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EX-10.49 - AMENDED AND RESTATED LTD. LIABILITY CO. AGMT. -GSO TARGETED OPPORTUNITY OVERSEAS - Blackstone Group L.P.dex1049.htm
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EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - Blackstone Group L.P.dex312.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Blackstone Group L.P.dex321.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - Blackstone Group L.P.dex311.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Blackstone Group L.P.dex322.htm
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 MARCH 31, 2010

OR

 

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

Commission File Number: 001-33551

 

 

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-8875684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 April 30, 2010 was 238,179,676. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of April 30, 2010 was 109,083,468.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page

PART I

  

FINANCIAL INFORMATION

  

ITEM 1.

  

FINANCIAL STATEMENTS

   1
  

Unaudited Condensed Consolidated Financial Statements — March 31, 2010 and 2009:

  
  

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

   1
  

Condensed Consolidated Statements of Operations for the Three Months Ended March 31,  2010 and 2009

   2
  

Condensed Consolidated Statement of Changes in Partners’ Capital for the Three Months Ended March 31, 2010

   3
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009

   4
  

Notes to Condensed Consolidated Financial Statements

   6

ITEM 1A.

  

UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION

   41

ITEM 2.

  

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

   43

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   85

ITEM 4T.

  

CONTROLS AND PROCEDURES

   87

PART II

  

OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

   88

ITEM 1A.

  

RISK FACTORS

   88

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   89

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

   89

ITEM 4.

  

(REMOVED AND RESERVED)

   89

ITEM 5.

  

OTHER INFORMATION

   89

ITEM 6.

  

EXHIBITS

   89

SIGNATURES

   90

Forward-Looking Statements

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

 

 

 

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Table of Contents

In this report, references to “Blackstone,” the “Partnership”, “we,” “us” or “our” refer (1) prior to the consummation of our reorganization into a holding partnership structure in June 2007 as described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Significant Transactions — Reorganization”, to Blackstone Group, which comprised certain consolidated and combined entities historically under the common ownership of (a) our two founders, Mr. Stephen A. Schwarzman and Mr. Peter G. Peterson, and our other senior managing directors, (b) selected other individuals engaged in some of our businesses and (c) a subsidiary of American International Group, Inc., to whom we refer collectively as our “Predecessor Owners” or “pre-IPO owners,” and (2) after our reorganization, to The Blackstone Group L.P. and its consolidated subsidiaries. Unless the context otherwise requires, references in this report to the ownership of our founders and other Blackstone personnel include the ownership of personal planning vehicles and family members of these individuals.

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

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

 

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

 

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

 

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

 

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

Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Interests related to our funds of hedge funds and certain of our credit-oriented funds are generally subject to annual, semi-annual or quarterly withdrawal or redemption by investors upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days’ notice, depending on the fund and the liquidity profile of the underlying assets. Investment advisory agreements related to separately managed accounts may generally be terminated by an investor on 30 to 90 days’ notice.

“Fee-earning assets under management” refers to the assets we manage on which we derive management and / or incentive fees. Our fee-earning assets under management equal the sum of:

 

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

 

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

 

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

 

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

 

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

 

ii


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

 

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

 

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

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

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

 

iii


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PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)

 

     March 31,
2010
   December 31,
2009

Assets

     

Cash and Cash Equivalents

   $ 627,257    $ 952,096

Cash Held by Blackstone Funds and Other ($247,097)

     276,540      86,084

Investments ($5,060,043)

     7,671,574      3,565,483

Accounts Receivable ($71,331)

     377,936      306,307

Due from Affiliates ($29,586)

     740,074      759,907

Intangible Assets, Net

     879,965      919,477

Goodwill

     1,703,602      1,703,602

Other Assets ($2,440)

     184,193      172,556

Deferred Tax Assets

     1,025,176      943,512
             

Total Assets

   $ 13,486,317    $ 9,409,024
             

Liabilities and Partners’ Capital

     

Loans Payable ($3,341,458)

   $ 3,973,091    $ 657,623

Due to Affiliates ($226,723)

     1,645,573      1,410,066

Accrued Compensation and Benefits

     423,403      488,945

Accounts Payable, Accrued Expenses and Other Liabilities ($139,416)

     448,329      308,857
             

Total Liabilities

     6,490,396      2,865,491
             

Commitments and Contingencies

     

Redeemable Non-Controlling Interests in Consolidated Entities

     545,348      526,311
             

Partners’ Capital

     

Partners’ Capital (common units: 342,549,885 issued and outstanding as of March 31, 2010; 319,939,772 issued and outstanding as of December 31, 2009)

     3,438,347      3,376,707

Appropriated Partners’ Capital

     298,164      —  

Accumulated Other Comprehensive Income

     1,709      2,420

Non-Controlling Interests in Consolidated Entities

     571,958      540,283

Non-Controlling Interests in Blackstone Holdings

     2,140,395      2,097,812
             

Total Partners’ Capital

     6,450,573      6,017,222
             

Total Liabilities and Partners’ Capital

   $ 13,486,317    $ 9,409,024
             

Asset and liability amounts in parentheses represent the portion of the March 31, 2010 consolidated balance attributable to Blackstone Fund entities which are variable interest or voting interest entities.

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

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

 

     Three Months Ended
March 31,
 
     2010     2009  

Revenues

    

Management and Advisory Fees

   $ 354,820      $ 341,172   

Performance Fees and Allocations

    

Realized

     54,049        646   

Unrealized

     131,779        (214,894
                

Total Performance Fees and Allocations

     185,828        (214,248
                

Investment Income (Loss)

    

Realized

     5,726        (69

Unrealized

     149,220        (82,384
                

Total Investment Income (Loss)

     154,946        (82,453
                

Interest and Dividend Revenue

     8,895        2,127   

Other

     (3,250     (1,684
                

Total Revenues

     701,239        44,914   
                

Expenses

    

Compensation and Benefits

    

Base Compensation

     924,950        920,213   

Performance Fee Related

    

Realized

     7,741        2,189   

Unrealized

     54,600        (110,055
                

Total Compensation and Benefits

     987,291        812,347   

General, Administrative and Other

     106,379        105,600   

Interest Expense

     7,185        1,399   

Fund Expenses

     (141     3,012   
                

Total Expenses

     1,100,714        922,358   
                

Other Income (Loss)

    

Net Gains (Losses) from Fund Investment Activities

     171,804        (34,763
                

Income (Loss) Before Provision for Taxes

     (227,671     (912,207

Provision for Taxes

     9,635        17,731   
                

Net Income (Loss)

     (237,306     (929,938

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

     23,969        2,596   

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

     135,966        (41,031

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

     (275,864     (659,929
                

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

   $ (121,377   $ (231,574
                

Net Loss Attributable to The Blackstone Group L.P.

    

Per Common Unit — Basic and Diluted

    

Common Units

   $ (0.36  
          

Common Units Entitled to Priority Distributions

     $ (0.84
          

Common Units Not Entitled to Priority Distributions

     $ (1.14
          

Weighted-Average Common Units Outstanding — Basic and Diluted

    

Common Units

     333,433,864     
          

Common Units Entitled to Priority Distributions

       273,624,497   
          

Common Units Not Entitled to Priority Distributions

       1,627,540   
          

Revenues Earned from Affiliates

    

Management and Advisory Fees

   $ 38,767      $ 20,284   
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands, Except Unit Data)

 

    Common
Units
    Partners’
Capital
    Appropriated
Partners’
Capital
  Accumulated
Other
Comprehensive

Income
(Loss)
    Non-
Controlling
Interests in
Consolidated
Entities
    Non-
Controlling
Interests in
Blackstone

Holdings
    Total
Partners’
Capital
    Redeemable
Non-
Controlling
Interests in
Consolidated
Entities
    Comprehensive
Income

(Loss)
 

Balance at December 31, 2009

  319,939,772      $ 3,376,707      $ —     $ 2,420      $ 540,283      $ 2,097,812      $ 6,017,222      $ 526,311      $ (2,387,985
                       

Transition Adjustment Relating to Consolidation of CLO Entities

  —          —          217,573     —          58        —          217,631        —          —     

Net Income (Loss)

  —          (121,377     80,591     —          55,375        (275,864     (261,275     23,969        (159,485

Currency Translation Adjustment

  —          —            (711     —          —          (711     —          (711

Net Unrealized Gain on Cash Flow Hedges

  —          —            —          —          —          —          735        —     

Capital Contributions

  —          —            —          3,550        —          3,550        5,000        —     

Capital Distributions

  —          (98,770       —          (15,530     (170,778     (285,078     (14,229     —     

Transfer of Non-Controlling Interests in Consolidated Entities

  —          —            —          (11,778     11,778        —          —          —     

Purchase of Interests from Certain Non-Controlling Interest Holders

  —          (152       —          —          —          (152     —          —     

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

  —          19,906          —          —          —          19,906        —          —     

Equity-Based Compensation

  —          223,395          —          —          525,574        748,969        —          —     

Relinquished in Deconsolidation of Partnership

  —          —            —          —          —          —          3,562        —     

Net Delivery of Vested Common Units

  2,964,369        (8,291       —          —          —          (8,291     —          —     

Repurchase of Common Units and Blackstone Holdings Partnership Units

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

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

  —          (5,551     —       —          —          5,551        —         

Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units

  19,730,632        53,678          —          —          (53,678     —          —          —     
                                                                   

Balance at March 31, 2010

  342,549,885      $ 3,438,347      $ 298,164   $ 1,709      $ 571,958      $ 2,140,395      $ 6,450,573      $ 545,348      $ (2,548,181
                                                                   

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended
March 31,
 
     2010     2009  

Operating Activities

    

Net Income (Loss)

   $ (237,306   $ (929,938

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

    

Blackstone Funds Related:

    

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

     (198,141     104,942   

Net Realized (Gains) Losses on Investments

     (29,801     53,190   

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

     (146,597     78,218   

Unrealized Depreciation on Hedge Activities

     6,083        —     

Non-Cash Performance Fees and Allocations

     (99,172     101,770   

Non-Cash Performance Fee Related Compensation

     62,341        (107,866

Equity-Based Compensation Expense

     723,145        738,045   

Amortization of Intangibles

     39,512        39,513   

Other Non-Cash Amounts Included in Net Income

     6,503        6,006   

Cash Flows Due to Changes in Operating Assets and Liabilities:

    

Cash Held by Blackstone Funds and Other

     (37,117     839,819   

Cash Relinquished with Deconsolidation of Partnership

     3,562        —     

Accounts Receivable

     (12,112     83,605   

Due from Affiliates

     (52,798     431,312   

Other Assets

     (8,841     53,455   

Accrued Compensation and Benefits

     (92,748     (156,351

Accounts Payable, Accrued Expenses and Other Liabilities

     23,089        (840,631

Due to Affiliates

     (30,073     (212,332

Short Term Investments Purchased

     (313,507     —     

Cash Proceeds from Sale of Investments

     239,918        —     

Blackstone Funds Related:

    

Investments Purchased

     (515,914     (181,552

Cash Proceeds from Sale of Investments

     690,474        454,677   
                

Net Cash Provided by Operating Activities

     20,500        555,882   
                

Investing Activities

    

Purchase of Furniture, Equipment and Leasehold Improvements

     (6,974     (4,482

Changes in Restricted Cash

     (146     2,438   
                

Net Cash Used in Investing Activities

     (7,120     (2,044
                

Financing Activities

    

Distributions to Non-Controlling Interest Holders in Consolidated Entities

     (37,040     (40,432

Contributions from Non-Controlling Interest Holders in Consolidated Entities

     3,773        94,674   

continued...

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

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

(Dollars in Thousands)

 

     Three Months Ended
March 31,
 
     2010     2009  

Purchase of Interests from Certain Non-Controlling Interest Holders

     (152     (2,479

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

     (9,489     (27,934

Proceeds from Loans Payable

     972        819   

Repayment of Loans Payable

     (26,735     (305,920

Distributions to Unitholders

     (269,548     —     
                

Net Cash Provided by (Used in) Financing Activities

     (338,219     (281,272
                

Net Increase (Decrease) in Cash and Cash Equivalents

   $ (324,839   $ 272,566   

Cash and Cash Equivalents, Beginning of Period

     952,096        503,737   
                

Cash and Cash Equivalents, End of Period

   $ 627,257      $ 776,303   
                

Supplemental Disclosure of Cash Flows Information

    

Payments for Interest

   $ 663      $ 653   
                

Payments for Income Taxes

   $ 24,281      $ 9,594   
                

Supplemental Disclosure of Non-Cash Financing Activities

    

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds

   $ 2,288      $ —     
                

Net Assets Related to the Consolidation of CLO Vehicles

   $ 217,631      $ —     
                

Reduction of Due to Limited Partners Account to Fund Sidepocket Investment

   $ (1   $ (2,442
                

Contributions Related to Transfers by Affiliated Partners

   $ 1      $ 2,442   
                

In-kind Redemption of Capital

   $ —        $ (907,373
                

In-kind Contribution of Capital

   $ —        $ 907,373   
                

Transfer of Interests to Non-Controlling Interest Holders

   $ (11,778   $ 15,069   
                

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

   $ (5,551   $ —     
                

Net Settlement of Vested Common Units

   $ 22,969      $ 922   
                

Conversion of Blackstone Holdings Units to Common Units

   $ 53,678      $ 7,080   
                

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

    

Deferred Tax Asset

   $ 83,403      $ 9,789   
                

Due to Affiliates

   $ (63,497   $ (8,321
                

Partners’ Capital

   $ 19,906      $ 1,468   
                

See notes to condensed consolidated financial statements.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

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

 

1. ORGANIZATION

The Blackstone Group L.P., together with its subsidiaries, (“Blackstone” or the “Partnership”) is a leading global manager of private capital and provider of financial advisory services. The alternative asset management business includes the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation (“CLO”) vehicles, separately managed accounts and publicly traded closed-end mutual funds (collectively referred to as the “Blackstone Funds”). Blackstone also provides various financial advisory services, including financial advisory, restructuring and reorganization advisory and fund placement services. Blackstone’s business is organized into four segments: private equity; real estate; credit and marketable alternatives; and financial advisory.

The Partnership was formed as a Delaware limited partnership on March 12, 2007. The Partnership is managed and operated by its general partner, Blackstone Group Management L.L.C., which is in turn wholly-owned and controlled by one of Blackstone’s founders, Stephen A. Schwarzman (the “Founder”), and Blackstone’s other senior managing directors.

The activities of the Partnership are conducted through its holding partnerships: Blackstone Holdings I L.P.; Blackstone Holdings II L.P.; Blackstone Holdings III L.P. and Blackstone Holdings IV L.P. (collectively, “Blackstone Holdings”, “Blackstone Holdings Partnerships” or the “Holding Partnerships”). On June 18, 2007, in preparation for an initial public offering (“IPO”), the predecessor owners (“Predecessor Owners”) of the Blackstone business completed a reorganization (the “Reorganization”) whereby, with certain limited exceptions, the operating entities of the predecessor organization and the intellectual property rights associated with the Blackstone name were contributed (“Contributed Businesses”) to five holding partnerships (Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P., Blackstone Holdings IV L.P. and Blackstone Holdings V L.P.) either directly or indirectly via a sale to certain wholly-owned subsidiaries of the Partnership and then a contribution to the Holding Partnerships. The Partnership, through its wholly-owned subsidiaries, is the sole general partner in each of these Holding Partnerships. The reorganization was accounted for as an exchange of entities under common control for the component of interests contributed by the Founders and the other senior managing directors (collectively, the “Control Group”) and as an acquisition of non-controlling interests using the purchase method of accounting for all the predecessor owners other than the Control Group.

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

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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

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

All intercompany balances and transactions have been eliminated in consolidation.

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

 

   

In the second quarter of 2009, Blackstone elected to disaggregate Investment Income and Other between Investment Income (Loss) and Interest Income and Other. Investment Income (Loss) represents the income (loss) from Blackstone’s proprietary and equity method investments, and Interest Income and Other represents primarily interest and dividend income.

 

   

In the fourth quarter of 2009, Blackstone elected to disaggregate Compensation and Benefits into Base Compensation and Performance Fee Related Compensation. Blackstone then disaggregated Investment Income (Loss), Performance Fees and Allocations, and Compensation and Benefits — Performance Fee Related into their realized and unrealized components. Blackstone also disaggregated Interest Income and Other between Interest and Dividend Revenue and Other. Interest and Dividend Revenue includes income earned in the form of interest and dividends and Other includes foreign currency exchange gains (losses) and other income.

 

   

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

Consolidation

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

 

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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 consolidates all variable interest entities (“VIE”) in which it is the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s business and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The revised consolidation rules require an analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a variable interest entity and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. Where the variable interest entities have qualified for the deferral of the revised consolidation rules as discussed in “Recent Accounting Developments”, the analysis is based on previous consolidation rules. These rules require an analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a variable interest entity and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, the Partnership determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continuously. In evaluating whether the Partnership is the primary beneficiary, Blackstone evaluates its economic interests in the entity held either directly by the Partnership or indirectly through employees. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Partnership is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Partnership, affiliates of the Partnership or third parties) or amendments to the governing documents of the respective Blackstone Funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

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

Fair Value of Financial Instruments

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

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

 

   

Level I — Quoted prices are available in active markets for identical financial instruments as of the reporting date. The type of financial instruments in Level I include listed equities and listed derivatives. The Partnership does not adjust the quoted price for these investments, even in situations where Blackstone holds a large position and a sale could reasonably impact the quoted price.

 

   

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Financial instruments which are generally included in this category

 

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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)

 

 

include corporate bonds and loans, less liquid and restricted equity securities, certain over-the-counter derivatives where the fair value is based on observable inputs, and certain fund of hedge funds investments in which Blackstone has the ability to redeem its investment at net asset value at, or within three months of, the reporting date.

 

   

Level III — Pricing inputs are unobservable for the financial instruments and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partnership interests in private equity and real estate funds, credit-oriented funds, distressed debt and non-investment grade residual interests in securitizations, collateralized loan obligations, certain over the counter derivatives where the fair value is based on unobservable inputs and certain funds of hedge funds which use net asset value per share to determine fair value in which Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date. Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date if an investee fund manager has the ability to limit the amount of redemptions, and/or the ability to side-pocket investments, irrespective of whether such ability has been exercised.

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

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

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

Private Equity Investments — The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (e.g., multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Private equity investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value.

 

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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)

 

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

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

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

Investments, at Fair Value

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

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

For certain instruments, the Partnership has elected the fair value option. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. The Partnership has applied the fair value option for certain loans and receivables and certain investments in private debt and equity securities, that otherwise would not have been carried at fair value with gains and losses recorded in net income, to consistently account for principal investments held by the Partnership. Loans extended to third parties are recorded within Accounts Receivable within the Condensed Consolidated Statements of Financial Condition. Debt and equity securities for which the fair value option has been elected are recorded within Investments. The methodology for measuring the fair value of such investments is consistent with the methodology applied to private equity, real estate, credit-oriented and funds of hedge funds investments. Changes in the fair value of such instruments are recognized in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. Interest

 

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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)

 

income on interest bearing loans and receivables and debt securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest and Dividend Revenue.

In addition, the Partnership has elected the fair value option for the assets and liabilities of certain CLO vehicles that are consolidated as of January 1, 2010, as a result of the initial adoption of revised variable interest entity consolidation rules. The transition adjustment resulting from the difference between the fair value of assets and liabilities on the effective date is presented within the Condensed Consolidated Statement of Changes in Partners’ Capital as Appropriated Partners’ Capital. Assets of the consolidated CLOs are presented within Investments within the Condensed Consolidated Statements of Financial Condition and Liabilities within Loans Payable for the amounts due to unaffiliated third parties and Due to Affiliates for the amounts held by non-consolidated affiliates. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income subsequent to adoption are presented within Net Gains (Losses) from Fund Investment Activities and are attributable to Non-Controlling Interests in Consolidated Entities in the Condensed Consolidated Statements of Operations.

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

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

Equity Method Investments

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

Derivative Instruments

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

 

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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 formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Partnership’s evaluation of effectiveness of its hedged transaction. On a monthly basis, the Partnership also formally assesses whether the derivative it designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in estimated fair values or cash flows of the hedged items using either the regression analysis or the dollar offset method. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

Cash Distribution Policy

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

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

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

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

 

   

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

 

   

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

 

   

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

 

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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)

 

As a result of the expiration on December 31, 2009 of the distribution priority previously accorded to holders of Blackstone common units, the Partnership no longer has two classes of equity. The calculation of net loss per common unit is presented using one class of equity for the period ended March 31, 2010, as shown in Note 12. “Net Loss Per Common Unit.”

Because the wholly-owned subsidiaries of The Blackstone Group L.P. must pay taxes and make payments under the tax receivable agreements described in Note 14. “Related Party Transactions”, the amounts ultimately distributed by The Blackstone Group L.P. to common unitholders in respect of fiscal 2010 and subsequent years are expected to be different, and likely less, on a per unit basis, than the amounts distributed by the Blackstone Holdings partnerships to the Blackstone personnel and others who are limited partners of the Blackstone Holdings partnerships in respect of their Blackstone Holdings partnership units.

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

Recent Accounting Developments

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

 

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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 dedicated funds are financed by third parties with Blackstone acting as an intermediary which fail condition (b) above. Such employee funds are currently consolidated as it is concluded that Blackstone is the primary beneficiary based on its implicit interest. The incremental impact of the revised consolidation rules has resulted in the consolidation of certain CLO vehicles managed by Blackstone. Additional disclosures relating to Blackstone’s involvement with VIEs are presented in Note 9. “Variable Interest Entities” of the Partnership’s financial statements.

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

 

3. GOODWILL AND INTANGIBLE ASSETS

The carrying value of goodwill was $1.7 billion as of March 31, 2010 and December 31, 2009. No indicators of impairment have been identified during the three month period ended March 31, 2010.

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

The following table outlines changes to the carrying amount of Intangible Assets as of March 31, 2010 and December 31, 2009:

 

     March 31,
2010
    December 31,
2009
 

Finite-Lived Intangible Assets / Contractual Rights

   $ 1,348,370      $ 1,348,370   

Accumulated Amortization

     (468,405     (428,893
                

Intangible Assets, Net

   $ 879,965      $ 919,477   
                

Amortization expense associated with Blackstone’s intangible assets was $39.5 million for each of the three months ended March 31, 2010 and 2009, and is included in General, Administrative and Other in the accompanying Condensed Consolidated Statements of Operations.

Amortization of Intangible Assets held at March 31, 2010 is expected to be $158.0 million for the years ending December 31, 2010 and 2011 and $103.2 million, $51.7 million, and $50.3 million for the years ending December 31, 2012, 2013, and 2014, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

4. INVESTMENTS

Investments

Investments consists of the following:

 

     March 31,
2010
   December 31,
2009

Investments of Consolidated Blackstone Funds

   $ 5,060,043    $ 1,306,445

Equity Method Investments

     1,268,308      1,104,701

High Grade Liquid Debt Strategies

     637,943      534,777

Performance Fees and Allocations

     676,263      554,463

Other Investments

     29,017      65,097
             
   $ 7,671,574    $ 3,565,483
             

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $424.9 million and $407.1 million at March 31, 2010 and December 31, 2009, respectively.

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Investments of Consolidated Blackstone Funds

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

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   March 31,
2010
   December 31,
2009
   March 31,
2010
    December 31,
2009
 

United States and Canada

          

Investment Funds, principally related to credit and marketable alternatives

          

Credit Driven

   $ 238,655    $ 277,388    4.7   21.3

Diversified Investments

     319,934      300,907    6.4   23.1

Equity

     82,512      80,956    1.6   6.2

Event-Driven

     101,866      95,760    2.0   7.4

Other

     353      408    —        —     
                          

Investment Funds Total
(Cost: 2010 — $765,170; 2009 — $819,638)

     743,320      755,419    14.7   58.0
                          

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

          

Manufacturing

     34,955      21,491    0.7   1.7

Services

     88,157      86,600    1.7   6.7

Natural Resources

     974      649    —        —     

Real Estate Assets

     830      462    —        —     
                          

Equity Securities Total
(Cost: 2010 — $111,902; 2009 — $112,364)

     124,916      109,202    2.4   8.4
                          

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

          

Real Estate Assets

     152,331      149,523    3.0   11.5

Services

     106,947      87,406    2.1   6.7

Manufacturing

     33,367      25,691    0.7   2.0

Natural Resources

     504      357    —        —     
                          

Partnership and LLC Interests Total
(Cost: 2010 — $425,585; 2009 — $426,678)

     293,149      262,977    5.8   20.2
                          

Debt Instruments, principally related to credit and marketable alternatives

          

Credit Driven

     29,018      29,330    0.7   2.2

Manufacturing

     3,339      3,203    0.1   0.2

Services

     8,289      7,837    0.2   0.6

Real Estate Assets

     2,472      2,458    —        0.2
                          

Debt Instruments Total
(Cost: 2010 — $37,767; 2009 — $37,983)

     43,118      42,828    1.0   3.2
                          

Assets of Consolidated CLO Vehicles

          

Corporate Loans

     2,602,727      —      51.4   —     

Corporate Bonds

     103,885      —      2.1   —     

Other

     12,706      —      0.3   —     
                          

Assets of Consolidated CLO Vehicles Total
(Cost: 2010 — $2,692,037; 2009 — $— )

     2,719,318      —      53.8   —     
                          

United States and Canada Total
(Cost: 2010 — $4,032,461; 2009 — $1,396,663)

     3,923,821      1,170,426    77.7   89.8
                          

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     Fair Value    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   March 31,
2010
   December 31,
2009
   March 31,
2010
    December 31,
2009
 

Europe

          

Equity Securities, principally related to private equity funds

          

Manufacturing

   $ 3,236    $ 2,681    0.1   0.2

Real Estate Assets

     744      365    —        —     

Services

     31,106      31,711    0.6   2.4
                          

Equity Securities Total
(Cost: 2010 — $40,396; 2009 — $40,353)

     35,086      34,757    0.7   2.6

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

          

Services

     30,552      29,270    0.6   2.2

Real Estate Assets

     10,327      10,741    0.2   0.8
                          

Partnership and LLC Interests Total
(Cost: 2010 — $48,339; 2009 — $48,334)

     40,879      40,011    0.8   3.0

Debt Instruments, principally related to credit and marketable alternatives

          

Manufacturing

     530      544    —        —     

Services

     1,296      1,259    —        0.1
                          

Debt Instruments Total
(Cost: 2010 — $1,576; 2009 — $1,623)

     1,826      1,803    —        0.1

Assets of Consolidated CLO Vehicles

          

Corporate Loans

     997,812      —      19.7   —     
                          

Assets of Consolidated CLO Vehicles Total
(Cost: 2010 — $1,077,333; 2009 — $—)

     997,812      —      19.7   —     
                          

Europe Total
(Cost: 2010 — $1,167,644; 2009 — $90,310)

     1,075,603      76,571    21.2   5.7
                          

Asia

          

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

          

Services

     11,438      8,031    0.2   0.6

Manufacturing

     10,157      10,501    0.2   0.8

Real Estate Assets

     270      —      —        —     

Diversified Investments

     4,562      6,262    0.1   0.5
                          

Equity Securities Total (Cost: 2010 — $21,918; 2009 — $20,794)

     26,427      24,794    0.5   1.9

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

          

Manufacturing

     1,403      1,183    —        0.1

Real Estate Assets

     456      457    —        —     

Services

     102      82    —        —     
                          

Partnership and LLC Interests Total
(Cost: 2010 — $1,691; 2009 — $1,833)

     1,961      1,722    —        0.1
                          

Debt Instruments, principally related to private equity funds
(Cost: 2010 — $112; 2009 — $114)

     107      111    —        —     
                          

Asia Total (Cost: 2010 — $23,721; 2009 — $22,741)

     28,495      26,627    0.5   2.0
                          

 

17


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    Percentage of
Investments of
Consolidated
Blackstone Funds
 

Geographic Region / Instrument Type / Industry
Description or Investment Strategy

   March 31,
2010
   December 31,
2009
   March 31,
2010
    December 31,
2009
 

Other

          

Equity Securities, principally related to private equity funds

          

Natural Resources

   $ 1,594    $ 1,583    —        0.1

Services

     3,849      4,560    0.1   0.3
                          

Equity Securities Total
(Cost: 2010 — $2,788; 2009 — $2,777)

     5,443      6,143    0.1   0.4
                          

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

          

Natural Resources

     26,586      26,586    0.5   2.0

Services

     95      92    —        —     
                          

Partnership and LLC Interests Total
(Cost: 2010 — $9,242; 2009 — $9,249)

     26,681      26,678    0.5   2.0
                          

Other Total
(Cost: 2010 — $12,030; 2009 — $12,026) principally related to private equity funds

     32,124      32,821    0.6   2.5
                          

Total Investments of Consolidated Blackstone Funds
(Cost: 2010 — $5,235,856; 2009 — $1,521,740)

   $ 5,060,043    $ 1,306,445    100.0   100.0
                          

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

 

     Three Months Ended
March 31,
 
         2010             2009      

Realized Gains (Losses)

   $ (23,524   $ (60,353

Net Change in Unrealized Gains (Losses)

     184,684        4,253   
                
   $ 161,160      $ (56,100
                

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

 

     Three Months Ended
March 31,
 
     2010     2009  

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

   $ 161,160      $ (56,100

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

     (17,453     16,817   

Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds

     13,676        11,895   

Investment Income Attributable to Non-Controlling Interest Holders

     14,421        (7,375
                

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

   $ 171,804      $ (34,763
                

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Equity Method Investments

The Partnership recognized net gains (losses) related to its equity method investments of $132.7 million and $(59.5) million for the three months ended March 31, 2010 and 2009, respectively.

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

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

 

     As of and for the Three Months Ended March 31, 2010  
     Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Total  
        
        

Statement of Financial Condition

        

Assets

        

Investments

   $ 20,883,069      $ 9,334,773      $ 16,376,235      $ 46,594,077   

Other Assets

     170,333        743,556        2,444,242        3,358,131   
                                

Total Assets

   $ 21,053,402      $ 10,078,329      $ 18,820,477      $ 49,952,208   
                                

Liabilities and Partners’ Capital

        

Debt

   $ 319,470      $ 224,238      $ 1,334,791      $ 1,878,499   

Other Liabilities

     55,432        204,089        828,042        1,087,563   
                                

Total Liabilities

     374,902        428,327        2,162,833        2,966,062   
                                

Partners’ Capital

     20,678,500        9,650,002        16,657,644        46,986,146   
                                

Total Liabilities and Partners’ Capital

   $ 21,053,402      $ 10,078,329      $ 18,820,477      $ 49,952,208   
                                

Statement of Income

        

Interest Income

   $ 5      $ 6,139      $ 133,291      $ 139,435   

Other Income

     151,778        38,252        10,554        200,584   

Interest Expense

     (1,553     (733     (19,114     (21,400

Other Expenses

     (5,037     (21,051     (36,175     (62,263

Net Realized and Unrealized Gain (Loss) from Investments

     2,852,369        1,181,963        70,411        4,104,743   
                                

Net Income (Loss)

   $ 2,997,562      $ 1,204,570      $ 158,967      $ 4,361,099   
                                

High Grade Liquid Debt Strategies

High Grade Liquid Debt Strategies represents the Partnership’s liquid investments in government and other investment grade securities, managed by third party institutions. The Partnership has managed its credit risk through diversification of its investments among major financial institutions, all of which have investment grade ratings.

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

During the three months ended March 31, 2010, the Partnership recognized realized gains (losses) of $1.4 million and net change in unrealized gains (losses) of $2.8 million. There were no realized gains (losses) or net change in unrealized gains (losses) for the three months ended March 31, 2009.

Performance Fees and Allocations

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

 

     March 31,
2010
   December 31,
2009

Performance Fees and Allocations

     

Private Equity

   $ 483,902    $ 425,615

Real Estate

     15,910      7,900

Credit and Marketable Alternatives

     176,451      120,948
             
   $ 676,263    $ 554,463
             

Other Investments

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

 

     Three Months Ended
March 31,
 
         2010            2009      

Realized Gains (Losses)

   $ 1,179    $ (1,666

Net Change in Unrealized Gains

     470      141   
               
   $ 1,649    $ (1,525
               

 

20


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)

 

5. NET ASSET VALUE AS FAIR VALUE

Certain of the consolidated Blackstone funds of hedge funds and credit-oriented funds measure their investments in underlying funds at fair value using NAV per share without adjustment. The terms of the investee’s partnership agreements and offering memoranda 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 a liquidity restriction. Redemptions are generally not permitted until the investments within a side pocket are liquidated or it is deemed that the conditions existing at the time that required the investment to be included in the side pocket no longer exist. As the timing of either of these events is uncertain, the timing at which the Partnership may redeem an investment held in a side pocket cannot be estimated. A summary of fair value by strategy type alongside the consolidated funds of hedge funds’ remaining unfunded commitments and ability to redeem such investments as of March 31, 2010 is presented below.

 

Strategy

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

Diversified Instruments

   $ 319,934    $ 10,919    (a   (a

Credit Driven

     236,282      29,558    (b   (b

Event Driven

     101,866      —      (c   (c

Equity

     82,512      —      (d   (d
                  
   $ 740,594    $ 40,477     
                  

 

(a) Diversified Instruments includes investments in hedge funds that invest across multiple strategies. Investments representing 98% of the value of the investments in this category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have exercised such ability) to side-pocket such investments. As of the reporting date, the investee fund manager had elected to side-pocket 12% of Blackstone’s investments. The time at which this redemption restriction may lapse cannot be estimated. The remaining 2% of investments within this category represent investments in hedge funds that are in the process of liquidating. Distributions from these funds will be received as underlying investments are liquidated.
(b) The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 43% of the value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Of this balance, 10% of investments are redeemable after July 1, 2010, on an annual basis, subject to a 60-day notice period. 37% of the value of the investments in the credit driven category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have exercised such ability) to side-pocket such investments. As of the reporting date, the investee fund manager had elected to side-pocket 11% of Blackstone’s investments. 18% of investments within this category represent an investment in a fund of hedge funds that is in the process of liquidating. Distributions from this fund will be received as underlying investments are liquidated. The remaining 2% of investments within this category are redeemable as of the reporting date.
(c) Included within the Event Driven category are investments in hedge funds whose primary investing strategy is to identify certain event-driven investments. Withdrawals are not permitted in this category. Distributions will be received as the underlying investments are liquidated.

 

21


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)

 

(d) The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Investments representing 44% of the total value of investments in this category may not be redeemed at, or within three months of, the reporting date. The remaining 56% are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have elected such ability) to side-pocket such investments. As of the reporting date, the investee fund manager had not elected to side-pocket Blackstone’s investments.

 

6. DERIVATIVE FINANCIAL INSTRUMENTS

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

Fair Value Hedges

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

Free Standing Derivatives

Free standing derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include foreign exchange contracts, equity swaps, options and other derivative contracts. Changes in the fair value of derivative instruments held by Blackstone funds are reflected in Net Gains (Losses) from Funds Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss), in the Condensed Consolidated Statements of Operations. The fair value of free standing derivative assets are recorded within Investments and free standing derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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

 

     March 31, 2010    December 31, 2009
     Assets    Liabilities    Assets    Liabilities
     Notional    Fair
Value
   Notional    Fair
Value
   Notional    Fair
Value
   Notional    Fair
Value

Fair Value Hedges

                       

Interest Rate Swaps

   $ —      $ —      $ 450,000    $ 30    $ —      $ —      $ 450,000    $ 19

Free Standing Derivatives

                       

Free Standing Derivatives

     11,913      159      969      275      2,039      653      656      4
                                                       

Total

   $ 11,913    $ 159    $ 450,969    $ 305    $ 2,039    $ 653    $ 450,656    $ 23
                                                       

Where hedge accounting is applied, hedge effectiveness testing is performed at least monthly to monitor ongoing effectiveness of the hedge relationships. During the three months ended March 31, 2010, the amount of ineffectiveness related to the interest rate swap hedges was a gain of $0.9 million. During the three months ended March 31, 2010, the portion of hedging instruments’ gain or loss excluded from the assessment of effectiveness for its fair value hedges was a loss of $7.0 million. The Partnership had no derivatives designated as fair value hedges during the quarter ended March 31, 2009.

During the three months ended March 31, 2010, the Partnership recognized $0.3 million of realized loss and $(0.1) million net change in unrealized gains (losses) related to free standing derivative instruments. Amounts recognized for the three months ended March 31, 2009 were not material.

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

 

7. FAIR VALUE OPTION

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

 

               Three Months Ended
March 31, 2010
 
     March 31,
2010
   December 31,
2009
   Realized
Gain (Loss)
    Net Change
in Unrealized
Gains (Losses)
 

Assets

          

Loans and Receivables

   $ 65,972    $ 68,550    $ 81      $ (80

Debt Securities

     —        26,466      (16     —     

Equity Securities

     548      1,905      —          —     

Assets of Consolidated CLOs

          

Corporate Loans

     3,600,539      —        (5,687     63,685   

Corporate Bonds

     103,885      —        (42     14,876   

Other

     12,706      —        702        828   
                              
   $ 3,783,650    $ 96,921    $ (4,962   $ 79,309   
                              

Liabilities

          

Liabilities of Consolidated CLOs

          

Senior Secured Notes

   $ 3,254,543    $ —      $ —        $ 16,685   

Subordinated Notes

     281,146      —        —          (19,602
                              
   $ 3,535,689    $ —      $ —        $ (2,917
                              

 

23


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 Partnership held no financial instruments on which the fair value option was elected during the three months ended March 31, 2009.

As of March 31, 2010, the fair value of Loans and Receivables and Corporate Bonds for which the fair value option was elected exceeded the principal amounts due by $0.9 million. The uncollected principal balance on Corporate Loans exceeded the fair value by $240.9 million. No Loans and Receivables or Corporate Bonds for which the fair value option was elected were past due and no Loans and Receivables were placed in non-accrual status. The fair value of Corporate Loans that were more than one day past due as of March 31, 2010 was $6.4 million. The principal balance related to such past due Corporate Loans exceeded the fair value by $5.6 million. Included within the Other category are structured finance obligations with contractual principal balances. The uncollected principal balance of such obligations exceeded the fair value by $1.8 million. No obligations were past due.

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

 

8. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

The following tables summarize the valuation of the Partnership’s financial assets and liabilities by the fair value hierarchy as of March 31, 2010 and December 31, 2009, respectively:

 

     March 31, 2010
      Level I    Level II    Level III    Total

Assets

           

Investments of Consolidated Blackstone Funds

           

Investment Funds

   $ —      $ 3,731    $ 739,589    $ 743,320

Equity Securities

     98,246      689      92,937      191,872

Partnership and LLC Interests

     16,015      —        346,655      362,670

Debt Instruments

     107      31,102      13,842      45,051

Assets of Consolidated CLO Vehicles

     —        3,538,452      178,678      3,717,130
                           

Total Investments of Blackstone Consolidated Funds

     114,368      3,573,974      1,371,701      5,060,043

High Grade Liquid Debt Strategies

     404,428      233,515      —        637,943

Loans and Receivables

     —        —        65,972      65,972

Other Investments (a)

     9,366      1,443      18,207      29,016
                           
   $ 528,162    $ 3,808,932    $ 1,455,880    $ 5,792,974
                           

Liabilities

           

Liabilities of Consolidated CLO Vehicles

   $ —      $ —      $ 3,535,689    $ 3,535,689

Derivative Instruments Used as Fair Value Hedges

     —        30      —        30

Free Standing Derivatives, Net

     —        98      —        98

Other Liabilities

     573      —        —        573
                           
   $ 573    $ 128    $ 3,535,689    $ 3,536,390
                           

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

     December 31, 2009
     Level I    Level II    Level III    Total

Assets

           

Investments of Consolidated Blackstone Funds

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

High Grade Liquid Debt Strategies

     398,487      136,290      —        534,777

Loans and Receivables

     —        —        68,550      68,550

Free Standing Derivative Instruments, Net

     2      279      368      649

Other Investments (b)

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

Liabilities

           

Derivative Instruments Used for Fair Value Hedges

   $ —      $ 19    $ —      $ 19

Securities Sold, Not Yet Purchased

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

 

(a) Included within Level III of Other Investments are investments in equity securities of $0.5 million for which the fair value option has been elected.
(b) Included within Level III of Other Investments are investments in debt and equity securities of $26.5 million and $1.9 million, respectively, for which the fair value option has been elected.

There were no significant transfers between Level I and Level II during the three months ending March 31, 2010.

The following table summarizes the valuation methodology used in the determination of the fair value of financial instruments for which Level III inputs were used as of March 31, 2010.

 

Valuation Methodology

   Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
    Total  

Third-Party Fund Managers

   —        —        50   —        50

Specific Valuation Metrics

   20   15   14   1   50
                              
   20   15   64   1   100
                              

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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

 

    Level III Financial Assets at Fair Value
Three Months Ended March 31,
 
    2010     2009  
    Investments of
Consolidated
Funds
    Loans
and
Receivables
    Other
Investments
    Total     Investments of
Consolidated
Funds
    Other
Investments
    Total  

Balance, Beginning of Period

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

Transfer In (Out) of Level III, Net

    146,147        —          —          146,147        (52     —          (52

Purchases (Sales), Net

    (39,222     (2,575     (29,216     (71,013     (308,170     (637     (308,807

Realized Gains (Losses), Net

    967        81        454        1,502        (5,222     —          (5,222

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

    71,345        (83     391        71,653        (33,282     —          (33,282
                                                       

Balance, End of Period

  $ 1,371,701      $ 65,972      $ 18,207      $ 1,455,880      $ 1,175,186      $ 15,458      $ 1,190,644   
                                                       

 

     Level III Financial Liabilities at Fair Value
Three Months Ended March 31, 2010
     Collateralized
Loan
Obligations
Senior
Notes
    Collateralized
Loan
Obligations
Subordinated
Notes
   Total

Balance, Beginning of Period

   $ —        $ —      $ —  

Transfer In (Out) of Level III, Net

     3,271,228        261,544      3,532,772

Purchases (Sales), Net

     —          —        —  

Realized Gains (Losses), Net

     —          —        —  

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

     (16,685     19,602      2,917
                     

Balance, End of Period

   $ 3,254,543      $ 281,146    $ 3,535,689
                     

For the three months ended March 31, 2010, the transfer out, net, of Level III financial assets was principally due to the initial public offering of one of the private equity portfolio company investments. For the three months ended March 31, 2010, the transfer in, net, of Level III financial liabilities was principally due to the consolidation of various CLO vehicles.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

9. VARIABLE INTEREST ENTITIES

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

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

 

     March 31,
2010
   December 31,
2009

Gross Assets

     

Consolidated Blackstone Funds Excluding CLO Vehicles

   $ 762,021    $ 741,024

Consolidated CLO Vehicles

     3,961,562      —  
             
   $ 4,723,583    $ 741,024
             

Gross Liabilities

     

Consolidated Blackstone Funds Excluding CLO Vehicles

   $ 40,732    $ 37,974

Consolidated CLO Vehicles

     3,665,353      —  
             
   $ 3,706,085    $ 37,974
             

There is no recourse to the Partnership for the consolidated VIEs’ liabilities. The assets and liabilities of consolidated VIEs comprise primarily investments and notes payable and are included within Investments and Loans Payable, respectively, in the Condensed Consolidated Statements of Financial Condition.

The Partnership holds variable interests in certain VIEs which are not consolidated as it is determined that the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. As of March 31, 2010, assets and liabilities recognized in the Partnership’s Condensed Consolidated Statement of Financial Condition related to the Partnership’s interest in these non-consolidated VIEs were $236.0 million and zero, respectively. Assets consisted of $102.5 million of investments and $133.5 million of receivables. The assets under management of VIEs in which Blackstone was not the primary beneficiary but in which Blackstone held a variable interest was $28.0 billion as of March 31, 2010. As of December 31, 2009, assets and liabilities recognized in the Partnership’s Condensed Consolidated Statement of Financial Condition related to the Partnership’s interest in these non-consolidated VIEs were $133.9 million and $0.1 million, respectively. Assets consisted of $21.7 million of investments and $112.2 million of receivables. The Partnership’s maximum exposure to loss relating to non-consolidated VIEs as of March 31, 2010 and December 31, 2009 was $237.7 million and $133.9 million, respectively. The maximum exposure to loss represents the loss of assets recognized by Blackstone relating to non-consolidated entities and any clawback obligation relating to previously distributed carried interest.

 

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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)

 

10. BORROWINGS

On March 23, 2010, an indirect, wholly-owned subsidiary of Blackstone entered into a new $1.07 billion revolving credit facility (the “Credit Facility”) with Citibank, N.A., as Administrative Agent. The Credit Facility provides for revolving credit borrowings, with a final maturity date of March 23, 2013. Interest on the borrowings is based on an adjusted LIBOR rate or alternate base rate, in each case plus a margin, and undrawn commitments bear a commitment fee. Borrowings may also be made in U.K. Sterling or Euros, in each case subject to certain sub-limits. The Credit Facility contains customary representations, covenants and events of default. Financial covenants consist of a maximum net leverage ratio and a requirement to keep a minimum amount of fee generating assets under management, each tested quarterly. The Credit Facility is unsecured. As of March 31, 2010, the Partnership had no outstanding borrowings under this Credit Facility.

Included within Loans Payable and Due to Affiliates are amounts due to holders of debt securities issued by Blackstone’s consolidated CLO vehicles. As of March 31, 2010, the Partnership’s borrowings through consolidated CLO vehicles consisted of the following:

 

     Borrowing
Outstanding
   Weighted
Average
Interest
Rate
    Weighted
Average Remaining
Maturity in Years

Senior Secured Notes

   $ 3,551,937    1.56   5.6

Subordinated Notes

     559,854    —   (a)    8.9
           
   $ 4,111,791     
           

 

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

Included within Senior Secured Notes and Subordinated Notes are amounts due to non-consolidated affiliates of $80.8 million and $275.7 million, respectively. The fair value of Senior Secured and Subordinated Notes as of March 31, 2010 was $3.3 billion and $281.1 million, respectively, of which $52.1 million and $148.5 million represents the amounts Due to Affiliates. The contractual maturities of these loans are greater than five years.

The Loans Payable of the consolidated CLO vehicles are collateralized by assets held by the CLO vehicle and assets of one vehicle may not be used to satisfy the liabilities of another. As of March 31, 2010, the fair value of the CLO assets was $3.8 billion. This collateral consisted of Cash, Corporate Loans, Corporate Bonds and other securities.

 

11. INCOME TAXES

Blackstone’s effective tax rate was (4.23)% and (1.94)% for the three months ended March 31, 2010 and 2009, respectively. Blackstone’s income tax provision was $9.6 million and $17.7 million for the three months ended March 31, 2010 and 2009, respectively.

Blackstone’s effective tax rate for the three months ended March 31, 2010 and 2009, respectively, was substantially due to the following: (a) certain corporate subsidiaries are subject to federal, state, local and foreign income taxes as applicable and other partnership subsidiaries are subject to New York City unincorporated business taxes, and (b) a portion of the compensation charges that contribute to Blackstone’s net loss are not deductible for tax purposes.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

12. NET LOSS PER COMMON UNIT

Basic and diluted net loss per common unit for the three months ended March 31, 2010 and basic and diluted net loss per common unit entitled to priority distributions and per common unit not entitled to priority distributions for the three months ended March 31, 2009 was calculated as follows:

 

     Basic and Diluted  
     Three Months Ended
March 31, 2010
 

Net Loss Attibutable to The Blackstone Group L.P.

   $ (121,377
        

Net Loss Per Common Unit

   $ (0.36
        

Total Weighted-Average Common Units Outstanding

     333,433,864   
        

 

     Basic and Diluted  
     Three Months Ended
March 31, 2009
 

Total Undistributed Loss

  

Net Loss Allocable to Common Unitholders

   $ (231,574

Less: Distributions to Common Unitholders

     (81,420
        

Total Undistributed Loss

   $ (312,994
        

Allocation of Total Undistributed Loss

  

Undistributed Loss — Common Unitholders Entitled to Priority Distributions

   $ (311,143

Undistributed Loss — Common Unitholders Not Entitled to Priority Distributions

     (1,851
        

Total Undistributed Loss

   $ (312,994
        

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

  

Undistributed Loss per Common Unit

   $ (1.14

Priority Distributions (a)

     0.30   
        

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

   $ (0.84
        

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

  

Undistributed Loss per Common Unit

   $ (1.14

Priority Distributions

     —     
        

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

   $ (1.14
        

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

     273,624,497   

Common Units Not Entitled to Priority Distributions

     1,627,540   
        

Total Weighted-Average Common Units Outstanding

     275,252,037   
        

 

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

For the three months ended March 31, 2010 and 2009, a total of 28,626,333 and 26,206,018 unvested deferred restricted common units and 764,866,007 and 830,772,697 Blackstone Holdings Partnership Units were anti-dilutive and as such have been excluded from the calculation of diluted earnings per unit, respectively.

Unit Repurchase Program

In January 2008, Blackstone announced that the Board of Directors of its general partner, Blackstone Group Management L.L.C., had authorized the repurchase by Blackstone of up to $500 million of Blackstone Common Units and Blackstone Holdings Partnership Units. Under this unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of Blackstone Common Units and Blackstone Holdings Partnership Units repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. This unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date. During the three months ended March 31, 2010, Blackstone repurchased 84,888 vested Blackstone Common Units as part of the unit repurchase program for a total cost of $1.2 million. As of March 31, 2010, the amount remaining available for repurchases under this program was $338.3 million.

 

13. EQUITY-BASED COMPENSATION

The Partnership has granted equity-based compensation awards to Blackstone’s senior managing directors, non-partner professionals, non-professionals and selected external advisors under the Partnership’s 2007 Equity Incentive Plan (the “Equity Plan”), the majority of which to date were granted in connection with the IPO. The Equity Plan allows for the granting of options, unit appreciation rights or other unit-based awards (units, restricted units, restricted common units, deferred restricted common units, phantom restricted common units or other unit-based awards based in whole or in part on the fair value of the Blackstone Common Units or Blackstone Holdings Partnership Units) which may contain certain service or performance requirements. As of January 1, 2010, the Partnership had the ability to grant 162,126,007 units under the Equity Plan for the year ending December 31, 2010.

The Partnership recorded total compensation expense in relation to its equity-based awards of $723.1 million and $738.0 million for the three months ended March 31, 2010 and 2009, respectively, with corresponding tax benefits of $1.6 million and $2.4 million, respectively. As of March 31, 2010, there was $5.7 billion of estimated unrecognized compensation expense related to unvested awards. This cost is expected to be recognized over a weighted-average period of 4.2 years.

Total vested and unvested outstanding units, including Blackstone Common Units, Blackstone Holdings Partnership Units and deferred restricted common units, were 1,126,493,462 as of March 31, 2010. Total outstanding unvested phantom units were 202,472 as of March 31, 2010.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

A summary of the status of the Partnership’s unvested equity-based awards as of March 31, 2010 and a summary of changes during the period January 1, 2010 through March 31, 2010 is presented below:

 

     Blackstone Holdings    The Blackstone Group L.P.

Unvested Units

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

Balance, December 31, 2009

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

Granted

   232,164        13.75    638,229        11.07    (31     14.65

Vested

   (469,554     12.15    (846,019     27.15    —          —  

Forfeited

   (100,299     31.00    (485,567     24.44    (6,089     14.65
                          

Balance, March 31, 2010

   270,121,036      $ 30.78    23,049,336      $ 22.42    202,472      $ 14.56
                          

Units Expected to Vest

The following unvested units, as of March 31, 2010, are expected to vest:

 

     Units    Weighted-Average
Service Period
in Years

Blackstone Holdings Partnership Units

   257,844,699    3.7

Deferred Restricted Blackstone Common Units and Options

   19,430,948    3.8
         

Total Equity-Based Awards

   277,275,647    3.7
         

Phantom Units

   193,389    0.3
         

 

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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)

 

14. RELATED PARTY TRANSACTIONS

Affiliate Receivables and Payables

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

 

     March 31,
2010
   December 31,
2009

Due from Affiliates

     

Accrual for Potential Clawback of Previously Distributed Interest

   $ 298,259    $ 308,378

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

     130,636      127,669

Amounts Due from Portfolio Companies and Funds

     122,369      115,441

Investments Redeemed in Non-Consolidated Funds of Funds

     4,565      77,600

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

     118,642      68,649

Payments Made on Behalf of Non-Consolidated Entities

     57,920      53,581

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

     7,683      8,589
             
   $ 740,074    $ 759,907
             

Due to Affiliates

     

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

   $ 890,846    $ 830,517

Accrual for Potential Repayment of Previously Received Performance Fees and Allocations

     483,632      485,253

Due to Note Holders of Consolidated CLOs

     200,608      —  

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

     58,644      58,083

Distributions Received on Behalf of Non-Consolidated Entities

     5,649      31,692

Payments Made by Non-Consolidated Entities

     6,194      4,521
             
   $ 1,645,573    $ 1,410,066
             

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

The Co-Founder, senior managing directors and employees invest on a discretionary basis in the Blackstone Funds both directly and through consolidated entities. Their investments may be subject to preferential management fee and performance fee and allocation arrangements. As of March 31, 2010 and December 31, 2009, the Co-Founder’s, other senior managing directors’ and employees’ investments aggregated $695.2 million and $649.4 million, respectively, and the Co-Founder’s, other senior managing directors’ and employees’ share of the Net Income (Loss) Attributable to Redeemable Non-Controlling and Non-Controlling Interests in Consolidated Entities aggregated $56.8 million and $(34.0) million for the three months ended March 31, 2010 and 2009, respectively.

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

Revenues Earned from Affiliates

Management and Advisory Fees earned from affiliates totaled $38.8 million and $20.3 million for the three months ended March 31, 2010 and 2009, respectively. Fees relate primarily to transaction and monitoring fees which are made in the ordinary course of business and under terms that would have been obtained from unaffiliated third parties.

Loans to Affiliates

Loans to affiliates consist of interest-bearing advances to certain Blackstone individuals to finance their investments in certain Blackstone Funds. These loans earn interest at Blackstone’s cost of borrowing, and such interest totaled $0.6 million and $0.4 million for the three months ended March 31, 2010 and 2009, respectively. No such loans to any director or executive officer of Blackstone have been made or were outstanding since March 22, 2007, the date of Blackstone’s initial filing with the Securities and Exchange Commission of a registration statement relating to its initial public offering.

Contingent Repayment Guarantee

Blackstone and its personnel who have received Carried Interest distributions have guaranteed payment on a several basis (subject to a cap) to the Carry Funds of any clawback obligation with respect to the excess Carried Interest allocated to the general partners of such funds and indirectly received thereby to the extent that either Blackstone or its personnel fails to fulfill its clawback obligation, if any. The Accrual for Possible Repayment of Previously Received Performance Fees and Allocations represents amounts previously paid to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone Funds if the Carry Funds were to be liquidated based on the fair value of their underlying investments as of March 31, 2010. See Note 15. “Commitments and Contingencies — Contingencies — Contingent Obligations (Clawback)”.

Aircraft and Other Services

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

Tax Receivable Agreement

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

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

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

Assuming no material changes in the relevant tax law and that the corporate taxpayers earn sufficient taxable income to realize the full tax benefit of the increased amortization of the assets, the expected future payments under the tax receivable agreements (which are taxable to the recipients) will aggregate $890.8 million over the next 15 years. The after-tax present value of these estimated payments totals $228.5 million assuming a 15% discount rate and using Blackstone’s most recent projections relating to the estimated timing of the benefit to be received. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. The payments under the tax receivable agreement are not conditioned upon continued ownership of Blackstone equity interests by the pre-IPO owners and the others mentioned above.

Other

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

 

15. COMMITMENTS AND CONTINGENCIES

Commitments

Investment Commitments

The consolidated Blackstone Funds had signed investment commitments of $23.1 million as of March 31, 2010. Included in this is $3.3 million of signed investment commitments for portfolio company acquisitions in the process of closing. In addition, the general partners of the Blackstone Funds had unfunded commitments to each of their respective funds of $1.3 billion as of March 31, 2010.

Contingencies

Guarantees

Certain of Blackstone’s consolidated real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their Portfolio Companies. There is no direct recourse to the Partnership to fulfill such obligations. To the extent that underlying funds are required to fulfill guarantee obligations, the Partnership’s invested capital in such funds is at risk. Total investments at risk in respect of guarantees extended by real estate funds was $3.3 million as of March 31, 2010.

Contingent Performance Fees and Allocations

There were $107.7 million of segment level Performance Fees and Allocations related to the hedge funds in the credit and marketable alternatives and real estate segments through the period ended March 31, 2010

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

attributable to arrangements where the measurement period had not ended. Measurement periods may be greater than the current reporting period. On a consolidated basis, after eliminations, such Performance Fees and Allocations were $106.5 million through the period ended March 31, 2010.

Litigation

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

Contingent Obligations (Clawback)

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

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

As of March 31, 2010, the current cash clawback obligation of the Blackstone general partners to the limited partner investors of the private equity, real estate and credit-oriented funds is zero. For financial reporting purposes, however, the general partners have recorded a liability for potential clawback obligations to the limited partners of some of the carry funds due to changes in the unrealized value of a fund’s remaining investments and where the fund’s general partner has previously received Carried Interest distributions with respect to such fund’s realized investments.

As of March 31, 2010, the clawback obligations, which are not currently due, were $483.6 million, of which $217.9 million related to Blackstone Holdings and $265.7 million related to current and former Blackstone personnel. As of December 31, 2009, such obligations were $485.3 million, of which $217.4 million related to Blackstone Holdings and $267.9 million related to current and former Blackstone personnel. The Accrual for Potential Repayment of Previously Received Performance Fees and Allocations is included in Due to Affiliates.

The following table presents the clawback obligations by segment:

 

     March 31, 2010    December 31, 2009

Segment

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

Private Equity

   $ 65,757    $ 120,307    $ 186,064    $ 65,237    $ 120,208    $ 185,445

Real Estate

     152,141      145,427      297,568      152,142      147,666      299,808
                                         

Total

   $ 217,898    $ 265,734    $ 483,632    $ 217,379    $ 267,874    $ 485,253
                                         

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

A portion of the carried interest paid to current and former Blackstone personnel is held in segregated accounts in the event of a cash clawback obligation. These segregated accounts are not included in the Condensed Consolidated Financial Statements of the Partnership, except to the extent a portion of the assets held in the segregated accounts may be allocated to a consolidated Blackstone fund of hedge funds. At March 31, 2010, $474.5 million was held in segregated accounts for the purpose of meeting any clawback obligations of current and former personnel if such payments are required.

 

16. SEGMENT REPORTING

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

Management makes operating decisions and assesses the performance of each of Blackstone’s business segments based on financial and operating metrics and data that is presented without the consolidation of any of

 

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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 Blackstone Funds that are consolidated into the Condensed Consolidated Financial Statements. Consequently, all segment data excludes the assets, liabilities and operating results related to the Blackstone Funds.

The following table presents the financial data for Blackstone’s four reportable segments as of and for the three months ended March 31, 2010:

 

     As of and for the Three Months Ended March 31, 2010  
     Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
    Total
Segments
 

Revenues

          

Management and Advisory Fees

          

Base Management Fees

   $ 65,432      $ 83,060      $ 103,479      $ —        $ 251,971   

Advisory Fees

     —          —          —          76,568        76,568   

Transaction and Other Fees, Net

     31,972        1,942        1,345        1        35,260   

Management Fee Offsets

     —          (489     (689     —          (1,178
                                        

Total Management and Advisory Fees

     97,404        84,513        104,135        76,569        362,621   
                                        

Performance Fees and Allocations

          

Realized

     46,175        5,948        1,758        —          53,881   

Unrealized

     45,549        11,391        75,393        —          132,333   
                                        

Total Performance Fees and Allocations

     91,724        17,339        77,151        —          186,214   
                                        

Investment Income (Loss)

          

Realized

     (495     2,632        2,983        187        5,307   

Unrealized

     84,684        46,892        19,715        230        151,521   
                                        

Total Investment Income (Loss)

     84,189        49,524        22,698        417        156,828   

Interest and Dividend Revenue

     3,428        2,718        1,148        1,396        8,690   

Other

     100        (1,876     (542     (932     (3,250
                                        

Total Revenues

     276,845        152,218        204,590        77,450        711,103   
                                        

Expenses

          

Compensation and Benefits

          

Base Compensation

     46,910        40,150        49,085        54,492        190,637   

Performance Fee Related

          

Realized

     6,005        1,524        212        —          7,741   

Unrealized

     6,344        6,937        41,319        —          54,600   
                                        

Total Compensation and Benefits

     59,259        48,611        90,616        54,492        252,978   

Other Operating Expenses

     24,431        14,290        19,575        14,727        73,023   
                                        

Total Expenses

     83,690        62,901        110,191        69,219        326,001   
                                        

Economic Net Income

   $ 193,155      $ 89,317      $ 94,399      $ 8,231      $ 385,102   
                                        

Segment Assets

   $ 3,526,373      $ 2,318,640      $ 2,313,250      $ 423,288      $ 8,581,551   
                                        

 

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THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

The following table reconciles the Total Reportable Segments to Blackstone’s Income (Loss) Before Provision for Taxes and Total Assets as of and for the three months ended March 31, 2010:

 

    As of and for the Three Months Ended
March 31,  2010
 
    Total
Segments
  Consolidation
Adjustments
and Reconciling
Items
    Blackstone
Consolidated
 

Revenues

  $ 711,103   $ (9,864 )(a)    $ 701,239   

Expenses

  $ 326,001   $ 774,713 (b)    $ 1,100,714   

Other Income (Loss)

  $ —     $ 171,804 (c)    $ 171,804   

Economic Net Income (Loss)

  $ 385,102   $ (612,773 )(d)    $ (227,671

Total Assets

  $ 8,581,551   $ 4,904,766 (e)    $ 13,486,317   

 

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

 

     Three Months Ended
March 31, 2010

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ 2,762

Fund Expenses Added in Consolidation

     708

Redeemable and Non-Redeemable Non-Controlling Interests in Income of Consolidated Entities

     168,334
      

Total Consolidation Adjustments

   $ 171,804
      

 

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

 

     Three Months Ended
March 31, 2010
 

Economic Net Income

   $ 385,102   
        

Adjustments:

  

Amortization of Intangibles

     (39,512

IPO and Acquisition-Related Charges

     (726,722

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

     159,935   

Management Fee Revenues Associated with Consolidated CLO Vehicles

     (6,474
        

Total Adjustments

     (612,773
        

Income (Loss) Before Provision for Taxes

   $ (227,671
        

 

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

 

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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 financial data for Blackstone’s four reportable segments for the three months ended March 31, 2009:

 

     Three Months Ended March 31, 2009  
     Private
Equity
    Real
Estate
    Credit and
Marketable
Alternatives
    Financial
Advisory
    Total
Segments
 

Revenues

          

Management and Advisory Fees

          

Base Management Fees

   $ 68,431      $ 80,198      $ 96,503      $ —        $ 245,132   

Advisory Fees

     —          —          —          90,940        90,940   

Transaction and Other Fees, Net

     10,328        3,140        443        —          13,911   

Management Fee Offsets

     —          (1,193     (4,213     —          (5,406
                                        

Total Management and Advisory Fees

     78,759        82,145        92,733        90,940        344,577   
                                        

Performance Fees and Allocations

          

Realized

     —          646        —          —          646   

Unrealized

     4,818        (229,219     9,922        —          (214,479
                                        

Total Performance Fees and Allocations

     4,818        (228,573     9,922        —          (213,833
                                        

Investment Income (Loss)

          

Realized

     (344     1,397        (11,998     —          (10,945

Unrealized

     (15,165     (67,239     8,090        —          (74,314
                                        

Total Investment Income (Loss)

     (15,509     (65,842     (3,908     —          (85,259

Interest and Dividend Revenue

     (152     384        709        1,044        1,985   

Other

     180        (669     (253     (943     (1,685
                                        

Total Revenues

     68,096        (212,555     99,203        91,041        45,785   
                                        

Expenses

          

Compensation and Benefits

          

Base Compensation

     36,848        36,002        53,707        50,952        177,509   

Performance Fee Related

          

Realized

     (6     2,138        57        —          2,189   

Unrealized

     (41,966     (75,459     7,370        —          (110,055
                                        

Total Compensation and Benefits

     (5,124     (37,319     61,134        50,952        69,643   

Other Operating Expenses

     20,108        12,615        23,645        12,976        69,344   
                                        

Total Expenses

     14,984        (24,704     84,779        63,928        138,987   
                                        

Economic Net Income (Loss)

   $ 53,112      $ (187,851   $ 14,424      $ 27,113      $ (93,202
                                        

 

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Table of Contents

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—(Continued)

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

 

The following table reconciles the Total Reportable Segments to Blackstone’s Income Before Provision for Taxes for the three months ended March 31, 2009:

 

     Three Months Ended March 31, 2009  
     Total
Segments
    Consolidation
Adjustments and
Reconciling Items
    Blackstone
Consolidated
 

Revenues

   $ 45,785      $ (871 )(a)    $ 44,914   

Expenses

   $ 138,987      $ 783,371 (b)    $ 922,358   

Other Income (Loss)

   $ —        $ (34,763 )(c)    $ (34,763

Economic Net Income (Loss)

   $ (93,202   $ (819,005 )(d)    $ (912,207

 

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

 

     Three Months Ended
March 31, 2009
 

Fund Management Fees and Performance Fees and Allocations Eliminated in Consolidation

   $ (1,602

Fund Expenses Added in Consolidation

     3,582   

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

     (36,743
        

Total Consolidation Adjustments

   $ (34,763
        

 

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

 

     Three Months Ended
March 31, 2009
 

Economic Net Income (Loss)

   $ (93,202
        

Adjustments:

  

Amortization of Intangibles

     (39,513

IPO and Acquisition-Related Charges

     (741,057

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

     (38,435
        

Total Adjustments

     (819,005
        

Income (Loss) Before Provision for Taxes

   $ (912,207
        

 

17. SUBSEQUENT EVENTS

On April 1, 2010, the Partnership acquired, through GSO, management agreements relating to certain collateralized debt obligations (“CDO”) and CLO vehicles previously managed by Callidus Capital Management, LLC. The acquisition is expected to have a material impact on the consolidated statement of financial condition. Based on the fair values of CLO assets and liabilities managed under such contracts, the consolidated assets and liabilities of Blackstone will increase by approximately $3.0 billion and $2.8 billion, respectively. There is no material impact to the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows.

 

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

THE BLACKSTONE GROUP L.P.

Unaudited Consolidating Statements of Financial Condition

(Dollars in Thousands)

 

     March 31, 2010
     Consolidated
Operating
Partnerships
   Consolidated
Blackstone
Funds (a)
   Reclasses and
Eliminations
    Consolidated

Assets

          

Cash and Cash Equivalents

   $ 627,257    $ —      $ —        $ 627,257

Cash Held by Blackstone Funds and Other

     —        276,540      —          276,540

Investments

     3,122,593      4,758,879      (209,898     7,671,574

Accounts Receivable

     309,070      68,866      —          377,936

Due from Affiliates

     730,843      33,311      (24,080     740,074

Intangible Assets, Net

     879,965      —        —          879,965

Goodwill

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

Other Assets

     183,045      1,148      —          184,193

Deferred Tax Assets

     1,025,176      —        —          1,025,176
                            

Total Assets

   $ 8,581,551    $ 5,138,744    $ (233,978   $ 13,486,317
                            

Liabilities and Partners’ Capital

          

Loans Payable

   $ 631,634    $ 3,341,457    $ —        $ 3,973,091

Due to Affiliates

     1,407,469      261,394      (23,290     1,645,573

Accrued Compensation and Benefits

     421,829      1,574      —          423,403

Accounts Payable, Accrued Expenses and Other Liabilities

     266,342      182,778      (791     448,329
                            

Total Liabilities

     2,727,274      3,787,203      (24,081     6,490,396
                            

Redeemable Non-Controlling Interests in Consolidated Entities

     —        —        545,348        545,348
                            

Partners’ Capital

          

Partners’ Capital

     3,444,870      748,722      (755,245     3,438,347

Appropriated Partners’ Capital

     —        298,164      —          298,164

Accumulated Other Comprehensive Income

     1,709      —        —          1,709

Non-Controlling Interests in Consolidated Entities

     267,303      304,655      —          571,958

Non-Controlling Interests in Blackstone Holdings

     2,140,395      —        —          2,140,395
                            

Total Partners’ Capital

     5,854,277      1,351,541      (755,245     6,450,573
                            

Total Liabilities and Partners’ Capital

   $ 8,581,551    $ 5,138,744    $ (233,978   $ 13,486,317
                            

 

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THE BLACKSTONE GROUP L.P.

Unaudited Consolidating Statements of Financial Condition—(Continued)

(Dollars in Thousands)

 

     December 31, 2009
     Consolidated
Operating
Partnerships
   Consolidated
Blackstone
Funds (a)
   Reclasses
and
Eliminations
    Consolidated

Assets

          

Cash and Cash Equivalents

   $ 952,096    $ —      $ —        $ 952,096

Cash Held by Blackstone Funds and Other

     —        86,084      —          86,084

Investments

     2,772,489      999,792      (206,798     3,565,483

Accounts Receivable

     305,846      461      —          306,307

Due from Affiliates

     735,471      64,384      (39,948     759,907

Intangible Assets, Net

     919,477      —        —          919,477

Goodwill

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

Other Assets

     171,463      1,141      (48     172,556

Deferred Tax Assets

     943,512      —        —          943,512
                            

Total Assets

   $ 8,503,956    $ 1,151,862    $ (246,794   $ 9,409,024
                            

Liabilities and Partners’ Capital

          

Loans Payable

   $ 651,993    $ 5,630    $ —        $ 657,623

Due to Affiliates

     1,362,781      65,776      (18,491     1,410,066

Accrued Compensation and Benefits

     486,951      1,994      —          488,945

Accounts Payable, Accrued Expenses and Other Liabilities

     235,673      94,688      (21,504     308,857
                            

Total Liabilities

     2,737,398      168,088      (39,995     2,865,491
                            

Redeemable Non-Controlling Interests in Consolidated Entities

     —        —        526,311        526,311
                            

Partners’ Capital

          

Partners’ Capital

     3,376,707      733,110      (733,110     3,376,707

Accumulated Other Comprehensive Income

     2,420      —        —          2,420

Non-Controlling Interests in Consolidated Entities

     289,619      250,664      —          540,283

Non-Controlling Interests in Blackstone Holdings

     2,097,812      —        —          2,097,812
                            

Total Partners’ Capital

     5,766,558      983,774      (733,110     6,017,222
                            

Total Liabilities and Partners’ Capital

   $ 8,503,956    $ 1,151,862    $ (246,794   $ 9,409,024
                            

 

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

Blackstone Distressed Securities Fund L.P.

Blackstone Market Opportunities Fund L.P.

Blackstone Strategic Alliance Fund L.P.

Blackstone Strategic Equity Fund L.P.

Blackstone Value Recovery Fund L.P.

BTD CP Holdings, LP

GSO Co-Investment Partners LLC

GSO Legacy Associates 2 LLC

GSO Legacy Associates LLC

The Asia Opportunities Fund L.P.

Private equity side-by-side, general partners’ and affiliated limited partners’ investment vehicles

Real estate side-by-side, general partners’ and affiliated limited partners’ investment vehicles

Mezzanine side-by-side, general partners’ and affiliated limited partners’ investment vehicles

Collateralized loan obligation vehicles*

 

  * Consolidated as of March 31, 2010 only.

 

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

The following discussion and analysis should be read in conjunction with The Blackstone Group L.P.’s Condensed Consolidated Financial Statements and the related notes included within this Quarterly Report on Form 10-Q.

Our Business

Blackstone is one of the largest independent managers of private capital in the world. We also provide a wide range of financial advisory services, including financial advisory, restructuring and reorganization advisory and fund placement services.

Our business is organized into four business segments:

 

   

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

 

   

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

 

   

Credit and Marketable Alternatives. Our credit and marketable alternatives segment is comprised of our management of funds of hedge funds, credit-oriented funds, collateralized loan obligation (“CLO”) vehicles and publicly-traded closed-end mutual funds. Our funds of hedge funds operation was organized in 1990 and has developed into a leading manager of institutional fund of hedge fund assets across a wide variety of strategies. Our credit-oriented funds and CLOs are managed by our subsidiary, GSO Capital Partners (“GSO”), a major participant in the leveraged finance market. GSO manages a variety of credit-oriented funds including senior credit-oriented funds, distressed debt funds, mezzanine funds and general credit-oriented funds. These products are intended to provide investors with greater levels of current income and for certain products, a greater level of liquidity.

 

   

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

We generate our revenue from fees earned pursuant to contractual arrangements with funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees), and from financial advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. We invest in the funds we manage and, in most cases, receive a preferred allocation of income (i.e., a “carried interest”) or an incentive fee from an investment fund in the event that specified cumulative investment returns are achieved. The composition of our revenues will vary based on market conditions and the

 

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cyclicality of the different businesses in which we operate. Net investment gains and resultant investment income generated by the Blackstone Funds, principally private equity and real estate funds, are driven by value created by our operating and strategic initiatives as well as overall market conditions. Our funds initially record fund investments at cost and then such investments are subsequently recorded at fair value. Fair values are affected by changes in the fundamentals of the portfolio company, the portfolio company’s industry, the overall economy as well as other market conditions.

Business Environment

Equity and credit markets rose in most regions of the world in the first quarter of 2010, although to a lesser extent than in late 2009. Downward pressure from sovereign debt issues in the Eurozone, as well as monetary tightening in China, were offset by strong corporate earnings, several positive economic data points and generally improving investor sentiment.

In the United States, there is a growing consensus that the risk of a double dip recession has abated which is positively impacting markets. Investor appetite for risk has continued to increase as market participants search for yield in a sustained low interest rate environment. Equity and credit markets benefited from positive fund flows and improving fundamentals in the first quarter. The S&P 500 rose for the fourth consecutive quarter, while high yield credit spreads modestly tightened and average leveraged loan prices continued to improve.

In real estate, the fundamental picture continued to improve in the first quarter. In office, major markets are each recovering albeit at a different pace. Increases in vacancy rates continued to moderate, with some markets, such as New York and London, actually showing signs of decreasing vacancy. As a general matter, leasing activity has picked up considerably over 2009 levels, but is still below historical norms. In hospitality, industry-wide Revenue Per Available Room (industry “RevPAR”), an important industry metric, grew 4% in March, which was the first month of growth in nearly two years.

Commodity prices were mixed in the first quarter, with a modest increase in oil prices occurring late in the quarter. The U.S. dollar rose against each of the Euro and Pound Sterling by 6.0% and 6.4%, respectively. Monetary policy remained accommodative in several markets in the first quarter, although certain foreign governments, such as China, raised interest rates and took additional steps to reduce liquidity. The outlook for global monetary policy is uncertain.

Blackstone’s businesses are materially affected by conditions in the financial markets and economic conditions in the U.S., Western Europe, Asia and, to a lesser extent, elsewhere in the world.

Significant Transactions

Acquisition of Management Agreements Related to CDO and CLO Vehicles

On April 1, 2010, the Partnership acquired, through GSO, management agreements relating to certain collateralized debt obligations (“CDO”) and CLO vehicles previously managed by Callidus Capital Management, LLC. The acquisition is expected to have a material impact on the consolidated statement of financial condition. Based on the fair values of CLO assets and liabilities managed under such contracts, the consolidated assets and liabilities of Blackstone will increase by approximately $3.0 billion and $2.8 billion, respectively. There is no material impact to the Condensed Consolidated Statement of Operations or the Condensed Consolidated Statement of Cash Flows.

Key Financial Measures and Indicators

Our key financial measures and indicators are discussed below.

Revenues

Revenues primarily consist of management and advisory fees, performance fees and allocations, investment income, interest and dividend revenue and other. Please refer to “Part I. Item 1. Business, Incentive

 

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Arrangements / Fee Structure” and “— Critical Accounting Policies, Revenue Recognition” in our 2009 Annual Report on Form 10-K for additional information regarding the manner in which Base Management Fees and Performance Fees and Allocations are generated.

Management and Advisory Fees — Management and Advisory Fees are comprised of management fees, including base management fees, transaction and other fees, management fee reductions and offsets, and advisory fees.

The Partnership earns base management fees from the limited partners of funds in each of its managed funds on any of the following bases: as a fixed p