Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

OR

 

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

Commission File Number: 001-33551

 

LOGO

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

 

Delaware   20-8875684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer  x

   Accelerated filer  ¨

Non-accelerated filer  ¨

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

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

The number of the Registrant’s voting common units representing limited partner interests outstanding as of October 30, 2015 was 558,440,339. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of October 30, 2015 was 59,083,468.

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I.   

FINANCIAL INFORMATION

  
ITEM 1.   

FINANCIAL STATEMENTS

     5   
  

Unaudited Condensed Consolidated Financial Statements — September 30, 2015 and 2014:

  
  

Condensed Consolidated Statements of Financial Condition as of September 30, 2015 and December  31, 2014

     5   
  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2015 and 2014

     7   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2015 and 2014

     8   
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2015 and 2014

     9   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2015 and 2014

     11   
  

Notes to Condensed Consolidated Financial Statements

     13   
ITEM 1A.   

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

     60   
ITEM 2.   

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

     62   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     125   
ITEM 4.   

CONTROLS AND PROCEDURES

     128   
PART II.   

OTHER INFORMATION

  
ITEM 1.   

LEGAL PROCEEDINGS

     130   
ITEM 1A.   

RISK FACTORS

     130   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     131   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     131   
ITEM 4.   

MINE SAFETY DISCLOSURES

     131   
ITEM 5.   

OTHER INFORMATION

     131   
ITEM 6.   

EXHIBITS

     132   

SIGNATURES

     133   

 

1


Table of Contents

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “indicator,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. The forward-looking statements speak only as of the date of this report, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Website and Social Media Disclosure

We use our website (www.blackstone.com), Facebook page (www.facebook.com/blackstone), Twitter (www.twitter.com/blackstone), LinkedIn (www.linkedin.com/company/the-blackstone-group), Instagram (instagram.com/Blackstone) and YouTube (www.youtube.com/user/blackstonegroup) accounts as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about Blackstone when you enroll your e-mail address by visiting the “Contact Us/Email Alerts” section of our website at ir.blackstone.com and the “Alerts & Subscriptions” page under “News & Views” at www.blackstone.com. The contents of our website, any alerts and social media channels are not, however, a part of this report.

 

 

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

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

 

2


Table of Contents

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

3


Table of Contents

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

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

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     September 30,
2015
    December 31,
2014
 

Assets

    

Cash and Cash Equivalents

   $ 1,380,404      $ 1,412,472   

Cash Held by Blackstone Funds and Other

     854,417        1,808,092   

Investments (including assets pledged of $65,493 and $45,764 at September 30, 2015 and December 31, 2014, respectively)

     15,298,755        22,765,589   

Accounts Receivable

     879,262        559,321   

Reverse Repurchase Agreements

     85,282        —     

Due from Affiliates

     1,210,658        1,128,408   

Intangible Assets, Net

     380,303        458,833   

Goodwill

     1,787,392        1,787,392   

Other Assets

     369,081        324,760   

Deferred Tax Assets

     1,373,149        1,252,230   
  

 

 

   

 

 

 

Total Assets

   $ 23,618,703      $ 31,497,097   
  

 

 

   

 

 

 

Liabilities and Partners’ Capital

    

Loans Payable

   $ 6,158,702      $ 8,923,841   

Due to Affiliates

     1,387,170        1,490,088   

Accrued Compensation and Benefits

     2,364,880        2,439,257   

Securities Sold, Not Yet Purchased

     173,707        85,878   

Repurchase Agreements

     42,102        29,907   

Accounts Payable, Accrued Expenses and Other Liabilities

     821,871        1,194,579   
  

 

 

   

 

 

 

Total Liabilities

     10,948,432        14,163,550   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Redeemable Non-Controlling Interests in Consolidated Entities

     183,161        2,441,854   
  

 

 

   

 

 

 

Partners’ Capital

    

The Blackstone Group L.P. Partners’ Capital

    

Partners’ Capital (common units: 621,979,987 issued and outstanding as of September 30, 2015; 595,624,855 issued and outstanding as of December 31, 2014)

     6,566,990        6,999,830   

Appropriated Partners’ Capital

     —          81,301   

Accumulated Other Comprehensive Loss

     (49,890     (20,864
  

 

 

   

 

 

 

Total The Blackstone Group L.P. Partners’ Capital

     6,517,100        7,060,267   

Non-Controlling Interests in Consolidated Entities

     2,369,183        3,415,356   

Non-Controlling Interests in Blackstone Holdings

     3,600,827        4,416,070   
  

 

 

   

 

 

 

Total Partners’ Capital

     12,487,110        14,891,693   
  

 

 

   

 

 

 

Total Liabilities and Partners’ Capital

   $ 23,618,703      $ 31,497,097   
  

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

5


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands)

 

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

 

     September 30,
2015
     December 31,
2014
 

Assets

     

Cash Held by Blackstone Funds and Other

   $ 481,251       $ 1,325,094   

Investments

     4,711,500         7,759,322   

Accounts Receivable

     186,005         131,996   

Due from Affiliates

     37,169         65,124   

Other Assets

     9,646         48,441   
  

 

 

    

 

 

 

Total Assets

   $ 5,425,571       $ 9,329,977   
  

 

 

    

 

 

 

Liabilities

     

Loans Payable

   $ 3,350,923       $ 6,787,100   

Due to Affiliates

     78,226         182,107   

Accounts Payable, Accrued Expenses and Other

     428,401         697,149   
  

 

 

    

 

 

 

Total Liabilities

   $ 3,857,550       $ 7,666,356   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

6


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Revenues

        

Management and Advisory Fees, Net

   $ 703,596      $ 640,949      $ 1,894,496      $ 1,833,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees

        

Realized

        

Carried Interest

     435,189        638,676        2,580,266        1,613,958   

Incentive Fees

     33,455        35,445        110,775        118,743   

Unrealized

        

Carried Interest

     (1,055,920     222,105        (1,124,010     1,213,181   

Incentive Fees

     (50,832     (6,163     36,274        112,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Performance Fees

     (638,108     890,063        1,603,305        3,058,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income (Loss)

        

Realized

     99,952        91,142        445,705        459,878   

Unrealized

     (179,298     38,445        (262,024     62,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Income (Loss)

     (79,346     129,587        183,681        522,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and Dividend Revenue

     26,244        18,107        70,129        47,516   

Other

     (813     720        (2,478     1,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     11,573        1,679,426        3,749,133        5,463,954   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Compensation and Benefits

        

Compensation

     393,655        525,093        1,426,233        1,511,085   

Performance Fee Compensation

        

Realized

        

Carried Interest

     97,798        186,003        628,079        595,702   

Incentive Fees

     15,062        19,029        49,126        61,173   

Unrealized

        

Carried Interest

     (228,697     164,132        (204,876     319,158   

Incentive Fees

     (14,641     (9,002     16,450        39,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

     263,177        885,255        1,915,012        2,526,339   

General, Administrative and Other

     158,664        128,015        436,496        400,061   

Interest Expense

     36,860        31,615        105,644        86,129   

Fund Expenses

     18,296        10,253        76,845        20,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

     476,997        1,055,138        2,533,997        3,032,770   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Loss)

        

Net Gains (Losses) from Fund Investment Activities

     (16,867     8,682        158,703        217,422   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) Before Provision for Taxes

     (482,291     632,970        1,373,839        2,648,606   

Provision for Taxes

     1,573        79,108        144,168        216,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     (483,864     553,862        1,229,671        2,432,119   

Net Income (Loss) Attributable to Redeemable

        

Non-Controlling Interests in Consolidated Entities

     (12,520     (23,328     8,787        44,950   

Net Income Attributable to Non-Controlling Interests in Consolidated Entities

     30,671        55,491        179,183        239,513   

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

     (247,318     271,194        532,782        1,114,518   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (254,697   $ 250,505      $ 508,919      $ 1,033,138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared Per Common Unit

   $ 0.74      $ 0.55      $ 2.41      $ 1.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Common Unit

        

Common Units, Basic

   $ (0.40   $ 0.41      $ 0.81      $ 1.70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

   $ (0.40   $ 0.41      $ 0.80      $ 1.69   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Common Units Outstanding

        

Common Units, Basic

     638,832,799        611,684,213        632,046,646        606,671,289   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

     638,832,799        614,978,870        635,439,828        610,221,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues Earned from Affiliates

        

Management and Advisory Fees, Net

   $ 48,200      $ 107,615      $ 125,143      $ 262,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net Income (Loss)

   $ (483,864   $ 553,862      $ 1,229,671      $ 2,432,119   

Other Comprehensive Loss, Net of Tax — Currency Translation Adjustment

     (13,413     (21,663     (46,325     (23,393
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

     (497,277     532,199        1,183,346        2,408,726   

Less

        

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

     (12,520     (23,328     8,787        44,950   

Comprehensive Income Attributable to Non-Controlling Interests in Consolidated Entities

     31,026        48,984        161,884        228,993   

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

     (247,318     271,194        532,782        1,114,518   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (268,465   $ 235,349      $ 479,893      $ 1,020,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

          The Blackstone Group L.P.                          
    Common
Units
    Partners’
Capital
    Appro-
priated
Partners’
Capital
    Accumulated
Other
Compre-
hensive
Income
(Loss)
    Total     Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
 

Balance at December 31, 2014

    595,624,855      $ 6,999,830      $ 81,301      $ (20,864   $ 7,060,267      $ 3,415,356      $ 4,416,070      $ 14,891,693      $ 2,441,854   

Deconsolidation of CLOs and Funds on Adoption of ASU 2015-02

    —          —          (90,928     —          (90,928     (1,002,728     —          (1,093,656     (2,258,289

Adjustment to Appropriated Partners’ Capital on Adoption of ASU 2014-13

    —          —          9,627        —          9,627        —          —          9,627        —     

Net Income

    —          508,919        —          —          508,919        179,183        532,782        1,220,884        8,787   

Currency Translation Adjustment

    —          —          —          (29,026     (29,026     (39,191     —          (68,217     —     

Capital Contributions

    —          —          —          —          —          294,661        —          294,661        2,354   

Capital Distributions

    —          (1,502,479     —          —          (1,502,479     (473,454     (1,415,625     (3,391,558     (11,545

Transfer of Non-Controlling Interests in Consolidated Entities

    —          —          —          —          —          (4,644     —          (4,644     —     

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

    —          22,049        —          —          22,049        —          —          22,049        —     

Equity-Based Compensation

    —          315,643        —          —          315,643        —          279,910        595,553        —     

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

    12,048,073        (55,860     —          —          (55,860     —          (1,903     (57,763     —     

Excess Tax Benefits Related to Equity-Based Compensation, Net

    —          68,481        —          —          68,481        —          —          68,481        —     

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

    —          93,847        —          —          93,847        —          (93,847     —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

    14,307,059        116,560        —          —          116,560        —          (116,560     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

    621,979,987      $ 6,566,990      $ —        $ (49,890   $ 6,517,100      $ 2,369,183      $ 3,600,827      $ 12,487,110      $ 183,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements

 

9


Table of Contents

THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

          The Blackstone Group L.P.                          
    Common
Units
    Partners’
Capital
    Appro-
priated
Partners’
Capital
    Accumulated
Other
Compre-
hensive
Income
(Loss)
    Total     Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone
Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
 

Balance at December 31, 2013

    572,592,279      $ 6,002,592      $ 300,708      $ 3,466      $ 6,306,766      $ 2,464,047      $ 3,656,416      $ 12,427,229      $ 1,950,442   

Transition and Acquisition Adjustments Relating to Consolidation of CLO Entities

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

Consolidation of Fund Entity

    —          —          —          —          —          323,158        —          323,158        30,922   

Net Income

    —          1,033,138        —          —          1,033,138        239,513        1,114,518        2,387,169        44,950   

Allocation of Losses of Consolidated CLO Entities

    —          —          (92,020     —          (92,020     92,020        —          —          —     

Currency Translation Adjustment

    —          —          —          (12,873     (12,873     (10,520     —          (23,393     —     

Allocation of Currency Translation Adjustment of Consolidated CLO Entities

    —          —          (10,520     —          (10,520     10,520        —          —          —     

Reclassification of Currency Translation Adjustment Due to Deconsolidation of CLO Entities

    —          611        —          —          611        —          —          611        —     

Capital Contributions

    —          —          —          —          —          400,602        —          400,602        769,548   

Capital Distributions

    —          (881,651     —          —          (881,651     (357,610     (898,716     (2,137,977     (352,383

Transfer of Non-Controlling Interests in Consolidated Entities

    —          —          —          —          —          (3,465     —          (3,465     —     

Purchase of Interests from Certain Non-Controlling Interest Holders

    —          (6     —          —          (6     —          —          (6     —     

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

    —          19,310        —          —          19,310        —          —          19,310        —     

Equity-Based Compensation

    —          333,656        —          —          333,656        —          307,474        641,130        —     

Relinquished with Deconsolidation and Liquidation of Partnership

    —          —          (82,488     —          (82,488     (82     —          (82,570     —     

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

    6,353,748        (33,076     —          —          (33,076     —          (783     (33,859     —     

Excess Tax Benefits Related to Equity-Based Compensation, Net

    —          21,371        —          —          21,371        —          —          21,371        —     

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

    —          3,168        —          —          3,168        —          (3,168     —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

    12,810,910        88,946        —          —          88,946        —          (88,946     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

    591,756,937      $ 6,588,059      $ 124,078      $ (9,407   $ 6,702,730      $ 3,158,183      $ 4,086,795      $ 13,947,708      $ 2,443,479   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

10


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Operating Activities

    

Net Income

   $ 1,229,671      $ 2,432,119   

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

    

Blackstone Funds Related

    

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

     258,201        (434,899

Net Realized Gains on Investments

     (3,280,963     (2,241,242

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

     251,411        12,765   

Non-Cash Performance Fees

     940,745        (936,097

Non-Cash Performance Fee Compensation

     483,795        1,015,254   

Equity-Based Compensation Expense

     561,454        584,353   

Excess Tax Benefits Related to Equity-Based Compensation

     (68,481     (19,320

Amortization of Intangibles

     77,947        76,909   

Other Non-Cash Amounts Included in Net Income

     147,636        125,602   

Cash Flows Due to Changes in Operating Assets and Liabilities

    

Cash Held by Blackstone Funds and Other

     953,674        (108,284

Cash Relinquished in Deconsolidation and Liquidation of Partnership

     (442,370     (470,523

Accounts Receivable

     (246,076     100,161   

Reverse Repurchase Agreements

     (85,282     55,446   

Due from Affiliates

     (65,367     263,731   

Other Assets

     (87,839     (96,815

Accrued Compensation and Benefits

     (514,677     (428,574

Securities Sold, Not Yet Purchased

     90,875        (38,793

Accounts Payable, Accrued Expenses and Other Liabilities

     (473,431     (72,861

Repurchase Agreements

     12,186        (233,029

Due to Affiliates

     (98,156     11,403   

Treasury Cash Management Strategies

    

Investments Purchased

     (3,106,152     (2,700,900

Cash Proceeds from Sale of Investments

     2,671,905        2,211,242   

Blackstone Funds Related

    

Investments Purchased

     (3,263,923     (5,236,260

Cash Proceeds from Sale or Pay Down of Investments

     5,436,696        8,196,265   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,383,479        2,067,653   
  

 

 

   

 

 

 

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (58,879     (21,386

Changes in Restricted Cash

     5,843        5,845   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (53,036     (15,541
  

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

11


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)—Continued

(Dollars in Thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

   $ (484,965   $ (656,034

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     291,609        1,116,670   

Purchase of Interests from Certain Non-Controlling Interest Holders

     —          (6

Payments Under Tax Receivable Agreement

     (82,830     (86,733

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

     (57,763     (33,858

Excess Tax Benefits Related to Equity-Based Compensation

     68,481        19,320   

Proceeds from Loans Payable

     675,831        491,252   

Repayment and Repurchase of Loans Payable

     (3,657     (8,870

Distributions to Unitholders

     (2,918,104     (1,780,367

Blackstone Funds Related

    

Proceeds from Loans Payable

     1,325,299        567,635   

Repayment of Loans Payable

     (175,696     (1,569,528
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (1,361,795     (1,940,519
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (716     (72
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     (32,068     111,521   

Cash and Cash Equivalents, Beginning of Period

     1,412,472        831,998   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 1,380,404      $ 943,519   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 112,340      $ 98,931   
  

 

 

   

 

 

 

Payments for Income Taxes

   $ 111,891      $ 207,536   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

    

Non-Cash Contributions from Non-Controlling Interest Holders

   $ 1,051      $ 50,183   
  

 

 

   

 

 

 

Non-Cash Distributions to Non-Controlling Interest Holders

   $ (34   $ (53,959
  

 

 

   

 

 

 

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ (291   $ 13,533   
  

 

 

   

 

 

 

Net Assets Related to the Consolidation of CLO Vehicles

   $ —        $ 8,398   
  

 

 

   

 

 

 

Net Assets Related to the Consolidation of Certain Fund Entities

   $ —        $ 354,080   
  

 

 

   

 

 

 

Notes Issuance Costs

   $ 5,269      $ 4,375   
  

 

 

   

 

 

 

Transfer of Interests to Non-Controlling Interest Holders

   $ (4,644   $ (3,465
  

 

 

   

 

 

 

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

   $ 93,847      $ 3,168   
  

 

 

   

 

 

 

Net Settlement of Vested Common Units

   $ 135,133      $ 64,295   
  

 

 

   

 

 

 

Conversion of Blackstone Holdings Partnership Units to Common Units

   $ 116,560      $ 88,946   
  

 

 

   

 

 

 

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

   $ (140,110   $ (88,479
  

 

 

   

 

 

 

Due to Affiliates

   $ 118,061      $ 69,169   
  

 

 

   

 

 

 

Partners’ Capital

   $ 22,049      $ 19,310   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

12


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

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

 

1. ORGANIZATION

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

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

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in audited financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.

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

All intercompany balances and transactions have been eliminated in consolidation.

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

 

13


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Consolidation

The Partnership consolidates all entities that it controls through a majority voting interest or otherwise, including those Blackstone Funds in which the general partner has a controlling financial interest. The Partnership has a controlling interest in Blackstone Holdings because the limited partners do not have the right to dissolve the partnerships or have substantive kick out rights or participating rights. Accordingly, the Partnership consolidates Blackstone Holdings and records non-controlling interests to reflect the economic interests of the limited partners of Blackstone Holdings.

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

The Partnership determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continually. In evaluating whether the Partnership is the primary beneficiary, Blackstone evaluates its economic interests in the entity held either directly or indirectly by the Partnership. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Partnership is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Partnership, affiliates of the Partnership or third parties) or amendments to the governing documents of the respective Blackstone Funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

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

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

Fair Value of Financial Instruments

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

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

 

   

Level I — Quoted prices are available in active markets for identical financial instruments as of the reporting date. The types of financial instruments in Level I include listed equities, listed derivatives and

 

14


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

 

mutual funds with quoted prices. The Partnership does not adjust the quoted price for these investments, even in situations where Blackstone holds a large position and a sale could reasonably impact the quoted price.

 

   

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Financial instruments which are generally included in this category include corporate bonds and loans, including corporate bonds and loans held within CLO vehicles, government and agency securities, less liquid and restricted equity securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Upon adoption of the new CLO measurement guidance adopted as of January 1, 2015, senior and subordinate notes issued by CLO vehicles are classified within Level II of the fair value hierarchy.

 

   

Level III — Pricing inputs are unobservable for the financial instruments and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partnership interests in private equity and real estate funds, credit-focused funds, distressed debt and non-investment grade residual interests in securitizations, certain corporate bonds and loans held within CLO vehicles, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. For periods prior to the adoption of new CLO measurement guidance, senior and subordinate notes issued by CLO vehicles are classified within Level III of the fair value hierarchy.

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

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

Level II Valuation Techniques

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

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

 

   

Debt Instruments and Equity Securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices and market transactions in comparable investments and various relationships between investments. The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction.

 

   

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

 

15


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

   

Upon adoption of the new CLO measurement guidance adopted as of January 1, 2015, senior and subordinate notes issued by CLO vehicles are classified based on the more observable fair value of CLO assets less (a) the fair value of any beneficial interests held by Blackstone, and (b) the carrying value of any beneficial interests that represent compensation for services.

Level III Valuation Techniques

In the absence of observable market prices, Blackstone values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist; management’s determination of fair value is then based on the best information available in the circumstances, and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, certain funds of hedge funds and credit-focused investments.

Private Equity Investments — The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are based on unaudited information at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (for example, multiplying a key performance metric of the investee company, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to EBITDA or price/earnings exit multiples.

Real Estate Investments — The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs, among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or assets (for example, multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to an exit EBITDA multiple or cap rate. Additionally, where applicable, projected distributable cash flow through debt maturity will be considered in support of the investment’s fair value.

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

Credit-Focused Liabilities — Credit-focused liabilities comprise senior and subordinate loans issued by Blackstone’s consolidated CLO vehicles. Such liabilities have historically been valued using a discounted cash flow method. On the adoption of new accounting guidance as of January 1, 2015 and the application of a permitted measurement alternative, such liabilities are valued based on the more observable fair value of related assets held by CLO vehicles less (a) the fair value of any beneficial interests held by Blackstone and (b) the carrying value of any beneficial interest that represent compensation for services.

 

16


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Level III Valuation Process

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

Investments, at Fair Value

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

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

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

In addition, the Partnership has elected the fair value option for the assets and liabilities of CLO vehicles that are consolidated as of January 1, 2010, as a result of the initial adoption of variable interest entity consolidation guidance. The Partnership has also elected the fair value option for CLO vehicles consolidated as a result of the acquisitions of CLO management contracts or the acquisition of the share capital of CLO managers. Historically, the adjustment resulting from the difference between the fair value of assets and liabilities for each of these events was presented as a transition and acquisition adjustment to Appropriated Partners’ Capital. Assets of the consolidated

 

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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)

 

CLOs are presented within Investments within the Condensed Consolidated Statements of Financial Condition and Liabilities within Loans Payable for the amounts due to unaffiliated third parties and Due to Affiliates for the amounts held by non-consolidated affiliates. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income subsequent to adoption and acquisition are presented within Net Gains (Losses) from Fund Investment Activities. Expenses of consolidated CLO vehicles are presented in Fund Expenses. Historically, amounts attributable to Non-Controlling Interests in Consolidated Entities had a corresponding adjustment to Appropriated Partners’ Capital. On the adoption of the new CLO measurement guidance, there is no attribution of amounts to Non-Controlling Interests and no corresponding adjustment to Appropriated Partners’ Capital.

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

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

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

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

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

Equity Method Investments

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

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Reverse Repurchase and Repurchase Agreements

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

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

The Partnership takes possession of securities purchased under reverse repurchase agreements and is permitted to repledge, deliver or otherwise use such securities. The Partnership also pledges its financial instruments to counterparties to collateralize repurchase agreements. Financial instruments pledged that can be repledged, delivered or otherwise used by the counterparty are recorded in Investments in the Condensed Consolidated Statements of Financial Condition. Additional disclosures relating to reverse repurchase and repurchase agreements are discussed in Note 10. “Reverse Repurchase and Repurchase Agreements”.

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

Securities Sold, Not Yet Purchased

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

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

Derivative Instruments

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

 

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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)

 

are excluded from the assessment of hedge effectiveness, are recognized in current period earnings. Gains or losses on a derivative instrument that is designated as, and is effective as, an economic hedge of a net investment in a foreign operation are reported in the cumulative translation adjustment section of other comprehensive income to the extent it is effective as a hedge. The ineffective portion of a net investment hedge is recognized in current period earnings.

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

For freestanding derivative contracts, the Partnership presents changes in fair value in current period earnings. Changes in the fair value of derivative instruments held by consolidated Blackstone Funds are reflected in Net Gains (Losses) from Fund Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The fair value of freestanding derivative assets are recorded within Investments and freestanding derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

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

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

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

Affiliates

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

Distributions

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

Recent Accounting Developments

In June 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on revenue from contracts with customers. The guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to

 

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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)

 

be entitled in exchange for those goods or services. An entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, an entity may include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.

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

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

In August 2015, the FASB issued new guidance deferring the effective date of the new revenue recognition standard by one year. The new guidance should be applied for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

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

The accounting guidance is effective for the first interim or annual period beginning after December 15, 2014. Adoption did not have a material impact on Blackstone’s financial statements. The amended disclosure guidance is effective for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The amended disclosure requirements are presented in Note 10. “Reverse Repurchase and Repurchase Agreements”. Adoption did not have a material impact on Blackstone’s financial statements.

In August 2014, the FASB issued amended guidance on the measurement of financial assets and financial liabilities of a consolidated collateralized financing entity. Under the amended guidance, a reporting entity that consolidates a collateralized financing entity may elect to measure the financial assets and the financial liabilities using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. When this measurement alternative is elected, a reporting entity’s consolidated net income (loss) should reflect the reporting entity’s own economic interest in the collateralized financing entity, including (a) changes in the fair value of the beneficial interests retained by the reporting entity and (b) beneficial interests that represent compensation for services. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of the annual period. The Partnership adopted the amended guidance for the quarter ended June 30, 2015 and applied a modified retrospective approach as

 

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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 January 1, 2015. As a result, prior periods have not been impacted. The guidance impacted the measurement of the financial liabilities of Blackstone’s consolidated CLOs. Adoption did not have a material impact on Blackstone’s financial statements.

In February 2015, the FASB issued amended guidance on consolidation. The amended guidance modifies the analysis that companies must perform in order to determine whether a legal entity should be consolidated. The amended guidance simplifies current consolidation rules by (a) reducing the number of consolidation models, (b) eliminating the risk that a reporting entity may have to consolidate a legal entity solely based on a fee arrangement with another legal entity, (c) placing more weight on the risk of loss in order to identify the party that has a controlling financial interest, (d) reducing the number of instances that related party guidance needs to be applied when determining the party that has a controlling financial interest, and changing rules for companies in certain industries that ordinarily employ limited partnership or VIE structures. The amended guidance is effective for public entities for interim and annual periods beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Partnership adopted the guidance for the quarter ended June 30, 2015 and applied a modified retrospective approach as of January 1, 2015. As a result, prior periods have not been impacted. As a result of adoption, certain Blackstone Funds were deconsolidated as of January 1, 2015 resulting in a reduction in consolidated assets and liabilities as of January 1, 2015 of $8.0 billion and $4.7 billion, respectively. The impact of adoption on Redeemable Non-Controlling Interests in Consolidated Entities, Appropriated Partners’ Capital, and Non-Controlling Interests in Consolidated Entities as of January 1, 2015 was a reduction of $2.3 billion, $90.9 million and $1.0 billion, respectively. Adoption of the amended guidance had no impact on Net Income Attributable to The Blackstone Group L.P.

In April 2015, the FASB issued amended guidance to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an Other Asset, consistent with debt discounts. The amendments are effective for fiscal years beginning after December 15, 2015 and interim periods within those years. Early adoption is permitted for financial statements that have not previously been issued. The Partnership adopted the guidance as of June 30, 2015 and applied the guidance retrospectively. Adoption of the amended guidance did not have a material impact on Blackstone’s financial statements.

In August 2015, the FASB issued clarifying guidance on the presentation and subsequent measurement of debt issuance costs associated with the line of credit arrangements. An entity may defer and present debt issuance costs as assets and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective immediately. The guidance did not have a material impact on Blackstone’s consolidated financial statements.

In May 2015, the FASB issued amended guidance on the disclosures for investments in certain entities that calculate NAV per share (or its equivalent). The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.

The guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those years. Early application is permitted. Blackstone adopted the guidance for the quarter ended June 30, 2015 and applied the guidance retrospectively. Adoption of the guidance did not have a material impact on Blackstone’s financial statements.

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

3. INTANGIBLE ASSETS

Intangible Assets, Net consists of the following:

 

     September 30,
2015
     December 31,
2014
 

Finite-Lived Intangible Assets/Contractual Rights

   $ 1,464,017       $ 1,464,017   

Accumulated Amortization

     (1,083,714      (1,005,184
  

 

 

    

 

 

 

Intangible Assets, Net

   $ 380,303       $ 458,833   
  

 

 

    

 

 

 

Amortization expense associated with Blackstone’s intangible assets was $29.5 million and $77.9 million for the three and nine month periods ended September 30, 2015, respectively, and $25.1 million and $76.9 million for the three and nine month periods ended September 30, 2014, respectively.

Amortization of Intangible Assets held at September 30, 2015 is expected to be $95.6 million, $85.6 million, $46.5 million, $46.5 million, and $46.4 million for each of the years ending December 31, 2015, 2016, 2017, 2018, and 2019, respectively. Blackstone’s intangible assets as of September 30, 2015 are expected to amortize over a weighted-average period of 6.5 years.

 

4. INVESTMENTS

Investments consists of the following:

 

     September 30,
2015
     December 31,
2014
 

Investments of Consolidated Blackstone Funds

   $ 4,743,145       $ 11,375,407   

Equity Method Investments

     3,017,850         3,240,825   

Blackstone’s Treasury Cash Management Strategies

     2,158,590         1,666,061   

Performance Fees

     5,220,114         6,337,045   

Other Investments

     159,056         146,251   
  

 

 

    

 

 

 
   $ 15,298,755       $ 22,765,589   
  

 

 

    

 

 

 

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $454.4 million and $704.9 million at September 30, 2015 and December 31, 2014, respectively.

Investments of Consolidated Blackstone Funds

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
          2015                 2014                 2015                 2014        

Realized Gains

  $ 51,150      $ 32,427      $ 178,662      $ 66,366   

Net Change in Unrealized Losses

    (102,340     (71,525     (100,597     (30,406
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    (51,190     (39,098     78,065        35,960   

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

    34,323        47,780        80,638        181,462   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (16,867   $ 8,682      $ 158,703      $ 217,422   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Equity Method Investments

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

Blackstone evaluates each of its equity method investments to determine if any were significant as defined by guidance from the United States Securities and Exchange Commission. As of and for the nine months ended September 30, 2015 and 2014, no individual equity method investment held by Blackstone met the significance criteria. As such, Blackstone is not required to present summarized financial information for any of its equity method investments.

The Partnership recognized net gains (losses) related to its equity method investments of $(89.7) million and $97.1 million for the three months ended September 30, 2015 and 2014, respectively. The Partnership recognized net gains related to its equity method investments of $91.9 million and $330.1 million for the nine months ended September 30, 2015 and 2014, respectively.

Blackstone’s Treasury Cash Management Strategies

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2015                     2014                     2015                     2014          

Realized Gains (Losses)

   $ (3,003   $ 2,142      $ (6,606   $ 6,307   

Net Change in Unrealized Gains (Losses)

     (8,984     (14,541     (12,922     1,551   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (11,987   $ (12,399   $ (19,528   $ 7,858   
  

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees

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

 

     Private
Equity
    Real
Estate
    Hedge Fund
Solutions
    Credit     Total  

Performance Fees, December 31, 2014

   $ 2,215,584      $ 3,721,751      $ 15,031      $ 384,679      $ 6,337,045   

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

     595,918        882,083        29,019        9,574        1,516,594   

Foreign Exchange Loss

     —          (20,321     —          —          (20,321

Fund Distributions

     (1,164,109     (1,334,908     (12,526     (101,661     (2,613,204
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees, September 30, 2015

   $ 1,647,393      $ 3,248,605      $ 31,524      $ 292,592      $ 5,220,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2015                     2014                     2015                     2014          

Realized Gains (Losses)

   $ 1,282      $ (460   $ 1,274      $ 5,152   

Net Change in Unrealized Gains (Losses)

     (2,779     239        (3,233     (6,252
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (1,497   $ (221   $ (1,959   $ (1,100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

5. NET ASSET VALUE AS FAIR VALUE

A summary of fair value by strategy type alongside the remaining unfunded commitments and ability to redeem such investments as of September 30, 2015 is presented below:

 

Strategy

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

Diversified Instruments

   $ 95,927       $ —         (a)   (a)

Credit Driven

     271,999         —         (b)   (b)

Event Driven

     60,296         —         (c)   (c)

Equity

     244         —         (d)   (d)

Commodities

     2,454         —         (e)   (e)
  

 

 

    

 

 

      
   $ 430,920       $ —          
  

 

 

    

 

 

      

 

(a) Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 15% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. The remaining 85% of investments in this category are redeemable as of the reporting date.
(b) The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 34% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 62% of the fair value of the investments in this category are redeemable as of the reporting date. Investments representing 4% of the total fair value in the credit driven category are subject to redemption restrictions such as the investee fund manager’s ability to limit the amount of redemptions.
(c) The Event Driven category includes investments in hedge funds whose primary investing strategy is to identify certain event-driven investments. Withdrawals are generally not permitted for the investments in this category. Distributions will be received as the underlying investments are liquidated.
(d) The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Withdrawals are generally not permitted for the investments in this category. Distributions will be received as the underlying investments are liquidated.
(e) The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Withdrawals are generally not permitted for the investments in this category. Distributions will be received as the underlying investments are liquidated.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

6. DERIVATIVE FINANCIAL INSTRUMENTS

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

Net Investment Hedges

To manage the potential exposure from adverse changes in currency exchange rates arising from Blackstone’s net investment in foreign operations, during December 2014, Blackstone entered into several foreign currency forward contracts to hedge a portion of the net investment in Blackstone’s non-U.S. dollar denominated foreign operations.

Blackstone uses foreign currency forward contracts to hedge portions of Blackstone’s net investments in foreign operations. The gains and losses due to change in fair value attributable to changes in spot exchange rates on foreign currency derivatives designated as net investment hedges were recognized in Other Comprehensive Income (Loss), Net of Tax — Currency Translation Adjustment. For the three months ended September 30, 2015 the resulting loss was $0.1 million. For the nine months ended September 30, 2015, the resulting gain was $5.2 million.

Freestanding Derivatives

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

 

26


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

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

 

    September 30, 2015     December 31, 2014  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
 

Net Investment Hedges

               

Foreign Currency Contracts

  $ 140      $ —        $ 56,008      $ 244      $ 62,078      $ 523      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

               

Blackstone — Other Interest Rate Contracts

    1,510,139        1,260        1,557,240        11,834        223,886        407        879,412        4,590   

Foreign Currency Contracts

    181,335        2,443        210,855        1,849        192,163        2,798        148,873        681   

Credit Default Swaps

    —          —          74,000        6,413        19,500        85        56,000        868   

Investments of Consolidated Blackstone Funds

               

Foreign Currency Contracts

    97,169        2,345        107,632        5,975        199,364        8,915        250,244        21,875   

Interest Rate Contracts

    —          —          —          —          22,659        2,281        —          —     

Credit Default Swaps

    —          —          87,088        4,454        —          —          91,372        2,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,788,643        6,048        2,036,815        30,525        657,572        14,486        1,425,901        30,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,788,783      $ 6,048      $ 2,092,823      $ 30,769      $ 719,650      $ 15,009      $ 1,425,901      $ 30,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2015                     2014                     2015                     2014          

Net Investment Hedges — Foreign Currency Contracts

        

Hedge Ineffectiveness

   $ —        $ —        $ 229      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

        

Realized Gains (Losses)

        

Interest Rate Contracts

   $ (2,076   $ 2,482      $ (7,169   $ 1,079   

Foreign Currency Contracts

     53        4,327        8,956        1,346   

Credit Default Swaps

     646        763        4,427        2,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1,377   $ 7,572      $ 6,214      $ 4,470   
  

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

        

Net Change in Unrealized Gains (Losses)

        

Interest Rate Contracts

   $ (7,282   $ (111   $ (3,321   $ (4,384

Foreign Currency Contracts

     1,796        (5,253     (6,449     (27,197

Credit Default Swaps

     (3,319     (1,060     (8,710     3,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (8,805   $ (6,424   $ (18,480   $ (27,843
  

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

As of September 30, 2015 and December 31, 2014, the Partnership had not designated any derivatives as cash flow hedges.

 

7. FAIR VALUE OPTION

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

 

     September 30,
2015
     December 31,
2014
 

Assets

     

Loans and Receivables

   $ 179,255       $ 40,397   

Equity and Preferred Securities

     271,905         102,907   

Debt Securities

     15,260         —     

Assets of Consolidated CLO Vehicles

     

Corporate Loans

     3,194,584         6,279,592   

Corporate Bonds

     351,674         292,690   

Other

     —           44,513   
  

 

 

    

 

 

 
   $ 4,012,678       $ 6,760,099   
  

 

 

    

 

 

 

Liabilities

     

Liabilities of Consolidated CLO Vehicles

     

Senior Secured Notes

   $ 3,244,579       $ 6,448,352   

Subordinated Notes

     111,029         348,752   
  

 

 

    

 

 

 
   $ 3,355,608       $ 6,797,104   
  

 

 

    

 

 

 

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

 

     Three Months Ended September 30,  
     2015     2014  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ (1,235   $ —        $ —     

Equity and Preferred Securities

     (36     (3,749     (468     (5,870

Debt Securities

     —          (342     —          —     

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     2,578        (38,888     384        (41,569

Corporate Bonds

     (988     (4,578     174        (4,069

Other

     1,003        (305     7,620        (1,032
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,557      $ (49,097   $ 7,710      $ (52,540
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ —        $ —        $ (1,822   $ (38,651

Subordinated Notes

     —          34,235        —          22,731   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ 34,235      $ (1,822   $ (15,920
  

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

     Nine Months Ended September 30,  
     2015     2014  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ (1,832   $ —        $ —     

Equity and Preferred Securities

     (273     (11,240     (1,791     44   

Debt Securities

     —          (342     —          —     

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     (2,269     1,993        (64,251     7,388   

Corporate Bonds

     (867     (62     (2,012     (375

Other

     4,276        (3,636     20,914        18,523   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 867      $ (15,119   $ (47,140   $ 25,580   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles

        

Senior Secured Notes

   $ —        $ —        $ (5,914   $ (134,289

Subordinated Notes

     —          23,997        —          78,345   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ 23,997      $ (5,914   $ (55,944
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     September 30, 2015     December 31, 2014  
           For Financial Assets
Past Due (a)
          For Financial Assets Past
Due (a)
 
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
    Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
(Deficiency)
of Fair Value
Over Principal
 

Loans and Receivables

   $ (7,303   $ —         $ —        $ (5,323   $ —         $ —     

Debt Securities

     (342     —           —          —          —           —     

Assets of Consolidated CLO Vehicles

              

Corporate Loans

     (36,356     318         (5,897     (197,580     4,369         (21,876

Corporate Bonds

     (7,449     —           —          (7,814     —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ (51,450   $ 318       $ (5,897   $ (210,717   $ 4,369       $ (21,876
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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

As of December 31, 2014, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of September 30, 2015 and December 31, 2014, no Corporate Bonds included within the Assets of Consolidated CLO Vehicles for which the fair value option was elected were past due or in non-accrual status.

 

29


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

8. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

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

 

    September 30, 2015  
    Level I     Level II     Level III     NAV     Total  

Assets

         

Investments of Consolidated Blackstone Funds (a)

         

Investment Funds

  $ —        $ —        $ —        $ 154,183      $ 154,183   

Equity Securities

    65,038        53,506        92,311        —          210,855   

Partnership and LLC Interests

    —          118,342        507,939        —          626,281   

Debt Instruments

    —          171,179        32,044        —          203,223   

Assets of Consolidated CLO Vehicles

         

Corporate Loans

    —          2,992,996        201,588        —          3,194,584   

Corporate Bonds

    —          347,700        3,974        —          351,674   

Freestanding Derivatives — Foreign Currency Contracts

    —          2,345        —          —          2,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments of Consolidated Blackstone Funds

    65,038        3,686,068        837,856        154,183        4,743,145   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Blackstone’s Treasury Cash Management Strategies

         

Investment Funds

    235,427        —          —          —          235,427   

Equity Securities

    242,534        —          —          —          242,534   

Debt Instruments

    —          1,385,369        44,593        117,790        1,547,752   

Other

    —          —          —          132,877        132,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Blackstone’s Treasury Cash Management Strategies

    477,961        1,385,369        44,593        250,667        2,158,590   

Money Market Funds

    308,504        —          —          —          308,504   

Freestanding Derivatives

         

Interest Rate Contracts

    661        599        —          —          1,260   

Foreign Currency Contracts

    —          2,443        —          —          2,443   

Loans and Receivables

    —          —          179,255        —          179,255   

Other Investments

    29,282        —          103,704        26,070        159,056   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 881,446      $ 5,074,479      $ 1,165,408      $ 430,920      $ 7,552,253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     September 30, 2015  
      Level I      Level II      Level III      Total  

Liabilities

           

Liabilities of Consolidated Funds and CLO Vehicles (a)

           

Senior Secured Notes (b)

   $ —         $ 3,244,579       $ —         $ 3,244,579   

Subordinated Notes (b)

     —           111,029         —           111,029   

Freestanding Derivatives — Foreign Currency Contracts

     —           5,975         —           5,975   

Freestanding Derivatives — Credit Default Swaps

     —           4,454         —           4,454   

Net Investment Hedges — Foreign Currency Contracts

     —           244         —           244   

Freestanding Derivatives

           

Interest Rate Contracts

     3,827         8,007         —           11,834   

Foreign Currency Contracts

     —           1,849         —           1,849   

Credit Default Swaps

     —           6,413         —           6,413   

Securities Sold, Not Yet Purchased

     —           173,707         —           173,707   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,827       $ 3,556,257       $ —         $ 3,560,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

    December 31, 2014  
    Level I     Level II     Level III     NAV     Total  

Assets

         

Investments of Consolidated Blackstone Funds (a)

         

Investment Funds

  $ —        $ —        $ —        $ 1,103,210      $ 1,103,210   

Equity Securities

    58,934        114,115        179,311        —          352,360   

Partnership and LLC Interests

    —          187,140        1,496,422        —          1,683,562   

Debt Instruments

    —          1,502,314        105,970        —          1,608,284   

Assets of Consolidated CLO Vehicles

         

Corporate Loans

    —          5,691,517        588,075        —          6,279,592   

Corporate Bonds

    —          292,690        —          —          292,690   

Freestanding Derivatives — Foreign Currency Contracts

    —          8,915        —          —          8,915   

Freestanding Derivatives — Interest Rate Contracts

    —          2,281        —          —          2,281   

Other

    13        19,455        25,045        —          44,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments of Consolidated Blackstone Funds

    58,947        7,818,427        2,394,823        1,103,210        11,375,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Blackstone’s Treasury Cash Management Strategies

         

Investment Funds

    307,111        —          —          —          307,111   

Equity Securities

    71,746        —          —          —          71,746   

Debt Instruments

    —          1,090,794        84,894        50,507        1,226,195   

Other

    —          —          —          61,009        61,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Blackstone’s Treasury Cash Management Strategies

    378,857        1,090,794        84,894        111,516        1,666,061   

Money Market Funds

    198,278        —          —          —          198,278   

Net Investment Hedges — Foreign Currency Contracts

    —          523        —          —          523   

Freestanding Derivatives

         

Interest Rate Contracts

    263        144        —          —          407   

Foreign Currency Contracts

    —          2,798        —          —          2,798   

Credit Default Swaps

    —          85        —          —          85   

Loans and Receivables

    —          —          40,397        —          40,397   

Other Investments

    31,731        436        104,491        9,593        146,251   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 668,076      $ 8,913,207      $ 2,624,605      $ 1,224,319      $ 13,430,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2014  
    Level I     Level II     Level III     Total  

Liabilities

       

Liabilities of Consolidated Funds and CLO Vehicles (a)

       

Senior Secured Notes

  $ —        $ —        $ 6,448,352      $ 6,448,352   

Subordinated Notes

    —          —          348,752        348,752   

Freestanding Derivatives — Foreign Currency Contracts

    —          21,875        —          21,875   

Freestanding Derivatives — Credit Default Swaps

    —          2,514        —          2,514   

Freestanding Derivatives

       

Interest Rate Contracts

    1,357        3,233        —          4,590   

Foreign Currency Contracts

    —          681        —          681   

Credit Default Swaps

    —          868        —          868   

Securities Sold, Not Yet Purchased

    —          85,878        —          85,878   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,357      $ 115,049      $ 6,797,104      $ 6,913,510   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

 

(a) Pursuant to GAAP consolidation guidance, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including certain CLO vehicles, and other funds in which a consolidated entity of the Partnership, as the general partner of the fund, is presumed to have control. While the Partnership is required to consolidate certain funds, including CLO vehicles, for GAAP purposes, the Partnership has no ability to utilize the assets of these funds and there is no recourse to the Partnership for their liabilities since these are client assets and liabilities.
(b) Senior and subordinate notes issued by CLO vehicles are classified based on the more observable fair value of CLO assets less (a) the fair value of any beneficial interests held by Blackstone, and (b) the carrying value of any beneficial interests that represent compensation for services.

The following table summarizes the fair value transfers between Level I and Level II for positions that existed as of September 30, 2015 and 2014, respectively:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
           2015                  2014                  2015                  2014        

Transfers from Level I into Level II (a)

   $ 287       $ —         $ 287       $ —     

Transfers from Level II into Level I (b)

   $ 26,534       $ —         $ 32,312       $ 67,327   

 

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

 

32


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of September 30, 2015:

 

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

Financial Assets

         

Investments of Consolidated Blackstone Funds

         

Equity Securities

  $ 70,957      Discounted Cash Flows   Discount Rate   7.8% - 25.0%   13.2%
      Revenue CAGR   -5% - 60.6%   8.1%
      Exit Multiple - EBITDA   5.0x - 18.2x   9.6x
      Exit Multiple - P/E   10.5x - 17.0x   11.0x
    15,683      Transaction Price   N/A   N/A   N/A
    166      Market Comparable Companies   EBITDA Multiple   6.7x - 7.3x   6.8x
    58      Third Party Pricing   N/A   N/A   N/A
    5,447      Other   N/A   N/A   N/A

Partnership and LLC Interests

    465,131      Discounted Cash Flows   Discount Rate   4.4% - 25.7%   9.4%
      Revenue CAGR   -5.8% - 35.6%   8.0%
      Exit Multiple - EBITDA   0.2x - 23.3x   10.5x
      Exit Capitalization Rate   2.6% - 10.5%   6.3%
    28,185      Transaction Price   N/A   N/A   N/A
    12,410      Third Party Pricing   N/A   N/A   N/A
    1,907      Other   N/A   N/A   N/A
    306      Market Comparable   EBITDA Multiple   0.4x   N/A
    Companies      

Debt Instruments

    9,994      Discounted Cash Flows   Discount Rate   6.5% - 37.1%   14.5%
      Revenue CAGR   7.2% - 20.0%   16.3%
      Exit Multiple - EBITDA   6.3x - 12.0x   10.4x
      Exit Capitalization Rate   1.0% - 4.8%   2.2%
    19,742      Third Party Pricing   N/A   N/A   N/A
    2,043      Transaction Pricing   N/A   N/A   N/A
    265      Market Comparable Companies   EBITDA Multiple   6.4x   N/A

Assets of Consolidated CLO Vehicles

    120,373      Third Party Pricing   N/A   N/A   N/A
    84,872      Market Comparable Companies   EBITDA Multiple   3.7x - 9.0x   6.1x
    317      Other
  N/A   N/A   N/A
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    837,856       

 

continued ....

 

33


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

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

Blackstone’s Treasury Cash Management Strategies

  $ 34,376      Discounted Cash Flows                Default Rate   1.1% - 2.0%   1.9%
      Recovery Rate   30.0% - 70.0%   66.6%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0% - 30.0%   25.4%
      Reinvestment Rate   LIBOR + 350 bps   LIBOR + 396 bps
        LIBOR + 400 bps  
      Discount Rate   5.8% - 13.0%   7.5%
    10,217      Third Party Pricing   N/A   N/A   N/A

Loans and Receivables

    158,180      Discounted Cash Flows   Discount Rate   11.9% - 16.0%   12.3%
    21,075      Third Party Pricing   N/A   N/A   N/A

Other Investments

    85,404      Discounted Cash Flows   Discount Rate   1.4% - 12.5%   3.1%
      Default Rate   2.0%   N/A
      Recovery Rate   70.0%   N/A
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
    453      Market Comparable Companies   EBITDA Multiple   7.0x   N/A
    17,847      Transaction Price   N/A   N/A   N/A
 

 

 

         

Total

  $ 1,165,408           
 

 

 

         

 

34


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of December 31, 2014:

 

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

Financial Assets

         

Investments of Consolidated Blackstone Funds

         

Equity Securities

  $ 106,727      Discounted Cash Flows   Discount Rate   8.4% - 24.7%   11.8%
      Revenue CAGR   0.7% - 24.4%   7.1%
      Exit Multiple - EBITDA   5.0x - 13.0x   10.1x
      Exit Multiple - P/E   10.5x - 17.0x   11.2x
    67,706      Transaction Price   N/A   N/A   N/A
    163      Market Comparable Companies   EBITDA Multiple   6.7x - 7.6x   6.9x
    45      Third Party Pricing   N/A   N/A   N/A
    4,670      Other   N/A   N/A   N/A

Partnership and LLC Interests

    485,748      Discounted Cash Flows   Discount Rate   4.4% - 21.5%   9.5%
      Revenue CAGR   -4.4% - 41.7%   6.5%
      Exit Multiple - EBITDA   1.0x - 19.1x   9.7x
      Exit Capitalization Rate   2.0% - 19.1%   6.8%
    996,199      Transaction Price   N/A   N/A   N/A
    13,793      Third Party Pricing   N/A   N/A   N/A
    682      Other   N/A   N/A   N/A

Debt Instruments

    9,570      Discounted Cash Flows   Discount Rate   8.8% - 24.7%   16.1%
      Revenue CAGR   4.7% - 6.8%   5.0%
      Exit Multiple - EBITDA   5.9x - 11.3x   11.0x
      Exit Capitalization Rate   1.0% - 12.4%   9.3%
      Default Rate   2%   N/A
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
    95,542      Third Party Pricing   N/A   N/A   N/A
    686      Transaction Price   N/A   N/A   N/A
    172      Market Comparable   EBITDA Multiple   6.6x - 7.9x   6.6x
    Companies      

Assets of Consolidated CLO Vehicles

    318,636      Third Party Pricing   N/A   N/A   N/A
    290,658      Market Comparable   EBITDA Multiple   3.8x - 15.0x   6.1x
    Companies      
    3,826      Discounted Cash Flows   Discount Rate   8.0%   N/A
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    2,394,823           

 

continued …

 

35


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

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

Blackstone’s Treasury Cash Management Strategies

  $ 26,167      Discounted Cash Flows   Default Rate   1.0%   N/A
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   30.0%   N/A
      Reinvestment Rate   LIBOR + 450 bps   N/A
      Discount Rate   5.8% - 10.0%   7.2%
    54,257      Third Party Pricing   N/A   N/A   N/A
    4,470      Transaction Price   N/A   N/A   N/A

Loans and Receivables

    26,247      Discounted Cash Flows   Discount Rate   10.5% - 12.2%   10.9%
    14,150      Transaction Price   N/A   N/A   N/A

Other Investments

    11,887      Transaction Price   N/A   N/A   N/A
    92,604      Discounted Cash Flows   Discount Rate   1.3% - 12.5%   2.9%
      Default Rate   2.0%   N/A
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Reinvestment Rate   LIBOR + 400 bps   N/A
 

 

 

         

Total

  $ 2,624,605           
 

 

 

         

Financial Liabilities

         

Liabilities of Consolidated CLO Vehicles

  $ 6,797,104      Discounted Cash Flows   Default Rate   2.0%   N/A
 

 

 

         
      Recovery Rate   30.0% - 70.0%   66.0%
      Recovery Lag   12 months   N/A
      Pre-payment Rate   20.0%   N/A
      Discount Rate   0.3% - 19.3%   2.3%
      Reinvestment Rate   LIBOR + 400 bps   N/A

 

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

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

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

 

36


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Since December 31, 2014, there have been no changes in valuation techniques within Level II and Level III that have had a material impact on the valuation of financial instruments.

The following tables summarize the changes in financial assets and liabilities measured at fair value for which the Partnership has used Level III inputs to determine fair value and does not include gains or losses that were reported in Level III in prior years or for instruments that were transferred out of Level III prior to the end of the respective reporting period. Total realized and unrealized gains and losses recorded for Level III investments are reported in Investment Income (Loss) and Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations.

 

    Level III Financial Assets at Fair Value
Three Months Ended September 30,
 
    2015     2014  
    Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (c)
    Total     Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (c)
    Total  

Balance, Beginning of Period

  $ 937,149      $ 36,440      $ 151,734      $ 1,125,323      $ 2,260,856      $ 42,725      $ 167,516      $ 2,471,097   

Transfer Out Due to Deconsolidation

    —          —          —          —          (64,634     —          —          (64,634

Transfer In to Level III (b)

    43,920        —          5,194        49,114        161,332        —          20,452        181,784   

Transfer Out of Level III (b)

    (143,531     —          (9,171     (152,702     (212,108     —          (9,913     (222,021

Purchases

    122,676        144,058        5,240        271,974        165,838        69,255        19,914        255,007   

Sales

    (139,229     —          (2,792     (142,021     (190,383     (42,261     (6,736     (239,380

Settlements

    —          (1,405     (140     (1,545     —          (526     (123     (649

Changes in Gains (Losses) Included in Earnings and Other Comprehensive Income (Loss)

    16,871        162        (1,768     15,265        11,581        601</