Blackstone (NYSE:BX) reported economic net income (ENI) for the second quarter of 2014 of $1.15 per unit vs. the consensus estimate of $0.68, meaningfully beating the Street view. The ENI for the quarter grew by about 85% year on year from $0.62 in Q2 2013. Sequentially, ENI grew by 64% from $0.70 per unit in Q1 2014. The main contributor in the quarter of ENI growth was strong performance at the BCP V private equity fund, which crossed its preferred return threshold in the quarter. BCP V accounted for $579MM of revenue and $487MM of ENI for the quarter (total revenue and ENI for the quarter were $2.2BN and $1.3BN, respectively).
Distributable earnings, or DE, per unit was $0.65 vs. $0.28 in Q2 2013, and $0.41 in Q1 2014, showing strong growth in the quarter of this metric. This is an important metric, as majority of distributable earnings is paid out to the unit-holders as cash distribution every quarter. For Q2 2014, the company will be paying a distribution of $0.55 per unit, almost doubling from $0.23 in Q2 2013, and about 57% higher sequential from $0.35 in Q1 2014. This is indeed a very strong growth in distribution, though looking forward it is likely that this number will be highly volatile given the volatility in the business model on a quarterly basis. That said, the distribution for the quarter is impressive, representing a quarterly yield of about 1.6%, and annualized yield of 6.4% (though again given the volatility, annualized yield figure has a limited meaning).
Business Segment Brief Overview
Total private equity AUM increased about 28% y-o-y from $53.2BN to $68.2BN in Q2 2014, and 3.1% sequentially from about $66.1BN in Q1 2014. Revenue and ENI showed turbo charged growth of over 160% and 270% on a y-o-y basis, respectively, driven mostly by strong performance in BCP V. Specifically, revenue and ENI increased from $356.1MM and $171.2MM in Q2 2013 to $938.8MM and $647.7MM in Q2 2014, respectively. Overall portfolio appreciation was 8.4% sequentially. Clearly, this is a very strong performance and demonstrates the leverage in the business model once the funds start earning preferred incentive fees.
Total real estate AUM increased about 25.8% y-o-y from $63.9BN to $80.4BN in Q2 2014, and decreased about 1.1% sequentially from about $81.3BN in Q1 2014. The sequential decrease in AUM was due to realizations in the quarter. ENI for the segment, on the other hand, showed strong growth increasing by over 52% sequentially to $489.3MM in Q2 2014 from $320.9MM in Q1 2014. On a y-o-y basis, ENI increased by about 32% from $370.9MM in Q2 2013. Overall portfolio value increased 6% in the quarter, which appears to be a strong sequential performance.
Hedge Fund Solutions
Total hedge fund solutions AUM increased about 21% y-o-y from $50.1BN to $60.6BN in Q2 2014, and 4.1% on a sequential basis from $58.2BN in Q1 2014. Revenue increased 20% y-o-y from $137.5MM in Q2 2013 to $165.7MM in Q2 2014. On a sequential basis, revenue decreased about -14.5% from $193.9MM in Q1 2014, and ENI decreased about -29% from $113.9MM in Q1 2014. The decreases in ENI and revenues were predominantly driven by sequential decrease in performance fees and investment income. The portfolio gross composite return was about 2% for the quarter, and fee eligible AUM was about half of total AUM, consistent with previous quarter.
Total credit AUM increased about 12% y-o-y from $62.2BN in Q2 2013 to $69.5BN in Q2 2014. On a sequential basis, the growth was about 5.3%, which is a rather impressive growth rate given the current state of the credit markets and realizations in the quarter. Revenue increased by about 8% y-o-y to 229.9MM in Q2 2014, while ENI increased by about 27% on a y-o-y basis to $103.7MM in Q2 2014 from $82MM in Q2 2013. On a sequential basis, revenue and ENI also increased rather impressively by 7.9% and 28%, respectively. The strong sequential increase was predominantly due to higher performance fees and strong decrease in other operating expenses.
Financial Advisory business revenues were down 2% y-o-y to $118.9MM in Q2 2014, however ENI was up 13% to $27MM for the same period predominantly due to lower compensation expense. The relevance of this business segment is rather small compared to the asset management businesses that the company operates.
Selected interesting points made by the company:
- This was the company's second best quarter ever.
- Realizations and dispositions continue to accelerate, though investment activity is also growing.
- Revenue and EBITDA for portfolio companies on average grew by 8% and 11% in the quarter, respectively.
- The company raised 14.5BN of gross capital in the quarter, mostly organically, while achieving $62BN gross inflows for the past year.
- The company commented on the debate in investment community whether it can invest significant amounts of capital at attractive returns in the current environment of frothy valuations? Management thinks that Blackstone's scale and integrated global reach will help find opportunities to deploy capital. Deployed $6BN in the quarter with another $8BN committed in the quarter.
- Hilton gain was about 2.8x invested capital or about $12 billion, which the company believes is the largest private equity gain in history.
- The company thinks private equity deal multiples are in general rather high, and is focusing on companies that need capital to grow. Focus on higher growth companies, and does not think valuation for growth companies are too high. Also, the company is deploying more capital in new-build projects.
- M&A outlook continues to improve with strategic players accelerating activity and more sales of portfolio companies to them are likely in the future.
- Sees significant growth opportunities related to new product introduction.
In summary, this was overall a very strong quarter. On the risk side, my biggest takeaway is that higher valuations of potential investments and associated ability to deploy capital at attractive future returns is probably the biggest risk. That said, if anyone, Blackstone is probably best positioned to navigate through this risk given its past track record. I remain long Blackstone.
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