The Blackstone Group (NYSE: BX) is an alternative asset manager and provider of financial advisory services. Originally an M&A boutique, Blackstone's current activities involve a broad range of both advisory and investment expertise. Its investing activities are spread among private equity funds, real estate opportunity funds, and a variety of hedge funds. In addition to advising on mergers and acquisitions, the firm also advises institutional clients on matters such restructuring and reorganization and fund placement.
As of December 2009, Blackstone had $98.2 billion in assets under management. While the company's operational performance has benefited from a boom in the private equity industry, the debt market, which is key to private equity's operations, has been showing signs of contracting due in large part to the subprime lending crisis. This growing credit crunch could make it difficult for Blackstone to continue realizing the same high level of returns.
Interest rates are a key metric for any Blackstone investor to watch - private equity companies borrow billions of dollars from banks to fund their purchases of companies. Then they use the companies' own revenues to pay off this debt, or else re-sell the company at a profit. Low interest rates make it cheap for companies like Blackstone to do business. When interest rates rise, it becomes more difficult for them to buy and resell companies at a profit.
Second Quarter 2010 Results
For the second quarter of 2010, Blackstone's revenues were $552.3 million, up significantly from $403.6 million for the second quarter of 2009. The improvement was driven by increases in Investment Income derived from an increase in the carrying value of the underlying portfolio investments in the Private Equity and Real Estate segments, and by increased fees earned in the Financial Advisory segment. These increases were partially offset by decreases in Performance Fees and Allocations.
GAAP results for the second quarter of 2010 included Revenues of $550.1 million, compared to $406.4 million for the second quarter of 2009, and Net Loss Attributable to The Blackstone Group L.P. of $193.3 million, compared to a net loss of $164.3 million for the second quarter of 2009.
Global equity markets declined sharply in the second quarter of 2010, while credit markets were flat to slightly down and spreads moderately widened. Volatility increased and investors became more risk averse, responding to growing concerns over the strength of the economic recovery, European sovereign debt issues and regulatory uncertainty. In real estate, the fundamental picture continued to improve in the second quarter. In office, certain markets continue to show improvements in occupancy trends and an increasing level of leasing activity. In hospitality, industry RevPAR (Revenue Per Available Room), an important hospitality industry metric, grew 6% in the second quarter, and has increased for four consecutive months, following nearly two years of declines.
The Company‘s Private Equity segment is a global business with 107 investment professionals and offices in New York, London, Menlo Park, Mumbai, Hong Kong, Beijing and Shanghai. It manages five general private equity funds, as well as one specialized fund focusing on communications-related investments. The Company’s Private Equity funds, which it refers to as the Blackstone Capital Partners (BCP) funds, invest primarily in control-oriented, privately negotiated investments and generally utilize leverage in consummating the investments they make. As of December 31, 2009, its Private Equity segment had $24.8 billion of assets under management, or 25.2% of its total assets under management.
The CoJack mpany’s Real Estate Segment is engaged in the real estate investing with an assortment of real estate funds that are diversified geographically and across a variety of sectors. It has managed six opportunistic real estate funds, two internationally focused real estate funds, a European focused real estate fund and a number of real estate debt-investment funds. The Company’s real estate funds, which it refers to as the Blackstone Real Estate Partners (BREP) funds, have made significant investments in lodging, major urban office buildings and a variety of real estate operating companies.
The BREP funds invest primarily in control-oriented, privately negotiated real estate investments and generally utilize leverage in consummating the investments they make. In addition, its debt-investment funds target non-controlling real estate debt-related investment opportunities in the public and private markets, primarily in the United States and Europe. The Real Estate segment consists of 69 investment professionals with offices in New York, Chicago, London, Paris, Mumbai, Tokyo, and Hong Kong. As of December 31, 2009, the Company’s Real Estate segment had $20.4 billion of assets under management, or 20.8% of its total assets under management.
The Company’s Credit and Marketable Alternatives segment consists of its funds of hedge funds, credit-oriented funds, separately managed accounts and CLO vehicles and publicly-traded, closed-end mutual funds. As of December 31, 2009, its Credit and Marketable Alternatives segment had $53 billion of assets under management, or 54% of its total assets under management. The Company’s funds of hedge funds group, which it refers to as Blackstone Alternative Asset Management (BAAM), manages a variety of funds of hedge funds and separately managed accounts. Its funds of hedge funds operation had approximately $27.1 billion of assets under management as of December 31, 2009.
The Company’s credit-oriented funds, CLO and separately managed accounts are managed by its subsidiary, GSO Capital Partners (GSO). GSO had $24.2 billion of assets under management as of December 31, 2009. The Company’s credit-oriented businesses have 73 investment professionals and offices in New York, London and Houston. The credit-oriented funds, which the Company manages or advises include senior credit-oriented funds, distressed debt funds, mezzanine funds and general credit-oriented funds focused on the leveraged finance marketplace. In addition, GSO manages a number of credit-oriented separately managed accounts. Those funds or accounts have investment portfolios consisted of securities spread across the capital structure, including senior debt, subordinated debt, preferred stock and common equity. In addition, GSO manages 24 separate CLO vehicles with total assets under management of approximately $13.3 billion focused primarily on senior secured debt.
The Company’s Financial Advisory segment consists of 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. Its financial advisory businesses are global businesses with 227 professionals and offices in New York, Atlanta, Chicago, Dallas, Boston, Los Angeles, San Francisco, Menlo Park, London, Paris, Hong Kong, Beijing and Tokyo. Its financial and strategic advisory business, Blackstone Advisory Partners L.P., has been an independent provider of creative solutions in complex and critical financial advisory assignments.
Blackstone focuses on a range of transaction execution capabilities with respect to acquisitions, mergers, joint ventures, minority investments, asset swaps, divestitures, takeover defenses, corporate finance advisory, private placements and distressed sales with offices in New York, London, Hong Kong, Atlanta, Boston, Menlo Park, Paris and Beijing. Its clients include Aluminum Corporation of China, American International Group, Inc. (AIG), Flextronics International LTD., Genworth Financial, Inc., Kraft Foods, Pennsylvania Insurance Commission, The Procter & Gamble Company, Publicis Groupe S.A., Suez S.A. and Xerox Corporation.
The Company’s restructuring and reorganization advisory operation acts as an adviser to companies and creditors in restructurings and bankruptcies with offices in New York and London. Its restructuring and reorganization advisory clients include companies, creditors, corporate parents, hedge funds, financial sponsors and acquirers of troubled companies. Some of the its clients include AIG, Allied Capital, American Axle & Manufacturing, BAA, Delta Air Lines, Ford Motor Company, MBIA, Nortek, SemGroup, Thule and W.R. Grace. Park Hill Group provides fund placement services for private equity funds, real estate funds, venture capital funds and hedge funds. Park Hill Group primarily provides placement services to unrelated third-party sponsored funds. It also assists the Company in raising capital for its own investment funds from time to time and providing insights into new alternative asset products and trends.
In September 2009, Blackstone sold 57% interest in Cineworld Group PLC. In November 2009, the Company and Lion Capital LLP announced that they have closed on the sale of the Orangina Schweppes Group (Orangina) to Suntory Holdings Limited (Suntory). In December 2009, Pinnacle Foods Group LLC, a private equity portfolio company of Blackstone Group L.P., completed its acquisition of Birds Eye Foods, Inc.
The private equity industry, which has been booming since the early 2000s, is showing signs of slowing down. A principal feature of private equity industry is its extensive use of debt to finance transactions, usually in the form of high-yield bonds. While these highly leveraged buyouts can yield very high returns, they're also significantly riskier than other types of investments. The fallout in the subprime lending industry has diminished investors' appetite for risk; as a result, it has become more difficult for private equity firms and the investment banks that structure their deals to find buyers for these high-yield bonds (also known as "junk" bonds"). These bonds are critical to Blackstone's continued ability to finance its operations, which could mean a significant decrease in the number of deals it makes in the years to come.
In response to the growing contraction in the debt market, the U.S. Federal Reserve decided to cut interest rates, with the intention of stimulating economic activity. As interest rates fall, the cost of borrowing money falls as well, which is particularly beneficial for a large borrower like Blackstone. In addition, lower interest rates make traditional savings accounts less attractive to consumers, driving them to invest their money elsewhere. The rate cuts should relieve some pressure in the debt market, which has been the biggest source of concern for Blackstone and other private equity firms.
Since its IPO, Blackstone has had to reconcile its private equity roots with the regulatory requirements of a publicly traded company. Currently, the firm is classified as a limited partnership rather than a corporation, a distinction that provides it with substantial tax savings. Additionally, Blackstone relies on a number of very complex exemptions to avoid being classified as an "investment company" (as defined by the U.S. Investment Company Act of 1940). Any changes to these rules or Blackstone's legal classification would have a significant, material impact on the firm's performance. The Antitrust Division of the U.S. Department of Justice has reportedly requested information from several of Blackstone's competitors regarding private equity transactions; the meaning of these requests is unclear, but it does signal a potential increase in legislative hurdles for the lightly regulated private equity industry.
China took a $3 billion stake before Blackstone's IPO, which amounted to approximately 10% of the company's pre-public value. This investment by the Chinese government may be a boon to Blackstone's current and future investments in China's burgeoning economy.
Most of Blackstone's competition comes from other private equity firms, which are almost all privately held. Large investment banks, such as Goldman Sachs Group (GS), Merrill Lynch (MER), and Bank of America (BAC), often have internal private equity divisions, though the majority of their income is generated from other business activities.