Case Studies:
The Blackstone Group L.P.
Mukhammad Norimov
Blackstone is a leading alternative asset manager, an investment firm managing $554
billion in assets under management, including investment vehicles focused on private equity,
real estate, public equity, real estate, public debt and equity, growth equity and non-investment
grade credit, real assets and secondary funds all on a global basis. The company has a mission
statement “by making companies stronger and better positioned for long term growth, we can
help to create good jobs, support local communities and ultimately secure the future of millions
of people around the world.” The company strongly emphasizes that they put their clients first
and offer individually tailored investment strategies with each client's needs. And one of the
main reasons for the growing performance is the company's focus on managing risk. This
avoidance is embedded to its backbone of the company, which from the environment that
excellence is the sole option to follow. Hence, the company creates this culture which
emphasizes entrepreneurship, collaboration, and meritocracy. As a result, the company for the
following past year receiving positive attention from the media, including the achievement
awards for being the best work in the money management sector. As of the year-end quarter of
2018, the company employed approximately 2,615 people and focuses on real estate, private
equity, and hedge fund solutions and credit. And the primary executive offices located in New
York, Dublin, Hong Kong, London, Mumbai, Singapore, Sydney, Tokyo.
Real estate segment has diversified investments focusing mainly Europe and Asia
through buying, then restructuring under managed assets, property such as hotels, office
buildings and industrial assets, plants, injecting significant investment capital at the end selling
it, but keeping a hold on substantially stabilized assets to generate stable income and value
appreciation. So, the company has special division Blackstone Real Estate Debt Strategies,
which mainly targets the debt investment opportunities collateralized by commercial real estate.
Through investing in public and private markets, they provide mezzanine loans, senior loans,
and liquid securities.
Private equity segment consisting of three sector-based funds and one geographically
focused funds. The primary focus of the company is to identify, managing and creating lasting
value for investors. So, the primary focus of this segment is to manage and create
energy-focused funds. Also, infrastructure-focused funds, private investment platforms,
multi-asset investment programs for high net worth individuals. And the primary way that the
Blackstone manages to have a stable growth of revenue is to conduct large scale transaction
types such as large buyouts and buying and building platforms and growing equity projects. Due
to the location of the Blackstone Group in different geographies, it requires a significantly
greater supply of capital, so the private equity firm can make investments to create goodwill. In
other words, regardless of the size free cash flow company strongly tries to generate strong
returns. Based on the historical transactions of the company team continuously optimizes the
approach in the uncertain foreign markets. The opportunities that the company offers to its
clients are leveraged buyouts, real estate, infrastructure, venture and growth capital and
co-investment where it sponsors alongside its partners.
The hedge fund solutions segment is called the Blackstone Alternative Asset
Management division. And it offers a wide range of customized hedge fund solutions through
the unique type of investment platform that invests directly into the ventures. With a total of 265
employees as of 2018, the company manages $77.8B, the main goal of protecting and growing
investors' assets blend of custom-tailored investment styles that would deliver low risk,
diversified returns on capital.
The credit segment with total assets of $127.5B, as of 2018, employs 410 people
focusing on the loans and securities of non-investment grade companies' spread between the
senior level debt and subordinate level of debt, essentially helping to restructure. And for the
long term credit strategies include focusing primarily on close-ended funds and separately
managed accounts.
One of the ways that Blackstone Group manages risk is limiting the investment amount
that will be invested and limiting the capital flow to certain geographical locations, also the key
factors including the quality or grade of the assets. As for the real estate, division professionals
screen the business and general investment criteria. Bi-weekly checks and reviews the stages
of restructuring, and evaluates the investment quality such as checking on the factors that can
reduce the value of assets, social and regional issues that are relevant to a certain geographic
region. Not only one single team will overlook the single investment project but the second team
will evaluate the operations with the main purpose of reinvesting just to enhance the portfolio.
Private equity segment professionals are evaluated on pursuing the operational
improvements and investment value creation as well as structuring and finding the exit strategy
on the given investment trade. Because of the professionals are required to create various
investment scenarios to predict the economic range and interest rate changes and other
macroeconomic issues. Reviewing the business and providing total solution and among other
things, reviewing the security is structurally divided into many levels. Meaning only the Strategic
partner can execute the trade, To reduce the risk and to create another income company trades
the credits long-lasting clients. And the fee structure is based upon a percentage of the fund’s
capital commitments also, fixed management fees from the portion of the proceeds from equity
offerings. Since the Blackstone group has a minimum performance level which is marked upon
the net capital appreciation, anything over that rate described by Blackstone as incentive fees.
Some of the real estates focused advisers receive customary fees, upon the fund's transaction.
Since the real estate asset management is very competitive, the Black Stone group is
also competing globally and on a regional and sector basis. The investment performance,
transaction execution skills, and reputation, range of products and services and innovation and
prices are several of the characters that the management compares with other professionals.
Many other competitors of the Blackstone group are increasing the capital on alternative
investment funds, like charging higher fees because of the increased competition. But some
other competitor favoring the in source capital like making direct investments in alternative
assets like without the assistance of those advisors. The main competitors are a similar type of
equity funds, focusing on hedge funds, specialized investment funds and other pools of capital.
So, with the lower cost of capital and available funds The Blackstone Group may fall into the
disadvantaged section. And because of the greater capital, the risk tolerance of its competitors
are also higher and able to achieve synergistic cost-saving opportunities and offer more
cheaper price to the bidder and provide them with a competitive advantage in a bidding was
with other bidders.
Blackstone Group's related risk including unfavorable market conditions like a decrease
in the value of funds that the company investing in that would adversely affect the revenue, cash
flow, earnings, and other ratios. Also, international events and conditions affect the fund value.
Also the size of the holding that the company has on its accounts at relatively big enough that it
may cause sudden drops on the performance of the fund. Also, the international monetary
policies would affect the price significantly, such as tighter credit conditions, a decreased
availability of foreign capital and high-interest rates. Through my research on the worsening
relations of US&China and the implementation of tariff and then retaliated tariffs by other
countries and the UK’s ongoing negotiations on leaving the EU are leading causes for a
performance decline and the underperformance of the stock. Also the higher level of interest
rates that the Federal Reserve announcement may create pressure on the price of the real
estate. As a result, it would eventually increase the cost of financing which would negatively
impact the business. Since the business relies on historical data to predict and optimize future
possible transactions, the big scrutiny of privacy by the government may affect the performance
of the funds. If the markets enter a period of slower growth like difficult market conditions in a
different geography, that may contribute to the underperformance of the Black Stone stock.
Also, the growth of the company would slow down and would certainly have a debt service
obligations .the volatility of the prices of commodities would also impact the performance since
the energy segment is the main market segment that Black Stone invests. Changes in the debt
financing market and the refinancing the investment may increase the cost of financing would
adversely affect the ability. As a result low yielding investments decrease the net income. For
instance, if the funds are unable to obtain favorable debt financing for potential acquisition; and
with the higher interest expenses, sustaining the growth rate is impossible hence it would be
difficult to complete otherwise profitable acquisitions. The company’s revenue and earnings, net
income and cash flow are highly variable which makes difficult for the Blackstone to achieve
steady earnings growth every quarter that causes not to achieve certain preferred returns. Even
if the investment proves to be profitable it may be several proceeding years cost may be too
high. Bad economic conditions negatively impact the amount of cash generated by Black Stone
group and slow down the growth of the business. Since the transaction executors are senior
managing directors, the loss of their services would negatively impact the business. So, they
managing directors and other key personnel with their substantial experiences and expertise
have strong business relationships with investors. To keep up with the growth, the company has
to extend services into new geographical markets which will face additional uncertainties.
Comprehensive US federal tax reform could negatively impact the business, such as limiting the
deductibility of interest, subject carried interest to more onerous taxation would negatively
impact the business. UK’s withdrawal from the European Union may negatively impact the value
of the Black Stone assets. Because of the ensuing political and economic volatility in the global
markets that may adversely affect the growth in the UK. Also the UK by leaving the union, it may
lose the access to global trade deals negotiated by the European Union on behalf of its
members, which in turns mean the business and financial attractiveness of the would-be
adversely affected, thereby impact the rate of economic growth in the growth in the UK. Since
the main operation in the business are highly dependent on information systems and
technology, the cost related to cyber or other security threats would negatively impact the
business. As the Black Stone grows, the information and technology systems may not be able
to accommodate the growth and the cost of maintaining the systems may increase from its
current level. The poor performance of the company’s investment funds would cause a decline
in revenue, income and cash flow. Asset management business depends in a large part
depends on the company’s ability to raise capital from third-party investors. If the company is
unable to raise capital from third-party investors. So the certain institutional investment
professionals and their direct investment in alternative assets would adversely affect the
business. Since the investment was made without the assistance of the investment firms. And
with sure certainty, Black Stone group cannot predict the future returns, hence the positive
performance of the investment funds that the company manages will not necessarily result in
positive returns on investment. Also leveraging the investment can negatively affect the ability to
create attractive returns. And many investments that Black Stone group undertake are highly
illiquid, specifically since the investment funds that the company invests are not publicly traded,
with the strict regulation on selling such securities in a short period would be highly unlikely.
Since the company globally conducts business any policies and procedures implemented may
create a potential conflict of interest and addressing those regulatory requirements may reduce
the synergies across the various segments of the business. In other words the Black Stone
business is materially affected by conditions in the financial markets and economic conditions in
the US, Europe, and Asia. With globally equity indices negatively performing impact the
performance of the stock.
Revenues were $6.8B for the year of 2018 relative to $7.1B for the year of 2017
decreased significantly, primarily in the decrease on Investment income and higher
management incentive fees and reduction on the other revenues. Revenue recognition primarily
consists of management and advisory fees, incentive fees, investment income, interest and
dividend revenue. So the management and advisory fees are accounted for the contracts with
customers. Interest and dividend revenue comprises primarily interest and dividend income
earned on the principal investment. Other revenue portion includes miscellaneous income and
foreign gains and losses arising on transactions denominated in foreign currencies. Decrease
income mainly the result of the Real Estate, Credit, Hedge fund solution segment of the
business, also partially attributable to the high volatility in the energy and credit markets. And
the changes in the other revenue is primarily due to the foreign exchange gain on
euro-denominated bonds. Expenses were $3.5B for the year of 2018coompared to the year
2017 $3.8B decreased significantly. The main reason for the decrease in the expense attributed
to the decrease in the general administrative costs, and incentive fees. The management fees
include earning from managed funds at a fixed percentage of assets under management, net
asset value, total assets, and committed capital invested capital. The taxes for the year of 2018
declined which would be attributed to the Trump administrations reduced corporate income tax
proposal.
The Black Stone group uses III levels of financial instruments to classify and determine
the fair value of the securities. Level I being based on the available information from the active
markets for identification of the financial instruments, which includes data available from the
balance or income sheet. Level II comprises of the pricing inputs and other quoted prices in the
markets, which are directly or indirectly observable. To this category, Black Stone puts
government securities, bonds and certain over the counter securities. Level III includes
unobservable financial instruments, such as identifying the fair value of requiring the
management's estimates, which includes mostly non-investment grade securities. The black
Stone group in a private equity investment including the fair value of the private equity
investments that is determined by the company professionals through determining the projected
earnings and earnings before interest, taxes, depreciation, and amortization, discounted cash
flow method and public market valuation compared to its competitors. Discounted cash flow
method used and terminal value derived by referencing to EBITDA multiple or price earning exit
multiple. Real estate Investment market fair determined through considering the projected
operating cash flow, sales of comparable assets and any other replacement costs. Valuation
derived by reference to observable valuation measures comparable companies' assets and
adjusting the investment referenced comparables. Additionally projected distributable cash flow
through debt maturities will be considered in determining the fair value of the investment. To
determine the fair value of the credit investment the Black Stone group compares the prices
among the market participants, for the no publicly traded companies, the company uses the
discounted cash flow back to valuation date using the market-based yield. Since the
market-based yield is estimated using the yields of publicly traded companies operating in
similar industries as the subject investment, with similar leverage statistics and time to maturity.
Equity Investments methods in which the company professionals are deemed to have significant
influence, but not control, are accounted for using this method of accounting except in cases
where the fair value option has been elected. Therefore, its investments, which include both an
adjusted and non-adjusted allocation of the profits and losses. Under that method company
professional’s share of earnings from equity method investment included in the income or loss
statements.
The Black Stone Group primarily enters into operating leases as the lessee for office
space. Assets and Operating leases liabilities are mentioned in Consolidated statements. And
those lease liabilities recognized based on the present value of the future minimum lease
payments throughout the lease ending date. Minimum lease payments for leases are twelve
month
Real Estate
2014
2015
2016
2017
2018
$ 628,502
$ 668,575
$ 795,161
$ 872,191
$ 985,399
91,610
110,577
95,324
82,781
152,513
Management Fee Offsets
(34,443)
(26,840)
(7,322)
(15,934)
(11,442)
Total Management Fees, Net
685,669
752,312
883,163
939,038
1,126,470
1,657
10,459
18,178
79,500
124,502
Fee Related Compensation
(320,101)
(350,745)
(379,331)
(437,311)
(459,430)
Other Operating Expenses
(105,995)
(125,513)
(137,581)
(136,042)
(146,260)
Fee Related Earnings
$ 261,230
$ 286,513
$ 384,429
$ 445,185
$ 645,282
Realized Performance Revenues
1,497,604
1,641,427
1,214,931
2,141,374
914,984
Realized Performance Compensation
(438,130)
(487,497)
(335,147)
(751,526)
(284,319)
Realized Principal Investment Income
309,095
235,582
122,712
255,903
92,525
1,368,569
1,389,512
1,002,496
1,645,751
723,190
Segment Distributable Earnings
$ 1,629,799
$ 1,676,025
$ 1,386,925
$ 2,090,936
$ 1,368,472
Segment Revenues
$ 2,494,025
$ 2,639,780
$ 2,238,984
$ 3,415,815
$ 2,258,481
Total Assets Under Management
$ 80,863,187 $ 93,917,824
$
101,963,652
$
115,340,363
$
136,247,229
Fee-Earning Assets Under Management
$ 52,563,068 $ 67,345,357 $ 72,030,054 $ 83,984,824 $ 93,252,724
(Dollars in Thousands)
Management Fees, Net
Base Management Fees
Transaction and Other Fees, Net
Fee Related Performance Revenues
Total Net Realizations
Weighted Average Fee-Earning AUM
$ 53,589,873 $ 63,722,064 $ 67,503,830 $ 74,421,496 $ 89,079,874
LP Capital Invested
$ 11,235,142 $ 16,259,362 $ 10,969,746 $ 19,586,515 $ 18,374,432
Total Capital Invested
$ 11,530,152 $ 16,603,472 $ 11,176,257 $ 19,882,215 $ 18,726,374
The increase from 2017 to 2018 in Investment Income is primarily due to the Real Estate
segment's $966.1M increase. And from the real Estate segment primary reason for the net
increase in the appreciation in the investment holdings, total increase of 19.4%. Since the
majority of the real estate assets primarily based on foreign land, foreign exchange fluctuation
significantly reduced the value. $18B inflows in the Real estate segment mainly driven Real
estate investments in Europe. Growing economic and political issues such as Fed Reserve
policy, Brexit, trade war with China contributed to the decline in the value of real assets. Also
with the higher interest rates debt financing expenses would increase significantly.
2018
2018
2017
2017
2016
2016
Gross(%)
Net (%)
Gross(%)
Net (%)
Gross(%)
Net (%)
BREP IV
-14
-12
3
3
-12
-10
BREP V
-6
-5
11
10
7
7
BREP VI
7
5
28
23
21
17
BREP VII
3
2
22
17
7
4
BREP VIII
20
14
24
16
29
19
BREP Int. II
34
29
23
21
23
23
BREP Europe III
-18
-15
25
20
-4
-4
BREP Europe IV
20
14
33
26
14
10
BREP Europe V
25
17
N/M
N/M
N/A
N/A
BREP Asia I
10
7
27
19
30
21
BREP Asia II
N/M
N/M
N/A
N/A
N/A
N/A
BREP Co-Inv
-1
—
24
22
16
14
BPP
11
10
13
10
11
10
BREDS
8
5
15
11
14
10
BREDS Liquid
6
4
11
8
2
—
BXMT
N/A
7
N/A
16
N/A
23
BREIT
N/A
8
N/A
10
N/A
N/A
The presented above the internal rates of return, which is the rate of the investment, or
the profitability. Based on the results BREP Europe IV, BREP International II, BREP VIII would
be suitable funds to focus on due to its relatively high and stable investment returns. In addition
to the cash received from debt offering and expected cash generated from operating activities,
each Real estate committed funds receive committed capital, in order to manage liquidity and
cash position. And the cash used to provide capital to facilitate the growth of existing business
and for expansion of those businesses and cover all the expenses. For the future, the amount
those real estate funds BREP Europe IV, BREP International II, BREP VIII expected to receive
$130B, $70B, $300B respectively. This puts the BREP Europe IV and BREP VIII into a
favorable position. Looking through the historical data from the company filings BREP Europe IV
between `13-`16 with only €6.3B investment achieved 18% return rate while Pennsylvania
based BREP VIII achieved %17 with the $10,699. Leaving the BREP Europe IV in a good
position. So this segment of the Black Stone Group seeks to acquire high quality substantially
stabilized real estate assets across Europe. Its primary targets are logistics, office and
hospitality and residential assets in Germany, France, Spain, Italy, and the Netherlands. By the
fund executives this Black Stone Real Estate Partners Europe (BREP Europe IV), the
investments on an individual's assets in Europe are found better pricing relative to the US and
the Asia Pacific. Black Stone Property Partners Europe is fully owned by the b Black Stone
Europe one of the Subsection of Black Stone Group. As of June 2019, BP Europe has gross
assets of €4.4B. The subdivision comprised of Office26% Logistics 41% and Residential 33%
positions. By geographically the biggest countries that this subdivision conduct business
Germany, France, and the Nordic Countries. Meaning that the investment in the Logistics
portfolio in Nordic Countries would strengthen this subdivision even more.
Investment Records as of September 30, 2019(a)
(Dollars in Thousands, Except Where Noted)
Committed
Fund (Investment Period Beginning Date / Ending
Date)
Capital
Unrealized
Investments
Total
Investments
Net IRRs (d)
Value
Value
Realized
Total
Real Estate
Pre-BREP
$140,714 $-
$345,190
33%
33%
380,708 -
1,327,708
40%
40%
BREP II (Oct 1996 / Mar 1999)
1,198,339 -
2,531,614
19%
19%
BREP III (Apr 1999 / Apr 2003)
1,522,708 -
3,330,406
21%
21%
BREP IV (Apr 2003 / Dec 2005)
2,198,694
76,765
4,588,119
28%
12%
BREP V (Dec 2005 / Feb 2007)
5,539,418
277,154
13,285,663
12%
11%
BREP VI (Feb 2007 / Aug 2011)
11,060,444
940,414
27,785,832
13%
13%
BREP VII (Aug 2011 / Apr 2015)
13,496,564
8,170,449
29,730,114
23%
16%
BREP VIII (Apr 2015 / Jun 2019)
16,607,049
17,779,455
23,422,624
27%
15%
BREP IX (Jun 2019 / Dec 2024)
20,468,154
1,618,192
BREP I (Sep 1994 / Oct 1996)
Total Global BREP
$72,612,792
1,618,192 n/a
$28,862,429 $107,965,462
n/m
18%
16%
€1,370,659
23%
23%
BREP Int'l (Jan 2001 / Sep 2005)
€824,172 €-
BREP Int'l II (Sep 2005 / Jun 2008) (e)
1,629,748
10,637
2,565,808
8%
8%
BREP Europe III (Jun 2008 / Sep 2013)
3,205,167
583,882
6,141,172
21%
14%
BREP Europe IV (Sep 2013 / Dec 2016)
6,709,145
4,219,471
11,924,756
24%
17%
BREP Europe V (Dec 2016 / Jun 2022)
8,153,287
6,907,803
7,339,580
45%
16%
BREP Europe VI (Oct 2019 / Apr 2025)
8,484,843 -
-
n/a
n/a
€29,006,362
€11,721,793
€29,341,975
16%
14%
BREP Asia I (Jun 2013 / Dec 2017)
$5,096,361
$4,205,495
$7,671,610
21%
15%
BREP Asia II (Dec 2017 / Jun 2023)
7,183,487
2,484,758
BREP Co-Investment (f)
7,045,918
1,611,092
Total Euro BREP
Total BREP
$126,546,964
2,490,342 n/m
6%
14,573,188
16%
16%
$50,823,345 $168,724,587
17%
15%
BPP (Various) (g)
27,194,838
31,556,095
BREDS High-Yield (Various) (h)
12,011,230
3,213,907
36,652,718 n/m
10%
14,742,352
11%
11%
$1,741,738
19%
19%
Private Equity
BCP I (Oct 1987 / Oct 1993)
$859,081 $-
BCP II (Oct 1993 / Aug 1997)
1,361,100 -
3,256,819
32%
32%
BCP III (Aug 1997 / Nov 2002)
3,967,422 -
9,184,688
14%
14%
BCOM (Jun 2000 / Jun 2006)
2,137,330
2,966,799
6%
6%
13,150
BCP IV (Nov 2002 / Dec 2005)
6,773,182
175,763
21,593,584
36%
36%
BCP V (Dec 2005 / Jan 2011)
21,013,586
787,587
37,952,365
9%
8%
BCP VI (Jan 2011 / May 2016)
15,192,244
12,994,521
27,461,609
18%
13%
BEP I (Aug 2011 / Feb 2015)
2,435,285
1,897,585
4,575,117
17%
13%
BEP II (Feb 2015 / Feb 2021)
4,909,004
4,390,305
4,662,140
42%
8%
BCP VII (May 2016 / May 2022)
18,781,046
15,599,523
16,778,864
45%
20%
BCP Asia (Dec 2017 / Dec 2023)
2,378,855
989,766
BEP III (TBD)
3,994,781 -
-
n/a
n/a
24,036,991 -
-
n/a
n/a
BCP VIII (TBD)
989,766 n/a
23%
So based on the analysis acquiring logistics assets in Nordic regions would be an
optimal option to this subdivision of Black Stone. It turns out in September of this year BPPEH
announced that it would be taking over the several logistics companies near Nordic Trade
Triangle. Company after the acquisition is expected to add 2.4 million sq meters of logistics
space and expected to lease out space on 5-year lease terms. BPPEH has a credit rating of
BBB. And the subdivision is expecting to generate sustainable profit from the high occupancy
rates. And it’s expected to use a mix of equity and debt assets. BPPEH's portfolio is well
balanced across asset types and regions across Europe. Logistics assets now account for 41%
of portfolio value, residential for 33%, and offices for 26%. These assets are spread across
Western Europe, mainly in or close to large metropolitan areas or distribution corridors. In the
case of the deteriorating rate of BPPEH's rental activities, such as falling occupancy and
negative like-for-like growth. The company would also take a negative view of acquisitions of
properties with weaker characteristics, such as those located in less prime locations. In an
upside scenario positive rating action if the company adopted a significantly more conservative
financial policy, with EBITDA interest coverage above 3.8x and debt-to-debt-plus-equity below
35% over a sustained period. Before the following years, BPPEH acquired 55 properties and 2.1
million square meters. The portfolio was purchased from various sellers, including publicly
traded firms. Based on the research I found that the estimated value of the land that BPPEH
acquiring is valued at €289M which includes logistics assets like warehouses and expecting to
lease all of the acquired assets on a 5-year lease term. Since the physical investment is taking
place in the Nordic region but the Black Stone Group’s division BPPEH is based on Germany, it
won’t be problematic to the BPPEH since both locations are part of the Eurozone. Since the
company acquiring the logistics company its considered brownfield investment for the parent
company Black Stone group not so much to the BPPEH since with the Eurozone laws, it's fairly
easy for capital flow to get in and out of between countries that are part of the Eurozone. Since
the acquiring locations are previously used for logistics business and future use or lease to
logistics services would be cost-effective to the BPPEH. Also because of the previous usage
restructuring and possibly renovating would be a little bit challenging. Through my research
found out that the floating interest rate is between 0.25% to 6.25% with 15 years, the reduced
rate derived from respective interbank lending interest rate. Meaning with the company pays
between €5,482,716 and €157,031,376. And the Month payment would be little over
€2,477,952. Meaning the company to break even has to make an income lower than the
monthly loan amount and any expenses over the 15 years. With the B- credit rating the
company may not receive a favorable interest rate.
References:
The Blackstone Group. (n.d.). Retrieved from ​www.sec.gov​.
The Blackstone Group. (n.d.) Retrieved from Bloomberg Terminal
The Blackstone Group.(n.d.)Retrieved from ​www.blackstone.com