Quarterly Report
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, 2016

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 November 2, 2016 was 571,989,912. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of November 2, 2016 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, 2016 and 2015:

  
  

Condensed Consolidated Statements of Financial Condition as of September 30, 2016 and December  31, 2015

     5   
  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2016 and 2015

     7   
  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015

     8   
  

Condensed Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2016 and 2015

     9   
  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2016 and 2015

     11   
  

Notes to Condensed Consolidated Financial Statements

     13   
ITEM 1A.   

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

     59   
ITEM 2.   

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

     61   
ITEM 3.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     129   
ITEM 4.   

CONTROLS AND PROCEDURES

     132   
PART II.   

OTHER INFORMATION

  
ITEM 1.   

LEGAL PROCEEDINGS

     134   
ITEM 1A.   

RISK FACTORS

     134   
ITEM 2.   

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     134   
ITEM 3.   

DEFAULTS UPON SENIOR SECURITIES

     135   
ITEM 4.   

MINE SAFETY DISCLOSURES

     135   
ITEM 5.   

OTHER INFORMATION

     135   
ITEM 6.   

EXHIBITS

     135   

SIGNATURES

        136   

 

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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, 2015 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 http://ir.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 focused funds), which we refer to collectively as our Blackstone Capital Partners (“BCP”) funds, our Blackstone Core Equity Partners (“BCEP”) fund, our opportunistic investment platform that invests globally across asset classes, industries and geographies, which we collectively refer to as Blackstone Tactical Opportunities (“Tactical Opportunities”), Strategic Partners Fund Solutions (“Strategic Partners”), a secondary private fund of funds business, Blackstone Total Alternatives Solution (“BTAS”), a multi-asset investment program for eligible high net worth investors offering exposure to certain of our key illiquid investment strategies through a single commitment, and our capital markets services business (“BXCM”). 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

 

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funds, which target substantially stabilized assets generating relatively stable cash flow, as Blackstone Property Partners (“BPP”) funds. We refer to our real estate investment trusts as “REITs” and to our listed REIT as “BXMT.” We refer to Blackstone Real Estate Income Trust, Inc., a non-listed REIT formed to invest primarily in stabilized income-oriented commercial real estate in the United States, as “BREIT.” “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.

“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, plus for certain credit-oriented funds the amounts available to be borrowed under asset based credit facilities,

 

  (b) the net asset value of our funds of hedge funds, hedge funds, open ended core+ real estate fund, certain registered investment companies, and BREIT,

 

  (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 BXMT.

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, hedge funds and funds structured like hedge funds in our Hedge Fund Solutions, Credit and Real Estate segments generally have structures that afford an investor the right to withdraw or redeem their interests on a periodic basis (for example, annually or quarterly), typically with 30 to 95 days’ notice, depending on the fund and the liquidity profile of the underlying assets. Investment advisory agreements related to certain separately managed accounts in our Hedge Fund Solutions and Credit segments 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, committed investable capital, 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, open ended core+ real estate fund, certain real estate separately managed accounts, certain registered investment companies, and BREIT,

 

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

 

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

 

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  (g) the aggregate par amount of collateral assets, including principal cash, of our CLOs, CDOs and certain credit focused separately managed accounts, and

 

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

Each of our segments includes certain Fee-Earning Assets Under Management on which we earn performance fees but not management fees.

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

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

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

 

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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,
2016
    December 31,
2015
 

Assets

    

Cash and Cash Equivalents

   $ 1,781,882      $ 1,837,324   

Cash Held by Blackstone Funds and Other

     1,108,967        587,132   

Investments (including assets pledged of $96,142 and $64,535 at September 30, 2016 and December 31, 2015, respectively)

     15,957,934        14,324,097   

Accounts Receivable

     506,892        613,153   

Reverse Repurchase Agreements

     89,326        204,893   

Due from Affiliates

     1,310,412        1,240,797   

Intangible Assets, Net

     278,219        345,547   

Goodwill

     1,718,519        1,718,519   

Other Assets

     373,479        377,189   

Deferred Tax Assets

     1,287,890        1,277,429   
  

 

 

   

 

 

 

Total Assets

   $ 24,413,520      $ 22,526,080   
  

 

 

   

 

 

 

Liabilities and Partners’ Capital

    

Loans Payable

   $ 7,244,634      $ 6,116,747   

Due to Affiliates

     1,309,901        1,282,700   

Accrued Compensation and Benefits

     2,292,718        2,029,918   

Securities Sold, Not Yet Purchased

     176,218        176,667   

Repurchase Agreements

     62,095        40,929   

Accounts Payable, Accrued Expenses and Other Liabilities

     973,919        648,662   
  

 

 

   

 

 

 

Total Liabilities

     12,059,485        10,295,623   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Redeemable Non-Controlling Interests in Consolidated Entities

     194,150        183,459   
  

 

 

   

 

 

 

Partners’ Capital

    

The Blackstone Group L.P. Partners’ Capital

    

Partners’ Capital (common units: 638,251,760 issued and outstanding as of September 30, 2016; 624,450,162 issued and outstanding as of December 31, 2015)

     6,344,792        6,322,307   

Accumulated Other Comprehensive Loss

     (47,470     (52,519
  

 

 

   

 

 

 

Total The Blackstone Group L.P. Partners’ Capital

     6,297,322        6,269,788   

Non-Controlling Interests in Consolidated Entities

     2,519,718        2,408,701   

Non-Controlling Interests in Blackstone Holdings

     3,342,845        3,368,509   
  

 

 

   

 

 

 

Total Partners’ Capital

     12,159,885        12,046,998   
  

 

 

   

 

 

 

Total Liabilities and Partners’ Capital

   $ 24,413,520      $ 22,526,080   
  

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands)

 

 

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

 

     September 30,
2016
     December 31,
2015
 

Assets

     

Cash Held by Blackstone Funds and Other

   $ 890,659       $ 435,775   

Investments

     5,402,121         4,558,216   

Accounts Receivable

     157,039         122,077   

Due from Affiliates

     25,088         25,561   

Other Assets

     3,582         12,693   
  

 

 

    

 

 

 

Total Assets

   $ 6,478,489       $ 5,154,322   
  

 

 

    

 

 

 

Liabilities

     

Loans Payable

   $ 4,443,181       $ 3,319,656   

Due to Affiliates

     106,401         39,532   

Securities Sold, Not Yet Purchased

     66,504         58,878   

Repurchase Agreements

     56,328         31,417   

Accounts Payable, Accrued Expenses and Other Liabilities

     403,109         226,203   
  

 

 

    

 

 

 

Total Liabilities

   $ 5,075,523       $ 3,675,686   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2016     2015     2016     2015  

Revenues

       

Management and Advisory Fees, Net

  $ 596,154      $ 703,596      $ 1,812,883      $ 1,894,496   
 

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees

       

Realized

       

Carried Interest

    503,990        435,189        1,058,633        2,580,266   

Incentive Fees

    30,295        33,455        88,155        110,775   

Unrealized

       

Carried Interest

    106,202        (1,055,920     242,080        (1,124,010

Incentive Fees

    30,545        (50,832     45,900        36,274   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Performance Fees

    671,032        (638,108     1,434,768        1,603,305   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income (Loss)

       

Realized

    119,351        99,952        172,387        445,705   

Unrealized

    23,752        (179,298     67,347        (262,024
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Income (Loss)

    143,103        (79,346     239,734        183,681   
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest and Dividend Revenue

    21,819        26,244        67,180        70,129   

Other

    (423     (813     1,900        (2,478
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    1,431,685        11,573        3,556,465        3,749,133   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

       

Compensation and Benefits

       

Compensation

    329,634        393,655        1,031,061        1,426,233   

Performance Fee Compensation

       

Realized

       

Carried Interest

    168,427        97,798        314,511        628,079   

Incentive Fees

    15,436        15,062        44,810        49,126   

Unrealized

       

Carried Interest

    70,044        (228,697     175,247        (204,876

Incentive Fees

    13,508        (14,641     19,645        16,450   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Compensation and Benefits

    597,049        263,177        1,585,274        1,915,012   

General, Administrative and Other

    124,322        158,664        378,355        436,496   

Interest Expense

    37,278        36,860        111,512        105,644   

Fund Expenses

    15,128        18,296        28,949        76,845   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    773,777        476,997        2,104,090        2,533,997   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Loss)

       

Net Gains (Losses) from Fund Investment Activities

    61,395        (16,867     111,240        158,703   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) Before Provision for Taxes

    719,303        (482,291     1,563,615        1,373,839   

Provision for Taxes

    27,714        1,573        84,275        144,168   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

    691,589        (483,864     1,479,340        1,229,671   

Net Income (Loss) Attributable to Redeemable

       

Non-Controlling Interests in Consolidated Entities

    10,764        (12,520     2,314        8,787   

Net Income Attributable to Non-Controlling

       

Interests in Consolidated Entities

    82,653        30,671        187,468        179,183   

Net Income (Loss) Attributable to Non-Controlling

       

Interests in Blackstone Holdings

    285,267        (247,318     618,274        532,782   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 312,905      $ (254,697   $ 671,284      $ 508,919   
 

 

 

   

 

 

   

 

 

   

 

 

 

Distributions Declared Per Common Unit

  $ 0.36      $ 0.74      $ 1.25      $ 2.41   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Per Common Unit

       

Common Units, Basic

  $ 0.48      $ (0.40   $ 1.04      $ 0.81   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

  $ 0.47      $ (0.40   $ 1.01      $ 0.80   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-Average Common Units Outstanding

       

Common Units, Basic

    650,917,510        638,832,799        647,595,189        632,046,646   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Units, Diluted

    1,195,805,315        638,832,799        1,194,862,252        635,439,828   
 

 

 

   

 

 

   

 

 

   

 

 

 

Revenues Earned from Affiliates

       

Management and Advisory Fees, Net

  $ 39,073      $ 48,200      $ 139,896      $ 125,143   
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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,
 
     2016      2015     2016      2015  

Net Income (Loss)

   $ 691,589       $ (483,864   $ 1,479,340       $ 1,229,671   

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

     1,138         (13,413     12,982         (46,325
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive Income (Loss)

     692,727         (497,277     1,492,322         1,183,346   

Less:

          

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

     10,764         (12,520     2,314         8,787   

Comprehensive Income Attributable to Non-Controlling Interests in Consolidated Entities

     85,375         31,026        195,401         161,884   

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

     285,267         (247,318     618,274         532,782   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 311,321       $ (268,465   $ 676,333       $ 479,893   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

          The Blackstone Group L.P.                          
    Common
Units
    Partners’
Capital
    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, 2015

    624,450,162      $ 6,322,307      $ (52,519   $ 6,269,788      $ 2,408,701      $ 3,368,509      $ 12,046,998      $ 183,459   

Net Income

    —          671,284        —          671,284        187,468        618,274        1,477,026        2,314   

Currency Translation Adjustment

    —          —          5,049        5,049        7,933        —          12,982        —     

Capital Contributions

    —          —          —          —          242,773        —          242,773        15,000   

Capital Distributions

    —          (801,952     —          (801,952     (319,242     (707,129     (1,828,323     (6,623

Transfer of Non-Controlling Interests in Consolidated Entities

    —          —          —          —          (7,915     —          (7,915     —     

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

    —          2,250        —          2,250        —          —          2,250        —     

Equity-Based Compensation

    —          123,300        —          123,300        —          117,256        240,556        —     

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

    6,131,764        (26,426     —          (26,426     —          (36     (26,462     —     

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

    —          7,929        —          7,929        —          (7,929     —          —     

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

    7,669,834        46,100        —          46,100        —          (46,100     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

    638,251,760      $ 6,344,792      $ (47,470   $ 6,297,322      $ 2,519,718      $ 3,342,845      $ 12,159,885      $ 194,150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

9

continued…

See notes to condensed consolidated financial statements.


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
(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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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,
 
     2016     2015  

Operating Activities

    

Net Income

   $ 1,479,340      $ 1,229,671   

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

     (182,464     258,201   

Net Realized Gains on Investments

     (1,368,591     (3,280,963

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

     28,533        251,411   

Non-Cash Performance Fees

     (166,283     940,745   

Non-Cash Performance Fee Compensation

     554,213        483,795   

Equity-Based Compensation Expense

     242,204        561,454   

Excess Tax Benefits Related to Equity-Based Compensation

     —          (68,481

Amortization of Intangibles

     67,328        77,947   

Other Non-Cash Amounts Included in Net Income

     53,920        147,636   

Cash Flows Due to Changes in Operating Assets and Liabilities

    

Cash Held by Blackstone Funds and Other

     (509,486     953,674   

Cash Relinquished in Deconsolidation and Liquidation of Partnership

     —          (442,370

Accounts Receivable

     145,131        (246,076

Reverse Repurchase Agreements

     115,567        (85,282

Due from Affiliates

     21,484        (65,367

Other Assets

     (15,957     (87,839

Accrued Compensation and Benefits

     (285,953     (514,677

Securities Sold, Not Yet Purchased

     (7,253     90,875   

Accounts Payable, Accrued Expenses and Other Liabilities

     (189,234     (473,431

Repurchase Agreements

     21,153        12,186   

Due to Affiliates

     22,324        (98,156

Treasury Cash Management Strategies

    

Investments Purchased

     (1,889,583     (3,106,152

Cash Proceeds from Sale of Investments

     1,542,251        2,671,905   

Blackstone Funds Related

    

Investments Purchased

     (2,622,157     (3,263,923

Cash Proceeds from Sale or Pay Down of Investments

     3,605,807        5,436,696   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     662,294        1,383,479   
  

 

 

   

 

 

 

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (18,458     (58,879

Changes in Restricted Cash

     5,843        5,843   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (12,615     (53,036
  

 

 

   

 

 

 

 

continued…

See notes to condensed consolidated financial statements.

 

11


Table of Contents

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Nine Months Ended
September 30,
 
     2016     2015  

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

   $ (325,865   $ (484,965

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     248,665        291,609   

Payments Under Tax Receivable Agreement

     (78,985     (82,830

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

     (26,462     (57,763

Excess Tax Benefits Related to Equity-Based Compensation

     —          68,481   

Proceeds from Loans Payable

     —          675,831   

Repayment and Repurchase of Loans Payable

     —          (3,657

Distributions to Unitholders

     (1,509,081     (2,918,104

Blackstone Funds Related

    

Proceeds from Loans Payable

     1,302,353        1,325,299   

Repayment of Loans Payable

     (315,733     (175,696
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (705,108     (1,361,795
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

     (13     (716
  

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (55,442     (32,068

Cash and Cash Equivalents, Beginning of Period

     1,837,324        1,412,472   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 1,781,882      $ 1,380,404   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 138,605      $ 112,340   
  

 

 

   

 

 

 

Payments for Income Taxes

   $ 52,029      $ 111,891   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

    

Non-Cash Contributions from Non-Controlling Interest Holders

   $ —        $ 1,051   
  

 

 

   

 

 

 

Non-Cash Distributions to Non-Controlling Interest Holders

   $ —        $ (34
  

 

 

   

 

 

 

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ —        $ (291
  

 

 

   

 

 

 

Notes Issuance Costs

   $ —        $ 5,269   
  

 

 

   

 

 

 

Transfer of Interests to Non-Controlling Interest Holders

   $ (7,915   $ (4,644
  

 

 

   

 

 

 

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

   $ 7,929      $ 93,847   
  

 

 

   

 

 

 

Net Settlement of Vested Common Units

   $ 100,301      $ 135,133   
  

 

 

   

 

 

 

Conversion of Blackstone Holdings Partnership Units to Common Units

   $ 46,100      $ 116,560   
  

 

 

   

 

 

 

Acquisition of Ownership Interests from Non-Controlling Interest Holders

    

Deferred Tax Asset

   $ (40,034   $ (140,110
  

 

 

   

 

 

 

Due to Affiliates

   $ 37,784      $ 118,061   
  

 

 

   

 

 

 

Partners’ Capital

   $ 2,250      $ 22,049   
  

 

 

   

 

 

 

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. 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’s business is organized into four segments: private equity, real estate, hedge fund solutions and credit.

On October 1, 2015, Blackstone completed the spin-off of the operations that historically constituted Blackstone’s Financial Advisory segment, other than Blackstone’s capital markets services business. Blackstone’s capital markets services business was retained and was not part of the spin-off. These historical operations included various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. As of October 1, 2015, Blackstone no longer reported a Financial Advisory segment.

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 AI 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 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 from each of the 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, 2015 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 has a controlling financial interest.

 

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)

 

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.

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 that would overcome the presumption of control by the Partnership. Accordingly, the Partnership consolidates Blackstone Holdings and records non-controlling interests to reflect the economic interests of the limited partners of Blackstone Holdings.

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

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 VIEs 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.

 

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)

 

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 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. Senior and subordinated 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.

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.

 

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)

 

   

Freestanding Derivatives are valued using contractual cash flows and observable inputs comprising yield curves, foreign currency rates and credit spreads.

 

   

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 capitalization 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. For credit-focused investments that are not publicly traded or whose market prices are not readily available, Blackstone may utilize other valuation techniques, including the discounted cash flow method or a market approach. The discounted cash flow method projects the expected cash flows of the debt instrument based on contractual terms, and discounts such cash flows back to the valuation date using a market-based yield. The market-based yield is estimated using yields of publicly traded debt instruments issued by companies operating in similar industries as the subject investment, with similar leverage statistics and time to maturity.

 

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)

 

The market approach is generally used to determine the enterprise value of the issuer of a credit investment, and considers valuation multiples of comparable companies or transactions. The resulting enterprise value will dictate whether or not such credit investment has adequate enterprise value coverage. In cases of distressed credit instruments, the market approach may be used to estimate a recovery value in the event of a restructuring.

Level III Valuation Process

Investments classified within Level III of the fair value hierarchy are valued on a quarterly basis, taking into consideration factors including 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 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, at current market conditions (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.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

In addition, the Partnership 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 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 adjustments 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

 

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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)

 

(losses) from equity method investments is included in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The carrying amounts of equity method investments are reflected in Investments in the Condensed Consolidated Statements of Financial Condition. As the underlying investments of the Partnership’s equity method investments in Blackstone Funds are reported at fair value, the carrying value of the Partnership’s equity method investments approximates fair value.

Repurchase and Reverse Repurchase Agreements

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

The Partnership manages credit exposure arising from 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

 

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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)

 

hedge”), (b) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), (c) a hedge of a net investment in a foreign operation, or (d) a derivative instrument not designated as a hedging instrument (“freestanding derivative”). For a fair value hedge, Blackstone records changes in the fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk, in current period earnings in General, Administrative and Other in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives designated as hedging instruments caused by factors other than changes in the risk being hedged, which are excluded from the assessment of hedge effectiveness, are recognized in current period earnings. 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.

 

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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)

 

Distributions

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

Recent Accounting Developments

In May 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 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.

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.

The new revenue 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 February 2016, the FASB issued amended guidance on the accounting for leases. The guidance requires the recognition of lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The guidance retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under previous GAAP. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not changed significantly from previous GAAP.

For operating leases, a lessee is required to do the following: (a) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the Statement of Financial Condition, (b) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and (c) classify all cash payments within operating activities in the statement of cash flows.

The guidance is effective for fiscal periods beginning after December 15, 2018. Early application is permitted. Blackstone is evaluating the impact of the amended guidance on the Consolidated Statement of Financial Condition. It is not expected to have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

In March 2016, the FASB issued amended guidance on stock compensation. The amendments simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and accounting for forfeitures (the amended guidance permits an entity to make an accounting policy election either to estimate the number of forfeitures expected to occur or to account for forfeitures when they occur). The amendments require all excess tax benefits and deficiencies related to share-based payment transactions to be recognized through the Provision for Taxes in the Condensed Consolidated Statement of Operations. The amendments also require excess tax benefits related to share-based payment transactions to be presented as operating activities in the Condensed Consolidated Statement of Cash Flows with employee taxes paid presented as a financing activity. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Blackstone has elected to early adopt the guidance for the quarter ended June 30, 2016 and any adjustments have been reflected prospectively as of January 1, 2016.

Blackstone has made an accounting policy election to continue estimating forfeitures in determining the number of equity-based awards that are expected to vest. Amendments relating to the recognition of excess tax benefits and deficiencies in the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows have been applied prospectively. As a result, prior period amounts have not been restated. Application of the guidance did not have a material impact on Blackstone’s Condensed Consolidated Statement of Operations or Condensed Consolidated Statement of Cash Flows.

In October 2016, the FASB issued amended guidance on consolidation. The amendments do not change the characteristics of a primary beneficiary, however, in evaluating whether an entity has the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE, an entity is now required to evaluate all indirect interests, including those held by a party under common control, on a proportionate basis. The guidance is effective for fiscal years beginning after December 15, 2016. The guidance is not expected to have a material impact on Blackstone’s financial statements.

 

3. INTANGIBLE ASSETS

Intangible Assets, Net consists of the following:

 

     September 30,
2016
     December 31,
2015
 

Finite-Lived Intangible Assets/Contractual Rights

   $ 1,424,226       $ 1,424,226   

Accumulated Amortization

     (1,146,007      (1,078,679
  

 

 

    

 

 

 

Intangible Assets, Net

   $ 278,219       $ 345,547   
  

 

 

    

 

 

 

Amortization expense associated with Blackstone’s intangible assets was $21.7 million and $67.3 million for the three and nine month periods ended September 30, 2016, respectively, and $29.5 million and $77.9 million for the three and nine month periods ended September 30, 2015, respectively.

Amortization of Intangible Assets held at September 30, 2016 is expected to be $82.9 million, $43.9 million, $43.8 million, $43.8 million, and $43.8 million for each of the years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively. Blackstone’s intangible assets as of September 30, 2016 are expected to amortize over a weighted-average period of 6.3 years.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

4. INVESTMENTS

Investments consist of the following:

 

     September 30,
2016
     December 31,
2015
 

Investments of Consolidated Blackstone Funds

   $ 5,436,085       $ 4,613,944   

Equity Method Investments

     3,110,320         3,110,810   

Blackstone’s Treasury Cash Management Strategies

     2,065,798         1,682,259   

Performance Fees

     5,078,448         4,757,932   

Other Investments

     267,283         159,152   
  

 

 

    

 

 

 
   $ 15,957,934       $ 14,324,097   
  

 

 

    

 

 

 

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $440.1 million and $451.9 million at September 30, 2016 and December 31, 2015, 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 (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Realized Gains

   $ 52,046      $ 51,150      $ 62,993      $ 178,662   

Net Change in Unrealized Losses

     (26,764     (102,340     (35,112     (100,597
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     25,282        (51,190     27,881        78,065   

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

     36,113        34,323        83,359        80,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 61,395      $ (16,867   $ 111,240      $ 158,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2016 and 2015, no individual equity method investment held by Blackstone met the significance criteria. As such, Blackstone is not required to present summarized statement of operations information for any of its equity method investments.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

The Partnership recognized net gains (losses) related to its equity method investments of $50.6 million and $(89.7) million for the three months ended September 30, 2016 and 2015, respectively. The Partnership recognized net gains related to its equity method investments of $120.3 million and $91.9 million for the nine months ended September 30, 2016 and 2015, 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 into primarily fixed income securities, mutual fund interests, and other fund interests. These strategies are managed by a combination of Blackstone personnel and third party advisors. 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,  
             2016                     2015                     2016                     2015          

Realized Losses

   $ (3,159   $ (3,003   $ (12,404   $ (6,606

Net Change in Unrealized Gains (Losses)

     17,689        (8,984     32,384        (12,922
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 14,530      $ (11,987   $ 19,980      $ (19,528
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2015

   $ 1,479,443      $ 3,101,688      $ 9,747      $ 167,054      $ 4,757,932   

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

     417,842        733,818        6,282        170,355        1,328,297   

Foreign Exchange Gain

     —          13,604        —          —          13,604   

Fund Distributions

     (113,806     (863,685     (6,448     (37,446     (1,021,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performance Fees, September 30, 2016

   $ 1,783,479      $ 2,985,425      $ 9,581      $ 299,963      $ 5,078,448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
             2016                      2015                     2016                      2015          

Realized Gains

   $ 83       $ 1,282      $ 4,560       $ 1,274   

Net Change in Unrealized Gains (Losses)

     10,039         (2,779     7,087         (3,233
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 10,122       $ (1,497   $ 11,647       $ (1,959
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

5. NET ASSET VALUE AS FAIR VALUE

A summary of fair value by strategy type alongside the remaining unfunded commitments and ability to redeem such investments as of September 30, 2016 is presented below:

 

Strategy

   Fair Value      Unfunded
Commitments
     Redemption
Frequency
(if currently

eligible)
    Redemption
Notice

Period
 

Diversified Instruments

   $ 160,822       $ 129         (a     (a

Credit Driven

     205,315         268         (b     (b

Equity

     65,008         —           (c     (c

Commodities

     2,015         —           (d     (d
  

 

 

    

 

 

      
   $ 433,160       $ 397        
  

 

 

    

 

 

      

 

(a) Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 4% 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 96% 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 45% 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 55% of investments in this category are redeemable as of the reporting date.
(c) 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.
(d) The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Investments representing 100% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date.

 

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.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

Blackstone 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, 2016 the resulting loss was $0.5 million. For the nine months ended September 30, 2016 the resulting loss was $1.3 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.

In June 2012, Blackstone removed the fair value hedge designation of its interest rate swaps that were previously used to hedge a portion of the interest rate risk on the Partnership’s fixed rate borrowings. Changes in the fair value of the interest rate swaps subsequent to the date of de-designation are reflected within Freestanding Derivatives within Interest Rate Contracts in the table below.

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, 2016     December 31, 2015  
    Assets     Liabilities     Assets     Liabilities  
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
    Notional     Fair
Value
 

Net Investment Hedges

               

Foreign Currency Contracts

  $ 53,402      $ 62      $ —        $ —        $ 53,627      $ 319      $ 138      $ 1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

               

Blackstone

               

Interest Rate Contracts

    1,823,069        1,185        465,455        4,816        1,681,533        2,212        1,054,465        4,288   

Foreign Currency Contracts

    665,112        3,348        201,135        1,161        158,684        2,088        271,891        2,042   

Credit Default Swaps

    —          —          7,274        634        —          —          19,250        2,411   

Investments of Consolidated

               

Blackstone Funds

               

Foreign Currency Contracts

    297,138        29,661        32,079        170        124,595        1,400        92,094        6,490   

Credit Default Swaps

    —          —          126,617        7,070        —          —          108,786        6,275   

Other Assets of Consolidated

               

Blackstone Funds

               

Foreign Currency Contracts

    10,479        1,670        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,795,798        35,864        832,560        13,851        1,964,812        5,700        1,546,486        21,506   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,849,200      $ 35,926      $ 832,560      $ 13,851      $ 2,018,439      $ 6,019      $ 1,546,624      $ 21,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Net Investment Hedges — Foreign Currency Contracts

        

Hedge Ineffectiveness

   $ —        $ —        $ (128   $ 229   
  

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

        

Realized Gains (Losses)

        

Interest Rate Contracts

   $ (3,493   $ (2,076   $ (10,305   $ (7,169

Foreign Currency Contracts

     (4,704     53        (9,424     8,956   

Credit Default Swaps

     (241     646        (4,790     4,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (8,438   $ (1,377   $ (24,519   $ 6,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Freestanding Derivatives

        

Net Change in Unrealized Gains (Losses)

        

Interest Rate Contracts

   $ 4,893      $ (7,282   $ (2,349   $ (3,321

Foreign Currency Contracts

     13,801        1,796        37,992        (6,449

Credit Default Swaps

     (719     (3,319     (4,201     (8,710
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 17,975      $ (8,805   $ 31,442      $ (18,480
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2016 and December 31, 2015, 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,
2016
     December 31,
2015
 

Assets

     

Loans and Receivables

   $ 75,901       $ 261,994   

Equity and Preferred Securities

     292,766         280,879   

Debt Securities

     13,841         15,176   

Assets of Consolidated CLO Vehicles

     

Corporate Loans

     3,857,058         3,087,563   

Corporate Bonds

     473,275         379,000   

Other

     24,627         —     
  

 

 

    

 

 

 
   $ 4,737,468       $ 4,024,612   
  

 

 

    

 

 

 

Liabilities

     

Liabilities of Consolidated CLO Vehicles

     

Senior Secured Notes

   $ 4,263,747       $ 3,225,064   

Subordinated Notes

     184,475         98,371   
  

 

 

    

 

 

 
   $ 4,448,222       $ 3,323,435   
  

 

 

    

 

 

 

 

27


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

The following table presents the Realized and Net Change in Unrealized Gains (Losses) on financial instruments on which the fair value option was elected:

 

     Three Months Ended September 30,  
     2016     2015  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ 298      $ —        $ (1,235

Equity and Preferred Securities

     27        10,200        (36     (3,749

Debt Securities

     —          (281     —          (342

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     16,672        33,071        2,578        (38,888

Corporate Bonds

     (662     7,491        (988     (4,578

Other

     (2,643     —          1,003        (305
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 13,394      $ 50,779      $ 2,557      $ (49,097
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles —

        

Subordinated Notes

   $ —        $ (56,690   $ —        $ 34,235   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2016     2015  
     Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
    Realized
Gains (Losses)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

        

Loans and Receivables

   $ —        $ (2,395   $ —        $ (1,832

Equity and Preferred Securities

     (266     11,624        (273     (11,240

Debt Securities

     —          (1,335     —          (342

Assets of Consolidated CLO Vehicles

        

Corporate Loans

     (12,288     70,592        (2,269     1,993   

Corporate Bonds

     (225     6,548        (867     (62

Other

     (2,377     —          4,276        (3,636
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (15,156   $ 85,034      $ 867      $ (15,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Liabilities of Consolidated CLO Vehicles —

        

Subordinated Notes

   $ —        $ (58,558   $ —        $ 23,997   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

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

 

     September 30, 2016      December 31, 2015  
           For Financial Assets
Past Due (a)
           For Financial Assets
Past Due (a)
 
     Excess
(Deficiency)
of Fair Value
Over Principal
    Fair
Value
     Excess
of Fair  Value
Over Principal
     (Deficiency)
of Fair Value
Over Principal
    Fair
Value
     (Deficiency)
of Fair Value
Over Principal
 

Loans and Receivables

   $ (11,587   $ —         $ —         $ (8,845   $ —         $ —     

Debt Securities

     (1,761     —           —           (426     —           —     

Assets of Consolidated CLO Vehicles

               

Corporate Loans

     3,330        —           —           (77,900     1,088         (5,620

Corporate Bonds

     (2,111     —           —           (6,046     —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ (12,129   $ —         $ —         $ (93,217   $ 1,088       $ (5,620
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(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, 2015, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of September 30, 2016 and December 31, 2015, 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:

 

    September 30, 2016  
    Level I     Level II     Level III     NAV     Total  

Assets

         

Investments of Consolidated Blackstone Funds (a)

         

Investment Funds

  $ —        $ —        $ —        $ 157,430      $ 157,430   

Equity Securities

    50,551        50,244        90,240        —          191,035   

Partnership and LLC Interests

    27,897        64,924        392,381        —          485,202   

Debt Instruments

    —          210,054        7,743        —          217,797   

Assets of Consolidated CLO Vehicles

         

Corporate Loans

    —          3,611,059        245,999        —          3,857,058   

Corporate Bonds

    —          473,275        —          —          473,275   

Freestanding Derivatives — Foreign Currency Contracts

    —          29,661        —          —          29,661   

Other

    —          —          24,627        —          24,627   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments of Consolidated Blackstone Funds

    78,448        4,439,217        760,990        157,430        5,436,085   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Blackstone’s Treasury Cash Management Strategies

         

Equity Securities

    149,040        —          —          —          149,040   

Debt Instruments

    —          1,621,709        38,200        53,766        1,713,675   

Other

    —          —          —          203,083        203,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Blackstone’s Treasury Cash Management Strategies

    149,040        1,621,709        38,200        256,849        2,065,798   

Money Market Funds

    393,897        —          —          —          393,897   

Net Investment Hedges — Foreign Currency Contracts

    —          62        —          —          62   

Freestanding Derivatives

         

Interest Rate Contracts

    737        448        —          —          1,185   

Foreign Currency Contracts

    —          3,348        —          —          3,348   

Other Assets of Consolidated Blackstone Funds

         

Freestanding Derivatives — Foreign Currency Contracts

    —          1,670        —          —          1,670   

Loans and Receivables

    —          —          75,901        —          75,901   

Other Investments

    143,877        —          104,525        18,881        267,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 765,999      $ 6,066,454      $ 979,616      $ 433,160      $ 8,245,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

     September 30, 2016  
     Level I      Level II      Level III      Total  

Liabilities

           

Liabilities of Consolidated CLO Vehicles (a)

           

Senior Secured Notes (b)

   $ —         $ 4,263,747       $ —         $ 4,263,747   

Subordinated Notes (b)

     —           184,475         —           184,475   

Freestanding Derivatives — Foreign Currency Contracts

     —           170         —           170   

Liabilities of Consolidated Blackstone Funds

           

Freestanding Derivatives — Credit Default Swaps

     —           7,070         —           7,070   

Freestanding Derivatives

           

Interest Rate Contracts

     862         3,954         —           4,816   

Foreign Currency Contracts

     —           1,161         —           1,161   

Credit Default Swaps

     —           634         —           634   

Securities Sold, Not Yet Purchased

     —           176,218         —           176,218   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 862       $ 4,637,429       $ —         $ 4,638,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2015  
     Level I      Level II      Level III      NAV      Total  

Assets

              

Investments of Consolidated Blackstone Funds (a)

              

Investment Funds

   $ —         $ —         $ —         $ 155,512       $ 155,512   

Equity Securities

     82,734         53,250         80,849         —           216,833   

Partnership and LLC Interests

     —           101,399         472,391         —           573,790   

Debt Instruments

     —           179,465         20,381         —           199,846   

Assets of Consolidated CLO Vehicles

              

Corporate Loans

     —           2,886,792         200,771         —           3,087,563   

Corporate Bonds

     —           379,000         —           —           379,000   

Freestanding Derivatives — Foreign Currency Contracts

     —           1,400         —           —           1,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments of Consolidated Blackstone Funds

     82,734         3,601,306         774,392         155,512         4,613,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Blackstone’s Treasury Cash Management Strategies

              

Equity Securities

     240,464         —           —           —           240,464   

Debt Instruments

     —           1,069,915         54,657         115,657         1,240,229   

Other

     —           —           —           201,566         201,566   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Blackstone’s Treasury Cash Management Strategies

     240,464         1,069,915         54,657         317,223         1,682,259   

Money Market Funds

     460,233         —           —           —           460,233   

Net Investment Hedges — Foreign Currency Contracts

     —           319         —           —           319   

Freestanding Derivatives

              

Interest Rate Contracts

     1,806         406         —           —           2,212   

Foreign Currency Contracts

     —           2,088         —           —           2,088   

Loans and Receivables

     —           —           261,994         —           261,994   

Other Investments

     40,261         —           101,184         17,707         159,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 825,498       $ 4,674,034       $ 1,192,227       $ 490,442       $ 7,182,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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)

 

     December 31, 2015  
     Level I      Level II      Level III      Total  

Liabilities

           

Liabilities of Consolidated CLO Vehicles (a)

           

Senior Secured Notes (b)

   $ —         $ 3,225,064       $ —         $ 3,225,064   

Subordinated Notes (b)

     —           98,371         —           98,371   

Freestanding Derivatives — Foreign Currency Contracts

     —           6,490         —           6,490   

Freestanding Derivatives — Credit Default Swaps

     —           6,275         —           6,275   

Net Investment Hedges — Foreign Currency Contracts

     —           1         —           1   

Freestanding Derivatives

           

Interest Rate Contracts

     835         3,453         —           4,288   

Foreign Currency Contracts

     —           2,042         —           2,042   

Credit Default Swaps

     —           2,411         —           2,411   

Securities Sold, Not Yet Purchased

     —           176,667         —           176,667   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 835       $ 3,520,774       $ —         $ 3,521,609   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, has a controlling financial interest. 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, 2016 and 2015, respectively:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
          2016                2015                2016                2015       

Transfers from Level I into Level II (a)

   $ —         $ 287       $ 2,114       $ 287   

Transfers from Level II into Level I (b)

   $ —         $ 26,534       $ 28,346       $ 32,312   

 

(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, 2016:

 

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

Financial Assets

         

Investments of Consolidated Blackstone Funds

         

Equity Securities

  $ 67,923        Discounted Cash Flows        Discount Rate        7.4% - 29.1%        12.6%   
        Revenue CAGR        0.0% - 20.6%        7.2%   
        Exit Multiple - EBITDA        4.0x - 19.0x        9.7x   
        Exit Multiple -P/E        10.5x - 17.0x        11.4x   
        Exit Capitalization Rate        5.3% - 11.4%        8.6%   
    13,330        Other        N/A        N/A        N/A   
    7,091        Transaction Price        N/A        N/A        N/A   
    1,879        Market Comparable Companies        Book Value Multiple        0.8x        N/A   
    17        Third Party Pricing        N/A        N/A        N/A   

Partnership and LLC Interests

    350,281        Discounted Cash Flows        Discount Rate        2.0% - 29.4%        9.8%   
        Revenue CAGR        -38.5% - 42.2%        7.0%   
        Exit Multiple - EBITDA        0.1x - 23.5x        9.0x   
        Exit Multiple - P/E        9.3x        N/A   
        Exit Capitalization Rate        3.0% - 10.7%        6.0%   
    18,160        Transaction Price        N/A        N/A        N/A   
    16,589        Third Party Pricing        N/A        N/A        N/A   
    7,351        Other        N/A        N/A        N/A   

Debt Instruments

    4,306        Third Party Pricing        N/A        N/A        N/A   
    3,437        Discounted Cash Flows        Discount Rate        8.3% - 77.9%        12.1%   
        Revenue CAGR        6.8%        N/A   
        Exit Multiple - EBITDA        12.0x        N/A   
        Exit Capitalization Rate        8.3%        N/A   

Assets of Consolidated
CLO Vehicles

    244,175        Third Party Pricing        N/A        N/A        N/A   
    24,627        Transaction Price        N/A        N/A        N/A   
    1,824        Market Comparable Companies        EBITDA Multiple        6.0x        N/A   
 

 

 

         

Total Investments of Consolidated Blackstone Funds

    760,990           

 

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

  $ 9,239        Discounted Cash Flows        Default Rate        1.0% - 2.0%        1.9%   
        Recovery Rate        16.5% - 79.1%        67.4%   
        Recovery Lag        12 months        N/A   
        Pre-payment Rate        20.0%        N/A   
        Reinvestment Rate        LIBOR + 350 bps -        LIBOR + 390 bps   
          LIBOR + 400 bps     
        Discount Rate        7.3% - 11.2%        8.4%   
    28,961        Third Party Pricing        N/A        N/A        N/A   

Loans and Receivables

    46,338        Discounted Cash Flows        Discount Rate        6.8% - 16.1%        10.0%   
    29,563        Third Party Pricing        N/A        N/A        N/A   

Other Investments

    83,971        Discounted Cash Flows        Discount Rate        1.3% - 15.8%        3.3%   
        Default Rate        2.0%        N/A   
        Recovery Rate        70.0%        N/A   
        Recovery Lag        12 months        N/A   
        Pre-payment Rate        20.0%        N/A   
        Reinvestment Rate        LIBOR + 400 bps        N/A   
    20,554        Transaction Price        N/A        N/A        N/A   
 

 

 

         

Total

  $ 979,616           
 

 

 

         

 

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, 2015:

 

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

Financial Assets

             

Investments of Consolidated Blackstone Funds

             

Equity Securities

   $ 66,962       Discounted Cash Flows      Discount Rate       7.8% - 25.0%   13.6%
           Revenue CAGR       -5.0% - 61.5%   10.2%
           Exit Multiple - EBITDA       5.0x -  18.2x   9.6x
           Exit Multiple - P/E       10.5x -  17.0x   11.2x
           Exit Capitalization Rate       5.5% - 11.4%   9%
     5,426       Other      N/A       N/A   N/A
     6,722       Transaction Price      N/A       N/A   N/A
     1,710       Market Comparable Companies      EBITDA Multiple       6.5x -  8.0x   6.6x
           Book Value Multiple       0.9x   N/A
     29       Third Party Pricing      N/A       N/A   N/A

Partnership and LLC Interests

     423,588       Discounted Cash Flows      Discount Rate       2.1% - 25.8%   9.3%
           Revenue CAGR       -24.1% - 31.8%   8.6%
           Exit Multiple - EBITDA       0.1x - 23.8x   9.8x
           Exit Multiple - P/E       9.3x   N/A
           Exit Capitalization Rate       2.7% - 12.1%   6.3%
     30,437       Transaction Price      N/A       N/A   N/A
     16,963       Third Party Pricing      N/A       N/A   N/A
     1,403       Other      N/A       N/A   N/A

Debt Instruments

     16,217       Third Party Pricing      N/A       N/A   N/A
     4,086       Discounted Cash Flows      Discount Rate       6.5% - 52.7%   14.1%
           Revenue CAGR       16.8%   N/A
           Exit Multiple - EBITDA       12.0x   N/A
           Exit Capitalization Rate       1.0% - 8.3%   5.8%
     78       Transaction Price      N/A       N/A   N/A

Assets of Consolidated CLO Vehicles

     180,988       Third Party Pricing      N/A       N/A   N/A
     19,783       Market Comparable Companies      EBITDA Multiple       4.5x - 7.0x   6.5x
  

 

 

            

Total Investments of Consolidated Blackstone Funds

     774,392              

 

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

   $ 32,004       Discounted Cash Flows      Default Rate       1.0% -  2.0%    1.9%
           Recovery Rate       30.0% - 70.0%    67.0%
           Recovery Lag       12 months    N/A
           Pre-payment Rate       20.0%    N/A
           Reinvestment Rate       LIBOR + 400 bps    N/A
           Discount Rate       5.8% - 14.0%    8.6%
     22,653       Third Party Pricing      N/A       N/A    N/A

Loans and Receivables

     241,897       Discounted Cash Flows      Discount Rate       6.7% - 20.6%    11.0%
     20,097       Third Party Pricing      N/A       N/A    N/A

Other Investments

     81,984       Discounted Cash Flows      Discount Rate       1.4% - 12.5%    3.3%
           Default Rate       2.0%    N/A
           Recovery Rate       70.0%    N/A
           Recovery Lag       12 months    N/A
           Pre-payment Rate       20.0%    N/A
           Reinvestment Rate       LIBOR + 400 bps    N/A
     19,200       Transaction Price      N/A       N/A    N/A
  

 

 

             

Total

   $ 1,192,227               
  

 

 

             

 

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.
Third Party Pricing    Third Party Pricing is generally determined on the basis of unadjusted prices between market participants provided by reputable dealers or pricing services.
Transaction Price    Includes recent acquisitions or transactions.
(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 and other investments 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, 2015, 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,
 
    2016     2015  
    Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (a)
    Total     Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (a)
    Total  

Balance, Beginning of Period

  $ 706,432      $ 207,519      $ 128,054      $ 1,042,005      $ 937,149      $ 36,440      $ 151,734      $ 1,125,323   

Transfer In to Level III (b)

    50,836        —          5,188        56,024        43,920        —          5,194        49,114   

Transfer Out of Level III (b)

    (41,852     —          (5,917     (47,769     (143,531     —          (9,171     (152,702

Purchases

    174,939        44,988        12,454        232,381        122,676        144,058        5,240        271,974   

Sales

    (151,701     (175,914     (284     (327,899     (139,229     —          (2,792     (142,021

Settlements

    —          (2,983     (140     (3,123     —          (1,405     (140     (1,545

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

    22,336        2,291        3,370        27,997        16,871        162        (1,768     15,265   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, End of Period

  $ 760,990      $ 75,901      $ 142,725      $ 979,616      $ 837,856      $ 179,255      $ 148,297      $ 1,165,408   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (16,130   $ 2,292      $ 2,627      $ (11,211   $ (41,807   $ 162      $ (1,837   $ (43,482
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

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

 

    Level III Financial Assets at Fair Value
Nine Months Ended September 30,
 
    2016     2015  
    Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (a)
    Total     Investments
of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments (a)
    Total  

Balance, Beginning of Period

  $ 774,392      $ 261,994      $ 155,841      $ 1,192,227      $ 2,394,823      $ 40,397      $ 189,385      $ 2,624,605   

Transfer Out Due to Deconsolidation

    —          —          —          —          (1,460,538     —          —          (1,460,538

Transfer In to Level III (b)

    76,564        —          14,515        91,079        47,035        —          25,092        72,127   

Transfer Out of Level III (b)

    (80,550     —          (16,121