The Blackstone Group L.P

Company Analysis

By: Tommy A. Lee

FINA 408

December 18th, 2015

Background

Blackstone is a leading global alternative asset management firm and provider of financial

advisory services. As of December 1st, 2015, Blackstone has $311 billion Total Assets Under

Management. We strive to produce outstanding results for our investors and clients by injecting

capital and ideas to help businesses succeed and grow. Our alternative asset management

business includes investment vehicles focused on private equity, real estate, hedge fund

solutions, non-investment grade credit, secondary funds, and multi-asset class exposures falling

outside of other funds’ criteria. On the financial advisory services side, we also include financial

and strategic advisory, restructuring and reorganization advisory, capital markets and fund

placement services. Each and every business of Blackstone uses solution oriented approach to

drive better performance. Since our inception in 1985, we have mended strong relationships with

clients in our financial advisory business, where we strive to provide objective and insightful

solutions and advice that our clients can trust. Our scaled, diversified businesses, long track

record of investment performance, proven investment approach, and strong client relationship,

positions us to perform well despite variances in market conditions. The primary limited partners

in the funds are corporate and public pension funds. Due to this, this drives us to have superb

preforming funds to help support a better retirement for hundreds of thousands of pensioners.

Since we are a global firm, we have investments in almost every continent, thus our investments

can make a difference around the world. Our commitment to making our family of companies

stronger and bigger in ways that can impact local economics positively. As of December 1st,

2015, we employ 137 senior managing directors and 910 other investment and advisory

professionals at our headquarters in New York and in 23 other cities around the world.

I. Governance and Communication Analysis

a. Analyst Call

i. The analyst call started off on a positive note with highlighting the key

ratios of the firm. Earnings were in line with analyst and market

expectations. As of July 27th, the dividend yield was 7% which is unheard

of for a large corporation. I really enjoyed listening to Stephen

Schwarzman (CEO) discuss about the continuous growth and performance

of their various businesses. He also notes how Blackstone’s Funds are

needing to cap since their funds are in such high demand. I notice his

constant references of outperforming all the developed public markets

throughout their various businesses.

Source: Blackstone 10-K

Questions

ii. How does Blackstone mitigate short-term volatility in public markets,

such as the crash of the SSE and SZSE?

iii. Due to the competitiveness of Private Equity and Hedge Funds, new

entrants and existing firms have taken into consideration of lowering

management fees. Will Blackstone follow or stick to the same 20/2?

b. Corporate Governance

i. Stephen Schwarzman is the CEO, Chair of Board, and Co-Founder.

Before he founded Blackstone, Schwarzman was Global Head of M&A at

Lehman Brothers. He has used his extensive knowledge of the financial

market and network to grow Blackstone to a powerhouse company. The

Board knows he is more than qualify to lead the company into further

expansion. The reason Schwarzman is the CEO and Chairman is because

his reputation of producing outstanding returns from investments and

knowledge of the industry is what makes him an outstanding candidate for

this position. The company believes in every decision he makes and they

should because he help grew Blackstone from a boutique financial

advisory services firm to a global alternative asset management

powerhouse.

ii. Richard Jenrette, William G. Parrett, Rochelle B. Lazarus, and Jay Light.

All members of the Audit Committee are financially literate. I completely

agree with this designation as all members serve on the board of Fortune

500 companies and have a strong background in finance and accounting.

For example, Richard Jenrette founded his own investment bank and then

after decades in banking, he left to become the chairman of the United

States Securities and Exchange Commission. William G. Parrett has a

strong financial background and was the co-founder of Deloitte’s Global

Financial Services.

iii. Stephen Schwarzman was paid a total of $22M and 98.4% of his total pay

was bonuses. His bonuses is all performance based and relies heavily on

the each funds’ carried interest. This is because it is an incentive for him

to have above average preforming funds in order to get a big bonus

payout. Also, it is beneficial for Schwarzman to get paid in bonuses

because it helps with tax purposes.

iv. The largest percentage holder of Blackstone’s common stock is FMR,

LLC (~10%). All beneficial owners of common stock are institutions.

v. There is another class of shares that is wholly owned by Blackstone

Holdings which is a partnership consisting of the Directors, Executive

Officers, and Stephen Schwarzman (majority ownership). The partnership

owns roughly 62% and these shares can be traded into common stock units

as a one-to-one offering. Thus, Blackstone Holding controls the majority

voting rights of The Blackstone Group.

II. Industry and Strategy Analysis

a. Industry Analysis

i. Porter’s Five Forces

1. Rivalry Among Existing Firms (High): The global alternative asset

management industry is highly competitive. It emphasizes on who

has the highest return and minimal risk investment strategies. The

top competitors in this industry are Bain Capital and The Carlyle

Group.

2. Threat of New Entrants (Low): It is extremely difficult to enter the

global alternative asset management industry. Not only do you

need to build a vast network and be financial savvy, but it is highly

capital intensive. One cannot simply set up shop and expect to

compete with Blackstone, Bain Capital, and Carlyle.

3. Threat of Substitute Products (Low): There are virtually no

substitute products that is worthwhile. One can invest in the public

stock market and hope for the best. Even if you invest in a mutual

fund, there are high chances they have allocated a portion of their

investment into these global alternative asset management firms.

4. Bargaining Power of Buyers (Low): Bargaining is unheard of in

this industry. The fund is capped at a certain amount and how

much you invest is subject to the percentage committed in the

fund. The only bargaining power buyers (investors) have are the

management fee structure or carried interest. But there are industry

standards that most if not all global alternative asset management

firm follow.

5. Bargaining Power of Suppliers (Low): The employees are the

suppliers in this case. Their bargaining power is virtually non-

existent as most top GAAM firms pay their employees’ base salary

according to the Street. There is a little bit of wiggle room in terms

of bonuses, but those follow the waterfall structure. So analyst and

associates should not expect much from these compared to

Directors and VPs.

ii. Value Chain Analysis

1. Product Development Institutional Sales Portfolio

Management Investing Controlling Institutional Reporting

2. Blackstone is in every process of the value chain expect for

institutional reporting. The product development is picking

different investment vehicles in each fund. A group of executives

discuss which new product offering does the firm see for profit

potential. As for institutional sales, that is capital raising for the

funds. This is where the capital raising team goes out to various

corporations and retirement funds to seek capital for their new

funds they introduce. Portfolio management is overseeing,

monitoring, and mitigate risk in each fund. Each investment group

is responsible for a sector in each fund; the investment group’s

associate will usually do the grunt work of modeling the

investment portfolio company and monitoring it. The investing

controlling part of the value chain is analyzing the portfolio and

computing potential exit opportunities. This is also mainly for the

job of an associate, where they do all the grunt work for seeking

potential exit opportunities such as an IPO or sell-off to an

acquirer.

b. Company Strategy Analysis

i. Blackstone is following the service differentiation strategy. The company

offers a variety of investment strategies from private equity funds to real

estate funds. Blackstone Real Estate is the biggest real estate fund in the

world and invests in a variety of real estate asset types such as: office,

residential, multi-family, mix-used, and hotels. Their private equity

division has invested in some notable companies. The selected portfolio

companies include: Crocs, Leica Cameras, Jack Wolfskin, Seaworld Parks

and Entertainment, Pinnacle Foods, and Michaels Stores. Blackstone’s

BAAM (Blackstone Alternative Asset Management) division is a hedge

fund solutions fund. There is an Alpha Fund I and Alpha Fund II which

essentially invests in various types of hedge fund solutions such as equity,

event-drive, credit-drive, and multi-category. Within their BAAM

division, there is also the BXMMX (Blackstone Alternative Multi-

Manager Fund). This acts as a funds of fund which invests in various

mutual funds for a more balance and diversified investment.

ii. Their 10K shows the different segmentation of their revenue stream. It

shows that their business segments are divided into five different

investment strategies: Private Equity, Real Estate, Hedge Fund Solutions,

Credit, and Financial Advisory. There is a breakdown chart accounting for

each business segments’ revenues. It can be found after the financial

statements in the commentary section associated with each financial

statements.

Business Segments

III. Accounting and Financial Analysis

a. Recasted Income Statement

i. The following Income Statement is consolidated to the best of my abilities

for an asset management firm. It is different from the consumer goods

sector or biotech where they are selling a product and there is COGS. I

have broken down revenue in: Management fees, unrealized performance

fees, realized performance fees, realized investment income, unrealized

investment income, interest income, and dividend income. The reason why

there is unrealized and realized is due to the fact that invested capital

investments are not complete sold off or liquidated. Unlike a regular

company, the expenses are broken down into realized and unrealized

compensation and benefits, fund expenses. Blackstone does have interest

expenses and SG&A expenses. In terms of other income, there is reversal

if tax receivable agreement liability and net gains from fund investment

activities. Reversal TRAs are basically a tax shelter for private equity

firms that sell off their portfolio company or exit through an IPO. As for

net gains from fund activities, it is from non-controlling interest and gains

for currency hedges.

Recasted Income Statement

HistoricalIncome Statement 2012 2013 2014(USD $ in millions, Except as Per Stated )

Revenues:Management & Advisory Fees, Net 2,030,693$ 2,193,985$ 2,497,252$ Performance Fees

Realized Carried Interest 327,422 943,958 2,450,082 Incentive Fees 301,801 464,838 249,005

UnrealizedCarried Interest 994,190 2,158,010 1,704,924 Incentive Fees (30,361) (22,749) (29,749)

Total Performance Fees 1,593,052 3,544,057 4,374,262 Investment Income

Realized 93,963 188,644 523,735 Unrealized 256,231 611,664 10,265

Total Investment Income 350,194 800,308 534,000 Interest & Dividend Income 40,354 64,511 69,809 Other 5,148 10,307 9,405

Total Revenue 4,019,441$ 6,613,168$ 7,484,728$

Expenses:Compensation & Benefits

Compensation 2,091,698$ 1,844,485$ 1,868,868$ Preformance Fee Compensation

RealizedCarried Interest 96,433 257,201 815,643 Incentive Fee 140,042 200,915 110,099

UnrealizedCarried Interest 321,599 966,717 379,037 Incentive Fee (44,528) (11,651) (19,276)

Total Compensation & Benefits 2,605,244 3,257,667 3,154,371 General, Administrative, & Other 548,738 474,442 549,463 Interest Expense 72,870 107,973 121,524 Fund Expense 33,829 26,658 30,498

Total Expenses 3,260,681$ 3,866,740$ 3,855,856$

Other Income:Reversal of Tax Receivable Agreement Liability -$ 20,469$ -$ Net Gains from Fund Investment Activities 256,145 381,664 357,854 Total Other Income 256,145$ 402,133$ 357,854$

Income Before Provision for Taxes 1,014,905$ 3,148,561$ 3,986,726$ Provision for Taxes 185,023 255,642 291,173 Net Income 829,882$ 2,892,919$ 3,695,553$

b. Recasted Balance Sheet

i. The consolidated balance sheet is similar to a normal consumer staples

company. The two thing that stands out in the balance sheet are

repurchased agreements and reversal repurchase agreements. Repurchase

agreements are placed in opportunistically higher yield investments to get

a better spread in financial instruments. The reversal repurchase agreement

is to take advantage of the opportunistic yields present in after-market

hours. It is used as a collateral to cover securities sold but not yet

purchased. Think of it as a hedging tactic. Another interesting line item in

the balance sheet is securities sold not yet purchased. It is another way of

shorting securities in the sense that Blackstone will “borrow” the security

from a third party and selling it to a buyer. Blackstone is required to cover

the short sale by buying the security at market price. It is also another way

of hedging and limiting their exposure to market conditions.

Recasted Balance Sheet

HistoricalBalance Sheet 2012 2013 2014(USD $ in millions, Except as Per Stated )

AssetsCash and Cash Equivalents 709,502$ 831,998$ 1,412,472$ Cash Held by Blackstone Funds and Other 1,404,411 1,045,882 1,808,092 Investments 20,847,270 21,729,523 22,765,589 Accounts Receivable 638,164 888,356 559,321 Reverse Repurchase Agreements 248,018 148,984 - Due from Affi liates 1,120,067 1,192,044 1,128,408 Intangible Assets, Net 598,535 560,748 458,833 Goodwill 1,703,602 1,787,392 1,787,392 Other Assets 376,372 284,472 338,557 Deferred Tax Assets 1,285,611 1,209,207 1,252,230

Total Assets 28,931,552$ 29,678,606$ 31,510,894$

Liabilities and Partners' CapitalLoans Payable 13,051,404$ 10,466,504$ 8,937,638$ Due to Affi liates 2,002,644 1,436,859 1,490,088 Accrued Compensation and Benefits 1,254,978 2,132,939 2,439,257 Securities Sold Not Yet Purchased 226,425 76,195 85,878 Repurchased Agreements 142,266 316,352 29,907 Accounts Payable, Accrued Expenses and Other Liabilities 1,038,888 872,086 1,194,579

Total Liabilities 17,716,605$ 15,300,935$ 14,177,347$

Redeemable Non-Controlling Interests in Consolidated Entities 1,556,185$ 1,950,442$ 2,441,854$

Partners' CapitalPartners' Capital 4,955,649$ 6,002,592$ 6,999,830$ Approproated Partners' Capital 509,028 300,708 81,301 Accumulated Other Comprehensive Income 2,170 3,466 (20,864) Non-Controlling Interests in Consolidated Entities 1,443,559 2,464,047 3,415,356 Non-Controlling Interests in Blackstone Holdings 2,748,356 3,656,416 4,416,070

Total Partners' Capital 9,658,762$ 12,427,229$ 14,891,693$

Total Liabilities and Partners' Capital 28,931,552$ 29,678,606$ 31,510,894$

c. DuPont Analysis

i. DuPont Analysis indicated that Blackstone has a strong ROE of 25%. The

average ROE of the financial services industry is roughly 8% to 19%

which insurance companies fall in the higher end.

DuPont Analysis

DuPont Analysis 2014

Net Profit Margin 49%Asset Turnover 0.24Assest/Equity Ratio 2.12

Return on Equity 25%

d. Profitability Analysis Ratio

i. Profit margins on average were 38%, which indicated strong growth and

returns in their funds. The average ROE was 8%, but this is due to the fact

that in the alternative asset management industry, hard assets are not

frequently common. The average ROE is 19%; this is in-line with industry

average. Gross profit margin on average was 36%, displaying positive

outlook in the future. On average, Blackstone receives payments from the

services/products roughly 9x a year. They also on average pay their

accounts 6x a year.

Profitability Analysis Ratios

HistoricalProfitability Analysis Ratios 2012 2013 2014 Average

Profit Margin 21% 44% 49% 38%Return on Assets 3% 10% 12% 8%Return on Equity 9% 23% 25% 19%Gross Profit Margin 19% 42% 48% 36%EBIT Margin 25% 48% 53% 42%Accounts Recievable Turnover 6.3 x 7.44 x 13.38 x 9.04 x

Days' Receivable 58 49 27 45Accounts Payable Turnover 3.87 x 7.58 x 6.27 x 5.91 x

Days' Payable 94 48 58 67Due to Affi liates 2.01 x 4.6 x 5.02 x 3.88 x

Days' Due to Affiliates 182 79 73 111Due from Affi liates 3.59 x 5.55 x 6.63 x 5.26 x

Days' Due from Affiliates 102 66 55 74

e. Risk Analysis

i. Difficult market conditions can significantly affect Blackstone’s business

by reducing the value or performance of the investments in the investment

funds. There will be harder exit opportunities and illiquidity in the market.

A prime example would be the global financial crisis in 2008. Another

risk factor is the decline in size of investments for real estate and private

equity funds from the Fed increasing interest rates. Investors will be

reluctant to inject capital in these investments due to the fact that they can

put their money in other investment vehicles that are safer but still get a

healthy return. The will indirectly force alternative asset management

firms to increase the IRR to subsequent for risks. The last risk I would like

to mention is if the amount of transaction and monitoring fees

significantly go up. This fee is shared with investors which will result in

decrease of return.

ii. The current ratio and quick ratio are the same due to the very fact that

Blackstone does not have any inventories. So they do not need to worry

about liquidating excess inventory in a distressed event. On average, they

can cover their current liabilities roughly 2x with current assets. In terms

of cash ratio, they are capital intensive and can cover current liabilities

1.84x with cash. As for liabilities-to-equity, they on average have 1.15x

more liabilities than equity. Lastly, their interest coverage ratio is off the

charts. They are able to cover their interest payments 25.3x on average.

There is no liquidity issues for Blackstone as it is an alternative asset

management firm.

Financial Risk Ratios

HistoricalFinancial Risk Ratios 2012 2013 2014 Average

Current Ratio 1.55 x 2.02 x 2.38 x 1.98 xQuick Ratio 1.55 x 2.02 x 2.38 x 1.98 xCash Ratio 1.43 x 1.85 x 2.24 x 1.84 xLiabilities-to-equity ratio 1.58 x 1.06 x 0.82 x 1.15 xInterest Coverage Ratio 13.93 x 29.16 x 32.81 x 25.3 x

IV. Forecasting

a. Growth Rate

i. The dividend payout in 2012, 2013, and 2014 is respectively 34%, 24%,

and 32%. This may look like a high percentage but in reality they are

satisfying their shareholders. Keep in mind that Blackstone Holdings Inc.

owned more than 60% of Blackstone Inc. (BX). Thus they are essentially

compensating themselves for having outstanding returns on their

investments. The sustainable growth right I calculated was 13% on

average within 2012-2014. This is actually not a sustainable growth rate,

but this was skewed by the three years of historical information. A more

accurate sustainable growth rate will be around 4% for an alternative asset

management firm. This information derived from my personal knowledge

of working at a growth/buyout private equity firm this past summer.

Sustainable Dividend Payout Ratio

HistoricalSustainable Dividend Payout Ratio 2012 2013 2014Annual Dividend 0.52$ 1.18$ 1.92$ EPS 1.54$ 4.90$ 6.03$

Dividend Payout Ratio 34% 24% 32%

Sustainable Growth Rate

HistoricalSustainable Growth Rate 2012 2013 2014 AverageDividend Payout Ratio 34% 24% 32% 30%ROE 9% 23% 25% 19%

Sustainable Growth Rate 6% 18% 17% 13%

b. Weighted Average Cost of Capital

i. The CAPM for Blackstone based on public comparable came out to

13.48%. I used a risk-free rate of 2.25% from the 10 year Treasury Bill

and has an equity-risk premium of 7.75%. This was derived from my

knowledge of valuing companies and speaking the private equity and

investment banking professionals. I compiled three public companies and

unlevered their beta to get an average of 1.18. This stripped the financial

structure and tax implications of the companies to make it more

comparable with Blackstone. I re-levered the beta of Blackstone using the

average unlevered beta. My cost of debt was 1.36%, which is quite low

but we have to remember that these alternative asset management firm can

easily borrow money at low rates due to high leverage. Now that I was

cost of debt and cost of equity, I computed the weighted average cost of

capital and it came out to 11%. The average WACC for investment

management industry is roughly 9%-15% due to the inherit risk and

exposure of volatile market conditions of the investments in these

companies.

Discount Rate Calculation($ in millions, Except Per Share Figures)

Discount Rate Calculation - AssumptionRisk-Free Rate: 2.25%Equity-Risk Premium: 7.75%Interest Rate on Debt: 1.36%

Comparable Companies - Unlevered Beta CalculationLeverage Equity Unlevered

Name Ticker Beta Debt Value Tax Rate BetaBlackRock, Inc. BLK 1.47 8,327$ 54,280$ 26% 1.32Invesco, Ltd. IVZ 1.93 8,437 13,520 28% 1.33Kohlberg Kravis Roberts APO 1.74 15,157 12,760 17% 0.88Average 1.18

Blackstone BX 1.69

Blackstone - Levered Beta & WACC CalculationUnlevered Equity Levered

Ticker Beta Debt Value Tax Rate Beta

Blackstone BX 1.18 8,938$ 35,530$ 7% 1.45

Cost of Equity Based on Comparables: 13.48%Cost of Equity Based on Historical Beta: 15.35%

WACC 11%