The Blackstone Group Group The Blackstone The Blackstone To get the Group economy 345 Park Avenue 2 2 No. No. Volume Annual Report 2008, Volume Annual Report 2008, going again… New York, New York 10154 blackstone.com Annual Report 2008 290366_Cvr.indd 1 4/21/09 11:36:34 AM Contents/ Introduction 1/ Letter to Unitholders 10/ Blackstone At a Glance 17/ Providing Capital— Promoting Opportunity 18/ Corporate Private Equity 20/ Real Estate 24/ Marketable Alternative Asset Management 28/ Financial Advisory 32/ Core Beliefs 34/ Investing in the American Dream— Pete Peterson 35/ Leadership Directory 36/ Financials 37/ Unitholder Information 84 290366_Cvr.indd 2 4/21/09 11:36:35 AM will take strong institutions willing to invest capital long term. 1 290366_L01_NARR.indd 1 4/21/09 10:02:30 PM We have a deep pool of resources to invest in the future. 1 With $27 billion in uninvested capital in Blackstone’s private equity, real estate and credit oriented funds, we have a deep pool of resources to invest in the future.1 2 Our Limited Partner capital is committed to Blackstone funds for the long term — generally ten years — eliminating the possibility of redemptions. 3 In 2008 Blackstone’s GSO business provided $1.77 billion in loans. 4 We closed on $3.3 billion of new private equity investments in 2008, focusing on non‑cyclical businesses. 5 At $12.2 billion, we believe we have the largest pool of capital available for potential global real estate investments. 1 As of February 27, 2009. 2 The Blackstone Group Annual Report 2008 290366_L01_NARR.indd 2 4/21/09 10:02:30 PM 2$277 billion in uninvested capital1 3 290366_L01_NARR.indd 3 4/15/09 11:18:10 AM Our experience over the past 23 years indicates that the best investment opportunities often come at the bottom of an economic cycle. 35 31% 31% 30 27% 26% 26% Private Equity Industry Returns Across Cycles 23% 23% 25 As shown in this chart setting forth returns for all U.S. private equity funds as a group over the past 20 years, the private equity industry has generated some of its 20% highest returns to limited partners from investments 19% made during trough years in the economic cycle. 2008–2009 20 17% should be excellent vintage years 15% 15% 14% 15 12% 11% 10% 9% 10 7% 6% 5 Source: Cambridge Associates LLC, U.S. Private Equity pooled mean net IRR to limited partners by vintage year as of September 30, 2008. Returns are net of fees, expenses and carried interest. Vintage year funds formed since 2004 are too young to have produced meaningful returns. 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0 4 The Blackstone Group Annual Report 2008 290366_L01_NARR.indd 4 4/15/09 11:51:40 AM Meltdown Meltdown Meltdown Year Year Year ’91 ’01 ’08 35 31% 31% 30 27% 26% 26% 23% 23% 25 20% 19% 2008–2009 20 17% should be excellent vintage years 15% 15% 14% 15 12% 11% 10% 9% 10 7% 6% 5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0 5 290366_L01_NARR.indd 5 4/21/09 10:02:31 PM Our capital touches almost a million lives. 1 The more than 50 companies in our Private Equity portfolio employ a total of 992,870 people as of December 31, 2008. 2 The firm’s proprietary Portfolio Operations platforms harness spending from a portfolio of 40+ companies with combined revenues of more than $110 billion to maximize purchasing efficiencies. We estimate that our procurement efforts and a new healthcare initiative have together resulted in estimated annual savings for 1,00 0,000 the firm’s portfolio companies of $215 million to $235 million. 3 Our Advisory Group has helped major companies in their restructuring efforts — in 2008 we advised such companies as Ford, General Motors, Procter & Gamble and Northern Rock. 6 The Blackstone Group Annual Report 2008 290366_L01_NARR.indd 6 4/21/09 10:02:31 PM nearly 1 million employed through blackstone portfolio companies as of december 31, 2008 1,00 0,000 7 290366_L01_NARR.indd 7 4/21/09 10:02:31 PM Our business is structured for stability and staying power. 1 The balance sheet as of December 31, 2008 reflected a strong cash position of $504 million and, with $693 million in pending redemptions from liquid Blackstone Funds, available cash totaled $1.2 billion. An additional $297 million was invested in liquid Blackstone funds and there was only $250 million in borrowings at the corporate level. 2 Management and advisory fees were $1.5 billion for 2008. 3 Due to the stability of our client relationships and long‑term track record of preserving capital, net external inflows for Marketable Alternative Asset Management (MAAM) were $8.4 billion in 2008— our strongest year. 8 The Blackstone Group Annual Report 2008 290366_L01_NARR.indd 8 4/21/09 10:02:31 PM 1$1.2 billion—cash. position as of december2 31, 2008 9 290366_L01_NARR.indd 9 4/15/09 11:51:40 AM “The application of Blackstone’s large capital resources, global reach and disciplined investment approach will transform today’s challenges into tomorrow’s opportunities”. 10 The Blackstone Group Annual Report 2008 290366_L01_NARR.indd 10 4/15/09 11:51:41 AM Stephen A. Schwarzman Chairman, Chief Executive Officer and Co-Founder 11 290366_L01_NARR.indd 11 4/15/09 11:52:07 AM While hardly any institution or individual In short, while many financial institutions was immune to this dramatic downturn, must now focus inward, on rebuilding capi‑ the question now is who will be most adept tal and repairing damaged balance sheets, Dear Fellow and best positioned to forge ahead across we are able to focus outward, on capturing this altered landscape. opportunities for our investors. With our Unitholders, Blackstone is extremely well positioned reputation for performance, integrity and for the volatile environment that we find insight, we are a sought‑after partner for ourselves in today, and for the emerging clients and investors seeking to profit from We ended 2008 and begin 2009 in one of financial markets of tomorrow. Our busi‑ the changing investment climate. It is also the most challenging equity, credit and ness has been built to last — by a seasoned reasonable to expect consolidation in the economic environments since the Great team that has navigated many market alternative asset industry, as firms that Depression. Economies around the world cycles. We have a rock solid balance sheet have felt the impact of the market disloca‑ have all weakened significantly and, in and strong liquidity: at year-end we had tion are compelled to combine with stronger the case of most developed nations, have $1.2 billion in cash and pending redemp‑ entities. Blackstone may be able to add declined very sharply. Liquidity in the global tions from Blackstone liquid funds, exceed‑ valuable new business areas and talent in banking system and capital markets has col‑ ing all outstanding borrowings. Since the these circumstances, although we will be lapsed, restricting borrowing opportunities end of 2008, we fully paid down our revolv‑ highly selective and sensible in evaluating for most individuals and corporations. ing line of credit. Our business also gener‑ expansion opportunities. Almost every asset class, including ates steady cash flow from management Historically, severe economic disloca‑ equities, debt and commodities, has been and advisory fees in excess of our operating tion has yielded many of the best invest‑ sharply devalued, and financial serv­­­­ices expenses, based on long‑term contracts. ment opportunities, and I believe that will companies’ earnings and stocks have been In addition, Blackstone is not like most be true in this case. With the extreme condi‑ among the hardest hit. Blackstone’s finan‑ firms in the financial serv­­­ices industry. We tions faced by many financial institutions cial results and share price have not been are long‑term investors and we are patient. in the past year, values were stressed by spared. While we advised purchasers of That means we can hold existing invest‑ unprecedented de‑levering and technical our units at the time of the IPO almost ments until markets are higher and more pressures in the marketplace. This forced two years ago that our firm would be sub‑ liquid and can exit at full value, rather than both good and bad assets to be liquidated in ject to cyclical forces — despite our com‑ being forced to sell into a rapidly deleverag‑ an indiscriminate fashion, which ultimately pelling long‑term growth story—no one ing market. And that allows us to be more should lead to opportunities to acquire qual‑ expected the extreme decline that most aggressive in a depressed environment ity assets at highly attractive valuations. financial serv­­­­ices stocks (including ours) when we can deploy capital to the maximum While I believe that the actions of gov‑ have experienced. benefit of our investors at the right time. ernments throughout the world to support This severe economic disruption has We also have a broadly diversified their financial institutions and markets changed the investment landscape in which portfolio of businesses, giving us numer‑ will ultimately have a stabilizing effect, it Blackstone operates. Institutional inves‑ ous avenues for value creation. For is impossible to predict how long the eco‑ tors that once would have sought only the example, our Financial Advisory group nomic recovery period may take.