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, 2014

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

 

LOGO

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  ¨

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

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

The number of the Registrant’s voting common units representing limited partner interests outstanding as of July 31, 2014 was 516,461,946. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of July 31, 2014 was 69,083,468.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I.   

FINANCIAL INFORMATION

  
ITEM 1.   

FINANCIAL STATEMENTS

     5   
  

Unaudited Condensed Consolidated Financial Statements — June 30, 2014 and 2013:

  
  

Condensed Consolidated Statements of Financial Condition as of June 30, 2014 and December  31, 2013

     5   
  

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2014 and 2013

     7   
  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June  30, 2014 and 2013

     8   
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Six Months Ended June 30, 2014 and 2013

     9   
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

     11   
  

Notes to Condensed Consolidated Financial Statements

     13   
ITEM 1A.   

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

     62   
ITEM 2.   

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

     64   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     130   
ITEM 4.   

CONTROLS AND PROCEDURES

     133   
PART II.   

OTHER INFORMATION

  
ITEM 1.   

LEGAL PROCEEDINGS

     134   
ITEM 1A.   

RISK FACTORS

     134   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     134   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     135   
ITEM 4.   

MINE SAFETY DISCLOSURES

     135   
ITEM 5.   

OTHER INFORMATION

     135   
ITEM 6.   

EXHIBITS

     136   

SIGNATURES

     137   


Table of Contents

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,” “indicator,” “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, 2013 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 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 (@Blackstone), LinkedIn (www.linkedin.com/company/the-blackstone-group), Facebook (www.facebook.com/Blackstone), Instagram (instagram.com/Blackstone) and YouTube (www.youtube.com/user/blackstonegroup) accounts 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 “Email Alerts” section of our website at http://ir.blackstone.com. 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 corporate private equity funds (including our sector and regional focused funds), which we refer to collectively as our Blackstone Capital Partners (“BCP”) funds, certain multi-asset class investment funds which we collectively refer to as our Blackstone Tactical Opportunities Accounts (“Tactical Opportunities”), and Strategic Partners Fund Solutions (“Strategic Partners”), a secondary private fund of funds business. 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.

 

2


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“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 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 invested capital or fair value of assets we manage pursuant to separately managed accounts,

 

  (d) the amount of debt and equity outstanding for our CLOs and CDOs during the reinvestment period,

 

  (e) the aggregate par amount of collateral assets, including principal cash, for our CLOs and CDOs after the reinvestment period,

 

  (f) the gross amount of assets (including leverage) for certain of our credit-focused registered investment companies, and

 

  (g) the fair value of common stock, preferred stock, convertible debt, or similar instruments issued by our public REIT.

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 Real Estate segment carry funds including certain real estate debt investment funds and certain of our Hedge Fund Solutions funds, the amount of capital commitments, remaining invested capital, fair value 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 invested capital or 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, subject to certain adjustments,

 

  (g) the aggregate par amount of collateral assets, including principal 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.

 

3


Table of Contents

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.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     June 30,
2014
     December 31,
2013
 

Assets

     

Cash and Cash Equivalents

   $ 1,223,073       $ 831,998   

Cash Held by Blackstone Funds and Other

     1,260,909         1,045,882   

Investments (including assets pledged of $66,359 and $316,564 at June 30, 2014 and December 31, 2013, respectively)

     21,627,145         21,729,523   

Accounts Receivable

     1,082,495         888,356   

Reverse Repurchase Agreements

     30,721         148,984   

Due from Affiliates

     1,049,224         1,192,044   

Intangible Assets, Net

     508,924         560,748   

Goodwill

     1,787,392         1,787,392   

Other Assets

     303,219         284,472   

Deferred Tax Assets

     1,186,207         1,209,207   
  

 

 

    

 

 

 

Total Assets

   $ 30,059,309       $ 29,678,606   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital

     

Loans Payable

   $ 8,989,184       $ 10,466,504   

Due to Affiliates

     1,346,903         1,436,859   

Accrued Compensation and Benefits

     2,349,374         2,132,939   

Securities Sold, Not Yet Purchased

     130,754         76,195   

Repurchase Agreements

     41,772         316,352   

Accounts Payable, Accrued Expenses and Other Liabilities

     1,390,617         872,086   
  

 

 

    

 

 

 

Total Liabilities

     14,248,604         15,300,935   
  

 

 

    

 

 

 

Commitments and Contingencies

     

Redeemable Non-Controlling Interests in Consolidated Entities

     2,284,169         1,950,442   
  

 

 

    

 

 

 

Partners’ Capital

     

Partners’ Capital (common units: 588,371,951 issued and outstanding as of June 30, 2014; 572,592,279 issued and outstanding as of December 31, 2013)

     6,520,288         6,002,592   

Appropriated Partners’ Capital

     218,279         300,708   

Accumulated Other Comprehensive Income

     5,749         3,466   

Non-Controlling Interests in Consolidated Entities

     2,692,608         2,464,047   

Non-Controlling Interests in Blackstone Holdings

     4,089,612         3,656,416   
  

 

 

    

 

 

 

Total Partners’ Capital

     13,526,536         12,427,229   
  

 

 

    

 

 

 

Total Liabilities and Partners’ Capital

   $ 30,059,309       $ 29,678,606   
  

 

 

    

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

5


Table of Contents

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,
2014
     December 31,
2013
 

Assets

     

Cash Held by Blackstone Funds and Other

   $ 988,094       $ 618,881   

Investments

     7,703,015         9,700,804   

Accounts Receivable

     561,281         231,052   

Due from Affiliates

     21,058         27,022   

Other Assets

     23,386         29,755   
  

 

 

    

 

 

 

Total Assets

   $ 9,296,834       $ 10,607,514   
  

 

 

    

 

 

 

Liabilities

     

Loans Payable

   $ 6,835,021       $ 8,802,155   

Due to Affiliates

     83,876         143,444   

Accounts Payable, Accrued Expenses and Other

     804,051         284,818   
  

 

 

    

 

 

 

Total Liabilities

   $ 7,722,948       $ 9,230,417   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

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,
 
    2014     2013     2014     2013  

Revenues

       

Management and Advisory Fees, Net

  $ 619,523      $ 578,723      $ 1,192,683      $ 1,060,856   
 

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees

       

Realized

       

Carried Interest

    641,659        183,288        975,282        477,458   

Incentive Fees

    39,504        76,104        83,298        99,845   

Unrealized

       

Carried Interest

    660,682        456,706        991,076        634,053   

Incentive Fees

    54,639        938        118,872        106,736   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Performance Fees

    1,396,484        717,036        2,168,528        1,318,092   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income

       

Realized

    215,710        75,490        368,736        117,843   

Unrealized

    10,809        56,570        24,309        162,800   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Income

    226,519        132,060        393,045        280,643   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest and Dividend Revenue

    15,340        13,814        29,409        26,371   

Other

    (6     (1,163     863        981   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    2,257,860        1,440,470        3,784,528        2,686,943   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

       

Compensation and Benefits

       

Compensation

    500,641        478,981        985,992        930,411   

Performance Fee Compensation

       

Realized

       

Carried Interest

    260,301        75,910        409,699        165,347   

Incentive Fees

    18,509        35,014        42,144        45,522   

Unrealized

       

Carried Interest

    114,296        172,824        155,026        268,296   

Incentive Fees

    24,692        3,084        48,223        47,562   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

    918,439        765,813        1,641,084        1,457,138   

General, Administrative and Other

    136,492        117,365        272,046        226,671   

Interest Expense

    29,847        26,956        54,514        54,018   

Fund Expenses

    5,003        4,628        9,988        12,036   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    1,089,781        914,762        1,977,632        1,749,863   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Income

       

Net Gains from Fund Investment Activities

    138,585        40,966        208,740        108,176   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Provision for Taxes

    1,306,664        566,674        2,015,636        1,045,256   

Provision for Taxes

    83,282        56,082        137,379        107,075   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

    1,223,382        510,592        1,878,257        938,181   

Net Income Attributable to Redeemable

       

Non-Controlling Interests in Consolidated Entities

    22,486        22,366        68,278        84,682   

Net Income Attributable to Non-Controlling Interests in Consolidated Entities

    140,061        27,944        184,022        18,492   

Net Income Attributable to Non-Controlling Interests in Blackstone Holdings

    543,819        249,134        843,324        456,224   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to The Blackstone Group L.P.

  $ 517,016      $ 211,148      $ 782,633      $ 378,783   
 

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared Per Common Unit

  $ 0.35      $ 0.30      $ 0.93      $ 0.72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Unit

       

Common Units, Basic

  $ 0.85      $ 0.36      $ 1.30      $ 0.65   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

  $ 0.85      $ 0.36      $ 1.29      $ 0.65   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Common Units Outstanding

       

Common Units, Basic

    606,690,740        583,843,094        604,123,284        583,086,840   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

    609,897,829        586,763,053        607,797,760        586,235,677   
 

 

 

   

 

 

   

 

 

   

 

 

 

Revenues Earned from Affiliates

       

Management and Advisory Fees, Net

  $ 81,343      $ 80,752      $ 155,375      $ 120,123   
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

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,
 
     2014     2013      2014     2013  

Net Income

   $ 1,223,382      $ 510,592       $ 1,878,257      $ 938,181   

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

     (564     10,018         (1,730     (1,932
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive Income

     1,222,818        520,610         1,876,527        936,249   

Less:

         

Comprehensive Income in Redeemable Non-Controlling Interests in Consolidated Entities

     22,486        22,366         68,278        84,682   

Comprehensive Income Attributable to Non-Controlling Interests in Consolidated Entities

     136,166        34,856         180,009        17,576   

Comprehensive Income Attributable to Non-Controlling Interests in Blackstone Holdings

     543,819        249,134         843,324        456,224   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive Income Attributable to The Blackstone Group L.P.

   $ 520,347      $ 214,254       $ 784,916      $ 377,767   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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, 2013

    572,592,279      $ 6,002,592      $ 300,708      $ 3,466      $ 2,464,047      $ 3,656,416      $ 12,427,229      $ 1,950,442   

Transition and Acquisition Adjustments Relating to Consolidation of CLO Entities

    —          —          8,398        —          —          —          8,398        —     

Consolidation of Fund Entity

    —          —          —          —          4,511        —          4,511        30,922   

Net Income

    —          782,633        —          —          184,022        843,324        1,809,979        68,278   

Allocation of Losses of Consolidated CLO Entities

    —          —          (34,505     —          34,505        —          —          —     

Currency Translation Adjustment

    —          —          —          2,283        (4,013     —          (1,730     —     

Allocation of Currency Translation Adjustment of Consolidated CLO Entities

    —          —          (4,013     —          4,013        —          —          —     

Reclassification of Currency Translation Adjustment Due to Deconsolidation of CLO Entities

    —          (2,695     —          —          —          —          (2,695     —     

Capital Contributions

    —          —          —          —          256,603        —          256,603        447,785   

Capital Distributions

    —          (550,393     —          —          (248,011     (572,730     (1,371,134     (213,258

Transfer of Non-Controlling Interests in Consolidated Entities

    —          —          —          —          (3,014     —          (3,014     —     

Purchase of Interests from Certain Non-Controlling Interest Holders

    —          (6     —          —          —          —          (6     —     

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

    —          14,996        —          —          —          —          14,996        —     

Equity-Based Compensation

    —          232,313        —          —          —          215,825        448,138        —     

Relinquished with Deconsolidation and Liquidation of Partnership

    —          —          (52,309     —          (55     —          (52,364     —     

Net Delivery of Vested Blackstone Holdings Partnership Units and Blackstone Common Units

    6,185,592        (24,860     —          —          —          (430     (25,290     —     

Excess Tax Benefits Related to Equity-Based Compensation, Net

    —          12,915        —          —          —          —          12,915        —     

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

    —          (11,704     —          —          —          11,704        —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

    9,594,080        64,497        —          —          —          (64,497     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    588,371,951      $ 6,520,288      $ 218,279      $ 5,749      $ 2,692,608      $ 4,089,612      $ 13,526,536      $ 2,284,169   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

9


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

(Loss)
    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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2014     2013  

Operating Activities

    

Net Income

   $ 1,878,257      $ 938,181   

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

     (290,698     (277,805

Net Realized Gains on Investments

     (1,457,777     (788,643

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

     45,811        (160,642

Non-Cash Performance Fees

     (930,489     (381,415

Non-Cash Performance Fee Compensation

     655,092        526,727   

Equity-Based Compensation Expense

     381,553        378,587   

Excess Tax Benefits Related to Equity-Based Compensation

     (17,938       

Amortization of Intangibles

     51,824        44,492   

Other Non-Cash Amounts Included in Net Income

     113,063        101,767   

Cash Flows Due to Changes in Operating Assets and Liabilities

    

Cash Held by Blackstone Funds and Other

     (106,245     227,249   

Cash Relinquished in Deconsolidation and Liquidation of Partnership

     (293,989     (135,843

Accounts Receivable

     280,586        (44,072

Reverse Repurchase Agreements

     118,263        71,745   

Due from Affiliates

     244,803        126,242   

Other Assets

     (30,289     2,966   

Accrued Compensation and Benefits

     (340,604     (267,844

Securities Sold, Not Yet Purchased

     (97,247     (143,916

Accounts Payable, Accrued Expenses and Other Liabilities

     (440,090     (342,707

Repurchase Agreements

     (313,675     (142,073

Due to Affiliates

     3,672        (34,986

Treasury Cash Management Strategies

    

Investments Purchased

     (1,595,138     (2,258,191

Cash Proceeds from Sale of Investments

     1,767,007        2,533,672   

Blackstone Funds Related

    

Investments Purchased

     (3,686,756     (5,163,545

Cash Proceeds from Sale or Pay Down of Investments

     5,904,448        6,530,610   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,843,444        1,340,556   
  

 

 

   

 

 

 

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (13,618     (14,645

Changes in Restricted Cash

     5,841        5,804   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (7,777     (8,841
  

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

11


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Six Months Ended
June 30,
 
     2014     2013  

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

   $ (449,914   $ (302,789

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     690,755        595,543   

Purchase of Interests from Certain Non-Controlling Interest Holders

     (6     (22

Payments Under Tax Receivable Agreement

     (80,565     —     

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

     (25,290     (15,441

Excess Tax Benefits Related to Equity-Based Compensation

     17,938        —     

Proceeds from Loans Payable

     490,101        2,850   

Repayment and Repurchase of Loans Payable

     (7,934     (3,691

Distributions to Unitholders

     (1,123,123     (905,115

Blackstone Funds Related

    

Proceeds from Loans Payable

     42,197        4,075   

Repayment of Loans Payable

     (998,743     (755,045
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (1,444,584     (1,379,635
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (8     (605
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     391,075        (48,525

Cash and Cash Equivalents, Beginning of Period

     831,998        709,502   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 1,223,073      $ 660,977   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 49,580      $ 56,621   
  

 

 

   

 

 

 

Payments for Income Taxes

   $ 89,792      $ 41,808   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

    

Non-Cash Contributions from Non-Controlling Interest Holders

   $ 10,553      $ —     
  

 

 

   

 

 

 

Non-Cash Distributions to Non-Controlling Interest Holders

   $ (11,355   $ —     
  

 

 

   

 

 

 

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ 5,239      $ (291
  

 

 

   

 

 

 

Net Assets Related to the Consolidation of CLO Vehicles

   $ 8,398      $ —     
  

 

 

   

 

 

 

Net Assets Related to the Consolidation of Certain Fund Entities

   $ 35,433      $ —     
  

 

 

   

 

 

 

In-kind Contribution of Capital

   $ —        $ 2,323   
  

 

 

   

 

 

 

Notes Issuance Costs

   $ 4,375      $ —     
  

 

 

   

 

 

 

Transfer of Interests to Non-Controlling Interest Holders

   $ (3,014   $ (1,291
  

 

 

   

 

 

 

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

   $ (11,704   $ (10,476
  

 

 

   

 

 

 

Net Settlement of Vested Common Units

   $ 59,301      $ 53,585   
  

 

 

   

 

 

 

Conversion of Blackstone Holdings Partnership Units to Common Units

   $ 64,497      $ 12,163   
  

 

 

   

 

 

 

Acquisition of Ownership Interests from Non-Controlling Interest Holders

    

Deferred Tax Asset

   $ (63,173   $ (85,538
  

 

 

   

 

 

 

Due to Affiliates

   $ 48,177      $ 8,639   
  

 

 

   

 

 

 

Partners’ Capital

   $ 14,996      $ 76,899   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

12


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, capital markets 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, 2013 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.

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

 

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)

 

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 determine (a) 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 in the 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 continually. 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 determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

 

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)

 

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 are classified within Level III of the fair value hierarchy.

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

 

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)

 

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 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

 

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)

 

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 existence of redemption restrictions, if any, 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.

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

 

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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)

 

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. 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 (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price).

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 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 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. 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. 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

 

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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)

 

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 (Losses) 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 approximates 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.

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 in the Condensed Consolidated Statements of Financial Condition.

 

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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)

 

Blackstone does not offset assets and liabilities relating to reverse repurchase agreements and repurchase agreements in 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 in Net Gains (Losses) from Fund 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.

 

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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 has elected to not offset derivative assets and liabilities or financial assets in its Condensed Consolidated Statements of Financial Condition, including cash and securities, 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 declared.

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 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.

 

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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 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 did not 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 should be applied to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. Adoption did not 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

 

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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)

 

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 did not 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 did not have a material impact on the Partnership’s financial statements.

In June 2014, the FASB issued amended guidance on revenue from contracts with customers. The guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, an entity may include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.

The guidance introduces new qualitative and quantitative disclosure requirements about contracts with customers including revenue and impairments recognized, disaggregation of revenue and information about contract balances and performance obligations. Information is required about significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and determining the transaction price and amounts allocated to performance obligations. Additional disclosures are required about assets recognized from the costs to obtain or fulfill a contract.

The amended guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The guidance may have a material impact on Blackstone’s consolidated financial statements if it is determined that both performance fees and carried interest are forms of variable consideration that may not be included in the transaction price. This may significantly delay the recognition of carried interest income and performance fees.

In June 2014, the FASB issued amended guidance on transfers and servicing. Under the amended guidance, repurchase transactions previously accounted for as sales should be accounted for as secured borrowings. There are additional disclosures relating to repurchase agreements, secured lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings including a disaggregation of the gross obligations by the class of collateral pledged, the remaining contractual tenor of the agreements and a discussion of the potential risks associated with the agreements and the related collateral pledged.

The guidance is effective for the first interim or annual period beginning after December 15, 2014. Earlier application is prohibited. The amended guidance is not expected to have a material impact on Blackstone’s financial statements.

In August 2014, the FASB issued amended guidance on the measurement of financial assets and financial liabilities of a consolidated collateralized financing entity. Under the amended guidance, a reporting entity that

 

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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)

 

consolidates a collateralized financing entity may elect to measure the financial assets and the financial liabilities using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. When this measurement alternative is elected, a reporting entity’s consolidated net income (loss) should reflect the reporting entity’s own economic interest in the collateralized financing entity, including (a) changes in the fair value of the beneficial interests retained by the reporting entity and (b) beneficial interests that represent compensation for services. When this measurement alternative is not elected, the amendments clarify that the fair value of financial assets and financial liabilities should be measured in accordance with existing fair value guidance and any difference in the fair value of financial assets and financial liabilities should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income (loss). The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of the annual period. The guidance is expected to impact the measurement of the financial assets or financial liabilities of Blackstone’s consolidated collateralized loan obligation vehicles and have a material impact on the recognition of appropriated partners’ capital. However, the impact on net income attributable to The Blackstone Group L.P. is not expected to be material.

 

3. INTANGIBLE ASSETS

Intangible Assets, Net consists of the following:

 

     June 30,
2014
    December 31,
2013
 

Finite-Lived Intangible Assets/Contractual Rights

   $ 1,464,017      $ 1,594,128   

Accumulated Amortization

     (955,093     (1,033,380
  

 

 

   

 

 

 

Intangible Assets, Net

   $ 508,924      $ 560,748   
  

 

 

   

 

 

 

Amortization expense associated with Blackstone’s intangible assets was $25.6 million and $51.8 million for the three and six month periods ended June 30, 2014, respectively, and $21.6 million and $44.5 million for the three and six month periods ended June 30, 2013, respectively.

Amortization of Intangible Assets held at June 30, 2014 is expected to be $102.2 million, $95.8 million, $85.6 million, $46.5 million and $46.5 million for each of the years ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively. Blackstone’s intangible assets as of June 30, 2014 are expected to amortize over a weighted-average period of 7.1 years.

 

4. INVESTMENTS

Investments consists of the following:

 

     June 30,
2014
     December 31,
2013
 

Investments of Consolidated Blackstone Funds

   $ 10,820,315       $ 12,521,248   

Equity Method Investments

     3,492,500         3,309,879   

Blackstone’s Treasury Cash Management Strategies

     1,185,858         1,104,800   

Performance Fees

     5,979,682         4,674,792   

Other Investments

     148,790         118,804   
  

 

 

    

 

 

 
   $ 21,627,145       $ 21,729,523   
  

 

 

    

 

 

 

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $696.2 million and $487.8 million at June 30, 2014 and December 31, 2013, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Investments of Consolidated Blackstone Funds

The following table presents 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,  
            2014                     2013                   2014                 2013        

Realized Gains

  $ 20,226      $ 30,547      $ 33,939      $ 98,335   

Net Change in Unrealized Gains (Losses)

    68,333        (41,232     41,119        (83,727
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    88,559        (10,685     75,058        14,608   

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

    50,026        51,651        133,682        93,568   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Income — Net Gains from Fund Investment Activities

  $ 138,585      $ 40,966      $ 208,740      $ 108,176   
 

 

 

   

 

 

   

 

 

   

 

 

 

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, 2014 and 2013, 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.

The Partnership recognized net gains related to its equity method investments of $135.8 million and $103.4 million for the three months ended June 30, 2014 and 2013, respectively. The Partnership recognized net gains related to its equity method investments of $233.0 million and $211.3 million for the six months ended June 30, 2014 and 2013, 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,  
           2014                  2013                 2014                  2013        

Realized Gains (Losses)

   $ 1,071       $ (1,354   $ 4,165       $ 2,557   

Net Change in Unrealized Gains (Losses)

     7,122         (18,196     16,092         (19,167
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 8,193       $ (19,550   $ 20,257       $ (16,610
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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)

 

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, 2013

   $ 971,860      $ 3,268,606      $ 9,468      $ 424,858      $ 4,674,792   

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

     1,001,329        877,904        34,275        148,041        2,061,549   

Foreign Exchange Loss

     —          (2,450     —          —          (2,450

Fund Distributions

     (255,670     (366,719     (16,133     (115,687     (754,209
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees, June 30, 2014

   $ 1,717,519      $ 3,777,341      $ 27,610      $ 457,212      $ 5,979,682   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
           2014                 2013                 2014                 2013        

Realized Gains (Losses)

   $ (695   $ 14,754      $ 5,612      $ 14,106   

Net Change in Unrealized Gains (Losses)

     13        (17,705     (6,491     (12,501
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (682   $ (2,951   $ (879   $ 1,605   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2014 is presented below:

 

Strategy

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

Diversified Instruments

   $ 130,069       $ 3,542         (a     (a

Credit Driven

     336,229         —           (b     (b

Event Driven

     122,853         —           (c     (c

Equity

     372,345         —           (d     (d

Commodities

     57,435         —           (e     (e

Private Equity

     86,345         —           (f     (f
  

 

 

    

 

 

      
   $ 1,105,276       $ 3,542        
  

 

 

    

 

 

      

 

(a)

Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 66% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 26% of the fair value of the investments in 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

 

26


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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)

 

  may lapse cannot be estimated. The remaining 8% of investments in this category are redeemable as of the reporting date. As of the reporting date, the investee fund manager had elected to side pocket 16% 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 68% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 30% of the fair value of the investments in this category are redeemable as of the reporting date. Investments representing 2% of the total fair 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. 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. Withdrawals are generally not permitted for investments in this category. Distributions will be received as the underlying investments are liquidated.
(e) The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Withdrawals are not permitted for investments representing 95% of the fair value of investments in this category. Distributions will be received as the underlying investments are liquidated. The remaining 5% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date.
(f) The Private Equity category includes investments in private equity funds that primarily invest in private equity, revenue interests and other private investments. Withdrawals are not permitted for investments in this category.

 

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.

 

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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 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, 2014     December 31, 2013  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
 

Freestanding Derivatives

               

Blackstone — Other
Interest Rate Contracts

  $ 398,243      $ 1,980      $ 1,006,429      $ 2,694      $ 1,994,276      $ 8,521      $ 1,083,140      $ 2,676   

Foreign Currency Contracts

    71,686        518        265,771        1,173        166,066        1,480        163,787        1,015   

Total Return Swaps

    —          —          —          —          326,929        342        —          —     

Credit Default Swaps

    10,000        218        9,000        1,583        —          —          10,000        591   

Investments of Consolidated
Blackstone Funds
    Foreign Currency
        Contracts

    283,843        18,189        262,295        18,753        396,569        30,830        239,037        10,018   

Interest Rate Contracts

    25,442        2,983        —          —          62,193        3,726        —          —     

Credit Default Swaps

    —          —          95,560        6,101        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 789,214      $ 23,888      $ 1,639,055      $ 30,304      $ 2,946,033      $ 44,899      $ 1,495,964      $ 14,300   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
           2014                 2013                 2014                 2013        

Freestanding Derivatives

        

Realized Gains (Losses)

        

Interest Rate Contracts

   $ (570   $ (429   $ (1,403   $ (955

Foreign Currency Contracts

     (4,420     (2,527     (2,981     (3,763

Credit Default Swaps

     996        (181     1,282        (173
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (3,994   $ (3,137   $ (3,102   $ (4,891
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Gains (Losses)

        

Interest Rate Contracts

   $ (1,731   $ (2,807   $ (4,273   $ (9,493

Foreign Currency Contracts

     (13,827     5,257        (21,944     12,636   

Credit Default Swaps

     2,985        (277     4,798        (300
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (12,573   $ 2,173      $ (21,419   $ 2,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2014 and December 31, 2013, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.

 

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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)

 

7. FAIR VALUE OPTION

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

 

     June 30,
2014
     December 31,
2013
 

Assets

     

Loans and Receivables

   $ 42,725       $ 137,788   

Equity and Preferred Securities

     91,094         88,568   

Assets of Consolidated CLO Vehicles

     

Corporate Loans

     6,230,918         8,466,889   

Corporate Bonds

     168,426         161,382   

Other

     26,041         41,061   
  

 

 

    

 

 

 
   $ 6,559,204       $ 8,895,688   
  

 

 

    

 

 

 

Liabilities

     

Liabilities of Consolidated CLO Vehicles

     

Senior Secured Notes

   $ 6,407,838       $ 8,302,572   

Subordinated Notes

     474,757         610,435   
  

 

 

    

 

 

 
   $ 6,882,595       $ 8,913,007   
  

 

 

    

 

 

 

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,  
     2014     2013  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ —        $ —        $ (154

Equity and Preferred Securities

     (739     796        (605     (2,869

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     (26,393     33,898        3,499        (44,274

Corporate Bonds

     (3,284     3,442        771        (2,070

Other

     (1,703     22,673        537        (497
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (32,119   $ 60,809      $ 4,202      $ (49,864
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ (1,554   $ (39,764   $ —        $ (64,042

Subordinated Notes

     —          18,659        —          41,267   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (1,554   $ (21,105   $ —        $ (22,775
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

     Six Months Ended June 30,  
     2014     2013  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ —        $ 43      $ (204

Equity and Preferred Securities

     (1,323     5,914        (1,398     281   

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     (64,635     48,957        43,074        34,872   

Corporate Bonds

     (2,186     3,694        3,653        (5,858

Other

     13,294        19,555        1,426        1,112   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (54,850   $ 78,120      $ 46,798      $ 30,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ (4,092   $ (95,638   $ —        $ (291,953

Subordinated Notes

     —          55,614        —          78,009   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (4,092   $ (40,024   $ —        $ (213,944
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents information for those financial instruments for which the fair value option was elected:

 

     June 30, 2014  
           For Financial Assets
Past Due (a)
    For Financial Assets
with Non-Accrual Status
 
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
 

Loans and Receivables

   $ (1,177   $ —         $ —        $ —         $ (1,703

Assets of Consolidated CLO Vehicles

            

Corporate Loans

     (134,252     12,674         (32,038     —           —     

Corporate Bonds

     2,911        —           —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ (132,518   $ 12,674       $ (32,038   $ —         $ (1,703
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2013  
           For Financial Assets
Past Due (a)
    For Financial Assets
with Non-Accrual Status
 
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
 

Loans and Receivables

   $ (533   $ —         $ —        $ —         $ —     

Assets of Consolidated CLO Vehicles

            

Corporate Loans

     (281,254     57,837         (176,379     —           —     

Corporate Bonds

     (1,789     —           —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ (283,576   $ 57,837       $ (176,379   $ —         $ —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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)

 

 

(a) 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 December 31, 2013, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of June 30, 2014 and December 31, 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.

 

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)

 

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, 2014  
     Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Blackstone Funds (a)

           

Investment Funds

   $ —         $ —         $ 984,184       $ 984,184   

Equity Securities

     112,952         68,589         201,456         382,997   

Partnership and LLC Interests

     —           226,209         1,215,690         1,441,899   

Debt Instruments

     2,122         1,478,713         83,843         1,564,678   

Assets of Consolidated CLO Vehicles

           

Corporate Loans

     —           5,487,401         743,517         6,230,918   

Corporate Bonds

     —           156,851         11,575         168,426   

Freestanding Derivatives — Foreign Currency Contracts

     —           18,189         —           18,189   

Freestanding Derivatives — Interest Rate Contracts

     —           2,983         —           2,983   

Other

     19         21,247         4,775         26,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments of Consolidated Blackstone Funds

     115,093         7,460,182         3,245,040         10,820,315   

Blackstone’s Treasury Cash Management Strategies

     249,137         877,568         59,153         1,185,858   

Money Market Funds

     363,245         —           —           363,245   

Freestanding Derivatives

           

Interest Rate Contracts

     1,184         796         —           1,980   

Foreign Currency Contracts

     —           518         —           518   

Credit Default Swaps

     —           218         —           218   

Loans and Receivables

     —           —           42,725         42,725   

Other Investments

     19,840         7,446         121,504         148,790   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 748,499       $ 8,346,728       $ 3,468,422       $ 12,563,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Liabilities of Consolidated Blackstone Funds (a)

           

Freestanding Derivatives — Credit Default Swaps

   $ —         $ 6,101       $ —         $ 6,101   

Liabilities of Consolidated CLO Vehicles

           

Senior Secured Notes

     —           —           6,407,838         6,407,838   

Subordinated Notes

     —           —           474,757         474,757   

Freestanding Derivatives — Foreign Currency Contracts

     —           18,753         —           18,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities of Consolidated Blackstone Funds

     —           24,854         6,882,595         6,907,449   

Freestanding Derivatives

           

Interest Rate Contracts

     1,700         994         —           2,694   

Foreign Currency Contracts

     —           1,173         —           1,173   

Credit Default Swaps

     —           1,583         —           1,583   

Securities Sold, Not Yet Purchased

     —           130,754         —           130,754   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,700       $ 159,358       $ 6,882,595       $ 7,043,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

32


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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)

 

     December 31, 2013  
     Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Blackstone Funds (a)

           

Investment Funds

   $ —         $ —         $ 897,843       $ 897,843   

Equity Securities

     51,147         130,816         193,699         375,662   

Partnership and LLC Interests

     —           88,555         1,254,903         1,343,458   

Debt Instruments

     —           1,154,902         45,495         1,200,397   

Assets of Consolidated CLO Vehicles

           

Corporate Loans

     —           7,537,661         929,228         8,466,889   

Corporate Bonds

     —           161,382         —           161,382   

Freestanding Derivatives — Foreign Currency Contracts

     —           30,830         —           30,830   

Freestanding Derivatives — Interest Rate Contracts

     —           3,726         —           3,726   

Other

     3,477         —           37,584         41,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments of Consolidated Blackstone Funds

     54,624         9,107,872         3,358,752         12,521,248   

Blackstone’s Treasury Cash Management Strategies

     19,629         1,041,039         44,132         1,104,800   

Money Market Funds

     173,781         —           —           173,781   

Freestanding Derivatives

           

Interest Rate Contracts

     7,423         1,098         —           8,521   

Foreign Currency Contracts

     —           1,480         —           1,480   

Total Return Swaps

     —           342         —           342   

Loans and Receivables

     —           —           137,788         137,788   

Other Investments

     87,068         17,270         14,466         118,804   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 342,525       $ 10,169,101       $ 3,555,138       $ 14,066,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Liabilities of Consolidated CLO Vehicles (a)

           

Senior Secured Notes

   $ —         $ —         $ 8,302,572       $ 8,302,572   

Subordinated Notes

     —           —           610,435         610,435   

Freestanding Derivatives — Foreign Currency Contracts

     —           10,018         —           10,018   

Freestanding Derivatives

           

Interest Rate Contracts

     2,484         192         —           2,676   

Foreign Currency Contracts

     —           1,015         —           1,015   

Credit Default Swaps

     —           591         —           591   

Securities Sold, Not Yet Purchased

     —           76,195         —           76,195   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,484       $ 88,011       $ 8,913,007       $ 9,003,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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)

 

The following table summarizes the fair value transfers between Level I and Level II for positions that existed as of June 30, 2014 and 2013, respectively:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
             2014                      2013                      2014                      2013          

Transfers from Level I into Level II (a)

   $ —         $ 31       $ —         $ 28,670   

Transfers from Level II into Level I (b)

   $ 49,298       $ 46,495       $ 67,327       $ —     

 

(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.

 

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 June 30, 2014:

 

    Fair Value     Valuation
Techniques
  Unobservable
Inputs
  Ranges   Weighted-
Average (a)

Financial Assets

         

Investments of Consolidated Blackstone Funds

         

Investment Funds

  $ 984,184      NAV as Fair Value   N/A   N/A   N/A

Equity Securities

    110,938      Discounted Cash Flows   Discount Rate   7.6% - 26.2%   11.6%
      Revenue CAGR   1.9% - 29.2%   6.3%
      Exit Multiple - EBITDA   5.0x - 13.0x   9.2x
      Exit Multiple - P/E   9.5x - 17.0x   10.5x
    83,809      Transaction Price   N/A   N/A   N/A
    159      Market Comparable Companies   EBITDA Multiple   6.8x - 7.4x   6.9x
    44      Third Party Pricing   N/A   N/A   N/A
    6,506      Other   N/A   N/A   N/A

Partnership and LLC Interests

    498,549      Discounted Cash Flows   Discount Rate   5.0% - 20.0%   9.0%
      Revenue CAGR   -2.2% - 42.4%   5.5%
      Exit Multiple - EBITDA   0.1x - 23.3x   9.8x
      Exit Capitalization Rate   4.3% - 10.5%   6.9%
    696,464      Transaction Price   N/A   N/A   N/A
    11,651      Third Party Pricing   N/A   N/A   N/A
    9,026      Other   N/A   N/A   N/A

Debt Instruments

    14,568      Discounted Cash Flows   Discount Rate   10.6% - 23.0%   19.8%
      Revenue CAGR   3.6% - 7.8%   4.6%
      Exit Multiple - EBITDA   5.9x - 11.0x   10.7x
      Exit Capitalization Rate   6.2% - 8.4%   6.3%
      Default Rate   2.0%   N/A
      Recovery Rate   70.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
    63,036      Third Party Pricing   N/A   N/A   N/A
    6,031      Transaction Price   N/A   N/A   N/A
    208      Market Comparable Companies   EBITDA Multiple   6.1x - 8.0x   6.1x

Assets of Consolidated CLO Vehicles

    470,263      Third Party Pricing   N/A   N/A   N/A
    269,579      Market Comparable Companies   EBITDA Multiple   3.5x - 15.0x   6.9x
    20,025      Discounted Cash Flows   Discount Rate   7.0% - 8.5%   7.3%
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    3,245,040       

 

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

  $ 17,308      Discounted Cash Flows                Default Rate   2.0%   N/A
      Recovery Rate   70.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
      Discount Rate   5.9% - 8.3%   6.6%
    26,192      Third Party Pricing   N/A   N/A   N/A
    5,629      Transaction Price   N/A   N/A   N/A
    10,024      NAV as Fair Value   N/A   N/A   N/A

Loans and Receivables

    42,725      Discounted Cash Flows   Discount Rate   13.0% - 16.2%   14.6%

Other Investments

    11,923      Transaction Price   N/A   N/A   N/A
    106,464      Discounted Cash Flows   Discount Rate   1.4% - 12.5%   2.9%
      Default Rate   2.0%   N/A
      Recovery Rate   70.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate            LIBOR + 400 bps     N/A
    3,117      NAV as Fair Value   N/A   N/A   N/A
 

 

 

         

Total

  $ 3,468,422           
 

 

 

         

Financial Liabilities

         

Liabilities of Consolidated CLO Vehicles

  $ 6,882,595      Discounted Cash Flows   Default Rate   2.0% - 3.0%   2.1%
 

 

 

         
      Recovery Rate   70.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Discount Rate   0.2% - 47.6%   2.4%
      Reinvestment Rate   LIBOR + 400 bps   N/A

 

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)

 

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, 2013:

 

    Fair Value     Valuation
Techniques
  Unobservable
Inputs
  Ranges   Weighted-
Average (a)

Financial Assets

         

Investments of Consolidated Blackstone Funds

         

Investment Funds

  $ 897,843      NAV as Fair Value   N/A   N/A   N/A

Equity Securities

    112,117      Discounted Cash Flows   Discount Rate   9.2% - 26.3%   12.4%
      Revenue CAGR   0.9% - 46.2%   6.8%
      Exit Multiple -
EBITDA
  5.0x - 14.0x   8.9x
      Exit Multiple -
P/E
  8.5x - 17.0x   9.8x
    78,154      Transaction Price   N/A   N/A   N/A
    275      Market Comparable Companies   EBITDA Multiple   6.3x - 7.5x   6.9x
    50      Third Party Pricing   N/A   N/A   N/A
    3,103      Other   N/A   N/A   N/A

Partnership and LLC Interests

    557,534      Discounted Cash Flows   Discount Rate   5.0% - 22.5%   9.0%
      Revenue CAGR   -0.7% - 17.7%   5.5%
      Exit Multiple -
EBITDA
  3.0x - 23.3x   9.4x
      Exit Capitalization
Rate
  4.3% - 10.5%   7.0%
    687,246      Transaction Price   N/A   N/A   N/A
    9,181      Third Party Pricing   N/A   N/A   N/A
    942      Other   N/A   N/A   N/A

Debt Instruments

    11,814      Discounted Cash Flows   Discount Rate   10.7% - 21.0%   19.2%
      Revenue CAGR   4.8% - 5.5%   4.8%
      Exit Multiple -
EBITDA
  5.8x - 11.1x   10.8x
      Exit Capitalization
Rate
  6.4% - 7.5%   6.7%
      Default Rate   2.0%   N/A
      Recovery Rate   67.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment
Rate
  LIBOR + 400 bps   N/A
    31,675      Third Party Pricing   N/A   N/A   N/A
    1,772      Transaction Price   N/A   N/A   N/A
    234      Market Comparable Companies   EBITDA Multiple   6.2x - 8.0x   6.2x

Assets of Consolidated CLO Vehicles

    615,414      Third Party Pricing   N/A   N/A   N/A
    293,382      Market Comparable Companies   EBITDA Multiple   3.5x - 11.3x   7.3x
    57,936      Discounted Cash Flows   Discount Rate   7.0% - 14.0%   7.8%
      Revenue CAGR   4.2%   N/A
      Exit Multiple -
EBITDA
  8.0x   N/A
    80      Transaction Price   N/A   N/A   N/A
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    3,358,752           

 

continued …

 

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)

 

    Fair Value     Valuation
Techniques
  Unobservable
Inputs
  Ranges   Weighted-
Average (a)

Blackstone’s Treasury Cash Management Strategies

  $ 17,040      Discounted Cash Flows                Default Rate   2.0%   N/A
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
      Discount Rate   6.0% - 8.6%   6.6%
    16,993      Third Party Pricing   N/A   N/A   N/A
    10,099      NAV as Fair Value   N/A   N/A   N/A

Loans and Receivables

    137,788      Discounted Cash Flows   Discount Rate   11.0% - 14.8%   12.6%

Other Investments

    7,927      Transaction Price   N/A   N/A   N/A
    3,725      NAV as Fair Value   N/A   N/A   N/A
    2,814      Discounted Cash Flows   Discount Rate   12.5%   N/A
 

 

 

         

Total

  $ 3,555,138           
 

 

 

         

Financial Liabilities

         

Liabilities of Consolidated CLO Vehicles

  $ 8,913,007      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% - 20.0%   18.0%
      Discount Rate   0.4% - 24.2%   2.6%
      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 (“P/E”) 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 Blackstone’s Treasury Cash Management Strategies, debt instruments, other investments and liabilities 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, EBITDA multiples 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 and revenue compound annual growth rates in isolation can result in a higher (lower) fair value measurement.

 

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)

 

Since December 31, 2013, 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 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,
 
    2014     2013  
    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

  $ 3,412,822      $ 61,573      $ 136,911      $ 3,611,306      $ 2,937,297      $ 3,867      $ 63,049      $ 3,004,213   

Transfer Out Due to Deconsolidation

    (140,393     —          —          (140,393     (50,181     —          —          (50,181

Transfer In to Level III (b)

    196,770        —          4,293        201,063        177,145        —          —          177,145   

Transfer Out of
Level III (b)

    (234,833     —          (9,735     (244,568     (259,570     —          (1,713     (261,283

Purchases

    227,522        12,403        55,791        295,716        308,817        103,653        28,260        440,730   

Sales

    (276,020     (31,345     (4,170     (311,535     (302,010     —          (41,074     (343,084

Settlements

    —          (432     (145     (577     —          —          —          —     

Realized Gains

               

(Losses), Net

    (26,634     —          (651     (27,285     29,476        —          13,587        43,063   

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

    85,806        526        (1,637     84,695        49,345        211        (14,195     35,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

  $ 3,245,040      $ 42,725      $ 180,657      $ 3,468,422      $ 2,890,319      $ 107,731      $ 47,914      $ 3,045,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

    Level III Financial Assets at Fair Value
Six Months Ended June 30,
 
    2014     2013  
    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

  $ 3,358,752      $ 137,788      $ 58,598      $ 3,555,138      $ 3,017,699      $ 30,663      $ 28,104      $ 3,076,466   

Transfer In Due to Consolidation and Acquisition (a)

    276,806        —          —          276,806        —          —          11,960        11,960   

Transfer Out Due to Deconsolidation

    (238,399     —          —          (238,399     (152,727     —          —          (152,727

Transfer In to Level III (b)

    222,991        —          7,972        230,963        224,363        —          —          224,363   

Transfer Out of
Level III (b)

    (292,469     —          (10,744     (303,213     (372,438     —          (1,713     (374,151

Purchases

    392,699        93,645        133,430        619,774        436,850        106,526        91,034        634,410   

Sales

    (559,330     (188,064     (8,237     (755,631     (430,563     (29,462     (80,536     (540,561

Settlements

    —          (1,170     (301     (1,471     —          (332     (1,559     (1,891

Realized Gains (Losses), Net

    (21,042     —          (549     (21,591     1,959        43        14,436        16,438   

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

    105,032        526        488        106,046        165,176        293        (13,812     151,657   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

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