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 JUNE 30, 2009

OR

 

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

Commission File Number: 001-33551

 

 

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8875684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer  x

   Accelerated filer  ¨

Non-accelerated filer  ¨

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

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

The number of the Registrant’s voting common units representing limited partner interests outstanding as of July 31, 2009 was 161,716,032. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of July 31, 2009 was 109,083,468.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

PART I

  

FINANCIAL INFORMATION

  

ITEM 1.

  

FINANCIAL STATEMENTS

   1
  

Unaudited Condensed Consolidated Financial Statements — June 30, 2009 and 2008:

  
  

Condensed Consolidated Statements of Financial Condition as of June 30, 2009 and December 31, 2008

   1
  

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008

   2
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Six Months Ended June 30,  2009 and 2008

   3
  

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008

   5
  

Notes to Condensed Consolidated Financial Statements

   7

ITEM 1A.

  

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

   37

ITEM 2.

  

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

   40

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   73

ITEM 4T.

  

CONTROLS AND PROCEDURES

   75

PART II

  

OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

   76

ITEM 1A.

  

RISK FACTORS

   76

ITEM 2.

  

UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

   77

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

   78

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   78

ITEM 5.

  

OTHER INFORMATION

   78

ITEM 6.

   EXHIBITS    79

SIGNATURES

   80

Forward-Looking Statements

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

 

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

 

 

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

 

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Table of Contents

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     June 30,
2009
   December 31,
2008
 

Assets

     

Cash and Cash Equivalents

   $ 784,579    $ 503,737   

Cash Held by Blackstone Funds and Other

     70,914      907,324   

Investments

     2,527,339      2,830,942   

Accounts Receivable

     245,392      312,067   

Due from Brokers

     714      48,506   

Investment Subscriptions Paid in Advance

     —        1,916   

Due from Affiliates

     361,161      861,434   

Intangible Assets, Net

     998,500      1,077,526   

Goodwill

     1,703,602      1,703,602   

Other Assets

     157,759      169,555   

Deferred Tax Assets

     848,772      845,578   
               

Total Assets

   $ 7,698,732    $ 9,262,187   
               

Liabilities and Partners’ Capital

     

Loans Payable

   $ 78,048    $ 387,000   

Amounts Due to Non-Controlling Interest Holders

     180,109      1,103,423   

Securities Sold, Not Yet Purchased

     310      894   

Due to Affiliates

     1,305,537      1,285,577   

Accrued Compensation and Benefits

     321,409      413,459   

Accounts Payable, Accrued Expenses and Other Liabilities

     163,451      180,259   
               

Total Liabilities

     2,048,864      3,370,612   
               

Commitments and Contingencies

     

Redeemable Non-Controlling Interests in Consolidated Entities

     454,823      362,462   
               

Partners’ Capital

     

Partners’ Capital (common units: 275,932,505 issued and outstanding as of June 30, 2009; 273,891,358 issued and 272,998,484 outstanding as of December 31, 2008)

     3,351,177      3,509,448   

Accumulated Other Comprehensive Income (Loss)

     576      (291

Non-Controlling Interests in Consolidated Entities

     73,294      198,197   

Non-Controlling Interests in Blackstone Holdings

     1,769,998      1,821,759   
               

Total Partners’ Capital

     5,195,045      5,529,113   
               

Total Liabilities and Partners’ Capital

   $ 7,698,732    $ 9,262,187   
               

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2009     2008     2009     2008  

Revenues

       

Management and Advisory Fees

  $ 340,829      $ 338,159      $ 682,001      $ 647,568   

Performance Fees and Allocations

    71,171        (13,722     (143,077     (202,409

Investment Income (Loss)

    (10,949     22,766        (93,402     (38,592

Interest Income and Other

    5,365        6,730        5,808        15,402   
                               

Total Revenues

    406,416        353,933        451,330        421,969   
                               

Expenses

       

Compensation and Benefits

    937,751        1,028,808        1,750,098        2,005,955   

Interest

    87        5,689        1,486        8,432   

General, Administrative and Other

    112,276        107,799        217,876        202,533   

Fund Expenses

    1,592        21,793        4,604        44,745   
                               

Total Expenses

    1,051,706        1,164,089        1,974,064        2,261,665   
                               

Other Income (Loss)

       

Net Gains (Losses) from Fund Investment Activities

    58,304        189,678        23,541        (25,958
                               

Income (Loss) Before Provision (Benefit) for Taxes

    (586,986     (620,478     (1,499,193     (1,865,654

Provision (Benefit) for Taxes

    10,885        (25,851     28,616        (16,870
                               

Net Income (Loss)

    (597,871     (594,627     (1,527,809     (1,848,784

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

    37,638        131,368        40,234        (52,826

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

    3,959        6,942        (37,072     (7,974

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

    (475,184     (576,406     (1,135,113     (1,380,460
                               

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

  $ (164,284   $ (156,531   $ (395,858   $ (407,524
                               

Net Loss Attributable to The Blackstone Group L.P.

       

Per Common Unit — Basic and Diluted

       

Common Units Entitled to Priority Distributions

  $ (0.60   $ (0.60   $ (1.44   $ (1.55
                               

Common Units Not Entitled to Priority Distributions

  $ (0.90     $ (2.04  
                   

Weighted-Average Common Units Outstanding — Basic and Diluted

       

Common Units Entitled to Priority Distributions

    275,199,027        263,610,181        274,416,111        263,378,650   
                               

Common Units Not Entitled to Priority Distributions

    385,796        —          1,003,238        —     
                               

Revenues Earned from Affiliates

       

Management and Advisory Fees

  $ 25,181      $ 24,252      $ 45,465      $ 52,659   
                               

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

    The Blackstone Group L.P. Unitholders     Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income

(Loss)
 
    Common
Units
    Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
           

Balance at December 31, 2008

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

Net Loss

  —          (395,858     —          (37,072     (1,135,113     (1,568,043     40,234      $ (1,527,809

Currency Translation Adjustment

  —          —          867        —          —          867        —          867   

Capital Contributions

  —          —          —          33,024        54        33,078        97,874        —     

Capital Distributions

  —          (82,572     —          (11,936     —          (94,508     (32,965     —     

Transfer of Non-Controlling Interests in Consolidated Entities

  —          —          —          15,438        (15,438     —          —          —     

Purchase of Interests from Certain Non-Controlling Interest Holders

  —          (6,258     —          —          —          (6,258     —          —     

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

  —          2,351        —          —          —          2,351        —          —     

Equity-Based Compensation

  —          368,416        —          —          1,110,528        1,478,944        —          —     

Net Delivery of Vested Common Units

  2,497,990        (28,648     —          —          —          (28,648     —          —     

Repurchase of Common Units and Blackstone Holdings Partnership Units

  (4,375,094     (27,008     —          —          (486     (27,494     —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

  4,811,125        11,306        —          —          (11,306     —          —          —     

Certain Partners Allocations of Blackstone Profit Sharing Arrangements

  —          —          —          (124,357     —          (124,357     —          —     

Loss Attributable to Consolidated Blackstone Funds in Liquidation

  —          —          —          —          —          —          (12,782     —     
                                                             

Balance at June 30, 2009

  275,932,505      $ 3,351,177      $ 576      $ 73,294      $ 1,769,998      $ 5,195,045      $ 454,823      $ (1,526,942
                                                             

continued…

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

    The Blackstone Group L.P. Unitholders   Non-Controlling
Interests in
Consolidated
Entities
    Non-Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income

(Loss)
 
    Common
Units
    Partners’
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
         

Balance at December 31, 2007

  259,826,700      $ 4,226,500      $ 345   $ 515,886      $ 3,103,288      $ 7,846,019      $ 2,438,266     

Net Loss

  —          (407,524     —       (7,974     (1,380,460     (1,795,958     (52,826   $ (1,848,784

Currency Translation Adjustment

  —          —          714     1,464        —          2,178        —          2,178   

Certain Partners Allocations of Blackstone Profit Sharing Arrangements

  —          —          —       (103,195     —          (103,195     —          —     

Capital Contributions

  —          —          —       48,514        —          48,514        191,824        —     

Capital Distributions

  —          (157,993     —       (131,417     (404,310     (693,720     (203,648     —     

Consolidation of Partnership

  —          —          —       —          —          —          159,624     

Acquisition of Consolidated Blackstone Funds

  —          —          —       120,874        —          120,874        90,188        —     

Purchase of Interests from Certain Non-Controlling Interest Holders

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

Repurchase of Common Units

  (10,000     (195     —       —          —          (195     —          —     

Deferred Tax Effects Resulting from Acquisition of Ownership Interests

  —          (666     —       —          —          (666     —          —     

Adjustment to Pre-IPO Reorganization Purchase Price

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

Equity-Based Compensation

  —          400,942        —       —          1,290,796        1,691,738        —          —     

Net Delivery of Vested Common Units

  4,329,870        (17,228     —       —          —          (17,228     —          —     
                                                           

Balance at June 30, 2008

  264,146,570      $ 3,999,764      $ 1,059   $ 444,152      $ 2,655,786      $ 7,100,761      $ 2,623,428      $ (1,846,606
                                                           

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)

 

     For the Six Months Ended
June 30,
 
     2009     2008  

Operating Activities

    

Net Income (Loss)

   $ (1,527,809   $ (1,848,784

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

    

Blackstone Funds Related:

    

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

     (84,926     88,688   

Net Realized (Gains) Losses on Investments

     91,559        (118,299

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

     92,976        55,053   

Non-Cash Performance Fees and Allocations

     12,271        113,622   

Equity-Based Compensation Expense

     1,500,566        1,720,268   

Intangible Amortization

     79,024        74,213   

Other Non-Cash Amounts Included in Net Income

     12,032        8,947   

Cash Flows Due to Changes in Operating Assets and Liabilities:

    

Cash Held by Blackstone Funds and Other

     836,410        84,268   

Due from Brokers

     47,791        153,356   

Accounts Receivable

     66,762        366,233   

Due from Affiliates

     500,106        (31,856

Other Assets

     24,668        (9,785

Accrued Compensation and Benefits

     (113,671     18,288   

Accounts Payable, Accrued Expenses and Other Liabilities

     (906,952     (30,226

Due to Affiliates

     (251,064     (70,010

Amounts Due to Non-Controlling Interest Holders

     —          (51,869

Cash Acquired from Consolidated Fund

     —          3   

Blackstone Funds Related:

    

Investments Purchased

     (261,084     (17,912,140

Cash Proceeds from Sale of Investments

     573,927        17,661,009   
                

Net Cash Provided by Operating Activities

     692,586        270,979   
                

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (12,893     (23,227

Cash Paid for Acquisitions, Net of Cash Acquired

     —          (336,571

Changes in Restricted Cash

     1,399        (8,910
                

Net Cash Used in Investing Activities

     (11,494     (368,708
                

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

     (45,373     (726,323

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     99,049        278,462   

Distributions to Predecessor Owners

     —          (20,917

Purchase of Interests from Certain Non-Controlling Interest Holders

     (6,258     (79,627

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)

 

     For the Six Months Ended
June 30,
 
     2009     2008  

Net Settlement of Vested Common Units and Repurchase of Common Units

   $ (56,142   $ (17,423

Proceeds from Loans Payable

     1,218        458,862   

Repayment of Loans Payable

     (310,172     (288,281

Distributions to Common Unitholders

     (82,572     (157,993
                

Net Cash Provided by (Used in) Financing Activities

     (400,250     (553,240
                

Net Increase (Decrease) in Cash and Cash Equivalents

     280,842        (650,969

Cash and Cash Equivalents, Beginning of Period

     503,737        868,629   
                

Cash and Cash Equivalents, End of Period

   $ 784,579      $ 217,660   
                

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 1,456      $ 9,376   
                

Payments for Income Taxes

   $ 27,726      $ 24,683   
                

Supplemental Disclosure of Non-Cash Financing Activities

    

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ 3,936      $ —     
                

Reduction of Due to Limited Partners Account to Fund Sidepocket Investment

   $ (5   $ —     
                

Contributions Related to Transfers by Affiliated Partners

   $ 5      $ —     
                

In-kind Redemption of Capital

   $ (907   $ —     
                

In-kind Contribution of Capital

   $ 907      $ —     
                

Transfer of Interests to Non-Controlling Interest Holders

   $ 15,438      $ —     
                

Settlement of Vested Common Units

   $ 135,491      $ 165,250   
                

Conversion of Blackstone Holdings Units to Common Units

   $ 11,306      $ —     
                

Reorganization of the Partnership:

    

Accounts Payable, Accrued Expenses and Other Liabilities

   $ —        $ (82,028
                

Non-Controlling Interests in Consolidated Entities

   $ —        $ 82,028   
                

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

    

Deferred Tax Asset

   $ (15,674   $ 4,440   
                

Due to Affiliates

   $ 13,323      $ (3,774
                

Partners’ Capital

   $ 2,351      $ (666
                

Acquisition of GSO Capital Partners LP:

    

Fair Value of Assets Acquired

   $ —        $ 1,018,747   

Cash Paid for Acquisition

     —          (356,972

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

     —          (381,375
                

Acquisition of GSO Capital Partners LP — Units Issued

   $ —        $ 280,400   
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

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

 

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

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

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

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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

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

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of private investments include the discounted cash flow method (using a likely next buyer’s capital structure and not Blackstone’s, or the applicable Blackstone Fund’s existing capital structure) and/or capitalization rates (“cap rates”) analysis. Valuations may also be derived by reference to observable valuation measures for comparable companies or assets (e.g., multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables and, in some instances, by reference to option pricing models or other similar methods. Corporate private equity and real estate investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value. These valuation methodologies involve a significant degree of management judgment.

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

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

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

Securities transactions are recorded on a trade date basis.

Recent Accounting Developments — The Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations, in December 2007 and FASB Staff Position FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise From Contingencies, in April 2009 (collectively “SFAS No. 141(R)”). SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets, liabilities, contractual contingencies and contingent consideration obtained in the transaction (whether for a full or partial acquisition); establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Partnership obtains control of one or more businesses, including those sometimes referred to as “true mergers” or “mergers of equals” and

 

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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)

 

combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Partnership had no such transactions for the six-month period ended June 30, 2009.

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

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

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

In June 2008, the FASB issued Staff Position EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, Earnings per Share. FSP EITF No. 03-6-1 requires entities to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. This FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The Partnership adopted FSP

 

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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)

 

EITF No. 03-6-1 effective January 1, 2009 and includes unvested participating Blackstone Common Units as a component of Common Units Entitled to Priority Distributions — Basic in the calculation of earnings per common unit for all periods presented, due to their equivalent distribution rights as Blackstone Common Units. The impact of the adoption and retroactive application on 2008 was as follows:

 

    Three Months Ended
June 30, 2008
    Six Months Ended
June 30, 2008
    Year Ended
December 31, 2008
 
    Originally
Reported
    Upon
Adoption
    Originally
Reported
    Upon
Adoption
    Originally
Reported
    Upon
Adoption
 

Net Loss Per Common Unit — Basic and Diluted

           

Common Units Entitled to Priority Distributions

  $ (0.60   $ (0.60   $ (1.57   $ (1.55   $ (4.36   $ (4.32
                                               

Common Units Not Entitled to Priority Distributions

          $ (3.09   $ (3.06
                       

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

In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS No. 107-1”). FSP FAS No. 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. FSP FAS No. 107-1 is effective for financial statements issued for interim or annual periods ending after June 15, 2009. The Partnership adopted FSP FAS No. 107-1 effective with the issuance of its June 30, 2009 financial statements. The adoption of FSP FAS No. 107-1 resulted in the inclusion of interim financial statement disclosures which had previously been annual, notably the inclusion in Note 4 of the summarized financial information for the Partnership’s equity method investments.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS No. 165”). SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The Partnership adopted SFAS No. 165 effective with the issuance of its June 30, 2009 financial statements. The adoption of SFAS No. 165 resulted in the additional required disclosure regarding subsequent events.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance applicable to variable interest entities (“VIEs”). The amendments will significantly affect the overall consolidation analysis under Interpretation 46(R). SFAS No. 167

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The Partnership is currently evaluating the impact of SFAS No. 167 on its condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS No. 168”). SFAS No. 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. SFAS No. 168 also replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, given that once in effect, the Codification will carry the same level of authority. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 will be limited to disclosure in the condensed consolidated financial statements and the manner in which the Partnership refers to GAAP authoritative literature.

 

3. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table outlines changes to the carrying amount of Goodwill as of June 30, 2009:

 

     Goodwill

Balance at December 31, 2008

   $ 1,703,602

Impairment

     —  
      

Balance at June 30, 2009

   $ 1,703,602
      

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

Intangible Assets

The following table outlines changes to the carrying amount of Intangible Assets, Net as of June 30, 2009:

 

     Intangible
Assets
 

Contractual Rights

   $ 1,348,370   

Accumulated Amortization

     (349,870
        

Intangible Assets, Net

   $ 998,500   
        

Amortization expense associated with intangible assets was $39.5 million and $40.7 million for the three months ended June 30, 2009 and 2008, respectively, and $79.0 million and $74.2 million for the six months ended June 30, 2009 and 2008, respectively, and is included in General, Administrative and Other in the accompanying Condensed Consolidated Statements of Operations. Amortization of intangible assets held at June 30, 2009 is expected to be approximately $158.0 million for the year ended December 31, 2009.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

4. INVESTMENTS

 

Investments

A summary of Investments consists of the following:

 

     June 30,
2009
   December 31,
2008

Investments of Consolidated Blackstone Funds

   $ 1,188,910    $ 1,556,261

Equity Method Investments

     1,080,504      1,063,615

Performance Fees and Allocations

     218,579      147,421

Other Investments

     39,346      63,645
             
   $ 2,527,339    $ 2,830,942
             

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $362.7 million and $409.2 million at June 30, 2009 and December 31, 2008, respectively. Equity Method Investments represents investments in non-consolidated funds as described below, of which Blackstone’s share totaled $1.0 billion and $1.0 billion at June 30, 2009 and December 31, 2008, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Investments of Consolidated Blackstone Funds

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

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

   June 30,
2009
   December 31,
2008
   June 30,
2009
    December 31,
2008
 

United States and Canada

          

Investment Funds, principally related to credit and marketable alternative funds

          

Credit Driven

   $ 346,988    $ 695,620    29.2   44.7

Diversified Investments

     348,823      345,033    29.4   22.2

Equity

     79,573      34,499    6.7   2.2

Other

     483      648    —        0.1
                          

Investment Funds Total
(Cost: 2009 — $936,318; 2008 — $1,283,697)

     775,867      1,075,800    65.3   69.2
                          

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

          

Manufacturing

     18,862      17,782    1.6   1.1

Services

     82,154      81,543    7.0   5.2

Natural Resources

     649      551    0.1   —     

Real Estate Assets

     386      1,769    —        0.1
                          

Equity Securities Total
(Cost: 2009 — $111,706; 2008 — $112,739)

     102,051      101,645    8.7   6.4
                          

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

          

Real Estate Assets

     57,447      103,453    4.8   6.6

Services

     88,022      98,592    7.4   6.3

Manufacturing

     30,021      23,599    2.5   1.5

Natural Resources

     357      317    —        —     

Credit Driven

     1,156      19,659    0.1   1.3
                          

Partnership and LLC Interests Total
(Cost: 2009 — $289,878; 2008 — $294,846)

     177,003      245,620    14.8   15.7
                          

Debt Instruments, principally related to credit and marketable alternatives funds

          

Manufacturing

     4,099      4,251    0.3   0.3

Services

     5,989      4,093    0.5   0.3

Real Estate Assets

     577      485    —        —     
                          

Debt Instruments Total
(Cost: 2009 — $10,233; 2008 — $9,396)

     10,665      8,829    0.8   0.6
                          

United States and Canada Total
(Cost: 2009 — $1,348,135; 2008 — $1,700,678)

     1,065,586      1,431,894    89.6   91.9
                          

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

    Fair Value   Percentage of
Investments of
Consolidated

Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

  June 30,
2009
  December 31,
2008
  June 30,
2009
    December 31,
2008
 

Europe

       

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

       

Manufacturing

  $ 11,398   $ 9,105   1.0   0.6

Services

    27,813     29,635   2.3   1.9
                       

Equity Securities Total
(Cost: 2009 — $47,137; 2008 — $45,295)

    39,211     38,740   3.3   2.5

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

       

Services

    28,648     31,572   2.4   2.0

Real Estate Assets

    9,251     13,674   0.8   0.9
                       

Partnership and LLC Interests Total
(Cost: 2009 — $47,481; 2008 — $46,104)

    37,899     45,246   3.2   2.9

Debt Instruments, principally related to credit and marketable alternatives funds

       

Manufacturing

    308     187   —        —     

Services

    659     —     0.1   —     
                       

Debt Instruments Total
(Cost: 2009 $1,639; 2008 $1,256)

    967     187   0.1   —     
                       

Europe Total (Cost: 2009 — $96,257; 2008 — $92,655)

    78,077     84,173   6.6   5.4
                       

Asia

       

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

       

Services

    6,549     11,201   0.6   0.8

Manufacturing

    7,309     8,654   0.6   0.6

Natural Resources

    —       442   —        —     

Real Estate Assets

    —       368   —        —     

Diversified Investments

    4,209     —     0.4   —     
                       

Equity Securities Total
(Cost: 2009 — $17,522; 2008 — $22,155)

    18,067     20,665   1.6   1.4

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

       

Manufacturing

    828     1,184   0.1   0.1

Real Estate Assets

    704     707   —        —     

Services

    79     45   —        —     
                       

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

    1,611     1,936   0.1   0.1
                       

Debt Instruments, principally related to credit and marketable alternatives funds
(Cost: 2009 $241; 2008 $256)

    166     151   —        —     
                       

Asia Total (Cost: 2009 — $19,596; 2008 — $24,222)

    19,844     22,752   1.7   1.5
                       

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     Fair Value    Percentage of
Investments of
Consolidated

Blackstone Funds
 

Geographic Region / Instrument Type / Industry

Description or Investment Strategy

   June 30,
2009
   December 31,
2008
   June 30,
2009
    December 31,
2008
 

Other

          

Equity Securities, principally related to corporate private equity funds

          

Natural Resources

   $ 1,422    $ 1,022    0.1   0.1

Services

     2,724      2,737    0.2   0.3
                          

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

     4,146      3,759    0.3   0.4
                          

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

          

Natural Resources

     21,166      13,599    1.8   0.9

Services

     91      84    —        0.1
                          

Partnership and LLC Interests Total
(Cost: 2009 — $7,163; 2008 — $5,063)

     21,257      13,683    1.8   1.0
                          

Other Total
(Cost: 2009 — $9,870; 2008 — $7,669)

     25,403      17,442    2.1   1.2
                          

Total Investments of Consolidated Blackstone Funds (Cost: 2009 — $1,473,858; 2008 — $1,825,224)

   $ 1,188,910    $ 1,556,261    100.0   100.0
                          

At June 30, 2009 and December 31, 2008, there were no individual investments, including consideration of derivative contracts, with fair values exceeding 5.0% of Blackstone’s net assets. At June 30, 2009 and December 31, 2008, consideration was given as to whether any individual consolidated fund of hedge funds, feeder fund or any other affiliate exceeded 5.0% of Blackstone’s net assets. At December 31, 2008, Blackport Capital Fund Ltd. had a fair value of $594.5 million and was the sole feeder fund investment to exceed the 5.0% threshold.

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

 

     Fair Value    Percentage of Securities Sold
Not Yet Purchased
 

Geographic Region / Instrument Type / Industry Class

   June 30,
2009
   December 31,
2008
   June 30,
2009
    December 31,
2008
 

Asia — Equity Instruments

          

Natural Resources

   $ 107    $ 77    34.5   8.6

Services

     115      611    37.1   68.3

Manufacturing

     71      —      22.9   —     

Real Estate Assets

     —        206    —        23.1

Diversified Investments

     17      —      5.5   —     
                          

Total
(Proceeds: 2009 — $236; 2008 — $782)

   $ 310    $ 894    100.0   100.0
                          

 

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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)

 

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2009     2008    2009     2008  

Realized Gains (Losses)

   $ (44,055   $ 42,405    $ (104,408   $ 19,902   

Net Change in Unrealized Gains (Losses)

     92,624        106,226      96,877        (130,835
                               
   $ 48,569      $ 148,631    $ (7,531   $ (110,933
                               

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
 
     2009     2008    2009     2008  

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

   $ 48,569      $ 148,631    $ (7,531   $ (110,933

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

     (1,945     1,096      14,872        7,459   

Interest and Dividend Income and Other Attributable to Consolidated Blackstone Funds

     11,680        39,951      16,200        77,516   
                               

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

   $ 58,304      $ 189,678    $ 23,541      $ (25,958
                               

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

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

These VIEs include investments in corporate private equity, real estate, credit-oriented and funds of hedge funds assets. The disclosures under FSP FAS No. 140-4 and FIN 46R-8 are presented on a fully aggregated basis. The investment strategies of Blackstone Funds differ by product; however, the fundamental risks of the Blackstone Funds have similar characteristics, including loss of invested capital and loss of incentive fees and

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

performance fees and allocations. Accordingly, disaggregation of Blackstone’s involvement with VIEs would not provide more useful information. In Blackstone’s role as general partner or investment advisor, it generally considers itself the sponsor of the applicable Blackstone Fund. For certain of these funds, Blackstone is determined to be the primary beneficiary and hence consolidates such funds within the condensed consolidated financial statements.

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

For those VIEs in which Blackstone is the sponsor, Blackstone may have an obligation as general partner to provide commitments to such funds. During the three and six months ended June 30, 2009, Blackstone did not provide any support other than its obligated amount.

At June 30, 2009, Blackstone was the primary beneficiary of VIEs whose gross assets were $601.5 million, which is the carrying amount of such financial assets in the condensed consolidated financial statements. Blackstone is also a significant variable interest holder or sponsor in VIEs which are not consolidated, as Blackstone is not the primary beneficiary. At June 30, 2009, assets recognized in the Partnership’s Condensed Consolidated Statements of Financial Condition related to our variable interests in these unconsolidated entities were $79.6 million with no liabilities. Assets consisted of $56.4 million of receivables and $23.1 million of investments. Blackstone’s aggregate maximum exposure to loss was $79.6 million as of June 30, 2009.

Performance Fees and Allocations

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

Equity Method Investments

Blackstone invests in corporate private equity funds, real estate funds, funds of hedge funds and credit-oriented funds that are not consolidated. The Partnership accounts for these investments under the equity method

 

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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 accounting. Blackstone’s share of operating income generated by these investments is recorded as a component of Investment Income (Loss). That amount reflects the fair value gains and losses of the associated funds’ underlying investments since Blackstone retains the specialized investment company accounting of these funds pursuant to EITF 85-12.

A summary of equity method investments follows:

 

     Equity Held    Equity in Net Income (Loss)  
     June 30,
2009
   December 31,
2008
   Three Months Ended June 30,    Six Months Ended June 30,  
               2009                 2008                2009                 2008        

Equity Method Investments

   $ 1,080,504    $ 1,063,615    $ (42,553   $ 25,185    $ (102,078   $ (29,049
                                             

The summarized financial information of the funds in which the Partnership has an equity method investment, presented before any cross-fund eliminations, is as follows:

 

     June 30, 2009 and the Six Months Then Ended  
     Corporate
Private Equity
    Real Estate     Credit and
Marketable
Alternatives
    Total  

Statement of Financial Condition

        

Assets

        

Investments

   $ 16,703,320      $ 7,401,173      $ 14,142,044      $ 38,246,537   

Other Assets

     120,732        548,941        3,069,519        3,739,192   
                                

Total Assets

   $ 16,824,052      $ 7,950,114      $ 17,211,563      $ 41,985,729   
                                

Liabilities and Partners’ Capital

        

Debt

   $ 158,909      $ 127,370      $ 1,344,688      $ 1,630,967   

Other Liabilities

     73,757        253,634        1,766,636        2,094,027   
                                

Total Liabilities

     232,666        381,004        3,111,324        3,724,994   
                                

Partners’ Capital

     16,591,386        7,569,110        14,100,239        38,260,735   
                                

Total Liabilities and Partners’ Capital

   $ 16,824,052      $ 7,950,114      $ 17,211,563      $ 41,985,729   
                                

Statement of Income

        

Interest Income

   $ 9,840      $ 4,906      $ 265,307      $ 280,053   

Other Income

     7,380        15,721        27,137        50,238   

Interest Expense

     (3,070     (2,935     (16,536     (22,541

Other Expenses

     (20,468     (12,647     (69,090     (102,205

Net Realized and Unrealized Gain (Loss) from Investments

     (4,978     (3,706,723     1,184,542        (2,527,159
                                

Net Income (Loss)

   $ (11,296   $ (3,701,678   $ 1,391,360      $ (2,321,614
                                

 

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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)

 

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 June 30,     Six Months Ended June 30,  
           2009                2008                 2009                 2008        

Realized Gains (Losses)

   $ 12    $ 99      $ (1,654   $ 355   

Net Change in Unrealized Gains (Losses)

     1,482      (1,695     1,623        (2,209
                               
   $ 1,494    $ (1,596   $ (31   $ (1,854
                               

Fair Value Measurements

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

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

 

   

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

 

   

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

 

   

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

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

 

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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 summarizes the valuation of Blackstone’s investments by the above SFAS No. 157 fair value hierarchy levels as of June 30, 2009 and December 31, 2008, respectively:

 

     June 30, 2009
     Level I    Level II    Level III    Total

Investments of Consolidated Blackstone Funds

   $ 59,242    $ 396    $ 1,129,272    $ 1,188,910

Other Investments

     23,297      —        16,049      39,346

Securities Sold, Not Yet Purchased

     310      —        —        310
     December 31, 2008
     Level I    Level II    Level III    Total

Investments of Consolidated Blackstone Funds

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

Other Investments

     22,499      —        41,146      63,645

Securities Sold, Not Yet Purchased

     894      —        —        894

The following table summarizes the Level III investments by valuation methodology as of June 30, 2009:

 

Fair Value Based on

   Corporate
Private Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Total
Investment
Company
Holdings
 

Third-Party Fund Managers

   —        —        68   68

Specific Valuation Metrics

   22   7   3   32
                        
   22   7   71   100
                        

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

 

     Three Months Ended June 30,    Six Months Ended June 30,  
           2009                 2008              2009             2008      

Balance, Beginning of Period

   $ 1,190,644      $ 2,274,684    $ 1,538,007      $ 2,362,542   

Transfer In (Out) of Level III, Net

     (2,334     160,040      (2,386     160,040   

Purchases (Sales), Net

     (63,465     6,703      (372,272     29,959   

Realized Gains (Losses), Net

     (93,138     2,777      (98,360     9,565   

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

     113,614        19,011      80,332        (98,891
                               

Balance, End of Period

   $ 1,145,321      $ 2,463,215    $ 1,145,321      $ 2,463,215   
                               

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

 

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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. LOANS PAYABLE

On May 11, 2009, Blackstone entered into a new committed revolving credit facility for $850 million.

As of June 30, 2009, Blackstone had no outstanding borrowings under its revolving credit facility.

 

6. INCOME TAXES

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

Blackstone adopted SFAS No. 160 effective January 1, 2009. As a result of the adoption, Blackstone is required to calculate its effective tax rate on Consolidated Income (Loss) Before Provision for Taxes as opposed to the Net Income (Loss) Attributable to The Blackstone Group L.P. Accordingly, under SFAS No. 160, Blackstone’s effective tax rate was (1.85)% and 4.17% for the three months ended June 30, 2009 and 2008, respectively, and (1.91)% and 0.90% for the six months ended June 30, 2009 and 2008, respectively. Blackstone’s income tax provision was an expense of $10.9 million and a benefit of $25.9 million for the three months ending June 30, 2009 and 2008, respectively, and an expense of $28.6 million and a benefit of $16.9 million for the six months ending June 30, 2009 and 2008, respectively.

Prior to the adoption of SFAS No. 160, after eliminating the effects of non-controlling interests, Blackstone’s effective tax rate would have been (3.53)% for the three months ended June 30, 2009, which is comparable to the 15.62% effective tax rate that was reported for the three months ended June 30, 2008, and (5.14)% for the six months ended June 30, 2009, which is comparable to the 5.72% effective tax rate that was reported for the six months ended June 30, 2008. Blackstone’s corresponding income tax provision would have been an expense of $5.6 million for the three months ended June 30, 2009, which is comparable to the benefit of $29.0 million reported for the three months ended June 30, 2008, and an expense of $19.3 million for the six months ended June 30, 2009, which is comparable to the benefit of $24.7 million reported for the six months ended June 30, 2008.

Blackstone’s effective tax rates for the three and six months ended June 30, 2009 were due to the following: (1) certain wholly-owned subsidiaries were subject to federal, state and local corporate income taxes on income allocated to Blackstone, and certain non-U.S. corporate entities continue to be subject to non-U.S. corporate income tax, and (2) a portion of the compensation charges that contribute to Blackstone’s net loss are not deductible for tax purposes.

 

7. NET LOSS PER COMMON UNIT

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Basic and diluted net loss per common unit for the three and six months ended June 30, 2009 is calculated as follows:

 

    Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 
    Basic     Diluted     Basic     Diluted  

Total Undistributed Loss

       

Net Loss Allocable to Common Unit Holders

  $ (164,284   $ (164,284   $ (395,858   $ (395,858

Less: Distributions to Common Unitholders

    (83,371     (83,371     (165,517     (165,517
                               

Total Undistributed Loss

  $ (247,655   $ (247,655   $ (561,375   $ (561,375
                               

Allocation of Total Undistributed Loss

       

Undistributed Loss — Common Unitholders Entitled to Priority Distributions

  $ (247,308   $ (247,308   $ (559,173   $ (559,173

Undistributed Loss — Common Unitholders Not Entitled to Priority Distributions

    (347     (347     (2,202     (2,202
                               

Total Undistributed Loss

  $ (247,655   $ (247,655   $ (561,375   $ (561,375
                               

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

       

Undistributed Loss per Common Unit

  $ (0.90   $ (0.90   $ (2.04   $ (2.04

Priority Distributions

    0.30        0.30        0.60        0.60   
                               

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

  $ (0.60   $ (0.60   $ (1.44   $ (1.44
                               

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

  $ (0.90   $ (0.90   $ (2.04   $ (2.04

Priority Distributions

    —          —          —          —     
                               

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

  $ (0.90   $ (0.90   $ (2.04   $ (2.04
                               

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

    275,199,027        275,199,027        274,416,111        274,416,111   

Common Units Not Entitled to Priority Distributions

    385,796        385,796        1,003,238        1,003,238   
                               

Total Weighted-Average Common Units Outstanding

    275,584,823        275,584,823        275,419,349        275,419,349   
                               

 

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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 June 30, 2009, a weighted-average total of 24,175,810 unvested deferred restricted common units and 823,827,409 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit. For the six months ended June 30, 2009, a weighted-average total of 25,185,306 unvested deferred restricted common units and 827,280,867 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit.

Basic and diluted net loss per common unit for the three and six months ended June 30, 2008 was as follows:

 

    Three Months Ended
June 30, 2008
    Six Months Ended
June 30, 2008
 
    Basic     Diluted     Basic     Diluted  

Net Loss Allocable to Common Unit Holders

  $ (156,531   $ (156,531   $ (407,524   $ (407,524
                               

Weighted-Average Common Units Outstanding

    263,610,181        263,610,181        263,378,650        263,378,650   
                               

Net Loss per Common Unit

  $ (0.60   $ (0.60   $ (1.55   $ (1.55
                               

For the three months ended June 30, 2008, a weighted-average total of 31,078,615 unvested deferred restricted common units and 836,010,555 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit. For the six months ended June 30, 2008, a weighted-average total of 31,569,772 unvested deferred restricted common units and 833,995,410 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit.

Cash Distribution Policy

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

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

 

   

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

 

   

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

 

   

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

 

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

Until December 31, 2009, Blackstone personnel and others with respect to their Blackstone Holdings Partnership Units will not receive any distributions (other than tax distributions in the circumstances specified above) for a year unless and until our common unitholders receive aggregate distributions of $1.20 per common unit for such year. Blackstone does not intend to maintain this priority allocation after December 31, 2009.

Unit Repurchase Program

In January 2008, Blackstone announced that the Board of Directors of its general partner, Blackstone Group Management L.L.C., had authorized the repurchase by Blackstone of up to $500 million of Blackstone Common Units and Blackstone Holdings Partnership Units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of Blackstone Common Units and Blackstone Holdings Partnership Units repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date.

During the six months ended June 30, 2009, Blackstone repurchased a combination of 4,629,866 Blackstone Common Units and Blackstone Holdings Partnership Units as part of the unit repurchase program for a total cost of $29.6 million. During the three months ended June 30, 2009, Blackstone repurchased 218,164 Blackstone Common Units and Blackstone Holdings Partnership Units as part of the unit repurchase program for a total cost of $2.4 million. As of June 30, 2009, the amount remaining available for repurchases was $340.3 million under this program. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings equity of $16.6 million.

During the six months ended June 30, 2008, Blackstone repurchased a combination of 8,329,101 vested and unvested Blackstone Holdings Partnership Units as part of the repurchase program. The repurchase resulted in a decrease in Blackstone’s ownership interest in Blackstone Holdings equity of $89.2 million.

 

8. EQUITY-BASED COMPENSATION

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

 

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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 and six months ended June 30, 2009, the Partnership recorded compensation expense of $762.7 million and $1.5 billion, respectively, in relation to its equity-based awards with corresponding tax benefits of $4.1 million and $6.5 million, respectively. The Partnership recorded compensation expense of $805.6 million and $1.7 billion in relation to its equity-based awards with corresponding tax benefits of $3.9 million and $9.4 million for the three and six months ended June 30, 2008, respectively. As of June 30, 2009, there was $7.7 billion of estimated unrecognized compensation expense related to unvested awards. That cost is expected to be recognized over a weighted-average period of 4.5 years.

Total vested and unvested outstanding units, including Blackstone Common Units, Blackstone Holdings Partnership Units, deferred restricted common units and options were 1,120,027,419 as of June 30, 2009. Total outstanding unvested phantom units were 280,587 as of June 30, 2009.

A summary of the status of the Partnership’s unvested equity-based awards as of June 30, 2009 and a summary of changes during the period January 1, 2009 through June 30, 2009, are presented below:

 

     Blackstone Holdings    The Blackstone Group L.P.
                Equity Settled Awards    Cash Settled Awards

Unvested Units

   Partnership
Units
    Weighted-
Average
Grant Date
Fair Value
   Deferred
Restricted
Common
Units and
Options
    Weighted-
Average
Grant Date
Fair Value
   Phantom
Units
    Weighted-
Average
Grant Date
Fair Value

Balance, December 31, 2008

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

Granted

   1,702,463        6.50    41,040        3.62    —          —  

Vested

   (76,959,442     30.96    (4,783,742     28.32    (239,556     26.78

Exchanged

   —          —      (3,322     5.80    3,322        5.80

Forfeited

   (7,563,387     30.43    (3,371,601     25.64    (32,581     26.22
                          

Balance, June 30, 2009

   271,491,066        30.74    20,451,983        25.51    263,979        25.23
                          

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

Units Expected to Vest

The following unvested units, as of June 30, 2009, are expected to vest:

 

     Units    Weighted-Average
Service Period

in Years

Blackstone Holdings Partnership Units

   254,802,509    4.4

Deferred Restricted Blackstone Common Units and Options

   16,697,220    4.6
       

Total Equity-Based Awards

   271,499,729    4.4
       

Phantom Units

   230,486    0.9
       

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

9. RELATED PARTY TRANSACTIONS

Affiliate Receivables and Payables

Blackstone Group considers its Founder, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates. As of June 30, 2009 and December 31, 2008, Due from Affiliates and Due to Affiliates were comprised of the following:

 

     June 30,
2009
   December 31,
2008

Due from Affiliates

     

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

   $ 147,293    $ 175,268

Amounts Due from Portfolio Companies and Funds

     92,257      72,376

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

     55,424      50,774

Payments Made on Behalf of Non-Consolidated Entities

     46,139      58,536

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

     11,155      8,130

Investments Redeemed in Non-Consolidated Funds of Funds

     8,893      496,350
             
   $ 361,161    $ 861,434
             

Due to Affiliates

     

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

   $ 720,488    $ 722,449

Accrual for Potential Repayment of Previously Received Performance Fees and Allocations

     506,519      260,018

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

     48,669      262,737

Distributions Received on Behalf of Non-Consolidated Entities

     23,808      22,938

Payments Made by Non-Consolidated Entities

     6,053      17,435
             
   $ 1,305,537    $ 1,285,577
             

Interests of the Founder, Senior Managing Directors and Employees

In addition, the Founder, senior managing directors and employees invest on a discretionary basis in the Blackstone Funds both directly and through consolidated entities. Their investments may be subject to preferential management fee and performance fee and allocation arrangements. As of June 30, 2009 and December 31, 2008, the Founder’s, other senior managing directors’ and employees’ investments aggregated $515.5 million and $507.2 million, respectively, and the Founder’s, other senior managing directors’ and employees’ share of the Net Income (Loss) Attributable to Redeemable Non-Controlling and Non-Controlling Interests in Consolidated Entities aggregated $12.4 million and $52.6 million for the three months ended June 30, 2009 and 2008, respectively, and $(21.6) million and $(13.9) million for the six months ended June 30, 2009 and 2008, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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 $0.5 million and $1.6 million for the three months ended June 30, 2009 and 2008, respectively, and $0.9 million and $3.1 million for the six months ended June 30, 2009 and 2008, respectively. No such loans that were outstanding as of June 30, 2009 were made to any director or executive officer of Blackstone since March 22, 2007, the date of Blackstone’s initial filing with the Securities and Exchange Commission of a registration statement relating to its initial public offering.

Contingent Repayment Guarantee

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

Carried interest is subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to Blackstone based on cumulative results. As such, the accrual for contingent repayments (“clawback”), which is a component of Due to Affiliates, represents all amounts previously distributed to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone Funds if the Blackstone carry funds were to be liquidated based on the current fair value of the underlying funds’ investments as of June 30, 2009 and December 31, 2008. The actual clawback liability, however, does not become realized until the end of a fund’s life or one year after a realized loss is incurred, depending on the fund. As of June 30, 2009, such obligations were $506.5 million, of which $220.0 million related to Blackstone Holdings and $286.5 million related to non-controlling interest holders. As of December 31, 2008, such obligations were $260.0 million, of which $109.8 million related to Blackstone Holdings and $150.2 million related to non-controlling interest holders.

Tax Receivable Agreement

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

Certain subsidiaries of the Partnership which are corporate taxpayers have entered into tax receivable agreements with each of certain non-controlling interest holders and additional tax receivable agreements have been executed, and will continue to be executed, with newly-admitted senior managing directors and others who acquire Blackstone Holdings Partnership Units. The agreements provide for the payment by the corporate taxpayers to such owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the corporate taxpayers actually realize as result of the aforementioned increases in tax basis and of certain other tax benefits related to entering into these tax receivable agreements. For purposes of the tax receivable agreements, cash savings in income tax will be computed by comparing the actual income tax liability of the corporate taxpayers to the amount of such taxes that the corporate taxpayers would have been required to pay had

 

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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)

 

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 $720.5 million over the next 15 years. The present value of these estimated payments totals $146.4 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 agreement are not conditioned upon continued ownership of Blackstone equity interests by the pre-IPO owners and the others mentioned above. In January 2009 payments totaling $17.0 million were made to certain pre-IPO owners in accordance with the tax receivable agreement and related to tax benefits we received for the 2007 taxable year.

 

10. COMMITMENTS AND CONTINGENCIES

Guarantees — Blackstone had approximately $6.0 million of letters of credit outstanding to provide collateral support related to a credit facility at June 30, 2009.

Certain real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their Portfolio Companies. At June 30, 2009, such guarantees amounted to $14.3 million.

Debt Covenants — Blackstone’s debt obligations contain various customary loan covenants. In management’s opinion, these covenants do not materially restrict Blackstone’s investment or financing strategy. Blackstone was in compliance with all of its loan covenants as of June 30, 2009.

Investment Commitments — The Blackstone Funds had signed investment commitments with respect to investments representing commitments of $26.0 million as of June 30, 2009. Included in this is $0.1 million of signed investment commitments for portfolio company acquisitions in the process of closing.

The general partners of the Blackstone Funds had unfunded commitments to each of their respective funds totaling $1.4 billion as of June 30, 2009.

Certain of Blackstone’s funds of hedge funds not consolidated in these financial statements have unfunded investment commitments to unaffiliated hedge funds of $727.6 million as of June 30, 2009. The funds of hedge funds consolidated in these financial statements may, but are not required to, allocate assets to these funds.

Contingent Obligations (Clawback) — Included within Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations are gains from Blackstone Fund investments. The portion of net gains (losses) attributable to non-controlling interest holders is included within Non-Controlling Interests in Income of Consolidated Entities. Net gains (losses) attributable to non-controlling interest holders are net of carried interest earned by Blackstone. Carried interest is subject to clawback to the extent that the carried interest received to date exceeds the amount due to Blackstone based on cumulative results. If, at June 30, 2009, all of the investments held by the carry funds, which are at fair value, were deemed worthless, a possibility that management views as remote, the amount of carried interest subject to potential clawback would be $1.4 billion, on an after tax basis where applicable, of which $338.5 million related to

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Blackstone Holdings and $1.1 billion related to current and former Blackstone personnel. These amounts are inclusive of the amounts described in Note 9 under Contingent Repayment Guarantee. A portion of the carried interest paid to current and former Blackstone personnel is held in segregated accounts in the event of a cash clawback obligation. These segregated accounts and most of the collateralized accounts are not included in the financial statements of the Partnership. At June 30, 2009, $473.4 million was held in such segregated accounts.

Contingent Performance Fees and Allocations — Through June 30, 2009, $7.0 million of performance fees and allocations has been recorded attributable to hedge funds where the measurement period has not ended.

Litigation — From time to time, Blackstone is named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. After consultation with legal counsel, management believes the ultimate liability arising from such actions that existed as of June 30, 2009, if any, will not materially affect Blackstone’s results of operations, financial position or cash flows.

 

11. SEGMENT REPORTING

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

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

 

   

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

 

   

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

 

   

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, CLO vehicles, publicly-traded closed-end mutual funds and separate accounts programs. GSO’s results have been included in this segment from the date of acquisition. This segment, formerly known as Marketable Alternative Asset Management, has been renamed to better reflect the product mix in this segment. This does not reflect a change to the underlying businesses or how they are reflected in Blackstone’s results of operations.

 

   

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

These business segments are differentiated by their various sources of income, with the Corporate Private Equity, Real Estate and 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 excluding the impact of income taxes and IPO and acquisition-related items, including charges associated with equity-based compensation, the amortization of intangibles and corporate actions including

 

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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)

 

acquisitions. For segment reporting purposes, revenues and expenses are presented on a basis that deconsolidates the investment funds we manage. The aggregate of ENI for all segments equals Total Segment ENI. ENI is used by management primarily in making resource deployment and compensation decisions across Blackstone’s four segments.

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

The following table presents the financial data for Blackstone’s four segments for the three months ended June 30, 2009 and as of and for the six months ended June 30, 2009:

 

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

Segment Revenues

           

Management Fees

           

Base Management Fees

   $ 67,740      $ 81,517      $ 96,293      $ —      $ 245,550   

Advisory Fees

     —          —          —          82,503      82,503   

Transaction and Other Fees

     15,711        2,879        687        —        19,277   

Management Fee Offsets

     (566     (486     (4,365     —        (5,417
                                       

Total Management and Advisory Fees

     82,885        83,910        92,615        82,503      341,913   

Performance Fees and Allocations

     97,185        (47,370     22,419        —        72,234   

Investment Income (Loss) and Other

     18,516        (55,461     25,375        996      (10,574
                                       

Total Revenues

     198,586        (18,921     140,409        83,499      403,573   
                                       

Expenses

           

Compensation and Benefits

     54,263        (6,824 )*      57,406        54,239      159,084   

Other Operating Expenses

     20,553        12,978        16,461        21,734      71,726   
                                       

Total Expenses

     74,816        6,154        73,867        75,973      230,810   
                                       

Economic Net Income (Loss)

   $ 123,770      $ (25,075   $ 66,542      $ 7,526    $ 172,763   
                                       

 

* The credit balance in Compensation and Benefits for the Real Estate segment is primarily the result of a reversal of $47.4 million of prior period carried interest allocations made to certain partners that are participating in the Partnership’s profit sharing arrangements.

 

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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)

 

     June 30, 2009 and the Six Months then Ended  
     Corporate
Private Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
   Total
Reportable
Segments
 

Segment Revenues

           

Management Fees

           

Base Management Fees

   $ 136,171      $ 161,715      $ 192,796      $ —      $ 490,682   

Advisory Fees

     —          —          —          173,443      173,443   

Transaction and Other Fees

     29,693        6,019        1,130        —        36,842   

Management Fee Offsets

     (4,220     (1,679     (8,578     —        (14,477
                                       

Total Management and Advisory Fees

     161,644        166,055        185,348        173,443      686,490   

Performance Fees and Allocations

     102,003        (275,943     32,341        —        (141,599

Investment Income (Loss) and Other

     3,035        (121,588     21,923        1,097      (95,533
                                       

Total Revenues

     266,682        (231,476     239,612        174,540      449,358   
                                       

Expenses

           

Compensation and Benefits

     49,139        (44,143 )*      118,540        105,191      228,727   

Other Operating Expenses

     40,661        25,593        40,106        34,710      141,070   
                                       

Total Expenses

     89,800        (18,550     158,646        139,901      369,797   
                                       

Economic Net Income (Loss)

   $ 176,882      $ (212,926   $ 80,966      $ 34,639    $ 79,561   
                                       

Segment Assets

   $ 2,381,115      $ 1,436,641      $ 2,262,340      $ 752,775    $ 6,832,871   
                                       

 

* The credit balance in Compensation and Benefits for the Real Estate segment is primarily the result of a reversal of $117.5 million of prior period carried interest allocations made to certain partners that are participating in the Partnership’s profit sharing arrangements.

The following table reconciles the Total Segments to Blackstone’s Income (Loss) Before Provision for Taxes and Total Assets for the three months ended June 30, 2009 and as of and for the six months ended June 30, 2009:

 

     Three Months Ended June 30, 2009  
     Total
Segments
   Consolidation
Adjustments
and Reconciling
Items
    Blackstone
Consolidated
 

Revenues

   $ 403,573    $ 2,843 (a)    $ 406,416   

Expenses

   $ 230,810    $ 820,896 (b)    $ 1,051,706   

Other Income

   $ —      $ 58,304 (c)    $ 58,304   

Economic Net Income

   $ 172,763    $ (759,749 )(d)    $ (586,986

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     June 30, 2009 and the Six Months then Ended  
     Total
Segments
   Consolidation
Adjustments
and
Reconciling
Items
    Blackstone
Consolidated
 

Revenues

   $ 449,358    $ 1,972 (a)    $ 451,330   

Expenses

   $ 369,797    $ 1,604,267 (b)    $ 1,974,064   

Other Income

   $ —      $ 23,541 (c)    $ 23,541   

Economic Net Income

   $ 79,561    $ (1,578,754 )(d)    $ (1,499,193

Total Assets

   $ 6,832,871    $ 865,861 (e)    $ 7,698,732   

 

(a) The Revenues adjustment principally represents management and performance fees and allocations earned from Blackstone Funds to arrive at Blackstone consolidated revenues which were eliminated in consolidation.
(b) The Expenses adjustment represents the addition of expenses of the consolidated Blackstone Funds to the Blackstone unconsolidated expenses, amortization of intangibles and expenses related to equity-based compensation to arrive at Blackstone consolidated expenses.
(c) The Other Income adjustment results from the following:

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ (3,150   $ (4,752

Fund Expenses Added in Consolidation

     2,491        6,073   

Non-Controlling Interests in Income of Consolidated Entities

     58,963        22,220   
                

Total Consolidation Adjustments

   $ 58,304      $ 23,541   
                

 

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

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 

Economic Net Income

   $ 172,763      $ 79,561   
                

Adjustments

    

Amortization of Intangibles

     (39,511     (79,024

IPO and Acquisition-Related Charges

     (761,834     (1,502,891

Income Associated with Non-Controlling Interests in Income of Consolidated Entities

     41,596        3,161   
                

Total Adjustments

     (759,749     (1,578,754
                

Income (Loss) Before Provision for Taxes

   $ (586,986   $ (1,499,193
                

 

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

The following table presents financial data for Blackstone’s four segments for the three and six months ended June 30, 2008:

 

     Three Months Ended June 30, 2008  
     Corporate
Private Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
   Total
Reportable
Segments
 

Segment Revenues

           

Management Fees

           

Base Management Fees

   $ 66,967      $ 67,977      $ 127,465      $ —      $ 262,409   

Advisory Fees

     —          —          —          71,080      71,080   

Transaction and Other Fees

     19,161        6,854        2,884        —        28,899   

Management Fee Offsets

     (15,232     (326     (16     —        (15,574
                                       

Total Management and Advisory Fees

     70,896        74,505        130,333        71,080      346,814   

Performance Fees and Allocations

     21,960        (77,133     45,027        —        (10,146

Investment Income (Loss) and Other

     (489     (10,837     49,741        1,382      39,797   
                                       

Total Revenues

     92,367        (13,465     225,101        72,462      376,465   
                                       

Expenses

           

Compensation and Benefits

     40,283        32,083        84,162        48,574      205,102   

Other Operating Expenses

     20,799        13,532        25,014        12,093      71,438   
                                       

Total Expenses

     61,082        45,615        109,176        60,667      276,540   
                                       

Economic Net Income (Loss)

   $ 31,285      $ (59,080   $ 115,925      $ 11,795    $ 99,925   
                                       

 

     Six Months Ended June 30, 2008  
     Corporate
Private Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
   Total
Reportable
Segments
 

Segment Revenues

           

Management Fees

           

Base Management Fees

   $ 134,303      $ 134,728      $ 230,652      $ —      $ 499,683   

Advisory Fees

     —          —          —          139,643      139,643   

Transaction and Other Fees

     29,998        18,649        4,012        —        52,659   

Management Fee Offsets

     (23,642     (730     (16     —        (24,388
                                       

Total Management and Advisory Fees

     140,659        152,647        234,648        139,643      667,597   

Performance Fees and Allocations

     (141,470     (107,195     50,085        —        (198,580

Investment Income (Loss) and Other

     (23,565     (11,411     (29,661     3,935      (60,702
                                       

Total Revenues

     (24,376     34,041        255,072        143,578      408,315   
                                       

Expenses

           

Compensation and Benefits

     (40,469 )*      67,771        140,435        95,541      263,278   

Other Operating Expenses

     42,973        29,294        43,302        23,110      138,679   
                                       

Total Expenses

     2,504        97,065        183,737        118,651      401,957   
                                       

Economic Net Income (Loss)

   $ (26,880   $ (63,024   $ 71,335      $ 24,927    $ 6,358   
                                       

 

* The credit balance in Compensation and Benefits for the Corporate Private Equity segment is primarily the result of a reversal of $101.6 million of prior period carried interest allocations made to certain partners that are participating in the Partnership’s profit sharing arrangements.

 

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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 reconciles the Total Segments to Blackstone’s Income Before Provision for Taxes for the three and six months ended June 30, 2008:

 

     Three Months Ended June 30, 2008  
     Total
Segments
   Consolidation
Adjustments and
Reconciling Items
    Blackstone
Consolidated
 

Revenues

   $ 376,465    $ (22,532 )(a)    $ 353,933   

Expenses

   $ 276,540    $ 887,549 (b)    $ 1,164,089   

Other Income

   $ —      $ 189,678 (c)    $ 189,678   

Economic Net Income

   $ 99,925    $ (720,403 )(d)    $ (620,478

 

     Six Months Ended June 30, 2008  
     Total
Segments
   Consolidation
Adjustments and
Reconciling Items
    Blackstone
Consolidated
 

Revenues

   $ 408,315    $ 13,654 (a)    $ 421,969   

Expenses

   $ 401,957    $ 1,859,708 (b)    $ 2,261,665   

Other Income

   $ —      $ (25,958 )(c)    $ (25,958

Economic Net Income

   $ 6,358    $ (1,872,012 )(d)    $ (1,865,654

 

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

 

     Three Months Ended
June 30, 2008
   Six Months Ended
June 30, 2008
 

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ 21,582    $ (17,738

Fund Expenses Added in Consolidation

     24,108      46,902   

Non-Controlling Interests in Income of Consolidated Entities

     143,988      (55,122
               

Total Consolidation Adjustments

   $ 189,678    $ (25,958
               

 

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

 

     Three Months Ended
June 30, 2008
    Six Months Ended
June 30, 2008
 

Economic Net Income

   $ 99,925      $ 6,358   
                

Adjustments

    

Amortization of Intangibles

     (40,685     (74,213

IPO and Acquisition-Related Charges

     (818,026     (1,736,997

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

     138,308        (60,802
                

Total Adjustments

     (720,403     (1,872,012
                

Income (Loss) Before Benefit for Taxes

   $ (620,478   $ (1,865,654
                

 

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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)

 

12. SUBSEQUENT EVENTS

There have been no subsequent events through August 7, 2009, the date that Blackstone’s condensed consolidated financial statements were available to be issued, that require recognition or disclosure in such condensed consolidated financial statements.

 

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

THE BLACKSTONE GROUP L.P.

Unaudited Condensed Consolidated Statements of Financial Condition

(Dollars in Thousands)

 

     June 30, 2009
     Consolidated
Operating
Partnerships
    Consolidated
Blackstone Funds (a)
   Reclasses and
Eliminations
    Consolidated

Assets

         

Cash and Cash Equivalents

   $ 784,579      $ —      $ —        $ 784,579

Cash Held by Blackstone Funds and Other

     51,211        19,703      —          70,914

Investments

     1,686,273        1,050,874      (209,808     2,527,339

Accounts Receivable

     241,771        3,621      —          245,392

Due from Brokers

     —          714      —          714

Due from Affiliates

     360,877        15,915      (15,631     361,161

Intangible Assets, Net

     998,500        —        —          998,500

Goodwill

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

Other Assets

     157,286        532      (59     157,759

Deferred Tax Assets

     848,772        —        —          848,772
                             

Total Assets

   $ 6,832,871      $ 1,091,359    $ (225,498   $ 7,698,732
                             

Liabilities and Partners’ Capital

         

Loans Payable

   $ 78,048      $ —      $ —        $ 78,048

Amounts Due to Non-Controlling Interest Holders

     59,459        120,650      —          180,109

Securities Sold, Not Yet Purchased

     —          310      —          310

Due to Affiliates

     1,297,215        23,953      (15,631     1,305,537

Accrued Compensation and Benefits

     319,260        2,149      —          321,409

Accounts Payable, Accrued Expenses and Other Liabilities

     158,287        5,223      (59     163,451
                             

Total Liabilities

     1,912,269        152,285      (15,690     2,048,864
                             

Redeemable Non-Controlling Interests in Consolidated Entities

     —          —        454,823        454,823
                             

Partners’ Capital

         

Partners’ Capital

     3,351,177        664,631      (664,631     3,351,177

Accumulated Other Comprehensive Income

     576        —        —          576

Non-Controlling Interests in Consolidated Entities

     (201,149     274,443      —          73,294

Non-Controlling Interests in Blackstone Holdings

     1,769,998        —        —          1,769,998
                             

Total Partners’ Capital

     4,920,602        939,074      (664,631     5,195,045
                             

Total Liabilities and Partners’ Capital

   $ 6,832,871      $ 1,091,359    $ (225,498   $ 7,698,732
                             

 

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THE BLACKSTONE GROUP L.P.

Unaudited Condensed Consolidated Statements of Financial Condition—(Continued)

(Dollars in Thousands)

 

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

Assets

         

Cash and Cash Equivalents

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

Cash Held by Blackstone Funds and Other

     57,536        849,788      —          907,324   

Investments

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

Accounts Receivable

     309,201        2,866      —          312,067   

Due from Brokers

     —          48,506      —          48,506   

Investment Subscriptions Paid in Advance

     6,697        —        (4,781     1,916   

Due from Affiliates

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

Intangible Assets, Net

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

Goodwill

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

Other Assets

     169,333        222      —          169,555   

Deferred Tax Assets

     845,578        —        —          845,578   
                               

Total Assets

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

Liabilities and Partners’ Capital

         

Loans Payable

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

Amounts Due to Non-Controlling Interest Holders

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

Securities Sold, Not Yet Purchased

     —          894      —          894   

Due to Affiliates

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

Accrued Compensation and Benefits

     410,593        2,866      —          413,459   

Accounts Payable, Accrued Expenses and Other Liabilities

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

Total Liabilities

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

Redeemable Non-Controlling Interests in Consolidated Entities

     —          —        362,462        362,462   
                               

Partners’ Capital

         

Partners’ Capital

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

Accumulated Other Comprehensive Income (Loss)

     (291     —        —          (291

Non-Controlling Interests in Consolidated Entities

     (95,206     293,403      —          198,197   

Non-Controlling Interests in Blackstone Holdings

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

Total Partners’ Capital

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

Total Liabilities and Partners’ Capital

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

 

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

Blackstone Distressed Securities Fund L.P.

Blackstone Kailix Fund L.P.*

Blackstone Market Opportunities Fund L.P.

 

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Blackstone Strategic Alliance Fund L.P.

Blackstone Strategic Equity Fund L.P.

Blackstone Value Recovery Fund L.P.

BTD CP Holdings, LP**

GSO Legacy Associates 2 LLC

GSO Legacy Associates LLC

GSO Co-Investment Partners LLC**

The Asia Opportunities Fund L.P.

Corporate private equity side-by-side investment vehicles

Real estate side-by-side investment vehicles

Mezzanine fund side-by-side investment vehicles

 

  * Consolidated as of December 31, 2008 only.
  ** Consolidated as of June 30, 2009 only.

 

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

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

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

Our Business

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

Our business is organized into four business segments:

 

   

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

 

   

Real Estate. We are a world leader in real estate investing with an assortment of real estate funds that are diversified geographically and across a variety of sectors. We launched our first real estate fund in 1994 and have managed six opportunistic real estate funds, two internationally focused real estate funds, a European focused real estate fund and a number of debt-focused real estate funds. Our real estate funds have made significant investments in lodging, major urban office buildings and a variety of real estate operating companies. In addition, our debt-focused funds target real estate debt related investment opportunities in the public and private markets, primarily in the United States and Europe.

 

   

Credit and Marketable Alternatives. Established in 1990, our credit and marketable alternatives segment is comprised of our management of funds of hedge funds, credit-oriented funds, CLO vehicles and publicly-traded closed-end mutual funds. These products are intended to provide investors with consistent distributions of current income. In addition, we provide investment advice to institutional investors in dedicated accounts (i.e., separately managed accounts). This segment, formerly known as Marketable Alternative Asset Management, has been renamed to better reflect the product mix in this segment. This does not reflect a change to the underlying businesses or how they are reflected in reporting our results of operations.

 

   

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

We generate our revenue from fees earned pursuant to contractual arrangements with funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees), and from corporate and

 

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mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. We invest in the funds we manage and, in most cases, receive an allocation of income (i.e., a “carried interest”) or an incentive fee from an investment fund in the event that specified cumulative investment returns are achieved. The composition of our revenues will vary based on market conditions and the cyclicality of the different businesses in which we operate. Net investment gains and resultant investment income generated by the Blackstone Funds over a fund’s investment cycle, principally corporate private equity and real estate funds, are driven by value created by our operating and strategic initiatives as well as overall market conditions. Our funds initially record fund investments at cost and then such investments are subsequently recorded at fair value. Fair values are affected by changes in the stock market, fundamentals of the portfolio company, the portfolio company’s industry, the overall economy, as well as other market conditions.

Business Environment

Global equity and debt markets recovered much of their previous losses in the second quarter of 2009, while the macro-economic backdrop remained challenged. In the United States and Europe, equities markets rose for the first time since the second quarter of 2007, after U.S. markets reached a 12-year low and European markets reached a 6-year low in March 2009. Emerging markets across Asia and Latin America rose even more quickly and ended the second quarter of 2009 35-75% higher than year-end 2008 levels.

High yield credit spreads tightened sharply to 978 basis points over Treasury securities at the end of June 2009, compared with credit spreads of 1,700 basis points over Treasury securities at year-end 2008. Despite this dramatic tightening, spreads remain well above historic averages and credit trends continue to be weak across both consumer and commercial asset classes. Investors returned to investing in high yield debt and issuance increased. Notwithstanding the meaningful rally in credit, bank lenders have not increased their appetite to make long-term capital commitments. Therefore, the volume of new leveraged transactions remains low given the overall global economic weakness and lack of financing.

Commercial real estate trends in the U.S. and Europe worsened in the second quarter of 2009, with lower occupancy and pricing trends. Global hospitality trends also declined, including revenue per available room (“RevPAR”), an important industry metric.

Commodities prices continued their upward climb. Crude oil ended the second quarter of 2009 at $70 per barrel, 41% higher than at the end of March 2009 and 57% higher than at year-end 2008. The dollar generally weakened against most currencies in the quarter, reversing the gains of the first quarter. In the second quarter of 2009, the dollar declined approximately 6% against the Euro, 13% against the Pound Sterling and 3% against the Japanese Yen.

Global economies appear to be benefiting from substantial government stimulus. Though economic trends in developed nations were negative in the second quarter of 2009, the rate of decline has slowed. Emerging nations, such as China and India, continue to have favorable growth trends. The consumer price index (CPI) increased 0.8% in the second quarter of 2009 on a seasonally adjusted basis and declined 1.4% over the preceding twelve month period.

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

 

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Key Financial Measures and Indicators

Our key financial measures and indicators are discussed below.

Revenues

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

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

 

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

 

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

 

  (i) For carry funds, generally as a percentage of the investment fund’s capital commitment during the investment period and a percentage of invested capital after the investment period;

 

  (ii) For credit-oriented and real estate funds structured like a hedge fund, generally as a percentage of the fund’s net asset value;

 

  (iii) For hedge funds, generally as a percentage of assets under management;

 

  (iv) For CLOs at cost and closed-end mutual funds, generally as a percentage of each fund’s total assets; and

 

  (v) For separately managed accounts, generally as a percentage of net asset value.

Refer to “Item 1. Business, Incentive Arrangements / Fee Structure” in our 2008 Annual Report on Form 10-K which provides additional information regarding the manner in which Base Management Fees are generated.

 

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

 

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

 

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

Performance Fees and Allocations. Performance fees and allocations represent the allocations of profits (“carried interest”) which are a component of our general partner interests in the carry funds. We are entitled to carried interest from an investment carry fund in the event investors in the fund achieve cumulative investment returns in excess of a specified rate. In certain performance fee arrangements related to funds of hedge funds and some credit-oriented funds in our Credit and Marketable Alternatives segment, we are entitled to receive performance fees and allocations subject to certain net loss carry-forward provisions (known as a “highwater mark”) and, in some cases, when the return on assets under management exceeds certain benchmark returns or other performance targets. In all cases, each fund is considered separately in that regard and for a given fund,

 

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performance fees and allocations can never be negative over the life of the fund. For our carry funds, Performance Fees and Allocations are realized when the underlying investment in a fund is profitably realized and the fund’s cumulative investment returns are in excess of a specified rate. For our hedge funds, Performance Fees and Allocations are realized at the end of each fund’s measurement period, as applicable to the performance fee or allocation.

Investment Income. Blackstone invests in corporate private equity funds, real estate funds, funds of hedge funds and credit-oriented funds that are not consolidated. The Partnership accounts for these investments under the equity method of accounting. Blackstone’s share of operating income (loss) generated by these investments is recorded as a component of Investment Income (Loss). Investment Income (Loss) is realized when we redeem all or a portion of our investment or when we receive cash income, such as from a dividend or distribution, from an investment in one of our funds which is not consolidated. Unrealized Investment Income (Loss) results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain (loss) at the time an investment is realized.

Interest Income and Other. Interest Income and Other principally includes interest earned from the investing of Blackstone’s available Cash and Cash Equivalents and any foreign exchange transaction amounts.

Expenses

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

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

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

Other Income

Other Income (Losses) — Net Income from Fund Investment Activities represents amounts attributable to funds that Blackstone includes in its condensed consolidated financial statements with such results allocated to non-controlling interest holders.

Non-Controlling Interests

A majority of our investment funds are unconsolidated or we record significant non-controlling interests in income of consolidated entities relating to the ownership interests of the limited partners of the Blackstone Holdings Partnerships and the limited partner interests in our consolidated investment funds. The Blackstone Group L.P. is, through wholly-owned subsidiaries, the sole general partner of each of the Blackstone Holdings partnerships. The Blackstone Group L.P. consolidates the financial results of Blackstone Holdings and its consolidated subsidiaries, and the ownership interest of the limited partners of Blackstone Holdings is reflected as Non-Controlling Interests in Blackstone Holdings. The limited partner interests of the consolidated Blackstone Funds is presented as Redeemable Non-Controlling Interests in Consolidated Entities in situations where the limited partner has, or will have, the option of redeeming their interests from consolidated Blackstone Fund,

 

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which is principally from our funds of hedge funds and certain credit-oriented funds. Limited partners interests in the consolidated Blackstone Funds where the redemption option does not exist, which is principally our carry funds, is recorded as Non-Controlling Interests in Consolidated Entities.

Income Taxes

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

There remains some uncertainty regarding Blackstone’s future taxation levels. In June 2007, a bill was introduced in the U.S. Senate that would preclude Blackstone from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. In addition, the U.S. Congress has recently considered other bills relating to the taxation of investment partnerships. Legislation has been introduced into the U.S. Congress this year that is substantially similar to a bill passed by the U.S. House of Representatives in 2008 that would generally (1) treat carried interest as non-qualifying income under the tax rules applicable to publicly traded partnerships, which would require Blackstone to hold interests in entities earning such income through taxable subsidiary corporations, and (2) tax carried interest as ordinary income for U.S. federal income tax purposes, rather than in accordance with the character of income derived by the underlying fund, which is in many cases capital gain. In addition, the Obama administration proposed in its published revenue proposals for 2010 that the current law regarding the treatment of carried interest be changed to treat such income as income received in connection with the performance of services and subject to ordinary income tax. If any such legislation or similar legislation were to be enacted and it applied to us, it would materially increase the amount of taxes payable by Blackstone and/or its unitholders.

Economic Net Income

Economic Net Income (“ENI”) represents segment net income excluding the impact of income taxes and 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. ENI is used by management primarily in making resource deployment and compensation decisions across Blackstone’s four segments. (See Note 11. “Segment Reporting” in the “Notes to the Condensed Consolidated Financial Statements” in Part I. Item 1. Financial Statements.)

Net Fee Related Earnings from Operations

Net Fee Related Earnings from Operations, which is a component of Adjusted Cash Flows from Operations, is a supplemental non-GAAP financial measure that reflects our earnings from operations excluding the income related to the performance fees and allocations and related carry plan costs and income earned from Blackstone’s investments in the Blackstone Funds. Management uses Net Fee Related Earnings from Operations as a measure to assess whether recurring revenue from our businesses more than adequately covers all of our operating expenses and generates profitability. Net Fee Related Earnings from Operations equals (i) contractual revenues and interest income, (ii) less compensation expenses, which include amortization of non-IPO and acquisition-related equity-based awards, but exclude amortization of IPO and acquisition-based equity awards, carried interest and incentive fee compensation, (iii) less other operating expenses and (iv) less cash taxes calculated in a manner similar to our ENI provision for income taxes. See “Liquidity and Capital Resources — Liquidity and

 

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Capital Resources” below for a detailed discussion of Net Fee Related Earnings from Operations. This measure should be considered in addition to, and not as a substitute for, or superior to, financial measures presented in accordance with GAAP.

Blackstone uses Earnings Before Interest, Taxes and Depreciation and Amortization from Net Fee Related Earnings from Operations (“EBITDA-NFRE”) as a measure of segment performance and a useful indicator of our ability to cover our recurring operating expenses. EBITDA-NFRE equals Net Fee Related Earnings from Operations before segment level interest expense, segment level depreciation and amortization and the cash taxes included in Net Fee Related Earnings from Operations.

Adjusted Cash Flows from Operations

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

Operating Metrics

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

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

 

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

 

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

 

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

 

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

Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Interests related to our funds of hedge funds and certain of our credit-oriented funds are generally subject to annual, semi-annual or quarterly withdrawal or redemption by investors upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days depending on the fund and the liquidity profile of the underlying assets. 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. Fee-Earning Assets Under Management refers to the assets we manage on which we derive management and incentive fees. Our Fee-Earning Assets Under Management generally equal the sum of:

 

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

 

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

 

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

 

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

 

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

 

  (6) the gross amount of assets of our CLOs at cost.

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

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

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

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

 

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Condensed Consolidated Results of Operations

Following is a discussion of our condensed consolidated results of operations for the three and six months ended June 30, 2009 and 2008. For a more detailed discussion of the factors that affected the results of our four business segments (which are presented on a basis that deconsolidates the investment funds we manage) in these periods, see “Segment Analysis” below.

The following table sets forth information regarding our consolidated results of operations for the three and six months ended June 30, 2009 and 2008.

 

    Three Months Ended
June 30,
    2009 vs. 2008     Six Months Ended
June 30,
    2009 vs. 2008  
    2009     2008     $     %     2009     2008     $     %  
    (Dollars in Thousands)  

Revenues

               

Management and Advisory Fees

  $ 340,829      $ 338,159      $ 2,670      1   $ 682,001      $ 647,568      $ 34,433      5

Performance Fees and Allocations

    71,171        (13,722     84,893      —          (143,077     (202,409     59,332      29

Investment Income (Loss)

    (10,949     22,766        (33,715   —          (93,402     (38,592     (54,810   -142

Interest Income and Other

    5,365        6,730        (1,365   -20     5,808        15,402        (9,594   -62
                                                           

Total Revenues

    406,416        353,933        52,483      15     451,330        421,969        29,361      7
                                                           

Expenses

               

Compensation and Benefits

    937,751        1,028,808        (91,057   -9     1,750,098        2,005,955        (255,857   -13

Interest

    87        5,689        (5,602   -98     1,486        8,432        (6,946   -82

General, Administrative and Other

    112,276        107,799        4,477      4     217,876        202,533        15,343      8

Fund Expenses

    1,592        21,793        (20,201   -93     4,604        44,745        (40,141   -90
                                                           

Total Expenses

    1,051,706        1,164,089        (112,383   -10     1,974,064        2,261,665        (287,601   -13
                                                           

Other Income (Loss)

               

Net Gains (Losses) from Fund Investment Activities

    58,304        189,678        (131,374   -69     23,541        (25,958     49,499      —     
                                                           

Income (Loss) Before Provision (Benefit) for Taxes

    (586,986     (620,478     33,492      5     (1,499,193     (1,865,654     366,461      20

Provision (Benefit) for Taxes

    10,885        (25,851     36,736      —          28,616        (16,870     45,486      —     
                                                           

Net Income (Loss)

    (597,871     (594,627     (3,244   -1     (1,527,809     (1,848,784     320,975      17

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

    37,638        131,368        (93,730   -71     40,234        (52,826     93,060      —     

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

    3,959        6,942        (2,983   -43     (37,072     (7,974     (29,098   —     

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

    (475,184     (576,406     101,222      18     (1,135,113     (1,380,460     245,347  &nbs