bx initiation

RBC Capital Markets, LLCBulent Ozcan, CFA (AssociateAnalyst)(212) [email protected]

Eric N. Berg, CPA (Analyst)(212) [email protected]

OutperformNYSE: BX; USD 22.94

Price Target USD 32.00Scenario Analysis*

DownsideScenario

18.0018%

CurrentPrice

22.94

PriceTarget

32.0044%

UpsideScenario

38.0070%

*Implied Total Returns

Key StatisticsShares O/S (MM): 555.5Dividend: 0.92

Market Cap (MM): 12,743Yield: 4.0%

Priced as of market close August 12, 2013 ET.

RBC EstimatesFY Dec 2012A 2013E 2014EDistributableEarnings

0.93 1.31 1.55

ENI 1.77 2.45 2.84FEAUM (MM) 167,880 192,231 215,427DPS 0.52 1.32 1.50Div Yield 2.3% 5.8% 6.5%

DistributableEarnings

Q1 Q2 Q3 Q4

2012 0.15A 0.17A 0.17A 0.45A2013 0.34A 0.28A 0.30E 0.39E2014 0.39E 0.35E 0.35E 0.47EENI2012 0.44A 0.19A 0.55A 0.59A2013 0.55A 0.62A 0.63E 0.66E2014 0.66E 0.71E 0.73E 0.75EAll values in USD unless otherwise noted.

August 12, 2013

The Blackstone Group LPSetting the Standard for the IndustryOur View: We are initiating coverage with an Outperform rating anda $32 price target. We believe that Blackstone is one of the best-runcompanies in the alternative asset management space. A deep bench oftalent, dedication to innovation, and a global footprint drive performanceand help Blackstone attract capital. We expect continued strong growthas Blackstone embarks on the next stage of growth.

Key Points:Strong performance across diverse businesses: With net internal ratesof return that are north of 15% (since inception), the company's privateequity, credit, and real estate businesses are running on all cylinders.Having strong performance across numerous investment strategiesallows Blackstone to harvest and generate promote (performance fees)consistently, selling down assets from multiple “buckets”.

Blackstone could be entering a prolonged harvesting cycle: We believethat there is a “backlog” of exits as investment cycles have been prolongeddue to the financial crisis. The ratio of total assets to fee earning assetshas climbed to above pre-crisis levels. This indicates that investments areapproaching return objectives that could lead to an extended period ofrealizations.

One of the best capital raising efforts in the industry: Blackstone is bestin class in respect to capital raising. Over the past two years, Blackstonehas raised over $90 billion of capital, which is more than the total capitalraised by its four closest competitors combined. We attribute this to strongperformance and management's constant objective of reinventing thebusiness.

Global footprint with scale in each business: Blackstone is not only thelargest alternative asset manager in the United States as measured by feeearning assets under management, but it has a global reach that expandswell beyond major markets. In our view, this allows the firm to seekinvestment opportunities that meet its hurdle rates globally, ultimatelyresulting in better performance and more capital allocation to Blackstone.

Strong hedge fund solutions business (BAAM) with potential to be acatalyst for AUM growth: Blackstone has reinvented its fund of fundsbusiness and is now embarking on the next stage of growth, namelyexpansion into the retail space. With a focus on innovation, we wouldexpect BAAM to excel as clients are increasingly looking for solutions thataddress their liability problems.

Liquidity and float are the highest among alternative asset managers:This attribute reduces the common concern around building a position inan alternative asset manager. This is appealing to investors who would shyaway from owning alternative asset managers due to liquidity concerns.

Priced as of prior trading day's market close, EST (unless otherwise noted).For Required Conflicts Disclosures, see Page 50.

Target/Upside/Downside Scenarios

Exhibit 1: The Blackstone Group LP

50.00

40.00

30.00

20.00

10.00

0.00Current Share Price

22.94

Price Target

32.00

Upside Scenario

38.00

Downside Scenario

18.00

Shar

e Pr

ice

(USD

/sh)

Source: RBC Capital Markets estimates

Target Price/ Base CaseOur base case scenario results in 2014 economic netincome of $2.84. This is broken down as follows: $0.75in management fee based earnings and $2.10 in incentiveincome based earnings. We are applying a P/E multiple of18x to management fee-based earnings and 9x to incentiveincome-based earnings to arrive at our $32 price target.Assumptions: Portfolio returns of 11.2% in Private Equity;returns of 13.8% in Real Estate; a quarterly return assumptionof 2% for Hedge Fund Solutions; total performance fees of$499.4 million in Credit for 2014; total fees of $396.5 millionfor Financial Advisory.

Upside ScenarioOur upside scenario results in $0.83 in management feeearnings per share and $2.61 in incentive income earnings pershare. We are applying a P/E multiple of 18x to managementfee earnings and 9x to incentive income earnings to arriveat our $38 upside valuation. Assumptions: Portfolio returnsof 14.7% in Private Equity; returns of 16.5% in Real Estate;a quarterly return assumption of 2.7% for Hedge FundSolutions; total performance fees of $583.3 million in Creditfor 2014; and total fees of $469.6 million for FinancialAdvisory.

Downside ScenarioOur downside scenario results in $0.64 in management feeearnings per share and $1.28 in incentive income earnings pershare. We are applying a P/E multiple of 14x to managementfee earnings and 7x to incentive income earnings to arrive atour $18 downside valuation. Assumptions: Portfolio returnsof 5.6% in Private Equity; returns of 8.2% in Real Estate;a quarterly return assumption of 0.6% for Hedge FundSolutions; total performance fees of $359.6 million in Creditfor 2014; total fees of $271.3 million for Financial Advisory.

Investment ThesisShares of Blackstone Group present one of the most attractiveexposures to alternative asset managers. With a deep benchof talent, a focus on reinventing its businesses constantly, anda global footprint, we believe Blackstone is able to generatestrong fund performance and raise more capital than itscompetitors.

Reasons why shares appear undervalued:• Strong performance across multiple strategies and asset

classes: Blackstone produces strong returns across all ofthe businesses and does not seem to have a "pocket ofweakness". With net internal rates of return (net IRR) northof 15% since inception in private equity, credit and realestate, we see multiple levers to generate promote.

• Blackstone could be entering a prolonged harvestingcycle: With the ratio of total assets to fee-earning assetsexceeding pre-crisis levels and having gone through aperiod of low realizations, we believe that Blackstone isapproaching an extended period of realizations. There couldbe a “backlog” of exits which should benefit shareholdersthrough increased distributions.

• One of the best capital raising efforts in the industry: Overthe past two years, Blackstone has raised over $90 billion ofcapital, which is more than the total capital raised by its fourclosest competitors combined. Innovation is a key driver,with more than $76 billion of assets being raised in entirelynew strategies since its IPO.

• Global footprint with scale in each business: With 25 officeson five continents, Blackstone has a global footprint. Webelieve that this is a significant contributor to performanceand facilitates capital raising efforts.

• Strong hedge fund solutions business (BAAM) couldbe a catalyst for strong AUM growth: Blackstone hastransformed its fund of funds business and is once moreembarking on the next stage of growth, namely the retailspace. We see opportunities here.

• Liquidity and float the highest among alternative assetmanagers: We believe this is appealing to investors whowould shy away from owning alternative asset managersdue to liquidity concerns.

Key risks to our thesis:• A slowdown in the economy and a decline in markets could

lead to weaker than expected realizations.• A rapid increase in inflation coupled with sluggish economic

recovery could lead to lower asset valuations and reduceexit opportunities.

• Potential tax reforms could result in carried interest beingtaxed as ordinary income.

• Limited interest due to K-1 filing requirements.

August 12, 2013 Bulent Ozcan (212) 863-4818; [email protected] 2

The Blackstone Group LP

Key Questions

Our View

1. Would a rising interest rate environment impact Blackstone’s shares negatively?

We believe that higher interest rates in a low inflationary environment, coupled with an improving economy could benefit Blackstone’s shares. With an improving economy, real estate valuation would improve and the stock market would rise, leading to exit opportunities. This would set in motion higher realizations in real estate and private equity and help the hedge fund business generate higher incentive income. In Credit, Blackstone seems to have a natural hedge against higher rates. Investment returns are based on floating rates, such as the LIBOR. Our view is that the Federal Reserve will act prudently and avoid raising interest rates quickly, as this would negatively affect the current recovery. We would not expect the Federal Reserve to stall the current economic recovery, which is progressing at a slow but steady pace.

2. Why buy BX shares now, as BCP V, Blackstone’s largest private equity fund, remains below its return threshold?

As the company has demonstrated over the past year, Blackstone can generate significant amount of promotion without having to rely on BCP V. There are multiple asset classes the company can fall back on to grow distributable income. As for BCP V, one should not ignore the fact that once the fund crosses its hurdle rate, we would expect accelerated incentive income. At that point, 80% of the outperformance will be allocated to the general partners. With $20 billion in net asset value, incentive income could be significant.

3. Can the shares appreciate from here? It seems that investors could acquire incentive income cheaper by buying shares of some of its peers. Can BX outperform peers given current valuation?

We view Blackstone as one of the best run companies in the alternative asset management space - with a deep bench of talent, a focus on reinventing the business and a global footprint. We believe that there is significant potential for share price appreciation. The shares of Blackstone were trading at a 21% discount to traditional asset managers when the company floated its shares in 2007. BX had about $102 billion of assets under management in 2007. Today, with $230 billion of assets under management, the shares are trading at a discount of over 45% to traditional asset managers. However, it does not experience the same sort of pressure on its business model. Very few investors would consider passive investing to be a substitute to active alternative asset management. Were the discount to traditional asset managers to return to pre-crisis levels, it would not be inconceivable to see the shares trading in line with our upside scenario.

4. Could Blackstone’s shares become less attractive if Congress changes tax treatment of carried interest?

While carried interest has been an issue since 2007, it seems more likely that Congress could move forward and change the tax treatment of carried interest. The Senate Finance Committee released its 8

th tax reform discussion paper on June 6,

2013, focusing on tax treatment of carried interest. The Committee stated that tax code reforms are needed to reduce or eliminate differences in overall tax burdens across different types of entities, owners and income. However, any change in the tax law would come with a multi-year transition period that would allow the firm to optimize its corporate structure. Changing the corporate structure and reorganizing as a corporation could increase institutional demand for Blackstone’s shares, potentially offsetting the negative impact associated with higher taxes.

5. A number of institutional clients cannot own limited partnerships. What are the alternatives to investing directly in BX?

We agree that the limited partnership structure makes investing in alternative asset managers difficult, if not impossible. However, investors interested in alternative asset managers can gain synthetic exposure to the securities by entering total return swaps or buying notes that provide synthetic ownership.



Table of Contents

Quick Background on Blackstone.......................................................................................... 5

Investment Thesis – Key Positives ........................................................................................ 6

Strong performance across diverse businesses provides Blackstone with multiple levers to generate promote (performance fees) ...................................................................................... 6

Blackstone could be entering a prolonged harvesting cycle, which should lead to higher distributable earnings ................................................................................................................ 8

Blackstone has one of the best capital raising efforts in the industry ..................................... 14

Global footprint with scale in each business ............................................................................ 16

Strong Hedge Fund Solutions business (Blackstone Alternative Asset Management – BAAM) could be a catalyst for AUM growth ........................................................................................ 18

Liquidity and float the highest among alternative asset managers ......................................... 20

Investment Thesis – Key Risks ............................................................................................ 22

Blackstone is not the least expensive exposure to alternative asset managers ...................... 22

Interest rate sensitivity could be an issue, depending on path of economic recovery ............ 23

Succession planning could weigh on shares............................................................................. 24

Potential tax rate changes could be lower distributable earnings ........................................... 25

K-1 filing requirement is holding back investors ...................................................................... 26

Analyzing companies within the sector is difficult given inconsistent accounting & utilization of non-GAAP measures across the sector and the difficulty of projecting realizations ........... 27

Company Description ......................................................................................................... 29

Milestones ......................................................................................................................... 30

Business Segments ................................................................................................................... 30

Revenues/Fee Structure ........................................................................................................... 36

Operating Metrics .............................................................................................................. 39

Assets under Management (AUM) ........................................................................................... 39

Distribution History .................................................................................................................. 41

Limited Partnerships ................................................................................................................ 42

Organization Structure ............................................................................................................. 43

Management Team ............................................................................................................ 45

Valuation Framework ......................................................................................................... 46

Risks and Price Target Impediments ................................................................................... 48

Note: report contents priced as of market close August 8, 2013 ET.



Quick Background on Blackstone The Blackstone Group L.P. (NYSE:BX) was founded in 1985 by Stephen A. Schwarzman, present Chairman and CEO of the company, and Peter G. Peterson, who retired as Senior Chairman in the year 2008. Blackstone is an alternative asset management and financial services company. Under the alternative asset management businesses, Blackstone manages private equity funds, real estate funds, publicly-traded closed-end mutual funds and credit oriented funds and provides access to hedge funds. Financial advisory services provided by the company include mergers and acquisitions, private placements and restructuring, and reorganization advisory services. Blackstone is an independent manager of private capital worldwide with US$229.6 billion Assets under Management (AUM) as of June 30, 2013. Headquartered in New York, USA, Blackstone has 25 offices in the United States and around the globe. Some of its offices are located in Paris, London, Sydney, Hong Kong, Tokyo, Shanghai, Seoul, Singapore, Beijing, Dusseldorf, Frankfurt, Dubai, Mumbai, Dublin and Istanbul.

Exhibit 2: Overview of Blackstone Group LP

Private Equity (BCP &

BEP)

Real Estate (BREP &

BREDS)

Hedge Fund Solutions

(BAAM)

Credit (GSO) Financial Advisory

FEAUM ($ in bn) $36.6 $43.6 $47.6 $48.5 n/a

Strategy Pursuing opportunities

throughout the world:

leveraged buyout

acquisitions of seasoned

and start-up businesses,

minority investments,

corporate partnerships,

distressed debt,

structured securities and

industry consolidations.

Debt investment funds

target high yield real

estate debt related

investment opportunities

in the public and private

markets, primarily in the

United States and

Europe. Blackstone

acquired Capital Trust's

investment management

business in December

2012, broadening its

expertise to debt

origination and special

servicing

Blackstone Alternative

Asset Management

(“BAAM”) manages a

broad range of

commingled funds of

hedge funds and

customized vehicles.

BAAM’s businesses also

include hedge fund seed,

long-only, special

situations and advisory

platforms and BAAM is

also building a public

funds platform

Senior credit-focused

funds, distressed debt

funds, mezzanine funds

and general credit-

focused funds

concentrated in the

leveraged finance

marketplace. GSO also

manages separately

managed accounts and

registered investment

companies including

business development

companies

Financial Advisory

segment comprises

financial and strategic

advisory services,

restructuring and

reorganization advisory

services and Park Hill

Group, which provides

fund placement services

for alternative

investment funds

Life of Business PE Investment funds: 10

years

RE Investment funds: 10

years

Perpetual Various (5 years to

perpetual)

n/a

Redemption Rights None None Semi-annual redemptions Hedge Funds

(semi-annual)

Drawdown Funds (None)

n/a

Source: Company reports



Investment Thesis – Key Positives

Strong performance across diverse businesses provides Blackstone with multiple levers to generate promote (performance fees) In the asset management sector, be it traditional or alternative asset managers, companies live and perish by their performance. Strong performance allows managers to gather assets and consistently strong performance allows them to retain client relationships for an extended period.

We believe that Blackstone is a very well managed company, with a deep bench of investment professionals who can produce strong returns across its businesses. Put it differently, there are no “pockets of strength” because there are no “pockets of weakness”. While some of its competitors might be doing great in certain areas and not so well in others, Blackstone has historically been able to replicate its successful investment approach and philosophy across all businesses.

Stephen Schwarzman, co-founder and CEO, attributes the performance to the fact that Blackstone is still the same firm he and Peter Peterson founded in 1985 – despite its current size. What he means by that is the firm still operates like a small partnership, dedicated to providing clients with solutions to address their challenges. Innovation and creating a supportive culture that requires everyone to strive for excellence drives strong returns. And understanding that losing a dollar hurt more than making a dollar, risk management remains a significant part of Blackstone’s culture.

The exhibit below compares net internal rate of returns for Blackstone’s businesses versus its peers.

Exhibit 3: Net IRRs across Blackstone’s various businesses are strong (1Q13)

26%

15%

19%

3%

15%

18%

11%9%

22%

15% 15%

10%

18%

n/an/a0%

5%

10%

15%

20%

25%

30%

Apollo Global

Management

Blackstone Group Carlyle Group KKR & Co Fortress

Investment Group

Private Equity Credit Real Estate

Source: FactSet; RBC Capital Markets

What is notable is the fact that net internal rates of return (net IRR) generated since inception in private equity, credit and real estate are north of 15%. In fact, the most recent data indicates that the net IRR in Real Estate has increased from 15% to 16% as of 2Q13.

With strong performance across multiple businesses, Blackstone is well positioned to raise capital and generate performance fees on a consistent basis



Having strong performance across multiple asset classes allows Blackstone to do a number of things. First, raising capital becomes a much easier undertaking. The company can not only raise capital from existing clients, but also build new relationships. After all, no one appreciates consistency in performance more so than institutional clients with set return objectives they need to meet every year.

Second, being able to raise capital quickly and having a large fund at one’s disposal could lead to better investment returns. There is less dependence on “club deals” (investments undertaken collectively with other private equity firms) which tend to result in weaker returns. Furthermore, by being able to act fast, one might avoid a competitive bidding situation. And managing a large fund allows the firm to pursue not only larger deals, but to maintain the diversification of the fund at the same time. A transaction to the tune of $2 billion in a $20 billion portfolio poses a different risk than an investment of $2 billion in a $4 billion portfolio.

Third, having strong performance across multiple investment strategies allows Blackstone to harvest and generate promote on a more consistent basis, selling down assets from multiple “buckets”. This, in turn, should lead to less uncertainty around cash distributions. The exhibit below compares Blackstone’s cash distributions with Och-Ziff’s. While both alternative asset managers are projected to pay dividends of around $1.30 in 2013, Och-Ziff’s shareholders had to endure more volatility in distributions given that Och-Ziff is a pure hedge fund. Thus, having multiple investment strategies with strong performance should not only result in less volatility in dividend payments, but should also lead to less volatility in valuation.

Exhibit 4: With a diversified business model, cash distributions are less volatile

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

2008 2009 2010 2011 2012 2013E

BLK OZM

Source: SNL Financial; FactSet; RBC Capital Markets estimates

Moreover, having a diverse business model can lead to realizations even in weak markets.

The exhibit below demonstrates this. Interestingly, even in the depth of the financial crisis, Blackstone was able to sell down assets and return cash to its investors.



Exhibit 5: Realizations continued even during the financial crisis ($ in billions)

$7.8

$1.0

$2.8

$5.2

$11.2

$13.1

$16.7

$21.2

$-

$5

$10

$15

$20

$25

2007 2008 2009 2010 2011 2012 1Q13 (LTM) 2H13 (LTM)

Source: Company reports; RBC Capital Markets

Finally, having a diversified business model allows the firm to explore opportunities from different angles. This could lead to better performance over the long-run. Joe Baratta, Global Head of Private Equity, summarized this succinctly when he said that they used to come across many opportunities that did not fit their core private equity investment strategy. The due diligence process would have stopped there in the past. However, with its current real estate, credit and hedge fund offerings, Blackstone can capitalize on these opportunities across various capital structures and investment strategies.

Blackstone could be entering a prolonged harvesting cycle, which should lead to higher distributable earnings The recent global financial crisis and the subsequent slow recovery has had a significant impact on alternative asset managers. Investors’ expectations regarding the pace of realizations changed as exit opportunities became rare given a decline in the value of portfolio companies. A decline in realizations was not a US-only event, but could be observed worldwide. The exhibit below shows the aggregate realizations of private equity-backed buyout exits going back to 2006.

We believe that there is a “backlog” of exits as investment cycles have been prolonged due to the financial crisis



Exhibit 6: With valuations down, global private equity exits slowed down considerably in 2009 and 2010 ($ in billions)

$-

$20

$40

$60

$80

$100

$120

$140

1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12

Aggregate Exit Value

Source: Preqin; RBC Capital Markets

Blackstone, of course, was not isolated from this trend. Below, we show realization activity for Blackstone’s private equity funds.

Exhibit 7: Realizations declined significantly from 2008 to 2010 ($ in billions)

$-

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

2007 2008 2009 2010 2011 2012 2Q13 (LTM)


We believe that there is a “backlog” of exits as investment cycles have been prolonged due to the financial crisis. The exhibit below shows the carrying values for various private equity funds and their vintage. We think that the older vintages could see increased harvesting activity over the coming years as Blackstone is incentivized to return capital to its limited partners.



Exhibit 8: There are 3 PE funds that could contribute to distributable earnings over the next few years (fair value of funds, $ in millions, as of 2Q13)

$4,382.1

(BCP VI)

$20,315.9

(BCP V)

$231.7

(BCOM)

$5,010.7

(BCP IV)

$-

$5,000

$10,000

$15,000

$20,000

$25,000

2000 2001 2002 2003 2004 2005 2011


Among the older vintage traditional buy-out funds, BCP IV is the most promising fund in terms of realization activity. The multiple of invested capital (MOIC) is about 2.0x for the fund, within the 2.0x–2.5x range identified by management as an attractive level for exiting investments. We would expect Blackstone to sell down assets within the fund.

As for BCP V, the fund remains below its return threshold. Based on the company’s latest earnings release, the fund would have to appreciate by $3.7 billion to cross the carry threshold. We are projecting in our model that BCP V will contribute to performance fees in 1Q15. This assumes a quarterly increase in the underlying assets of 3% per quarter. Were we to assume a 5% appreciation of underlying companies, BCP V could cross the carry threshold by the end of 3Q14.

While BCP V could start generating promote in 2015, Blackstone has a number of businesses it can depend on to produce performance fees.

With returns in its real estate business remaining very strong, we would expect the Real Estate segment to contribute increasingly to distributable earnings. As Jonathan Gray, Global Head of Real Estate, pointed out, gross distributions were up three-fold from 2010 to 2011, and doubled again in 2012. He expects realizations in real estate to accelerate over the next few years. He believes that sovereign wealth funds could be buyers of real estate as these assets generate yields around 5%. This compares to a yield of about 2.5% for the 10-year US treasury. The chart below shows MOIC for Blackstone and its competitors across various asset classes.

While BCP V remains below its threshold return objective, there are a number of businesses that could contribute to performance fees



Exhibit 9: Blackstone seems to have one of the best performing real estate platforms among its peers (MOIC on total investments)

1.8x1.7x

1.8x1.7x

1.2x

1.6x

1.4x

1.6x

1.3x 1.3x

0.8x

2.1x

1.5x

0.0x 0.0x0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

Apollo Global

Management

Blackstone Group Carlyle Group KKR & Co Fortress Investment

Group

Private Equity Credit Real Estate


Blackstone disclosed that the MOIC on its unrealized investment for the BREP V is 1.7x. This fund has a value of $7.6 billion. Furthermore, BREP VI with a fair value of $15.3 billion, has a MOIC on unrealized investments of 1.6x. These two real estate funds could contribute to distributable earnings over the coming quarters. The exhibit below shows realization activity since 2008. Interestingly, Blackstone reported gross distributions of $3 billion in 1H13. Assuming that realization activity remains at this pace, distributions to limited partnerships could reach $6 billion by the end of the year.

Exhibit 10: Distributions to limited partners continue to increase in Real Estate ($ in million)

- --

-

-

2013

annualized

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2008 2009 2010 2011 2012 1H2013

Real Estate Gross Realizations 1H2013 Annualized


In summary, realizations across the firm have picked up. Management pointed out that in 1H12, there were 64 transactions that generated gross realizations of $4.5 billion. In 2H12, the number of transactions increased to 86 generating $8.6 billion of cash. In 1H13, there



were 105 transactions, generating $12.6 billion of cash. We would expect this trend to continue. The chart below shows why. Since 2009, total AUM grew at a faster pace than fee-earning AUM (FEAUM). This indicates that the valuation of portfolio companies is increasing, leading to a higher ratio. As these investments surpass targeted hurdle rates and the ratio of total AUM to fee earnings AUM increases, we would expect Blackstone to sell down the assets.

Exhibit 11: While the ratio of total AUM to fee earning AUM declined from 2007 and 2009, we have seen a reversal of this trend

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

2006 2007 2008 2009 2010 2011 2012 1H13

Total AUM / Fee earning AUM


As a reference point: The ratio of total assets under management to fee earnings assets under management was 1.27x in 2006. As of 2Q13, this ratio had increased to 1.30x.

With the ratio of total AUM to fee-earning AUM exceeding pre-crisis levels, we would expect realizations to accelerate and the firm to generate promote. The exhibit below indicates that distributable earnings could increase. We have graphed the ratio of cash earnings (distributable earnings) to total AUM. We estimate that this ratio is going to be about 0.7%. If we look at 2006, the same ratio used to be 1.6%. One way of interpreting is that distributable earnings could double based on the asset Blackstone manages today—$229.6 billion as of 2Q13 versus $69.5 billion as of 2006.

The ratio of total AUM to fee-earning AUM has increased to pre-crisis levels. We view this as an indicator that realization activity could increase



Exhibit 12: Distributable earnings could increase significantly, as the ratio of cash earnings to total asset remains below levels seen in 2006 and 2007

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2006 2007 2008 2009 2010 2011 2012 2013E

Cash earnings / Total AUM

Source: Company reports; RBC Capital Markets estimates

A final ratio we would like to highlight is the relation between distributable earnings (cash earnings) and economic net income (which includes unrealized marks on portfolios). This ratio remains below the 63% we had seen in 2007. As of 2012, the ratio was about 52%. We believe that based on marks on the portfolios, we could see Blackstone selling down its assets and returning capital to its limited partners and shareholders.

Exhibit 13: Distributable earnings could increase, as the ratio of cash earnings to economic net income remains below levels seen in 2007

-40%

-20%

0%

20%

40%

60%

80%

2006 2007 2008 2009 2010 2011 2012

Distributable earnings / ENI


As for the balance sheet, net accrued performance fees stand at $2.24 per share, as of 2Q13. As a comparison, this figure was $1.58 as of 2Q12. This is promising as the higher amount indicates that shareholders would get $2.24 if the Blackstone Group liquidated its assets and sold off its portfolio companies.



Blackstone has one of the best capital raising efforts in the industry We believe Blackstone is best in class in respect to its capital raising effort. This should come as no surprise given the company’s breadth of product offering, sector expertise and the strong fund performance. The exhibit below shows that fee earning assets under management grew at a compound annual growth rate of 14.7% from 2007 to 1Q13.

Exhibit 14: Blackstone’s fee earning assets under management (FEAUM) grew at a CAGR of 14.7% from 2007 to 1Q13

27.8%

14.7%13.0%

10.3%8.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Apollo Global

Management

Blackstone Group Carlyle Group Fortress Investment

Group

KKR & Co


While Apollo Global Management’s fee earning assets grew at a higher CAGR, Blackstone’s base was $83.2 billion in FEAUM as of 2007. This compares to $22.5 billon for Apollo. To us, it appears that Blackstone is outperforming its peers in terms of capital raising. Over the past two years, Blackstone has raised over $90 billion in capital. During the company’s most recent investor day, management pointed out that this amount was more than the total capital raised by its four closest competitors combined. Management reasoned that AUM growth is driven by innovation. This makes sense to us. Blackstone and other alternative asset managers position themselves as solution providers. They work with their clients to address the client’s funding needs and return objectives. This explains how Blackstone has attracted more than $76 billion of assets in entirely new strategies since going public in 2007. These are strategies and asset classes that the company had not provided prior to its IPO in 2007. The exhibit below demonstrates the success Blackstone has enjoyed and shows the total sum of capital raised for private equity funds from 1Q11 to 1Q13.

With “easy” access to capital, Blackstone has been able to grow AUM at a CAGR of 15% since 2007



Exhibit 15: Blackstone raised $23.8 billion of capital for its PE funds (cumulative from 2011 to 1Q13; $ in million)

$2,133.0

$23,837.8

$10,809.1

$7,731.0$8,855.0

$0.0

$5,000.0

$10,000.0

$15,000.0

$20,000.0

$25,000.0

$30,000.0

Apollo Global

Management

Blackstone Group Carlyle Group KKR & Co Fortress

Investment Group


In total dollar terms, the amount of capital Blackstone raised is impressive as this amount exceeds its closest competitor by a factor of two. Looking at this from a different perspective, namely organic growth rate, we arrive at a similar conclusion. The only alternative asset manager with higher organic growth is Fortress Investment Group. This is impressive given that Blackstone’s FEAUM of $109.5 billion as at the end of 2010 was more than three times the size of Fortress’s assets.

Exhibit 16: With an organic growth of 22% in private equity, Blackstone is one of the fastest growing alternative asset managers (2011 to 1Q13)

4.5%

21.8%

13.4%

16.8%

26.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Apollo Global

Management

Blackstone Group Carlyle Group KKR & Co Fortress Investment

Group




Global footprint with scale in each business Blackstone is not only the largest alternative asset manager in the United States as measured by fee earning assets under management, but it has a global reach that expands well beyond major markets.

Exhibit 17: With 25 offices in 16 countries, Blackstone has a global reach

Apollo Global

Management

Blackstone

Group

Carlyle

Group

KKR & Co Fortress

Investment

Group

x a a a a

x x a a x

x x a x x

x x a x x

a a a a a

x a a a x

x x a x x

x a x x x

a a x x a

x x a x x

x a x a x

a x a x x

x x x x a

x x a x x

x a a x x

x a a a x

a a a a x

a a a a a

a a a a a

x a a a x

x x a x x

x a a x a

x a a a x

x a a a a

x a a x a

x x a x x

x x a x x

252 638 650 245 240

x No

a Yes

Legend

Sydney, AU

Johannesburg, ZA

Lagos, NG

Investment Professionals

Chengdu, CN

Shanghai, CN

Seoul, KR

Tokyo, JP

Mumbai, IN

Singapore, SG

Hong Kong, HK

Beijing, CN

Rome, IT

Milan, IT

Istanbul, TR

Dubai, AE

Frankfurt, DE

Munich, DE

Dublin, IE

Luxembourg, LU

London, UK

Paris, France

Amsterdam,NL

Dusseldorf, DE

Various cities, USA

Sao Paulo, BR

Lima, PE

Barcelona, ES


There are a number of advantages of having “boots on the ground” around the world. Having presence in multiple countries could provide an edge in raising capital. After all, investors prefer relationships with general partners that have a permanent presence in their market. Furthermore, while alternative assets make an increasing percentage of asset allocation in US portfolios, there is a large growth opportunity outside of the United States. The exhibit below shows the expected allocation to various alternative asset classes and is based on a survey conducted by McKinsey&Company titled “The Mainstreaming of Alternative

Today, Blackstone has 25 offices on 5 continents. We believe that a global footprint is essential in driving performance and raising capital



Investments”. As the authors point out, growth in alternative asset classes will be broad and strong. However, there are three items we would like to point to:

Allocations to alternative asset classes are higher in North America, and we would expect European investors to increase their allocation to alternative asset managers.

Allocation in real estate is expected to increase the most in Europe. We would consider real estate investing as Blackstone’s strength.

This survey does not include Asia, a rapidly growing market.

A report published by Julius Baer, a wealth manager, predicted that the high-net-worth population (cash and assets over $1 million) will more than double in Asia, increasing from 1.16 million in 2010 to 2.67 million by 2015.

Exhibit 18: Allocation to alternative asset classes is expected to increase in 2013

Real EstateHedge FundsPrivate Equity

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2009 2010 2013E 2009 2010 2013E 2009 2010 2013E

North America European Union

Source: McKinsey&Company estimates; RBC Capital Markets

Having a broad global presence allows the firm to identify attractive investment opportunities by utilizing their expertise about the local market, in our view. Blackstone has a single global investment committee that conducts a risk and reward analysis across all geographies and across verticals. With a flexible, global mandate, Blackstone can invest up and down the capital structure and across various regions and sectors.

Having investment teams in a number of countries and regions could improve performance. Bloomberg published an article on July 16, 2013, portraying Adam Levinson who runs Fortress Investment Group’s Asia Macro Fund. Mr. Levinson made the decision to relocate a team of eight traders and analysts to Singapore. This move seems to be paying off as the fund returned 21% last year, easily exceeding the 2.8% return by the Eurokahedge Macro Hedge Fund Index. In the first half of 2013, the fund is up 12.9%. The strong performance seems to have attracted capital. Fortress Asia Macro Fund had $208 million of AUM as of March 31, 2011. This grew to $686 million as of 1Q13. Today, the fund has about $1.7 billion of AUM. While this might not be representative, it seems that the decision to have local presence is paying off. Thus, all else being equal, we prefer alternative asset managers with a broader footprint over the ones with a narrow global reach.



Strong Hedge Fund Solutions business (Blackstone Alternative Asset Management – BAAM) could be a catalyst for AUM growth BAAM, which started as a fund of funds business, has been able to re-invent itself. It has defied an industry-wide trend in that it has been growing assets under management, while the hedge fund of funds (FoF) industry has been in outflow mode. With the onset of the financial crisis in 2008 and investors shaken by events such as the Bernie Madoff scandal, the hedge fund of funds industry experienced continuous outflows. Reducing reliance on FoFs, investors have chosen direct investments over fund of funds structures. This trend benefited mostly large hedge funds such as Och-Ziff or Bridgewater Associates. Institutional investors started to prefer working closely with their managers. They wanted to be closer to the individuals and firms managing their capital. In this new world, institutional investors wanted to be able to assess their risk and understand their risk exposure better than they had in the past. A money manager’s risk management capabilities became a key consideration when allocating assets. This, in turn, led to a decline in assets managed by fund of hedge funds. The exhibit below shows the assets under management for fund of hedge funds.

Exhibit 19: Total fund of hedge fund AUM has been declining since 2007 ($ in billion)

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

2004 2005 2006 2007 2008 2009 2010 2011 2012

Esti

mat

ed A

sset

s

Source: Barclayshedge; RBC Capital Markets

And while total fund of hedge fund assets have declined over 54% since 2007, Blackstone grew its assets under management in what it calls Hedge Fund Solutions (BAAM). Understanding their clients’ needs, we believe that Blackstone distanced itself from the traditional fund of funds business and reinvented itself. The focus shifted from merely finding the best hedge fund manager to providing customized solutions to meet their clients’ needs.

We believe that the reason why Blackstone has seen such a significant increase in assets under management is due to innovation, which in turn resulted in a diversified platform. As Tom Hill, CEO of BAAM, said, the firm would not have been able to grow its assets under a “traditional fund of funds” model. We agree. Blackstone’s fund of hedge funds business has adapted to reflect changes in customer preference. BAAM is focusing on customization and creating portfolios to meet the specific needs of their client. For instance, Blackstone was one of the first asset managers to use hedge funds to create customized portfolios for long-only strategies.

Retail market could be the next phase of growth for BAAM. We would expected continued growth



Exhibit 20: BAAM’s total AUM has increased 87% since 2007 ($ in billion)

$-

$10

$20

$30

$40

$50

$60

2004 2005 2006 2007 2008 2009 2010 2011 2012 1H13

Estimated Assets

Source: Barclayshedge; RBC Capital Markets

This demonstrates once more the importance of adapting quickly to changing customer needs. The firm was able to grow its assets in a shrinking industry. Today, BAAM is one of the world’s largest discretionary allocators to hedge funds. It is noteworthy that Blackstone did not suspend redemptions during the 2008 financial crisis and provided liquidity to its clients, focusing on the long-term impact of its actions on its business. We believe that this demonstrates management’s foresight.

Taking a long-term view distinguishes BAAM from some of the other hedge fund providers, in our view. The business model has been constantly evolving. Management categorizes the evolution of its business in phases:

The first phase (2001 to 2002) was marked by creating customized solutions to complement Blackstone’s co-mingled strategies.

The second phase (2005 to 2006) was focused on expanding capabilities and growing investment teams. BAAM focused on building specialty products such as Resources Select, a long-only commodities fund where it uses hedge funds to disintermediate the indices.

Currently, BAAM is in its third phase of evolution: It is investing directly in underlying securities (special opportunities fund); it is focusing on individual investor solutions; it is buying minority stakes in existing hedge funds that are well established; and it is increasing its global footprint.

While there are a number of levers of growth, we see a big opportunity in individual investor solutions. Blackstone is expanding beyond its traditional client base of institutional and high net-worth clients. As Blackstone mentioned during its investor day, there are about $19.5 trillion invested in US retirement assets. This figure includes $5 trillion of defined contribution (DC) assets, a market Blackstone is targeting. Defined contribution plans are attractive given constant contributions by plan participants.



Exhibit 21: Over the past six years, defined contribution inflows have been about $85 billion per year

$19.5 trillion in US retirement assets

IRAs

27%

Annuities

9%

Gov't defined

benefit

25%

Private defined

benefit

13%

DC plans

26%

US Defined contribution market inflows ($ in billion)

$-

$20

$40

$60

$80

$100

$120

2007 2008 2009 2010 2011 2012

Source: 2013 Blackstone investor day

The DC segment had about $65 billion of inflows last year and Blackstone wants its share of these flows. To achieve this, Blackstone is launching a 40 Act fund (BXMMX – Blackstone Alternative Multi-Manager Fund) and is currently in the final phase of negotiations with one distributor. This open end fund will offer daily liquidity, charge no performance fees and have leverage limitations. Blackstone will allocate assets among a variety of investment sub-advisors and could manage a portion of the assets directly or invest in unaffiliated hedge funds. We see big potential in entering a market for liquid alternatives. Morningstar estimates that alternative mutual funds saw inflows of $19.7 billion in 2012, while only $7.6 billion was allocated to single-strategy hedge funds. Based on Investment Company Institute data, assets in hedge fund mutual funds were less than 1% of the $1.3 trillion in US mutual fund assets as of year end 2012.

Liquidity and float the highest among alternative asset managers Blackstone has relatively high liquidity, which allows investors interested in the sector an opportunity to quickly build a position. About 37% of shares outstanding are owned by the top 10 shareholders. As a comparison, Fortress Investment Group’s top 10 shareholders own about 68% of shares outstanding.

While low relative to traditional asset managers, investors are able to quickly build and exit a position in Blackstone



Exhibit 22: 90-day average trading volume (in millions)

5.05

2.61

1.541.31

1.13

0.600.38

0.00

1.00

2.00

3.00

4.00

5.00

6.00

BX KKR APO FIG OZM CG OAK


There is legitimate concerned about being able to build and exit a meaningful position in alternative asset managers. Assuming that an investor wanted to own 5% of Blackstone’s outstanding shares, it would take less than six days to accomplish this – based on 555.5 million of shares outstanding. As a comparison, it would take about nine trading days to build a 5% ownership in Fortress given the daily average trading volume.



Investment Thesis – Key Risks

Blackstone is not the least expensive exposure to alternative asset managers One concern on investors’ minds could be valuation. Blackstone does not appear to be a value stock relative to a Fortress Investment Group. Blackstone’s shares could seem expensive relative to its peer group were we to rank the firms by how much investors are currently paying for incentive income the company has generated from 1Q12 to 1Q13 (We chose this period as not all companies had reported earnings by the time we created the table).

Here is how we arrive at our conclusion: We assigned a P/E multiple of 17x to pre-tax fee based earnings generated by the various alternative asset managers over a 12-month period. This provided us with a valuation assigned to the firms’ management fee earnings. We then added net cash and investments carried on the balance sheets to arrive at a valuation excluding incentive income. Finally, we compared our valuation with where the stock is trading and calculated a P/E multiple the market is assigning to incentive income generated over a 12-month period - with LTM incentive income as the denominator and the difference between our valuation and trading price as the numerator. The table below shows that the market is assigning a multiple of 7.3x to incentive income generated by Blackstone.

Exhibit 23: Market appears to be paying the most for BX’s pre-tax incentive income

Ticker

LTM Mgmt Fee

Earnings Multiple Assigned Value

Cash &

Investments

Valuation ex.

Incentive Income Current Price

Pre-tax LTM

Incentive Income

Multiple assigned to

Inc. Income

FIG $0.23 17.0x $3.91 $2.95 $6.86 $7.57 $0.62 1.1xKKR $0.47 17.0x $8.07 $9.00 $17.07 $20.09 $1.12 2.7xBX $0.61 17.0x $10.37 $4.43 $14.80 $22.98 $1.12 7.3xAPO $0.65 17.0x $11.11 $5.27 $16.38 $28.05 $1.36 8.6xCG $0.52 17.0x $8.89 $4.41 $13.30 $27.21 $1.54 9.0x

Source: Company reports; FactSet; RBC Capital Markets (Priced as of market close ET, August 8, 2013)

Based on the table above, one could conclude that there is limited upside potential for Blackstone’s shares relative to a Fortress (FIG) given current valuation. However, we believe that realizations will pick up over the coming quarters, increasing the denominator of the P/E equation. Blackstone reported that realization activity has already increased. The company pointed out that while realizations were to the tune of $1.4 billion in 2Q12, this number had grown to $6.6 billion in 2Q13 – and this improvement was broadly based across all its businesses. With the exception of the BCP V fund and BREP International II fund, we would expect realizations to contribute increasingly to earnings. Thus, higher realizations could result in higher valuation.

Another approach to assessing the attractiveness of the shares could be by comparing the discount over traditional asset managers at various points in time. When Blackstone went public in 2007, its shares were trading at a 15x P/E multiple while traditional asset managers were trading at 19x earnings. This would imply a 21% discount to traditional asset managers. Today, Blackstone is trading at 8.1x 2014E earnings multiple, while traditional asset managers are trading at 15.3x on average. This is a 47% discount to traditional asset managers. The discount to traditional asset managers has increased, while assets under management more than doubled from $102 billion as of 2007 to $230 billion today – and we expect assets to grow further by 2014. More importantly, Blackstone is not experiencing the same level of secular change faced by traditional asset managers, with passive investing pressuring their fees and margins Were we to apply a 21% discount to the average

While Blackstone’s shares might appear more pricy than some of its competitors, we believe that the shares are attractively priced given growth prospect of distributable earnings



traditional asset management P/E multiple, i.e, use a 12.1x 2014E P/E multiple, we could get to a $34 valuation based on consensus earnings of $2.82 for 2014. Keep in mind that Blackstone is not only a larger firm today, but also a more diversified alternative asset manager. One could even argue that alternative asset managers enjoy a competitive edge over traditional asset managers and that the discount should be lower.

Yet, another way to look at valuation would be by utilizing the dividend yield. Today, the yield on Blackstone’s shares is 5%. We are modeling distributable earnings of $1.56 in 2014. Using a 5% dividend yield and our projection, we would arrive at a valuation of $31. As of August 8, 2013, the shares were trading at $23. This would imply a 35% upside from today’s share price. Distributable earnings could exceed our projections since it is difficult to forecast exit values accurately. Blackstone disclosed that over a 15-year period, real estate and private equity exits were about 15% to 20% higher than the marks the company carried these assets at on its balance sheet. There seems to be a level of conservatism in respect to valuations at Blackstone, which could result in higher than expected distributable earnings.

Interest rate sensitivity could be an issue, depending on path of economic recovery Some investors might be concerned regarding the interest rate sensitivity of Blackstone. This makes sense as higher interest rates have the potential to hurt the company on multiple fronts. First, higher interest rates could lead to a decline in the number of attractive deals, as financing costs would increase. Furthermore, higher interest rates could hurt real estate valuations as higher cap rates could lead to lower appraisals. The chart below shows fee earning assets. An investor could conclude that Blackstone is interest rate sensitive based on the fact that over 70% of the assets could be impacted either due to lower valuation of the assets or due to fewer opportunities to put money to work.

Exhibit 24: Over 70% of fee earning assets could appear to be interest rate sensitive (2Q13)

Credit (GSO)

27%

Hedge Fund Solutions

27%

Real Estate

25%

Private Equity

21%


This explains why the management team dedicated a good amount of time during its 2Q13 earnings call to this topic.

We believe that higher interest rates in a low inflationary environment, coupled with an improving economy should be a net positive for Blackstone. We think that the Federal Reserve will act prudently and not raise interest rates quickly as this would hurt the recovery.

We believe that Blackstone could be a net beneficiary of higher interest rates and here is why: Higher interest rates can result in higher cash flows in private equity as revenues increase due to a better operating environment; higher real estate asset valuation as the

Interest rate sensitivity could appear to be an issue – however, this would depend on the path of recovery and pace of inflation



impact of higher cap rates are more than offset by higher occupancy rates and stronger net operating income; and better returns for Hedge Fund Solutions as the economy recovers and equity markets rally. As for the Credit business, it would also benefit as it is investing in floating rate securities, which would yield higher returns.

Management provided the results of its analysis that shows higher interest rates are a positive for its Real Estate assets. Accordingly, commercial real estate values increased between 4% and 15% on an annualized basis in periods of rising interest rates and the following year, respectively. The analysis used data going back 20 years. As for residential real estate, management mentioned that interest rates rose in 26 years of the past 50 years and that home prices appreciated in each of the years when interest rates rose. And while treasury rates could rise, management believes that the impact on cap rates could be small as spreads over base rates have been high and could decline as the economy gets stronger.

Nonetheless, while the impact of increasing interest rates seems to be a tailwind, there might be other scenarios that could negatively impact Blackstone’s share price. For instance, a rapid increase in inflation coupled with sluggish economic recovery could lead to higher cap rates and no increase in the occupancy rate – a net negative for the real estate business. We view this scenario as unlikely. Thus, whether we think about Blackstone as sensitive to interest rates depends on our view of the path of the recovery and what we believe the Federal Reserve will do as it unwinds its quantitative easing. We tend to be of the opinion that the Fed will be very cautious so as not to create a shock to the economy and the recovery.

Succession planning could weigh on shares A question that comes up frequently with respect to alternative asset managers is succession planning. We think that this is not surprising given that these firms are led by individuals with charisma, by leaders who are willing to roll up their sleeves and create value for their investors.

As such, a major concern of investors is key person risk. What could happen if one of the individuals everyone associates with the firm leaves? Will the funds still be able to generate strong returns? Will the firm be able to retain assets? Will the firm be able to raise new capital? These are all legitimate questions and one of the major risks associated with investing in the sector.

We admit that there is a large pool of talent that publicly traded private equity firms can fall back on to identify the next person to head the business. This pool has probably become larger as talent started leaving investment banks due to increased regulation and potentially lower compensation. Nonetheless, whether the risk is perceived or real, a key person leaving the firm could affect share price performance.

While we would categorize this risk as “perceived”, given Blackstone’s depth and breadth of management talent, we could see some volatility in the share price if top talent leaves. In addition to Stephen Schwarzman, we would consider Hamilton “Tony” James, J. Tomilson Hill, Jonathan Gray and Laurence Anthony Tosi as key personnel. The average age of these individuals is 64 years. In comparison, the average age of the co-founders at Fortress Investment Group is 50 years.

As with all other alternative asset managers, key person risk remains a concern – despite deep bench



Exhibit 25: Succession planning could become an important topic at Blackstone

50 yrs55 yrs

64 yrs 64 yrs69 yrs

0

10

20

30

40

50

60

70

80

FIG APO BX CG KKR

Age


We need to emphasize that we believe all these leaders have the stamina, focus and vision to continue doing their job for years to come. They all perform at the highest level. However, key man risk remains one of the major concerns on investors’ minds and can affect stock performance.

Potential tax rate changes could be lower distributable earnings The tax treatment of carried interest has been in the spotlight for some time now. With the need to raise tax revenues and reduce the budget deficit, we would expect this debate to continue for some time. This is despite the fact that as the Private Equity Growth Capital Council pointed out, changing the tax treatment of carried interest would only pay for 3.1 hours a year in federal government operations.

Private equity firms generate income in two ways. They receive a management fee, which is taxed as ordinary income, and carried interest. Private equity funds receive 20% of partnerships profit when the return exceeds a certain hurdle rate, i.e., carried interest. Currently, carried interest qualifies to be treated as long-term capital gains.

In 2007, Congress held hearings on this topic. The Obama Administration’s 2008 Budget Blueprint included a sentence that carried interest should be taxed as ordinary income. In 2010, the US House of Representatives passed HR 4213, the American Jobs and Closing Tax Loopholes Act.

While it is difficult to predict whether the tax treatment of carried interest will change and be a part of a tax reform bill, if passed, taxing carried interest as ordinary income could have an adverse impact on capital distributions and dividend yields as it would significantly raise the amount of taxes owed. HR 4213 could prevent Blackstone from completing certain types of internal reorganization transactions or converting to a corporation on a tax-free basis. The proposed legislation could also increase the ordinary income portion of any gain realized from the sale of class A shares.

However, there could be a multi-year transition period before capital gains can be taxed as ordinary income. Thus, the impact of any tax reform would not be immediate and there could be sufficient time to revise any tax law changes under a new administration. Furthermore, it is difficult to predict how the company’s shares would react to any changes in the tax law. Currently, there is a reluctance to own shares of alternative asset managers as

Investors could remain on the sidelines until there is more clarity about tax treatment of carried interest. However, any change in tax treatment would require a 10-year transition period



institutional investors don’t want to be burdened with filing K-1s, cannot own them due to fund mandates or due to the float not being sufficient. This is why a large number of institutional investors are not investing in alternative asset managers.

Alternative asset managers could reconsider their corporate structure and reorganize as a corporation, if carried interest is taxed as ordinary income. This, in turn, could increase demand for their shares and liquidity, helping offset some of the negative effect of having to pay ordinary income taxes.

K-1 filing requirement is holding back investors As mentioned above, certain institutional investors do not want to invest in alternative asset managers due to the K-1 filing requirement. Limited partnerships are required to issue a Schedule K-1 to unitholders. This would require institutional investors to build out their back office operations.

Furthermore, each unitholder has to report the partnership’s taxable income on a K-1. Certain portion of the income from owning the A shares could have tax consequences for tax-exempt entities if it was deemed “Unrelated Business Taxable Income” (UBTI).

The bottom line is this: Owning shares of any alternative asset manager structured as a limited partnership can lead to incremental administrative burdens. Institutional investors are not willing to commit to these incremental costs.

However, institutional investors can avoid this by entering into a total return swap (TRS)/buying a note that provides a synthetic exposure to returns. Our understanding of a TRS/note is that brokers would structure this such that the counterparty would receive the cash flow associated with the underlying assets – for a fee. The broker would take care of any filing requirements/back-office duties. This would allow institutional investors to own the economic benefits in companies such as Blackstone without having to outright own the shares. This, of course, is a very high-level description of the structure and the details would be beyond the scope of this note. Some institutional clients are prohibited from owning a limited partnership due to fund mandates. Owning a TRS/note would alleviate increased administrative costs associated with owning the underlying securities outright.

Exhibit 26: Analyzing top 10 owners - About 9% of Blackstone’s shares are owned by brokers providing synthetic exposure to underlying securities

10.9%

9.5% 9.2%

5.6%

3.0%

0.0% 0.0%0%

2%

4%

6%

8%

10%

12%

FIG OZM BX KKR APO CG OAK


Incremental administrative burdens make investing in limited partnerships less attractive – but there are options to avoiding these



As for Blackstone, about 37% of shares outstanding are owned by its top 10 holders. Three out of those top 10 owners are brokers owning 9.2% of total shares outstanding. This shows that there is demand for the security and investors willing to own the shares can do so by entering into a TRS or buying a note that provides them synthetic exposure to Blackstone.

Were alternative asset managers to change their corporate structure due to a loss of tax advantages associated with being a limited partnership, we believe that more institutional investors could be enticed to own their shares. As mentioned previously, some institutional investors cannot own limited partnerships due to fund mandates. Owning the shares directly would add to liquidity. After all, there is likely a high probability that brokers providing exposure to limited partnerships may match buy and sell orders internally before routing any trades to the exchanges.

Analyzing companies within the sector is difficult given inconsistent accounting & utilization of non-GAAP measures across the sector and the difficulty of projecting realizations We believe that the reason why alternative asset managers trade at a discount to traditional asset managers can be explained by the complexity of the industry, lack of visibility into earnings (realization) and the difficulty of comparing companies within the sector.

For instance, while some alternative asset managers disclose the value of accrued performance fees on their balance sheet, others do not. Furthermore, while most companies disclose economic net income (a non-GAAP measure of earnings power), Fortress does not. The reason is that economic net income (ENI) adds volatility to earnings. ENI shows marks on portfolios, unrealized incentive fees and carried interest as earnings, which can fluctuate from quarter to quarter. Fortress argues that over time, ENI and distributable earnings will converge and that investors are better served focusing on a metric that is more predictable. There are other examples of non-GAAP measures being used to demonstrate value creation. Simple exercises such as comparing capital raising activity and capital deployment are inherently difficult because not all companies disclose these measures for all of their business units. Moreover, it is extremely difficult to project earnings as there is very little visibility into realizations. This leads to many surprises and misses when the companies report earnings.

The chart below depicts this and shows the average deviation of reported earnings versus the mean analyst expectation over time. The data goes back to 1Q08 or latest quarter data was available. As for Blackstone, there were two quarters of large “surprises” when the company missed consensus earnings estimates – in 3Q08 and in 3Q11. Were we to exclude these two data points, the average deviation from consensus estimates would have been a positive 23%.

Following alternative asset managers has its challenges, but can be rewarding as there are fewer resources allocated to the space



Exhibit 27: Earnings surprises – actual reported earnings versus estimated earnings (1Q08 to 2Q13)

(254.4%)

(34.9%)

(572.3%)

48.6%

(23.8%)

(700%)

(600%)

(500%)

(400%)

(300%)

(200%)

(100%)

0%

100%

200%

FIG APO BX KKR CG


Yet, we believe that the lack of transparency could lead to opportunities. We would not expect the accounting to change, nor would we expect the alternative asset managers to agree to use common non-GAAP measures to make their performance more comparable. Consequently, the sector as a whole trades at a discount given the issues described above. We could see a multiple expansion as the industry matures, investors become more comfortable with the accounting, and alternative asset managers provide additional information that will allow an easier comparison across the sector.



Company Description

The Blackstone Group L.P. (NYSE:BX) was founded in 1985 by Stephen A. Schwarzman, present chairman and CEO of the company, and Peter G. Peterson, who retired as senior chairman in the year 2008. Blackstone is an alternative asset management and financial services company. Under the alternative asset management businesses, Blackstone manages private equity funds, Hedge Fund Solutions, real estate funds, publicly-traded closed-end mutual funds and credit oriented funds. Financial advisory services provided by the company include mergers and acquisitions, private placements and restructuring and reorganization advisory services. Blackstone is an independent manager of private capital worldwide with US$229.6 billion Assets under Management (AUM) as of June 30, 2013. Headquartered in New York, USA, Blackstone has 25 offices in the United States and around the globe. Some of its offices are located in Paris, London, Sydney, Hong Kong, Tokyo, Shanghai, Seoul, Singapore, Beijing, Dusseldorf, Frankfurt, Dubai, Mumbai, Dublin, and Istanbul.

Exhibit 28: Blackstone Snapshot

Blackstone Snapshot Founded 1985

Founders Peter G. Peterson

Stephen A. Schwarzman

Headquarters New York, US Key Management Stephen A. Schwarzman (Founder, Chairman and CEO and Director)

Hamilton E. James (President, COO & Director of General Partner

Business Segments Private Equity

Real Estate

Hedge Fund Solutions Credit Financial Advisory Services

Total Revenue US$1.4 Bn (June 2013)

Total AUM US$229.6 Bn (June 2013)

Source: Company Reports

The company conducts its alternative asset management and financial advisory businesses through five segments:

Private Equity: Established in 1987, this segment involves the management of private equity funds and certain multi-asset class investment funds.

Real Estate: Blackstone’s real estate division manages general and internationally focused opportunistic real estate funds. This segment also provides debt investment funds that essentially target non-controlling real estate debt-related investment opportunities in the public and private markets in the United States and Europe. The company’s first real estate fund was set up in the year 1994.

Hedge Fund Solutions: This segment comprises of Blackstone Alternative Asset Management, which was organized in the year 1990 and has now turned into a leading institutional solutions provider that utilizes hedge funds across a wide range of strategies. It is the world’s largest discretionary allocator to hedge funds.

Credit: Blackstone’s credit business essentially comprises of GSO Capital Partners LP, which manages numerous credit-oriented funds such as distressed debt funds, general credit-oriented funds, senior credit-oriented funds, mezzanine funds and collateralized loan obligation (CLO) vehicles.

Financial Advisory: This segment delivers financial advisory services, fund placement services for alternative investment funds and restructuring and reorganization advisory services to a diverse group of global clients.



Milestones Exhibit 29: Milestones

Year Highlights

1985 Founded by Stephen A. Schwarzman and Peter G. Peterson

1987 Launched its first Private Equity fund: Blackstone Capital Partners I

1990 Founded Blackstone Alternative Asset Management (BAAM)

1991 Restructuring Advisory practice formed

1992 Established Blackstone's Real Estate group

1999 Formation of Corporate Debt Group

2000 Opened office in London

2004 Established offices in Paris, France and Atlanta, Georgia

Entered into a strategic partnership with Brazilian Private Equity Firm called Pátria-Banco de Negócios

2005 Formed a fund placement business called The Park Hill Group

Opened an office in Mumbai

2007 Completed its IPO listing on the NYSE

2008 Acquired credit-oriented alternative asset manager, GSO Capital Partners

2009 Signed an agreement with the Government of Pudong, China to establish the firm's first Renminbi-denominated Blackstone Zhonghua Development Investment Fund

2010 Selected by Bank of America Merrill Lynch to manage over US$2 billion in Asian real estate assets Named the new general partner for the Merrill Lynch Asian Real Estate Opportunity Fund

Bought 40% stake in Brazil's leading Alternative Asset manager, Pátria to expand business in Brazil & South America

GSO acquired the Collateral Agreement for all 9 CDO and CLO funds 2011 Blackstone Capital Partners VI announces it closed one of the largest private equity funds raised

2012 GSO acquired Harbourmaster Capital, a European leveraged loan manager with US$10.2 billion of AUM as of Sep 30, 2011

Blackstone Capital Partners VI LP completed the acquisition of Vivint on behalf of Blackstone's private equity investors

Blackstone Real Estate fund raises $13.3 Billion 2013 Infonic AG and Blackstone announce strategic partnership Blackstone made a strategic investment in iSIGHT Partners Blackstone announced agreement to acquire Strategic Partners, with a total AUM of US$ 10 billion


Business Segments Private Equity Blackstone’s private equity business is conducted in its offices located in London, New York, Hong Kong, Shanghai, Beijing, Singapore, Mumbai, and Menlo Park. The company handles six general private equity funds along with two sector-specific funds. These funds are collectively called Blackstone Capital Partners (BCP) Funds. BCP funds invest primarily in control-oriented, privately negotiated investments. The company also manages certain multi-asset class investment funds referred to as Blackstone Tactical Opportunities Accounts. Private equity portfolio consists of companies from various industries including, Agri-inputs, Business Services, Chemicals, Energy & Natural Resources, Financial Services, Healthcare & Pharmaceuticals, Media/Telecom, Technology, and others.



Exhibit 30: Private Equity AUM and Revenue

Private Equity-AUM by Geography- March 2013

North

America 75%Europe 17%

Asia 6%

Others

2%

Revenue from Private Equity ($Mn)

399

191 171

12

327 319

225

356

(285)

274

(300)

(200)

(100)

0

100

200

300

400

500

Mar-

11

Jun-

11

Sep-

11

Dec-

11

Mar-

12

Jun-

12

Sep-

12

Dec-

12

Mar-

13

Jun-

13


Blackstone’s private equity funds track investment opportunities in various global markets. As of March 31, 2013, 75% of AUM held by the private equity segment came from North America while the remaining 17%, 6%, and 2% came from Europe, Asia, and other regions, respectively. Blackstone’s revenue from private equity increased US$344.3 million to US$356.1 million for the three months ended June 30, 2013 from US$11.8 million for the same period last year. This rise was mainly led by an increase in performance fees, which grew by US$245.9 million to US$186.8 million in the quarter from US$(59.1) million during the same period last year. The strong performance of BCP IV as well as BCP V funds primarily led to this growth. Total management fees and investment income increased US$21.2 million and US$77.2 million during the quarter, respectively, from the same period last year. During the quarter, Blackstone’s tactical opportunities investment vehicle raised an addition US$324 million of commitments to reach US$3.0 billion in total commitments for the strategy. Also, during the period, Blackstone made an agreement to acquire Strategic Partners, with a total AUM of US$ 10 billion. Strategic Partners is the secondary alternative business unit of Credit Suisse.

Real Estate

The real estate division manages an array of real estate funds that are diversified both geographically and sector wise. Blackstone’s real estate opportunity funds are known as Blackstone Real Estate Partners (BREP) Funds. The BREP fund has made significant investments in urban office buildings, shopping centers, lodging, and numerous real estate operating companies. These funds primarily invest in control-oriented, privately negotiated real estate investments using the leverage in completing the investments they make. The company’s real estate debt-investment funds referred to as Blackstone Real Estate Debt Strategies (BREDS) funds was started in 2008 and mainly deals with non-controlling real estate debt-related investments in both public and private markets, located mostly in the United States and Europe. Second quarter ended June 30, 2013 revenue from Real Estate segment grew to stand at US$605.3 million backed by US$238 million increase (Y/Y) in the performance fees. During the second quarter 2013, total management fees and investment income earned in the Real Estate segment saw an increase of US$3.5 million and US$25.2 million, respectively, over the same period last year.



Exhibit 31: Real Estate Revenue

Revenue from Real Estate ($Mn)

392427

339

465404

569605

556649

(15)(100)

0

100

200

300

400

500

600

700

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Source: Company Reports

Blackstone carries out its real estate business from its offices located in New York, Los Angeles, Chicago, Paris, London, Hong Kong, Tokyo, Seoul, Singapore, and Mumbai. Under the real estate segment, the company also manages Asian real estate assets of Bank of America Merrill Lynch. Also, as per an agreement executed in the year 2010, Blackstone also manages an investment fund focusing on Asian real estate assets which was previously managed by Bank of America Merrill Lynch.

Real estate portfolio’s first Asia fund made its initial closing in June 2013 with US$1.5 billion in total commitments. During the quarter, Real Estate Debt Strategies drawdown fund made an initial closing of US$2 billion, which was followed by an addition closing in July to bring total capital available for this strategy to US$3.5 billion. In October 2012, Blackstone closed its latest global real estate fund, Blackstone Real Estate Partners VII (BREP VII).

Hedge Fund Solutions Under the Hedge Fund Solutions segment, Blackstone Alternative Asset Management (BAAM) manages funds of hedge funds and also provides customized investment strategies and platforms through the use of hedge funds. BAAM helps to protect and grow investors’ assets by co-mingling customized investment strategies, which are designed to deliver compelling risk-adjusted returns and mitigate risk. BAAM manages institutional funds of hedge funds with the help of 130 investment professionals located in Blackstone’s New York, London, and Sydney offices. The company’s hedge fund clients include public and union pension funds, corporate, central banks, and sovereign wealth.

Exhibit 32: Hedge Fund Solutions Revenue ($millions)

Revenue from Hedge Fund Solutions ($Mn)

84

57

91

117

72

133138137

105

0

25

50

75

100

125

150

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

168




For the second quarter ended June 30, 2013, the Hedge Fund Solutions segment earned revenues worth US$137.5 million compared to US$72 million in the same period last year, primarily due to growth in Fee-Earning AUM. During the quarter, total management, performance fees and investment income grew by US$16.6 million, US$44.6 million, and US$4.3 million, respectively.

Credit Business/GSO

Blackstone’s subsidiary GSO manages its credit-oriented funds, credit-focused separately managed accounts, collateralized loan obligation (CLOs) and publicly registered debt-focused investment companies. Blackstone acquired GSO Capital Partners LP and certain of its affiliates on March 3, 2008. GSO is an alternative asset manager that manages multi-strategy credit hedge fund, a mezzanine fund, a senior debt fund and various CLO vehicles.

GSO manages Blackstone’s credit-oriented business with the help of 233 employees at offices located in New York, London, Dublin and Houston. Under this business segment, the company manages and recommends credit-oriented funds, mezzanine funds, distressed debt funds, general credit-oriented funds focused on the leveraged finance marketplace. The investment portfolio of credit-oriented separately managed accounts and publicly registered investment companies comprise of securities and loans such as subordinated debt, senior debt, common equity, and preferred stock.

Exhibit 33: Credit/GSO AUM and Revenue

Break-Up of Total AUM ($Bn) - 2Q13

CLOs, 23.2

Customized

Credit

Strategies,

17.7

Mezzanine

Funds, 7.6

Hedge Fund

Strategies, 4.6

Rescue

Lending, 9.1

Revenue from Credit ($Mn)

98

15

125

181

126

213229238233

157

0

25

50

75

100

125

150

175

200

225

250

Mar-

11

Jun-

11

Sep-

11

Dec-

11

Mar-

12

Jun-

12

Sep-

12

Dec-

12

Mar-

13

Jun-

13


Revenue for second quarter ended June 30, 2013 improved to stand at US$213 million compared to US$126.3 million during second quarter ended June 30, 2012 primarily due to a US$55.8 million rise in performance fees along with a US$22.0 million increase in total management fees. Investment income also grew by US$8.8 million over the same period last year.

As of June 30, 2013, GSO had US$62 billion assets under management (27.1% of its total assets under management) as compared to US$9 billion in the year 2005 recording a CAGR growth of 29.3%.



Exhibit 34: Credit/GSO Total AUM CAGR

GSO Total AUM Growth (In $Bn)

9

14

2023 24

31

37

56

62

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012 Jun-13

CAGR: 29.3%


GSO has a high-quality institutional investor base which includes pensions, financial institutions, high net worth, fund of funds, sovereign wealth, foundations/endowments and others. These clients are located across the globe with 76% of investors located in North America, 15% in Asia/Australia, 7% in Europe and remaining 2% in Middle East.

Exhibit 35: Credit/GSO Investor Type and Geography Mix

GSO Investor Type As of Sept 2012

Pension

42%

Financial

Institution

22%

High Net

Worth

13%Fund of Funds

8%

Sovereign

Wealth

6%

FoundationsE

ndowment5%

GP Employee

4%

GSO Investor: Geography Mix As of Sept 2012

North

America

76%

Asia /

Australia 15%

Europe

7%

Middle East

2%

Note: GSO Investor Type and Geography Mix data is available for period ending September 30, 2012. Source: Company reports

In January 2012, GSO Capital Partners LP completed the acquisition of leading European leveraged loan manager called Harbourmaster Capital. As of September 30, 2011, Harbourmaster had €7.6 billion (US$10.2 billion) of assets under management. This acquisition has helped GSO in becoming one of the biggest leveraged loan investors in the United States and Europe.

Financial Advisory: This segment comprises: Financial and Strategic Advisory Services: Blackstone Advisory Partners LP provides

strategic solutions to company’s clients around the globe via its offices located in



Boston, Atlanta, Menlo Park, London, New York, Paris, Hong Kong and Beijing. It provides a wide array of financial and strategic services which includes mergers, acquisitions, private placements, spin-offs, divestitures, takeover defenses, joint ventures, corporate finance advisory and other transactions. Some of its recent clients are Nestle S.A., Bank of America Corporation, Aluminum Corporation of China, Xerox Corporation, The Procter & Gamble Company, Noble Group Limited and others.

Restructuring and Reorganization Advisory Services: Blackstone provides solutions to businesses facing troubles due to inappropriate capital structures and/or challenging economic or industry conditions. It provides a wide range of advisory services including Debtor Advisory, Creditor Advisory, Out-of-Court Solutions, Distressed Mergers & Acquisitions and Expert Witness Testimony to various industries located across the globe through its offices located in New York and London. Its clientele includes creditors, companies, hedge funds, acquirers of troubled companies, corporate parents and financial sponsors. Alliance Medical, Lee Enterprises, Abitibi Bowater, Punch Taverns, Centaur Gaming and Angiotech are some of Blackstone’s recent customers.

Fund Placement Services/Park Hill Group: Since its origin in 2005, Park Hill Group delivers fund placement services for alternative investment managers. These funds include real estate funds, private equity funds, hedge funds and venture capital funds. The services are delivered to clients via Park Hill offices located in Dallas, New York, Chicago, San Francisco, London, Tokyo, Singapore, Hong Kong, Dubai and Sydney. Park Hill Group delivers its services to unrelated third-party sponsored funds. In time of need, it also helps Blackstone in raising capital for its own investment funds.

Exhibit 36: Financial Advisory Revenue

Revenue from Financial Advisory ($Mn)

104

87

125

78

96

62

131

68

121

73

0

25

50

75

100

125

150



Revenue from Financial Advisory services for quarter ended June 30, 2013 increased 26% to stand at US$120.9 million from US$95.7 million a year ago. The growth was primarily led by increased number of closed deals in Restructuring and Park Hill businesses.



Revenues/Fee Structure Blackstone revenues primarily consist of:

Management and Advisory Fees: It comprises of: Base Management Fees: It is based on contractual terms laid down in the

underlying investment advisory agreements. Base Management fee is earned from limited partners of funds in each of its managed funds at a fixed percentage of AUM, total assets, net assets, invested or committed capital or in other cases a fixed fee.

Transaction & Other Fees: These types of fees are charged directly to funds and portfolio companies.

Advisory Fees: It includes transaction-based fee arrangements. These transactions may include activities such as mergers, acquisitions, reorganization, restructuring and divestiture activities along with providing fund placement services for alternative investment funds. Advisory fees also include advisory retainer fees which are recognized at the time when services related to these transactions are completed as per the terms of the individual agreements set forth.

Performance Fees: It is based on the performance of the company’s funds during a specific period. The fee can either be subjected to minimum return levels achievement or high water marks depending on the terms put down in each hedge fund’s governing agreements. Performance fees comprises of two components: Carried Interest: is generated by Private Equity, Real Estate and GSO (Mezzanine). It

is realized on the profitable disposal of an underlying investment and when the fund’s cumulative returns are in excess of the preferred return.

Incentive Fees: are generated by Real Estate Debt Strategies (BREDS), BAAM and GSO (Hedge).

Investment Income (Loss): includes all the realized and unrealized gains & losses on the Partnership’s principal investments. These investments include equity method investments, unconsolidated investments in Blackstone Funds and other principal investments.

Interest and Dividend Revenue: includes interest and dividend income earned on principal investments held by Blackstone.

Other Revenue: includes foreign exchange gains and losses.



Exhibit 37: Revenue break-up by Segments

Revenue Break-Up (In $Bn)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0


Management & Advisory Fees, Net Performance FeesInvestment Income (Loss) Interest and Dividend RevenueOthers

1.21.2

1.4

1.21.3

(0.1)

1.0

0.6

1.2

0.9


For quarter ended June 30, 2013, Blackstone’s total revenue stood at US$1.4 billion compared to US$644.3 million same period last year. The growth in the revenue was primarily driven by US$584.4 million rise in the performance fees. Total management fees also increased by US$90.7 million.

Blackstone earned 49.8% of its 2Q13 revenue from performance fees followed by management & advisory fees which contributed 40.2%. The remaining part of the revenue came from investment income, interest & dividends and other revenue streams.

Exhibit 38: Revenue Break-Up 2Q13

Revenue Break-Up (2Q-13)

Mgt & Advisory Fees,

40.2%

Performance Fees,

49.8%Investment Income

(Loss), 9.2%

Interest & Dividend ,

1.0%

Others, -0.1%




Exhibit 39: Revenue, Adjusted EBITDA and Adjusted EBITDA Margin (%)

627

1,223 1,217 1,246

236 238 221 203 238 255

672

438 418

1,4401,153

1,308

(124)

915952

163

18% 21%

55%

35% 29%20%

-131%

24%

21%

38%

(150)

100

350

600

850

1,100

1,350


-150%

-100%

-50%

0%

50%

100%

Revenue Adjusted EBITDA Adj. EBITDA Margin (%)

In $Mn




Operating Metrics

Assets under Management (AUM) As of June 30, 2013, Blackstone’s total AUM grew 5.2% sequentially to US$229.6 billion compared to US$218.2 billion at March 31, 2013. Gross inflows for the quarter stood at US$14.2 billion including US$6.5 billion inflows in the company’s Credit segment and US$4.5 billion in the Real Estate segment. Hedge Fund Solutions saw net inflows of US$2.6 billion and the Private Equity segment witnessed inflow worth US$525 million mainly due to fundraising for tactical opportunities. Market appreciation stood at US$5.8 billion and realizations at US$6.6 billion. Outflow figure during the quarter stood at US$2.0 billion. By the end of the second quarter, total AUM increased 21% (Y-o-Y) or US$39.3 million from US$190.3 billion since June 30, 2012. Private Equity AUM added 14% in the last twelve months mainly due to fundraising and market appreciation worth US$9.2 billion. Also, Real Estate, Hedge Fund Solutions and Credit segment increased 27%, 17% and 23%, respectively, during the period.

Exhibit 40: AUM by Business Segment

8%

AUM by Business Segment ($Bn)

44 47 43 46 48 47 50 51 52 53.3

35 38 41 43 48 50 54 57 59 63.940 41 40 41

43 4346 46 48 50.1

3134 37

51 5155 56

5862.2

34

0

20

40

60

80

100

120

140

160

180

200

220

240

260


Private Equity Real Estate Hedge Fund Solutions Credit

210218

205190190

166158159

150

7%

4%

7%

2%

230


As of June 30, 2013, Private Equity segment had US$53.3 billion of assets under management, or 23.2% of company’s total assets under management. For the same period, the Real Estate segment had US$63.9 billion of assets under management (27.8% of total assets under management). Blackstone’s Hedge Fund Solutions operation had US$50.1 billion of assets under management (21.8% of total assets under management). Credit segment (GSO) had US$62.2 billion assets under management (27.1% of company’s total assets under management)



Exhibit 41: AUM by Segment - 2Q13

AUM By Segment (2Q-13)

Credit, 27.1%

Hedge Fund

Solutions, 21.8% Real Estate, 27.8%

Private Equity, 23.2%


Assets under Management for December 31, 2012 improved by 26% (US$44.0 billion) to US$210.2 billion from US$166.2 billion at December 31, 2011. Out of the total inflow, US$12.6 billion inflow was in Real Estate segment primarily from capital committed to BREP VII. The Hedge Fund Solutions segment witnessed an inflow of US$5.3 billion. Inflow in Credit segment was US$24.3 billion, primarily due to fundraising in company’s hedge funds. US$4.2 billion inflow was accounted by the Private Equity segment mainly due to closing of tactical opportunities and additional closing on its BEP fund.

Exhibit 42: AUM Growth

AUM (US$ Bn)

51

70

10295 98

128

166

210

230

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 Jun-13

9%


The company witnessed net market appreciation of US$15.9 billion and outflows and realizations at US$5.9 billion and US$12.6 billion, respectively.

Fee-Earning AUM: These include the assets on which Blackstone earns incentive and/or management fees. At June 30, 2013, Fee-Earning AUM rose by 3% (US$5.4 billion) to US$176.3 billion compared to US$170.9 billion at March 31, 2013. Out of US$11 billion



inflow, US$4.6 billion inflow was in company’s Credit segment followed by US$2.8 billion in the Real Estate segment. US$805 million inflow in the Private Equity segment was offset by US$950 million of realizations. Hedge Fund Solutions saw an inflow of US$2.7 billion. Market appreciation and realizations stood at US$777 million and US$4.8 billion, respectively.

Exhibit 43: Fee-Earning AUM

Fee-Earning AUM (In $Bn)

36 36 37 37 37 37 39 37 37 37

26 28 30 31 37 38 41 42 42 44

36 37 37 3841 40 44 43 46 48

26 28 29 3042 42

46 45 46 48

0

20

40

60

80

100

120

140

160

180

200


Private Equity Real Estate Hedge Fund Solutions Credit Businesses

124 129 133 137

156 158169 168 171 176


Distribution History During first quarter ended June 30, 2013, the company declared a quarterly distribution of US$0.23 per common unit to record holders as of July 29, 2013; payable on August 5, 2013 compared to US$0.30 of distributable earnings per common unit during the previous quarter. During the first quarter of 2013, Blackstone increased its base quarterly distribution to US$0.12 per unit from US$0.10 per unit in 2012. Net cash available for distribution to common unitholders is distributed each quarter as earned. The company keeps any excess net of retained capital for the fourth quarter.

Exhibit 44: Distribution History

Distribution History

$0.10 $0.10 $0.10

$0.22

$0.10

$0.10 $0.10

$0.42

$0.30

$0.23100%

77%

100%

157%

67%

67%93% 91%

82%

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45


60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

Actual Distribution per Common Unit Actual Distribution as % of DE Per Common Unit




Limited Partnerships Blackstone has over 1,500 limited partners which include academic endowments and charitable foundations, public and corporate pension funds, sovereign wealth funds, and other investors. These limited partners are located in around 52 countries in North America, Europe, Asia/Australia, Middle East and others regions.

Exhibit 45: Limited Partners by Investor Type and Geography

Investors by Category as of Dec 2012

(By Capital Raised % of Total)

Public

Pension

34%

Financial

Institution

19%

Corporate

Pension

15%

Sovereign

Wealth

Funds

13%

Private

Wealth

10%

Foundations/

Endowments

5%Others

4%

Limited Partners by Geography as of Dec 2012

(By Capital Raised % of Total)

North

America, 63%

Europe, 16%

Asia/Australia

, 13%

Middle East,

7%

Others, 1%


For the three months ended June 30, 2013, limited partner capital investment increased US$1.2 billion (51.2%) to stand at US$3.6 billion compared to US$2.4 billion for the three months ended June 30, 2012. The increase was primarily led by Limited Partner capital investment of US$0.6 billion in the Private Equity segment followed by increase in investment in Real Estate segment of US$0.4 billion. The Hedge Fund Solutions and Credit segments witnessed an increase in Limited Partner capital investment of US$0.1 billion each from the same period last year.

Exhibit 46: Limited Partners- Capital Invested

Limited Partners- Capital Invested ($Bn)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


Private Equity Real Estate Hedge Fund Solutions Credit

1.7

3.7

4.8

3.4

2.72.4

3.1

5.7

1.8

3.6




Organization Structure The Blackstone Group L.P., (Blackstone) is a holding company listed on NYSE. The company’s primary assets are general partner interests in its holding partnerships which include Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P. and Blackstone Holdings IV L.P. (collectively called Holding Partnerships). Principal operations are conducted through Holding Partnerships which are indirectly managed and operated by general partner, Blackstone Group Management L.L.C., which is in turn wholly-owned and controlled by one of Blackstone’s founders, Stephen A. Schwarzman, and Blackstone’s other senior managing directors.

Exhibit 47: Organizational Structure

100%

Blackstone Holdings

partnership units

· Limited partner interest General partner Common units

· 48.9% Equity Stake · Limited partner interest

· 53.6% Voting Rights · 100% of economic rights in

Special Voting Unit The Blackstone Group L.P.

·No economic rights (42.3% of equity in Blackstone

·Limited voting rights business held by public

unit holders and 8.8% of equity

is held by Beijing Wonderful Investments)

100% 100% 100% 100%

General Partner

General Partner · 21.7% of partnership· 51.1% Equity Stake

· 51.1% Equity Stake General Partner General Partner units· 46.4% Voting Rights

· 46.4% Voting Rights · 51.1% Equity Stake · 51.1% Equity Stake

· 46.4% Voting Rights · 46.4% Voting Rights

No economic rights

OPERATING ENTITIES

Senior Managing

Directors

Senior Managing Directors

and Existing Owners

Public Unit Holders and

Beijing Wonderful

Investments

Blackstone Partners L.L.C.

(Delaware LLC)

Blackstone Group Mgmt L.L.C.

(Delaware LLC)

The Blackstone Group

L.P. (Delaware LP)

Blackstone Holdings I

L.P.Blackstone Holdings II

L.P.

Blackstone Holdings

III L.P.

Blackstone Holdings IV

L.P.

Blackstone Holdings

IV L.P.

Blackstone Holdings

IIII L.P.

Blackstone Holdings II

L.P.

Blackstone Holdings I

L.P.


Share Structure: Blackstone has one class of shares listed in June 2007 and are publicly traded on NYSE. These shares provide economic interest, i.e., pay dividends out of the holding company. In addition, shareholders are entitled to one vote per share.

Economic Interest: As of March 31, 2013, Blackstone’s public shareholders represent approximately 49.1% economic interest in Holding Partnerships (Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P. and Blackstone Holdings IV L.P.). Blackstone Partners L.L.C. held 49.9% of economic interest in the holding company. Beijing Wonderful Investments, an investment vehicle established and controlled by The People’s Republic of China, held 8.9% of economic interest in the holding company.

Voting Rights: As of March 31, 2013, Blackstone Partners L.L.C., an entity wholly owned by senior managing directors and limited partners held 54.8% of the voting power of



Blackstone. Another 44.2% of voting rights were held public unit holders. The remaining 1.0% of voting rights was held by senior managers.

Formed as a Delaware limited partnership in March 2007, Blackstone is managed and operated by its general partner called Blackstone Group Management LLC. The general partner is in turn wholly-owned by Blackstone’s senior managing directors and controlled by one of its founders, Stephen A. Schwarzman.

Historically, Blackstone operated via a large number of entities which were owned by its predecessor owners (Peter G. Peterson and Stephen A. Schwarzman). In June 2007, the company carried out reorganization in order to facilitate the IPO. As per the reorganization, five holding partnerships were formed, namely Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P., Blackstone Holdings IV L.P. and Blackstone Holdings V L.P. These were collectively known as ‘Blackstone Holdings’. The Blackstone Group LP through wholly-owned subsidiaries became the sole general partner of the Blackstone Holdings.

In January 2009, the number of Holding Partnerships was reduced from five to four through the transfer of assets and liabilities of Blackstone Holdings III LP to Blackstone Holdings IV L.P. Blackstone Holdings IV LP was then renamed Blackstone Holdings III LP and Blackstone Holdings V LP was renamed Blackstone Holdings IV LP. The term ‘Blackstone Holdings’ which was earlier used for the five holding partnerships prior to the January 2009 reorganization are now used for the four holding partnerships that came into existence after the January 2009 reorganization.

The table below depicts sole voting and investment power with respect to all units owned by the beneficial owner (as of February 14, 2013):

Exhibit 48: Voting and Investment power of beneficial owners

Number % of Class Number % of Class

5% Unitholders

Credit Suisse AG 22,213,120 5% — —

FMR LLC 26,062,389 6% — —

Waddell & Reed Financial, Inc. 22,613,690 5% — —

Directors and Executive Officers

Stephen A. Schwarzman — — 231,924,793 43%

Hamilton E. James 7,750,000 2% 30,680,300 6%

J. Tomilson Hill 2,248,442 1% 14,645,085 3%

Laurence A. Tosi — — 505,180 *

Joan Solotar 11,694 * 158,614 *

Jonathan D. Gray — — 40,585,300 8%

The Right Honorable Brian Mulroney 126,042 * — —

William G. Parrett 53,257 * — —

Richard Jenrette 21,154 * — —

Jay O. Light 22,194 * — —

All executive officers and

directors as a group 10,232,783 2% 318,649,272 59%

Name of Benefic ial Owner

Common Units

Benefic ially Owned

Blackstone Holdings

Partnership Units

Benefic ially Owned

Source: Company Reports; as of February 14, 2013



Management Team

Exhibit 49: Management Team

Name Age Title Background

Stephen A. Schwarzman

66 Chairman of the Board, CEO & Co-Founder, Chairman of the Board of the general partner

Mr. Schwarzman co-founded Blackstone in 1985 and has been involved with the company’s progress ever since. He has been the chairman of the board of the general partner from March 20, 2007. Mr. Schwarzman began his career as a managing director at Lehman Brothers in 1978 where he was engaged in the firm’s mergers and acquisitions business. He is also a member of The Business Council and the Council on Foreign Relations. He holds a BA from Yale University and an MBA from Harvard Business School.

Hamilton E. James 62 President, Chief Operating Officer and Director of General Partner

Mr. Hamilton E. James is president and chief operating officer of Blackstone. He was elected to the board of directors of Blackstone Group LP general partner with effect from March 20, 2007. He has served on numerous corporate boards and is currently director of Costco Wholesale Corporation and Swift River Investments Inc. He earned a BA from Harvard College and an MBA with high distinction from the Harvard Business School.

J. Tomilson Hill 64 Vice Chairman and Director Mr. Hill is currently serving as president & CEO of BAAM. He is also the vice chairman of Blackstone and a member of its board of directors of the general partner. Prior to working as CEO of BAAM, he served as Blackstone’s co-head of the Corporate and Mergers and Acquisitions Advisory group. He began his career at First Boston in 1993 and later became the co-founder of its Mergers & Acquisitions Department. Mr. Hill is a graduate of Harvard College and the Harvard Business School.

Jonathan D. Gray 43 Global Head of Real Estate and Director

Mr. Jonathan D. Gray is the global head of Real Estate at Blackstone. He is a member of the board of directors of Blackstone’s general partner. He also sits on the company’s management and executive committees. He joined Blackstone in 1992 and has been heading the privatization of various public real estate companies including Hilton Hotels, Extended Stay America and Carr America ever since. Mr. Gray earned a BS in Economics from the Wharton School. He also holds a BA in English from the University of Pennsylvania.

Laurence A. Tosi 45 Chief Financial Officer Mr. Tosi is serving as chief financial officer and member of Blackstone’s executive committee. Prior to joining Blackstone, he held numerous senior positions at Merrill Lynch & Co. with the most recent being managing partner and the chief operating officer of Global Markets and Investment. He earned a BA, JD and an MBA from Georgetown University.

John G. Finley 56 Chief Legal Officer Mr. John G. Finley has been serving as chief legal officer at Blackstone since September 2010. He is also member of the firm’s Executive committee. Prior to joining Blackstone, he was working as the head of Global Mergers & Acquisitions at Simpson Thacher & Bartlett where he was a partner for 22 years. He was also a member of that law firm’s executive committee. He completed his BS in Economics and BA in History from the University of Pennsylvania. He also earned a JD from Harvard Law School.

Joan Solotar 48 Senior Managing Director—External Relations and Strategy

Prior to joining Blackstone in the year 2007, Ms. Joan Solotar was serving as managing director and head of Equity Research at Bank of America Securities. Before that, she was working with the financial services team at Donaldson, Lufkin & Jenrette after which she served as a managing director at CSFB. Ms. Solotar received a BS in Management Information Systems from the State University of New York, Albany. She did her MBA in Finance from New York University.




Valuation Framework We value Blackstone Group LP using a “one plus a half methodology”, which is a deviation from the valuation approach we have used for traditional asset managers. Under this method, earnings derived from fee-based earnings (asset management fees) are valued using a peer traditional asset management multiple, while earnings attributed to incentive income (performance fees) are valued at a 50% discount.

Management fees earned by Blackstone Group LP are higher than those earned by traditional long-only fund managers, justifying a premium to peer P/E multiples. Thus, we are applying a premium to the P/E multiple for traditional asset managers. As for incentive income, we apply a 50% discount to the P/E multiple related to incentive income. We believe a discount is justified as performance fees are more volatile than fee-based earnings and difficult to project.

Our price target for Blackstone Group LP is $32. We arrive at our price target using a price-to-earnings multiple of 18.0x on 2014 estimated fee-based earnings of $0.75 per common unit. We value earnings based on management fees at $13.41.

Moreover, we value incentive income based on a price-to-earnings multiple of 9x and 2014 estimated incentive income EPS of $2.10. The multiple of 9x represents a 50% discount to the fee-based earnings multiple. We value earnings based on incentive income at $18.86 per common unit. The sum of the two valuations leads us to our price target of $32 for Blackstone Group LP.

Exhibit 50: Price target based on one-plus-a-half-methodology

Valuation2014 Management Fee EPS $0.75P/E Multiple 18.0xPer Share $13.41

2014 Incentive Income EPS $2.10P/E Multiple 9.0xPer Share $18.86

Price Target $32


Our $32 base case scenario valuation is based on these 2014 assumptions: portfolio returns of 11.2% in private equity for the remainder of the year; portfolio returns of 13.8% in real estate for the remainder of the year; a quarterly return assumption of 2% for Hedge Fund Solutions funds; total performance fees of $499.4 million in Credit for 2013; total advisory fees of $396.5 million for Financial Advisory.

Our upside scenario results in $0.83 in management fee earnings per share and $2.61 in incentive income earnings per share. We are applying a P/E multiple of 18x to management fee earnings and 9x to incentive income earnings to arrive at our $38 upside valuation.

These are our 2014 assumptions for our upside scenario: portfolio returns of 14.7% in private equity for the remainder of the year; portfolio returns of 16.5% in real estate for the remainder of the year; a quarterly return assumption of 2.7% for Hedge Fund Solutions funds; total performance fees of $583.3 million in Credit for 2014; total advisory fees of $469.6 million for Financial Advisory.



Exhibit 51: Upside Scenario based on one-plus-a-half-methodology



Price Target $38


Our downside scenario results in $0.64 in management fee earnings per share and $1.28 in incentive income earnings per share. We are applying a P/E multiple of 14x to management fee earnings and 7x to incentive income earnings to arrive at our $18 downside valuation. The downside P/E multiple reflects a sell off in the markets due to concerns about the economy.

These are our 2014 assumptions for our downside scenario: Portfolio returns of 5.6% in private equity for the remainder of the year; portfolio returns of 8.2% in real estate; a quarterly return assumption of 0.6% for Hedge Fund Solutions funds; total performance fees of $359.6 million in Credit for 2014; total advisory fees of $271.3 million for Financial Advisory.

Exhibit 52: Downside Scenario based on one-plus-a-half-methodology



Price Target $18




Risks and Price Target Impediments Weaker-than-expected realizations could lead to a shortfall in distributable earnings Blackstone, like other alternative asset managers, derives a large portion of its earnings from realizations. Investors in the common share of publicly traded companies prefer to invest in firms that are in the “harvesting” period and can generate strong cash earnings and dividends.

Adverse capital market and economic conditions could impact Blackstone’s earnings Declining equity markets could lead to lower than expected realization activity as exit opportunities would be subdued. This would lead to a potential shortfall in distributions and lower incentive income. Blackstone earns management fees based on fee-based assets under management. A decline in the value of assets under management could lead to lower management fee revenues and earnings. Blackstone relies on debt financing for potential acquisitions. An inability to obtain committed debt financing or an increase in interest rates could lead to declining investment returns and earnings. Likewise, portfolio companies’ difficulties in tapping the debt market for financing could lead to subpar operating results. This, in turn, would lead to lower valuations and earnings.

Weak investment performance could impact earnings and result in declining assets under management Weaker than expected fund performance could lead to netting holes, lower incentive fees and potentially, to clawbacks. A majority of the funds have to meet certain investment return thresholds before the company can earn any carry and incentive income. Furthermore, investors could reduce their investments and redeem assets if performance does not meet their return requirement. Lower assets under management will lead to lower fee-based earnings. Weak fund performance could also make future fund-raising efforts more difficult.

Changes in the tax code could negatively impact the company’s share Changes to the US federal tax law could have a negative impact on the share price. Currently, carried interest is treated as capital gain and not ordinary income. If carried interest income were to be treated as ordinary fee income, the company’s share price could be negatively impacted as this would affect dividends.

Key person risk Retention of the company’s founder, Stephen A. Schwarzman, and other key senior managing directors is important to Blackstone. A departure of key personnel and loss of their services could have an adverse impact on the company’s ability to raise and retain capital. Departure of the company’s principals could also lead to the departure of highly qualified employees. Several funds have “key person” provisions, which provide investors with the right to redeem their investments should a senior employee (other than the principals) leave the firm. A loss of a key person could negatively affect fund performance.



Base Case

Source: Company Reports; RBC Capital Markets Estimate

($ in '000) 1QA 2QA 3QE 4QE 2012A 2013E 2014E

Revenues

Management and Advisory Fees, Net

Base Management Fees $408,747 $425,674 $438,392 $455,615 $1,591,403 $1,728,428 $1,957,095

Advisory Fees 67,020 120,734 77,936 130,813 357,417 396,503 412,363

Transaction and Other Fees, Net 37,974 66,464 82,860 90,460 227,119 277,757 393,638

Management Fee Offsets (9,662) (10,535) (12,223) (12,223) (40,953) (44,643) (48,892)

Total Management and Advisory Fees, Net $504,079 $602,337 $586,965 $664,665 $2,134,986 $2,358,046 $2,714,204

Performance Fees

Realized Carried Interest $294,170 $183,288 $234,594 $270,769 $327,422 $982,822 $1,493,860

Realized Incentive Fees 24,727 74,867 35,953 225,136 301,464 360,683 406,915

Unrealized Carried Interest 177,347 456,706 308,731 308,060 994,190 1,250,844 1,144,095

Unrealized Incentive Fees 107,755 4,358 84,927 (100,163) (29,311) 96,876 126,037

Total Performance Fees $603,999 $719,219 $664,204 $703,802 $1,593,765 $2,691,224 $3,170,907

Investment Income

Realized $38,110 $54,586 $58,237 $59,702 $95,398 $210,635 $304,401

Unrealized 96,661 42,533 57,604 57,662 190,846 254,460 180,703

Total Investment Income (Loss) $134,771 $97,119 $115,841 $117,364 $286,244 $465,095 $485,104

Interest Income and Dividend Revenue $14,661 $15,342 $15,612 $15,898 $46,630 $61,513 $66,118

Other 2,143 (1,164) (101) (101) 5,149 777 (65)

Total Revenues $1,259,653 $1,432,853 $1,382,522 $1,501,628 $4,066,774 $5,576,656 $6,436,268

Expenses

Compensation $266,977 $306,477 $288,813 $310,513 $1,030,776 $1,172,780 $1,333,831

Performance Fee Compensation

Realized Carried Interest $89,437 $75,910 $89,436 $108,018 $96,433 $362,800 $566,518

Realized Incentive Fees 10,508 35,014 9,725 53,348 140,042 108,594 116,640

Unrealized Carried Interest 95,472 172,824 94,733 148,484 321,599 511,513 390,280

Unrealized Incentive Fees 44,478 3,084 35,507 (30,852) (44,528) 52,218 63,019

Total Compensation and Benefits $239,895 $286,832 $229,401 $278,998 $513,546 $1,035,126 $1,136,456

Other Operating Expenses 114,444 120,152 131,433 138,523 481,445 504,553 595,231

Total Expenses $621,316 $713,461 $649,646 $728,035 $2,025,767 $2,712,458 $3,065,518

Economic Income (Loss) -- Pre-Tax $638,337 $719,392 $732,876 $773,593 $2,041,007 $2,864,198 $3,370,750

Taxes ($10,031) ($16,152) ($14,658) ($15,472) (45,708) (56,312) (67,415)

Economic Net Income (Loss) $628,306 $703,240 $718,218 $758,121 $1,995,299 $2,807,885 $3,303,335

Taxes $10,031 $16,152 $14,658 $15,472 $45,708 $56,312 $67,415

Performance Fee Adjustment (603,999) (719,219) (664,204) (703,802) (1,593,765) (2,691,224) (3,170,907)

Investment Income (Loss) Adjustment (134,771) (97,119) (115,841) (117,364) (286,244) (465,095) (485,104)

Investment Income (Loss) - Blackstone's Treasury Cash Management Strategies(1,729) ($21,452) $3,687 $3,723 25,769 (15,771) 15,270

Performance Fee Compensation and Benefits Adjustment 239,895 286,832 229,401 278,998 513,546 1,035,126 1,136,456

Fee Related Earnings $137,733 $168,434 $185,917 $235,149 $700,313 $727,233 $866,464

Realized Performance Fees $218,952 $147,231 $171,387 $334,540 $392,411 $872,110 $1,217,618

Realized Investment Income 38,110 54,586 58,237 59,702 95,398 210,635 304,401

Adj. Related to Real. Inv. Income - Treasury Cash Mgmt Strategies (3,820) $1,469 ($2,581) ($2,606) (21,872) (7,538) (10,689)

Less: Related Payables (12,148) ($44,220) ($40,520) ($94,319) (132,325) (191,207) (248,569)

Equity Based Compensation 12,085 $10,985 $27,650 $30,033 90,040 80,753 128,725

Distributable Earnings $390,912 $338,485 $372,440 $532,466 $1,123,965 $1,691,986 $2,257,951

Interest $26,069 $25,960 $21,013 $21,013 $69,152 $94,055 $84,051

Taxable and Related Payables including Payable Under Tax Receivable Agreement12,148 44,220 40,520 94,319 132,325 191,207 248,569

Depreciation and Amortization 8,643 $9,116 $9,116 $9,116 42,235 35,991 36,464

Adjusted EBITDA $437,772 $417,781 $443,089 $656,914 $1,367,677 $2,013,239 $2,627,035

Economic EPS (ENI) $0.55 $0.62 $0.63 $0.66 $1.77 $2.45 $2.84

Distributable Earnings 390,912 338,485 372,440 532,466 $1,123,965 $1,634,303 $2,129,226

Add: Other Paybales Attributable to Common Unitholders 2,204 $28,498 $20,012 $61,237 91,633 111,951 111,951

Distributable Earnings Before Certain Payables $393,116 $366,983 $392,452 $593,703 $1,215,598 $1,746,254 $2,241,177

Percentage to Common Unitholders 51% 51% 51% 51% 49% 51% 51%

DE Before Cert. Payables Attrib. to Common Unitholders $199,812 $187,652 $200,151 $302,789 $595,204 $890,403 $1,143,000

Less: Other Paybales Attributable to Common Unitholders (2,204) (28,498) (20,012) (61,237) (91,633) (111,951) (111,951)

Distributable Earnings Attributable to Common Unitholders $197,608 $159,154 $180,139 $241,552 $503,571 $778,452 $1,031,049

Distributable Earnings per Common Unit $0.34 $0.28 $0.30 $0.39 $0.93 $1.31 $1.55

Less: Retained Capital per Unit ($0.04) ($0.05) ($0.05) ($0.05) ($0.21) ($0.19) ($0.20)

Net Cash Available for Distribution Per Common Unit $0.30 $0.23 $0.25 $0.34 $0.72 $1.12 $1.35

Actual Distribution per Common Unit $0.30 $0.23

Management Fee EPS $0.12 $0.15 $0.16 $0.20 $0.62 $0.63 $0.75

Incentive Income EPS $0.43 $0.47 $0.46 $0.45 $1.15 $1.82 $2.10

Weighted Average ENI Adjusted Units 1,143,163,069 1,141,987,767 1,146,555,718 1,151,141,941 1,129,115,647 1,145,712,124 1,162,699,498

Dividends per common unit $0.42 $0.30 $0.30 $0.30 $0.52 $1.32 $1.50

Asset Rollforward - Fee Earnings Assets ($ in mm)

Beginning Balance $167,880 $170,950 $176,341 $188,378 $136,757 $167,880 $192,231

Inflows $6,334 $10,968 $5,467 $5,779 n/a 28,548 25,000

Inflows - New funds $0 $0 $8,500 $0 n/a 8,500 8,500

Outflows ($818) ($1,600) ($1,402) ($1,436) n/a (5,256) (6,230)

Realizations ($3,643) ($4,755) ($2,106) ($2,122) n/a (12,626) (11,190)

Net Inflows (Outflows) $1,873 $4,613 $10,459 $2,221 $28,782 $19,166 $16,081

Market Activity $1,198 $778 $1,578 $1,632 ($2,341) 5,186 7,116

Ending Balance $170,950 $176,341 $188,378 $192,231 $167,880 $192,231 $215,427

2013



Required Disclosures

Conflicts DisclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromThe Blackstone Group LP in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of The Blackstone Group LP.

A partner, director or officer of a member company of RBC Capital Markets or one of its affiliates, or an analyst involved in thepreparation of a report on The Blackstone Group LP has, during the preceding 12 months, provided services for The BlackstoneGroup LP for remuneration other than normal course investment advisory or trade execution services.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from The Blackstone Group LP during the past 12 months. During this time, a member company ofRBC Capital Markets or one of its affiliates provided non-securities services to The Blackstone Group LP.

RBC Capital Markets is currently providing The Blackstone Group LP with non-securities services.

RBC Capital Markets has provided The Blackstone Group LP with investment banking services in the past 12 months.

RBC Capital Markets has provided The Blackstone Group LP with non-securities services in the past 12 months.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

Explanation of RBC Capital Markets Equity Rating SystemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.



Distribution of RatingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of Ratings

RBC Capital Markets, Equity Research

As of 12-Aug-2013

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 760 50.87 277 36.45

HOLD [Sector Perform] 652 43.64 162 24.85

SELL [Underperform] 82 5.49 12 14.63

References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by a business unit of the Wealth Management Division of RBC Capital Markets, LLC. These RecommendedLists include a former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio:Large Cap (RL 7), Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL9), and the Guided Portfolio: ADR(RL 10). The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' meansthe date a security was removed from a Recommended List.

Conflicts PolicyRBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.To access our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdfor send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, SouthTower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of Research and Short-Term Trade IdeasAugust 12, 2013 Bulent Ozcan (212) 863-4818; [email protected] 51


RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, havingregard to local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensureeligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distributionmay be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors.Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research.RBC Capital Markets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains marketcolor and commentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in thisor other research reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com. A Short-Term TradeIdea reflects the research analyst's directional view regarding the price of the security of a subject company in the coming days orweeks, based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendationsin our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subjectcompany, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the securityof a subject company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buyingopportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rateda long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideasare not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes anyobligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for allinvestors and have not been tailored to individual investor circumstances and objectives, and investors should make their ownindependent decisions regarding any Short-Term Trade Ideas discussed therein.

Analyst CertificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all ofthe subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial ServicesLLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warrantiesof originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, SydneyBranch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty,express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. Allopinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice andare provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investmentadvice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives ofpersons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independentinvestment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buyany securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC CapitalMarkets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and otherinvestment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not beeligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicableindustry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report isnot, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is notlegally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets norany of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the informationcontained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents:This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which acceptsresponsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in



https://www.rbcinsight.com

a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, shouldcontact and place orders with RBC Capital Markets, LLC.To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution inOntario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) andthat wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBCDominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the FinancialConduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for generaldistribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients ofRBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.To Persons Receiving This Advice in Australia:This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been preparedfor general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting onthis material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisitionor possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that productand consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section761G of the Corporations Act.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets (HongKong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institution underthe Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation,or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBCInvestment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong KongBranch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).To Singapore Residents:This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities grantedoffshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and doesnot take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser beforepurchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicativeof future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada(Asia) Limited.To Japanese Residents:Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financialinstruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

.® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.Copyright © RBC Capital Markets, LLC 2013 - Member SIPC

Copyright © RBC Dominion Securities Inc. 2013 - Member CIPFCopyright © RBC Europe Limited 2013

Copyright © Royal Bank of Canada 2013All rights reserved



bx initiation

Documents