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 June 30, 2013

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  x    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   ¨  (Do not check if a smaller reporting company)    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 July 31, 2013 was 468,367,363. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of July 31, 2013 was 94,583,468.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I.

   FINANCIAL INFORMATION   

ITEM 1.

   FINANCIAL STATEMENTS      4   
  

Unaudited Condensed Consolidated Financial Statements—June 30, 2013 and 2012:

  
  

Condensed Consolidated Statements of Financial Condition as of June 30, 2013 and December  31, 2012

     4   
  

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2013 and 2012

     6   
  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June  30, 2013 and 2012

     7   
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2013 and 2012

     8   
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

     10   
  

Notes to Condensed Consolidated Financial Statements

     12   

ITEM 1A.

   UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION      60   

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      63   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      120   

ITEM 4.

   CONTROLS AND PROCEDURES      123   

PART II.

   OTHER INFORMATION   

ITEM 1.

   LEGAL PROCEEDINGS      124   

ITEM 1A.

   RISK FACTORS      125   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      126   

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      126   

ITEM 4.

   MINE SAFETY DISCLOSURES      126   

ITEM 5.

   OTHER INFORMATION      126   

ITEM 6.

   EXHIBITS      127   

SIGNATURES

        128   

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, 2012 and in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“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 report and in our other periodic filings. The forward-looking

 

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statements speak only as of the date of this report, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Website and Social Media Disclosure

We use our website (www.blackstone.com), our corporate Facebook page (www.facebook.com/blackstone) and our corporate Twitter account (@Blackstone) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about Blackstone when you enroll your e-mail address by visiting the “E-mail Alerts” section of our website at http://ir.blackstone.com/alerts.cfm?. The contents of our website and social media channels are not, however, a part of this report.

 

 

In this report, references to “Blackstone,” the “Partnership”, “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 Mr. Stephen A. Schwarzman, our founder, and other Blackstone personnel include the ownership of personal planning vehicles and family members of these individuals.

“Blackstone Funds,” “our funds” and “our investment funds” refer to the private equity funds, real estate funds, funds of hedge funds, credit-focused funds, collateralized loan obligation (“CLO”) and collateralized debt obligation (“CDO”) vehicles, real estate investment trusts and registered investment companies that are managed by Blackstone. “Our carry funds” refer to the private equity funds, real estate funds and certain of the credit-focused funds (with multi-year drawdown, commitment-based structures that only pay carry on the realization of an investment) that are managed by Blackstone. Blackstone’s Private Equity segment comprises its management of private equity funds (including our sector and regional focused funds), which we refer to collectively as our Blackstone Capital Partners (“BCP”) funds, and certain multi-asset class investment funds which we collectively refer to as our Blackstone Tactical Opportunities Accounts (“Tactical Opportunities”). We refer to our real estate opportunistic funds as our Blackstone Real Estate Partners (“BREP”) funds and our real estate debt investment funds as our Blackstone Real Estate Debt Strategies (“BREDS”) funds. We refer to our listed real estate investment trusts as “REITs”. “Our hedge funds” refer to our funds of hedge funds, certain of our real estate debt investment funds and certain other credit-focused funds, which are managed by Blackstone.

“Assets under management” refers to the assets we manage. Our assets under management equals the sum of:

 

  (a) the fair value of the investments held by our carry funds, REITs and our side-by-side and co-investment entities managed by us, plus the capital that we are entitled to call from investors in those funds and entities pursuant to the terms of their respective capital commitments, including capital commitments to funds that have yet to commence their investment periods,

 

  (b) the net asset value of our funds of hedge funds, hedge funds, and certain registered investment companies,

 

  (c) the fair value of assets we manage pursuant to separately managed accounts,

 

  (d) the amount of capital raised for our CLOs and the amount of debt and equity outstanding for our CDOs, and

 

  (e) the gross amount of assets (including leverage) for certain of our credit-focused registered investment companies.

 

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Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Our funds of hedge funds and hedge funds generally have structures that afford an investor the right to withdraw or redeem their interests on a periodic basis (for example, annually or quarterly), in most cases upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days’ notice, depending on the fund and the liquidity profile of the underlying assets. Investment advisory agreements related to separately managed accounts may generally be terminated by an investor on 30 to 90 days’ notice.

“Fee-earning assets under management” refers to the assets we manage on which we derive management and / or performance fees. Our fee-earning assets under management equals the sum of:

 

  (a) for our Private Equity segment funds and carry funds including certain real estate debt investment funds in our Real Estate segment, the amount of capital commitments, remaining invested capital or par value of assets held, depending on the fee terms of the fund,

 

  (b) for our credit-focused carry funds, the amount of remaining invested capital (which may include leverage) or net asset value, depending on the fee terms of the fund,

 

  (c) the remaining invested capital of co-investments managed by us on which we receive fees,

 

  (d) the net asset value of our funds of hedge funds, hedge funds and certain registered investment companies,

 

  (e) the fair value of assets we manage pursuant to separately managed accounts,

 

  (f) the net proceeds received from equity offerings and accumulated core earnings of our REITs,

 

  (g) the aggregate par amount of collateral assets, including cash, of our CLOs and CDOs, and

 

  (h) the gross amount of assets (including leverage) for certain of our credit-focused registered investment companies.

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, the remaining amount of invested capital at cost depending on whether the investment period has or has not expired or the fee terms of the fund. 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.

This report does not constitute an offer of any Blackstone Fund.

 

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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)

 

     June 30,
2013
     December 31,
2012
 

Assets

     

Cash and Cash Equivalents

   $ 660,977       $ 709,502   

Cash Held by Blackstone Funds and Other

     1,176,875         1,404,411   

Investments (including assets pledged of $0 and $141,931 at June 30, 2013 and December 31, 2012, respectively)

     19,897,566         20,847,270   

Accounts Receivable

     936,240         638,164   

Reverse Repurchase Agreements

     176,273         248,018   

Due from Affiliates

     997,055         1,120,067   

Intangible Assets, Net

     554,043         598,535   

Goodwill

     1,703,602         1,703,602   

Other Assets

     347,921         376,372   

Deferred Tax Assets

     1,292,326         1,285,611   
  

 

 

    

 

 

 

Total Assets

   $ 27,742,878       $ 28,931,552   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital

     

Loans Payable

   $ 11,363,892       $ 13,051,404   

Due to Affiliates

     1,824,009         2,002,644   

Accrued Compensation and Benefits

     1,380,546         1,254,978   

Securities Sold, Not Yet Purchased

     77,553         226,425   

Repurchase Agreements

     —          142,266   

Accounts Payable, Accrued Expenses and Other Liabilities

     1,096,167         1,038,888   
  

 

 

    

 

 

 

Total Liabilities

     15,742,167         17,716,605   
  

 

 

    

 

 

 

Commitments and Contingencies

     

Redeemable Non-Controlling Interests in Consolidated Entities

     1,978,286         1,556,185   
  

 

 

    

 

 

 

Partners’ Capital

     

Partners’ Capital (common units: 564,782,122 issued and outstanding as of June 30, 2013; 556,354,387 issued and outstanding as of December 31, 2012)

     5,202,090         4,955,649   

Appropriated Partners’ Capital

     335,656         509,028   

Accumulated Other Comprehensive Income

     1,154         2,170   

Non-Controlling Interests in Consolidated Entities

     1,560,344         1,443,559   

Non-Controlling Interests in Blackstone Holdings

     2,923,181         2,748,356   
  

 

 

    

 

 

 

Total Partners’ Capital

     10,022,425         9,658,762   
  

 

 

    

 

 

 

Total Liabilities and Partners’ Capital

   $ 27,742,878       $ 28,931,552   
  

 

 

    

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands)

The following presents the portion of the consolidated balances presented above attributable to consolidated Blackstone Funds which are variable interest entities. The following assets may only be used to settle obligations of these consolidated Blackstone Funds and these liabilities are only the obligations of these consolidated Blackstone Funds and they do not have recourse to the general credit of Blackstone.

 

     June 30,
2013
     December 31,
2012
 

Assets

     

Cash Held by Blackstone Funds and Other

   $ 947,924       $ 1,163,915   

Investments

     10,582,000         12,320,611   

Accounts Receivable

     190,249         187,343   

Due from Affiliates

     25,133         27,034   

Other Assets

     36,897         35,447   
  

 

 

    

 

 

 

Total Assets

   $ 11,782,203       $ 13,734,350   
  

 

 

    

 

 

 

Liabilities

     

Loans Payable

   $ 9,690,646       $ 11,375,877   

Due to Affiliates

     150,323         253,546   

Accounts Payable, Accrued Expenses and Other

     454,301         518,656   
  

 

 

    

 

 

 

Total Liabilities

   $ 10,295,270       $ 12,148,079   
  

 

 

    

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  

Revenues

       

Management and Advisory Fees, Net

  $ 578,723      $ 488,048      $ 1,060,856      $ 959,724   
 

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees

       

Realized

       

Carried Interest

    183,288        55,929        477,458        69,489   

Incentive Fees

    76,104        11,631        99,845        16,910   

Unrealized

       

Carried Interest

    456,706        84,290        634,053        383,086   

Incentive Fees

    938        (16,436     106,736        50,699   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Performance Fees

    717,036        135,414        1,318,092        520,184   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income (Loss)

       

Realized

    75,490        5,758        117,843        22,093   

Unrealized

    56,570        (10,519     162,800        62,307   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Income (Loss)

    132,060        (4,761     280,643        84,400   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest and Dividend Revenue

    13,814        9,267        26,371        16,903   

Other

    (1,163     (765     981        (1,972
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    1,440,470        627,203        2,686,943        1,579,239   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

       

Compensation and Benefits Compensation

    478,981        533,367        930,411        1,028,622   

Performance Fee Compensation

       

Realized

       

Carried Interest

    75,910        7,898        165,347        15,836   

Incentive Fees

    35,014        5,576        45,522        9,828   

Unrealized

       

Carried Interest

    172,824        36,815        268,296        121,359   

Incentive Fees

    3,084        (9,595     47,562        3,183   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

    765,813        574,061        1,457,138        1,178,828   

General, Administrative and Other

    117,365        135,737        226,671        278,503   

Interest Expense

    26,956        13,773        54,018        28,291   

Fund Expenses

    4,628        16,248        12,036        37,990   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    914,762        739,819        1,749,863        1,523,612   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Income

       

Net Gains from Fund Investment Activities

    40,966        248,230        108,176        536,372   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Provision for Taxes

    566,674        135,614        1,045,256        591,999   

Provision for Taxes

    56,082        41,337        107,075        80,090   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

    510,592        94,277        938,181        511,909   

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

    22,366        (17,666     84,682        36,594   

Net Income Attributable to Non-Controlling Interests in Consolidated Entities

    27,944        239,934        18,492        437,576   

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

    249,134        (53,027     456,224        54,378   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 211,148      $ (74,964   $ 378,783      $ (16,639
 

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared Per Common Unit

  $ 0.30      $ 0.10      $ 0.72      $ 0.32   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Common Unit—Basic and Diluted

  $ 0.36      $ (0.14   $ 0.65      $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Common Units Outstanding

       

Common Units, Basic

    583,843,094        528,778,977        583,086,840        517,882,253   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

    586,763,053        528,778,977        586,235,677        517,882,253   
 

 

 

   

 

 

   

 

 

   

 

 

 

Revenues Earned from Affiliates

       

Management and Advisory Fees, Net

  $ 80,752      $ 56,133      $ 120,123      $ 104,117   
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013      2012     2013     2012  

Net Income

   $ 510,592       $ 94,277      $ 938,181      $ 511,909   

Other Comprehensive Income (Loss), Net of Tax — Currency Translation Adjustment

     10,018         (21,255     (1,932     (23,429
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive Income

     520,610         73,022        936,249        488,480   

Less:

         

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

     22,366         (17,666     84,682        36,594   

Comprehensive Income Attributable to Non-Controlling Interests in Consolidated Entities

     34,856         220,044        17,576        414,173   

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

     249,134         (53,027     456,224        54,378   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ 214,254       $ (76,329   $ 377,767      $ (16,665
  

 

 

    

 

 

   

 

 

   

 

 

 

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.                          
     Common
Units
     Partners’
Capital
    Appro-
priated
Partners’
Capital
    Accumulated
Other
Compre-
hensive
Income
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
 

Balance at December 31, 2012

     556,354,387       $ 4,955,649      $ 509,028      $ 2,170      $ 1,443,559      $ 2,748,356      $ 9,658,762      $ 1,556,185   

Net Income

     —             378,783        —          —          18,492        456,224        853,499        84,682   

Allocation of Losses of Consolidated CLO Entities

     —           —          (141,719     —          141,719        —          —          —     

Currency Translation Adjustment

     —           —          —          (1,016     (916     —          (1,932     —     

Allocation of Currency Translation Adjustment of Consolidated CLO Entities

     —           —          (916     —          916        —          —          —     

Capital Contributions

     —           —          —          —          95,651        153        95,804        502,372   

Capital Distributions

     —           (412,480     —          —          (137,786     (492,635     (1,042,901     (165,003

Transfer of Non-Controlling Interests in Consolidated Entities

     —           —          —          —          (1,291     —          (1,291     —     

Purchase of Interests from Certain Non-Controlling Interest Holders

     —           (22     —          —          —          —          (22     —     

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

     —           76,899        —          —          —          —          76,899        —     

Equity-Based Compensation

     —           216,736        —          —          —          213,049        429,785        —     

Relinquished with Deconsolidation and Liquidation of Partnership

     —           —          (30,737     —          —          —          (30,737     50   

Net Delivery of Vested Common Units

     5,988,448         (15,162     —          —          —          (279     (15,441     —     

Change in The Blackstone Group L.P.’s Ownership Interest

     —           (10,476     —          —          —          10,476        —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

     2,439,287         12,163        —          —          —          (12,163     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     564,782,122       $ 5,202,090      $ 335,656      $ 1,154      $ 1,560,344      $ 2,923,181      $ 10,022,425      $ 1,978,286   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

8


Table of Contents

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.                          
     Common
Units
     Partners’
Capital
    Appro-
priated
Partners’
Capital
    Accumulated
Other
Compre-
hensive
Income
    Non-Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
 

Balance at December 31, 2011

     489,430,907       $ 4,281,841      $ 386,864      $ 1,958      $ 1,029,270      $ 2,460,520      $ 8,160,453      $ 1,091,833   

Transition and Acquisition Adjustments Relating to Consolidation of CLO Entities

     —           —          233,386        —          155        —          233,541        —     

Net Income (Loss)

     —           (16,639     —          —          437,576        54,378        475,315        36,594   

Allocation of Income of Consolidated CLO Entities

     —           —          370,084        —          (370,084     —          —          —     

Currency Translation Adjustment

     —           —          —          (26     (23,403     —          (23,429     —     

Allocation of Currency Translation Adjustment of Consolidated CLOs

     —           —          (23,403     —          23,403        —          —          —     

Capital Contributions

     —           —          —          —          97,832        —          97,832        210,447   

Capital Distributions

     —           (163,964     —          —          (47,843     (226,326     (438,133     (100,728

Transfer of Non-Controlling Interests in Consolidated Entities

     —           —          —          —          (3,616     (943     (4,559     —     

Purchase of Interests from Certain Non-Controlling Interest Holders

     —           (33     —          —          —          —          (33     —     

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

     —           12,743        —          —          —          —          12,743        —     

Equity-Based Compensation

     —           234,224        —          —          —          274,730        508,954        —     

Relinquished in Deconsolidation and Liquidation of Partnership

     —           —          —          —          —          —          —          20,149   

Net Delivery of Vested Common Units

     8,175,645         (17,032     —          —          —          (207     (17,239     —     

Change in The Blackstone Group L.P.’s Ownership Interest

     —           (9,467     —          —          —          9,467        —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

     22,148,152         91,649        —          —          —          (91,649     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

     519,754,704       $ 4,413,322      $ 966,931      $ 1,932      $ 1,143,290      $ 2,479,970      $ 9,005,445      $ 1,258,295   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

9


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Six Months Ended June 30,  
     2013     2012  

Operating Activities

    

Net Income

   $ 938,181      $ 511,909   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Blackstone Funds Related:

    

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

     (277,805     (520,599

Net Realized Gains on Investments

     (788,643     (97,353

Changes in Unrealized Gains on Investments Allocable to The Blackstone Group L.P.

     (160,642     (31,230

Unrealized Appreciation on Hedge Activities

     —          22,599   

Non-Cash Performance Fees

     (381,415     (332,432

Non-Cash Performance Fee Compensation

     526,727        150,206   

Equity-Based Compensation Expense

     378,587        467,005   

Amortization of Intangibles

     44,492        84,835   

Other Non-Cash Amounts Included in Net Income

     101,767        24,379   

Cash Flows Due to Changes in Operating Assets and Liabilities:

    

Cash Held by Blackstone Funds and Other

     227,249        152,335   

Cash Relinquished with Deconsolidation and Liquidation of Partnership

     (135,843     20,148   

Accounts Receivable

     (44,072     (130,775

Reverse Repurchase Agreements

     71,745        50,961   

Due from Affiliates

     126,242        (20,202

Other Assets

     2,966        (8,051

Accrued Compensation and Benefits

     (267,844     31,071   

Securities Sold, Not Yet Purchased

     (143,916     (50,143

Accounts Payable, Accrued Expenses and Other Liabilities

     (342,707     (425,377

Repurchase Agreements

     (142,073     14,138   

Due to Affiliates

     (34,986     (27,892

Treasury Cash Management Strategies:

    

Investments Purchased

     (2,258,191     (1,382,392

Cash Proceeds from Sale of Investments

     2,533,672        1,356,654   

Blackstone Funds Related:

    

Investments Purchased

     (5,163,545     (3,593,721

Cash Proceeds from Sale or Pay Down of Investments

     6,530,610        4,080,259   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,340,556        346,332   
  

 

 

   

 

 

 

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (14,645     (20,948

Net Cash Paid for Acquisitions, Net of Cash Acquired

     —          (156,972

Changes in Restricted Cash

     5,804        (176
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (8,841     (178,096
  

 

 

   

 

 

 

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

     (302,789     (141,769

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     595,543        297,528   

continued…

See notes to condensed consolidated financial statements.

 

10


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Six Months Ended June 30,  
     2013     2012  

Purchase of Interests from Certain Non-Controlling Interest Holders

   $ (22   $ (32

Net Settlement of Vested Common Units and Repurchase of Common and Holdings Units

     (15,441     (17,239

Proceeds from Loans Payable

     2,850        4,899   

Repayment and Repurchase of Loans Payable

     (3,691     (10,115

Distributions to Unitholders

     (905,115     (390,290

Blackstone Funds Related:

    

Proceeds from Loans Payable

     4,075        3,981   

Repayment of Loans Payable

     (755,045     (257,283
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (1,379,635     (510,320
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (605     (115
  

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (48,525     (342,199

Cash and Cash Equivalents, Beginning of Period

     709,502        754,744   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 660,977      $ 412,545   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 56,621      $ 42,853   
  

 

 

   

 

 

 

Payments for Income Taxes

   $ 41,808      $ 14,752   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

    

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ (291   $ (4,377
  

 

 

   

 

 

 

Net Assets Related to the Consolidation of CLO Vehicles

   $ —        $ 233,541   
  

 

 

   

 

 

 

In-kind Redemption of Capital

   $ —        $ (2,017
  

 

 

   

 

 

 

In-kind Contribution of Capital

   $ 2,323      $ 2,017   
  

 

 

   

 

 

 

Transfer of Interests to Non-Controlling Interest Holders

   $ (1,291   $ (3,615
  

 

 

   

 

 

 

Change in The Blackstone Group L.P.’s Ownership Interest

   $ (10,476   $ (9,467
  

 

 

   

 

 

 

Net Settlement of Vested Common Units

   $ 53,585      $ 91,690   
  

 

 

   

 

 

 

Conversion of Blackstone Holdings Units to Common Units

   $ 12,163      $ 91,649   
  

 

 

   

 

 

 

Acquisition of Ownership Interests from Non-Controlling Interest Holders:

    

Deferred Tax Asset

   $ (85,538   $ (76,569
  

 

 

   

 

 

 

Due to Affiliates

   $ 8,639      $ 63,826   
  

 

 

   

 

 

 

Partners’ Capital

   $ 76,899      $ 12,743   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

11


Table of Contents

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

The Blackstone Group L.P., together with its subsidiaries, (“Blackstone” or the “Partnership”) is a leading global manager of private capital and provider of financial advisory services. The alternative asset management business includes the management of private equity funds, real estate funds, real estate investment trusts (“REITs”), funds of hedge funds, credit-focused funds, collateralized loan obligation (“CLO”) vehicles, collateralized debt obligation (“CDO”) vehicles, separately managed accounts and registered investment companies (collectively referred to as the “Blackstone Funds”). Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. Blackstone’s business is organized into five segments: private equity, real estate, hedge fund solutions, credit and financial advisory.

The Partnership was formed as a Delaware limited partnership on March 12, 2007. The Partnership is managed and operated by its general partner, Blackstone Group Management L.L.C., which is in turn wholly-owned and controlled by one of Blackstone’s founders, Stephen A. Schwarzman (the “Founder”), and Blackstone’s other senior managing directors. The activities of the Partnership are conducted through its holding partnerships: Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P. and Blackstone Holdings IV L.P. (collectively, “Blackstone Holdings”, “Blackstone Holdings Partnerships” or the “Holding Partnerships”). The Partnership, through its wholly-owned subsidiaries, is the sole general partner in each of these Holding Partnerships.

Generally, holders of the limited partner interests in the four Holding Partnerships may, four times each year, exchange their limited partnership interests (“Partnership Units”) for Blackstone Common Units, on a one-to-one basis, exchanging one Partnership Unit in each of the four Holding Partnerships for one Blackstone Common Unit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 audited 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 for the year ended December 31, 2012 filed with the Securities and Exchange Commission.

The condensed consolidated financial statements include the accounts of the Partnership, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Partnership is considered the primary beneficiary, and certain partnerships or similar entities which are not considered variable interest entities but in which the general partner is presumed to have control.

All intercompany balances and transactions have been eliminated in consolidation.

 

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Table of Contents

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)

 

Restructurings within consolidated CLOs are treated as investment purchases or sales, as applicable, in the Condensed Consolidated Statements of Cash Flows.

Consolidation

The Partnership consolidates all entities that it controls through a majority voting interest or otherwise, including those Blackstone Funds in which the general partner is presumed to have control. Although the Partnership has a non-controlling interest in the Blackstone Holdings Partnerships, the limited partners do not have the right to dissolve the partnerships 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 to reflect the economic interests of the limited partners of Blackstone Holdings.

In addition, the Partnership consolidates all variable interest entities (“VIE”) in which it is the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a VIE and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. VIEs qualify for the deferral of the consolidation guidance if all of the following conditions have been met:

 

  (a) The entity has all of the attributes of an investment company as defined under American Institute of Certified Public Accountants Accounting and Auditing Guide, Investment Companies (“Investment Company Guide”), or does not have all the attributes of an investment company but it is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the Investment Company Guide,

 

  (b) The reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity, and

 

  (c) The entity is not a securitization or asset-backed financing entity or an entity that was formerly considered a qualifying special purpose entity.

Where the VIEs have qualified for the deferral of the current consolidation guidance, the analysis is based on previous consolidation guidance. This guidance requires an analysis to determine (a) whether an entity in which the Partnership holds a variable interest is a variable interest entity and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, the Partnership 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 continuously. In evaluating whether the Partnership is the primary beneficiary, Blackstone evaluates its economic interests in the entity held either directly by the Partnership and its affiliates or indirectly through employees. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Partnership is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Partnership, affiliates of the Partnership or third parties) or amendments to the governing documents of the respective Blackstone Funds could affect an entity’s status as a VIE or the

 

13


Table of Contents

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)

 

determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

Assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated VIE and liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of Blackstone are presented in a separate section in the Condensed Consolidated Statements of Financial Condition.

Blackstone’s other disclosures regarding VIEs are discussed in Note 9. “Variable Interest Entities”.

Fair Value of Financial Instruments

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:

 

   

Level I – Quoted prices are available in active markets for identical financial instruments as of the reporting date. The type of financial instruments in Level I include listed equities, listed derivatives and mutual funds with quoted prices. 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. Financial instruments which are generally included in this category include corporate bonds and loans, government and agency securities, less liquid and restricted equity securities, certain over-the-counter derivatives where the fair value is based on observable inputs, and certain funds of hedge funds and proprietary investments in which Blackstone has the ability to redeem its investment at net asset value at, or within three months of, the reporting date.

 

   

Level III – Pricing inputs are unobservable for the financial instruments and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partnership interests in private equity and real estate funds, credit-focused funds, distressed debt and non-investment grade residual interests in securitizations, certain corporate bonds and loans held within CLO vehicles, certain over-the-counter derivatives where the fair value is based on unobservable inputs and certain funds of hedge funds that use net asset value per share to determine fair value in which Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date. Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date if an investee fund manager has the ability to limit the amount of redemptions, and/or the ability to side pocket investments, irrespective of whether such ability has been exercised. Senior and subordinate notes issued by CLO vehicles generally are classified within Level III of the fair value hierarchy.

 

14


Table of Contents

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 financial instrument 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 financial instrument.

Transfers between levels of the fair value hierarchy are recognized at the beginning of the reporting period.

Level II Valuation Techniques

Financial instruments classified within Level II of the fair value hierarchy comprise debt instruments, including corporate loans and bonds held by Blackstone’s consolidated CLO vehicles, those held within Blackstone’s Treasury Cash Management Strategies and debt securities sold, not yet purchased and interests in investment funds. Certain equity securities and derivative instruments valued using observable inputs are also classified as Level II.

The valuation techniques used to value financial instruments classified within Level II of the fair value hierarchy are as follows:

 

   

Debt Instruments 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 matrices and market transactions in comparable investments and various relationships between investments. The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction.

 

   

Investment Funds held by the consolidated Blackstone Funds are valued using net asset value per share as described in Level III Valuation Techniques – Funds of Hedge Funds. Certain investments in investment funds are classified within Level II of the fair value hierarchy as the investment can be redeemed at, or within three months of, the reporting date.

 

   

Freestanding Derivatives and Derivative Instruments Designated as Fair Value Hedges are valued using contractual cash flows and observable inputs comprising yield curves, foreign currency rates and credit spreads.

Level III Valuation Techniques

In the absence of observable market prices, Blackstone values its investments using valuation methodologies applied on a consistent basis. 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 and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, certain funds of hedge funds and credit-focused investments.

Private Equity Investments – The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other

 

15


Table of Contents

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)

 

measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (for example, multiplying a key performance metric of the investee company 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. Where a discounted cash flow method is used, a terminal value is derived by reference to EBITDA or price/earnings exit multiples.

Real Estate Investments – The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or assets (for example, 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. Where a discounted cash flow method is used, a terminal value is derived by reference to an exit EBITDA multiple or capitalization rate. Additionally, where applicable, projected distributable cash flow through debt maturity will be considered in support of the investment’s fair value.

Funds of Hedge Funds – The investments of consolidated Blackstone Funds in funds of hedge funds (“Investee Funds”) are valued at net asset value (“NAV”) per share of the Investee Fund. In limited circumstances, the Partnership may determine, based on its own due diligence and investment procedures, that NAV per share does not represent fair value. In such circumstances, the Partnership will estimate the fair value in good faith and in a manner that it reasonably chooses, in accordance with the requirements of GAAP.

Certain investments of Blackstone and of the consolidated Blackstone funds of hedge funds and credit-focused funds measure their investments in underlying funds at fair value using NAV per share without adjustment. The terms of the investee’s investment generally provide for minimum holding periods or lock-ups, the institution of gates on redemptions or the suspension of redemptions or an ability to side pocket investments, at the discretion of the investee’s fund manager, and as a result, investments may not be redeemable at, or within three months of, the reporting date. A side pocket is used by hedge funds and funds of hedge funds to separate investments that may lack a readily ascertainable value, are illiquid or are subject to liquidity restriction. Redemptions are generally not permitted until the investments within a side pocket are liquidated or it is deemed that the conditions existing at the time that required the investment to be included in the side pocket no longer exist. As the timing of either of these events is uncertain, the timing at which the Partnership may redeem an investment held in a side pocket cannot be estimated. Investments for which fair value is measured using NAV per share are reflected within the fair value hierarchy based on the observability of pricing inputs as described above. Further disclosure on instruments for which fair value is measured using NAV per share is presented in Note 5. “Net Asset Value as Fair Value”.

Credit-Focused Investments – The fair values of credit-focused investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. In some instances, Blackstone may utilize other valuation techniques, including the discounted cash flow method or a market approach.

Credit-Focused Liabilities – Credit-focused liabilities comprise senior and subordinate loans issued by Blackstone’s consolidated CLO vehicles. Such liabilities are valued using a discounted cash flow method.

 

16


Table of Contents

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)

 

Level III Valuation Process

Investments classified within Level III of the fair value hierarchy are valued on a quarterly basis, taking into consideration any changes in Blackstone’s weighted average cost of capital assumptions, discounted cash flow projections and exit multiple assumptions, as well as any changes in economic and other relevant conditions, and valuation models are updated accordingly. The valuation process also includes a review by an independent valuation party, at least annually for all investments, and quarterly for certain investments, to corroborate the values determined by management. The valuations of Blackstone’s investments are reviewed quarterly by a valuation committee which is chaired by Blackstone’s Vice Chairman and includes senior heads of each of Blackstone’s businesses, as well as representatives of legal and finance. Each quarter, the valuations of Blackstone’s investments are also reviewed by the Audit Committee in a meeting attended by the chairman of the valuation committee as well as the senior heads of each of Blackstone’s businesses. The valuations are further tested by comparison to actual sales prices obtained on disposition of the investments.

Investments, at Fair Value

The Blackstone Funds are accounted for as investment companies under the Investment Company Guide, and reflect their investments, including majority-owned and controlled investments (the “Portfolio Companies”), at fair value. Blackstone has retained the specialized accounting for the consolidated Blackstone Funds. Thus, such consolidated funds’ investments are reflected in Investments 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 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).

Blackstone’s principal investments are presented at fair value with unrealized appreciation or depreciation and realized gains and losses recognized in the Condensed Consolidated Statements of Operations within Investment Income (Loss).

For certain instruments, the Partnership has elected the fair value option. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. The Partnership has applied the fair value option for certain loans and receivables and certain investments in private debt securities that otherwise would not have been carried at fair value with gains and losses recorded in net income. Accounting for these financial instruments at fair value is consistent with how the Partnership accounts for its other principal investments. Loans extended to third parties are recorded within Accounts Receivable within the Condensed Consolidated Statements of Financial Condition. Debt securities for which the fair value option has been elected are recorded within Investments. The methodology for measuring the fair value of such investments is consistent with the methodology applied to private equity, real estate, credit-focused and funds of hedge funds investments. Changes in the fair value of such instruments are recognized in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. Interest income on interest bearing loans and receivables and debt securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest and Dividend Revenue.

In addition, the Partnership has elected the fair value option for the assets and liabilities of CLO vehicles that are consolidated as of January 1, 2010, as a result of the initial adoption of variable interest entity consolidation guidance. The Partnership has also elected the fair value option for CLO vehicles consolidated as a result of the acquisitions of CLO management contracts or the acquisition of the share capital of CLO managers.

 

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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 adjustment resulting from the difference between the fair value of assets and liabilities for each of these events is presented as a transition and acquisition adjustment to Appropriated Partners’ Capital. The recognition of the initial difference between the fair value of assets and liabilities of CLO vehicles consolidated as a result of the acquisition of management contracts or CLO managers subsequent to the initial adoption of revised accounting guidance effective January 1, 2010, as an adjustment to Appropriated Partners’ Capital, is currently under review by the Emerging Issues Task Force (“EITF”). Assets of the consolidated CLOs are presented within Investments within the Condensed Consolidated Statements of Financial Condition and Liabilities within Loans Payable for the amounts due to unaffiliated third parties and Due to Affiliates for the amounts held by non-consolidated affiliates. The methodology for measuring the fair value of such assets and liabilities is consistent with the methodology applied to private equity, real estate and credit-focused investments. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income subsequent to adoption and acquisition are presented within Net Gains from Fund Investment Activities. Expenses of consolidated CLO vehicles are presented in Fund Expenses. Amounts attributable to Non-Controlling Interests in Consolidated Entities have a corresponding adjustment to Appropriated Partners’ Capital.

The Partnership has elected the fair value option for certain proprietary investments that would otherwise have been accounted for using the equity method of accounting. The fair value of such investments is based on quoted prices in an active market or using the discounted cash flow method. Changes in fair value are recognized in Investment Income (Loss) in the Condensed Consolidated Statements of Operations.

Further disclosure on instruments for which the fair value option has been elected is presented in Note 7. “Fair Value Option” to the Condensed Consolidated Financial Statements.

Security and loan transactions are recorded on a trade date basis.

Equity Method Investments

Investments in which the Partnership is deemed to exert significant influence, but not control, are accounted for using the equity method of accounting. Under the equity method of accounting, the Partnership’s share of earnings (losses) from equity method investments is included in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The carrying amounts of equity method investments are reflected in Investments in the Condensed Consolidated Statements of Financial Condition. As the underlying investments of the Partnership’s equity method investments in Blackstone Funds are reported at fair value, the carrying value of the Partnership’s equity method investments represents fair value.

Repurchase and Reverse Repurchase Agreements

Securities purchased under agreements to resell (“reverse repurchase agreements”) and securities sold under agreements to repurchase (“repurchase agreements”), comprised primarily of U.S. and non-U.S. government and agency securities, asset-backed securities and corporate debt, represent collateralized financing transactions. Such transactions are recorded in the Condensed Consolidated Statements of Financial Condition at their contractual amounts and include accrued interest. The carrying value of repurchase and reverse repurchase agreements approximates fair value.

The Partnership manages credit exposure arising from repurchase agreements and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Partnership, in the event of a counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and 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)

 

The Partnership takes possession of securities purchased under reverse repurchase agreements and is permitted to repledge, deliver or otherwise use such securities. The Partnership also pledges its financial instruments to counterparties to collateralize repurchase agreements. Financial instruments pledged that can be repledged, delivered or otherwise used by the counterparty are recorded in Investments on the Condensed Consolidated Statements of Financial Condition.

Blackstone does not offset assets and liabilities relating to reverse repurchase agreements and repurchase agreements on its Condensed Consolidated Statements of Financial Condition. Additional disclosures relating to offsetting are discussed in Note 11. “Offsetting of Assets and Liabilities”.

Securities Sold, Not Yet Purchased

Securities Sold, Not Yet Purchased consist of equity and debt securities that the Partnership has borrowed and sold. The Partnership is required to “cover” its short sale in the future by purchasing the security at prevailing market prices and delivering it to the counterparty from which it borrowed the security. The Partnership is exposed to loss in the event that the price at which a security may have to be purchased to cover a short sale exceeds the price at which the borrowed security was sold short.

Securities Sold, Not Yet Purchased are recorded at fair value in the Condensed Consolidated Statements of Financial Condition.

Derivative Instruments

The Partnership recognizes all derivatives as assets or liabilities on its Condensed Consolidated Statements of Financial Condition at fair value. On the date the Partnership enters into a derivative contract, it designates and documents each derivative contract as one of the following: (a) a hedge of a recognized asset or liability (“fair value hedge”), (b) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), (c) a hedge of a net investment in a foreign operation, or (d) a derivative instrument not designated as a hedging instrument (“freestanding derivative”). For a fair value hedge, Blackstone records changes in the fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk, in current period earnings in General, Administrative and Other in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives designated as hedging instruments caused by factors other than changes in the risk being hedged, which are excluded from the assessment of hedge effectiveness, are recognized in current period earnings.

The Partnership formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Partnership’s evaluation of effectiveness of its hedged transaction. At least monthly, the Partnership also formally assesses whether the derivative it designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in estimated fair values or cash flows of the hedged items using either the regression analysis or the dollar offset method. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. The Partnership may also at any time remove a designation of a fair value hedge. The fair value of the derivative instrument is reflected within Other Assets in the Condensed Consolidated Statements of Financial Condition.

For freestanding derivative contracts, the Partnership presents changes in fair value in current period earnings. Changes in the fair value of derivative instruments held by consolidated Blackstone Funds are reflected

 

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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 Net Gains from Funds Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The fair value of freestanding derivative assets are recorded within Investments and freestanding derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

The Partnership has elected to not offset derivative assets and liabilities or financial assets on its Condensed Consolidated Statements of Financial Condition, including cash, that may be received or paid as part of collateral arrangements, even when an enforceable master netting agreement is in place that provides the Partnership, in the event of counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.

Blackstone’s other disclosures regarding derivative financial instruments are discussed in Note 6. “Derivative Financial Instruments”.

Blackstone’s disclosures regarding offsetting are discussed in Note 11. “Offsetting of Assets and Liabilities”.

Affiliates

Blackstone considers its Founder, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates.

Distributions

Distributions are reflected in the condensed consolidated financial statements when paid.

Recent Accounting Developments

In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance did not change the requirement for reporting net income or other comprehensive income in financial statements. However, the amendments required an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.

The guidance was effective prospectively for periods beginning after December 15, 2012. Adoption had no impact on the Partnership’s financial statements.

In December 2011, the FASB issued guidance to enhance disclosures about financial instruments and derivative instruments that are either (a) offset or (b) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Under the amended guidance, an entity is required to

 

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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)

 

disclose quantitative information relating to recognized assets and liabilities that are offset or subject to an enforceable master netting arrangement or similar agreement, including (a) the gross amounts of those recognized assets and liabilities, (b) the amounts offset to determine the net amount presented in the statement of financial position, and (c) the net amount presented in the statement of financial position. With respect to amounts subject to an enforceable master netting arrangement or similar agreement which are not offset, disclosure is required of (a) the amounts related to recognized financial instruments and other derivative instruments, (b) the amount related to financial collateral (including cash collateral), and (c) the overall net amount after considering amounts that have not been offset. The guidance was effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospective application is required. As the amendments were limited to disclosure only, adoption did not have a material impact on the Partnership’s financial statements.

In January 2013, the FASB issued guidance to clarify the scope of disclosures about offsetting assets and liabilities. The amendments clarified that the scope of guidance issued in December 2011 to enhance disclosures around financial instruments and derivative instruments that are either (a) offset, or (b) subject to a master netting agreement or similar agreement, irrespective of whether they are offset, applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendments were effective for interim and annual periods beginning on or after January 1, 2013. Adoption did not have a material impact on the Partnership’s financial statements.

In February 2013, the FASB issued guidance on the measurement of joint and several liability arrangements in which the total amount of the obligation is fixed at the reporting date. The guidance requires entities to measure obligations from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In March 2013, the FASB issued guidance on a parent entity’s accounting for cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a parent entity ceases to have a controlling financial interest in a subsidiary or a group of assets that is a business within a foreign entity, any related portion of the total cumulative translation adjustment should be released into net income if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, partial sale guidance applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. For an equity method investment that is not a foreign entity, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the guidance clarifies that the sale of an investment in a foreign entity includes both (a) events that result in the loss of a controlling financial interest in a foreign entity (that is, irrespective of any retained investment) and (b) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. The guidance shall be applied on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2013. The guidance

 

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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)

 

should be applied to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In April 2013, the FASB issued guidance on when and how an entity should prepare its financial statements using the liquidation basis of accounting. The guidance requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Financial statements prepared using the liquidation basis of accounting shall measure and present assets at the amount of the expected cash proceeds from liquidation. The presentation of assets shall include any items that had not previously been recognized under GAAP but that it expects to either sell in liquidation or use in settling liabilities. Liabilities shall be recognized and measured in accordance with GAAP that otherwise applies to those liabilities. The guidance requires an entity to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities. The guidance requires disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The guidance is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013 and interim periods therein. The guidance should be applied prospectively. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In June 2013, the FASB issued guidance to clarify the characteristics of an investment company and to provide guidance for assessing whether an entity is an investment company. Consistent with existing guidance for investment companies, all investments are to be measured at fair value including non-controlling ownership interests in other investment companies. There are no changes to the current requirements relating to the retention of specialized accounting in the consolidated financial statements of a non-investment company parent. The guidance is effective for interim and annual periods beginning after December 15, 2013 and early application is prohibited. Adoption is not expected to have a material impact on the Partnership’s financial statements.

3. INTANGIBLE ASSETS

Intangible Assets, Net consists of the following:

 

     June 30,
2013
    December 31,
2012
 

Finite-Lived Intangible Assets / Contractual Rights

   $ 1,536,244      $ 1,536,244   

Accumulated Amortization

     (982,201     (937,709
  

 

 

   

 

 

 

Intangible Assets, Net

   $ 554,043      $ 598,535   
  

 

 

   

 

 

 

Amortization expense associated with Blackstone’s intangible assets was $21.6 million and $44.5 million for the three and six month periods ended June 30, 2013, respectively, and $36.7 million and $84.8 million for the three and six month periods ended June 30, 2012, respectively.

Amortization of Intangible Assets held at June 30, 2013 is expected to be $88.1 million, $83.5 million, $77.1 million, $72.8 million, and $46.4 million for each of the years ending December 31, 2013, 2014, 2015, 2016, and 2017, respectively. Blackstone’s intangible assets as of June 30, 2013 are expected to amortize over a weighted-average period of 8.2 years.

 

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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)

 

4. INVESTMENTS

Investments consist of the following:

 

     June 30,
2013
     December 31,
2012
 

Investments of Consolidated Blackstone Funds

   $ 12,577,076       $ 14,026,745   

Equity Method Investments

     2,777,039         2,582,504   

Blackstone’s Treasury Cash Management Strategies

     1,079,171         1,411,680   

Performance Fees

     3,378,892         2,780,217   

Other Investments

     85,388         46,124   
  

 

 

    

 

 

 
   $ 19,897,566       $ 20,847,270   
  

 

 

    

 

 

 

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $480.4 million and $500.5 million at June 30, 2013 and December 31, 2012, respectively.

At June 30, 2013 and December 31, 2012, consideration was given as to whether any individual investment, including derivative instruments, had a fair value which exceeded 5% of Blackstone’s net assets. At June 30, 2013 and December 31, 2012, no investment exceeded the 5% threshold.

Investments of Consolidated Blackstone Funds

The following table presents the Realized and Net Change in Unrealized Gains (Losses) on investments held by the consolidated Blackstone Funds and a reconciliation to Other Income—Net Gains from Fund Investment Activities in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Realized Gains (Losses)

   $ 30,547      $ (54,791   $ 98,335      $ (10,441

Net Change in Unrealized Gains (Losses)

     (41,232     232,484        (83,727     388,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (10,685     177,693        14,608        377,728   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

     51,651        70,537        93,568        158,644   

Other Income—Net Gains from Fund Investment Activities

   $ 40,966      $ 248,230      $ 108,176      $ 536,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity Method Investments

Blackstone’s equity method investments include its investments in private equity funds, real estate funds, funds of hedge funds and credit-focused funds and other proprietary investments, which are not consolidated but in which the Partnership exerts significant influence.

Blackstone evaluates each of its equity method investments to determine if any were significant as defined by guidance from the United States Securities and Exchange Commission. As of and for the three months ended June 30, 2013 and 2012, no individual equity method investment held by Blackstone met the significance criteria. As such, Blackstone is not required to present summarized financial information for any of its equity method investments.

 

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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 Partnership recognized net gains (losses) related to its equity method investments of $103.4 million and $(14.1) million for the three months ended June 30, 2013 and 2012, respectively. The Partnership recognized net gains related to its equity method investments of $211.3 million and $44.0 million for the six months ended June 30, 2013 and 2012, respectively.

Blackstone’s Treasury Cash Management Strategies

The portion of Blackstone’s Treasury Cash Management Strategies included in Investments represents the Partnership’s liquid investments in government, other investment and non-investment grade securities and other investments. These strategies are primarily managed by third-party institutions. The following table presents the realized and net change in unrealized gains (losses) on investments held by Blackstone’s Treasury Cash Management Strategies:

 

     Three Months Ended
June  30,
       Six Months Ended
June  30,
 
     2013        2012        2013        2012  

Realized Gains (Losses)

   $ (1,354      $ 2,167         $ 2,557         $ 10   

Net Change in Unrealized Gains (Losses)

     (18,196        5,245           (19,167        826   
  

 

 

      

 

 

      

 

 

      

 

 

 
   $ (19,550      $ 7,412         $ (16,610      $ 836   
  

 

 

      

 

 

      

 

 

      

 

 

 

Performance Fees

Performance Fees allocated to the general partner in respect of performance of certain Carry Funds, funds of hedge funds and credit-focused funds were as follows:

 

     Private
Equity
    Real Estate     Hedge Fund
Solutions
    Credit     Total  

Performance Fees, December 31, 2012

   $ 780,474      $ 1,633,279      $ 6,214      $ 360,250      $ 2,780,217   

Performance Fees Allocated as a Result of Changes in Fund Fair Values

     173,638        728,716        30,666        169,897        1,102,917   

Foreign Exchange Gain

     —         3,060        —         —         3,060   

Fund Distributions

     (149,174     (212,995     (3,526     (141,607     (507,302
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees, June 30, 2013

   $ 804,938      $ 2,152,060      $ 33,354      $ 388,540      $ 3,378,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Investments

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

 

     Three Months Ended
June  30,
       Six Months Ended
June  30,
 
     2013        2012        2013        2012  

Realized Gains

   $ 14,754         $ 541         $ 14,106         $ 796   

Net Change in Unrealized Gains (Losses)

     (17,705        (2,547        (12,501        190   
  

 

 

      

 

 

      

 

 

      

 

 

 
   $ (2,951      $ (2,006      $ 1,605         $ 986   
  

 

 

      

 

 

      

 

 

      

 

 

 

 

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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)

 

5. NET ASSET VALUE AS FAIR VALUE

A summary of fair value by strategy type alongside the remaining unfunded commitments and ability to redeem such investments as of June 30, 2013 is presented below:

 

Strategy

   Fair Value      Unfunded
Commitments
     Redemption
Frequency
(if currently eligible)
    Redemption
Notice Period
 

Diversified Instruments

   $ 131,088       $ 5,573         (a     (a

Credit Driven

     224,468         1,980         (b     (b

Event Driven

     111,200         —          (c     (c

Equity

     487,390         —          (d     (d

Commodities

     58,326         —          (e     (e
  

 

 

    

 

 

      
   $ 1,012,472       $ 7,553        
  

 

 

    

 

 

      

 

(a) Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 61% of the value of the investments in this category may not be redeemed at, or within three months of, the reporting date. The remaining 39% of investments within this category represent investments in hedge funds that are in the process of liquidating. Distributions from these funds will be received as underlying investments are liquidated. The time at which this redemption restriction may lapse cannot be estimated. As of the reporting date, the investee fund manager had elected to side-pocket 23% of Blackstone’s investments in this category.
(b) The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 82% of the value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 6% of the total value in the credit driven category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have exercised such ability) to side-pocket such investments. The remaining 12% of investments within this category are redeemable as of the reporting date. As of the reporting date, the investee fund manager had not elected to side-pocket any of Blackstone’s investments in this category.
(c) The Event Driven category includes investments in hedge funds whose primary investing strategy is to identify certain event-driven investments. Withdrawals are not permitted in this category. Distributions will be received as the underlying investments are liquidated.
(d) The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Investments representing 70% of the total value of investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 18% of the total value of investments in this category are subject to lock-up restrictions. Investments representing 11% of the total value of investments in this category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have elected such ability) to side-pocket such investments or gate such investments, whereby limiting the amount of withdrawals from the fund during a redemption period. Investments representing 1% of the total value of investments in this category are in hedge funds that are in the process of liquidating. As of the reporting date, the investee fund manager had elected to side-pocket 2% of Blackstone’s investments in this category.
(e) The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Investments in this category may not be redeemed at, or within three months of, the reporting date.

 

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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)

 

6. DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain risk management objectives and for general investment purposes. Additionally, Blackstone may enter into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Freestanding Derivatives

Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include interest rate swaps, foreign exchange contracts, equity swaps, options, futures and other derivative contracts.

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.

 

    June 30, 2013     December 31, 2012  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair Value     Notional     Fair Value     Notional     Fair Value     Notional     Fair Value  

Freestanding Derivatives

               

Blackstone—Other

               

Interest Rate Contracts

  $ 1,380,954      $ 47,664      $ 362,505      $ 3,360      $ 689,300      $ 55,270      $ 636,555      $ 4,116   

Foreign Currency Contracts

    135,527        3,059        105,316        3,162        16,771        74        7,025        81   

Credit Default Swaps

    —         —         16,000        1,879        —         —         —         —    

Investments of Consolidated Blackstone Funds

               

Foreign Currency Contracts

    394,227        43,523        277,265        9,353        435,229        37,898        301,551        17,101   

Interest Rate Contracts

    79,637        4,010        —         —         165,517        6,132        90,500        772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,990,345      $ 98,256      $ 761,086      $ 17,754      $ 1,306,817      $ 99,374      $ 1,035,631      $ 22,070   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

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 table below summarizes the impact to the Condensed Consolidated Statements of Operations from derivative financial instruments:

 

    Three Months Ended
June  30,
    Six Months Ended
June  30,
 
            2013         2012             2013             2012      

Fair Value Hedges—Interest Rate Swaps

       

Hedge Ineffectiveness

  $ —       $ 1,342      $ —        $ 548   
 

 

 

   

 

 

   

 

 

   

 

 

 

Excluded from Assessment of Effectiveness

  $ —        $ 4,950      $ —        $ (938
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized Gain

  $ —        $ 22,941      $ —        $ 22,941   
 

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

       

Realized Gains (Losses)

       

Interest Rate Contracts

  $ (429   $ (2,687   $ (955   $ (2,551

Foreign Currency Contracts

    (2,527     1,070        (3,763     2,795   

Other

    (181     7        (173     7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (3,137   $ (1,610   $ (4,891   $ 251   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Gains (Losses)

       

Interest Rate Contracts

  $ (2,807   $ 1,022      $ (9,493   $ 7,619   

Foreign Currency Contracts

    5,257        (14,386     12,636        (665

Credit Default Swaps

    (277     (45     (300     (41
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,173      $ (13,409   $ 2,843      $ 6,913   
 

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2013 and December 31, 2012, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.

7. FAIR VALUE OPTION

The following table summarizes the financial instruments for which the fair value option has been elected:

 

     June 30,
2013
     December 31,
2012
 

Assets

     

Loans and Receivables

   $ 107,731       $ 30,663   

Equity and Preferred Securities

     65,030         16,147   

Assets of Consolidated CLO Vehicles

     

Corporate Loans

     9,282,272         11,053,513   

Corporate Bonds

     149,081         162,456   

Other

     18,184         18,285   
  

 

 

    

 

 

 
   $ 9,622,298       $ 11,281,064   
  

 

 

    

 

 

 

Liabilities

     

Liabilities of Consolidated CLO Vehicles

     

Senior Secured Notes

   $ 9,189,948       $ 10,695,136   

Subordinated Notes

     618,682         846,471   
  

 

 

    

 

 

 
   $ 9,808,630       $ 11,541,607   
  

 

 

    

 

 

 

 

27


Table of Contents

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 realized and net change in unrealized gains (losses) on financial instruments on which the fair value option was elected:

 

     Three Months Ended June 30,  
     2013     2012  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ (154   $ —        $ (402

Equity and Preferred Securities

     (605     (2,869     —          —     

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     3,499        (44,274     (63,992     12,481   

Corporate Bonds

     771        (2,070     311        (3,386

Other

     537        (497     1,419        6,626   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 4,202      $ (49,864   $ (62,262   $ 15,319   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ —        $ (64,042   $ 1      $ (21,509

Subordinated Notes

     —          41,267        —          42,247   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ (22,775   $ 1      $ 20,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2013     2012  
     Realized Gains
(Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ 43      $ (204   $ —        $ (396

Equity and Preferred Securities

     (1,398     281        —          —     

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     43,074        34,872        (24,718     301,712   

Corporate Bonds

     3,653        (5,858     718        9,295   

Other

     1,426        1,112        1,539        10,107   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 46,798      $ 30,203      $ (22,461   $ 320,718   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ —        $ (291,953   $ (43   $ (114,712

Subordinated Notes

     —          78,009        —          7,764   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ (213,944   $ (43   $ (106,948
  

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

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 information for those financial instruments for which the fair value option was elected:

 

    June 30, 2013     December 31, 2012  
          For Financial Assets Past
Due (a)
          For Financial Assets Past
Due (a)
 
    Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
    Excess
(Deficiency)
of Fair Value
Over Principal
    Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
    Excess
(Deficiency)
of Fair Value
Over Principal
 

Loans and Receivables

  $ (440   $ —        $ —        $ (292   $ —        $ —     

Assets of Consolidated CLO Vehicles

           

Corporate Loans

    (448,964     69,499        (167,937     (586,450     35,322        (73,291

Corporate Bonds

    (2,454     —          —          (984     831        (44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ (451,858   $ 69,499      $ (167,937   $ (587,726   $ 36,153      $ (73,335
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Past due Corporate Loans and Corporate Bonds within CLO assets are classified as past due if contractual payments are more than one day past due.

As of June 30, 2013 and December 31, 2012, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of June 30, 2013, no Corporate Bonds included within the Assets of Consolidated CLO Vehicles for which the fair value option was elected were past due or in non-accrual status.

 

29


Table of Contents

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)

 

8. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

The following tables summarize the valuation of the Partnership’s financial assets and liabilities by the fair value hierarchy:

 

    June 30, 2013  
    Level I     Level II     Level III     Total  

Assets

       

Investments of Consolidated Blackstone Funds (a)

       

Investment Funds

  $ —        $ —        $ 974,599      $ 974,599   

Equity Securities

    59,432        63,314        217,646        340,392   

Partnership and LLC Interests

    —          8,547        628,255        636,802   

Debt Instruments

    —          1,102,396        25,817        1,128,213   

Assets of Consolidated CLO Vehicles

       

Corporate Loans

    —          8,258,099        1,024,173        9,282,272   

Corporate Bonds

    —          146,472        2,609        149,081   

Freestanding Derivatives—Foreign Currency Contracts

    —          43,523        —          43,523   

Freestanding Derivatives—Interest Rate Contracts

    —          4,010        —          4,010   

Other

    —          964        17,220        18,184   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments of Consolidated Blackstone Funds

    59,432        9,627,325        2,890,319        12,577,076   

Blackstone’s Treasury Cash Management Strategies

    415,584        631,783        31,804        1,079,171   

Money Market Funds

    178,931        —          —          178,931   

Freestanding Derivatives

       

Interest Rate Contracts

    3,444        44,220        —          47,664   

Foreign Currency Contracts

    —          3,059        —          3,059   

Loans and Receivables

    —          —          107,731        107,731   

Other Investments

    62,197        7,081        16,110        85,388   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 719,588      $ 10,313,468      $ 3,045,964      $ 14,079,020   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Liabilities of Consolidated CLO Vehicles (a)

       

Senior Secured Notes

  $ —        $ —        $ 9,189,948      $ 9,189,948   

Subordinated Notes

    —          —          618,682        618,682   

Freestanding Derivatives—Foreign Currency Contracts

    —          9,353        —          9,353   

Freestanding Derivatives—Interest Rate Contracts

    —          —          —          —     

Freestanding Derivatives

       

Interest Rate Contracts

    1,289        2,071        —          3,360   

Foreign Currency Contracts

    —          3,162        —          3,162   

Credit Default Swaps

    —          1,879        —          1,879   

Securities Sold, Not Yet Purchased

    —          77,553        —          77,553   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,289      $ 94,018      $ 9,808,630      $ 9,903,937   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

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)

 

    December 31, 2012  
    Level I     Level II     Level III     Total  

Assets

       

Investments of Consolidated Blackstone Funds (a)

       

Investment Funds

  $ —        $ 1,799      $ 890,465      $ 892,264   

Equity Securities

    95,898        28,654        217,060        341,612   

Partnership and LLC Interests

    212        12,375        581,151        593,738   

Debt Instruments

    —          903,123        17,724        920,847   

Assets of Consolidated CLO Vehicles

       

Corporate Loans

    —          9,775,070        1,278,443        11,053,513   

Corporate Bonds

    —          146,625        15,831        162,456   

Freestanding Derivatives—Foreign Currency Contracts

    —          37,898        —          37,898   

Freestanding Derivatives—Interest Rate Contracts

    —          6,132        —          6,132   

Other

    —          1,260        17,025        18,285   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments of Consolidated Blackstone Funds

    96,110        10,912,936        3,017,699        14,026,745   

Blackstone’s Treasury Cash Management Strategies

    672,766        737,708        1,206        1,411,680   

Money Market Funds

    129,549        —          —          129,549   

Freestanding Derivatives

       

Interest Rate Contracts

    486        54,784        —          55,270   

Foreign Currency Contracts

    —          74        —          74   

Loans and Receivables

    —          —          30,663        30,663   

Other Investments

    12,443        6,783        26,898        46,124   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 911,354      $ 11,712,285      $ 3,076,466      $ 15,700,105   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Liabilities of Consolidated CLO Vehicles (a)

       

Senior Secured Notes

  $ —        $ —        $ 10,695,136      $ 10,695,136   

Subordinated Notes

    —          —          846,471        846,471   

Freestanding Derivatives—Foreign Currency Contracts

    —          17,101        —          17,101   

Freestanding Derivatives—Interest Rate Contracts

    —          772        —          772   

Freestanding Derivatives

       

Interest Rate Contracts

    277        3,839        —          4,116   

Foreign Currency Contracts

    —          81        —          81   

Securities Sold, Not Yet Purchased

    —          226,425        —          226,425   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 277      $ 248,218      $ 11,541,607      $ 11,790,102   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Pursuant to GAAP consolidation guidance, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including certain CLO vehicles, and other funds in which a consolidated entity of the Partnership, as the general partner of the fund, is presumed to have control. While the Partnership is required to consolidate certain funds, including CLO vehicles, for GAAP purposes, the Partnership has no ability to utilize the assets of these funds and there is no recourse to the Partnership for their liabilities since these are client assets and liabilities.

 

31


Table of Contents

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 summarizes the fair value transfers between Level I and Level II for positions that existed as of June 30, 2013 and 2012, respectively:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
         2013              2012              2013              2012      

Transfers from Level I into Level II (a)

   $ 31       $ 15,924       $ 28,670       $ 45,440   

Transfers from Level II into Level I (b)

   $ 46,495       $ 529       $ —        $ 801   

 

(a) Transfers out of Level I represent those financial instruments for which restrictions exist and adjustments were made to an otherwise observable price to reflect fair value at the reporting date.
(b) Transfers into Level I represent those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset.

 

32


Table of Contents

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 summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of June 30, 2013:

 

    Fair Value    

Valuation

Techniques

 

Unobservable

Inputs

 

Ranges

 

Weighted
Average (a)

Financial Assets

  

       

Investments of Consolidated Blackstone Funds

         

Investment Funds

  $ 974,599     

NAV as Fair Value

  N/A   N/A   N/A

Equity Securities

    156,394     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Multiple - P/E

 

8.2% - 25.0%

0.9% - 43.4%

5.0x - 11.5x

8.5x - 17.0x

 

11.3%

5.4%

9.5x

10.0x

    58,753     

Transaction Price

  N/A   N/A   N/A
    279     

Market Comparable Companies

  EBITDA Multiple   7.2x - 7.8x   7.4x
    85     

Third Party Pricing

  N/A   N/A   N/A
    2,135     

Other

  N/A   N/A   N/A

Partnership and LLC Interests

    608,846     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

 

5.1% - 26.3%

-4.6% - 33.9%

3.0x - 20.0x

5.0% - 10.5%

 

9.0%

5.9%

9.8x

7.0%

    12,107     

Transaction Price

  N/A   N/A   N/A
    7,302     

Third Party Pricing

  N/A   N/A   N/A

Debt Instruments

    13,708     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

 

8.4% - 27.0%

1.6% - 3.4%

5.8x - 11.5x

6.1% - 10.0%

2.0% - 3.0%

70.0%

12 months

20.0%

LIBOR + 375 bps

 

15.7%

2.1%

10.5x

7.4%

2.6%

N/A

N/A

N/A

N/A

    11,690     

Third Party Pricing

  N/A   N/A   N/A
    121     

Transaction Price

  N/A   N/A   N/A
    298     

Market Comparable Companies

  EBITDA Multiple   6.3x - 7.6x   6.3x

Assets of Consolidated CLO Vehicles

    562,383     

Third Party Pricing

  N/A   N/A   N/A
    426,496     

Market Comparable Companies

  EBITDA Multiple   2.0x - 11.4x   8.0x
    55,114     

Discounted Cash Flows

  Discount Rate   6.9% - 12.9%   7.6%
    9     

Transaction Price

  N/A   N/A   N/A
 

 

 

         
         

Total Investments of Consolidated Blackstone Funds

    2,890,319           
          continued...

 

33


Table of Contents

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    

Valuation

Techniques

 

Unobservable

Inputs

 

Ranges

 

Weighted
Average (a)

Blackstone’s Treasury Cash Management Strategies

  $ 4,351      Transaction Price   N/A   N/A   N/A
    17,822      Third Party Pricing   N/A   N/A   N/A
    9,631      Discounted Cash Flows  

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

Discount Rate

 

2.0%

30.0% - 70.0%

12 months

10.0% - 20.0%

LIBOR + 375 bps

6.3% - 10.3%

 

N/A

66.0%

N/A

19.0%

N/A

8.0%

Loans and Receivables

    107,731      Discounted Cash Flows   Discount Rate   8.5% - 30.1%   11.5%

Other Investments

    3,983      NAV as Fair Value   N/A   N/A   N/A
    4,249      Discounted Cash Flows   Discount Rate   12.5%   N/A
    7,878      Transaction Price   N/A   N/A   N/A
 

 

 

         

Total

  $ 3,045,964           
 

 

 

         

Financial Liabilities

         

Liabilities of Consolidated CLO Vehicles

  $ 9,808,630      Discounted Cash Flows   Default Rate   2.0% - 3.0%   2.1%
 

 

 

         
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   5.0% - 40.0%   18.0%
      Discount Rate   0.7% - 47.0%   3.2%
      Reinvestment Rate   LIBOR + 375 bps   N/A

 

34


Table of Contents

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 summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of December 31, 2012:

 

    Fair Value    

Valuation Techniques

 

Unobservable Inputs

 

Ranges

 

Weighted
Average (a)

Financial Assets

  

       

Investments of Consolidated Blackstone Funds

         

Investment Funds

  $ 890,465     

NAV as Fair Value

  N/A   N/A   N/A

Equity Securities

    151,899     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Multiple - P/E

 

8.4% - 25.1%

0.7% - 83.4%

5.8x - 11.5x

8.5x - 17.0x

 

11.2%

5.6%

9.2x

10.1x

    61,479     

Transaction Price

  N/A   N/A   N/A
    1,602     

Market Comparable Companies

 

Book Value Multiple

EBITDA Multiple

 

0.9x

5.0x - 8.7x

 

N/A

7.8x

    200     

Third Party Pricing

  N/A   N/A   N/A
    1,880     

Other

  N/A   N/A   N/A

Partnership and LLC Interests

    562,678     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

 

5.3% - 22.6%

-8.2% - 62.0%

4.5x - 15.4x

1.0% - 10.5%

 

8.9%

5.3%

10.0x

7.0%

    13,316     

Transaction Price

  N/A   N/A   N/A
    5,157     

Third Party Pricing

  N/A   N/A   N/A

Debt Instruments

    13,056     

Discounted Cash Flows

 

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

 

7.8% - 42.0%

2.9% - 5.1%

9.5x

7.0% - 7.5%

2.0%

70.0%

12 months

20.0%

LIBOR + 400 bps

 

15.6%

3.8%

N/A

7.1%

N/A

N/A

N/A

N/A

N/A

    4,004     

Third Party Pricing

  N/A   N/A   N/A
    664     

Market Comparable Companies

  EBITDA Multiple   6.5x - 7.5x   6.7x

Assets of Consolidated CLO Vehicles

    900,146     

Third Party Pricing

  N/A   N/A   N/A
    278,972     

Market Comparable Companies

 

EBITDA Multiple

Liquidity Discount

 

2.0x - 13.0x

1.0% - 25.0%

 

6.5x

8.4%

    132,171     

Discounted Cash Flows

  Discount Rate   7.0% - 15.7%   9.3%
    10     

Transaction Price

  N/A   N/A   N/A
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    3,017,699           
          continued...

 

35


Table of Contents

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    

Valuation Techniques

 

Unobservable Inputs

 

Ranges

 

Weighted
Average (a)

Blackstone’s Treasury Cash Management Strategies

  $ 1,006     

Discounted Cash Flows

 

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Discount Rate

Reinvestment Rate

 

2.0%

70.0%

12 months

20.0%

12.0%

LIBOR + 400 bps

 

N/A

N/A

N/A

N/A

N/A

N/A

    200     

Transaction Price

  N/A   N/A   N/A

Loans and Receivables

    30,620     

Discounted Cash Flows

  Discount Rate   11.8% - 25.9%   13.7%
    43     

Market Comparable Companies

  EBITDA Multiple   8.7x   N/A

Other Investments

    17,901     

NAV as Fair Value

  N/A   N/A   N/A
    5,647     

Discounted Cash Flows

  Discount Rate   12.5%   N/A
    3,350     

Transaction Price

  N/A   N/A   N/A
 

 

 

         

Total

  $ 3,076,466           
 

 

 

         

Financial Liabilities

         

Liabilities of Consolidated CLO Vehicles

  $ 11,541,607     

Discounted Cash Flows

  Default Rate   2.0% - 5.0%   2.1%
 

 

 

         
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   5.0% - 20.0%   18.0%
      Discount Rate   1.1% - 50.0%   3.9%
      Reinvestment Rate   LIBOR + 400 bps   N/A

 

N/A                    Not applicable.
CAGR                Compound annual growth rate.
EBITDA            Earnings before interest, taxes, depreciation and amortization.
Exit Multiple     Ranges include the last twelve months EBITDA, forward EBITDA and price/earnings exit multiples.
(a)                    Unobservable inputs were weighted based on the fair value of the investments included in the range.

The significant unobservable inputs used in the fair value measurement of the assets, Blackstone’s Treasury Cash Management Strategies, debt instruments and obligations of consolidated CLO vehicles are discount rates, default rates, recovery rates, recovery lag, pre-payment rates and reinvestment rates. Increases (decreases) in any of the discount rates, default rates, recovery lag and pre-payment rates in isolation would result in a lower (higher) fair value measurement. Increases (decreases) in any of the recovery rates and reinvestment rates in isolation would result in a higher (lower) fair value measurement. Generally, a change in the assumption used for default rates may be accompanied by a directionally similar change in the assumption used for recovery lag and a directionally opposite change in the assumption used for recovery rates and pre-payment rates.

The significant unobservable inputs used in the fair value measurement of equity securities, partnership and LLC interests, debt instruments, assets of consolidated CLO vehicles and loans and receivables are discount rates, exit capitalization rates, exit multiples, book value multiples, EBITDA multiples, liquidity discount and revenue compound annual growth rates. Increases (decreases) in any of discount rates and exit capitalization rates in isolation can result in a lower (higher) fair value measurement. Increases (decreases) in any of exit multiples, book value multiples and revenue compound annual growth rates in isolation can result in a higher (lower) fair value measurement.

 

36


Table of Contents

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)

 

Since December 31, 2012, there have been no changes in valuation techniques within Level II and Level III that have had a material impact on the valuation of financial instruments.

The following tables summarize the changes in financial assets and liabilities measured at fair value for which the Partnership has used Level III inputs to determine fair value and 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 respective reporting period. Total realized and unrealized gains and losses recorded for Level III investments are reported in Investment Income (Loss) and Net Gains from Fund Investment Activities in the Condensed Consolidated Statements of Operations.

 

    Level III Financial Assets at Fair Value
Three Months Ended June 30,
 
    2013     2012  
    Investments  of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments  (c)
    Total     Investments  of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments  (c)
    Total  

Balance, Beginning of Period

  $ 2,937,297      $ 3,867      $ 63,049      $ 3,004,213      $ 2,390,276      $ 105,004      $ 21,791      $ 2,517,071   

Transfer Out Due to Deconsolidation

    (50,181     —         —         (50,181     (1,599     —         —         (1,599

Transfer In to Level III (b)

    177,145        —         —         177,145        171,916        —         —         171,916   

Transfer Out of Level III (b)

    (259,570     —         (1,713     (261,283     (59,315     —         —         (59,315

Purchases

    308,817        103,653        28,260        440,730        232,684        39,657        100        272,441   

Sales

    (302,010     —         (41,074     (343,084     (173,516     (41,872     (541     (215,929

Settlements

    —         —         —         —         —         (186     —         (186

Realized Gains (Losses), Net

    29,476        —         13,587        43,063        (12,264     —         541        (11,723

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

    49,345        211        (14,195     35,361        (8,026     1,604        (529     (6,951
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

  $ 2,890,319      $ 107,731      $ 47,914      $ 3,045,964      $ 2,540,156      $ 104,207      $ 21,362      $ 2,665,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

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)

 

    Level III Financial Assets at Fair Value
Six Months Ended June 30,
 
    2013     2012  
    Investments  of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments  (c)
    Total     Investments  of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments  (c)
    Total  

Balance, Beginning of Period

  $ 3,017,699      $ 30,663      $ 28,104      $ 3,076,466      $ 2,103,769      $ 8,555      $ 20,164      $ 2,132,488   

Transfer In Due to Consolidation and Acquisition (a)

    —         —         11,960        11,960        122,565        —         —         122,565   

Transfer Out Due to Deconsolidation

    (152,727     —         —         (152,727     (1,599     —         —         (1,599

Transfer In to Level III (b)

    224,363        —         —         224,363        253,608        —         —         253,608   

Transfer Out of Level III (b)

    (372,438     —         (1,713     (374,151     (103,280     —         —         (103,280

Purchases

    436,850        106,526        91,034        634,410        320,312        142,908        100        463,320   

Sales

    (430,563     (29,462     (80,536     (540,561     (229,623     (49,251     (541     (279,415

Settlements

    —         (332     (1,559     (1,891     —         (46     —         (46

Realized Gains (Losses), Net

    1,959        43        14,436        16,438        (9,093     —         639        (8,454

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

    165,176        293        (13,812     151,657        83,497        2,041        1,000        86,538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

  $ 2,890,319      $ 107,731      $ 47,914      $ 3,045,964      $ 2,540,156      $ 104,207      $ 21,362      $ 2,665,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

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)

 

     Level III Financial Liabilities at Fair Value
Three Months Ended June 30,
 
     2013     2012  
     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
    Total     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
    Total  

Balance, Beginning of Period

   $ 9,634,747      $ 720,552      $ 10,355,299      $ 10,984,018      $ 857,772      $ 11,841,790   

Transfer Out Due to Deconsolidation

     (343,392     (67,629     (411,021     —         —         —    

Issuances

     —         —         —         227        —         227   

Settlements

     (299,993     (4     (299,997     (140,736     (238     (140,974

Realized (Gains) Losses, Net

     —         —         —         (1     —         (1

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

     198,586        (34,237     164,349        (309,255     (155,886     (465,141
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 9,189,948      $ 618,682      $ 9,808,630      $ 10,534,253      $ 701,648      $ 11,235,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Level III Financial Liabilities at Fair Value
Six Months Ended June 30,
 
     2013     2012  
     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
    Total     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
    Total  

Balance, Beginning of Period

   $ 10,695,136      $ 846,471      $ 11,541,607      $ 7,449,766      $ 630,236      $ 8,080,002   

Transfer In Due to Consolidation and Acquisition (a)

     —         —         —         3,419,084        149,225        3,568,309   

Transfer Out Due to Deconsolidation

     (1,100,842     (150,925     (1,251,767     —         —         —    

Issuances

     1,054        775        1,829        4,620        838        5,458   

Settlements

     (704,377     (346     (704,723     (272,609     (2,984     (275,593

Realized (Gains) Losses, Net

     —         —         —         43        —         43   

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

     298,977        (77,293     221,684        (66,651     (75,667     (142,318
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

   $ 9,189,948      $ 618,682      $ 9,808,630      $ 10,534,253      $ 701,648      $ 11,235,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

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) Represents the transfer into Level III of financial assets and liabilities held by CLO vehicles as a result of the acquisition of management contracts and the Harbourmaster acquisition.
(b) Transfers in and out of Level III financial assets and liabilities were due to changes in the observability of inputs used in the valuation of such assets and liabilities.
(c) Represents Blackstone’s Treasury Cash Management Strategies and Other Investments.

9.     VARIABLE INTEREST ENTITIES

Pursuant to GAAP consolidation guidance, the Partnership consolidates certain VIEs in which it is determined that the Partnership is the primary beneficiary either directly or indirectly, through a consolidated entity or affiliate. VIEs include certain private equity, real estate, credit-focused or funds of hedge funds entities and CLO vehicles. The purpose of such VIEs is to provide strategy specific investment opportunities for investors in exchange for management and performance based fees. The investment strategies of the Blackstone Funds differ by product; however, the fundamental risks of the Blackstone Funds have similar characteristics, including loss of invested capital and loss of management fees and performance based fees. In Blackstone’s role as general partner, collateral manager or investment adviser, it generally considers itself the sponsor of the applicable Blackstone Fund. The Partnership does not provide performance guarantees and has no other financial obligation to provide funding to consolidated VIEs other than its own capital commitments.

The assets of consolidated variable interest entities may only be used to settle obligations of these consolidated Blackstone Funds. In addition, there is no recourse to the Partnership for the consolidated VIEs’ liabilities including the liabilities of the consolidated CLO vehicles.

The Partnership holds variable interests in certain VIEs which are not consolidated as it is determined that the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. The maximum exposure to loss represents the loss of assets recognized by Blackstone relating to non-consolidated entities, any amounts due to non-consolidated entities and any clawback obligation relating to previously distributed Carried Interest. The assets and liabilities recognized in the Partnership’s Condensed Consolidated Statements of Financial Condition related to the Partnership’s interest in these non-consolidated VIEs and the Partnership’s maximum exposure to loss relating to non-consolidated VIEs were as follows:

 

     June 30, 2013      December 31, 2012  

Investments

   $ 514,451       $ 364,709   

Accounts Receivable

     74,300         1,885   

Due from Affiliates

     68,521         112,686   
  

 

 

    

 

 

 

Total VIE Assets

     657,272         479,280   

Due to Affiliates

     308        <