share, to Master Limited Partnerships (“EITF 07-4”). EITF 07-4 applies to master limited partnerships that make incentive equity distributions. EITF 07-4 is to be applied retrospectively beginning with financial statements issued in the interim periods of fiscal years beginning after December 15, 2008. The Partnership adopted EITF 07-4 on January 1, 2009. The adoption of EITF 07-4 did not have a material impact on the Partnership’s consolidated financial statements.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 affects entities with recognized intangible assets and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The new guidance applies prospectively to (1) intangible assets that are acquired individually or with a group of other assets and (2) both intangible assets acquired in business combinations and asset acquisitions. The adoption of FSP No. 142-3 did not have a material impact on the Partnership’s consolidated financial statements.

In June 2008, the FASB issued Staff Position EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, Earnings per Share. FSP EITF No. 03-6-1 requires entities to treat unvested share-based payment awards that have non-forfeitable rights to dividend or

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

dividend equivalents as a separate class of securities in calculating earnings per share. This FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Partnership adopted FSP EITF No. 03-6-1 effective January 1, 2009 and includes unvested participating Blackstone Common Units as a component of Common Units Entitled to Priority Distributions – Basic in the calculation of earnings per common unit for all periods presented, due to their equivalent distribution rights as Blackstone Common Units. The impact of the adoption and retroactive application on 2008 was as follows:

 

    Three Months Ended     Year Ended  
    March 31, 2008     December 31, 2008  
    Originally
Reported
    Upon
Adoption
    Originally
Reported
    Upon
Adoption
 

Net Loss Per Common Unit — Basic and Diluted

       

Common Units Entitled to Priority Distributions

  $ (0.97 )   $ (0.95 )   $ (4.36 )   $ (4.31 )
                               

Common Units Not Entitled to Priority Distributions

      $ (3.09 )   $ (3.06 )
                   

In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measures. FSP FAS 157-4 is effective for financial statements issued for interim or annual periods ending after June 15, 2009. The Partnership is currently evaluating the impact of FSP FAS 157-4 on its consolidated financial statements.

In April 2009, the FASB issued Staff Position No. 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2”) which provides new guidance on the recognition of other-than-temporary impairments of investments in debt securities and provides new presentation and disclosure requirements for other-than-temporary impairments of investments in debt and equity securities. FSP FAS 115-2 is effective for financial statements issued for interim or annual periods ending after June 15, 2009. The Partnership is currently evaluating the impact of FSP FAS 157-4 on its consolidated financial statements.

In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Statements (“FSP FAS 107-1”). FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments to require disclosures about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. FSP FAS 107-1 is effective for financial statements issued for interim or annual periods ending after June 15, 2009. As FSP FAS 107-1 applies only to financial statement disclosures, the impact of adoption will be limited to financial statement disclosure.

 

3. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table outlines changes to the carrying amount of Goodwill as of March 31, 2009:

 

     Goodwill

Balance at December 31, 2008

   $ 1,703,602

Amortization

     —  
      

Balance at March 31, 2009

   $ 1,703,602
      

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Total Goodwill has been allocated to each of the Partnership’s segments as follows: Corporate Private Equity – $694,512; Real Estate – $421,739; Marketable Alternative Asset Management – $518,477; and Financial Advisory – $68,874.

Intangible Assets

The following table outlines changes to the carrying amount of Intangible Assets, Net as of March 31, 2009:

 

     Intangible
Assets
 

Contractual Rights

   $ 1,348,370  

Accumulated Amortization

     (310,357 )
        

Intangible Assets, Net

   $ 1,038,013  
        

Amortization expense associated with intangible assets was $39.5 million and $33.5 million for the quarters ended March 31, 2009 and 2008, respectively, and is included in General, Administrative and Other in the accompanying Condensed Consolidated Statements of Operations. Amortization of intangible assets held at March 31, 2009 is expected to be approximately $158.0 million for the year ended December 31, 2009.

 

4. INVESTMENTS

Investments

A summary of Investments consists of the following:

 

     March 31,
2009
   December 31,
2008

Investments of Consolidated Blackstone Funds

   $ 1,216,915    $ 1,556,261

Equity Method Investments

     1,028,059      1,063,615

Performance Fees and Allocations

     118,322      147,421

Other Investments

     33,838      63,645
             
   $ 2,397,134    $ 2,830,942
             

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $351.6 million and $409.2 million at March 31, 2009 and December 31, 2008, respectively. Equity Method Investments represents investments in non-consolidated funds as described below, of which Blackstone’s share totaled $963.5 million and $1.0 billion at March 31, 2009 and December 31, 2008, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Investments of Consolidated Blackstone Funds

The following table presents a condensed summary of the investments held by the consolidated Blackstone Funds that are reported at fair value. These investments are presented as a percentage of Investments of Consolidated Blackstone Funds:

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

   March 31,
2009
   December 31,
2008
   March 31,
2009
    December 31,
2008
 

United States and Canada

          

Investment Funds, principally related to marketable alternative asset management funds

          

Credit Driven

   $ 379,500    $ 695,620    31.2 %   44.7 %

Diversified Investments

     332,526      345,033    27.5 %   22.2 %

Equity

     76,194      34,499    6.3 %   2.2 %

Other

     512      648    —       0.1 %
                          

Investment Funds Total
(Cost: 2009 — $994,555; 2008 — $1,283,697)

     788,732      1,075,800    65.0 %   69.2 %
                          

Equity Securities, principally related to marketable alternative asset management and corporate private equity funds

          

Manufacturing

     17,653      17,782    1.5 %   1.1 %

Services

     69,390      81,543    5.8 %   5.2 %

Natural Resources

     636      551    0.1 %   —    

Real Estate Assets

     1,454      1,769    0.1 %   0.1 %
                          

Equity Securities Total
(Cost: 2009 — $112,576; 2008 — $112,739)

     89,133      101,645    7.5 %   6.4 %
                          

Partnership and LLC Interests, principally related to corporate private equity and real estate funds

          

Real Estate Assets

     78,462      103,453    6.4 %   6.6 %

Services

     92,360      98,592    7.6 %   6.3 %

Manufacturing

     24,631      23,599    2.0 %   1.5 %

Natural Resources

     356      317    —       —    

Credit Driven

     19,215      19,659    1.6 %   1.3 %
                          

Partnership and LLC Interests Total
(Cost: 2009 — $298,680; 2008 — $294,846)

     215,024      245,620    17.6 %   15.7 %
                          

Debt Instruments, principally related to marketable alternative asset management funds

          

Manufacturing

     3,886      4,251    0.3 %   0.3 %

Services

     4,203      4,093    0.3 %   0.3 %

Real Estate Assets

     485      485    —       —    
                          

Debt Instruments Total
(Cost: 2009 — $9,529; 2008 — $9,396)

     8,574      8,829    0.6 %   0.6 %
                          

United States and Canada Total
(Cost: 2009 — $1,415,340; 2008 — $1,700,678)

     1,101,463      1,431,894    90.7 %   91.9 %
                          

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

   March 31,
2009
   December 31,
2008
   March 31,
2009
    December 31,
2008
 

Europe

          

Equity Securities, principally related to marketable
alternative asset management and corporate private
equity funds

          

Manufacturing

     8,787      9,105    0.7 %   0.6 %

Services

     25,830      29,635    2.1 %   1.9 %
                          

Equity Securities Total
(Cost: 2009 — $45,525; 2008 — $45,295)

     34,617      38,740    2.8 %   2.5 %

Partnership and LLC Interests, principally related to
corporate private equity and real estate funds

          

Services

     29,721      31,572    2.4 %   2.0 %

Real Estate Assets

     9,985      13,674    0.8 %   0.9 %
                          

Partnership and LLC Interests, principally related to
corporate private equity and real estate funds
(Cost: 2009 — $45,762; 2008 — $46,104)

     39,706      45,246    3.2 %   2.9 %

Debt Instruments, principally related to marketable
alternative asset management funds

          

Manufacturing

   $ 151    $ 187    —       —    

Services

     20      —      —       —    
                          

Debt Instruments, principally related to marketable
alternative asset management funds
(Cost: 2009 $1,283; 2008 $1,256)

     171      187    —       —    
                          

Europe Total
(Cost: 2009 — $92,570; 2008 — $92,655)

     74,494      84,173    6.0 %   5.4 %
                          

Asia

          

Equity Securities, principally related to marketable
alternative asset management and corporate private
equity funds

          

Services

     7,309      11,201    0.6 %   0.8 %

Manufacturing

     6,550      8,654    0.5 %   0.6 %

Natural Resources

     173      442    —       —    

Real Estate Assets

     118      368    —       —    

Diversified Investments

     6      —      —       —    
                          

Equity Securities Total
(Cost: 2009 — $15,219; 2008 — $22,155)

     14,156      20,665    1.1 %   1.4 %

Partnership and LLC Interests, principally related to
corporate private equity and real estate funds

          

Manufacturing

     1,182      1,184    0.1 %   0.1 %

Real Estate Assets

     704      707    0.1 %   —    

Services

     74      45    —       —    
                          

Partnership and LLC Interests Total
(Cost: 2009 — $1,833; 2008 — $1,811)

     1,960      1,936    0.2 %   0.1 %
                          

Debt Instruments, principally related to marketable
alternative asset management funds
(Cost: 2009 $235; 2008 $256)

     153      151    —       —    
                          

Asia Total (Cost: 2009 — $17,287; 2008 — $24,222)

     16,269      22,752    1.3 %   1.5 %
                          

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

   March 31,
2009
   December 31,
2008
   March 31,
2009
    December 31,
2008
 

Other

          

Equity Securities, principally related to corporate private equity funds

          

Natural Resources

     1,422      1,022    0.1 %   0.1 %

Services

     2,019      2,737    0.2 %   0.3 %
                          

Equity Securities Total
(Cost: 2009 — $2,707; 2008 — $2,606)

     3,441      3,759    0.3 %   0.4 %
                          

Partnership and LLC Interests, principally related to corporate private equity and real estate funds

          

Natural Resources

     21,166      13,599    1.7 %   0.9 %

Services

     82      84    —       0.1 %
                          

Partnership and LLC Interests Total
(Cost: 2009 — $7,145; 2008 — $5,063)

     21,248      13,683    1.7 %   1.0 %
                          

Other Total
(Cost: 2009 — $9,852; 2008 — $7,669)

     24,689      17,442    2.0 %   1.2 %
                          

Total Investments of Consolidated Blackstone Funds
(Cost: 2009 — $1,535,049; 2008 — $1,825,224)

   $ 1,216,915    $ 1,556,261    100.0 %   100.0 %
                          

At March 31, 2009 and December 31, 2008, there were no individual investments, including consideration of derivative contracts, with fair values exceeding 5.0% of Blackstone’s net assets. At March 31, 2009 and December 31, 2008, consideration was given as to whether any individual consolidated funds of hedge funds, feeder fund or any other affiliate exceeded 5.0% of Blackstone’s net assets. At December 31, 2008, Blackport Capital Fund Ltd. had a fair value of $594.5 million and was the sole feeder fund investment to exceed the 5.0% threshold.

Securities Sold, Not Yet Purchased. The following table presents the Partnership’s Securities Sold, Not Yet Purchased held by the consolidated Blackstone Funds, which were principally held by one of Blackstone’s proprietary hedge funds. These investments are presented as a percentage of Securities Sold, Not Yet Purchased.

 

     Fair Value    Percentage of Securities Sold
Not Yet Purchased
 

Geographic Region / Instrument Type / Industry Class

   March 31,
2009
   December 31,
2008
   March 31,
2009
    December 31,
2008
 

Asia — Equity Instruments

          

Natural Resources

   $ 80    $ 77    11.6 %   8.6 %

Services

     429      611    62.2 %   68.3 %

Manufacturing

     127      —      18.4 %   —    

Real Estate Assets

     54      206    7.8 %   23.1 %
                          

Total
(Proceeds: 2009 — $638; 2008 — $782)

   $ 690    $ 894    100.0 %   100.0 %
                          

Realized and Net Change in Unrealized Gains (Losses) from Blackstone Funds. Net Gains (Losses) from Fund Investment Activities on the Condensed Consolidated Statements of Operations include net realized gains

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

(losses) from realizations and sales of investments and the net change in unrealized gains (losses) resulting from changes in fair value of the consolidated Blackstone Funds’ investments. The following table presents the realized and net change in unrealized gains (losses) on investments held through the consolidated Blackstone Funds:

 

     Three Months Ended
March 31,
 
     2009     2008  

Realized Gains (Losses)

   $ (60,353 )   $ (22,503 )

Net Change in Unrealized Gains (Losses)

     4,253       (237,061 )
                
   $ (56,100 )   $ (259,564 )
                

The following reconciles the Realized and Net Change in Unrealized Gains (Losses) from Blackstone Funds presented above to the Other Income (Loss) — Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended
March 31,
 
     2009     2008  

Realized and Net Change in Unrealized Gains (Losses) from Blackstone Funds

   $ (56,100 )   $ (259,564 )

Reclassification to Investment Income (Loss) and Other Attributable to Blackstone Side-by-Side Investment Vehicles

     16,817       6,363  

Interest and Dividend Income and Other Attributable to Consolidated Blackstone Funds

     4,520       37,565  
                

Other Income — Net Gains (Losses) from Fund Investment Activities

   $ (34,763 )   $ (215,636 )
                

Investments in Variable Interest Entities. Blackstone consolidates certain variable interest entities (“VIEs”) in addition to those entities consolidated under EITF 04-5, when it is determined that Blackstone is the primary beneficiary, either directly or indirectly, through a consolidated entity or affiliate. The assets of the consolidated VIEs are classified principally within Investments. The liabilities of the consolidated VIEs are non-recourse to Blackstone.

FASB Staff Position Financial Accounting Standard No. 140-4 and FASB Interpretation Number 46R-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS No. 140-4 and FIN 46R-8”) provides disclosure requirements for, among other things, involvements with VIEs. Those involvements include when Blackstone (1) consolidates an entity because it is the primary beneficiary, (2) has a significant variable interest in the entity, or (3) is the sponsor of the entity.

These VIEs include investments in corporate private equity, real estate, credit-oriented and funds of hedge funds assets. The disclosures under FSP FAS No. 140-4 and FIN 46R-8 are presented on a fully aggregated basis. The investment strategies of Blackstone Funds differ by product; however, the fundamental risks of the Blackstone Funds have similar characteristics, including loss of invested capital and loss of incentive fees and performance fees and allocations. Accordingly, disaggregation of Blackstone’s involvement with VIEs would not provide more useful information. In Blackstone’s role as general partner or investment advisor, it generally considers itself the sponsor of the applicable Blackstone Fund. For certain of these funds, Blackstone is determined to be the primary beneficiary and hence consolidates such funds within the consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

FIN 46(R) requires an analysis to (i) determine whether an entity in which Blackstone holds a variable interest is a variable interest entity, and (ii) whether Blackstone’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., incentive and management fees), would be expected to absorb a majority of the variability of the entity. Performance of that analysis requires the exercise of judgment. Blackstone determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion based on certain events. In evaluating whether Blackstone is the primary beneficiary, Blackstone evaluates its economic interests in the fund held either directly by Blackstone or indirectly through employees. The consolidation analysis under FIN 46(R) can generally be performed qualitatively. However, if it is not readily apparent that Blackstone is not the primary beneficiary, a quantitative expected losses and expected residual returns calculation will be performed. Investments and redemptions (either by Blackstone, affiliates of Blackstone or third parties) or amendments to the governing documents of the respective Blackstone Fund could affect an entity’s status as a VIE or the determination of the primary beneficiary.

For those VIEs in which Blackstone is the sponsor, Blackstone may have an obligation as general partner to provide commitments to such funds. During the first quarter of 2009, Blackstone did not provide any support other than its obligated amount.

At March 31, 2009, Blackstone was the primary beneficiary of VIEs whose gross assets were $582.0 million, which is the carrying amount of such financial assets in the condensed consolidated financial statements. Blackstone is also a significant variable interest holder or sponsor in VIEs which are not consolidated, as Blackstone is not the primary beneficiary. At March 31, 2009, assets recognized in the Partnership’s Condensed Consolidated Statements of Financial Condition related to our variable interests in these unconsolidated entities were $394.2 million with no liabilities. Assets consisted of $330.5 million of investments and $63.7 million of receivables Blackstone’s aggregate maximum exposure to loss was $394.2 million as of March 31, 2009.

Performance Fees and Allocations

Blackstone manages corporate private equity funds, real estate funds, funds of hedge funds and credit-oriented funds that are not consolidated. The Partnership records as revenue (and/or adjusts previously recorded revenue) to reflect the amount that would be due pursuant to the fund agreements at each period end as if the fund agreements were terminated at that date. In certain performance fee arrangements related to certain funds of hedge funds and credit-oriented funds in the marketable alternative asset management segment, Blackstone is entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fees and allocations are accrued monthly or quarterly based on measuring account / fund performance to date versus the performance benchmark stated in the investment management agreement.

Equity Method Investments

Blackstone invests in corporate private equity funds, real estate funds, funds of hedge funds and credit-oriented funds that are not consolidated. The Partnership accounts for these investments under the equity method of accounting. Blackstone’s share of operating income generated by these investments is recorded as a component of Investment Income (Loss) and Other. That amount reflects the fair value gains and losses of the associated funds’ underlying investments since Blackstone retains the specialized investment company accounting of these funds pursuant to EITF 85-12.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

A summary of Blackstone’s equity method investments follows:

 

     Equity Held         Equity in Net Income (Loss)  
     March 31,
2009
   December 31,
2008
        Three Months Ended March 31,  
              2009     2008  

Equity Method Investments

   $ 1,028,059    $ 1,063,615   

Equity in Net Income (Loss)

   $ (59,525 )   $ (54,234 )
                                 

Other Investments

Other Investments consist primarily of investment securities held by Blackstone for its own account. The following table presents Blackstone’s realized and net change in unrealized gains (losses) in other investments:

 

     Three Months Ended
March 31,
 
     2009     2008  

Realized Gains

   $ (1,666 )   $ 256  

Net Change in Unrealized Gains (Losses)

     141       (514 )
                
   $ (1,525 )   $ (258 )
                

Fair Value Measurements

SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”), establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories.

 

   

Level I — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments in Level I include listed equities and listed derivatives. As required by SFAS No. 157, the Partnership does not adjust the quoted price for these investments, even in situations where Blackstone holds a large position and a sale could reasonably impact the quoted price.

 

   

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.

 

   

Level III — Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include general and limited partnership interests in corporate private equity and real estate funds, credit-oriented funds, funds of hedge funds, distressed debt and non-investment grade residual interests in securitizations and collateralized debt obligations.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The following table summarizes the valuation of Blackstone’s investments by the above SFAS No. 157 fair value hierarchy levels as of March 31, 2009 and December 31, 2008, respectively:

 

     March 31, 2009
     Level I    Level II    Level III    Total

Investments of Consolidated Blackstone Funds

   $ 41,208    $ 572    $ 1,175,135    $ 1,216,915

Other Investments

     18,329      —        15,509      33,838

Securities Sold, Not Yet Purchased

     690      —        —        690

 

     December 31, 2008
     Level I    Level II    Level III    Total

Investments of Consolidated Blackstone Funds

   $ 58,406    $ 994    $ 1,496,861    $ 1,556,261

Other Investments

     22,499      —        41,146      63,645

Securities Sold, Not Yet Purchased

     894      —        —        894

The following table summarizes the Level III investments by valuation methodology as of March 31, 2009:

 

Fair Value Based on

   Corporate
Private Equity
    Real Estate     Marketable
Alternative
Asset
Management
    Total
Investment
Company
Holdings
 

Third-Party Fund Managers

   —       —       66 %   66 %

Specific Valuation Metrics

   21 %   9 %   4 %   34 %
                        
   21 %   9 %   70 %   100 %
                        

The changes in investments measured at fair value for which the Partnership has used Level III inputs to determine fair value are as follows. The following table does not include gains or losses that were reported in Level III in prior years or for instruments that were transferred out of Level III prior to the end of the current reporting period.

 

     Three Months Ended
March 31,
 
     2009     2008  

Balance, Beginning of Period

   $ 1,538,007     $ 2,362,542  

Transfer In (Out) of Level III, Net

     (52 )     —    

Purchases (Sales), Net

     (308,807 )     23,256  

Realized Gains (Losses), Net

     (5,222 )     6,788  

Changes in Unrealized Gains (Losses) Included in Earnings Related to Investments Still Held at the Reporting Date

     (33,282 )     (117,902 )
                

Balance, End of Period

   $ 1,190,644     $ 2,274,684  
                

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Total realized and unrealized gains and losses recorded for Level III investments are reported in Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations.

 

5. LOANS PAYABLE

As of March 31, 2009, Blackstone had no outstanding borrowings under its revolving credit facility.

Blackstone has a new committed revolving credit facility for $850 million, which will be effective May 11, 2009 when the current facility expires.

 

6. INCOME TAXES

The Blackstone Holdings Partnerships operate in the U.S. as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions; accordingly, these entities in some cases are subject to the New York City unincorporated business tax or, in the case of non-U.S. entities, to non-U.S. corporate income taxes. In addition, certain wholly-owned entities of the Partnership are subject to federal, state and local corporate income taxes.

Blackstone adopted SFAS No. 160 effective January 1, 2009. As a result of the adoption, Blackstone is required to calculate its effective tax rate on Consolidated Income (Loss) Before Provision for Taxes as opposed to the Net Income (Loss) Attributable to The Blackstone Group L.P. Accordingly, under SFAS No. 160, Blackstone’s effective tax rate was 1.94% and 0.72% for the three months ended March 31, 2009 and 2008, respectively. Blackstone’s income tax provision was $17.7 million and $9.0 million for the three months ending March 31, 2009 and 2008, respectively.

Prior to the adoption of SFAS No. 160, after eliminating the effects of non-controlling interests, Blackstone’s effective tax rate would have been 6.31% for the three months ended March 31, 2009, which is comparable to the 1.73% effective tax rate that was reported for the three months ended March 31, 2008. Blackstone’s corresponding income tax provision would have been $13.7 million for the three months ended March 31, 2009, which is comparable to the $4.3 million reported for three months ended March 31, 2008.

Blackstone’s effective tax rate for the three months ended March 31, 2009 was due to the following: (1) certain wholly-owned subsidiaries were subject to federal, state and local corporate income taxes on income allocated to Blackstone and certain non-U.S. corporate entities continue to be subject to non-U.S. corporate income tax, and (2) a portion of the compensation charges that contribute to Blackstone’s net loss are not deductible for tax purposes.

 

7. NET LOSS PER COMMON UNIT

Beginning in the third quarter of 2008, certain unitholders exchanged Blackstone Holdings Partnership Units for Blackstone Common Units. Until the Blackstone Common Units issued in such exchanges are transferred to third parties, the exchanging unitholders will forego any priority distributions referred to below. As a result, net loss available to the common unitholders was allocated between common units entitled to priority distributions and common units not entitled to priority distributions. The Partnership has calculated net loss per unit in accordance with EITF Issue No. 03-06, Participating Securities and the Two-Class Method Under FASB Statement 128 (“EITF 03-06”) and FSP EITF No. 03-6-1.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Basic and diluted net loss per common unit for the three months ended March 31, 2009 is calculated as follows:

 

     Three Months Ended
March 31, 2009
 
     Basic     Diluted  

Total Undistributed Loss

    

Net Loss Allocable to Common Unit Holders

   $ (231,574 )   $ (231,574 )

Less: Distributions to Common Unitholders

     (81,420 )     (81,420 )
                

Total Undistributed Loss

   $ (312,994 )   $ (312,994 )
                

Allocation of Total Undistributed Loss

    

Undistributed Loss — Common Unitholders Entitled to Priority Distributions

   $ (311,143 )   $ (311,143 )

Undistributed Loss — Common Unitholders Not Entitled to Priority Distributions

     (1,851 )     (1,851 )
                

Total Undistributed Loss

   $ (312,994 )   $ (312,994 )
                

Net Loss Per Common Unit — Common Units Entitled to Priority Distributions Undistributed Loss per Common Unit

   $ (1.14 )   $ (1.14 )

Priority Distributions

     0.30       0.30  
                

Net Loss Per Common Unit — Common Units Entitled to Priority Distributions

   $ (0.84 )   $ (0.84 )
                

Net Loss Per Common Unit — Common Units Not Entitled to Priority Distributions Undistributed Loss per Common Unit

   $ (1.14 )   $ (1.14 )

Priority Distributions

     —         —    
                

Net Loss Per Common Unit — Common Units Not Entitled to Priority Distributions

   $ (1.14 )   $ (1.14 )
                

Weighted-Average Common Units Outstanding — Common Units Entitled to Priority Distributions

     273,624,497       273,624,497  

Common Units Not Entitled to Priority Distributions

     1,627,540       1,627,540  
                

Total Weighted-Average Common Units Outstanding

     275,252,037       275,252,037  
                

For the three months ended March 31, 2009, a weighted-average total of 26,206,018 unvested deferred restricted common units and 830,772,697 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Basic and diluted net loss per common unit for the three months ended March 31, 2008 was as follows:

 

     Three Months Ended
March 31, 2008
 
     Basic     Diluted  

Net Loss Allocable to Common Unit Holders

   $ (250,993 )   $ (250,993 )
                

Weighted-Average Common Units Outstanding

     263,147,120       263,147,120  
                

Net Loss per Common Unit

   $ (0.95 )   $ (0.95 )
                

For the three months ended March 31, 2008, a weighted-average total of 32,060,929 unvested deferred restricted common units and 831,980,264 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit.

Cash Distribution Policy

Blackstone’s current intention is to distribute to its common unitholders substantially all of The Blackstone Group L.P.’s net after-tax share of our annual adjusted cash flows from operations in excess of amounts determined by its general partner to be necessary or appropriate to provide for the conduct of its business, to make appropriate investments in our business and our funds, to comply with applicable law, any of its debt instruments or other agreements, or to provide for future distributions to its common unitholders for any ensuing quarter. The declaration and payment of any distributions will be at the sole discretion of the general partner, which may change the distribution policy at any time.

The partnership agreements of the Blackstone Holdings partnerships provide that until December 31, 2009, the income (and accordingly distributions) of Blackstone Holdings are to be allocated each year:

 

   

first, to The Blackstone Group L.P.’s wholly-owned subsidiaries until sufficient income has been so allocated to permit The Blackstone Group L.P. to make aggregate distributions to its common unitholders of $1.20 per common unit on an annualized basis for such year;

 

   

second, to the other partners of the Blackstone Holdings partnerships until an equivalent amount of income on a partnership interest basis has been allocated to such other partners for such year; and

 

   

thereafter, pro rata to all partners of the Blackstone Holdings partnerships in accordance with their respective partnership interests.

In addition, the partnership agreements of the Blackstone Holdings partnerships will provide for cash distributions, referred to as “tax distributions,” to the partners of such partnerships if the wholly-owned subsidiaries of The Blackstone Group L.P., which are the general partners of the Blackstone Holdings partnerships, determine that the taxable income of the relevant partnership will give rise to taxable income for its partners. Generally, these tax distributions will be computed based on Blackstone’s estimate of the net taxable income of the relevant partnership allocable to a partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). The Blackstone Holdings partnerships will make tax distributions only to the extent distributions from such partnerships for the relevant year were otherwise insufficient to cover such tax liabilities.

Until December 31, 2009, Blackstone personnel and others with respect to their Blackstone Holdings Partnership Units will not receive any distributions (other than tax distributions in the circumstances specified

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

above) for a year unless and until our common unitholders receive aggregate distributions of $1.20 per common unit for such year. Blackstone does not intend to maintain this priority allocation after December 31, 2009.

Unit Repurchase Program

In January 2008, Blackstone announced that the Board of Directors of its general partner, Blackstone Group Management L.L.C., had authorized the repurchase by Blackstone of up to $500 million of Blackstone Common Units and Blackstone Holdings Partnership Units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of Blackstone Common Units and Blackstone Holdings Partnership Units repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. During the three months ended March 31, 2009, Blackstone repurchased a combination of 4,411,702 Blackstone Common Units and Blackstone Holdings Partnership Units as part of the unit repurchase program for a total cost of $27.3 million. As of March 31, 2009, the amount remaining available for repurchases was $342.6 million under this program. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings on Blackstone’s equity of $14.7 million. During the three months ended March 31, 2008, Blackstone repurchased a combination of 8,319,101 vested and unvested Blackstone Holdings Partnership Units as part of the repurchase program. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings equity of $89.2 million.

 

8. EQUITY-BASED COMPENSATION

The Partnership has granted equity-based compensation awards to Blackstone’s senior managing directors, non-partner professionals, non-professionals and selected external advisors under the Partnership’s 2007 Equity Incentive Plan (the “Equity Plan”), the majority of which to date were granted in connection with the IPO. The Equity Plan allows for the granting of options, unit appreciation rights or other unit-based awards (units, restricted units, restricted common units, deferred restricted common units, phantom restricted common units or other unit-based awards based in whole or in part on the fair value of the Blackstone Common Units or Blackstone Holdings Partnership Units). As of January 1, 2009, the Partnership had the ability to grant 163,574,323 units under the Equity Plan during the year ending December 31, 2009.

For the three months ended March 31, 2009, the Partnership recorded compensation expense of $738.0 million in relation to its equity-based awards with a corresponding tax benefit of $2.4 million. The Partnership recorded compensation expense of $914.7 million in relation to its equity-based awards with a corresponding tax benefit of $5.4 million for the three months ended March 31, 2008. As of March 31, 2009, there was $8.6 billion of estimated unrecognized compensation expense related to unvested awards. That cost is expected to be recognized over a weighted-average period of 4.7 years.

Total vested and unvested outstanding units, including Blackstone Common Units, Blackstone Holdings Partnership Units and deferred restricted common units, were 1,127,145,343 as of March 31, 2009. Total outstanding unvested phantom units were 508,522 as of March 31, 2009.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

A summary of the status of the Partnership’s unvested equity-based awards as of March 31, 2009 and a summary of changes during the period January 1, 2009 through March 31, 2009, are presented below:

 

     Blackstone Holdings    The Blackstone Group L.P.

Unvested Units

   Partnership
Units
    Weighted-
Average
Grant Date
Fair Value
   Equity Settled Awards    Cash Settled Awards
        Deferred
Restricted
Common
Units
    Weighted-
Average
Grant Date
Fair Value
   Phantom
Units
    Weighted-
Average
Grant Date
Fair Value

Balance, December 31, 2008

   354,311,432     $ 30.89    28,569,608     $ 25.90    532,794     $ 26.09

Granted

   1,153,386       4.75    —         —      —         —  

Vested

   (449,780 )     25.22    (205,734 )     26.44    (3,667 )     27.59

Exchanged

   —         —      (3,322 )     5.80    3,322       5.80

Forfeited

   (3,446,663 )     29.95    (2,289,592 )     25.40    (23,927 )     26.10
                          

Balance, March 31, 2009

   351,568,375       30.82    26,070,960       26.08    508,522       25.97
                          

In March 2008, the Partnership modified certain senior managing directors’ Blackstone Holdings Partnership Unit award agreements and subsequently repurchased under the unit repurchase program both vested and unvested units in conjunction with the modifications. At the date of such modifications, the Partnership recognized total compensation expense of $167.2 million, which was included in the total equity-based compensation expense of $914.7 million for the three months ended March 31, 2008, related to the modifications and cash settlement.

Units Expected to Vest

The following unvested units, as of March 31, 2009, are expected to vest:

 

     Units    Weighted-Average
Service Period
in Years

Blackstone Holdings Partnership Units

   332,983,329    4.5

Deferred Restricted Blackstone Common Units

   21,853,349    4.8
       

Total Equity-Based Awards

   354,836,678    4.5
       

Phantom Units

   458,013    1.1
       

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

9. RELATED PARTY TRANSACTIONS

Affiliate Receivables and Payables

Blackstone Group considers its Founder, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates. As of March 31, 2009 and December 31, 2008, Due from Affiliates and Due to Affiliates were comprised of the following:

 

     March 31,
2009
   December 31,
2008

Due from Affiliates

     

Primarily Interest Bearing Advances Made on Behalf of Certain Non-Controlling Interest Holders and Blackstone Employees for Investments in Blackstone Funds

   $ 154,925    $ 175,268

Payments Made on Behalf of Non-Consolidated Entities

     56,598      58,536

Management and Performance Fees Due from Non-Consolidated Funds of Funds

     57,351      50,774

Amounts Due from Portfolio Companies and Funds

     93,813      72,376

Advances Made to Certain Non-Controlling Interest Holders and Blackstone Employees

     8,448      8,130

Investments Redeemed in Non-Consolidated Funds of Funds

     58,734      496,350
             
   $ 429,869    $ 861,434
             

Due to Affiliates

     

Due to Certain Non-Controlling Interest Holders in Connection with the Tax Receivable Agreement

   $ 714,463    $ 722,449

Accrual for Potential Repayment of Previously Received Performance Fees and Allocations

     455,822      260,018

Distributions Received on Behalf of Certain Non-Controlling Interest Holders and Blackstone Employees

     87,859      262,737

Distributions Received on Behalf of Non-Consolidated Entities

     12,152      22,938

Payments Made by Non-Consolidated Entities

     3,126      17,435
             
   $ 1,273,422    $ 1,285,577
             

Interests of the Founder, Senior Managing Directors and Employees

In addition, the Founder, senior managing directors and employees invest on a discretionary basis in the Blackstone Funds both directly and through consolidated entities. Their investments may be subject to preferential management fee and performance fee and allocation arrangements. As of March 31, 2009 and December 31, 2008, the Founder’s, other senior managing directors’ and employees’ investments aggregated $495.1 million and $507.2 million, respectively, and the Founder’s, other senior managing directors’ and employees’ share of the Net Income (Loss) Attributable to Redeemable Non-Controlling and Non-Controlling Interests in Consolidated Entities aggregated $(34.0) million and $(66.4) million for the three months ended March 31, 2009 and 2008, respectively.

Loans to Affiliates

Loans to affiliates consist of interest-bearing advances to certain Blackstone individuals to finance their investments in certain Blackstone Funds. These loans earn interest at Blackstone’s cost of borrowing and such interest totaled $0.4 million and $1.5 million for the three months ended March 31, 2009 and 2008, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

No such loans that were outstanding as of March 31, 2009 were made to any director or executive officer of Blackstone since March 22, 2007, the date of Blackstone’s initial filing with the Securities and Exchange Commission of a registration statement relating to its initial public offering.

Contingent Repayment Guarantee

Blackstone and its personnel who have received carried interest distributions have guaranteed payment on a several basis (subject to a cap), to the corporate private equity, real estate and certain credit-oriented funds of any contingent repayment (clawback) obligation with respect to the excess carried interest allocated to the general partners of such funds and indirectly received thereby to the extent that either Blackstone or its personnel fails to fulfill its clawback obligation, if any.

Accrual for potential repayment of previously received Performance Fees and Allocations, which is a component of Due to Affiliates, represents amounts previously paid to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone Funds if the Blackstone carry funds were to be liquidated based on the fair value of the underlying funds’ investments as of March 31, 2009 and December 31, 2008. As of March 31, 2009, such obligations were $455.8 million, of which $217.5 million related to Blackstone Holdings and $238.3 million related to non-controlling interest holders. As of December 31, 2008, such obligations were $260.0 million, of which $109.8 million related to Blackstone Holdings and $150.2 million related to non-controlling interest holders.

Tax Receivable Agreement

Blackstone used a portion of the proceeds from the IPO and the sale of non-voting common units to Beijing Wonderful Investments to purchase interests in the predecessor businesses from certain non-controlling interest holders. In addition, holders of Blackstone Holdings Partnership Units may exchange their Blackstone Holdings Partnership Units for Blackstone Common Units on a one-for-one basis. The purchase and subsequent exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Blackstone Holdings and therefore reduce the amount of tax that Blackstone’s wholly-owned subsidiaries would otherwise be required to pay in the future.

Certain subsidiaries of the Partnership which are corporate taxpayers have entered into tax receivable agreements with each of certain non-controlling interest holders and additional tax receivable agreements have been executed, and will continue to be executed, with newly-admitted senior managing directors and others who acquire Blackstone Holdings Partnership Units. The agreements provide for the payment by the corporate taxpayers to such owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the corporate taxpayers actually realize as result of the aforementioned increases in tax basis and of certain other tax benefits related to entering into these tax receivable agreements. For purposes of the tax receivable agreements, cash savings in income tax will be computed by comparing the actual income tax liability of the corporate taxpayers to the amount of such taxes that the corporate taxpayers would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of Blackstone Holdings as a result of the exchanges and had the corporate taxpayers not entered into the tax receivable agreements.

Assuming no material changes in the relevant tax law and that the corporate taxpayers earn sufficient taxable income to realize the full tax benefit of the increased amortization of the assets, the expected future payments under the tax receivable agreements (which are taxable to the recipients) will aggregate $714.5 million over the next 15 years. The present value of these estimated payments totals $140.7 million assuming a 15% discount rate and using Blackstone’s most recent projections relating to the estimated timing of the benefit to be

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

received. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. The payments under the tax receivable agreement are not conditioned upon continued ownership of Blackstone equity interests by the pre-IPO owners and the others mentioned above. In January 2009 payments totaling $17.0 million were made to certain pre-IPO owners in accordance with the tax receivable agreement and related to tax benefits we received for the 2007 taxable year.

 

10. COMMITMENTS AND CONTINGENCIES

Guarantees — Blackstone had approximately $12.0 million of letters of credit outstanding to provide collateral support related to a credit facility at March 31, 2009.

Certain real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their Portfolio Companies. At March 31, 2009, such guarantees amounted to $4.2 million.

Debt Covenants — Blackstone’s debt obligations contain various customary loan covenants. In management’s opinion, these covenants do not materially restrict Blackstone’s investment or financing strategy. Blackstone was in compliance with all of its loan covenants as of March 31, 2009.

Investment Commitments — The Blackstone Funds had signed investment commitments with respect to investments representing commitments of $28.4 million as of March 31, 2009. Included in this is $0.2 million of signed investment commitments for portfolio company acquisitions in the process of closing.

The general partners of the Blackstone Funds had unfunded commitments to each of their respective funds totaling $1.4 billion as of March 31, 2009.

Certain of Blackstone’s funds of hedge funds not consolidated in these financial statements have unfunded investment commitments to unaffiliated hedge funds of $739.9 million as of March 31, 2009. The funds of hedge funds consolidated in these financial statements may, but are not required to, allocate assets to these funds.

Contingent Obligations (Clawback) — Included within Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations are gains from Blackstone Fund investments. The portion of net gains (losses) attributable to non-controlling interest holders is included within Non-Controlling Interests in Income of Consolidated Entities. Net gains (losses) attributable to non-controlling interest holders are net of carried interest earned by Blackstone. Carried interest is subject to clawback to the extent that the carried interest received to date exceeds the amount due to Blackstone based on cumulative results. If, at March 31, 2009, all of the investments held by the carry funds, which are at fair value, were deemed worthless, a possibility that management views as remote, the amount of carried interest subject to potential clawback would be $1.4 billion, on an after tax basis where applicable, of which $334.3 million related to Blackstone Holdings and $1.1 billion related to current and former Blackstone personnel. These amounts are inclusive of the amounts described in Note 9 under Contingent Repayment Guarantee. A portion of the carried interest paid to current and former Blackstone personnel is held in segregated accounts in the event of a cash clawback obligation. These segregated accounts and most of the collateralized accounts are not included in the financial statements of the Partnership. At March 31, 2009, $472.8 million was held in such segregated accounts.

Contingent Performance Fees and Allocations — Through March 31, 2009, $18.8 million of performance fees and allocations has been recorded attributable to hedge funds where the measurement period has not ended.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

Litigation — From time to time, Blackstone is named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. After consultation with legal counsel, management believes the ultimate liability arising from such actions that existed as of March 31, 2009, if any, will not materially affect Blackstone’s results of operations, financial position or cash flows.

 

11. SEGMENT REPORTING

Blackstone transacts its primary business in the United States and substantially all of its revenues are generated domestically.

Blackstone conducts its alternative asset management and financial advisory businesses through four segments:

 

   

Corporate Private Equity — Blackstone’s Corporate Private Equity segment comprises its management of corporate private equity funds.

 

   

Real Estate — Blackstone’s Real Estate segment comprises its management of general real estate funds and internationally focused real estate funds.

 

   

Marketable Alternative Asset Management — Blackstone’s Marketable Alternative Asset Management segment, whose consistent focus is current earnings, comprises its management of funds of hedge funds, credit-oriented funds, CLO vehicles and publicly-traded closed-end mutual funds. GSO’s results have been included in this segment from the date of acquisition.

 

   

Financial Advisory — Blackstone’s Financial Advisory segment comprises its corporate and mergers and acquisitions advisory services, restructuring and reorganization advisory services and Park Hill Group, which provides fund placement services for alternative investment funds.

These business segments are differentiated by their various sources of income, with the Corporate Private Equity, Real Estate and Marketable Alternative Asset Management segments primarily earning their income from management fees and investment returns on assets under management, while the Financial Advisory segment primarily earns its income from fees related to investment banking services and advice and fund placement services.

Economic Net Income (“ENI”) is a key performance measure used by management. ENI represents segment net income excluding the impact of income taxes and transaction-related items, including charges associated with equity-based compensation, the amortization of intangibles and corporate actions including acquisitions. The aggregate of ENI for all segments equals Total Segment ENI. ENI is used by management primarily in making resource deployment and compensation decisions across Blackstone’s four segments.

Management makes operating decisions and assesses the performance of each of Blackstone’s business segments based on financial and operating metrics and data that is presented without the consolidation of any of the Blackstone Funds that are consolidated into the condensed consolidated financial statements. Consequently, all segment data excludes the assets, liabilities and operating results related to the Blackstone Funds.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

The following table presents the financial data for Blackstone’s four segments as of and for the three months ended March 31, 2009:

 

     March 31, 2009 and the Three Months then Ended  
     Corporate
Private Equity
    Real
Estate
    Marketable
Alternative
Asset
Management
    Financial
Advisory
   Total
Segments
 
           
           
           

Revenues

           

Management and Advisory Fees

           

Base Management Fees

   $ 68,431     $ 80,198     $ 96,503     $ —      $ 245,132  

Advisory Fees

     —         —         —         90,940      90,940  

Transaction and Other Fees

     13,982       3,140       443       —        17,565  

Management Fee Offsets

     (3,654 )     (1,193 )     (4,213 )     —        (9,060 )
                                       

Total Management and Advisory Fees

     78,759       82,145       92,733       90,940      344,577  

Performance Fees and Allocations

     4,818       (228,573 )     9,922       —        (213,833 )

Investment Income (Loss) and Other

     (15,136 )     (65,462 )     (3,190 )     1,045      (82,743 )
                                       

Total Revenues

     68,441       (211,890 )     99,465       91,985      48,001  
                                       

Expenses

           

Compensation and Benefits

     (5,124 )*     (37,319 )*     61,134       50,952      69,643  

Other Operating Expenses

     20,453       13,280       23,907       13,920      71,560  
                                       

Total Expenses

     15,329       (24,039 )     85,041       64,872      141,203  
                                       

Economic Net Income (Loss)

   $ 53,112     $ (187,851 )   $ 14,424     $ 27,113    $ (93,202 )
                                       

Segment Assets

   $ 2,620,685     $ 1,922,395     $ 1,605,424     $ 617,045    $ 6,765,549  
                                       

 

* The credit balances in Compensation and Benefits for the Corporate Private Equity and Real Estate segments are primarily the result of a reversal of $40.7 million and $70.1 million, respectively, of prior period carried interest allocations made to certain partners that are participating in the Partnership’s profit sharing arrangements.

The following table reconciles the Total Segments to Blackstone’s Income (Loss) Before Provision for Taxes and Total Assets as of and for the three months ended March 31, 2009:

 

     March 31, 2009 and the Three Months then Ended  
     Total
Segments
    Consolidation
Adjustments and
Reconciling Items
    Blackstone
Consolidated
 
      
      

Revenues

   $ 48,001     $ (870 )(a)   $ 47,131  

Expenses

   $ 141,203     $ 783,372 (b)   $ 924,575  

Other Income (Loss)

   $ —       $ (34,763 )(c)   $ (34,763 )

Economic Net Income (Loss)

   $ (93,202 )   $ (819,005 )(d)   $ (912,207 )

Total Assets

   $ 6,765,549     $ 908,960 (e)   $ 7,674,509  

 

(a) The Revenues adjustment principally represents management and performance fees and allocations earned from Blackstone Funds to arrive at Blackstone consolidated revenues which were eliminated in consolidation.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

(b) The Expenses adjustment represents the addition of expenses of the consolidated Blackstone Funds to the Blackstone unconsolidated expenses, amortization of intangibles and expenses related to equity-based compensation to arrive at Blackstone consolidated expenses.
(c) The Other Income (Loss) adjustment results from the following:

 

     Three Months Ended
March 31, 2009
 
  

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ (1,602 )

Fund Expenses Added in Consolidation

     3,582  

Non-Controlling Interests in Income (Loss) of Consolidated Entities

     (36,743 )
        

Total Consolidation Adjustments

   $ (34,763 )
        

 

(d) The reconciliation of Economic Net Income (Loss) to Income (Loss) Before Provision for Taxes as reported in the Condensed Consolidated Statements of Operations consists of the following:

 

     Three Months Ended
March 31, 2009
 
  

Economic Net Income (Loss)

   $ (93,202 )
        

Adjustments

  

Amortization of Intangibles

     (39,513 )

Transaction-Related Charges

     (741,057 )

Income (Loss) Associated with Non-Controlling Interests in Income (Loss) of Consolidated Entities

     (38,435 )
        

Total Adjustments

     (819,005 )
        

Income (Loss) Before Provision for Taxes

   $ (912,207 )
        

 

(e) The Total Assets adjustment represents the addition of assets of the consolidated Blackstone Funds to the Blackstone unconsolidated assets to arrive at Blackstone consolidated assets.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

The following table presents financial data for Blackstone’s four segments for the three months ended March 31, 2008:

 

     Three Months Ended March 31, 2008  
     Corporate
Private Equity
    Real
Estate
    Marketable
Alternative
Asset
Management
    Financial
Advisory
   Total
Segments
 
           
           
           

Revenues

           

Management and Advisory Fees

           

Base Management Fees

   $ 67,336     $ 66,751     $ 103,187     $ —      $ 237,274  

Advisory Fees

     —         —         —         68,563      68,563  

Transaction and Other Fees

     10,837       11,795       1,128       —        23,760  

Management Fee Offsets

     (8,410 )     (404 )     —         —        (8,814 )
                                       

Total Management and Advisory Fees

     69,763       78,142       104,315       68,563      320,783  

Performance Fees and Allocations

     (163,430 )     (30,062 )     5,058       —        (188,434 )

Investment Income (Loss) and Other

     (23,050 )     (176 )     (79,383 )     2,597      (100,012 )
                                       

Total Revenues

     (116,717 )     47,904       29,990       71,160      32,337  
                                       

Expenses

           

Compensation and Benefits

     (80,752 )*     35,688       56,273       46,967      58,176  

Other Operating Expenses

     22,200       16,160       18,307       11,061      67,728  
                                       

Total Expenses

     (58,552 )     51,848       74,580       58,028      125,904  
                                       

Economic Net Income (Loss)

   $ (58,165 )   $ (3,944 )   $ (44,590 )   $ 13,132    $ (93,567 )
                                       

 

* The credit balance in Compensation and Benefits for the Corporate Private Equity segment is primarily the result of the reversal of $112.5 million of prior period carried interest allocations made to certain partners that are participating in the Partnership’s profit sharing arrangements.

The following table reconciles the Total Segments to Blackstone’s Income Before Provision for Taxes for the three months ended March 31, 2008:

 

     Three Months Ended March 31, 2008  
     Total
Segments
    Consolidation
Adjustments and
Reconciling Items
    Blackstone
Consolidated
 
      
      

Revenues

   $ 32,337     $ 36,186 (a)   $ 68,523  

Expenses

   $ 125,904     $ 972,159 (b)   $ 1,098,063  

Other Income (Loss)

   $ —       $ (215,636 )(c)   $ (215,636 )

Economic Net Income (Loss)

   $ (93,567 )   $ (1,151,609 )(d)   $ (1,245,176 )

 

(a) The Revenues adjustment principally represents management and performance fees and allocations earned from Blackstone Funds to arrive at Blackstone consolidated revenues which were eliminated in consolidation.
(b) The Expenses adjustment represents the addition of expenses of the consolidated Blackstone Funds to the Blackstone unconsolidated expenses to arrive at Blackstone consolidated expenses.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

 

(c) The Other Income (Loss) adjustment results from the following:

 

     Three Months Ended
March 31, 2008
 
  

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ (39,320 )

Fund Expenses Added in Consolidation

     22,794  

Non-Controlling Interests in Income of Consolidated Entities

     (199,110 )
        

Total Consolidation Adjustments

   $ (215,636 )
        

 

(d) The reconciliation of Economic Net Income to Income Before Provision for Taxes as reported in the Condensed Consolidated Statements of Operations consists of the following:

 

     Three Months Ended
March 31, 2008
 
  

Economic Net Income (Loss)

   $ (93,567 )
        

Adjustments

  

Amortization of Intangibles

     (33,528 )

Transaction-Related Charges

     (918,971 )

Income (Loss) Associated with Non-Controlling Interests in Income (Loss) of Consolidated Entities

     (199,110 )
        

Total Adjustments

     (1,151,609 )
        

Income (Loss) Before Provision for Taxes

   $ (1,245,176 )
        

 

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ITEM 1A. UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

THE BLACKSTONE GROUP L.P.

Unaudited Condensed Consolidated Statements of Financial Condition

(Dollars in Thousands)

 

     March 31, 2009  
     Consolidated
Operating
Partnerships
    Consolidated
Blackstone Funds (a)
   Reclasses and
Eliminations
    Consolidated  

Assets

         

Cash and Cash Equivalents

   $ 776,303     $ —      $ —       $ 776,303  

Cash Held by Blackstone Funds and Other

     52,866       14,824      (185 )     67,505  

Investments

     1,527,652       1,063,093      (193,611 )     2,397,134  

Accounts Receivable

     245,151       3,538      —         248,689  

Due from Brokers

     —         970      —         970  

Investment Subscriptions Paid in Advance

     —         —        —         —    

Due from Affiliates

     409,761       20,111      (3 )     429,869  

Intangible Assets, Net

     1,038,013       —        —         1,038,013  

Goodwill

     1,703,602       —        —         1,703,602  

Other Assets

     166,875       223      —         167,098  

Deferred Tax Assets

     845,326       —        —         845,326  
                               

Total Assets

   $ 6,765,549     $ 1,102,759    $ (193,799 )   $ 7,674,509  
                               

Liabilities and Partners’ Capital

         

Loans Payable

   $ 81,874     $ —      $ —       $ 81,874  

Amounts Due to Non-Controlling Interest Holders

     91,628       156,251      —         247,879  

Securities Sold, Not Yet Purchased

     —         690      —         690  

Due to Affiliates

     1,231,159       77,811      (35,548 )     1,273,422  

Accrued Compensation and Benefits

     254,255       11,164      —         265,419  

Accounts Payable, Accrued Expenses and Other Liabilities

     202,911       5,954      (184 )     208,681  
                               

Total Liabilities

     1,861,827       251,870      (35,732 )     2,077,965  
                               

Redeemable Non-Controlling Interests in Consolidated Entities

     —         —        432,585       432,585  
                               

Partners’ Capital

         

Partners’ Capital

     3,433,752       590,652      (590,652 )     3,433,752  

Accumulated Other Comprehensive Income

     (2,906 )     —        —         (2,906 )

Non-Controlling Interests in Consolidated Entities

     (175,554 )     260,237      —         84,683  

Non-Controlling Interests in Blackstone Holdings

     1,648,430       —        —         1,648,430  
                               

Total Partners’ Capital

     4,903,722       850,889      (590,652 )     5,163,959  
                               

Total Liabilities and Partners’ Capital

   $ 6,765,549     $ 1,102,759    $ (193,799 )   $ 7,674,509  
                               

 

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THE BLACKSTONE GROUP L.P.

Unaudited Condensed Consolidated Statements of Financial Condition—(Continued)

(Dollars in Thousands)

 

    December 31, 2008  
    Consolidated
Operating
Partnerships
    Consolidated
Blackstone Funds (a)
  Reclasses and
Eliminations
    Consolidated  

Assets

       

Cash and Cash Equivalents

  $ 503,737     $ —     $ —       $ 503,737  

Cash Held by Blackstone Funds and Other

    57,536       849,788     —         907,324  

Investments

    1,650,071       1,385,132     (204,261 )     2,830,942  

Accounts Receivable

    309,201       2,866     —         312,067  

Due from Brokers

    —         48,506     —         48,506  

Investment Subscriptions Paid in Advance

    6,697       —       (4,781 )     1,916  

Due from Affiliates

    1,057,362       216     (196,144 )     861,434  

Intangible Assets, Net

    1,077,526       —       —         1,077,526  

Goodwill

    1,703,602       —       —         1,703,602  

Other Assets

    169,333       222     —         169,555  

Deferred Tax Assets

    845,578       —       —         845,578  
                             

Total Assets

  $ 7,380,643     $ 2,286,730   $ (405,186 )   $ 9,262,187  
                             

Liabilities and Partners’ Capital

       

Loans Payable

  $ 387,000     $ —     $ —       $ 387,000  

Amounts Due to Non-Controlling Interest Holders

    105,942       1,009,780     (12,299 )     1,103,423  

Securities Sold, Not Yet Purchased

    —         894     —         894  

Due to Affiliates

    1,064,980       362,526     (141,929 )     1,285,577  

Accrued Compensation and Benefits

    410,593       2,866     —         413,459  

Accounts Payable, Accrued Expenses and Other Liabilities

    176,418       112,699     (108,858 )     180,259  
                             

Total Liabilities

    2,144,933       1,488,765     (263,086 )     3,370,612  
                             

Redeemable Non-Controlling Interests in Consolidated Entities

    —         —       362,462       362,462  
                             

Partners’ Capital

       

Partners’ Capital

    3,509,448       504,562     (504,562 )     3,509,448  

Accumulated Other Comprehensive Income

    (291 )     —       —         (291 )

Non-Controlling Interests in Consolidated Entities

    (95,206 )     293,403     —         198,197  

Non-Controlling Interests in Blackstone Holdings

    1,821,759       —       —         1,821,759  
                             

Total Partners’ Capital

    5,235,710       797,965     (504,562 )     5,529,113  
                             

Total Liabilities and Partners’ Capital

  $ 7,380,643     $ 2,286,730   $ (405,186 )   $ 9,262,187  
                             

 

(a) The consolidated Blackstone Funds consisted of the following:

Blackstone Distressed Securities Fund L.P.

Blackstone Kailix Fund L.P.

Blackstone Market Opportunities Fund L.P.

Blackstone Strategic Alliance Fund L.P.

Blackstone Strategic Equity Fund L.P.

Blackstone Value Recovery Fund L.P.

GSO Legacy Associates 2 LLC

GSO Legacy Associates LLC

GSO Co-Investment Partners LLC*

The Asia Opportunities Fund L.P.

Corporate private equity side-by-side investment vehicles

Real estate side-by-side investment vehicles

Mezzanine fund side-by-side investment vehicles

* Consolidated as of March 31, 2009 only

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with The Blackstone Group L.P.’s condensed consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q.

On March 3, 2008, we acquired GSO Capital Partners L.P. and certain of its affiliates (“GSO”). GSO is an alternative asset manager specializing in the leveraged finance marketplace. GSO manages various credit-oriented funds and collateralized loan obligation (“CLO”) vehicles. GSO’s results are included in our Marketable Alternative Asset Management segment from the date of acquisition.

Our Business

Blackstone is one of the largest independent alternative asset managers in the world. We also provide a wide range of financial advisory services, including corporate and mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

Our business is organized into four business segments:

 

   

Corporate Private Equity. We are a world leader in private equity investing, having managed five general private equity funds, as well as one specialized fund focusing on media and communications-related investments, since we established this business in 1987. In addition, we are in the process of raising our seventh private equity fund and are seeking to launch new investment funds to make infrastructure and clean technology investments. Through our corporate private equity funds we pursue transactions throughout the world, including leveraged buyout acquisitions of seasoned companies, transactions involving growth equity or start-up businesses in established industries, minority investments, corporate partnerships, distressed debt, structured securities and industry consolidations, in all cases in strictly friendly transactions.

 

   

Real Estate. Our real estate segment is diversified geographically and across a variety of sectors. We launched our first real estate fund in 1994 and have managed six general real estate funds, two internationally focused real estate funds, a European focused real estate fund and a special situations real estate fund. Our real estate funds have made significant investments in lodging, major urban office buildings and a variety of real estate operating companies. In addition, our real estate special situations fund targets global non-controlling debt and equity investment opportunities in the public and private markets.

 

   

Marketable Alternative Asset Management. Established in 1990, our marketable alternative asset management segment is comprised of our management of funds of hedge funds, credit-oriented funds, CLO vehicles and publicly-traded closed-end mutual funds. These products are intended to provide investors with greater levels of current income and, for certain products, a greater level of liquidity.

 

   

Financial Advisory. Our financial advisory segment serves a diverse and global group of clients with corporate and mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds.

We generate our revenue from fees earned pursuant to contractual arrangements with funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees), and from corporate and mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. We invest in the funds we manage and, in most cases, receive a preferred allocation of income (i.e., a “carried interest”) or an incentive fee from an investment fund in the event that specified cumulative investment returns are achieved. The composition of our revenues will vary

 

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based on market conditions and the cyclicality of the different businesses in which we operate. Net investment gains and resultant investment income generated by the Blackstone Funds, principally corporate private equity and real estate funds, are driven by value created by our strategic initiatives as well as overall market conditions. Our funds initially record fund investments at cost and then such investments are subsequently recorded at fair value. Fair values are affected by changes in the fundamentals of the portfolio company, the portfolio company’s industry, the overall economy, as well as other market conditions.

Business Environment

Global economies weakened further in the first quarter of 2009, with several developed nations officially in a recession and emerging nations experiencing slowing growth. The consumer price index (CPI) increased 0.5% in the first quarter of 2009 and declined 0.4% on a year-over-year basis, the first 12-month decline in over 50 years. Credit trends worsened across most consumer and commercial asset classes. Overall, market performance was more variable as compared with the fourth quarter of 2008.

In the United States and Europe, equities markets declined in the double-digit range, while Asian markets rebounded approximately 15%-35% off of their lows. Loan pricing moderately improved in the first quarter and modest debt issuance was visible. However, commercial mortgage backed securities markets remained mostly closed. The Credit Suisse High Yield Index returned 5.8% in the first quarter of 2009 after a record bad year of (26.2)% in 2008 and (18.8)% in the fourth quarter of 2008. Credit spreads tightened modestly by quarter’s end, which continued into April 2009. Commodities prices, which dropped sharply in the second half of 2008, rose in the first quarter of 2009. Crude oil prices were $50 per barrel at March 31, 2009, 11% higher than at year end 2008, after a significant decline of 54% in 2008.

Several government initiatives to potentially stimulate lending, consumer spending and the functioning of debt capital markets were announced during the first quarter. The dollar amount of stimulus spending announced by governments worldwide is unprecedented.

Most currencies weakened against the U.S. dollar in the first quarter, with the U.S. dollar 5.5% higher against the Euro, 2.1% higher against the Pound Sterling and 9.1% higher against the Japanese Yen. U.S. Treasury pricing declined modestly after its historic high at year end, with the 10-year Treasury yielding 2.7% at the end of the first quarter of 2009 compared with 2.2% at December 31, 2008.

Macro-economic weakness continues to negatively affect real estate fundamentals globally. Hotel fundamentals worsened in the first quarter of 2009 as compared with the fourth quarter of 2008, particularly related to corporate travel expenditures and the luxury segment. Both rental rates and vacancy trends continued to worsen in the first quarter.

The external shocks to the financial services industry have, and likely will, continue to reshape the competitive landscape. Some of the largest financial institutions have been acquired, required government bailouts or are shedding businesses. The largest brokerage firms have become bank holding companies.

Lenders continue to severely restrict commitments to new debt, limiting industry-wide leveraged acquisition activity levels in both corporate and real estate markets. General acquisition activity has continued to decline, which has had a significant impact on several of our investment businesses.

The duration of current economic and market conditions is unknown. Blackstone’s businesses are materially affected by conditions in the financial markets and economic conditions in the United States, Western Europe, Asia and to some extent elsewhere in the world.

 

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Key Financial Measures and Indicators

Our key financial measures and indicators are discussed below.

Revenues

Revenues primarily consist of management and advisory fees, performance fees and allocations and investment income and other.

Management and Advisory Fees. Management and advisory fees consist of (1) fund management fees and (2) advisory fees.

 

  (1) Fund Management Fees. Fund management fees are comprised of:

 

  (a) Base Management Fees. Base management fees are fees charged directly to the fund or fund investors.

 

  (b) Transaction and Other Fees. Transaction and other fees (including monitoring fees) are comprised of fees charged directly to funds and fund portfolio companies. Our investment advisory agreements generally require that the investment advisor share a portion of certain fees with the limited partners of the fund. Transaction and other fees are net of amounts, if any, shared with limited partners.

 

  (c) Management Fee Offsets. Our investment advisory agreements generally require that the investment advisor share a portion of certain expenses with the limited partners of the fund. These shared items (“management fee reductions”) reduce the management fees received from the limited partners. Management fee offsets are comprised principally of broken deal and placement fee expenses.

 

  (2) Advisory Fees. Advisory fees consist of advisory retainer and transaction-based fee arrangements related to mergers, acquisitions, restructurings, divestitures and fund placement services for alternative investment funds.

Performance Fees and Allocations. Performance fees and allocations represent the preferential allocations of profits (“carried interest”) which are a component of our general partner interests in the carry funds. We are entitled to carried interest from an investment carry fund in the event investors in the fund achieve cumulative investment returns in excess of a specified rate. In certain performance fee arrangements related to funds of hedge funds and some credit-oriented funds in our Marketable Alternative Asset Management segment, we are entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets. In all cases, each fund is considered separately in that regard and for a given fund, performance fees and allocations can never be negative over the life of the fund.

Investment Income. Blackstone invests in corporate private equity funds, real estate funds, funds of hedge funds and credit-oriented funds that are not consolidated. The Partnership accounts for these investments under the equity method of accounting. Blackstone’s share of operating income (loss) generated by these investments is recorded as a component of Investment Income (Loss) and Other.

Expenses

Compensation and Benefits Expense. Compensation and benefits expense reflects (1) employee compensation and benefits expense paid and payable to our employees, including our senior managing directors, (2) equity-based compensation associated with grants of equity-based awards to senior managing directors, other employees and selected other individuals engaged in our businesses and (3) performance payment arrangements for Blackstone personnel and profit sharing interests in carried interest.

 

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Other Operating Expenses. The balance of our expenses represent general and administrative expenses including interest expense, occupancy and equipment expenses and other expenses, which consist principally of professional fees, public company costs, travel and related expenses, communications and information services and depreciation and amortization.

Fund Expenses. The expenses of our consolidated Blackstone Funds consist primarily of interest expense, professional fees and other third-party expenses.

Non-Controlling Interests in Income of Consolidated Entities

A majority of our investment funds are unconsolidated or we record significant non-controlling interests in income of consolidated entities relating to the ownership interests of the limited partners of the Blackstone Holdings Partnerships and the limited partner interests in our consolidated investment funds. The Blackstone Group L.P. is, through wholly-owned subsidiaries, the sole general partner of each of the Blackstone Holdings partnerships. The Blackstone Group L.P. consolidates the financial results of Blackstone Holdings and its consolidated subsidiaries, and the ownership interest of the limited partners of Blackstone Holdings is reflected as a non-controlling interest in The Blackstone Group L.P.’s consolidated financial statements.

Income Taxes

The Blackstone Holdings partnerships and certain of their subsidiaries operate in the United States as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. As a result, our income is not subject to U.S. federal and state income taxes. Generally, the tax liability related to income earned by these entities represents obligations of the individual partners and members. A portion of our income may be subject to the New York City unincorporated business tax and other non-U.S. income taxes applicable to income earned in non-U.S. jurisdictions. In addition, certain of the wholly-owned subsidiaries of The Blackstone Group L.P. and the Blackstone Holdings partnerships are subject to corporate federal, state and local income taxes that are reflected in our consolidated financial statements.

There remains some uncertainty regarding Blackstone’s future taxation levels. In June 2007, a bill was introduced in the U.S. Senate that would preclude Blackstone from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. In addition, the U.S. Congress has recently considered other bills relating to the taxation of investment partnerships. In June 2008, the U.S. House of Representatives passed a bill that would generally (1) treat carried interest as non-qualifying income under the tax rules applicable to publicly traded partnerships, which would require Blackstone to hold interests in entities earning such income through taxable subsidiary corporations, and (2) tax carried interest as ordinary income for U.S. federal income tax purposes, rather than in accordance with the character of income derived by the underlying fund, which is in many cases capital gain. A similar bill was introduced in the U.S. House of Representatives on April 3, 2009, and the Obama Administration’s budget proposals released on February 26, 2009 include a proposal to tax carried interest as ordinary income. If any such legislation or similar legislation were to be enacted and it applied to us, it would materially increase the amount of taxes payable by Blackstone and/or its unitholders.

Economic Net Income

Economic Net Income (“ENI”) represents segment net income excluding the impact of income taxes and transaction-related items, including charges associated with equity-based compensation, the amortization of intangibles and corporate actions including acquisitions. ENI is used by management primarily in making resource deployment and compensation decisions across Blackstone’s four segments. (See Note 11. “Segment Reporting” in the “Notes to the Condensed Consolidated Financial Statements” in Part I. Item 1. Financial Statements.)

 

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Net Fee Related Earnings from Operations

Net Fee Related Earnings from Operations, which is a component of Adjusted Cash Flows from Operations, is a supplemental non-GAAP financial measure that reflects our earnings from operations excluding the income related to the performance fees and allocations and income earned from Blackstone’s investments in the Blackstone Funds. Management uses Net Fee Related Earnings from Operations as a measure to assess whether recurring revenue from our businesses more than adequately covers all of our operating expenses and generates profitability. See “Liquidity and Capital Resources — Liquidity and Capital Resources” below for a detailed discussion of Net Fee Related Earnings from Operations. This measure should be considered in addition to, and not as a substitute for, or superior to, financial measures presented in accordance with GAAP.

Adjusted Cash Flows from Operations

Adjusted Cash Flows from Operations, which is derived from our segment reported results, is a supplemental non-GAAP financial measure we use to assess liquidity and amounts available for distribution to owners. Adjusted Cash Flows from Operations is intended to reflect the cash flows attributable to Blackstone without the effects of the consolidation of the Blackstone Funds. The equivalent GAAP measure is Net Cash Provided by (Used in) Operating Activities. See “Liquidity and Capital Resources — Liquidity and Capital Resources” below for our detailed discussion of Adjusted Cash Flows from Operations. This measure should be considered in addition to, and not as a substitute for, or superior to, financial measures presented in accordance with GAAP.

Operating Metrics

The alternative asset management business is a complex business that is primarily based on managing third party capital and does not require substantial capital investment to support rapid growth. However, there also can be volatility associated with its earnings and cash flows. Since our inception, we have developed and used various key operating metrics to assess and monitor the operating performance of our various alternative asset management businesses in order to monitor the effectiveness of our value creating strategies.

Assets Under Management. Assets Under Management refers to the assets we manage. Our Assets Under Management equal the sum of:

 

  (1) the fair value of the investments held by our carry funds plus the capital that we are entitled to call from investors in those funds pursuant to the terms of their capital commitments to those funds (plus the fair value of co-investments arranged by us that were made by limited partners of our funds in portfolio companies of such funds and as to which we receive fees or a carried interest allocation);

 

  (2) the net asset value of our funds of hedge funds, hedge funds and our closed-end mutual funds; and

 

  (3) the amount of capital raised for our CLOs.

Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Interests related to our funds of hedge funds and certain of our credit-oriented funds are generally subject to annual, semi-annual or quarterly withdrawal or redemption by investors upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days depending on the fund and the liquidity profile of the underlying assets.

Fee-Earning Assets Under Management. Fee-Earning Assets Under Management refers to the assets we manage on which we derive management fees. Our Fee-Earning Assets Under Management equal the sum of:

 

  (1) for our carry funds where the investment period has not expired, the amount of capital commitments;

 

  (2) for our carry funds where the investment period has expired, the remaining amount of invested capital;

 

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  (3) the fair value of co-investments arranged by us that were made by limited partners of our funds in portfolio companies of such funds and as to which we receive fees;

 

  (4) the net asset value of our funds of hedge funds, hedge funds and our closed-end mutual funds; and

 

  (5) the gross amount of assets of our CLOs.

Our calculations of assets under management and fee-earning assets under management may differ from the calculations of other asset managers, and as a result this measure may not be comparable to similar measures presented by other asset managers. In addition, our calculation of assets under management includes commitments to and the fair value of invested capital in our funds from Blackstone and our personnel regardless of whether such commitments or invested capital are subject to fees. Our definitions of assets under management or fee-earning assets under management are not based on any definition of assets under management or fee-earning assets under management that is set forth in the agreements governing the investment funds that we manage.

For our carry funds, total assets under management includes the fair value of the investments held whereas fee-earning assets under management includes the amount of capital commitments or the remaining amount of invested capital at cost depending on whether the investment period has or has not expired. As such, fee-earning assets under management may be greater than total assets under management when the aggregate fair value of the remaining investments is less than the cost of those investments.

Limited Partner Capital Invested. Limited Partner Capital Invested represents the amount of Limited Partner capital commitments which were invested by our carry funds during each period presented, plus the capital invested through co-investments arranged by us that were made by limited partners in investments of our carry funds as to which we receive fees or a carried interest allocation.

We manage our business using both financial measures and our key operating metrics since we believe that these metrics measure the productivity of our investment activities.

Condensed Consolidated Results of Operations

Following is a discussion of our condensed consolidated results of operations for the three months ended March 31, 2009 and 2008. For a more detailed discussion of the factors that affected the results of our four business segments (which are presented on a basis that deconsolidates the investment funds we manage) in these periods, see “Segment Analysis” below.

 

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The following table sets forth information regarding our consolidated results of operations and certain key operating metrics for the three months ended March 31, 2009 and 2008.

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Revenues

        

Management and Advisory Fees

   $ 341,172     $ 309,409     $ 31,763     10 %

Performance Fees and Allocations

     (214,248 )     (188,687 )     (25,561 )   -14 %

Investment Income (Loss) and Other

     (79,793 )     (52,199 )     (27,594 )   -53 %
                              

Total Revenues

     47,131       68,523       (21,392 )   -31 %
                              

Expenses

        

Compensation and Benefits

     812,347       977,147       (164,800 )   -17 %

Interest

     1,399       2,743       (1,344 )   -49 %

General, Administrative and Other

     107,817       95,221       12,596     13 %

Fund Expenses

     3,012       22,952       (19,940 )   -87 %
                              

Total Expenses

     924,575       1,098,063       (173,488 )   -16 %
                              

Other Income (Loss)

        

Net Gains (Losses) from Fund Investment Activities

     (34,763 )     (215,636 )     180,873     84 %
                              

Income (Loss) Before Provision for Taxes

     (912,207 )     (1,245,176 )     332,969     27 %

Provision for Taxes

     17,731       8,981       8,750     97 %
                              

Net Income (Loss)

     (929,938 )     (1,254,157 )     324,219     26 %

Net Income (Loss) Attributable to Redeemable Non-Controlling Interests in Consolidated Entities

     2,596       (184,194 )     186,790     N/M  

Net Income (Loss) Attributable to Non-Controlling Interests in Consolidated Entities

     (41,031 )     (14,916 )     (26,115 )   -175 %

Net Income (Loss) Attributable to Non-Controlling Interests in Blackstone Holdings

     (659,929 )     (804,054 )     144,125     18 %
                              

Net Income (Loss) Attributable to The Blackstone Group L.P.

   $ (231,574 )   $ (250,993 )   $ 19,419     8 %
                              

The following table presents certain operating metrics for the three months ended March 31, 2009 and 2008. For a description of how assets under management is determined, please see “Key Financial Measures and Indicators — Operating Metrics — Assets Under Management.”

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Fee-Earning Assets Under Management (End of Period)

   $ 92,227,566     $ 92,947,719     $ (720,153 )   -1 %
                              

Assets Under Management

        

Balance, Beginning of Period

   $ 94,559,217     $ 102,427,372      

Inflows (a)

     2,697,936       14,091,882      

Outflows (b)

     (1,478,085 )     (803,872 )    

Market Appreciation (Depreciation) (c)

     (3,233,900 )     (2,184,811 )    
                    

Balance, End of Period

   $ 92,545,168     $ 113,530,571     $ (20,985,403 )   -18 %
                              

Capital Deployed

        

Limited Partner Capital Invested

   $ 619,622     $ 728,710     $ (109,088 )   -15 %
                              

 

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(a) Inflows represent contributions by limited partners and Blackstone and its employees in our funds of hedge funds, credit-oriented funds and closed-end mutual funds and increases in available capital for our carry funds (capital raises, recallable capital and increased side-by-side commitments) and CLOs. For 2008, this also includes the assets under management of GSO at the closing date of the acquisition.
(b) Outflows represent redemptions by limited partners and Blackstone and its employees in our funds of hedge funds, credit-oriented funds and closed-end mutual funds, decreases in available capital for our carry funds (expired capital, expense drawdowns and decreased side-by-side commitments) and realizations from the disposition of assets by our carry funds.
(c) Market appreciation (depreciation) includes realized and unrealized gains (losses) on portfolio investments and the impact of foreign exchange rate fluctuations.

Revenues

Management and Advisory Fees were $341.2 million for the three months ended March 31, 2009, an increase of $31.8 million, or 10%, as compared to $309.4 million for the three months ended March 31, 2008. The change was principally driven by an increase in advisory fees generated by both our restructuring and reorganization advisory services and mergers and acquisitions advisory services businesses.

Performance Fees and Allocations were $(214.2) million for the three months ended March 31, 2009, a decrease of $25.6 million, or 14%, as compared to $(188.7) million for the three months ended March 31, 2008. The change was principally due to depreciation in the fair value of certain investments held in our real estate funds in the first quarter of 2009. The decrease attributable to our real estate funds was partially offset by positive performance fees earned on one of our corporate private equity funds and by favorable investment performance of certain of our credit-oriented funds.

Investment Income (Loss) and Other was $(79.8) million for the three months ended March 31, 2009, as compared to a loss of $(52.2) million, or 53%, for the three months ended March 31, 2008. The change was due to a decrease in the fair value of certain investments held in our real estate funds, partially offset by improved investment performance of our remaining investments in certain of our funds of hedge funds.

Expenses

Expenses were $924.6 million for the three months ended March 31, 2009, a decrease of $173.5 million, or 16%, as compared to $1.1 billion for the three months ended March 31, 2008. The change reflected decreased Compensation and Benefits of $164.8 million, principally resulting from a decline in the amortization of equity-based compensation expense of $176.6 million. Fund Expenses decreased $19.9 million from the first quarter of 2008 due principally to a decrease in interest expenses associated with our then-existing proprietary hedge funds. General, Administrative and Other increased $12.6 million, primarily due to an increase in occupancy costs and incremental amortization expense associated with intangible assets related to our acquisition of GSO in March 2008.

Other Income (Loss)

Other Income (Loss) was $(34.8) million for the three months ended March 31, 2009, an increase of $180.9 million as compared to $(215.6) million for the three months ended March 31, 2008. The change was primarily related to a decrease in unrealized losses associated with our then-existing proprietary hedge funds.

Fee-Earning Assets Under Management

Fee-Earning Assets Under Management were $92.2 billion at March 31, 2009, a decrease of $720.2 million, or 1%, compared with $92.9 billion at March 31, 2008. The decrease was primarily due to a reduction in the fair value of the underlying portfolio investments in our funds of hedge funds and closed-end mutual funds, as well as

 

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the liquidation of one of our proprietary hedge funds. These decreases were partially offset by additional capital raised for our funds of hedge funds and European focused real estate fund since March 31, 2008.

Assets Under Management

Assets Under Management were $92.5 billion at March 31, 2009, a decrease of $21.0 billion, or 18%, as compared with $113.5 billion at March 31, 2008. The decrease was primarily related to a net depreciation in the fair value of portfolio investments of $26.8 billion, partially offset by additional capital raised, principally in our funds of hedge funds and European focused real estate fund.

Capital Deployed

Limited Partner Capital Invested was $619.6 million for the three months ended March 31, 2009, a decrease of $109.1 million, or 15%, as compared to $728.7 million for the three months ended March 31, 2008. The change reflected a decrease in the size and volume of consummated transactions during the first quarter of 2009.

Segment Analysis

Discussed below is our ENI for each of our segments. This information is reflected in the manner utilized by our senior management to make operating decisions, assess performance and allocate resources. References to “our” sectors or investments may also refer to portfolio companies and investments of the underlying funds that we manage.

For segment reporting purposes, revenues and expenses are presented on a basis that deconsolidates the investment funds we manage. As a result, segment revenues are greater than those presented on a consolidated GAAP basis because fund management fees recognized in certain segments are received from the Blackstone Funds and eliminated in consolidation when presented on a consolidated GAAP basis. Furthermore, segment expenses are lower than related amounts presented on a consolidated GAAP basis due to the exclusion of fund expenses that are paid by Limited Partners and the elimination of non-controlling interests.

Corporate Private Equity

The following table presents our results of operations for our Corporate Private Equity segment:

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Segment Revenues

        

Management Fees

        

Base Management Fees

   $ 68,431     $ 67,336     $ 1,095     2 %

Transaction and Other Fees

     13,982       10,837       3,145     29 %

Management Fee Offsets

     (3,654 )     (8,410 )     4,756     57 %
                              

Total Management Fees

     78,759       69,763       8,996     13 %

Performance Fees and Allocations

     4,818       (163,430 )     168,248     N/M  

Investment Income (Loss) and Other

     (15,136 )     (23,050 )     7,914     34 %
                              

Total Revenues

     68,441       (116,717 )     185,158     N/M  
                              

Expenses

        

Compensation and Benefits

     (5,124 )     (80,752 )     75,628     94 %

Other Operating Expenses

     20,453       22,200       (1,747 )   -8 %
                              

Total Expenses

     15,329       (58,552 )     73,881     N/M  
                              

Economic Net Income (Loss)

   $ 53,112     $ (58,165 )   $ 111,277     N/M  
                              

 

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The following operating metrics are used in the management of this business segment:

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Fee-Earning Assets Under Management (End of Period)

   $ 25,461,139     $ 25,061,921     $ 399,218     2 %
                              

Assets Under Management

        

Balance, Beginning of Period

   $ 23,933,511     $ 31,802,951      

Inflows, including Commitments

     628       58,660      

Outflows, including Distributions

     (49,786 )     (294,621 )    

Market Appreciation (Depreciation)

     (681,404 )     (915,967 )    
                    

Balance, End of Period

   $ 23,202,949     $ 30,651,023     $ (7,448,074 )   -24 %
                              

Capital Deployed

        

Limited Partner Capital Invested

   $ 196,140     $ 340,119     $ (143,979 )   -42 %
                              

Revenues

Revenues were $68.4 million for the three months ended March 31, 2009, an increase of $185.2 million as compared to $(116.7) million for the three months ended March 31, 2008. The increase in Performance Fees and Allocations and Investment Income (Loss) and Other was principally driven by positive performance fees earned on one of our funds and lower net depreciation in the total fair value of the underlying portfolio in the first quarter of 2009. The net depreciation of the segment’s underlying portfolio investments was approximately (3%) in the first quarter of 2009 compared to approximately (5%) and (20)% in the first and fourth quarters of 2008, respectively, as declines in telecommunications, hospitality and food service portfolio investments were partially offset by increases in energy investments and non-cyclicals. We are entitled to carried interest from an investment fund in the event investors in the fund achieve cumulative investment returns in excess of a specified rate. Each fund is considered separately in this regard and for a given fund performance fees can never be negative in the aggregate. As a result, despite the negative net depreciation on the segment’s underlying portfolio investments, we recorded positive performance fees for the quarter. The decrease in Management Fee Offsets was due to a decrease in the amortization of fees related to marketing of our funds and reduction of spending on due diligence for potential transactions. Transaction and Other Fees increased $3.1 million, driven by an increase in monitoring fees, partially offset by a reduction in transaction fees.

Expenses

Expenses were $15.3 million for the three months ended March 31, 2009, an increase of $73.9 million compared to $(58.6) million for the three months ended March 31, 2008. The first quarter of 2008 included a $109.5 million reversal of prior period carried interest allocations to certain personnel, resulting from the net depreciation in fair value of certain portfolio investments, compared with a reversal of $40.7 million in the first quarter of 2009, which also reflected a change to our carry compensation plan. As a result, Compensation and Benefits increased $75.6 million principally related to this reduction in compensation reversals. Other Operating Expenses decreased $1.7 million, driven principally by a decrease in professional fees.

Fee-Earning Assets Under Management

Fee-Earning Assets Under Management were $25.5 billion at March 31, 2009, an increase of $399.2 million, or 2%, compared with $25.1 billion at March 31, 2008. The increase was driven principally by $527.9 million of capital deployed in funds which charge a fee based upon invested capital, partially offset by net depreciation in the fair value of the segments’ underlying portfolio investments of $75.4 million and realizations of $57.1 million.

 

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Assets Under Management

Assets Under Management were $23.2 billion at March 31, 2009, a decrease of $7.4 billion, or 24%, compared with $30.7 billion at March 31, 2008. The decrease was primarily driven by a net depreciation in the fair value of the segment’s underlying portfolio investments of $6.8 billion and $378.0 million of realizations since March 31, 2008.

Capital Deployed

Limited Partner Capital Invested was $196.1 million for the three months ended March 31, 2009, a decrease of $144.0 million, or 42%, as compared to $340.1 million for the three months ended March 31, 2008. The decrease reflects smaller transaction sizes in the first quarter of 2009 as compared to the first quarter of 2008.

Real Estate

The following table presents our results of operations for our Real Estate segment:

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Segment Revenues

        

Management Fees

        

Base Management Fees

   $ 80,198     $ 66,751     $ 13,447     20 %

Transaction and Other Fees

     3,140       11,795       (8,655 )   -73 %

Management Fee Offsets

     (1,193 )     (404 )     (789 )   -195 %
                              

Total Management Fees

     82,145       78,142       4,003     5 %

Performance Fees and Allocations

     (228,573 )     (30,062 )     (198,511 )   N/M  

Investment Income (Loss) and Other

     (65,462 )     (176 )     (65,286 )   N/M  
                              

Total Revenues

     (211,890 )     47,904       (259,794 )   N/M  
                              

Expenses

        

Compensation and Benefits

     (37,319 )     35,688       (73,007 )   N/M  

Other Operating Expenses

     13,280       16,160       (2,880 )   -18 %
                              

Total Expenses

     (24,039 )     51,848       (75,887 )   N/M  
                              

Economic Net Income (Loss)

   $ (187,851 )   $ (3,944 )   $ (183,907 )   N/M  
                              

The following operating metrics are used in the management of this business segment:

 

     Three Months Ended
March 31,
    2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Fee-Earning Assets Under Management (End of Period)

   $ 22,867,992     $ 18,795,343     $ 4,072,649     22 %
                              

Assets Under Management

        

Balance, Beginning of Period

   $ 24,154,642     $ 26,128,049      

Inflows, including Commitments

     8,128       176,973      

Outflows, including Distributions

     (379,695 )     (31,293 )    

Market Appreciation (Depreciation)

     (2,328,980 )     4,569      
                    

Balance, End of Period

   $ 21,454,095     $ 26,278,298     $ (4,824,203 )   -18 %
                              

Capital Deployed

        

Limited Partner Capital Invested

   $ 215,123     $ 369,202     $ (154,079 )   -42 %
                              

 

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Revenues

Revenues were $(211.9) million for the three months ended March 31, 2009, a decrease of $259.8 million compared to $47.9 million for the three months ended March 31, 2008. The decreases in Performance Fees and Allocations and Investment Income (Loss) and Other were due principally to net depreciation in the fair value of the segment’s underlying portfolio investments of approximately (19%) compared with net depreciation of approximately (1%) and (30)% for the first and fourth quarters of 2008, respectively. The net depreciation in the first quarter of 2009 was primarily the result of a reduction in the fair value of certain investments in our portfolios due to revised operating projections for our portfolio investment companies, particularly in the office and lodging sectors. Office fundamentals, which generally trail the change in the overall economy, continued to deteriorate during the first quarter of 2009. Specifically, the vacancy rate in commercial office space has risen as leasing velocity has slowed. Additionally, the current economic environment continued to exert pressure on the operating results of hospitality assets. Base Management Fees increased $13.4 million, driven by a $4.1 billion increase in Fee Earning Assets Under Management from the first quarter of 2008. The increase in Base Management Fees was partially offset by a decrease in Transaction and Other Fees due to fewer closed fee-earning transactions in the first quarter of 2009.

Expenses

Expenses were $(24.0) million for the three months ended March 31, 2009, a decrease of $75.9 million as compared to $51.8 million for the three months ended March 31, 2008. Compensation and Benefits decreased $73.0 million, principally from the reversal of prior period carried interest allocations to certain personnel of $70.1 million.

Fee-Earning Assets Under Management

Fee-Earning Assets Under Management were $22.9 billion at March 31, 2009, an increase of $4.1 billion, or 22%, compared with $18.8 billion at March 31, 2008. The increase was primarily driven by additional capital raised for our European focused real estate fund since March 31, 2008.

Assets Under Management

Assets Under Management were $21.5 billion at March 31, 2009, a decrease of $4.8 billion, or 18%, compared with $26.3 billion at March 31, 2008. The change was primarily due to net depreciation in the fair value of the segment’s underlying portfolio investments of $9.2 billion, partially offset by $5.5 billion of inflows, principally due to additional capital raised for our European focused real estate fund since March 31, 2008.

Capital Deployed

Limited Partner Capital Invested was $215.1 million for the three months ended March 31, 2009, a decrease of $154.1 million, or 42%, from $369.2 million for the three months ended March 31, 2008. The decrease was due to a reduction in the volume and size of closed transactions in the first quarter of 2009 as compared to the first quarter of 2008.

 

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Marketable Alternative Asset Management

The following table presents our results of operations for our Marketable Alternative Asset Management segment:

 

     Three Months Ended March 31,     2009 vs. 2008  
           2009                 2008           $     %  
     (Dollars in Thousands)  

Segment Revenues

        

Management Fees

        

Base Management Fees

   $ 96,503     $ 103,187     $ (6,684 )   -6 %

Transaction and Other Fees

     443       1,128       (685 )   -61 %

Management Fee Offsets

     (4,213 )     —         (4,213 )   N/M  
                              

Total Management Fees

     92,733       104,315       (11,582 )   -11 %

Performance Fees and Allocations

     9,922       5,058       4,864     96 %

Investment Income (Loss) and Other

     (3,190 )     (79,383 )     76,193     96 %
                              

Total Revenues

     99,465       29,990       69,475     N/M  
                              

Expenses

        

Compensation and Benefits

     61,134       56,273       4,861     9 %

Other Operating Expenses

     23,907       18,307       5,600     31 %
                              

Total Expenses

     85,041       74,580       10,461     14 %
                              

Economic Net Income (Loss)

   $ 14,424     $ (44,590 )   $ 59,014     N/M  
                              

The following operating metrics are used in the management of this business segment:

 

     Three Months Ended March 31,     2009 vs. 2008  
     2009     2008     $     %  
     (Dollars in Thousands)  

Fee-Earning Assets Under Management (End of Period)

   $ 43,898,435     $ 49,090,455     $ (5,192,020 )   -11 %
                              

Assets Under Management

        

Balance, Beginning of Period

   $ 46,471,064     $ 44,496,372      

Inflows, including Commitments

     2,689,180       13,856,249      

Outflows, including Distributions

     (1,048,604 )     (477,958 )    

Market Appreciation (Depreciation)

     (223,516 )     (1,273,413 )    
                    

Balance, End of Period

   $ 47,888,124     $ 56,601,250     $ (8,713,126 )   -15 %
                              

Capital Deployed

        

Limited Partner Capital Invested

   $ 208,359       19,389     $ 188,970     N/M  
                              

Revenues

Revenues were $99.5 million for the three months ended March 31, 2009, an increase of $69.5 million as compared to $30.0 million for the three months ended March 31, 2008. The decreased loss in Investment Income (Loss) and Other was primarily related to the reduction in total capital invested in our funds of hedge funds, as compared with the first quarter of 2008, as well as the improved performance of our remaining investments in certain of our funds of hedge funds and credit-oriented funds for the first quarter of 2009 as compared to the first quarter of 2008. Additionally, the first quarter of 2008 included an investment loss associated with one of our then-existing proprietary hedge funds. Performance Fees and Allocations increased $4.9 million, principally driven by performance in certain of our credit-oriented funds. Base Management Fees decreased $6.7 million due to a $5.2 billion decrease in Fee-Earning Assets Under Management from the first quarter of 2008, partially offset by an increase associated with our acquisition of GSO in March 2008. The increase in Management Fee Offsets was due to the amortization of fees related to the marketing of certain of our credit-oriented funds.

 

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Expenses

Expenses were $85.0 million for the three months ended March 31, 2009, an increase of $10.5 million, or 14%, as compared to $74.6 million for the three months ended March 31, 2008. The increases in both Compensation and Benefits and Other Operating Expenses were principally due to our acquisition of GSO in March 2008.

Fee-Earning Assets Under Management

Fee-Earning Assets Under Management were $43.9 billion at March 31, 2009, a decrease of $5.2 billion, or 11%, compared to $49.1 billion at March 31, 2008. The decrease was primarily due to a reduction in the fair value of the segment’s underlying portfolio investments of $9.6 billion, primarily in our funds of hedge funds and closed-end mutual funds and the liquidation of one of our proprietary hedge funds in the fourth quarter of 2008. These decreases were partially offset by $12.7 billion of inflows, primarily additional capital raised.

Assets Under Management

Assets Under Management were $47.9 billion at March 31, 2009, a decrease of $8.7 billion, or 15%, compared to $56.6 billion at March 31, 2008. The change from the first quarter of 2008 was driven primarily by a reduction in the fair value of portfolio investments and redemptions, partially offset by capital raised. Assets Under Management were also affected by our decision to close two proprietary single manager hedge funds.

Capital Deployed

Limited Partner Capital Invested was $208.4 million for the three months ended March 31, 2009, an increase of $189.0 million compared to $19.4 million for the three months ended March 31, 2008. The increase principally reflected investments made by certain of our credit-oriented funds.

Financial Advisory

The following table presents our results of operations for our Financial Advisory segment:

 

     Three Months Ended March 31,    2009 vs. 2008  
         2009            2008        $     %  
     (Dollars in Thousands)  

Segment Revenues

          

Advisory Fees

   $ 90,940    $ 68,563    $ 22,377     33 %

Investment Income and Other

     1,045      2,597      (1,552 )   -60 %
                            

Total Revenues

     91,985      71,160      20,825     29 %
                            

Expenses

          

Compensation and Benefits

     50,952      46,967      3,985     8 %

Other Operating Expenses

     13,920      11,061      2,859     26 %
                            

Total Expenses

     64,872      58,028      6,844     12 %
                            

Economic Net Income

   $ 27,113    $ 13,132    $ 13,981     106 %
                            

Revenues

Revenues were $92.0 million for the three months ended March 31, 2009, an increase of $20.8 million, or 29%, as compared to $71.2 million for the three months ended March 31, 2008. The change was driven by an increase of $34.5 million in fees generated by our restructuring and reorganization advisory services business as continued credit market turmoil and low levels of available liquidity led to increased bankruptcies, debt defaults and debt restructurings. Additionally, fees earned by our corporate and mergers and acquisitions advisory services business increased $8.1 million, or 39%, as clients increasingly looked to us for independent advice in

 

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complicated transactions. These increases were partially offset by a decrease of $20.2 million in fees generated by our fund placement business as efforts to raise capital proved challenging in the current economic environment.

The revenues generated by each of the businesses in our financial advisory segment are transactional in nature and therefore results can fluctuate significantly from period to period.

Expenses

Expenses were $64.9 million for the three months ended March 31, 2009, an increase of $6.8 million, or 12%, as compared to $58.0 million for the three months ended March 31, 2008. Compensation and Benefits increased $4.0 million due to the increase in Advisory Fees, as a portion of compensation is directly related to the profitability of each of the services businesses. Other Operating Expenses increased $2.9 million, principally due to costs associated with the expansion of our corporate and mergers and acquisitions advisory services business.

Liquidity and Capital Resources

Liquidity and Capital Resources

Blackstone’s business model derives revenue primarily from third party assets under management and from advisory businesses. Blackstone is not a capital or balance sheet intensive business and targets operating expense levels such that total management and advisory fees exceed total operating expense each period. As a result, Blackstone requires limited capital resources to support the working capital or operating needs of our businesses. Blackstone draws primarily on the long term committed capital of our limited partner investors to fund the investment requirements of the Blackstone Funds and uses its own realizations and cash flows to invest in growth initiatives or make commitments to its own funds which are typically less than 5% of the assets under management of a fund.

Fluctuations in our balance sheet result primarily from activities of the Blackstone Funds which are consolidated. The majority economic ownership interests of these Blackstone Funds are reflected as Non-controlling Interests in Consolidated Entities in the condensed consolidated financial statements. The consolidation of these Blackstone Funds has no net effect on the Partnership’s Net Income or Partners’ Capital. Additionally, fluctuations in our balance sheet also include appreciation or depreciation in Blackstone investments in the Blackstone Funds, additional investments and redemptions of such interests in the Blackstone Funds and the collection of receivables related to management and advisory fees. For the three months ended March 31, 2009, we had total management and advisory fees and interest income of $347.1 million and total cash expenses of $257.6 million, generating Net Fee Related Earnings from Operations of $89.5 million for the quarter.

Blackstone has multiple sources of liquidity to meet its capital needs, including annual cash flows, accumulated earnings in the businesses, investments in its own liquid funds and access to the committed credit facility described below. At March 31, 2009, we had $776.3 million in cash, $400.1 million invested in liquid Blackstone funds and pending redemptions from our liquid funds of $38.7 million. The Consolidated Statements of Cash Flows reflect the cash flows of the Blackstone operating businesses as well as those of the consolidated Blackstone Funds.

We use Adjusted Cash Flows from Operations as a supplemental non-GAAP measure to assess our cash flows and amounts available for distribution to unitholders. In accordance with GAAP, certain of the Blackstone Funds are consolidated into the consolidated financial statements of Blackstone, notwithstanding the fact that Blackstone has only a minor economic interest in these funds. Consequently, Blackstone’s consolidated financial statements reflect the cash flows of the consolidated Blackstone Funds on a gross basis rather than the cash flows attributable to Blackstone. Adjusted Cash Flows from Operations is therefore intended to reflect the cash flows attributable to Blackstone and is equal to operating activities presented in accordance with GAAP, adjusted for cash flows relating to changes in our operating assets and liabilities, Blackstone Funds’ related investment

 

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activity, differences in the timing of realized gains between Blackstone and Blackstone Funds, non-controlling interests related to departed partners and non-controlling interests in income of consolidated entities and other non-cash adjustments. Management assesses Adjusted Cash Flows from Operations, which is derived from our segment reported results, by monitoring its key components, defined by management to be (1) Net Fee Related Earnings from Operations, (2) Performance Fees and Allocations net of related profit sharing interests that are included in compensation and (3) Blackstone investment income related to its investments in liquid funds and its net realized investment income on its illiquid investments.

We entered into a new $850 million line of credit, which will be effective on May 11, 2009. As a result of our strong cash and liquidity position, although we received $1.3 billion in commitments, we elected to reduce the line of credit under the renewed facility (“New Credit Facility”) to $850 million. The New Credit Facility provides for revolving credit borrowings, with a final maturity date of May 10, 2010. Interest on the borrowings is based on an adjusted LIBOR rate or alternate base rate, in each case plus a margin, and undrawn commitments bear a commitment fee. The New Credit Facility is unsecured and unguaranteed.

The following table is a reconciliation of Net Cash Provided by Operating Activities presented on a GAAP basis to Adjusted Cash Flows from Operations:

 

     Three Months Ended March 31,  
           2009                 2008        
     (Dollars in Thousands)  

Net Cash Provided by Operating Activities

   $ 555,882     $ 115,154  

Changes in Operating Assets and Liabilities

     (182,718 )     (316,363 )

Blackstone Funds Related Investment Activities

     (273,125 )     248,434  

Net Realized Gains (Losses) on Investments

     (53,190 )     (256 )

Non-controlling Interests in Income of Consolidated Entities

     685,129       793,184  

Realized Gains (Losses) — Blackstone Funds

     (6,488 )     (23,854 )

Cash Flows from Operations — Adjustments

    

Interests Held by Blackstone Holdings Limited Partners (a)

     (659,929 )     (804,054 )

Incremental Cash Tax Effect (b)

     9,223       (16,647 )
                

Adjusted Cash Flows from Operations

   $ 74,784     $ (4,402 )
                

The following table provides the details of the components of Adjusted Cash Flows from Operations. Adjusted Cash Flows from Operations is the principal factor in determining the amount of distributions to unitholders.

 

     Three Months Ended March 31,  
           2009                 2008        

Fee Related Earnings

    

Total Management and Advisory Fees (c)

   $ 347,093     $ 329,587  

Total Expenses (d)

     257,575       262,026  
                

Net Fee Related Earnings from Operations

     89,518       67,561  
                

Performance Fees and Allocations Net of Related Compensation (e)

     —         8,286  
                

Blackstone Investment Income (f)

    

Liquid

     (1,702 )     (82,911 )

Illiquid

     (13,032 )     2,662  
                
     (14,734 )     (80,249 )
                

Adjusted Cash Flows from Operations

   $ 74,784     $ (4,402 )
                

 

(a) Represents an adjustment to add back net income (loss) allocable to interest holders of Blackstone Holdings Limited Partners after the Reorganization recorded as Non-Controlling Interests.

 

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(b) Represents the provisions for and/or adjustments to income taxes that were calculated using the same methodology applied in calculating such amounts for the period after the reorganization.
(c) Comprised of total segment Management and Advisory Fees plus Interest Income.
(d) Comprised of total segment compensation expense (excluding compensation expense related to Performance Fees and Allocations pursuant to Blackstone’s profit sharing plans related to carried interest and incentive fees which are included in (e) below), other operating expenses and Blackstone’s estimate of cash taxes currently due.
(e) Represents realized Performance Fees and Allocations net of corresponding actual amounts due under Blackstone’s profit sharing plans related thereto.
(f) Comprised of Blackstone’s investment income (realized and unrealized) on its liquid investments from its Marketable Alternative Asset Management segment as well as its net realized investment income on its illiquid investments, principally from its Corporate Private Equity and Real Estate Segments and permanent impairment charges on certain illiquid investments.

Our Sources of Cash and Liquidity Needs

We expect that our primary liquidity needs will be cash to (1) provide capital to facilitate the growth of our existing businesses which principally includes funding our general partner and co-investment commitments to our funds, (2) provide capital to facilitate our expansion into new businesses that are complementary, (3) pay operating expenses, including cash compensation to our employees and other obligations as they arise, (4) fund modest capital expenditures, (5) repay borrowings and related interest costs, (6) pay income taxes and (7) make distributions to our unitholders and the holders of Blackstone Holdings Partnership Units. Our own capital commitments to our funds and funds we invest in as of March 31, 2009, consisted of the following:

 

Fund

   Original
Commitment
   Remaining
Commitment
     
     (Dollars in Thousands)

Corporate Private Equity and Related Funds

     

BCP VI

   $ 500,000    $ 500,000

BCP V

     629,356      204,319

BCP IV

     150,000      16,416

BCOM

     50,000      5,444

Real Estate Funds

     

BREP VI

     750,000      441,703

BREP V

     52,545      8,069

BREP International II

     26,410      4,886

BREP IV

     50,000      —  

BREP International

     20,000      3,293

BREP Europe III

     100,000      100,000

Real Estate Special Situations

     50,000      29,425

Marketable Alternative Asset Management

     

BMEZZ II

     17,692      3,626

BMEZZ

     41,000      2,609

Strategic Alliance

     50,000      20,928

Blackstone Credit Liquidity Partners

     32,244      13,043

Value Recovery

     25,000      5,694

GSO Capital Opportunities

     1,000      590

GSO Liquidity Partners

     601      —  

GSO Liquidity Sidecar

     250      —  

GSO Energizer Sidecar II

     2      —  

Co-Investment Partners LLC

     10,954      5,504
             

Total

   $ 2,557,054    $ 1,365,549
             

 

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For some of the general partner commitments shown in the table above we require our senior managing directors and certain other professionals to fund a portion of the commitment even though the ultimate obligation to fund the aggregate commitment is ours pursuant to the governing agreements of the respective funds. For BCP VI, BREP VI and BREP Europe III it is intended that our senior managing directors and certain other professionals will fund $250 million, $150 million and $35 million of the aggregate applicable general partner commitment shown above, respectively. We expect our commitments to be drawn down over time and to be funded by available cash and cash generated from operations and realizations. Taking into account prevailing market conditions and both the liquidity and cash or liquid investment balances, we believe that the sources of liquidity described below will be sufficient to fund our working capital requirements.

In addition to the cash we received in connection with our IPO, we expect to recei