Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

OR

 

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

Commission File Number: 001-33551

 

 

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8875684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer  x

   Accelerated filer  ¨

Non-accelerated filer  ¨

   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 October 29, 2010 was 258,577,585. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of October 29, 2010 was 109,083,468.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

          Page  

PART I

   FINANCIAL INFORMATION   

ITEM 1.

  

FINANCIAL STATEMENTS

     4   
  

Unaudited Condensed Consolidated Financial Statements — September 30, 2010 and 2009:

  
  

Condensed Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009

     4   
  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009

     5   
  

Condensed Consolidated Statement of Changes in Partners’ Capital for the Nine Months Ended September 30, 2010

     6   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

     7   
  

Notes to Condensed Consolidated Financial Statements

     9   

ITEM 1A.

  

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

     49   

ITEM 2.

  

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

     51   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     99   

ITEM 4.

  

CONTROLS AND PROCEDURES

     101   

PART II

  

OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

     102   

ITEM 1A.

  

RISK FACTORS

     102   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     103   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     103   

ITEM 4.

  

(REMOVED AND RESERVED)

     103   

ITEM 5.

  

OTHER INFORMATION

     103   

ITEM 6.

  

EXHIBITS

     104   

SIGNATURES

     105   

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2009 and in this report, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

 

 

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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 co-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-oriented funds, collateralized loan obligation (“CLO”) vehicles, and closed-end mutual funds that are managed by Blackstone. “Our carry funds” refer to the private equity funds, real estate funds and certain of the credit-oriented funds (with multi-year drawdown, commitment-based structures that only receive carry on the realization of an investment) that are managed by Blackstone. “Our hedge funds” refer to our funds of hedge funds, certain of our real estate debt investment funds and certain other credit-oriented funds that are managed by Blackstone.

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

 

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

 

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

 

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

 

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

Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Interests related to our funds of hedge funds and certain of our credit-oriented funds are generally subject to annual, semi-annual or quarterly withdrawal or redemption by investors upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days’ 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 incentive fees. Our fee-earning assets under management equal the sum of:

 

  (a) for our Blackstone Capital Partners (“BCP”) and Blackstone Real Estate Partners (“BREP”) funds where the investment period has not expired, the amount of capital commitments;

 

  (b) for our BCP and BREP funds where the investment period has expired, the remaining amount of invested capital;

 

  (c) for our real estate debt investment funds, the remaining amount of invested capital;

 

  (d) for our credit-oriented carry funds, the amount of invested capital (which may be calculated to include leverage) or net asset value;

 

  (e) the invested capital of co-investments arranged by us that were made by limited partners of our funds in portfolio companies of such funds and on which we receive fees;

 

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

 

  (g) the fair value of assets we manage pursuant to separately managed accounts;

 

  (h) the gross amount of underlying assets of our CLOs at cost; and

 

  (i) the gross amount of assets (including leverage) for our credit oriented closed-end mutual fund.

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

 

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commitments to, and the fair value of, invested capital in our funds from Blackstone and our personnel, regardless of whether such commitments or invested capital are subject to fees. Our definitions of assets under management or fee-earning assets under management are not based on any definition of assets under management or fee-earning assets under management that is set forth in the agreements governing the investment funds that we manage.

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

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

 

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PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     September 30,
2010
     December 31,
2009
 

Assets

     

Cash and Cash Equivalents

   $ 1,016,229      $ 952,096  

Cash Held by Blackstone Funds and Other ($352,192)

     391,691        86,084  

Investments ($7,655,958)

     11,026,730        3,565,483  

Accounts Receivable ($84,585)

     424,931        306,307  

Reverse Repurchase Agreements

     287,445        —     

Due from Affiliates ($33,230)

     657,342        759,907  

Intangible Assets, Net

     820,169        919,477  

Goodwill

     1,703,602        1,703,602  

Other Assets ($46,842)

     295,436        172,556  

Deferred Tax Assets

     1,117,316        943,512  
                 

Total Assets

   $ 17,740,891      $ 9,409,024  
                 

Liabilities and Partners’ Capital

     

Loans Payable ($5,665,499)

   $ 6,735,736      $ 657,623  

Due to Affiliates ($275,345)

     1,701,434        1,410,066  

Accrued Compensation and Benefits

     760,160        488,945  

Securities Sold, Not Yet Purchased

     264,037        357  

Accounts Payable, Accrued Expenses and Other Liabilities ($145,681)

     623,730        308,500  
                 

Total Liabilities

     10,085,097        2,865,491  
                 

Commitments and Contingencies

     

Redeemable Non-Controlling Interests in Consolidated Entities

     587,399        526,311  
                 

Partners’ Capital

     

Partners’ Capital (common units: 369,463,277 issued and outstanding as of September 30, 2010; 319,939,772 issued and outstanding as of December 31, 2009)

     3,580,488        3,376,707  

Appropriated Partners’ Capital

     551,737        —     

Accumulated Other Comprehensive Income

     5,999        2,420  

Non-Controlling Interests in Consolidated Entities

     693,300        540,283  

Non-Controlling Interests in Blackstone Holdings

     2,236,871        2,097,812  
                 

Total Partners’ Capital

     7,068,395        6,017,222  
                 

Total Liabilities and Partners’ Capital

   $ 17,740,891      $ 9,409,024  
                 

Asset and liability amounts in parentheses represent the portion of the September 30, 2010 consolidated balance attributable to Blackstone Fund entities which are variable interest or voting interest entities.

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2010     2009     2010     2009  

Revenues

       

Management and Advisory Fees

  $ 362,521     $ 367,605     $ 1,123,403     $ 1,049,606  

Performance Fees and Allocations

       

Realized

    66,142       (3,452     171,941       2,004  

Unrealized

    199,824       157,465       312,304       8,932  
                               

Total Performance Fees and Allocations

    265,966       154,013       484,245       10,936  
                               

Investment Income (Loss)

       

Realized

    13,542       6,279       29,493       7,556  

Unrealized

    127,428       58,530       371,691       (36,149
                               

Total Investment Income (Loss)

    140,970       64,809       401,184       (28,593
                               

Interest and Dividend Revenue

    10,075       6,703       25,922       11,124  

Other

    4,468       3,893       573       5,280  
                               

Total Revenues

    784,000       597,023       2,035,327       1,048,353  
                               

Expenses

       

Compensation and Benefits

       

Base Compensation

    664,004       923,272       2,556,665       2,805,567  

Performance Fee Related

       

Realized

    24,962       (712     55,582       1,014  

Unrealized

    104,324       58,068       158,032       (75,855
                               

Total Compensation and Benefits

    793,290       980,628       2,770,279       2,730,726  

General, Administrative and Other

    114,291       110,641       341,853       328,517  

Interest Expense

    11,766       5,258       26,633       6,744  

Fund Expenses

    6,422       1,267       15,484       5,871  
                               

Total Expenses

    925,769       1,097,794       3,154,249       3,071,858  
                               

Other Income

       

Net Gains from Fund Investment Activities

    285,071       73,812       397,625       97,353  
                               

Income (Loss) Before Provision (Benefit) for Taxes

    143,302       (426,959     (721,297     (1,926,152

Provision (Benefit) for Taxes

    (4,225     52,551       24,802       81,167  
                               

Net Income (Loss)

    147,527       (479,510     (746,099     (2,007,319

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

    23,623       50,281       47,171       90,515  

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

    242,723       3,622       320,816       (33,450

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

    (74,461     (357,230     (755,031     (1,492,343
                               

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

  $ (44,358   $ (176,183   $ (359,055   $ (572,041
                               

Net Loss Per Common Unit, Basic and Diluted

       

Common Units

  $ (0.12     $ (1.02  
                   

Common Units Entitled to Priority Distributions

    $ (0.61     $ (2.05
                   

Common Units Not Entitled to Priority Distributions

    $ (0.91     $ (2.95
                   

Weighted-Average Common Units Outstanding — Basic and Diluted

       

Common Units

    370,101,582         352,794,385    
                   

Common Units Entitled to Priority Distributions

      283,243,485         277,390,904  
                   

Common Units Not Entitled to Priority Distributions

      8,311,085         3,465,956  
                   

Revenues Earned from Affiliates

       

Management and Advisory Fees

  $ 34,242     $ 23,019     $ 110,356     $ 68,484  
                               

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

    Common
Units
    Partners’
Capital
    Appropriated
Partners’
Capital
    Accumulated
Other
Comprehensive
Income
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income (Loss)
 

Balance at December 31, 2009

    319,939,772     $ 3,376,707     $ —        $ 2,420     $ 540,283     $ 2,097,812     $ 6,017,222     $ 526,311    

Transition and Acquisition Adjustments Relating to Consolidation of CDO and CLO Entities

    —          —          406,858       —          56       —          406,914       —          —     

Net Income (Loss)

    —          (359,055     161,854       —          158,962       (755,031     (793,270     47,171       (746,099 )* 

Currency Translation Adjustment

    —          —          (16,975     3,579       —          —          (13,396     —          (13,396 )* 

Comprehensive (Income) Loss Attributable to Non-Controlling Interest

    —          —          —          —          —          —          —          —          404,019   

Reclassification of Capital Due to Non-Controlling Interest Holders

    —          —          —          —          (60,197     —          (60,197     —          —     

Capital Contributions

    —          —          —          —          111,970       —          111,970       64,125       —     

Capital Distributions

    —          (171,803     —          —          (41,847     (317,468     (531,118     (47,072     —     

Transfer of Non-Controlling Interests in Consolidated Entities

    —          —          —          —          (15,927     15,927       —          —          —     

Purchase of Interests from Certain Non-Controlling Interest Holders

    —          (153     —          —          —          —          (153     —          —     

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

    —          34,415       —          —          —          —          34,415       —          —     

Equity-Based Compensation

    —          609,912       —          —          —          1,308,051       1,917,963       —          —     

Relinquished in Deconsolidation of Partnership

    —          —          —          —          —          —          —          (3,136     —     

Net Delivery of Vested Common Units

    6,456,315       (20,757     —          —          —          —          (20,757     —          —     

Repurchase of Common Units and Blackstone Holdings Partnership Units

    (84,888     (1,198     —          —          —          —          (1,198     —          —     

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

    —          (8,460     —          —          —          8,460       —          —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

    43,152,078       120,880       —          —          —          (120,880     —          —          —     
                                                                       

Balance at September 30, 2010

    369,463,277     $ 3,580,488     $ 551,737     $ 5,999     $ 693,300     $ 2,236,871     $ 7,068,395     $ 587,399     $ (355,476 )** 
                                                                       

 

* Total Condensed Consolidated Comprehensive Income equals the sum of these amounts.
** Total Comprehensive Income Attributable to The Blackstone Group L.P.

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Nine Months Ended
September 30,
 
             2010                     2009          

Operating Activities

    

Net Income (Loss)

   $ (746,099   $ (2,007,319

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

    

Blackstone Funds Related:

    

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

     (533,466     (110,421

Net Realized (Gains) Losses on Investments

     (140,095     140,377  

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

     (352,506     40,993  

Unrealized Depreciation on Hedge Activities

     48,951       8,799  

Non-Cash Performance Fees and Allocations

     (192,208     (121,977

Non-Cash Performance Fee Related Compensation

     213,614       (74,842

Equity-Based Compensation Expense

     1,924,358       2,238,970  

Amortization of Intangibles

     121,206       118,537  

Other Non-Cash Amounts Included in Net Income

     19,349       17,977  

Cash Flows Due to Changes in Operating Assets and Liabilities:

    

Cash Held by Blackstone Funds and Other

     (48,376     833,600  

Cash Relinquished with Deconsolidation of Partnership

     (3,136     —     

Accounts Receivable

     (79,622     68,937  

Reverse Repurchase Agreements

     (287,445     —     

Due from Affiliates

     13,107        512,713  

Other Assets

     (100,385     103,204  

Accrued Compensation and Benefits

     62,520       (23,549

Securities Sold, Not Yet Purchased

     262,395       (606

Accounts Payable, Accrued Expenses and Other Liabilities

     253,986       (999,172

Due to Affiliates

     (33,600     (261,449

Short Term Investments Purchased

     (1,785,838     (1,030,000

Cash Proceeds from Sale of Investments

     1,390,991       —     

Blackstone Funds Related:

    

Investments Purchased

     (2,344,140     (292,194

Cash Proceeds from Sale of Investments

     2,652,554       742,950  
                

Net Cash Provided by (Used in) Operating Activities

     316,115       (94,472
                

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (30,587     (18,323

Net Cash Paid for Acquisition of Management Contracts

     (21,898     —     

Changes in Restricted Cash

     35       1,239  
                

Net Cash Used in Investing Activities

     (52,450     (17,084
                

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

     (77,039     (84,333

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     117,896       138,785  

 

continued...

 

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands)

 

     Nine Months Ended
September 30,
 
             2010                     2009          

Purchase of Interests from Certain Non-Controlling Interest Holders

   $ (153   $ (8,877

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

     (21,955     (56,188

Proceeds from Loans Payable

     408,574       592,513  

Repayment of Loans Payable

     (34,207     (320,213

Distributions to Unitholders

     (489,271     (167,398

Blackstone Funds Related:

    

Proceeds from Loans Payable

     14,014       —     

Repayment of Loans Payable

     (93,099     —     
                

Net Cash Provided by (Used in) Financing Activities

     (175,240     94,289  
                

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (24,292     —     
                

Net Increase (Decrease) in Cash and Cash Equivalents

     64,133       (17,267

Cash and Cash Equivalents, Beginning of Period

     952,096       503,737  
                

Cash and Cash Equivalents, End of Period

   $ 1,016,229     $ 486,470  
                

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 2,966     $ 1,683  
                

Payments for Income Taxes

   $ 51,319     $ 49,898  
                

Supplemental Disclosure of Non-Cash Operating Activities

    

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ 4,037     $ 5,018  
                

Net Assets Related to the Consolidation of CDO and CLO Vehicles

   $ 406,914     $ —     
                

Reclassification of Capital Due to Non-Controlling Interest Holders

   $ (60,197   $ —     
                

In-kind Contribution of Capital

   $ 75,516     $ —     
                

Notes Issuance Costs

   $ 2,000     $ 4,663  
                

Transfer of Interests to Non-Controlling Interest Holders

   $ (15,927   $ 18,337  
                

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

   $ (8,460   $ —     
                

Net Settlement of Vested Common Units

   $ 133,907     $ 140,755  
                

Conversion of Blackstone Holdings Units to Common Units

   $ 120,880     $ 66,820  
                

Exchange of Founders’ and Non-Controlling Interest Holders’ Interests in Blackstone Holdings:

    

Deferred Tax Asset

   $ (184,831   $ (134,125
                

Due to Affiliates

   $ 150,416     $ 114,007  
                

Partners’ Capital

   $ 34,415     $ 20,118  
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

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

 

1. ORGANIZATION

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, funds of hedge funds, credit-oriented funds, separately managed accounts and publicly traded closed-end mutual funds (collectively referred to as the “Blackstone Funds”). Blackstone also provides various financial advisory services, including financial advisory, restructuring and reorganization advisory and fund placement services. Blackstone’s business is organized into four segments: private equity; real estate; credit and marketable alternatives; 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”). On June 18, 2007, in preparation for an initial public offering (“IPO”), the predecessor owners (“Predecessor Owners”) of the Blackstone business completed a reorganization (the “Reorganization”) whereby, with certain limited exceptions, the operating entities of the predecessor organization and the intellectual property rights associated with the Blackstone name were contributed (“Contributed Businesses”) to five holding partnerships (Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P., Blackstone Holdings IV L.P. and Blackstone Holdings V L.P.) either directly or indirectly via a sale to certain wholly-owned subsidiaries of the Partnership and then a contribution to the Holding Partnerships. The Partnership, through its wholly-owned subsidiaries, is the sole general partner in each of these Holding Partnerships. The reorganization was accounted for as an exchange of entities under common control for the component of interests contributed by the Founders and the other senior managing directors (collectively, the “Control Group”) and as an acquisition of non-controlling interests using the purchase method of accounting for all the predecessor owners other than the Control Group.

On January 1, 2009, the number of Holding Partnerships was reduced from five to four through the transfer of assets and liabilities of Blackstone Holdings III L.P. to Blackstone Holdings IV L.P. In connection therewith, Blackstone Holdings IV L.P. was renamed Blackstone Holdings III L.P. and Blackstone Holdings V L.P. was renamed Blackstone Holdings IV L.P. Blackstone Holdings refers to the five holding partnerships prior to the January 2009 reorganization and the four holding partnerships subsequent to the January 2009 reorganization.

Generally, holders of the limited partner interests in the four Holding Partnerships may, up to 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 annual financial

 

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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)

 

statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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 Partnership has a controlling financial interest.

All intercompany balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to prior year amounts to conform to the current year presentation as follows:

 

   

Beginning in 2010, Blackstone elected to separately present performance fee related unrealized and realized compensation expense as an Adjustment to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities in the Condensed Consolidated Statements of Cash Flows. Previously, amounts were included in Cash Flows Due to Changes in Operating Assets and Liabilities within Due to Affiliates, Due from Affiliates and/or Accrued Compensation and Benefits. The reclassification has no impact on Net Cash Provided by Operating Activities.

 

   

As of September 30, 2010, Blackstone elected to separately present Securities Sold, Not Yet Purchased in the Condensed Consolidated Statements of Financial Condition. Previously, these amounts were included in Accounts Payable, Accrued Expenses and Other Liabilities. The reclassification has no impact on Total Liabilities.

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 variable interest entity that most significantly impact the entity’s business 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 variable interest entity. The revised consolidation rules require an analysis to (a) determine 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 (e.g., management and

 

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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 related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. Where the variable interest entities have qualified for the deferral of the revised consolidation rules as discussed in “Recent Accounting Developments”, the analysis is based on previous consolidation rules. These rules require an analysis to (a) determine 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 (e.g., management and performance related fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, the Partnership determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continuously. In evaluating whether the Partnership is the primary beneficiary, Blackstone evaluates its economic interests in the entity held either directly by the Partnership 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.

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

Fair Value of Financial Instruments

GAAP establishes a hierarchal 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 and listed derivatives. 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, less liquid and restricted equity securities, certain over-the-counter derivatives where the fair value is based on observable inputs, and certain fund of hedge funds 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

 

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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)

 

 

and real estate funds, credit-oriented funds, distressed debt and non-investment grade residual interests in securitizations, collateralized loan obligations, certain over the counter derivatives where the fair value is based on unobservable inputs and certain funds of hedge funds which 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.

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

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

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 or certain funds of hedge funds. The valuation technique for each of these investments is described below:

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 (e.g., multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Private equity investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value.

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 (e.g., multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced

 

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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)

 

comparables, and in some instances by reference to option pricing models or other similar methods. Additionally, where applicable, projected distributable cash flow through debt maturity will also be considered in support of the investment’s carrying value.

Funds of Hedge Funds — Blackstone Funds’ direct investments in funds of hedge funds (“Investee Funds”) are valued at net asset value (“NAV”) per share of the Investee Fund. If the Partnership determines, based on its own due diligence and investment procedures, that NAV per share does not represent fair value, the Partnership will estimate the fair value in good faith and in a manner that it reasonably chooses, in accordance with its valuation policies.

Credit-Oriented Investments — The fair values of credit-oriented 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.

Investments, at Fair Value

The Blackstone Funds are accounted for as investment companies under the AICPA Audit and Accounting Guide, Investment Companies, and reflect their investments, including majority-owned and controlled investments (the “Portfolio Companies”), at fair value. Blackstone has retained the specialized accounting for the consolidated Blackstone Funds. Thus, such consolidated funds’ investments are reflected in Investments on the Condensed Consolidated Statements of Financial Condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of Net Gains from Fund Investment Activities in the Condensed Consolidated Statements of Operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price).

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

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

In addition, the Partnership has elected the fair value option for the assets and liabilities of certain collateralized loan obligation (“CLO”) vehicles that are consolidated as of January 1, 2010, as a result of the initial adoption of revised variable interest entity consolidation rules. The Partnership has also elected the fair value option for CLO vehicles consolidated as of April 1, 2010 and July 20, 2010, as a result of the acquisitions

 

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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)

 

of CLO management contracts as described in Note 3. “Acquisitions, Goodwill and Intangible Assets.” The transition adjustment resulting from the difference between the fair value of assets and liabilities for each of these events is presented within the Condensed Consolidated Statement of Changes in Partners’ Capital as 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. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income subsequent to adoption are presented within Net Gains from Fund Investment Activities and are attributable to Non-Controlling Interests in Consolidated Entities 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 where 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 are reported at fair value, the carrying value of the Partnership’s equity method investments are at fair value.

Repurchase and Reverse Repurchase Agreements

Securities purchased under agreement to resell (“reverse repurchase agreements”) and securities sold under agreements to repurchase (“repurchase agreements”), comprising 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. Repurchase Agreements are included in Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

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 customer 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 owned to counterparties to collateralize repurchase agreements. Financial instruments pledged that can be repledged, delivered or otherwise used by the counterparty are recorded in Investments on the Condensed Consolidated Statements of Financial Condition.

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

 

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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)

 

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 (“free standing 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 the same caption in the Condensed Consolidated Statements of Operations as the hedged item. 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. For free standing derivative contracts, the Partnership presents changes in fair value 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. On a monthly basis, 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.

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

Cash Distribution Policy

Blackstone’s current intention is to distribute to its common unitholders substantially all of The Blackstone Group L.P.’s net after-tax share of annual Distributable Earnings in excess of amounts determined by Blackstone’s general partner to be necessary or appropriate to provide for the conduct of the Partnership’s business, to make appropriate investments in the business and funds, to comply with applicable law, any of Blackstone’s debt instruments or other agreements, or to provide for future distributions to Blackstone’s common unitholders for any ensuing quarter. Because Blackstone will not know what Distributable Earnings will be for any fiscal year until the end of such year, the Partnership expects that the first three quarterly distributions in respect of any given year will be based on the anticipated annualized Net Fee Related Earnings only. As such, the distribution for the first three quarters may be smaller than the final quarterly distribution in respect of such year. Blackstone expects to also reflect realized Performance Fees and Allocations net of related compensation and realized net investment income in its determination of the amount of the fourth quarter distribution.

 

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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 most years the aggregate amounts of distributions to unitholders will not equal Distributable Earnings for that year. Distributable Earnings will only be a starting point for the determination of the amount to be distributed to unitholders because as noted above, in determining the amount to be distributed Blackstone will subtract from Distributable Earnings any amounts determined by its general partner to be necessary or appropriate to provide for the conduct of its business, to make appropriate investments in its business and its funds, to comply with applicable law, any of its debt instruments or other agreements, or to provide for future distributions to its unitholders for any ensuing quarter.

All of the foregoing is subject to the qualification that the declaration and payment of any distributions are at the sole discretion of the general partner and the general partner may change the distribution policy at any time.

Because The Blackstone Group L.P. is a holding partnership and has no material assets other than its ownership of partnership units in Blackstone Holdings held through wholly-owned subsidiaries, distributions by The Blackstone Group L.P., if any, are funded in three steps:

 

   

First, Blackstone Holdings makes distributions to partners, including The Blackstone Group L.P.’s wholly-owned subsidiaries. If Blackstone Holdings makes such distributions, the limited partners of Blackstone Holdings will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings (except as set forth in the following paragraph);

 

   

Second, The Blackstone Group L.P.’s wholly-owned subsidiaries distribute to The Blackstone Group L.P. the share of such distributions, net of the taxes and amounts payable under the tax receivable agreements by such wholly-owned subsidiaries; and

 

   

Third, The Blackstone Group L.P. distributes the net share of such distributions to the common unitholders on a pro rata basis.

As a result of the expiration on December 31, 2009 of the distribution priority previously accorded to holders of Blackstone common units, the Partnership no longer has two classes of equity. The calculation of net loss per common unit is presented using one class of equity for the period ended September 30, 2010, as shown in Note 13. “Net Loss Per Common Unit.”

Because the wholly-owned subsidiaries of The Blackstone Group L.P. must pay taxes and make payments under the tax receivable agreements described in Note 15. “Related Party Transactions”, the amounts ultimately distributed by The Blackstone Group L.P. to common unitholders in respect of fiscal 2010 and subsequent years are expected to be different, and likely less, on a per unit basis, than the amounts distributed by the Blackstone Holdings partnerships to the Blackstone personnel and others who are limited partners of the Blackstone Holdings partnerships in respect of their Blackstone Holdings partnership units.

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

 

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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)

 

 

Recent Accounting Developments

On January 1, 2010, the Partnership adopted guidance issued by the Financial Accounting Standards Board (“FASB”) on issues related to variable interest entities (“VIEs”). The amendments significantly affect the overall consolidation analysis, changing the approach taken by companies in identifying which entities are VIEs and in determining which party is the primary beneficiary. The guidance requires continuous assessment of the reporting entity’s involvement with such VIEs. The revised guidance also enhances the disclosure requirements for a reporting entity’s involvement with VIEs, including presentation on the Condensed Consolidated Statements of Financial Condition of assets and liabilities of consolidated VIEs which meet the separate presentation criteria and disclosure of assets and liabilities recognized in the Condensed Consolidated Statements of Financial Condition and the maximum exposure to loss for those VIEs in which a reporting entity is determined to not be the primary beneficiary but in which it has a variable interest. The guidance provides a limited scope deferral for a reporting entity’s interest in an entity that meets all of the following conditions: (a) the entity has all the attributes of an investment company as defined under AICPA Audit and Accounting Guide, Investment Companies, or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide, Investment Companies, (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 entity, asset-backed financing entity or an entity that was formerly considered a qualifying special-purpose entity. The reporting entity is required to perform a consolidation analysis for entities that qualify for the deferral in accordance with previously issued guidance on variable interest entities. Blackstone’s involvement with its funds is such that all three of the above conditions are met with the exception of certain CLO vehicles which fail condition (c) above and certain funds in which leveraged employee interests in dedicated funds are financed by third parties with Blackstone acting as an intermediary which fail condition (b) above. Such employee funds are currently consolidated as it is concluded that Blackstone is the primary beneficiary based on its implicit interest. The incremental impact of the revised consolidation rules has resulted in the consolidation of certain CLO vehicles managed by Blackstone. Additional disclosures relating to Blackstone’s involvement with VIEs are presented in Note 9. “Variable Interest Entities” of the Partnership’s financial statements.

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. The guidance requires additional disclosure on transfers in and out of Levels I and II fair value measurements in the fair value hierarchy and the reasons for such transfers. In addition, for fair value measurements using significant unobservable inputs (Level III), the reconciliation of beginning and ending balances shall be presented on a gross basis, with separate disclosure of gross purchases, sales, issuances and settlements and transfers in and transfers out of Level III. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. In addition, an entity is required to provide further disclosures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level II or Level III. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level III fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Partnership adopted the guidance, excluding the reconciliation of Level III activity, with the issuance of its March 31, 2010 financial statements. As the guidance is limited to enhanced disclosures, adoption did not have a material impact on the Partnership’s financial statements.

In April 2010, the FASB issued guidance on the accounting for stock awards to employees of a foreign operation or employees whose pay is denominated in a currency other than the one in which the equity security trades. The guidance clarifies that share-based payment awards with an exercise price denominated in 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)

 

currency of a market in which a substantial portion of the entity’s equity securities trade shall not be considered to contain a condition that is not a market, performance, or service condition. Such an award shall not be classified as a liability if it otherwise qualifies for equity classification. The guidance is effective for fiscal years and interim periods ending after December 15, 2010. Blackstone makes share-based payment awards to employees in foreign operations. The guidance is not expected to have a material impact on the Partnership’s financial statements.

In July 2010, the FASB issued guidance to enhance existing disclosure requirements relating to the credit quality of financing receivables and the allowance for credit losses. The guidance requires information on the credit quality of financing receivables and allowance for credit losses to be disaggregated by portfolio segment and class of financing receivable. The guidance also requires an entity to disclose credit quality indicators, past due information, and modifications of financing receivables. The guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. As the guidance is limited to enhanced disclosures, adoption is not expected to have a material impact on the Partnership’s financial statements.

 

3. ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS

Acquisitions

On April 1, 2010, the Partnership, through GSO Capital Partners LP, completed the acquisition of management agreements relating to eight collateralized debt obligation (“CDO”) and CLO vehicles previously managed by Callidus Capital Management LLC for consideration of $21.5 million. The assets acquired are finite-lived contractual rights.

On July 20, 2010, the Partnership, through GSO Capital Partners LP, completed the acquisition of a management agreement relating to a CLO vehicle previously managed by Callidus Capital Management LLC for consideration of $0.4 million. The assets acquired are finite-lived contractual rights.

Pursuant to GAAP consolidation rules, the Partnership has been identified, in each of the April 1, 2010 and July 20, 2010 acquisitions, as the primary beneficiary in certain of the CDO and CLO vehicles underlying the acquired management agreements. As a result, the CDO and CLO vehicles have been consolidated in the Partnership’s financial statements from April 1, 2010 and July 20, 2010, respectively. The results of the acquired CDO and CLO vehicles from the date of acquisition have been included in the Condensed Consolidated Statements of Operations within Net Gain from Fund Investment Activities and Fund Expenses, as applicable.

Goodwill and Intangible Assets

The carrying value of goodwill was $1.7 billion as of September 30, 2010 and December 31, 2009. No indicators of impairment have been identified during the nine months ended September 30, 2010.

Total goodwill has been allocated to each of the Partnership’s segments as follows: Private Equity ($694.5 million), Real Estate ($421.7 million), Credit and Marketable Alternatives ($518.5 million) and Financial Advisory ($68.9 million).

 

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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)

 

 

Intangible Assets, Net consists of the following:

 

     September 30,
2010
    December 31,
2009
 

Finite-Lived Intangible Assets / Contractual Rights

   $ 1,370,267     $ 1,348,370  

Accumulated Amortization

     (550,098     (428,893
                

Intangible Assets, Net

   $ 820,169     $ 919,477  
                

Amortization expense associated with Blackstone’s intangible assets was $40.9 million and $121.2 million for the three and nine month periods ended September 30, 2010, respectively, and $39.5 million and $118.5 million for the three and nine month periods ended September 30, 2009, respectively. Amortization expense is included within General, Administrative and Other in the accompanying Condensed Consolidated Statements of Operations.

Amortization of Intangible Assets held at September 30, 2010 is expected to be $162.1 million for the years ending December 31, 2010 and $163.4 million, $108.6 million, $57.0 million, and $52.2 million for each of the years ending December 31, 2011, 2012, 2013, and 2014, respectively.

 

4. INVESTMENTS

Investments

Investments consists of the following:

 

     September 30,
2010
     December 31,
2009
 

Investments of Consolidated Blackstone Funds

   $ 7,655,958      $ 1,306,445  

Equity Method Investments

     1,567,313        1,104,701  

Blackstone’s Treasury Cash Management Strategies

     980,537        534,777  

Performance Fees and Allocations

     794,566        554,463  

Other Investments

     28,356        65,097  
                 
   $ 11,026,730      $ 3,565,483  
                 

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $373.4 million and $407.1 million at September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010 and December 31, 2009, consideration was given as to whether any individual investment, including derivative instruments, had a fair value which exceeded 5% of Blackstone’s net assets. At September 30, 2010 and December 31, 2009, no investments exceeded the 5% threshold.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

Investments of Consolidated Blackstone Funds

The following table presents a condensed summary of the investments held by the consolidated Blackstone Funds that are reported at fair value. Pursuant to revised GAAP consolidation rules, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including our investments in CDO and CLO vehicles and other funds in which the general partner is presumed to have control. While we are required to consolidate certain funds, including our CDO and 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. These investments are presented as a percentage of Investments of Consolidated Blackstone Funds:

 

     Fair Value      Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   September 30,
2010
     December 31,
2009
     September 30,
2010
    December 31,
2009
 

United States and Canada

          

Investment Funds, principally related to credit and marketable alternatives

          

Credit Driven

   $ 220,046      $ 277,388        2.9     21.3

Diversified Investments

     280,169        300,907        3.7     23.1

Equity

     83,963        80,956        1.1     6.2

Event-Driven

     118,648        95,760        1.5     7.4

Other

     —           408        —          —     
                                  

Investment Funds Total
(Cost: 2010 — $689,737; 2009 — $819,638)

     702,826        755,419        9.2     58.0
                                  

Equity Securities, principally related to credit and marketable alternatives and private equity funds

          

Manufacturing

     34,316        21,491        0.4     1.7

Services

     91,838        86,600        1.3     6.7

Natural Resources

     1,021        649        —          —     

Real Estate Assets

     1,751        462        —          —     
                                  

Equity Securities Total
(Cost: 2010 — $95,337; 2009 — $112,364)

     128,926        109,202        1.7     8.4
                                  

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

          

Real Estate Assets

     250,912        149,523        3.4     11.5

Services

     87,206        87,406        1.1     6.7

Manufacturing

     34,430        25,691        0.4     2.0

Natural Resources

     1,126        357        —          —     
                                  

Partnership and LLC Interests Total
(Cost: 2010 — $434,250; 2009 — $426,678)

     373,674        262,977        4.9     20.2
                                  

Debt Instruments, principally related to credit and marketable alternatives

          

Credit Driven

     28,689        29,330        0.4     2.2

Manufacturing

     33,974        3,203        0.4     0.2

Services

     81,466        7,837        1.1     0.6

Real Estate Assets

     1,559        2,458        —          0.2
                                  

Debt Instruments Total
(Cost: 2010 — $142,004; 2009 — $37,983)

     145,688        42,828        1.9     3.2
                                  

Assets of Consolidated CDO and CLO Vehicles

          

Corporate Loans

     4,828,660        —           63.1     —     

Corporate Bonds

     163,923        —           2.1     —     

Other

     1,998        —           —          —     
                                  

Assets of Consolidated CDO and CLO Vehicles Total
(Cost: 2010 — $4,990,864; 2009 — $ —)

     4,994,581        —           65.2     —     
                                  

United States and Canada Total
(Cost: 2010 — $6,352,192; 2009 — $1,396,663)

     6,345,695        1,170,426        82.9     89.8
                                  

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     Fair Value      Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   September 30,
2010
     December 31,
2009
     September 30,
2010
    December 31,
2009
 

Europe

          

Equity Securities, principally related to private equity funds

          

Manufacturing

   $ 3,345      $ 2,681        —          0.2

Real Estate Assets

     —           365        —          —     

Services

     31,955        31,711        0.4     2.4
                                  

Equity Securities Total
(Cost: 2010 — $40,300; 2009 — $40,353)

     35,300        34,757        0.4     2.6
                                  

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

          

Services

     28,046        29,270        0.4     2.2

Real Estate Assets

     22,511        10,741        0.3     0.8
                                  

Partnership and LLC Interests Total
(Cost: 2010 — $49,039; 2009 — $48,334)

     50,557        40,011        0.7     3.0
                                  

Debt Instruments, principally related to credit and marketable alternatives

          

Manufacturing

     630        544        —          —     

Services

     1,450        1,259        —          0.1
                                  

Debt Instruments Total
(Cost: 2010 — $1,571; 2009 — $1,623)

     2,080        1,803        —          0.1
                                  

Assets of Consolidated CDO and CLO Vehicles

          

Corporate Loans

     1,129,706        —           14.8     —     

Corporate Bonds

     20,041        —           0.3     —     

Other

     9,776        —           0.1     —     
                                  

Assets of Consolidated CDO and CLO Vehicles Total
(Cost: 2010 — $1,265,318; 2009 — $ —)

     1,159,523        —           15.2     —     
                                  

Europe Total (Cost: 2010 — $1,356,228; 2009 — $90,310)

     1,247,460        76,571        16.3     5.7
                                  

Asia

          

Equity Securities, principally related to credit and marketable alternatives and private equity funds

          

Services

     11,031        8,031        0.1     0.6

Manufacturing

     11,391        10,501        0.2     0.8

Natural Resources

     848        —           —          —     

Diversified Investments

     5,231        6,262        0.1     0.5
                                  

Equity Securities Total
(Cost: 2010 — $23,762; 2009 — $20,794)

     28,501        24,794        0.4     1.9
                                  

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

          

Manufacturing

     1,476        1,183        —          0.1

Real Estate Assets

     740        457        —          —     

Services

     110        82        —          —     
                                  

Partnership and LLC Interests Total
(Cost: 2010 — $1,944; 2009 — $1,833)

     2,326        1,722        —          0.1
                                  

Debt Instruments, principally related to private equity funds

          

Real Estate Assets

     194        —           —          —     

Services

     94        111        —          —     
                                  

Debt Instruments, principally related to private equity funds
(Cost: 2010 — $304; 2009 — $114)

     288        111        —          —     
                                  

Asia Total (Cost: 2010 — $26,010; 2009 — $22,741)

     31,115        26,627        0.4     2.0
                                  

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     Fair Value      Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   September 30,
2010
     December 31,
2009
     September 30,
2010
    December 31,
2009
 

Other

          

Equity Securities, principally related to private equity funds

          

Natural Resources

   $ 1,585      $ 1,583        —          0.1

Services

     2,907        4,560        —          0.3
                                  

Equity Securities Total
(Cost: 2010 — $2,778; 2009 — $2,777)

     4,492        6,143        —          0.4
                                  

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

          

Natural Resources

     27,116        26,586        0.4     2.0

Services

     80        92        —          —     
                                  

Partnership and LLC Interests Total
(Cost: 2010 — $9,418; 2009 — $9,249)

     27,196        26,678        0.4     2.0
                                  

Other Total
(Cost: 2010 — $12,196; 2009 — $12,026)

     31,688        32,821        0.4     2.5
                                  

Total Investments of Consolidated Blackstone Funds (Cost: 2010 — $7,746,626; 2009 — $1,521,740)

   $ 7,655,958      $ 1,306,445        100.0     100.0
                                  

Net Gains from Fund Investment Activities on the Condensed Consolidated Statements of Operations include net realized gains (losses) from realizations and sales of investments and the net change in unrealized gains resulting from changes in the fair value of the consolidated Blackstone Funds’ investments. The following table presents the realized and net change in unrealized gains on investments held by the consolidated Blackstone Funds:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Realized Gains (Losses)

   $ (40,063   $ (45,087   $ (60,500   $ (149,495

Net Change in Unrealized Gains

     296,049       118,183       387,571       215,060  
                                
   $ 255,986     $ 73,096     $ 327,071     $ 65,565  
                                

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010      2009     2010      2009  

Realized and Net Change in Unrealized Gains from Blackstone Funds

   $ 255,986      $ 73,096     $ 327,071      $ 65,565  

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

     —           (8,194     —           6,678  

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

     29,085        8,910       70,554        25,110  
                                  

Other Income — Net Gains from Fund Investment Activities

   $ 285,071      $ 73,812     $ 397,625      $ 97,353  
                                  

 

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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)

 

 

Equity Method Investments

The Partnership recognized net gains (losses) related to its equity method investments of $343.6 million and $(83.3) million for the nine months ended September 30, 2010 and 2009, respectively.

Blackstone’s equity method investments include its investments in private equity funds, real estate funds, funds of hedge funds and credit-oriented funds, which are not consolidated but in which the Partnership exerts significant influence. As of September 30, 2010 and December 31, 2009, no single equity method investment held by Blackstone exceeded 20% of its total consolidated assets or income. As such, Blackstone is not required to present separate financial statements for any of its equity method investees.

The summarized financial information of the funds in which the Partnership has an equity method investment is as follows:

 

     As of September 30, 2010 and the Nine Months Then Ended  
     Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Total  

Statement of Financial Condition

        

Assets

        

Investments

   $ 23,110,965     $ 14,566,181     $ 13,771,938     $ 51,449,084  

Other Assets

     266,941       1,002,540       2,279,866       3,549,347  
                                

Total Assets

   $ 23,377,906     $ 15,568,721     $ 16,051,804     $ 54,998,431  
                                

Liabilities and Partners’ Capital

        

Debt

   $ 182,411     $ 482,436     $ 755,327     $ 1,420,174  

Other Liabilities

     66,972       175,077       1,367,111       1,609,160  
                                

Total Liabilities

     249,383       657,513       2,122,438       3,029,334  
                                

Partners’ Capital

     23,128,523       14,911,208       13,929,366       51,969,097  
                                

Total Liabilities and Partners’ Capital

   $ 23,377,906     $ 15,568,721     $ 16,051,804     $ 54,998,431  
                                

Statement of Income

        

Interest Income

   $ 5,261     $ 20,861     $ 399,370     $ 425,492  

Other Income

     179,004       74,663       50,077       303,744  

Interest Expense

     (7,555     (4,971     (38,301     (50,827

Other Expenses

     (19,852     (34,336     (111,028     (165,216

Net Realized and Unrealized Gain from Investments

     4,524,920       5,340,430       930,061       10,795,411  
                                

Net Income

   $ 4,681,778     $ 5,396,647     $ 1,230,179     $ 11,308,604  
                                

Blackstone’s Treasury Cash Management Strategies

Blackstone’s Treasury cash management strategies represents the Partnership’s liquid investments in government and other investment and non-investment grade securities and Reverse Repurchase Agreements. These strategies are managed by third-party institutions. The Partnership has managed its credit risk through diversification of its investments among major financial institutions, all of which have investment grade ratings.

During the three and nine months ended September 30, 2010, the Partnership recognized realized gains of $1.1 million and $2.6 million, respectively, and net change in unrealized gains of $8.2 million and $15.1 million,

 

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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)

 

respectively. The net change in unrealized gains was $4.8 million for both the three and nine months ended September 30, 2009. There were no realized gains for the three and nine months ended September 30, 2009.

Performance Fees and Allocations

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

 

     September 30,      December 31,  
     2010      2009  

Performance Fees and Allocations

     

Private Equity

   $ 517,116      $ 425,615  

Real Estate

     52,791        7,900  

Credit and Marketable Alternatives

     224,659        120,948  
                 
   $ 794,566      $ 554,463  
                 

Other Investments

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
       2010         2009       2010      2009  

Realized Gains (Losses)

   $ 36     $ (441   $ 978      $ (2,095

Net Change in Unrealized Gains (Losses)

     (335     6,559       592        8,182  
                                 
   $ (299   $ 6,118     $ 1,570      $ 6,087  
                                 

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

5. NET ASSET VALUE AS FAIR VALUE

Certain of the consolidated Blackstone funds of hedge funds and credit-oriented 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. A summary of fair value by strategy type alongside the consolidated funds of hedge funds’ remaining unfunded commitments and ability to redeem such investments as of September 30, 2010 is presented below.

 

Strategy

   Fair Value      Unfunded
Commitments
     Redemption
Frequency

(if  currently eligible)
    Redemption
Notice
Period
 

Diversified Instruments

   $ 280,169      $ 11,894        (a     (a

Credit Driven

     220,046        29,558        (b     (b

Event Driven

     118,648        —           (c     (c

Equity

     83,963        —           (d     (d
                      
   $ 702,826      $ 41,452       
                      

 

(a) Diversified Instruments includes investments in hedge funds that invest across multiple strategies. Investments representing 98% of the value of the investments in this 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 elected to side-pocket 15% of Blackstone’s investments. The time at which this redemption restriction may lapse cannot be estimated. The remaining 2% of investments within this category represent investments in hedge funds that are in the process of liquidating. Distributions from these funds will be received as underlying investments are liquidated.
(b) The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 63% of the 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 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 elected to side-pocket 3% of Blackstone’s investments. Investments representing 6% of the value within this category represents an investment in a fund of hedge funds that is in the process of liquidation. Distributions from this fund will be received as underlying investments are liquidated. The remaining 1% of investments within this category are redeemable as of the reporting date.
(c) The Event Driven category includes investments in hedge funds whose primary investing strategy is to identify certain event-driven investments. Withdrawals are not permitted in this category. Distributions will be received as the underlying investments are liquidated.
(d) The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Investments representing 41% of the total value of investments in this category may not be redeemed at, or within three months of, the reporting date. The remaining 59% are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have elected such ability) to side-pocket such investments. As of the reporting date, the investee fund manager had not elected to side-pocket Blackstone’s investments.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

6. DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone enters into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. Additionally, Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain other risk management objectives and for general investment purposes. 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.

Fair Value Hedges

The Partnership uses interest rate swaps to hedge all or a portion of the interest rate risk associated with its fixed rate borrowings. The Partnership has designated these financial instruments as fair value hedges. Changes in fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged liability, are recorded within General, Administrative and Other in the Condensed Consolidated Statements of Operations. The fair value of the derivative instrument is reflected within Other Assets in the Condensed Consolidated Statements of Financial Condition.

Free Standing Derivatives

Free standing 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 foreign exchange contracts, equity swaps, options and other derivative contracts. Changes in the fair value of derivative instruments held by consolidated Blackstone Funds are reflected in Net Gains from Funds Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss), in the Condensed Consolidated Statements of Operations. The fair value of free standing derivative assets are recorded within Investments and free standing derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments.

 

     September 30, 2010      December 31, 2009  
     Assets      Liabilities      Assets      Liabilities  
     Notional      Fair
Value
     Notional      Fair
Value
     Notional      Fair
Value
     Notional      Fair
Value
 

Fair Value Hedges

                       

Interest Rate Swaps

   $ 450,000      $ 45,893      $ —         $ —         $ —         $ —         $ 450,000      $ 19  
                                                                       

Free Standing Derivatives

                       

Blackstone

     231,432        476        90,202        1,728        1,099        636        —           —     

Investments of Consolidated Blackstone Funds

     699        56        22        5        940        17        656        4  
                                                                       

Free Standing Derivatives

     232,131        532        90,224        1,733        2,039        653        656        4  
                                                                       

Total

   $ 682,131      $ 46,425      $ 90,224      $ 1,733      $ 2,039      $ 653      $ 450,656      $ 23  
                                                                       

 

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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)

 

 

Where hedge accounting is applied, hedge effectiveness testing is performed at least monthly to monitor ongoing effectiveness of the hedge relationships. During the three and nine months ended September 30, 2010, the amount of ineffectiveness related to the interest rate swap hedges was a gain of $2.1 million and $6.7 million, respectively. During the three and nine months ended September 30, 2010, the portion of hedging instruments’ gain or loss excluded from the assessment of effectiveness for its fair value hedges was a gain (loss) of $(7.6) million and $(9.7) million, respectively. During the three and nine months ended September 30, 2009, the portion of hedging instruments’ gain or loss excluded from the assessment of effectiveness was not material for its fair value hedges.

During the three and nine months ended September 30, 2010, the Partnership recognized $(2.0) million and $(1.7) million, respectively, of realized loss and $2.3 million and $0.5 million, respectively, in net change in unrealized gains (losses) related to free standing derivative instruments. Amounts recognized in the three and nine months ended September 30, 2009 were not material.

As of September 30, 2010 and December 31, 2009, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.

 

7. FAIR VALUE OPTION

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

 

     September 30,
2010
     December 31,
2009
     Nine Months Ended
September 30, 2010
 
           Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

          

Loans and Receivables

   $ —         $ 68,550      $ 5,695     $ (101

Debt Securities

     —           26,466        (16     —     

Equity Securities

     —           1,905        (350     —     

Assets of Consolidated CDO and CLO Vehicles

          

Corporate Loans

     5,958,365        —           (14,935     123,770  

Corporate Bonds

     183,964        —           (1,005     3,255  

Other

     11,775        —           702       (2,469
                                  
   $ 6,154,104      $ 96,921      $ (9,909   $ 124,455  
                                  

Liabilities

          

Liabilities of Consolidated CDO and CLO Vehicles

          

Senior Secured Notes

   $ 5,454,757      $ —         $ (2,513   $ 105,194  

Subordinated Notes

     446,144        —           —          (87,423
                                  
   $ 5,900,901      $ —         $ (2,513   $ 17,771  
                                  

The Partnership held no financial instruments on which the fair value option was elected during the nine months ended September 30, 2009.

As of September 30, 2010, the uncollected principal balance on Corporate Loans and Corporate Bonds exceeded the fair value by $398.3 million and $4.3 million, respectively. The fair value of Corporate Loans that were more than one day past due as of September 30, 2010 was $22.4 million. The principal balance related to such past due Corporate Loans exceeded the fair value by $37.4 million. The fair value of Corporate Bonds that

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

were more than one day past due as of September 30, 2010 was $3.0 million. The principal balance related to such past due Corporate Bonds exceeded the fair value by $1.3 million. Included within the Other category are structured finance obligations with contractual principal balances. The fair value of such obligations exceeded the uncollected principal balance by $1.8 million. No obligations were past due.

As of December 31, 2009, the fair value of Loans and Receivables and Debt Securities for which the fair value option was elected exceeded their principal amounts due by $0.5 million. No Loans and Receivables and Debt Securities on which the fair value option was elected were past due or in non-accrual status.

 

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 as of September 30, 2010 and December 31, 2009, respectively:

 

     September 30, 2010  
     Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Blackstone Funds (a)

           

Investment Funds

   $ —         $ 2,472      $ 700,354      $ 702,826  

Equity Securities

     100,670        53        96,496        197,219  

Partnership and LLC Interests

     12,412        —           441,341        453,753  

Debt Instruments

     115        135,657        12,284        148,056  

Assets of Consolidated CDO and CLO Vehicles

     —           5,931,991        222,113        6,154,104  
                                   

Total Investments of Blackstone Consolidated Funds

     113,197        6,070,173        1,472,588        7,655,958  

Blackstone’s Treasury Cash Management Strategies

     443,222        537,315        —           980,537  

Free Standing Derivatives

     184        292        —           476  

Derivative Instruments Used as Fair Value Hedges

     —           45,893        —           45,893  

Other Investments

     9,404        1,452        17,500        28,356  
                                   
   $ 566,007      $ 6,655,125      $ 1,490,088      $ 8,711,220  
                                   

Liabilities

           

Liabilities of Consolidated and CDO CLO Vehicles (a)

   $ —         $ —         $ 5,900,901      $ 5,900,901  

Free Standing Derivatives

     655        1,073        —           1,728  

Securities Sold, Not Yet Purchased

     553        263,484        —           264,037  
                                   
   $ 1,208      $ 264,557      $ 5,900,901      $ 6,166,666  
                                   
     December 31, 2009  
     Level I      Level II      Level III      Total  

Assets

           

Investments of Consolidated Blackstone Funds (a)

   $ 80,610      $ 33,355      $ 1,192,463      $ 1,306,428  

Blackstone’s Treasury Cash Management Strategies

     398,487        136,290        —           534,777  

Loans and Receivables

     —           —           68,550        68,550  

Free Standing Derivatives, Net

     2        279        368        649  

Other Investments (b)

     8,711        10,176        46,210        65,097  
                                   
   $ 487,810      $ 180,100      $ 1,307,591      $ 1,975,501  
                                   

Liabilities

           

Derivative Instruments Used for Fair Value Hedges

   $ —         $ 19      $ —         $ 19  

Securities Sold, Not Yet Purchased

     357        —           —           357  
                                   
   $ 357      $ 19      $ —         $ 376  
                                   

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

(a) Pursuant to revised GAAP consolidation rules, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including our investments in CDO and CLO vehicles and other funds in which the general partner is presumed to have control. While we are required to consolidate certain funds, including our CDO and 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.
(b) Included within Level III of Other Investments are investments in debt and equity securities of $26.5 million and $1.9 million, respectively, for which the fair value option has been elected.

There were no significant transfers between Level I and Level II during the nine months ended September 30, 2010.

The following table summarizes the valuation methodology used in the determination of the fair value of financial instruments for which Level III inputs were used as of September 30, 2010.

 

Valuation Methodology

   Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Total  

Third-Party Fund Managers

     —          —          47     47

Specific Valuation Metrics

     19     18     16     53
                                
     19     18     63     100
                                

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

 

    Level III Financial Assets at Fair Value
Three Months Ended September 30,
 
    2010     2009  
    Investments of
Consolidated
Funds
    Loans
and
Receviables
    Other
Investments
    Total     Investments of
Consolidated
Funds
    Other
Investments
    Total  

Balance, Beginning of Period

  $ 1,414,606     $ 26,844     $ 18,875     $ 1,460,325     $ 1,129,272     $ 16,049     $ 1,145,321  

Transfer In Due to Consolidation and Acquisition (a)

    200       —          —          200       83,339       —          83,339  

Transfer Out Due to Deconsolidation (b)

    —          —          —          —          (3,950       (3,950

Transfer In to Level III (c)

    11,526       —          —          11,526       —          —          —     

Transfer Out of Level III (c)

    (7,782     —          —          (7,782     (4,101     —          (4,101

Purchases (Sales), Net

    (60,156     (29,126     (233     (89,515     (78,737     (600     (79,337

Realized Gains (Losses), Net

    (11,938     5,310       (851     (7,479     (46,708     —          (46,708

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

    126,132       (3,028     (291     122,813       110,934       (165     110,769  
                                                       

Balance, End of Period

  $ 1,472,588     $ —        $ 17,500     $ 1,490,088     $ 1,190,049     $ 15,284     $ 1,205,333  
                                                       

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

    Level III Financial Assets at Fair Value
Nine Months Ended September 30,
 
    2010     2009  
    Investments of
Consolidated
Funds
    Loans and
Receviables
    Other
Investments
    Total     Investments of
Consolidated
Funds
    Other
Investments
    Total  

Balance, Beginning of Period

  $ 1,192,464     $ 68,549     $ 46,578     $ 1,307,591     $ 1,521,912     $ 16,095     $ 1,538,007  

Transfer In Due to Consolidation and Acquisition (a)

    227,794       —          —          227,794       83,339       —          83,339  

Transfer Out Due to Deconsolidation (b)

    —          —          —          —          (3,950       (3,950

Transfer In to Level III (c)

    11,706       —          —          11,706       187       —          187  

Transfer Out of Level III (c)

    (28,329     —          —          (28,329     (6,674     —          (6,674

Purchases (Sales), Net

    (145,720     (74,244     (29,701     (249,665     (450,244     (1,365     (451,609

Realized Gains (Losses), Net

    (29,331     5,695       104       (23,532     (145,068     —          (145,068

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

    244,004       —          519       244,523       190,547       554       191,101  
                                                       

Balance, End of Period

  $ 1,472,588     $ —        $ 17,500     $ 1,490,088     $ 1,190,049     $ 15,284     $ 1,205,333  
                                                       

 

     Level III Financial Liabilities at Fair Value  
     Three Months Ended September 30, 2010     Nine Months Ended September 30, 2010  
     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
     Total     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
     Total  

Balance, Beginning of Period

   $ 5,483,483     $ 443,847      $ 5,927,330     $ —        $ —         $ —     

Transfer In Due to Consolidation and Acquisition (a)

     102,631       —           102,631       5,751,806       364,829        6,116,635  

Purchases (Sales), Net

     (55,875     —           (55,875     (79,085     —           (79,085

Realized Gains (Losses), Net

     —          —           —          —          —           —     

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

     (75,482     2,297        (73,185     (217,964     81,315        (136,649
                                                  

Balance, End of Period

   $ 5,454,757     $ 446,144      $ 5,900,901     $ 5,454,757     $ 446,144      $ 5,900,901  
                                                  

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

(a) Represents the transfer into Level III of financial assets and liabilities held by CDO and CLO vehicles as a result of the application of revised consolidation guidance effective January 1, 2010 and as a result of the acquisition of management contracts on April 1, 2010 and July 20, 2010, as described in Note 3. “Acquisitions, Goodwill and Intangible Assets”. Transfers into Level III financial assets for the three and nine months ended September 30, 2009 were a result of the transfer of assets from a non-consolidated fund to a consolidated Blackstone Fund.
(b) Represents the transfer out of Level III financial assets as a result of deconsolidation of certain Blackstone Funds.
(c) Transfers in and out of Level III financial assets and liabilities were due to changes in the observability of inputs used in the valuation of such assets and liabilities.

For the nine months ended September 30, 2009, there were no Level III financial liabilities.

 

9. VARIABLE INTEREST ENTITIES

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

The gross assets and liabilities of consolidated VIEs reflected in the Condensed Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009 were as follows:

 

     September 30,
2010
     December 31,
2009
 

Gross Assets

     

Consolidated Blackstone Funds Excluding CDO and CLO Vehicles

   $ 839,122      $ 741,024  

Consolidated CDO and CLO Vehicles

     6,518,925        —     
                 
   $ 7,358,047      $ 741,024  
                 

Gross Liabilities

     

Consolidated Blackstone Funds Excluding CDO and CLO Vehicles

   $ 47,776      $ 37,974  

Consolidated CDO and CLO Vehicles

     5,985,002        —     
                 
   $ 6,032,778      $ 37,974  
                 

There is no recourse to the Partnership for the consolidated VIEs’ liabilities including the liabilities of the consolidated CDO and CLO vehicles. The assets and liabilities of consolidated VIEs comprise primarily investments and notes payable and are included within Investments, Loans Payable and Due to Affiliates, respectively, 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 holds variable interests in certain VIEs which are not consolidated as it is determined that the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. As of September 30, 2010, assets and liabilities recognized in the Partnership’s Condensed Consolidated Statement of Financial Condition related to the Partnership’s interest in these non-consolidated VIEs were $201.1 million and zero, respectively. Assets consisted of $84.8 million of investments and $116.3 million of receivables. As of December 31, 2009, assets and liabilities recognized in the Partnership’s Condensed Consolidated Statement of Financial Condition related to the Partnership’s interest in these non-consolidated VIEs were $133.9 million and $0.1 million, respectively. Assets consisted of $21.7 million of investments and $112.2 million of receivables. The Partnership’s maximum exposure to loss relating to non-consolidated VIEs as of September 30, 2010 and December 31, 2009 was $203.8 million and $133.9 million, respectively. The maximum exposure to loss represents the loss of assets recognized by Blackstone relating to non-consolidated entities and any clawback obligation relating to previously distributed Carried Interest.

 

10. REVERSE REPURCHASE AND REPURCHASE AGREEMENTS

At September 30, 2010, the Partnership received securities, primarily U.S. and non-U.S. government and agency securities, asset-backed securities and corporate debt, with a fair value of $287.6 million as collateral for reverse repurchase agreements that could be repledged, delivered or otherwise used. Securities with a fair value of $267.6 million were repledged, delivered or used to settle Securities Sold, Not Yet Purchased. The Partnership also pledged securities with a fair value of $138.8 million to collateralize its repurchase agreements.

 

11. BORROWINGS

On March 23, 2010, an indirect, wholly-owned subsidiary of Blackstone entered into a new $1.07 billion revolving credit facility (the “Credit Facility”) with Citibank, N.A., as Administrative Agent. The unsecured Credit Facility provides for revolving credit borrowings, with a final maturity date of March 23, 2013. Interest on the borrowings is based on an adjusted LIBOR rate or alternate base rate, in each case plus a margin, and undrawn commitments bear a commitment fee. Borrowings may also be made in U.K. Sterling or Euros, in each case subject to certain sub-limits. The Credit Facility contains customary representations, covenants and events of default. Financial covenants consist of a maximum net leverage ratio and a requirement to keep a minimum amount of fee generating assets under management, each tested quarterly. As of September 30, 2010, the Partnership had no outstanding borrowings under this Credit Facility.

On September 15, 2010, Blackstone Holdings Finance Co. L.L.C. (the “Issuer”), an indirect subsidiary of the Partnership, issued $400 million of senior notes due March 15, 2021 (the “Notes”). The Notes, which were issued at a discount, have an interest rate of 5.875% per annum, accruing from September 20, 2010. Interest is payable semiannually in arrears on March 15 and September 15 of each year, commencing on March 15, 2011. The Notes are unsecured and unsubordinated obligations of the Issuer. The Notes are fully and unconditionally guaranteed, jointly and severally, by the Partnership, Blackstone Holdings and the Issuer (the “Guarantors”). The guarantees are unsecured and unsubordinated obligations of the Guarantors. Interest expense on the Notes was $0.7 million for each of the three and nine months ended September 30, 2010. Transaction costs related to the issuance of the Notes have been capitalized and are being amortized over the life of the Notes. As of September 30, 2010, the fair value of the Notes was $398.1 million.

The indenture includes covenants, including limitations on the Issuer’s and the Guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The indenture also provides for events of default and further provides that the trustee or the holders of not less than 25% in aggregate principal amount

 

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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)

 

of the outstanding Notes may declare the Notes immediately due and payable upon the occurrence and during the continuance of any event of default after expiration of any applicable grace period. In the case of specified events of bankruptcy, insolvency, receivership or reorganization, the principal amount of the Notes and any accrued and unpaid interest on the Notes automatically become due and payable. All or a portion of the Notes may be redeemed at the Issuer’s option in whole or in part, at any time and from time to time, prior to their stated maturity, at the make-whole redemption price set forth in the Notes. If a change of control repurchase event occurs, the holders of the Notes may require the Issuer to repurchase the Notes at a repurchase price in cash equal to 101% of the aggregate principal amount of the Notes repurchased plus any accrued and unpaid interest on the Notes repurchased to, but not including, the date of repurchase.

As of September 30, 2010, the fair value of the notes issued in August 2009 was $637.8 million.

Included within Loans Payable and Due to Affiliates are amounts due to holders of debt securities issued by Blackstone’s consolidated CDO and CLO vehicles. At September 30, 2010, the Partnership’s borrowings through consolidated CDO and CLO vehicles consisted of the following:

 

     Borrowing
Outstanding
     Weighted
Average

Interest
Rate
    Weighted
Average  Remaining
Maturity in Years
 

Senior Secured Notes

   $ 6,187,073        1.38     5.4  

Subordinated Notes

     836,729        (a     8.5  
             
   $ 7,023,802       
             

 

(a) The Subordinated Notes do not have contractual interest rates, but instead receive distributions from the excess cash flows of the CDO and CLO vehicles.

Included within Senior Secured Notes and Subordinated Notes are amounts due to non-consolidated affiliates of $99.3 million and $276.6 million, respectively. The fair value of Senior Secured and Subordinated Notes as of September 30, 2010 was $5.5 billion and $446.1 million, respectively, of which $68.6 million and $177.7 million represents the amounts Due to Affiliates. The contractual maturities of Senior Secured Notes are greater than five years.

The Loans Payable of the consolidated CDO and CLO vehicles are collateralized by assets held by each respective CDO and CLO vehicle and assets of one vehicle may not be used to satisfy the liabilities of another. As of September 30, 2010, the fair value of the CDO and CLO assets was $6.5 billion. This collateral consisted of Cash, Corporate Loans, Corporate Bonds and other securities.

 

12. INCOME TAXES

Blackstone’s effective tax rate was (2.95)% and (12.31)% for the three months ended September 30, 2010 and 2009, respectively, and (3.44)% and (4.21)% for the nine months ended September 30, 2010 and 2009, respectively. Blackstone’s income tax provision was a benefit of $4.2 million and an expense of $52.6 million for the three months ended September 30, 2010 and 2009, respectively, and an expense of $24.8 million and an expense of $81.2 million for the nine months ended September 30, 2010 and 2009, respectively.

Blackstone’s effective tax rate for the three and nine months ended September 30, 2010 and 2009 was substantially due to the following: (a) certain corporate subsidiaries are subject to federal, state, local and foreign income taxes as applicable and other subsidiaries are subject to New York City unincorporated business taxes, and (b) a portion of the compensation charges that contribute to Blackstone’s net loss are not deductible for tax purposes.

 

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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)

 

 

13. NET LOSS PER COMMON UNIT

Basic and diluted net loss per common unit for the three and nine months ended September 30, 2010 and basic and diluted net loss per common unit entitled to priority distributions and per common unit not entitled to priority distributions for the three and nine months ended September 30, 2009 was calculated as follows:

 

     Basic and Diluted  
     Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 

Net Loss Attributable to The Blackstone Group L.P.

   $ (44,358   $ (359,055
                

Net Loss Per Common Unit

   $ (0.12   $ (1.02
                

Total Weighted-Average Common Units Outstanding

     370,101,582       352,794,385  
                
     Basic and Diluted  
     Three Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2009
 

Total Undistributed Loss

    

Net Loss Allocable to Common Unitholders

   $ (176,183   $ (572,041

Less: Distributions to Common Unitholders

     (89,188     (254,705
                

Total Undistributed Loss

   $ (265,371   $ (826,746
                

Allocation of Total Undistributed Loss

    

Undistributed Loss — Common Unitholders Entitled to Priority Distributions

   $ (257,806   $ (816,980

Undistributed Loss — Common Unitholders Not Entitled to Priority Distributions

     (7,565     (9,766
                

Total Undistributed Loss

   $ (265,371   $ (826,746
                

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

    

Undistributed Loss per Common Unit

   $ (0.91   $ (2.95

Priority Distributions (a)

     0.30       0.90  
                

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

   $ (0.61   $ (2.05
                

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

    

Undistributed Loss per Common Unit

   $ (0.91   $ (2.95
                

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

   $ (0.91   $ (2.95
                

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

     283,243,485       277,390,904  

Common Units Not Entitled to Priority Distributions

     8,311,085       3,465,956  
                

Total Weighted-Average Common Units Outstanding

     291,554,570       280,856,860  
                

 

(a) Undistributed Loss per Common Unit — Priority Distributions are forecast based upon common units outstanding at the end of the reporting period and differ from actual distributions paid to common unitholders which are based on common units outstanding at the time priority distributions are made.

 

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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)

 

 

For the three months ended September 30, 2010 and 2009, a total of 23,636,653 and 19,750,299 unvested deferred restricted common units and 727,528,593 and 808,479,683 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit, respectively. For the nine months ended September 30, 2010 and 2009, a total of 26,542,362 and 23,353,728 unvested deferred restricted common units and 745,006,116 and 820,944,937 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit, respectively.

Unit Repurchase Program

In January 2008, Blackstone announced that the Board of Directors of its general partner, Blackstone Group Management L.L.C., had authorized the repurchase by Blackstone of up to $500 million of Blackstone Common Units and Blackstone Holdings Partnership Units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of Blackstone Common Units and Blackstone Holdings Partnership Units repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. During the nine months ended September 30, 2010, Blackstone repurchased 84,888 vested Blackstone Common Units as part of the unit repurchase program for a total cost of $1.2 million. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings equity of $1.0 million. As of September 30, 2010, the amount remaining available for repurchases under this program was $338.3 million.

During the nine months ended September 30, 2009, Blackstone repurchased a combination of 4,689,091 Blackstone Common Units and Blackstone Holdings Partnership Units as part of the unit repurchase program for a total cost of $30.5 million. During the three months ended September 30, 2009, Blackstone repurchased 59,225 Blackstone Common Units and Blackstone Holdings Partnership Units as part of the unit repurchase program for a total cost of $0.8 million. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings equity of $17.3 million. As of September 30, 2009, the amount remaining available for repurchases was $339.5 million under this program.

 

14. EQUITY-BASED COMPENSATION

The Partnership has granted equity-based compensation awards to Blackstone’s senior managing directors, non-partner professionals, non-professionals and selected external advisors under the Partnership’s 2007 Equity Incentive Plan (the “Equity Plan”), the majority of which to date were granted in connection with the IPO. The Equity Plan allows for the granting of options, unit appreciation rights or other unit-based awards (units, restricted units, restricted common units, deferred restricted common units, phantom restricted common units or other unit-based awards based in whole or in part on the fair value of the Blackstone Common Units or Blackstone Holdings Partnership Units) which may contain certain service or performance requirements. As of January 1, 2010, the Partnership had the ability to grant 162,126,007 units under the Equity Plan.

For the three and nine months ended September 30, 2010, the Partnership recorded compensation expense of $457.4 million and $1.9 billion, respectively, in relation to its equity-based awards with corresponding tax benefits of $2.8 million and $7.4 million, respectively. For the three and nine months ended September 30, 2009, the Partnership recorded compensation expense of $738.2 million and $2.2 billion, respectively, in relation to its equity-based awards with corresponding tax benefits of $(0.6) million and $5.9 million, respectively. As of September 30, 2010, there was $4.4 billion of estimated unrecognized compensation expense related to unvested awards. This cost is expected to be recognized over a weighted-average period of 3.8 years.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

Total vested and unvested outstanding units, including Blackstone Common Units, Blackstone Holdings Partnership Units and deferred restricted common units, were 1,121,144,937 as of September 30, 2010. Total outstanding unvested phantom units were 10,201 as of September 30, 2010.

A summary of the status of the Partnership’s unvested equity-based awards as of September 30, 2010 and a summary of changes during the period January 1, 2010 through September 30, 2010 is presented below:

 

     Blackstone Holdings      The Blackstone Group L.P.  

Unvested Units

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

Balance, December 31, 2009

     270,458,725     $ 30.76        23,742,693     $ 23.10        208,592     $ 25.07  

Granted

     422,768       13.85        1,405,740       10.16        3,552       9.52  

Vested

     (117,073,919     30.89        (5,278,181     25.37        (193,497     14.56  

Forfeited

     (4,703,239     31.00        (983,715     24.51        (8,446     14.60  
                                

Balance, September 30, 2010

     149,104,335     $ 30.61        18,886,537     $ 21.22        10,201     $ 14.65  
                                

Units Expected to Vest

The following unvested units, after expected forfeitures, as of September 30, 2010, are expected to vest:

 

     Units      Weighted-Average
Service Period in
Years
 

Blackstone Holdings Partnership Units

     138,762,641        3.8  

Deferred Restricted Blackstone Common Units and Options

     14,850,644        3.8  
                 

Total Equity-Based Awards

     153,613,285        3.8  
                 

Phantom Units

     8,703        1.7  
                 

Equity-Based Awards with Performance Conditions

In connection with certain equity-based awards with performance conditions, Blackstone has recorded compensation expense of $1.9 million as the likelihood that the relevant performance threshold will be exceeded in future periods has been deemed as probable. Such awards will be granted in 2012 and are accounted for as a liability award subject to re-measurement at the end of each reporting period.

 

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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)

 

 

15. RELATED PARTY TRANSACTIONS

Affiliate Receivables and Payables

Blackstone considers its Founders, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates. As of September 30, 2010 and December 31, 2009, Due from Affiliates and Due to Affiliates comprised the following:

 

      September 30,
2010
     December 31,
2009
 

Due from Affiliates

     

Accrual for Potential Clawback of Previously Distributed Interest

   $ 206,648      $ 308,378  

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

     142,270        127,669  

Amounts Due from Portfolio Companies and Funds

     152,660        115,441  

Investments Redeemed in Non-Consolidated Funds of Funds

     4,989        77,600  

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

     77,603        68,649  

Payments Made on Behalf of Non-Consolidated Entities

     56,218        53,581  

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

     16,954        8,589  
                 
   $ 657,342      $ 759,907  
                 
     September 30,
2010
     December 31,
2009
 

Due to Affiliates

     

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

   $ 980,217      $ 830,517  

Accrual for Potential Repayment of Previously Received Performance Fees and Allocations

     392,041        485,253  

Due to Note-Holders of Consolidated CDO and CLO Vehicles

     246,342        —     

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

     62,641        58,083  

Distributions Received on Behalf of Non-Consolidated Entities

     13,531        31,692  

Payments Made by Non-Consolidated Entities

     6,662        4,521  
                 
   $ 1,701,434      $ 1,410,066  
                 

Interests of the Co-Founder, Senior Managing Directors and Employees

The Co-Founder, senior managing directors and employees invest on a discretionary basis in the Blackstone Funds both directly and through consolidated entities. Their investments may be subject to preferential management fee and performance fee and allocation arrangements. As of September 30, 2010 and December 31, 2009, the Co-Founder’s, other senior managing directors’ and employees’ investments aggregated $776.9 million and $649.4 million, respectively, and the Co-Founder’s, other senior managing directors’ and employees’ share of the Net Income Attributable to Redeemable Non-Controlling and Non-Controlling Interests in Consolidated Entities aggregated $60.4 million and $23.2 million for the three months ended September 30, 2010 and 2009, respectively, and $142.1 million and $1.7 million for the nine months ended September 30, 2010 and 2009, 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)

 

 

Revenues Earned from Affiliates

Management and Advisory Fees earned from affiliates totaled $34.2 million and $23.0 million for the three months ended September 30, 2010 and 2009, respectively. Management and Advisory Fees earned from affiliates totaled $110.4 million and $68.5 million for the nine months ended September 30, 2010 and 2009, respectively. Fees relate primarily to transaction and monitoring fees which are made in the ordinary course of business and under terms that would have been obtained from unaffiliated third parties.

Loans to Affiliates

Loans to affiliates consist of interest-bearing advances to certain Blackstone individuals to finance their investments in certain Blackstone Funds. These loans earn interest at Blackstone’s cost of borrowing and such interest totaled $0.4 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively, and $1.5 million and $1.6 million for the nine months ended September 30, 2010 and 2009, respectively. No such loans to any director or executive officer of Blackstone have been made or were outstanding since March 22, 2007, the date of Blackstone’s initial filing with the Securities and Exchange Commission of a registration statement relating to its initial public offering.

Contingent Repayment Guarantee

Blackstone and its personnel who have received Carried Interest distributions have guaranteed payment on a several basis (subject to a cap) to the Carry Funds of any clawback obligation with respect to the excess Carried Interest allocated to the general partners of such funds and indirectly received thereby to the extent that either Blackstone or its personnel fails to fulfill its clawback obligation, if any. The Accrual for Possible Repayment of Previously Received Performance Fees and Allocations represents amounts previously paid to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone Funds if the Carry Funds were to be liquidated based on the fair value of their underlying investments as of September 30, 2010. See Note 16. “Commitments and Contingencies — Contingencies — Contingent Obligations (Clawback)”.

Aircraft and Other Services

In the normal course of business, Blackstone personnel have made use of aircraft owned as personal assets by Stephen A. Schwarzman (“Personal Aircraft”). In addition, on occasion, Mr. Schwarzman and his family have made use of an aircraft in which Blackstone owns a fractional interest, as well as other assets of Blackstone. Mr. Schwarzman paid for his purchases of the aircraft himself and bears all operating, personnel and maintenance costs associated with their operation. In addition, Mr. Schwarzman is charged for his and his family’s personal use of Blackstone assets based on market rates and usage. Payment by Blackstone for the use of the Personal Aircraft by other Blackstone employees are made at market rates. Personal use of Blackstone resources are also reimbursed to Blackstone at market rates. The transactions described herein are not material to the Condensed Consolidated Financial Statements.

Tax Receivable Agreements

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

 

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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)

 

 

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

Assuming no material changes in the relevant tax law and that the corporate taxpayers earn sufficient taxable income to realize the full tax benefit of the increased amortization of the assets, the expected future payments under the tax receivable agreements (which are taxable to the recipients) will aggregate $980.2 million over the next 15 years. The after-tax net present value of these estimated payments totals $274.0 million assuming a 15% discount rate and using Blackstone’s most recent projections relating to the estimated timing of the benefit to be received. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. The payments under the tax receivable agreements are not conditioned upon continued ownership of Blackstone equity interests by the pre-IPO owners and the others mentioned above.

Other

Blackstone does business with and on behalf of some of its Portfolio Companies; all such arrangements are on a negotiated basis.

 

16. COMMITMENTS AND CONTINGENCIES

Commitments

Investment Commitments

Blackstone had $1.4 billion of investment commitments as of September 30, 2010 representing general partner capital funding commitments to the Blackstone Funds, limited partner capital funding to other funds and Blackstone principal investment commitments. The consolidated Blackstone Funds had signed investment commitments of $23.9 million as of September 30, 2010 which includes $7.9 million of signed investment commitments for portfolio company acquisitions in the process of closing.

Contingencies

Guarantees

Certain of Blackstone’s consolidated real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their Portfolio Companies. There is no direct recourse to the Partnership to fulfill such obligations. To the extent that underlying funds are required to fulfill guarantee obligations, the Partnership’s invested capital in such funds is at risk. Total investments at risk in respect of guarantees extended by real estate funds was $4.9 million as of September 30, 2010.

 

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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)

 

 

Contingent Performance Fees and Allocations

There were $130.9 million of segment level Performance Fees and Allocations related to the hedge funds in the Credit and Marketable Alternatives and Real Estate segments through the period ended September 30, 2010 attributable to arrangements where the measurement period had not ended. Measurement periods may be greater than the current reporting period. On a consolidated basis, after eliminations, such Performance Fees and Allocations were $129.3 million for the nine months ended September 30, 2010.

Litigation

From time to time, Blackstone is named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. Although there can be no assurance of the outcome of such legal actions, in the opinion of management, Blackstone does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially adversely affect its results of operations, financial position or cash flows.

Contingent Obligations (Clawback)

Included within Net Gains from Fund Investment Activities in the Condensed Consolidated Statements of Operations are gains from Blackstone Fund investments. The portion of net gains attributable to non-controlling interest holders is included within Non-Controlling Interests in Income of Consolidated Entities. Net gains (losses) attributable to non-controlling interest holders are net of Carried Interest earned by Blackstone. Carried Interest is subject to clawback to the extent that the Carried Interest received to date exceeds the amount due to Blackstone based on cumulative results.

The actual clawback liability, however, does not become realized until the end of a fund’s life except for Blackstone’s real estate funds which may have an interim clawback liability come due after a realized loss is incurred, depending on the fund. The lives of the carry funds with a potential clawback obligation, including available contemplated extensions, are currently anticipated to expire at various points beginning toward the end of 2012 and extending through 2018. Further extensions of such terms may be implemented under given circumstances.

For financial reporting purposes, the general partners have recorded a liability for potential clawback obligations to the limited partners of some of the carry funds due to changes in the unrealized value of a fund’s remaining investments and where the fund’s general partner has previously received Carried Interest distributions with respect to such fund’s realized investments.

During the quarter ended September 30, 2010, the Blackstone general partners paid an interim cash clawback obligation of $16.2 million relating to a real estate fund of which $13.7 million was paid by Blackstone Holdings and $2.5 million by current and former Blackstone personnel. During the nine months ended September 30, 2010, the Blackstone general partners paid an interim cash clawback obligation of $19.3 million relating to a real estate fund of which $15.4 million was paid by Blackstone Holdings and $3.9 million by current and former Blackstone personnel.

As of September 30, 2010, the clawback obligations were $392.0 million, of which $185.4 million related to Blackstone Holdings and $206.6 million related to current and former Blackstone personnel. As of December 31, 2009, the clawback obligations were $485.3 million, of which $217.4 million related to Blackstone Holdings and $267.9 million related to current and former Blackstone personnel. The Accrual for Potential Repayment of Previously Received Performance Fees and Allocations is included in Due to Affiliates.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

 

The following table presents the clawback obligations by segment:

 

     September 30, 2010      December 31, 2009  

Segment

   Blackstone
Holdings
     Current and
Former
Personnel
     Total      Blackstone
Holdings
     Current and
Former
Personnel
     Total  

Private Equity

   $ 67,431      $ 119,338      $ 186,769      $ 65,237      $ 120,208      $ 185,445  

Real Estate

     117,962        87,310        205,272        152,142        147,666        299,808  
                                                     

Total

   $ 185,393      $ 206,648      $ 392,041      $ 217,379      $ 267,874      $ 485,253  
                                                     

A portion of the Carried Interest paid to current and former Blackstone personnel is held in segregated accounts in the event of a cash clawback obligation. These segregated accounts are not included in the Condensed Consolidated Financial Statements of the Partnership, except to the extent a portion of the assets held in the segregated accounts may be allocated to a consolidated Blackstone fund of hedge funds. At September 30, 2010, $478.2 million was held in segregated accounts for the purpose of meeting any clawback obligations of current and former personnel if such payments are required.

 

17. SEGMENT REPORTING

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

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

 

   

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

 

   

Real Estate — Blackstone’s Real Estate segment primarily comprises its management of general real estate funds and internationally focused real estate funds. In addition, the segment has debt investment funds targeting non-controlling real estate debt-related investment opportunities in the public and private markets, primarily in the United States and Europe.

 

   

Credit and Marketable Alternatives — Blackstone’s Credit and Marketable Alternatives segment, whose consistent focus is current earnings, comprises its management of funds of hedge funds, credit-oriented funds, CDO and CLO vehicles, separately managed accounts and publicly-traded closed-end mutual funds.

 

   

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

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

Economic Net Income (“ENI”) is a key performance measure used by management. ENI represents segment net income before taxes excluding transaction-related charges. Transaction-related charges include principally charges associated with equity-based compensation, the amortization of intangibles and corporate actions

 

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

 

including acquisitions. Blackstone uses ENI as a key measure of value creation and as a benchmark of its performance. ENI represents segment net income excluding the impact of income taxes and initial public offering (“IPO”) and acquisition-related items, including charges associated with equity-based compensation, the amortization of intangibles and corporate actions including acquisitions. For segment reporting purposes, revenues and expenses are presented on a basis that deconsolidates the investment funds we manage. Total Segment ENI equals the aggregate of ENI for all segments. ENI is used by management primarily in making resource deployment and compensation decisions across Blackstone’s four segments.

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

 

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The following table presents the financial data for Blackstone’s four segments for the three months ended September 30, 2010 and 2009:

 

     Three Months Ended September 30, 2010  
     Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
     Total
Segments
 

Segment Revenues

           

Management and Advisory Fees

           

Base Management Fees

   $ 66,077     $ 83,232     $ 120,125     $ —         $ 269,434  

Advisory Fees

     —          —          —          84,541        84,541  

Transaction and Other Fees, Net

     13,348       8,538       1,062       —           22,948  

Management Fee Offsets

     (91     (401     (182     —           (674
                                         

Total Management and Advisory Fees

     79,334       91,369       121,005       84,541        376,249  
                                         

Performance Fees and Allocations

           

Realized

     44,814       5,010       16,215       —           66,039  

Unrealized

     45,499       69,910       77,336       —           192,745  
                                         

Total Performance Fees and Allocations

     90,313       74,920       93,551       —           258,784  
                                         

Investment Income

           

Realized

     9,940       2,159       1,708       469        14,276  

Unrealized

     30,491       83,968       13,181       607        128,247  
                                         

Total Investment Income

     40,431       86,127       14,889       1,076        142,523  

Interest and Dividend Revenue

     3,802       3,026       1,750       1,609        10,187  

Other

     1,061       2,330       600       477        4,468  
                                         

Total Revenues

     214,941       257,772       231,795       87,703        792,211  
                                         

Expenses

           

Compensation and Benefits

           

Base Compensation

     47,552       43,219       53,280       66,531        210,582  

Performance Fee Related

           

Realized

     10,783       1,806       12,373       —           24,962  

Unrealized

     18,306       46,182       39,835       —           104,323  
                                         

Total Compensation and Benefits

     76,641       91,207       105,488       66,531        339,867  

Other Operating Expenses

     26,359       18,584       22,057       17,253        84,253  
                                         

Total Expenses

     103,000       109,791       127,545       83,784        424,120  
                                         

Economic Net Income

   $ 111,941     $ 147,981     $ 104,250     $ 3,919      $ 368,091  
                                         

 

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

 

 

     Three Months Ended September 30, 2009  
     Private
Equity
     Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
     Total
Segments
 

Segment Revenues

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