Samuel Johannes 11/20/2012 FINC 410 Paper #1: Blackstone Group LP (BX

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Mission Statement & Business Overview
While Blackstone Group LP does not have a mission statement, they state the following guiding principles: Everything we do is guided by a set of principles that define our character and culture; they have been at the core of Blackstone since its inception. These enduring qualities are the shared convictions that we bring to our professional and personal conduct – they are a fundamental strength of our business. Accountability Our capital and reputation are always on the line Excellence Anything less is never acceptable Integrity Leadership demands responsibility Teamwork Always makes us better Entrepreneurship Using creativity to find opportunities overlooked by others1 Blackstone makes three claims concerning its five guiding principles. First, they claim that their guiding principles define their corporate culture. Second, Blackstone claims that their five guiding principles are reflected in their professional and personal conduct. Finally, Blackstone claims that their guiding principles are a fundamental strength of their business. According to BusinessUG.com, “People who encounter Blackstone

employees are often impressed with their depth of knowledge in their transactions...

1www.blackstone.com/the-firm/guiding-principles

Analysts are given quite a bit of responsibility, sometimes working directly with just a partner - some say that they are tasked with associate-level work after a year.” 2 Blackstone analysts are given associate-level responsibilities within several years of being hired, and often work directly with partners. This indicates a culture of

accountability and teamwork, with value being added at multiple levels of management. Additionally, a strong emphasis on quantitative modeling requires Blackstone analysts to have an increased attention to detail. Blackstone recruits almost exclusively from the top business schools in the country. Such practices indicate high expectations for excellence in their staff. According to the Crimson, Blackstone’s Senior Managing Director John Studzinski said at a recruitment event that, “Harvard and Wharton are the two major programs of schools that fill our analyst program.”3 Blackstone projects a culture of accountability and excellence in both their professional and personal interactions. In this capacity, Blackstone adheres to its guiding principles. Blackstone is a leading global manager of private capital and provider of financial advisory services. Blackstone had $166.2 billion of assets under management as of December 31, 2011. Its alternative asset management businesses include the management of private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation (“CLO”) vehicles and separately managed accounts. Blackstone also provides a wide range of financial advisory services, including financial advisory, restructuring and reorganization and fund placement services.

http://businessug.com/services/bx.htm http://www.thecrimson.com/article/2009/9/14/crimson-careers-theblackstone-groupnowhere-to-hide/
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As of December 31, 2011, Blackstone had 112 senior managing directors and employed approximately 620 other investment and advisory professionals at their headquarters in New York and offices in Atlanta, Beijing, Boston, Chicago, Dallas, Dubai, Düsseldorf, Hong Kong, Houston, Istanbul, London, Los Angeles, Menlo Park, Mumbai, Paris, San Francisco, Santa Monica, Seoul, Shanghai, Singapore, Sydney and Tokyo. Blackstone credits the depth and breadth of the intellectual capital and experience of their employees as the key reasons they have generated excellent returns while managing downside risk for their investors. Blackstone’s five business segments are: Private Equity, Real Estate, Hedge Fund Solutions, Credit Businesses, and Financial Advisory.4 Blackstone LLP., FY 11 Form 10K for the Period Ending December 31, 2011 (filed Feb. 2012). The Private Equity Segment manages seven hedge funds, including funds specializing in communicationsrelated investments, energy-focused investments, and investments in China. Blackstone’s Private Equity segment’s investment approach is guided by several core investment principles: corporate partnerships, sector expertise, a contrarian bias (e.g., investing in out-of-favor / under-appreciated industries), global scope, distressed securities investing, significant number of exclusive opportunities, superior financing expertise, operations oversight and a strong focus on value creation. Their existing private equity funds, collectively referred to as the Blackstone Capital Partners (“BCP”) funds, invest primarily in control-oriented, privately negotiated investments and generally leverage the

Blackstone LP., FY 11 Form 10-K for the Period Ending December 31, 2011 (filed Feb. 2012).
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investments they make. As of December 31, 2011, the Private Equity segment had $45.9 billion of assets under management.5 Blackstone manages several types of real estate funds that are diversified geographically and across a variety of sectors. They have managed six opportunistic real estate funds; three European focused opportunistic real estate funds and several real estate debt-investment funds. Blackstone’s real estate opportunity funds, collectively referred to as the Blackstone Real Estate Partners (“BREP”) funds, have invested in lodging, major urban office buildings, shopping centers and a variety of real estate operating companies. The BREP funds invest primarily in control-oriented, privately negotiated real estate investments and generally leverage the investments they make. In addition, Blackstone’s real estate debt-investment funds, referred to as the Blackstone Real Estate Debt Strategies (“BREDS”) funds, target non-controlling real estate debtrelated investment opportunities in the public and private markets, primarily in the United States and Europe. In addition, Blackstone manages Bank of America Merrill Lynch’s Asian real estate assets. The Real Estate segment’s investing approach is guided by several core investment principles including global scope, a significant number of exclusive opportunities, superior financing expertise, operations oversight and a strong focus on value creation. As of December 31, 2011, the Real Estate segment had $42.9 billion of assets under management. Blackstone’s Hedge Fund Solutions segment is comprised of funds of hedge funds. Referred to as Blackstone Alternative Asset Management (“BAAM”), the Hedge Fund Solutions segment manages a broad range of commingled funds of hedge funds and

5

Ibid.

Diversification.6 Blackstone’s credit-oriented funds. BAAM’s overall investment philosophy is to protect and grow investors’ assets through both commingled and custom-tailored investment strategies designed to deliver compelling risk-adjusted returns and mitigate risk. GSO is a major participant in the leveraged finance markets with $37. Although certain underlying managers that BAAM invests with may utilize leverage in connection with the investments those managers make in their respective underlying hedge funds. preferred stock and common equity. These vehicles have investment portfolios comprised of loans and securities spread across the capital structure. risk management. distressed debt funds. subordinated debt. GSO manages a number of credit-oriented separately managed accounts and publicly registered investment companies. the Hedge Fund Solutions operation had $40. credit-focused separately managed accounts and publicly registered debt-focused investment companies are managed by their subsidiary. In addition. mezzanine funds and general credit-oriented funds focused on the leveraged finance marketplace. . 2011. GSO may utilize leverage in connection with the investments the credit-oriented 6 Ibid. BAAM does not utilize long-term leverage for the investments it makes in the underlying hedge funds. due diligence and a focus on downside protection are key tenets of their approach. including senior debt. GSO. 2011.0 billion of assets under management as of December 31.customized vehicles. As of December 31. CLOs.5 billion of assets under management. GSO manages or advises a variety of credit-oriented funds including senior credit-oriented funds.

(“AIG”). complex and high-profile bankruptcies and restructurings. prioritizing client’s interests.”) provides financial and strategic advisory services. corporate parents. hedge funds. and Xerox Corporation. minority investments. separately managed accounts or investment companies’ make. restructuring and reorganization advisory services and fund placement services for alternative investment funds. As of December 31. and the Los Angeles Dodgers. mergers. 7 Ibid. corporate finance advisory. and creative resolutions.’s core principles are protecting client confidentiality. Bank of America Corporation.P. creditors. Lee Enterprises. American International Group. Inc.P. real estate funds. private placements and distressed sales. Park Hill Group provides fund placement services for private equity funds. Recent clients include Aluminum Corporation of China. Nestle S. joint ventures. financial sponsors and acquirers of troubled companies. avoidance of conflicts and senior-level attention. Blackstone’s restructuring and reorganization group advises companies. The group is particularly active in large. 2011. takeover defenses. asset swaps. Park Hill Group provides Blackstone’s fund placement services. Our financial and strategic advisory business focuses on a wide range of transaction execution capabilities with respect to acquisitions. Recent clients include Alliance Medical. GSO had $16. The restructuring and reorganization group’s key principles are senior-level attention. out-of-court focus.funds. divestitures.7 Blackstone’s Financial Advisory segment (“Blackstone Advisory Partners L. The Procter & Gamble Company.A. venture capital funds and hedge funds.1 billion of total assets under management. . Blackstone Advisory Partners L. global emphasis and the ability to facilitate prompt.

Park Hill Group primarily provides placement services to unrelated third-party sponsored funds. turmoil in global financial markets during 2008 and 2009 caused significant volatility of securities prices.8 For example. availability of credit or debt financing. Those events led to a significantly diminished availability of Private Equity Growth Capital Council. there was been a strain on banks and other financial services participants. SWOT Analysis & Porter’s Five Forces EXTERNAL General Economy As a private equity and financial services firm. the response by Eurozone policy makers. particularly financial markets. 2012. including leading financial institutions. experienced significant declines in employment. the recent speculation regarding the inability of Greece and other European countries to pay their national debt. the Dodd-Frank Act. many economies around the world. which had a significant material adverse effect on Blackstone’s investment businesses. 8 . Issues. contraction in the availability of credit and the failure of a number of companies. commodity prices. In addition. Changes in interest rates. During that period. “Tax policy. Blackstone’s business is materially affected by the conditions of the general economy. and the Foreign Accounting Tax Compliance Act”. inflation rates. As a result. and the concerns regarding the stability of the Euro have created uncertainty in the credit markets. which adversely affected Blackstone’s ability to obtain credit. and currency exchange rates may affect the level and volatility of securities prices and the liquidity and value of investments. It also assists Blackstone in raising capital for their investment funds. and lending. household wealth.

Blackstone’s fund investment performance could suffer. Any recurrence of the significant contraction in the market for debt financing that occurred in 2008 and 2009 or other adverse change such as. the general economy affects firms in which Blackstone holds an equity position. Blackstone is vulnerable to changes in debt financing markets.9 In addition to credit markets. Ibid. the deterioration of the credit markets may hinder Blackstone’s opportunities to realize value on investments made before 2008. would create difficulty for Blackstone in completing otherwise profitable acquisitions. and/or more restrictive covenants. resulting in little or no carried interest earned.credit and an increase in the cost of financing. higher rates. higher equity requirements. or may generate profits that are lower than would otherwise be the case. 9 10 . The lack of credit in 2008 and 2009 prevented the initiation of new. which may not be available on acceptable terms. Additionally. The decrease in carried interest would cause cash flow from operations to significantly decrease. If the global economy fails to improve. large-sized transactions for Blackstone’s private equity and real estate segments and adversely impacting revenue.10 Contracting credit and debt markets pose financing challenges to Blackstone that could be amplified by reduced liquidity. adversely affecting the amount of cash available to conduct operations. 11 Ibid.11 In addition to directly affecting the performance of Blackstone’s fund investment performance. Less cash on hand could require Blackstone to rely on financing from credit and debt markets. as their expected return has decreased. During periods of difficult market conditions or slowdowns Blackstone’s Ibid.

According to a study by the Private Equity Council. thereby significantly affecting those investment portfolio’s performance and consequently Blackstone’s operating results and cash flow. materially affect Blackstone’s operations. Ibid. including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Foreign Account Tax Compliance Act (FATCA). passed in 2010. financial losses. decreased revenues.12 Historically.13 Legislation and Regulation Several pieces of legislation. private equity backed firms (i. . companies backed by private equity sponsors with strong track records tended to borrow on more favorable terms than comparable companies. as 12 13 Ibid. in particular to reform banks (i. may be less sensitive to financing challenges precipitated by a poorly performing economy. This trend indicates that private equity firms with strong reputations. tasked to the Financial Stability Oversight Council (FSOC).84% versus 6. The Dodd-Frank Act. during the “Great Recession” of 2008-2009.17%. companies acquired in a leveraged buyout or similar transaction) defaulted at less than one-half the rate of comparable noninvestment grade companies: 2.e. during the Great Recession. difficulty in obtaining access to financing and increased funding costs. Negative financial results in portfolio companies could adversely affect Blackstone’s ability to raise new funds as well as operating results and cash flow.portfolio companies may experience adverse operating performance. deposit takers) and non-bank financial institutions. To the extent those portfolio companies experience adverse operating performance. Blackstone may sell those assets at values resulting in a loss. A fundamental intention of the Dodd-Frank Act. like Blackstone. was intended as a response to the 2008 financial crisis.e.

Investments are isolated so that a non-performing investment does not affect another investment. is to mitigate the risk that firms deemed “too big or interconnected to fail” pose to the aggregate financial system. private equity investments are not cross collateralized. in fact. Blackstone maintains limited or no leverage at the fund level. private equity firms are not leveraged in the same manner as the “too big to fail” banks of the 2008 financial crisis.5 billion and $150 billion in assets under management. As a result. Furthermore. Blackstone could potentially qualify as “too big or interconnected to fail” and a systemic risk. an important distinction from leverage maintained at the portfolio company level.14 However. With a market capitalization of $18. First. for the following reasons. Ibid. it is uncertain as to whether Blackstone does. Additionally.15 Second. Blackstone invests in companies across the country and is not intertwined with other financial market participants through derivatives positions. while Lehman Brothers was leveraged at approximately 32:1.16 Third.85:1.articulated by the Obama administration. counterparty exposures or prime brokerage relationships. pose a systemic risk. such as Lehman Brothers. Blackstone is not subject to unsustainable debt or creditor margin calls. neither an investor nor debt holder can force a fund to sell unrelated assets to repay a debt. Blackstone does not engage in the short-term speculative positions that fueled real estate asset-price bubbles during 2008. 16 Ibid. limiting their degree of interconnectedness. the average gross leverage ratio of private equity portfolio companies is historically about 2. Private equity investors commit their capital for approximately 10- Ibid. 14 15 .

19 Ibid. The rule serves two primary purposes: to ban proprietary trading by banks (i. such as Blackstone. and the Volcker Rule becomes effective. and the Commodities and Futures Trading Commission. banking institutions will have at least two years to meet compliance standards. limiting firms’ abilities to accommodate increased regulatory costs. with few redemption rights. are in the process of implementing the Volcker Rule. 17 18 . Accordingly. the Federal Reserve.12 years. Any limit on or ban of proprietary trading in the United States will force firms to seek new markets to meet their cash needs. trading on their own account) and to cap bank ownership in hedge funds and private equity funds at three percent. including the Securities and Exchange Commission. The Volcker Rule poses a threat to Blackstone’s operations in the United States. The uncertainty regarding both the specific regulations and the implementation timeline of Dodd-Frank disallows financial market participants from enacting anticipatory changes in their operations. Gains from proprietary trading allow Blackstone to meet short-term liquidity needs. The Federal Reserve Board is also given authority to grant an additional extension of up to five years for illiquid funds. 19 Ibid.e.18 Though the Dodd-Frank Act was passed in 2010. ambiguities in the legislation have delayed implementation. Blackstone invests in companies in order to create long-term value. Ibid. Thus.17 Another main element of the Dodd-Frank Act is the Volcker Rule. such as London or Hong Kong. Six agencies. Once regulations are completed. Blackstone may relocate their proprietary positions to markets with less stringent rules.

like most private equity firms. This hierarchy costs a significant amount. Ibid. Registration and increased data reporting are guaranteed to increase the administrative costs of private equity firms. The CCO sets policies that are enforced by compliance officers to ensure the firm’s compliance with the law. ultimately reporting to the Chief Compliance Officer (CCO). independent accounting etc. .Increased regulatory costs have centered on ensuring compliance with the new regulation. a single firm may have to file data reports with multiple regulatory agencies. Depending on the nature of the business in which it engages. details on credit providers.) Dodd-Frank also requires registered private equity investors with at least $1 billion in assets under management to file a new Form PF. Blackstone. in every segment of their business. as it requires the creation of new full-time positions. Dodd-Frank requires most private equity firms to register with the SEC.20 Additionally. as well as basic corporate governance standards (e. Form PF would require firms to supply data on monthly valuations of assets (including hard-to-value illiquid assets) and quarterly filings on managed assets.21 Another main focus of Dodd-Frank was aimed at addressing perceived abuses and conflicts of interest in the area of executive compensation. and the requirement to generate an increased number of data reports. like Blackstone.g. risk profiles. board structure. investor concentration and firm performance among others. including the perception that some financial firms operated under compensation practices that encouraged overzealous 20 21 Ibid. Registration entails SEC oversight as to professional qualifications of the principals of the firm’s legal fitness for office. has created a hierarchy of compliance officers.

The additional costs associated with administering FATCA will materially increase Blackstone’s general and administrative costs. Section 952 of Dodd-Frank requires the independence of compensation committees. beginning in 2014. stocks and securities). The reporting obligations imposed under FATCA require FFIs to enter into agreements with the IRS to obtain and disclose information about certain investors to the IRS. as well as adversely affect their ability to raise funds from certain foreign investors.risk-taking. Several exchanges have proposed that once regulations regarding the independence of compensation committees are finalized. Blackstone has a sizable number of entities in its funds families that are expected to become participating FFIs. Recently issued proposed regulations. even if that stake is considerably less than 50%. be subject to a 30% United States withholding tax on certain U. so that compensation is appropriately linked to performance. would delay the 22 Ibid. if finalized. from the compensation committee independence requirements. which will be required to comply with FATCA reporting or certification procedures. payments (and beginning in 2015. .22 The Foreign Account Tax Compliance Act (FATCA) requires that “Foreign Financial Institutions” (FFIs) enter into reporting agreements with the Internal Revenue Service (IRS) and provide the IRS with relevant information.S.S. Under FATCA. to exempt an employee of a private equity firm or other non-management significant shareholder that holds a significant equity stake in a covered issuer. a 30% withholding tax on gross proceeds from the sale of U. Regulations implementing FATCA have not yet been finalized. all entities in a broadly defined class FFIs are required to comply with a complicated and expansive reporting regime or.

in general.S. as income subject to a new blended tax rate that is higher than the capital gains rate applicable to such income under current law.implementation of certain reporting requirements under FATCA but no assurance can be given that the proposed regulations will be finalized or that any final regulations will include any delay.S. Blackstone’s common units and the interests Blackstone holds in entities that are entitled to receive carried interest would likely have been classified as ISPIs for purposes of this legislation. or “ISPI”. funds. the administrative and economic costs of compliance with FATCA may discourage some foreign investors from investing in U. . funds until there is more certainty around FATCA implementation. treated income and gains. if enacted. the U. In June 2010. tax laws pose a legislative risk to Blackstone. Congress has considered legislation that. would have (a) precluded Blackstone from qualifying as a partnership or required them to hold carried interest through taxable subsidiary corporations and (b) taxed individual holders of common units at increased rates. some foreign investors may hesitate to invest in U.S. the U. 2010. attributable to an investment services partnership interest. The U. Ibid. except to the extent such ISPI would have been considered under the legislation to be a qualified capital interest. Senate 23 24 Ibid.24 On May 28.23 In addition to the compliance cost of regulations concerning business operations.S.S. Accordingly. If any similar legislation were to be enacted Blackstone could incur a material increase in tax liability and a substantial portion of their income could be taxed at a higher rate to the individual holders of common units. In addition. like Blackstone. including gain on sale. House of Representatives passed legislation that would have.

2011. with an exception for certain qualified capital interests. This proposed legislation follows 25 26 Ibid. their effective tax rate could increase significantly.S. or “2012 Levin bill”. If Blackstone were taxed as a U. corporations. attributable to an ISPI at ordinary rates.S. if similar legislation were to be enacted. with an exception for certain qualified capital interests. following such ten-year period. federal income tax purposes or be required to hold all such ISPIs through corporations. for taxable years beginning ten years after the date of enactment. . corporation or held all ISPIs through U.S. 2012.S. income derived with respect to an ISPI that is not a qualified capital interest and that is subject to the rules discussed above would not meet the qualifying income requirements under the publicly traded partnership rules. Congress will pass such legislation or what provisions will be included in any final legislation if enacted. the Obama administration submitted similar legislation to Congress in the American Jobs Act that would tax income and gain.26 On September 12. On February 14. Therefore. It is unclear whether or when the U. Blackstone would be precluded from qualifying as a partnership for U. Ibid. The proposed legislation would also characterize certain income and gain in respect of ISPIs as non-qualifying income under the tax rules applicable to publicly traded partnerships after a ten-year transition period from the effective date.25 Both the May 2010 House bill and the 2012 Levin bill provide that. including gain on sale.S.considered but did not pass legislation that was generally similar to the legislation passed by the U. that would tax carried interest at ordinary income tax rates (which would be higher than the proposed blended rate under the May 2010 House bill). House of Representatives. Representative Levin introduced similar legislation.

in 2010. Ibid. For example.28 Additional proposed changes in the U. Several parts of the framework could adversely affect Blackstone.27 States and other jurisdictions have also considered legislation to increase taxes with respect to carried interest. which could have caused a non-resident of New York who hold Blackstone common units to be subject to New York state income tax on carried interest earned by entities in which Blackstone holds indirect interest. . franchise or other forms of taxation. the New York State Assembly passed a bill. 2012. because of widespread state budget deficits. If any state were to impose a tax upon Blackstone as an entity. dividend payouts would reduce. It is unclear whether or when similar legislation will be enacted. Finally. First. thereby requiring the non-resident to file a New York state income tax return reporting such carried interest income. the framework 27 28 Ibid. In its published revenue proposal for 2013. when it would be proposed or what its prospects for enactment would be.S. and it is unclear what any actual legislation would provide. several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income. On February 22. federal income tax rules for businesses.S. the Obama administration proposed that the current law regarding the treatment of carried interest be changed to subject such income to ordinary income tax. The Obama administration proposed similar changes in its published revenue proposals for 2010. the Obama administration announced its “framework” of key elements to change the U.several prior statements by the Obama administration in support of changing the taxation of carried interest. Few specifics were included. 2011 and 2012. taxation of businesses could adversely affect Blackstone’s business.

30 Finally. another potential legislative compliance cost would be the SEC’s requirement that public entities report financial results under International Financial Reporting Standards (“IFRS”) instead of under accounting principles generally accepted in the United States of America (“U. and private equity firms in general. Additionally.would reduce the deductibility of interest for corporations in some manner not specified. GAAP and IFRS. Such a reduction could also increase the effective cost of financing by portfolio companies. Because the framework did not include specifics. which could reduce the value of Blackstone’s carried interest in respect of such companies. which could again reduce the value of carried interest.S. There remain significant and material differences in several key areas between U.29 A reduction in interest deductions could increase tax rates thereby reducing cash available for distribution to investors or for other uses. its effect on Blackstone. The framework would also reduce the top marginal tax rate on corporations from 35% to 28%. Ibid. Such a change could increase the effective cost of financing such investments.S. GAAP”). as provided in the President’s revenue proposal for 2013 described above. the framework reiterates the President’s support for treatment of carried interest as ordinary income. The adoption of IFRS is highly complex and would have an impact on many aspects and 29 30 Ibid. . The framework suggests that some entities currently treated as partnerships for tax purposes should be subject to an entity-level income tax similar to the corporate income tax. GAAP provides specific guidance in classes of accounting transactions for which equivalent guidance in IFRS does not exist. is uncertain.S. Finally. IFRS is a set of accounting principles that has been gaining acceptance on a worldwide basis. U. which would affect Blackstone.

including but not limited to financial accounting and reporting systems. Despite its minority support amongst voters. borrowing covenants and cash management. that we had the biggest financial crisis since the Great Depression. and yet you're still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place. It is expected that a significant amount of time. voiced support for the Occupy Wall Street movement. with 45% opposing. internal and external resources and expenses over a multi-year period would be required for this conversion.” In addition to policy makers. the Occupy Wall Street Movement’s goals did parallel. In particular. negative sentiments towards the investment and financial services gained moment with the general public. the Occupy Wall Street movement represented a populist reaction to income inequality. 31 Ibid. such as the Transport Workers Union of America. the Industrial Workers of the World. huge collateral damage all throughout the country .. internal controls. particularly from the financial services sector. According to a November 2011 poll by Public Policy Polling. In an October news conference Barack Obama stated. “I think it expresses the frustrations the American people feel. taxes. corporate greed and corruption. . several labor unions.31 Societal Values As a result of the Great Recession. 33% of voters supported the Occupy Wall Street Movement. and undue corporate influence in government. and the National Nurses Union. and 22% undecided. the policy objectives of the Obama administration and congressional Democrats.operations of Blackstone.. to a degree.

CEO of the hedge fund Euro Pacific Capital Inc. The actual writing of regulations is delegated to regulatory agencies.” The extent to which distrust of the financial services industry. Additionally.” and views the Occupy Wall Street protests as "dangerous" and inciting "class warfare". various sections of society can. founder of Paulson & Co. claimed that Occupy Wall Street vilified successful business people. One could argue that the Dodd-Frank Act is a product of such influence. through the influence of lobby groups. Thus. stated in his article In Defense of the 1%. several Republican lawmakers voiced their opinions. can influence legislation is limited. The influence of lobbying interests’ input into legislation is diluted in the implementation process. In fact. market participants. The least I deserve is the ability to keep what I earn. Alternatively. providing huge benefits to everyone in our city and state. several notable business people expressed opposition to the Occupy Wall Street movement.In opposition. also citing “The top 1% of New Yorkers pay over 40% of all income taxes. I have to work twice as hard to compete with bigger financial firms that are propped up by the US government. [he] believes that to aim at one industry or region of America is a mistake. “I own a brokerage firm. Hedge Fund. in an interview with the Wall Street Journal. but I didn’t receive any bailout money. Disgruntled voters can elect candidates with similar ideologies. attempt to shape legislation regarding the financial services industry. exercising this mechanism of influence is constricted by the timing of election cycles. embodied by Occupy Wall Street.” Peter Schiff. John Paulson. which often require the input of market participants. . who said that while there were "bad actors [that needed to be] found and plucked out. including Presidential Candidate Mitt Romney.

The digitization of transactions and account record keeping requires a high degree of security. technology and the efficient. Firms rely on . As the financial services industry operates on the exchange of information amongst millions of parties. efficient and effective systems of communication are essential. and CME are calculated from the up-to-the-minute flow of information from locations across the globe. the capacity of modern computers has given rise to high frequency algorithmic trading.who stand to be regulated. accurate exchange of information. only attainable through substantial investment in IT. Price levels on exchanges such as the NYSE. is essential to the pricing of many asset classes. The importance of the exchange of information at the firm level is reflected in the role information technology departments’ play in financial services firms. NASDAQ. At an industry level. The expansion of global capital resources contributes to more efficient markets. The reliability of such infrastructure facilitates the integration of emerging markets into the global financial system. In addition to the infrastructural role of technology in the financial services industry. a failure of technological systems would have immediate material effect on the operation of financial services firms. Technology Technology plays a vital role in the infrastructure of the financial services industry. In these capacities. have a more direct influence on the regulations governing them than anti-Wall Street elements of society. An effective IT department can lower costs by increasing the accuracy and turn-around speed of a firm’s operations. Many hedge and pension funds utilize high-powered computers to execute orders according to market data processed at fractions of a second. and stimulated growth.

including Blackstone. However. Private equity firms have outperformed many pension fund internal benchmarks. Population Demographics A key demographic trend that will affect private equity firms is the aging population in the United States. Pension funds have steadily been increasing their allocations in private equity. and thus potential profit. will require substantial income from retirement investments. over a ten-year period. Both the California State Teachers’ Retirement System (Calstrs) and the Teachers Retirement System of Texas have committed several billion dollars to firms such as Blackstone. a tremendous amount of trading volume. TPG Capital. have pushed for lower management fees. In response. many large firms. as well as those becoming so within the decade. and the subsequent migration to private equity investment will provide more business for Blackstone in the future. If a firm that engages in high frequency trading suffers a malfunction in their computer system. many firms will reduce the size of their pension contributions. A growing segment of people aged 65 and over will create a severe strain on programs such as Medicare and Social Security.computers’ ability to process massive amounts of data. such that they can implement highly precise trading strategies that require executing multiple orders per second. like Calstrs. sizable pension funds. Given current projections regarding the sustainability of those programs. As the aforementioned tax burden will increase labor costs. The heightened expectations for returns on pensions. in a market of low interest rates. most people age 65 and over. have started providing . and Apollo Global Management. This trend will put an even greater strain on pension funds to garner substantial returns. can be lost.

On the opposite end of the age spectrum. In these strategic partnerships. GDP. the future indebtedness of undergraduates. A heavily indebted. making them less attractive candidates for investment. people aged 18-25 exhibit trends that could materially affect Blackstone. and the federal government continues to increase aid-per-student. . and the current qualification issues of workers 25 and younger will affect Blackstone. As private equity firms reflect the performance of the general economy. Such conditions cause slow growth in the general economy. full-time students do not complete their programs within six years. the private equity firm will provide a wide range of advisory and investment services at a lower fee. The U. roughly 50% of college graduates aged 25 or younger are unemployed or in jobs that do not require a degree. in return for a large investment from the pension fund. If higher education continues to be over consumed.S. Disposable incomes will decrease as interest rates rise on lingering debt. inappropriately qualified labor force will translate to slower growth in the U. In four-year institutions.S.“strategic partnerships” with some pension funds. stifling consumption. tuitions will rise. and being unqualified for jobs that would allow them to comfortably repay it. According to the Associated Press. Department of Labor estimates that only three of the thirty jobs expected to have the greatest growth by 2020 will require a degree. Business will become less productive. The result of these trends will be students incurring debt. more than 40% of firsttime. These trends suggest an overconsumption of higher education. Rising tuitions will cause a greater strain on young people entering the work force with large amounts of student loan debt.

both the upside and downside effects of leveraging can be accurately measured and tailored to investors with an explicit required rate of return. the financial return they can expect. and other firms. relative to other non-private equity financial institutions and the availability of favorable terms under which it can receive credit.S. if one year from now. Thus.33 However.2 billion. The leverage ratio on the deal is 4 to 1. 32 . The extent to which Blackstone levers a company or an individual investment deal is measured by the ratio of debt-to-equity. then Blackstone's investment would have a negative 100% return. commensurately. it is a measure of the risk they are taking and. The balance of financing ($800 million) it borrows from a bank (e. 2011 (filed Feb. FY 11 Form 10-K for the Period Ending December 31. The higher the leverage ratio.g. The value would be just Blackstone LP. If one year from now the value of the investment--the foreign bank--has gone up to $1. Blackstone uses credit financing to leverage its investments in marketable securities. the investment fell in value to $0.2 billion.g. JP Morgan). Blackstone would still owe $800 million of debt.32 A simple numerical example is as follows: Blackstone is going to buy a Spanish bank (or any other investment e. If it sold at $1. then Blackstone has made 100% profit. real estate. the higher the potential profit. 2012). leaving net proceeds of $400 million.INTERNAL Strengths A primary driver of Blackstone’s success is its easy access to credit financing. U. real estate developer) for $1 billion. It only wishes to use $200 million of its own money as equity. such as a pension fund. 33 Ibid..8 billion.

expected return would be zero. Blackstone invests in a collection of business projects. If it had to put all it's own money in.e. The market for private equity leverage is a buyers market. relative to an average corporation or average financial institution. The higher the leverage ratio. If the bank established a strong relationship with a private equity firm.8 billion) is equal. as there are fewer private equity firms than potential lenders. it can expect additional business from additional private equity 34 35 Ibid.enough to pay off the debt.34 There are four principal reasons why Blackstone has better access to and better terms for credit. Ibid. then Blackstone's expected return is 50%. Clearly. typically in the form of secured loans. Banks compete to loan to private equity firms by providing flexible loaning terms. . Thus. they are typically well protected by covenants in the loan documents that give the lender a lot of influence over the borrower in case of an unexpected loss. the loans for which are tied to a specific project and secured by it. Even when the loans are not formally secured.35 The second principal reason Blackstone has better access to and better terms for credit is banks tend to favor private equity firms in the hope of attracting other business from them. $1 billion at the start. If the probability of each outcome ($1 billion or $0. debt is secured on specific project revenues. and thus can expect a higher return. the availability of bank financing (i. Blackstone is taking a greater risk through leverage. the J P Morgan loan) is important to Blackstone's profits. i. the greater the potential downside risk. In essence.e. First. Loan obligations are secured against cash receivables or assets.

Greg Mondre. as they present less default risk."37 The second primary driver of Blackstone’s success is the value added through its partner’s management expertise. private equity firms have to maintain a focus on substantive operational improvements that result from the application of deep industry and functional expertise. noted private equity sponsors also own better companies than they did in past downturns. Mondre said. The weaker competitors fall by the wayside. private equity firms tend to own well-capitalized companies. well-capitalized institution.38 First. General partners choose each target company and Ibid. Rather. by focusing on core competencies and cost cutting.36 The third principle reason is Blackstone is traditionally a large. stable companies with leading market positions than in the past. they invest with the intent to create long-term value. 38 Ibid. managing director of Silver Lake (a large tech-oriented private equity firm). "In any downturn. Ibid. to attract continued investment from limited partners.takeovers in the form of underwriting fees when the portfolio company makes its initial public offering. private equity firms do not simply “flip” companies. it is the leaders that come out with the highest market share and better margins. In addition to well-capitalized sponsor’s balance sheets. Contrary to public perception. sponsors were able to acquire an increased number of large. Private equity firms are in a unique position to create such value for several reasons. During the most recent period of private equity expansion in the early 2000s. 36 37 . Banks are more likely to lend to well-capitalized firms. Private equity firms’ focus on core value begins with due diligence.

as previously discussed. and scrutinize discretionary expenses. private equity firms’ usage of high-leverage models. reduce their inventories. consistent with the imperative to generate cash quickly to pay down debt is private equity’s focus on quickly enacting plans for improvement. private equity firms tightly manage portfolio companies’ receivables and payables. they delay or altogether cancel lower-value discretionary projects or expenses. Private equity firms and their management teams feel a sense of urgency and rapidly make decisions to change. 39 40 . The perpetual monitoring of value creation often means private equity firm exiting entire lines of business that are not drawing on the company’s core strengths and differentiating capabilities. instills a focus and sense of urgency to liberate and generate cash as expeditiously as possible.explicitly define how they will create value and on what timeline. Private equity firms will quickly draw capital from projects that create value in favor of those that do.40 Third. To improve cash flow. 41 Ibid. This is an ongoing assessment as the firm periodically evaluates the value creation potential of their portfolio companies.39 Second. investing only in resources that contribute significant value. To preserve cash. They do not need to navigate layers of oversight or appease external stakeholders. Ibid.41 Ibid. Private equity firms invariably impose a 100-day program on portfolio companies during the first few months of ownership. Their structure frees them from some of the obligation for consensus building inherent in corporation management structures.

plus a long-term incentive compensation package tied to the returns realized upon exit. They typically have three to five years to invest the funds. After realizing the short-term cost benefit of eliminating low-value activities. providing time to carefully assess potential targets and develop an investment thesis. A private equity firm will act assertively to put the right CEO and management in place. and two-thirds are replaced during the first four years. Ibid.42 Fifth. One-third of portfolio company CEOs exit in the first 100 days.43 Sixth. the general partners can afford to invest in the long-term value creation potential of the companies they acquire. but add in highly variable and annual bonuses based on company and individual performance. In fact. that is the only way they will secure their targeted returns upon exit — by convincing a buyer that they have positioned the company for future growth and profitability. Decisions about management are executed swiftly. The assessment of talent begins as soon as due diligence commences and intensifies after the loan or acquisition is made.Fourth. Private equity firms pay modest base salaries to their portfolio company managers. This package typically takes the form of stock and options. private equity general partners understand that effective leadership is critical to the success of their investment. the CEO and senior managers at a private equity portfolio company are deeply invested in the performance of their business. . private equity firms have a long-term focus. and may well draw on its own in-house experts or external network to fill talent gaps. Private equity firms then have a window of about 10 years to exit these deals and return the proceeds to investors. A 2009 study in the Journal of Economic Perspectives of 42 43 Ibid.

Not only does management participate in the upside in a private equity operating company. indebtedness may constitute approximately 70% or more of a portfolio company’s or real 44 45 Ibid.43 leveraged buyouts pegged the median CEO’s stake in the equity upside at 5. unlike bonuses at public companies.625% per annum.875% per annum. they issued $400 million of ten-year senior notes at a rate of 5. in many private equity investments. Top managers receive their annual performance bonus only if they achieve a several performance targets. which have become an expected part of overall compensation irrespective of performance. it reinforces the alignment between top management’s agenda and that of the private equity shareholders. . For example. Because this equity is essentially illiquid until the private equity firm sells the company. Blackstone issued $600 million of ten-year senior notes at a rate of 6. Private equity firms will reduce or even eliminate bonus payments if an operating company fails to achieve its targets.45 Blackstone’s funds’ use of leverage. General partners have “skin in the game” in the form of a meaningful equity investment in the acquired company.44 Weaknesses The main weakness in Blackstone’s business model is its downside leverage exposure to the performance of its portfolio companies. Ibid. For example. and their ability to achieve attractive rates of return on investments will depend on their ability to access sufficient sources of indebtedness at attractive rates. in August 2009. whereas the management team collectively received 16% of company stock. but it also shares in the potential downside. reducing any temptation to manipulate short-term performance. and in September 2010.4%.

including debt that may be incurred in connection with the investment. leading to a bankruptcy and a loss of part or all of the equity investment in it. increases in expenses and interest rates and adverse economic. The incurrence of a significant amount of indebtedness by an entity could:46  give rise to an obligation to make mandatory prepayments of debt using excess cash flow.estate asset’s total debt and equity capitalization. which might limit the entity’s ability to respond to changing industry conditions to the extent additional cash is needed for the response. and  limit the entity’s ability to obtain additional financing or increase the cost of obtaining such financing.  limit the entity’s ability to adjust to changing market conditions. many investments 46 Ibid. For example. market and industry developments.  allow even moderate reductions in operating cash flow to render it unable to service its indebtedness. the risk of loss associated with a leveraged entity is generally greater than for companies with comparatively less debt. thereby placing it at a competitive disadvantage compared to its competitors who have relatively less debt. As a result. The absence of available sources of debt financing for extended periods of time could therefore materially and adversely affect Blackstone’s private equity and real estate businesses. Investments in highly leveraged entities are inherently more sensitive to declines in revenues.  limit the entity’s ability to engage in strategic acquisitions that might be necessary to generate attractive returns or further growth. .

47 When Blackstone’s existing portfolio investments reach the point when debt incurred to finance those investments mature in significant amounts and must be either repaid or refinanced. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss in the value of the investment portfolio. .48 Many of the hedge funds in which Blackstone’s funds of hedge funds invest. If a limited availability of financing for such purposes were to persist for an extended period of time. creditoriented funds and CLOs may choose to use leverage as part of their respective investment programs and regularly borrow a substantial amount of their capital. The interest expense and other costs incurred in connection with such borrowing may not be recovered by appreciation in the securities purchased and will be lost. The timing and magnitude of such losses may be accelerated or 47 48 Ibid. when significant amounts of the debt incurred to finance their private equity and real estate funds’ existing portfolio investments came due. in certain cases. Ibid. A fund may borrow money from time to time to purchase securities or may enter into derivative transactions with counterparties that have embedded leverage.consummated by private equity sponsors during 2005. defaulted on their debt obligations due to a decrease in revenues and cash flow precipitated by the subsequent economic downturn. these funds could be materially and adversely affected. those investments may materially suffer if they have generated insufficient cash flow to repay maturing debt and there is insufficient capacity and availability in the financing markets to permit them to refinance maturing debt on satisfactory terms. 2006 and 2007 that were significantly leveraged subsequently experienced severe economic stress and.

S. To the extent that portfolio firms’ results reflect the condition of the general economy. However. 49 Ibid. . Blackstone is materially affected by changes in interest rates.exacerbated in the event of a decline in the market value of such securities. if investment results fail to cover the cost of borrowings. Blackstone is exposed to the risks associated with the performance of the general economy. As previously discussed. the fund’s net asset value could also decrease faster than if there had been no borrowings.49 Economic Conditions & Forecasts U. Economy The following table contains data from the Congressional Budget Office and Federal Reserve on several metrics of the general economy. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings.

1%/2.8% 8.2% 0.7% 0.1% 2010 2.9% 2008 -0.8% 1.6% 5.4%/3.7% 9.6% 0.6% 2012 2.14%/3.8% .5%/4.9% 0.6% 4.0%/3.1%/2.4% 2011 1.1% 4.2% 8.1%/2.15%/3.0% 2013 1.Year GDP (% change from previous period) Unemployment Rate Interest Rates (3 month T-Bill/10 year Treasury) 2007 1.5% 5.2% 0.6% 2.3% 2009 -3.1% 2014-2017 4.3% 9.3% 9.

9% 3. but in the U. which has resulted in increasing occupancy and rents..S. 2011 (filed Feb.9% Evaluation of Management and Operating Results Business Environment World equity and debt markets were mixed in 2011. There are similar trends in Blackstone’s industrial. FY 11 Form 10-K for the Period Ending December 31. In equities.3% 1. Corporate earnings were generally better than expected for most of 2011. steady growth in GDP and employment. The office sector is benefiting from historically low levels of new supply. characterized by high levels of volatility due to macroeconomic.Inflation (Consumer Price Index) 2. combined with slow. the Federal Reserve has remained committed to keeping inflation at low levels.50 The development of monetary policy throughout the world was mixed.51 In commercial real estate. Blackstone LP.S. operating fundamentals remain healthy across all of Blackstone’s real estate investment types. Credit indices rose in 2011.6% 3. political and regulatory uncertainty. The U. and cash flows and balance sheets remained very healthy. unemployment rate remains elevated.2% 1. the MSCI World Index declined 8%.9% -0. due to strong corporate earnings and higher demand.5% 1. 50 . 2012).. despite volatility in the global economy and equity markets. but declined to its lowest level in three years at the end of 2011. although companies have remained cautious in hiring. 51 Ibid.4% 1. with developed markets generally outperforming developing markets in Asia and elsewhere.

If publicly traded partnerships were to be taxed as a corporation or were forced to hold interests in entities earning income from Carried Interest through taxable subsidiary corporations. Over the past several years.52 There remains some uncertainty regarding Blackstone’s future taxation levels. a material source of revenue for Blackstone. 54 Ibid. this could materially increase their tax liability.3 billion for the year ended December 31. House of Representatives.retail and senior living sectors. and the state and local tax rates aggregate approximately 10%. with U. 2011. federal income tax purposes.54 Results of Operations Revenues Total Revenues were $3. have been passed by the U. Ibid. Ibid. in certain cases. an increase of $133. The federal tax rate for corporations is currently 35%.53 Proposed legislation stipulated that Carried Interest due to publicly traded partnerships be held in taxable subsidiary corporations. have been introduced and.2 million compared to $3. a number of legislative and administrative proposals to change the taxation of Carried Interest. rather than being treated as capital gains. industry RevPAR (“Revenue per Available Room”) up 8% for 2011. 52 53 . If future legislation precludes Blackstone from qualifying for treatment as a publicly traded partnership for U.S. trends remain positive. In the hospitality sector.S. Blackstone’s effective tax rate could increase significantly.1 billion for the year ended December 31.S. and could well result in a reduction in their share price.

2010.8 million in Investment Income.. which commenced their investment periods during the first and third quarters of 2011. (b) increases in transaction fees in Blackstone’s Real Estate segment. Blackstone is entitled to a Blackstone LLP. due to the continued increase in investment activity in Blackstone Real Estate Partners (“BREP”) funds.0 million in Management and Advisory Fees and an increase in Performance Fees of $244.S. The increase in Management and Advisory Fees was due to (a) increases in management fees in Blackstone’s Private Equity segment. 2012). The “catch-up” provisions of the Real Estate funds’ profit allocations specify that once a fund’s preferred return hurdle has been reached. respectively.55 The increase in Performance Fees was due to improved operating performance and projected cash flows resulting in the appreciation of the fair value of the investments across the Real Estate carry funds and the impact of the “catch-up” provisions of the Real Estate funds’ profit allocations. driven by fees generated from Blackstone Capital Partners (“BCP”) Tier VI and Blackstone Energy Partners (“BEP”) funds. and (c) increases in management fees in Blackstone’s Credit Businesses and Hedge Fund Solutions segments due to higher Fee-Earning Assets Under Management. 2011 (filed Aug.8 million. primarily as a result of BREP Tier VI’s acquisition of the U. The increase in revenues were driven by an increase of $227. and management fees earned from the management of the Bank of America Merrill Lynch Asia real estate platform. FY 11 Q1 Form 10-Q for the Period Ending June 30. assets of Centro in the second quarter of 2011. 55 . partially offset by a decrease of $347.

The reversal occurred from corporate Blackstone LLP.4 billion for the year ended December 31. 58 Ibid. or 18%.57 General. 2011. a decrease of $289. 2011 (filed Feb.2 million compared to $502.6 million from the same period of 2010 due to Blackstone’s issuance of senior notes in 2010. Administrative and Other expenses were $566. 2011. 2012). compared to $4. 57 Ibid.8 million in Compensation and Benefits. 2010. Interest Expense was $57. The decrease of $487.disproportionately greater share (80% of the profits) until it effectively reaches its full share of performance fees (20% of the total profits). a decrease of $755.8 million of Other Income. an increase of $100. an increase of $16. 56 .8 million for the current year. This decrease was partially offset by $197.5 million from the prior year period to $2.1 million of Net Gains from Fund Investment Activities was due to declines in income from Blackstone’s Private Equity and Real Estate consolidated side-by-side entities and consolidated collateralized loan obligation (“CLO”) vehicles. The decrease in expenses was due to a decrease of $871.. FY 11 Form 10-K for the Period Ending December 31.4 billion as a result of the absence of expenses related to equity-based compensation awards. Compensation decreased $831.0 million for the year ended December 31.8 million for the year ended December 31. 2010.1 billion for the year ended December 31.9 million.56 Expenses Expenses were $3.58 Other Income Other Income was $212.0 million due to an increase in the levels of business activity. revenue growth and headcount. resulting from the reversal of the tax receivable agreement liability.3 million for the current year period.

subsidiaries adopting a New York City law for sourcing of revenue that reduces their effective tax rate and therefore reduces the expected future tax savings that would result in payments under the tax receivable agreements.5 billion consisted of (a) inflows of $18.60 Outflows of $16. were attributable to (a) outflows of $4. and (c) reductions of $3. or 30%. (b) inflows of $11. Ibid.1 Ibid. 59 60 . (b) outflows of $3. Private Equity and Hedge Fund Solutions segments.1 billion at December 31.3 billion in the Credit Businesses segment primarily from the acquisition of $2. Inflows of $49.8 billion in the Credit Businesses segment from the deleveraging of CLO vehicles post their reinvestment periods.3 billion of CLO vehicles and capital raised across its long only platform.59 Assets Under Management Assets Under Management were $166. 2011. (c) inflows of $11. 61 Ibid.6 billion in the Private Equity segment as BCP Tier VI began its investment period. 2010. compared to $128. principally from the Credit Businesses.5 billion.61 Net market appreciation of $5.2 billion at December 31.2 billion in the Private Equity segment’s FeeEarning Assets Under Management due for the most part to the end of BCP Tier V’s investment period during the first quarter of 2011.3 billion in the Real Estate segment primarily from the deployment of coinvestment capital and the beginning of BREP Tier VII’s investment period.1 billion. an increase of $38.3 billion in the Hedge Fund Solutions segment due to growth in the hedge fund manager seeding platform. and (d) inflows of $8.4 billion in the Real Estate segment from realizations from the Bank of America Merrill Lynch Asia real estate platform and the end of BREP Tier VI’s investment period.

2 million.5 million. compared to Ibid. and Vanguard Health Systems. The decrease in revenues consisted of decreases in Performance Fees and Investment Income of $237. and an increase in Total Management Fees of $102.billion consisted of appreciation in the Real Estate and Private Equity segments of $4. respectively..4 million for the year ended December 31. Inc. including Nielsen Holdings N.. a decrease of $237. compared to $308.5 million.8 million for the year ended December 31.V. particularly the investments which had initial public offerings in 2011.6 million compared to $828.4 million for the year ended December 31. Ibid.7 billion.64 The returns in 2011 derived from investments in the energy sector and Blackstone’s publicly traded portfolio. respectively. The decrease was due to lower Performance Fees in BCP Tier IV which had net returns of 8% in 2011 versus 30% during the 2010 year. Inc. a decrease of $114.5 million and $114. Investment Income was $54. 2010.63 Performance Fees were $70. BankUnited. 64 Ibid. 2010.9 million for the year ended December 31..4 billion and $2. 2011. Real Estate and Private Equity benefited from improvements in the carrying values of their investments while Hedge Fund Solutions was affected by equity market declines. Kosmos Energy Ltd. 2011. a decrease of $249.62 Performance by Segment Private Equity Revenues Revenues were $578.6 million.2 million. 62 63 . and depreciation in the Hedge Fund Solutions segment of $1.2 billion.

an increase of $60. 2011.6 million compared to $335. a decrease of $5.65 Total Management Fees were $437. 2010. an increase of $102. 67 Ibid. Ibid. compared to $342.68 Expenses Expenses were $337.0 million for the year ended December 31. principally determined by the performance of BCP Tier IV and V funds.6 million for the year ended December 31. principally as a result of an increase in Fee-Earning Assets Under Management due to the beginning of the BCP Tier VI and BEP funds’ investment periods.8 million compared to $72.0 million for the year ended December 31. 2010. as well as fees generated from the subsequent increase in new investment. 2011. an increase of $68.7 million compared to $263. which had lower fund returns than for the prior year.67 Management Fee Offsets were determined by the reduction of management fees payable by Blackstone’s limited partners in BCP Tier VI.7 million for the year ended December 31.4 million for the year ended December 31. comprised of increased Base Management Fees and Transaction and Other Fees.2 million for the year ended December 31. based on the amount they reimbursed Blackstone for placement fees. 2010.66 Transaction and Other Fees were $133.$168. 2011. Base Management Fees were $332.3 million for the year ended December 31. 65 66 . 2010. 2010. 2011. 68 Ibid. The Ibid.2 million. resultant of one time fees earned from the termination of management advisory service agreements with portfolio companies that completed initial public offerings. partially offset by an increase in Management Fee Offsets.9 million for the year ended December 31.9 million for the year ended December 31.

The increase in revenues were due to an increase of $652. Ibid.6 million from $330. The net appreciation in fair value of the investments in BREP Tier V and VI carry funds primarily contributed to the increase in Performance Fees for the year ended December Ibid. 2010.0 billion for the year ended December 31.72 Performance Fees were $949.6 million for the year ended December 31. offset by a decrease of $209. 2011. 2011.6 billion for the year ended December 31. decreasing $209. Compensation rose due to increased headcount and an improvement in the performance measures to which a portion of compensation is linked. 71 Ibid. Investment Income was $120.3 million compared to $297.1 million in Total Management Fees. 2011.2 million increase in Compensation and an $11.3 million in Total Performance Fees and an increase of $102.7 million decrease in Performance Fee Compensation.69 Performance Fee Compensation decreased as a result of the decreases in Performance Fees revenue.3 million to $120.71 Real Estate Revenues Revenues were $1.2 million for the year ended December 31. 2010. mostly offset by a $38.3 million increase in Other Operating Expenses. 69 70 .2 million decrease was comprised of a $54. principally due to interest expense allocated to the segment and occupancy costs.70 Other Operating Expenses increased from $11.8 million compared to $1.5 million for the year ended December 31.9 million. 72 Ibid. an increase of $652.6 million in Total Investment Income.$5. 2010. an increase of $545.3 million for the year ended December 31.

2011 resulted from improved operating performance and projected cash flows across the Real Estate carry funds’ investments. increasing $102. hotel and retail portfolios. 76 Ibid.75 As of December 31. 75 Ibid. which resulted in the appreciation of Blackstone’s holdings. Ibid. 2011. augmented by the “catch-up” provisions of the Real Estate funds’ profit allocations. 74 The carrying fair value of assets for Blackstone’s contributed Real Estate funds increased 16.4 million for the year ended December 31. The decrease in Investment Income resulted from the year over year decrease in the appreciation of investments related to the BREP Tier VI fund.5 million for the year ended December 31. reflecting the Ibid.1 million from $397. Positive performance in year ended December 31.76 Total Management Fees were $499. primarily derived from the management of the Bank of America Merrill Lynch Asia real estate platform and management fees earned from co-investments. Transaction and Other Fees were $109. Base Management Fees were $394.4 times investors’ original investment. 2011. principally within their office.31.8 million for the year ended December 31.3 million for the year ended December 31. increasing $49.73 Performance Fees benefited from the strong performance of carry funds. 2011. 2010. 73 74 . 2010. 2011.9 million for the year ended December 31.7% for the year ended December 31.3 million for the year ended December 31.4 million from $338. the unrealized value and cumulative realized proceeds of Blackstone’s Real Estate funds represented 1. 2011. increasing $56.6 million from $59. 2010. 2011.

7 million to $103.5 million.continued increase in investment activity in BREP funds.S.5 million for the year ended December 31.77 Expenses Expenses were $579. 77 78 . Ibid.2 million Ibid. 2011. 2010. 2011. and expenses related to the management of the Bank of America Merrill Lynch Asia real estate platform.4 million in Performance Fees to $12. The increase was primarily attributed to a $100. 79 Ibid.8 million.9 million for the year ended December 31. 2011.79 Hedge Fund Solutions Revenues Revenues were $338. decreasing $28. resulting from improved Performance Fees revenue and an increase in Compensation of $53.2 million from year ended December 31. 2010. an increase of $183.78 Other Operating Expenses increased $29. assets of Centro. primarily as a result of BREP Tier VI’s acquisition of the U. compared to $396.6 million to $236.1 million for the year ended December 31. interest expense allocated to the segment. The decrease in revenues was primarily attributed to decreases of $47. principally due to placement fees related to debt investment funds.2 million increase in Performance Fee Compensation.5 million for the year ended December 31. Compensation rose primarily due to headcount increases related to the management of the Bank of America Merrill Lynch Asia real estate platform and the profitability of the segment.

8 million for the year ended December 31. increasing $29.3 million increase was primarily attributed to a $15. 83 Ibid. increasing $41.7 million for the year ended December 31. Investment Income was $(1. 80 81 . 2011.5 million from the prior year period.80 Total Management Fees were $317.3 million compared to the year ended December 31.7 million. 2011. 2011 compared to the year ended December 31.0 million for the year ended December 31. 2010. 2010. decreasing $47.2 million for the year ended December 31.8)% during the year ended December 31. 82 Ibid. 2010.3) million. thus eligible for Performance Fees. 84 Ibid. also decreased during the year ended December 31. decreasing $30.6 million for the year ended December 31. 2011.7 million from $276.84 Expenses Expenses were $197.6 million increase in Total Compensation and Ibid.82 Performance Fees were $12. partially offset by an increase of $41.4 million from $59.83 Both decreases reflect the lower returns in the segment in 2011 compared to 2010.and $30.3) million for the year ended December 31.7 million in Total Management Fees to $317.9 million for the year ended December 31.1 million from the prior year period.5 million in Investment Income to $(1. increasing $43. 2011.81 Base Management Fees were $315. The returns of the underlying assets for Blackstone’s Hedge Fund Solutions’ funds were (1. driven by an increase in FeeEarning Assets Under Management of 14%. 2010. 2011. 2011. Ibid. Fee-Earning Assets Under Management related to funds of funds above their respective hurdle rate. The $29.

0 million for the year ended December 31.1 million for the year ended December 31.85 Compensation was $129.Benefits and a $13. 85 86 . 2011.1% for the mezzanine funds and 4.6 million.4 million for the year ended December 31.87 Credit Business Revenues Revenues were $395.7 million to $65.8 million for the year ended December 31.1 million for the year ended December 31. 2011.8 million compared to $261. from $51. 87 Ibid. 2011. The returns of the underlying assets for Blackstone’s credit-oriented business were 8. due to an increase in headcount to support the growth of the business. Performance Fees were $141. from $95.1 million.4 million for the prior year period.0 million for the year ended December 31. which is $119. increasing $33. decreasing $83. This was partially offset by an increase of $44.7 million increase in Other Operating Expenses. 2010.4% for the rescue lending funds for the year ended December 31. Ibid.9% for the flagship hedge funds. 2011. 2010. 88 Ibid.2 million lower than the prior year period.86 Other Operating Expenses increased $13. or 23%. 2011. 28.88 Ibid. in Total Management Fees. due to increased professional fees from to the growth of the business and other expenses. 2010. The decrease in revenues was resulted from lower Performance Fees of $141.7 million from the year ended December 31. The lower Performance Fees were primarily attributable to a slowing in the increase of the carrying value of the underlying assets.

92 Financial Advisory Ibid. resulting from a decrease of $67. 2010. partially offset by increases of $5.3 million to $128. 2011.0 million for the year ended December 31.6 million for the year ended December 31. 91 Ibid.6 million.4 million for the year ended December 31.3 million for the prior year period.1 million from the prior year period. or 17%. 2011. increasing $44. compared to $142. Base Management Fees were $238. 2011.1 million for the prior year period primarily due to increases in professional fees related to business development and fund-raising activities.8 million to $50. 89 90 . 2011 of $146. 2011. Other Operating Expenses increased $10. a decrease of $51. Performance Fee Compensation was $74.The Realized Performance Fees for the year ended December 31. compared to the year ended December 31.8 million in Other Operating Expenses.6 million for the prior year period.6 million were primarily determined by realizations in the Credit Businesses’ mezzanine and flagship hedge funds.3 million in Compensation and $10. 2011.0 million for the year ended December 31.89 Total Management Fees were $240. increasing $43. 92 Ibid. Ibid.5 million for the year ended December 31.90 Expenses Expenses were $253.8 million in Performance Fee Compensation. primarily due to higher Fee-Earning Assets Under Management.91 The decrease was due to lower Performance Fee accruals in the current year compared to the prior year period. 2011. from $123. Compensation increased $5.6 million compared to the prior year period.8 million for the year ended December 31. from $39.

3 million over the year ended December 31. Compensation and Benefits decreased $29. Other Operating Expenses increased $11. caused decreases in Blackstone’s restructuring and reorganization business. driven by decreases in Blackstone’s restructuring and reorganization business and in Blackstone Advisory Partners’ business.0 million. or 10%.93 Cyclical declines across the industry.94 The decrease in Blackstone Advisory Partners’ business was due reduced transaction activity compared to the prior year period. 2011.2 million for the year ended December 31.0 million. Ibid. due to decreased compensation expenses in Blackstone’s restructuring and reorganization business and Blackstone Advisory Partners’ business.95 Expenses Expenses were $330. decreasing $42. 95 Ibid. 2011.Revenues Revenues were $389.9 million for the year ended December 31. 2010. decreasing $18. 2010. from $348. from a peak in 2009 as the global economy continued to stabilize during 2011. or 5%. 93 94 .3 million compared to the year ended December 31.9 million for the year ended December 31. 96 Ibid. from $431. 2010.2 million for the year ended December 31. Ibid. The increase in fees earned by Blackstone’s fund placement business was driven by improvements in the fund-raising of capital from institutional investors for alternative investment products compared to the prior year period.96 Compensation expense for these businesses is related to their financial performance. partially offset by an increase in Blackstone’s fund placement business.

2013 to April 8. 2011. Ibid. (c) pay operating expenses.L.02 billion. Blackstone Holdings Finance Co. 2016. (f) pay income taxes and (g) make distributions to shareholders. principally funding general partner and coinvestment commitments to funds.. as Administrative Agent. principally due to increases in all other expenses. 2010. indirect subsidiaries of Blackstone entered into an unsecured revolving credit facility (the “Credit Facility”) with Citibank. 97 98 .97 Sources of Cash and Liquidity Needs Blackstone expects their primary liquidity needs will be cash to (a) provide capital to facilitate the growth of existing businesses. On April 8.K. in each case subject to certain sub-limits. issued $600 million in aggregate principal amount of 6. the Credit Facility was further amended to extend the maturity date from March 23. partially offset by a decrease in bad debt expenses. 99 Ibid. the Credit Facility was amended to set the facility aggregate borrowing limit at $1.2010. including cash compensation to employees and other obligations as they arise.625% Senior Notes which will mature on Ibid.”99  “In August 2009. Blackstone believes that the following sources of liquidity will be more than sufficient to fund their working capital requirements:  “On March 23.C. L.98 Taking into account prevailing market conditions and both liquidity and cash balances. On November 23. (b) provide capital to facilitate expansion into new businesses that are complementary.A. Sterling or Euros. N. (d) fund modest capital expenditures. (e) repay borrowings and related interest costs. 2010. Borrowings may also be made in U.

2012. (b) Carried Interest and incentive income realizations. L. 2021.102 Ibid.22 per common share in the fourth quarter of 2011 payable on March 30.August 15.L.”100  “In addition to the cash we received in connection with our IPO. unless earlier redeemed or repurchased. Blackstone paid distributions of $0. and (c) realizations on the carry and hedge fund investments that we make. Ibid.”101 With respect to fiscal year 2011. unless earlier redeemed or repurchased. 2019. In September 2010. Blackstone Holdings Finance Co. issued $400 million in aggregate principal amount of 5.875% Senior Notes which will mature on March 15.C. we expect to receive (a) cash generated from operating activities.30 per common share and has declared an additional distribution of $0. 100 101 . 102 Ibid. debt offering and our borrowing facilities.

Quick ratio ROI. ROA Customer Internal Business Learning and Growth Employee retention. Increase productivity Increase accuracy on forecasted returns Measurements EVA.Balanced Score Card Perspective Financial Goals Continuously improve financial performance Continue to add value to portfolio firms Continue to improve operational efficiency Continue to develop and refine due diligence processes Objectives Decrease costs. ROCE. Debt-toequity. maintain adequate liquidity Find creative opportunities to generate value Increase quality. performance based compensation Estimated-to-actual return spreads .

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