Edgar Filing: Blackstone Group L.P.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO

Commission File Number: 001-33551

LOGO

The Blackstone Group L.P.

(Exact name of Registrant as specified in its charter)

Delaware

20-8875684

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices)(Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of the Registrant’s voting common units representing limited partner interests outstanding as of October 31, 2013 was 485,694,686. The number of the Registrant’s non-voting common units representing limited partner interests outstanding as of October 31, 2013 was 79,083,468.

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS		3

	Unaudited Condensed Consolidated Financial Statements — September 30, 2013 and 2012:

	Condensed Consolidated Statements of Financial Condition as of September 30, 2013 and December 31, 2012		3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012		5

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012		6

	Condensed Consolidated Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2013 and 2012		7

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		9

	Notes to Condensed Consolidated Financial Statements		11

ITEM 1A.	UNAUDITED SUPPLEMENTAL PRESENTATION OF STATEMENTS OF FINANCIAL CONDITION		55

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		57

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		115

ITEM 4.	CONTROLS AND PROCEDURES		118

PART II.	OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		119

ITEM 1A.	RISK FACTORS		120

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		120

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		121

ITEM 4.	MINE SAFETY DISCLOSURES		121

ITEM 5.	OTHER INFORMATION		121

ITEM 6.	EXHIBITS		121



SIGNATURES					122

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2012 and in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. The forward-looking statements speak only as of the date of this report, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Website and Social Media Disclosure

We use our website (www.blackstone.com), our corporate Facebook page (www.facebook.com/blackstone) and our corporate Twitter account (@Blackstone) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about Blackstone when you enroll your e-mail address by visiting the “E-mail Alerts” section of our website at http://ir.blackstone.com/alerts.cfm?. The contents of our website and social media channels are not, however, a part of this report.

In this report, references to “Blackstone,” the “Partnership”, “we,” “us” or “our” refer to The Blackstone Group L.P. and its consolidated subsidiaries. Unless the context otherwise requires, references in this report to the ownership of Mr. Stephen A. Schwarzman, our founder, and other Blackstone personnel include the ownership of personal planning vehicles and family members of these individuals.

“Blackstone Funds,” “our funds” and “our investment funds” refer to the private equity funds, real estate funds, funds of hedge funds, credit-focused funds, collateralized loan obligation (“CLO”) and collateralized debt obligation (“CDO”) vehicles, real estate investment trusts and registered investment companies that are managed by Blackstone. “Our carry funds” refer to the private equity funds, real estate funds and certain of the credit-focused funds (with multi-year drawdown, commitment-based structures that only pay carry on the realization of an investment) that are managed by Blackstone. Blackstone’s Private Equity segment comprises its management of private equity funds (including our sector and regional focused funds), which we refer to collectively as our Blackstone Capital Partners (“BCP”) funds, certain multi-asset class investment funds which we collectively refer to as our Blackstone Tactical Opportunities Accounts (“Tactical Opportunities”), and Strategic Partners Fund Solutions (“Strategic Partners”), a secondary private fund of funds business. We refer to our real estate opportunistic funds as our Blackstone Real Estate Partners (“BREP”) funds and our real estate debt investment funds as our Blackstone Real Estate Debt Strategies (“BREDS”) funds. We refer to our listed real estate investment trusts as “REITs”. “Our hedge funds” refer to our funds of hedge funds, certain of our real estate debt investment funds and certain other credit-focused funds, which are managed by Blackstone.

“Assets under management” refers to the assets we manage. Our assets under management equals the sum of:

(a)

the fair value of the investments held by our carry funds, REITs and our side-by-side and co-investment entities managed by us, plus the capital that we are entitled to call from investors in those

funds and entities pursuant to the terms of their respective capital commitments, including capital commitments to funds that have yet to commence their investment periods,

(b)

the net asset value of our funds of hedge funds, hedge funds, and certain registered investment companies,

(c)

the fair value of assets we manage pursuant to separately managed accounts,

(d)

the amount of debt and equity outstanding for our CLOs and CDOs, and

(e)

the gross amount of assets (including leverage) for certain of our credit-focused registered investment companies.

Our carry funds are commitment-based drawdown structured funds that do not permit investors to redeem their interests at their election. Our funds of hedge funds and hedge funds generally have structures that afford an investor the right to withdraw or redeem their interests on a periodic basis (for example, annually or quarterly), in most cases upon advance written notice, with the majority of our funds requiring from 60 days up to 95 days’ notice, depending on the fund and the liquidity profile of the underlying assets. Investment advisory agreements related to separately managed accounts may generally be terminated by an investor on 30 to 90 days’ notice.

“Fee-earning assets under management” refers to the assets we manage on which we derive management and/or performance fees. Our fee-earning assets under management equals the sum of:

(a)

for our Private Equity segment funds and carry funds including certain real estate debt investment funds in our Real Estate segment, the amount of capital commitments, remaining invested capital, fair value or par value of assets held, depending on the fee terms of the fund,

(b)

for our credit-focused carry funds, the amount of remaining invested capital (which may include leverage) or net asset value, depending on the fee terms of the fund,

(c)

the remaining invested capital of co-investments managed by us on which we receive fees,

(d)

the net asset value of our funds of hedge funds, hedge funds and certain registered investment companies,

(e)

the fair value of assets we manage pursuant to separately managed accounts,

(f)

the net proceeds received from equity offerings and accumulated core earnings of our REITs,

(g)

the aggregate par amount of collateral assets, including cash, of our CLOs and CDOs, and

(h)

the gross amount of assets (including leverage) for certain of our credit-focused registered investment companies.

Our calculations of assets under management and fee-earning assets under management may differ from the calculations of other asset managers, and as a result this measure may not be comparable to similar measures presented by other asset managers. In addition, our calculation of assets under management includes commitments to, and the fair value of, invested capital in our funds from Blackstone and our personnel, regardless of whether such commitments or invested capital are subject to fees. Our definitions of assets under management or fee-earning assets under management are not based on any definition of assets under management or fee-earning assets under management that is set forth in the agreements governing the investment funds that we manage.

For our carry funds, total assets under management includes the fair value of the investments held, whereas fee-earning assets under management includes the amount of capital commitments, the remaining amount of invested capital at cost depending on whether the investment period has or has not expired or the fee terms of the fund. As such, fee-earning assets under management may be greater than total assets under management when the aggregate fair value of the remaining investments is less than the cost of those investments.

This report does not constitute an offer of any Blackstone Fund.

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands, Except Unit Data)


	September 30, 2013		December 31, 2012
Assets
Cash and Cash Equivalents	$	888,938	$	709,502
Cash Held by Blackstone Funds and Other		1,123,530		1,404,411
Investments (including assets pledged of $68,449 and $141,931 at September 30, 2013 and December 31, 2012, respectively)		20,151,386		20,847,270
Accounts Receivable		854,607		638,164
Reverse Repurchase Agreements		95,977		248,018
Due from Affiliates		954,733		1,120,067
Intangible Assets, Net		587,144		598,535
Goodwill		1,787,392		1,703,602
Other Assets		312,395		376,372
Deferred Tax Assets		1,278,780		1,285,611

Total Assets	$	28,034,882	$	28,931,552

Liabilities and Partners’ Capital
Loans Payable	$	10,801,714	$	13,051,404
Due to Affiliates		1,810,168		2,002,644
Accrued Compensation and Benefits		1,633,184		1,254,978
Securities Sold, Not Yet Purchased		101,581		226,425
Repurchase Agreements		68,505		142,266
Accounts Payable, Accrued Expenses and Other Liabilities		1,115,206		1,038,888

Total Liabilities		15,530,358		17,716,605

Commitments and Contingencies

Redeemable Non-Controlling Interests in Consolidated Entities		2,117,602		1,556,185

Partners’ Capital
Partners’ Capital (common units: 569,206,010 issued and outstanding as of September 30, 2013; 556,354,387 issued and outstanding as of December 31, 2012)		5,373,626		4,955,649
Appropriated Partners’ Capital		296,304		509,028
Accumulated Other Comprehensive Income		1,634		2,170
Non-Controlling Interests in Consolidated Entities		1,676,552		1,443,559
Non-Controlling Interests in Blackstone Holdings		3,038,806		2,748,356

Total Partners’ Capital		10,386,922		9,658,762

Total Liabilities and Partners’ Capital	$	28,034,882	$	28,931,552

continued…

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Financial Condition (Unaudited)

(Dollars in Thousands)

The following presents the portion of the consolidated balances presented above attributable to consolidated Blackstone Funds which are variable interest entities. The following assets may only be used to settle obligations of these consolidated Blackstone Funds and these liabilities are only the obligations of these consolidated Blackstone Funds and they do not have recourse to the general credit of Blackstone.


	September 30, 2013		December 31, 2012
Assets
Cash Held by Blackstone Funds and Other	$	826,809	$	1,163,915
Investments		10,119,663		12,320,611
Accounts Receivable		148,847		187,343
Due from Affiliates		23,118		27,034
Other Assets		29,630		35,447

Total Assets	$	11,148,067	$	13,734,350

Liabilities
Loans Payable	$	9,130,406	$	11,375,877
Due to Affiliates		141,629		253,546
Accounts Payable, Accrued Expenses and Other		382,261		518,656

Total Liabilities	$	9,654,296	$	12,148,079

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in Thousands, Except Unit and Per Unit Data)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Revenues
Management and Advisory Fees, Net	$	531,095	$	469,109		$	1,591,951	$	1,428,833

Performance Fees
Realized
Carried Interest		182,654		83,765			660,112		153,254
Incentive Fees		30,884		11,588			130,729		28,497
Unrealized
Carried Interest		290,052		403,465			924,105		786,551
Incentive Fees		37,713		104,312			144,449		155,011

Total Performance Fees		541,303		603,130			1,859,395		1,123,313

Investment Income
Realized		19,507		18,559			137,350		40,652
Unrealized		100,341		119,599			263,141		181,906

Total Investment Income		119,848		138,158			400,491		222,558

Interest and Dividend Revenue		19,892		10,278			46,263		27,181
Other		4,707		2,415			5,688		443

Total Revenues		1,216,845		1,223,090			3,903,788		2,802,328

Expenses
Compensation and Benefits
Compensation		465,631		503,295			1,396,042		1,531,917
Performance Fee Compensation
Realized
Carried Interest		60,369		22,023			225,716		37,860
Incentive Fees		14,599		4,457			60,121		14,284
Unrealized
Carried Interest		82,341		128,863			350,637		250,221
Incentive Fees		11,084		44,254			58,646		47,437

Total Compensation and Benefits		634,024		702,892			2,091,162		1,881,719
General, Administrative and Other		119,435		139,172			346,106		417,675
Interest Expense		26,268		19,074			80,286		47,365
Fund Expenses		6,678		(9,747	)		18,714		28,243

Total Expenses		786,405		851,391			2,536,268		2,375,002

Other Income (Loss)
Net Gains (Losses) from Fund Investment Activities		87,952		(135,960	)		196,128		400,412

Income Before Provision for Taxes		518,392		235,739			1,563,648		827,738
Provision for Taxes		57,477		39,237			164,552		119,327

Net Income		460,915		196,502			1,399,096		708,411
Net Income Attributable to Redeemable Non-Controlling Interests in Consolidated Entities		51,188		41,854			135,870		78,447
Net Income (Loss) Attributable to Non-Controlling Interests in Consolidated Entities		30,231		(157,607	)		48,723		279,970
Net Income Attributable to Non-Controlling Interests in Blackstone Holdings		208,332		183,431			664,556		237,809

Net Income Attributable to The Blackstone Group L.P.	$	171,164	$	128,824		$	549,947	$	112,185

Distributions Declared Per Common Unit	$	0.23	$	0.10		$	0.95	$	0.42

Net Income Per Common Unit
Common Units, Basic	$	0.29	$	0.24		$	0.94	$	0.21

Common Units, Diluted	$	0.29	$	0.24		$	0.93	$	0.21

Weighted-Average Common Units Outstanding
Common Units, Basic		589,643,844		544,716,399			585,296,526		526,892,258

Common Units, Diluted		592,920,795		546,923,603			588,488,068		532,702,872

Revenues Earned from Affiliates
Management and Advisory Fees, Net	$	48,906	$	48,972		$	169,029	$	153,089

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
Net Income	$	460,915	$	196,502		$	1,399,096	$	708,411
Other Comprehensive Income (Loss), Net of Tax — Currency Translation Adjustment		6,420		14,637			4,488		(8,792	)

Comprehensive Income		467,335		211,139			1,403,584		699,619
Less
Comprehensive Income in Redeemable Non-Controlling Interests in Consolidated Entities		51,188		41,854			135,870		78,447
Comprehensive Income (Loss) Attributable to Non-Controlling Interests in Consolidated Entities		36,171		(142,440	)		53,747		271,733
Comprehensive Income Attributable to Non-Controlling Interests in Blackstone Holdings		208,332		183,431			664,556		237,809

Comprehensive Income Attributable to The Blackstone Group L.P.	$	171,644	$	128,294		$	549,411	$	111,630

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)

(Dollars in Thousands, Except Unit Data)


			The Blackstone Group L.P.																		Redeemable Non- Controlling Interests in Consolidated Entities
	Common Units		Partners’ Capital			Appro- priated Partners’ Capital			Accumulated Other Compre- hensive Income			Non- Controlling Interests in Consolidated Entities			Non- Controlling Interests in Blackstone Holdings			Total Partners’ Capital
Balance at December 31, 2012		556,354,387	$	4,955,649		$	509,028		$	2,170		$	1,443,559		$	2,748,356		$	9,658,762		$	1,556,185
Net Income		—		549,947			—			—			48,723			664,556			1,263,226			135,870
Allocation of Losses of Consolidated CLO Entities		—		—			(187,011	)		—			187,011			—			—			—
Currency Translation Adjustment		—		—			—			(536	)		5,024			—			4,488			—
Allocation of Currency Translation Adjustment of Consolidated CLO Entities		—		—			5,024			—			(5,024	)		—			—			—
Capital Contributions		—		—			—			—			182,273			153			182,426			763,387
Capital Distributions		—		(545,259	)		—			—			(184,004	)		(647,533	)		(1,376,796	)		(337,890	)
Transfer of Non-Controlling Interests in Consolidated Entities		—		—			—			—			(1,010	)		—			(1,010	)		—
Purchase of Interests from Certain Non-Controlling Interest Holders		—		(33	)		—			—			—			—			(33	)		—
Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non-Controlling Interest Holders		—		88,132			—			—			—			—			88,132			—
Equity-Based Compensation		—		312,797			—			—			—			306,199			618,996			—
Relinquished in Deconsolidation and Liquidation of Partnership		—		—			(30,737	)		—			—			—			(30,737	)		50
Net Delivery of Vested Common Units		6,251,348		(20,051	)		—			—			—			(481	)		(20,532	)		—
Change in The Blackstone Group L.P.’s Ownership Interest		—		(1,798	)		—			—			—			1,798			—			—
Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units		6,600,275		34,242			—			—			—			(34,242	)		—			—

Balance at September 30, 2013		569,206,010	$	5,373,626		$	296,304		$	1,634		$	1,676,552		$	3,038,806		$	10,386,922		$	2,117,602

continued…

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Changes in Partners’ Capital (Unaudited)

(Dollars in Thousands, Except Unit Data)


			The Blackstone Group L.P.																		Redeemable Non- Controlling Interests in Consolidated Entities
	Common Units		Partners’ Capital			Appro- priated Partners’ Capital			Accumulated Other Compre- hensive Income			Non- Controlling Interests in Consolidated Entities			Non- Controlling Interests in Blackstone Holdings			Total Partners’ Capital
Balance at December 31, 2011		489,430,907	$	4,281,841		$	386,864		$	1,958		$	1,029,270		$	2,460,520		$	8,160,453		$	1,091,833
Transition and Acquisition Adjustments Relating to Consolidation of CLO Entities		—		—			233,386			—			155			—			233,541			—
Net Income		—		112,185			—			—			279,970			237,809			629,964			78,447
Allocation of Income of Consolidated CLO Entities		—		—			125,066			—			(125,066	)		—			—			—
Currency Translation Adjustment		—		—			—			(555	)		(8,237	)		—			(8,792	)		—
Allocation of Currency Translation Adjustment of Consolidated CLOs		—		—			(8,237	)		—			8,237			—			—			—
Capital Contributions		—		—			—			—			222,314			22			222,336			374,820
Capital Distributions		—		(217,603	)		—			—			(80,235	)		(284,796	)		(582,634	)		(94,041	)
Transfer of Non-Controlling Interests in Consolidated Entities		—		—			—			—			(4,444	)		3,553			(891	)		—
Purchase of Interests from Certain Non-Controlling Interest Holders		—		(48	)		—			—			—			—			(48	)		—
Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non- Controlling Interest Holders		—		16,413			—			—			—			—			16,413			—
Equity-Based Compensation		—		344,039			—			—			—			397,141			741,180			—
Relinquished in Deconsolidation and Liquidation of Partnership		—		—			—			—			—			—			—			(89	)
Net Delivery of Vested Common Units		8,477,448		(19,973	)		—			—			—			(789	)		(20,762	)		—
Change in The Blackstone Group L.P.’s Ownership Interest		—		(1,475	)		—			—			—			1,475			—			—
Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units		27,122,582		112,726			—			—			—			(112,726	)		—			—

Balance at September 30, 2012		525,030,937	$	4,628,105		$	737,079		$	1,403		$	1,321,964		$	2,702,209		$	9,390,760		$	1,450,970

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months Ended September 30,
	2013			2012
Operating Activities
Net Income	$	1,399,096		$	708,411
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Blackstone Funds Related
Unrealized Appreciation on Investments Allocable to Non-Controlling Interests in Consolidated Entities		(452,478	)		(546,221	)
Net Realized Gains on Investments		(1,017,481	)		(215,711	)
Changes in Unrealized Gains on Investments Allocable to The Blackstone Group L.P.		(253,445	)		(107,763	)
Unrealized Depreciation on Hedge Activities		—			22,599
Non-Cash Performance Fees		(588,894	)		(704,852	)
Non-Cash Performance Fee Compensation		695,120			349,802
Equity-Based Compensation Expense		572,134			690,617
Amortization of Intangibles		69,275			115,432
Other Non-Cash Amounts Included in Net Income		148,748			91,612
Cash Flows Due to Changes in Operating Assets and Liabilities
Cash Held by Blackstone Funds and Other		292,510			212,350
Cash Relinquished in Deconsolidation and Liquidation of Partnership		(136,524	)		(46,330	)
Accounts Receivable		(95,491	)		2,286
Reverse Repurchase Agreements		152,041			33,904
Due from Affiliates		182,372			(86,496	)
Other Assets		(4,624	)		62,117
Accrued Compensation and Benefits		(165,771	)		167,451
Securities Sold, Not Yet Purchased		(119,741	)		(33,413	)
Accounts Payable, Accrued Expenses and Other Liabilities		(231,459	)		(465,817	)
Repurchase Agreements		(73,761	)		(32,397	)
Due to Affiliates		(46,836	)		(13,665	)
Treasury Cash Management Strategies
Investments Purchased		(3,263,154	)		(2,306,256	)
Cash Proceeds from Sale of Investments		3,630,030			1,767,080
Blackstone Funds Related
Investments Purchased		(6,815,776	)		(4,894,341	)
Cash Proceeds from Sale or Pay Down of Investments		8,856,814			5,585,951

Net Cash Provided by Operating Activities		2,732,705			356,350

Investing Activities
Purchase of Furniture, Equipment and Leasehold Improvements		(18,574	)		(26,973	)
Net Cash Paid for Acquisitions, Net of Cash Acquired		(146,117	)		(156,972	)
Changes in Restricted Cash		5,765			2,341

Net Cash Used in Investing Activities		(158,926	)		(181,604	)

continued…

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months Ended September 30,
	2013			2012
Financing Activities
Distributions to Non-Controlling Interest Holders in Consolidated Entities	$	(521,894	)	$	(167,473	)
Contributions from Non-Controlling Interest Holders in Consolidated Entities		880,530			586,073
Purchase of Interests from Certain Non-Controlling Interest Holders		(33	)		(48	)
Net Settlement of Vested Common Units and Repurchase of Common and Holdings Units		(20,532	)		(20,762	)
Proceeds from Loans Payable		4,087			632,710
Repayment and Repurchase of Loans Payable		(4,576	)		(27,347	)
Distributions to Unitholders		(1,192,792	)		(502,399	)
Blackstone Funds Related
Proceeds from Loans Payable		8,654			16,284
Repayment of Loans Payable		(1,547,497	)		(613,000	)

Net Cash Used in Financing Activities		(2,394,053	)		(95,962	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		(290	)		(13	)

Net Increase in Cash and Cash Equivalents		179,436			78,771
Cash and Cash Equivalents, Beginning of Period		709,502			754,744

Cash and Cash Equivalents, End of Period	$	888,938		$	833,515

Supplemental Disclosure of Cash Flows Information
Payments for Interest	$	109,911		$	78,750

Payments for Income Taxes	$	60,415		$	23,105

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Non-Cash Contributions from Non-Controlling Interest Holders	$	—		$	6,803

Non-Cash Distributions to Non-Controlling Interest Holders	$	—		$	(6,803	)

Net Activities Related to Capital Transactions of Consolidated Blackstone Funds	$	(1,145	)	$	(5,370	)

Net Assets Related to the Consolidation of CLO Vehicles	$	—		$	233,541

In-kind Redemption of Capital	$	—		$	(2,017	)

In-kind Contribution of Capital	$	2,323		$	2,017

Notes Issuance Costs	$	—		$	4,788

Transfer of Interests to Non-Controlling Interest Holders	$	(1,010	)	$	(4,444	)

Change in The Blackstone Group L.P.’s Ownership Interest	$	(1,798	)	$	(1,475	)

Net Settlement of Vested Common Units	$	60,732		$	100,041

Conversion of Blackstone Holdings Units to Common Units	$	34,242		$	112,726

Acquisition of Ownership Interests from Non-Controlling Interest Holders
Deferred Tax Asset	$	(113,040	)	$	(89,464	)

Due to Affiliates	$	24,908		$	73,051

Partners’ Capital	$	88,132		$	16,413

See notes to condensed consolidated financial statements.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

1.	ORGANIZATION

The Blackstone Group L.P., together with its subsidiaries, (“Blackstone” or the “Partnership”) is a leading global manager of private capital and provider of financial advisory services. The alternative asset management business includes the management of private equity funds, real estate funds, real estate investment trusts (“REITs”), funds of hedge funds, credit-focused funds, collateralized loan obligation (“CLO”) vehicles, collateralized debt obligation (“CDO”) vehicles, separately managed accounts and registered investment companies (collectively referred to as the “Blackstone Funds”). Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory and fund placement services. Blackstone’s business is organized into five segments: private equity, real estate, hedge fund solutions, credit and financial advisory.

The Partnership was formed as a Delaware limited partnership on March 12, 2007. The Partnership is managed and operated by its 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 (the “Founder”), and Blackstone’s other senior managing directors. The activities of the Partnership are conducted through its holding partnerships: Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P. and Blackstone Holdings IV L.P. (collectively, “Blackstone Holdings”, “Blackstone Holdings Partnerships” or the “Holding Partnerships”). The Partnership, through its wholly-owned subsidiaries, is the sole general partner in each of these Holding Partnerships.

Generally, holders of the limited partner interests in the four Holding Partnerships may, four times each year, exchange their limited partnership interests (“Partnership Units”) for Blackstone Common Units, on a one-to-one basis, exchanging one Partnership Unit in each of the four Holding Partnerships for one Blackstone Common Unit.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in audited financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission.

The condensed consolidated financial statements include the accounts of the Partnership, its wholly-owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Partnership is considered the primary beneficiary, and certain partnerships or similar entities which are not considered variable interest entities but in which the general partner is presumed to have control.

All intercompany balances and transactions have been eliminated in consolidation.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Restructurings within consolidated CLOs are treated as investment purchases or sales, as applicable, in the Condensed Consolidated Statements of Cash Flows.

Consolidation

The Partnership consolidates all entities that it controls through a majority voting interest or otherwise, including those Blackstone Funds in which the general partner is presumed to have control. Although the Partnership has a non-controlling interest in the Blackstone Holdings Partnerships, the limited partners do not have the right to dissolve the partnerships or have substantive kick out rights or participating rights that would overcome the presumption of control by the Partnership. Accordingly, the Partnership consolidates Blackstone Holdings and records non-controlling interests to reflect the economic interests of the limited partners of Blackstone Holdings.

In addition, the Partnership consolidates all variable interest entities (“VIE”) in which it is the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a VIE and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment. VIEs qualify for the deferral of the consolidation guidance if all of the following conditions have been met:

(a)

The entity has all of the attributes of an investment company as defined in the American Institute of Certified Public Accountants Accounting and Auditing Guide, Investment Companies (“Investment Company Guide”), or does not have all the attributes of an investment company but it is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the Investment Company Guide,

(b)

The reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity, and

(c)

The entity is not a securitization or asset-backed financing entity or an entity that was formerly considered a qualifying special purpose entity.

Where the VIEs have qualified for the deferral of the current consolidation guidance, the analysis is based on previous consolidation guidance. This guidance requires an analysis to determine (a) whether an entity in which the Partnership holds a variable interest is a variable interest entity and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (for example, management and performance related fees), would be expected to absorb a majority of the variability of the entity. Under both guidelines, the Partnership determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continuously. In evaluating whether the Partnership is the primary beneficiary, Blackstone evaluates its economic interests in the entity held either directly by the Partnership and its affiliates or indirectly through employees. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Partnership is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Partnership, affiliates of the Partnership or third parties) or amendments to the governing documents of the respective Blackstone Funds could affect an entity’s status as a VIE or the

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.

Assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated VIE and liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of Blackstone are presented in a separate section in the Condensed Consolidated Statements of Financial Condition.

Blackstone’s other disclosures regarding VIEs are discussed in Note 9. “Variable Interest Entities”.

Fair Value of Financial Instruments

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:

•

Level I — Quoted prices are available in active markets for identical financial instruments as of the reporting date. The type of financial instruments in Level I include listed equities, listed derivatives and mutual funds with quoted prices. The Partnership does not adjust the quoted price for these investments, even in situations where Blackstone holds a large position and a sale could reasonably impact the quoted price.

•

Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Financial instruments which are generally included in this category include corporate bonds and loans, government and agency securities, less liquid and restricted equity securities, certain over-the-counter derivatives where the fair value is based on observable inputs, and certain funds of hedge funds and proprietary investments in which Blackstone has the ability to redeem its investment at net asset value at, or within three months of, the reporting date.

•

Level III — Pricing inputs are unobservable for the financial instruments and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partnership interests in private equity and real estate funds, credit-focused funds, distressed debt and non-investment grade residual interests in securitizations, certain corporate bonds and loans held within CLO vehicles, certain over-the-counter derivatives where the fair value is based on unobservable inputs and certain funds of hedge funds that use net asset value per share to determine fair value in which Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date. Blackstone may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date if an investee fund manager has the ability to limit the amount of redemptions, and/or the ability to side pocket investments, irrespective of whether such ability has been exercised. Senior and subordinate notes issued by CLO vehicles generally are classified within Level III of the fair value hierarchy.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Transfers between levels of the fair value hierarchy are recognized at the beginning of the reporting period.

Level II Valuation Techniques

Financial instruments classified within Level II of the fair value hierarchy comprise debt instruments, including corporate loans and bonds held by Blackstone’s consolidated CLO vehicles, those held within Blackstone’s Treasury Cash Management Strategies and debt securities sold, not yet purchased and interests in investment funds. Certain equity securities and derivative instruments valued using observable inputs are also classified as Level II.

The valuation techniques used to value financial instruments classified within Level II of the fair value hierarchy are as follows:

•

Debt Instruments and Equity Securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices and market transactions in comparable investments and various relationships between investments. The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction.

•

Investment Funds held by the consolidated Blackstone Funds are valued using net asset value per share as described in Level III Valuation Techniques – Funds of Hedge Funds. Certain investments in investment funds are classified within Level II of the fair value hierarchy as the investment can be redeemed at, or within three months of, the reporting date.

•

Freestanding Derivatives and Derivative Instruments Designated as Fair Value Hedges are valued using contractual cash flows and observable inputs comprising yield curves, foreign currency rates and credit spreads.

Level III Valuation Techniques

In the absence of observable market prices, Blackstone values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist; management’s determination of fair value is then based on the best information available in the circumstances, and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, certain funds of hedge funds and credit-focused investments.

Private Equity Investments — The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

measures which, in many cases, are unaudited at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (for example, multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to EBITDA or price/earnings exit multiples.

Real Estate Investments — The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures for comparable companies or assets (for example, multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to an exit EBITDA multiple or capitalization rate. Additionally, where applicable, projected distributable cash flow through debt maturity will be considered in support of the investment’s fair value.

Funds of Hedge Funds — The investments of consolidated Blackstone Funds in funds of hedge funds (“Investee Funds”) are valued at net asset value (“NAV”) per share of the Investee Fund. In limited circumstances, the Partnership may determine, based on its own due diligence and investment procedures, that NAV per share does not represent fair value. In such circumstances, the Partnership will estimate the fair value in good faith and in a manner that it reasonably chooses, in accordance with the requirements of GAAP.

Certain investments of Blackstone and of the consolidated Blackstone funds of hedge funds and credit-focused funds measure their investments in underlying funds at fair value using NAV per share without adjustment. The terms of the investee’s investment generally provide for minimum holding periods or lock-ups, the institution of gates on redemptions or the suspension of redemptions or an ability to side pocket investments, at the discretion of the investee’s fund manager, and as a result, investments may not be redeemable at, or within three months of, the reporting date. A side pocket is used by hedge funds and funds of hedge funds to separate investments that may lack a readily ascertainable value, are illiquid or are subject to liquidity restriction. Redemptions are generally not permitted until the investments within a side pocket are liquidated or it is deemed that the conditions existing at the time that required the investment to be included in the side pocket no longer exist. As the timing of either of these events is uncertain, the timing at which the Partnership may redeem an investment held in a side pocket cannot be estimated. Investments for which fair value is measured using NAV per share are reflected within the fair value hierarchy based on the observability of pricing inputs as described above. Further disclosure on instruments for which fair value is measured using NAV per share is presented in Note 5. “Net Asset Value as Fair Value”.

Credit-Focused Investments — The fair values of credit-focused investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. In some instances, Blackstone may utilize other valuation techniques, including the discounted cash flow method or a market approach.

Credit-Focused Liabilities — Credit-focused liabilities comprise senior and subordinate loans issued by Blackstone’s consolidated CLO vehicles. Such liabilities are valued using a discounted cash flow method.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Level III Valuation Process

Investments classified within Level III of the fair value hierarchy are valued on a quarterly basis, taking into consideration any changes in Blackstone’s weighted-average cost of capital assumptions, discounted cash flow projections and exit multiple assumptions, as well as any changes in economic and other relevant conditions, and valuation models are updated accordingly. The valuation process also includes a review by an independent valuation party, at least annually for all investments, and quarterly for certain investments, to corroborate the values determined by management. The valuations of Blackstone’s investments are reviewed quarterly by a valuation committee which is chaired by Blackstone’s Vice Chairman and includes senior heads of each of Blackstone’s businesses, as well as representatives of legal and finance. Each quarter, the valuations of Blackstone’s investments are also reviewed by the Audit Committee in a meeting attended by the chairman of the valuation committee as well as the senior heads of each of Blackstone’s businesses. The valuations are further tested by comparison to actual sales prices obtained on disposition of the investments.

Investments, at Fair Value

The Blackstone Funds are accounted for as investment companies under the Investment Company Guide, and reflect their investments, including majority-owned and controlled investments (the “Portfolio Companies”), at fair value. Blackstone has retained the specialized accounting for the consolidated Blackstone Funds. Thus, such consolidated funds’ investments are reflected in Investments on the Condensed Consolidated Statements of Financial Condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the exit price).

Blackstone’s principal investments are presented at fair value with unrealized appreciation or depreciation and realized gains and losses recognized in the Condensed Consolidated Statements of Operations within Investment Income (Loss).

For certain instruments, the Partnership has elected the fair value option. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. The Partnership has applied the fair value option for certain loans and receivables and certain investments in private debt securities that otherwise would not have been carried at fair value with gains and losses recorded in net income. Accounting for these financial instruments at fair value is consistent with how the Partnership accounts for its other principal investments. Loans extended to third parties are recorded within Accounts Receivable within the Condensed Consolidated Statements of Financial Condition. Debt securities for which the fair value option has been elected are recorded within Investments. The methodology for measuring the fair value of such investments is consistent with the methodology applied to private equity, real estate, credit-focused and funds of hedge funds investments. Changes in the fair value of such instruments are recognized in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. Interest income on interest bearing loans and receivables and debt securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest and Dividend Revenue.

In addition, the Partnership has elected the fair value option for the assets and liabilities of CLO vehicles that are consolidated as of January 1, 2010, as a result of the initial adoption of variable interest entity consolidation guidance. The Partnership has also elected the fair value option for CLO vehicles consolidated as a result of the acquisitions of CLO management contracts or the acquisition of the share capital of CLO managers.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

The adjustment resulting from the difference between the fair value of assets and liabilities for each of these events is presented as a transition and acquisition adjustment to Appropriated Partners’ Capital. The recognition of the initial difference between the fair value of assets and liabilities of CLO vehicles consolidated as a result of the acquisition of management contracts or CLO managers subsequent to the initial adoption of revised accounting guidance effective January 1, 2010, as an adjustment to Appropriated Partners’ Capital, is currently under review by the Emerging Issues Task Force (“EITF”). Assets of the consolidated CLOs are presented within Investments within the Condensed Consolidated Statements of Financial Condition and Liabilities within Loans Payable for the amounts due to unaffiliated third parties and Due to Affiliates for the amounts held by non-consolidated affiliates. The methodology for measuring the fair value of such assets and liabilities is consistent with the methodology applied to private equity, real estate and credit-focused investments. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income subsequent to adoption and acquisition are presented within Net Gains (Losses) from Fund Investment Activities. Expenses of consolidated CLO vehicles are presented in Fund Expenses. Amounts attributable to Non-Controlling Interests in Consolidated Entities have a corresponding adjustment to Appropriated Partners’ Capital.

The Partnership has elected the fair value option for certain proprietary investments that would otherwise have been accounted for using the equity method of accounting. The fair value of such investments is based on quoted prices in an active market or using the discounted cash flow method. Changes in fair value are recognized in Investment Income (Loss) in the Condensed Consolidated Statements of Operations.

Further disclosure on instruments for which the fair value option has been elected is presented in Note 7. “Fair Value Option” to the Condensed Consolidated Financial Statements.

Security and loan transactions are recorded on a trade date basis.

Equity Method Investments

Investments in which the Partnership is deemed to exert significant influence, but not control, are accounted for using the equity method of accounting. Under the equity method of accounting, the Partnership’s share of earnings (losses) from equity method investments is included in Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The carrying amounts of equity method investments are reflected in Investments in the Condensed Consolidated Statements of Financial Condition. As the underlying investments of the Partnership’s equity method investments in Blackstone Funds are reported at fair value, the carrying value of the Partnership’s equity method investments represents fair value.

Repurchase and Reverse Repurchase Agreements

Securities purchased under agreements to resell (“reverse repurchase agreements”) and securities sold under agreements to repurchase (“repurchase agreements”), comprised primarily of U.S. and non-U.S. government and agency securities, asset-backed securities and corporate debt, represent collateralized financing transactions. Such transactions are recorded in the Condensed Consolidated Statements of Financial Condition at their contractual amounts and include accrued interest. The carrying value of repurchase and reverse repurchase agreements approximates fair value.

The Partnership manages credit exposure arising from repurchase agreements and reverse repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Partnership, in the event of a counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

The Partnership takes possession of securities purchased under reverse repurchase agreements and is permitted to repledge, deliver or otherwise use such securities. The Partnership also pledges its financial instruments to counterparties to collateralize repurchase agreements. Financial instruments pledged that can be repledged, delivered or otherwise used by the counterparty are recorded in Investments on the Condensed Consolidated Statements of Financial Condition.

Blackstone does not offset assets and liabilities relating to reverse repurchase agreements and repurchase agreements on its Condensed Consolidated Statements of Financial Condition. Additional disclosures relating to offsetting are discussed in Note 11. “Offsetting of Assets and Liabilities”.

Securities Sold, Not Yet Purchased

Securities Sold, Not Yet Purchased consist of equity and debt securities that the Partnership has borrowed and sold. The Partnership is required to “cover” its short sale in the future by purchasing the security at prevailing market prices and delivering it to the counterparty from which it borrowed the security. The Partnership is exposed to loss in the event that the price at which a security may have to be purchased to cover a short sale exceeds the price at which the borrowed security was sold short.

Securities Sold, Not Yet Purchased are recorded at fair value in the Condensed Consolidated Statements of Financial Condition.

Derivative Instruments

The Partnership recognizes all derivatives as assets or liabilities on its Condensed Consolidated Statements of Financial Condition at fair value. On the date the Partnership enters into a derivative contract, it designates and documents each derivative contract as one of the following: (a) a hedge of a recognized asset or liability (“fair value hedge”), (b) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), (c) a hedge of a net investment in a foreign operation, or (d) a derivative instrument not designated as a hedging instrument (“freestanding derivative”). For a fair value hedge, Blackstone records changes in the fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk, in current period earnings in General, Administrative and Other in the Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives designated as hedging instruments caused by factors other than changes in the risk being hedged, which are excluded from the assessment of hedge effectiveness, are recognized in current period earnings.

The Partnership formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Partnership’s evaluation of effectiveness of its hedged transaction. At least monthly, the Partnership also formally assesses whether the derivative it designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in estimated fair values or cash flows of the hedged items using either the regression analysis or the dollar offset method. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. The Partnership may also at any time remove a designation of a fair value hedge. The fair value of the derivative instrument is reflected within Other Assets in the Condensed Consolidated Statements of Financial Condition.

For freestanding derivative contracts, the Partnership presents changes in fair value in current period earnings. Changes in the fair value of derivative instruments held by consolidated Blackstone Funds are reflected

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

in Net Gains (Losses) from Funds Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss) in the Condensed Consolidated Statements of Operations. The fair value of freestanding derivative assets are recorded within Investments and freestanding derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Condensed Consolidated Statements of Financial Condition.

The Partnership has elected to not offset derivative assets and liabilities or financial assets on its Condensed Consolidated Statements of Financial Condition, including cash, that may be received or paid as part of collateral arrangements, even when an enforceable master netting agreement is in place that provides the Partnership, in the event of counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.

Blackstone’s other disclosures regarding derivative financial instruments are discussed in Note 6. “Derivative Financial Instruments”.

Blackstone’s disclosures regarding offsetting are discussed in Note 11. “Offsetting of Assets and Liabilities”.

Affiliates

Blackstone considers its Founder, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates.

Distributions

Distributions are reflected in the condensed consolidated financial statements when paid.

Recent Accounting Developments

In February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The guidance did not change the requirement for reporting net income or other comprehensive income in financial statements. However, the amendments required an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.

The guidance was effective prospectively for periods beginning after December 15, 2012. Adoption had no impact on the Partnership’s financial statements.

In December 2011, the FASB issued guidance to enhance disclosures about financial instruments and derivative instruments that are either (a) offset or (b) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset. Under the amended guidance, an entity is required to disclose quantitative information relating to recognized assets and liabilities that are offset or subject to an

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

enforceable master netting arrangement or similar agreement, including (a) the gross amounts of those recognized assets and liabilities, (b) the amounts offset to determine the net amount presented in the statement of financial position, and (c) the net amount presented in the statement of financial position. With respect to amounts subject to an enforceable master netting arrangement or similar agreement which are not offset, disclosure is required of (a) the amounts related to recognized financial instruments and other derivative instruments, (b) the amount related to financial collateral (including cash collateral), and (c) the overall net amount after considering amounts that have not been offset. The guidance was effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods and retrospective application is required. As the amendments were limited to disclosure only, adoption did not have a material impact on the Partnership’s financial statements.

In January 2013, the FASB issued guidance to clarify the scope of disclosures about offsetting assets and liabilities. The amendments clarified that the scope of guidance issued in December 2011 to enhance disclosures around financial instruments and derivative instruments that are either (a) offset, or (b) subject to a master netting agreement or similar agreement, irrespective of whether they are offset, applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. The amendments were effective for interim and annual periods beginning on or after January 1, 2013. Adoption did not have a material impact on the Partnership’s financial statements.

In February 2013, the FASB issued guidance on the measurement of joint and several liability arrangements in which the total amount of the obligation is fixed at the reporting date. The guidance requires entities to measure obligations from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In March 2013, the FASB issued guidance on a parent entity’s accounting for cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a parent entity ceases to have a controlling financial interest in a subsidiary or a group of assets that is a business within a foreign entity, any related portion of the total cumulative translation adjustment should be released into net income if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, partial sale guidance applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. For an equity method investment that is not a foreign entity, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. Additionally, the guidance clarifies that the sale of an investment in a foreign entity includes both (a) events that result in the loss of a controlling financial interest in a foreign entity (that is, irrespective of any retained investment) and (b) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative translation adjustment should be released into net income upon the occurrence of those events. The guidance shall be applied on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2013. The guidance

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

should be applied to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In April 2013, the FASB issued guidance on when and how an entity should prepare its financial statements using the liquidation basis of accounting. The guidance requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Financial statements prepared using the liquidation basis of accounting shall measure and present assets at the amount of the expected cash proceeds from liquidation. The presentation of assets shall include any items that had not previously been recognized under GAAP but that it expects to either sell in liquidation or use in settling liabilities. Liabilities shall be recognized and measured in accordance with GAAP that otherwise applies to those liabilities. The guidance requires an entity to accrue and separately present the costs that it expects to incur and the income that it expects to earn during the expected duration of the liquidation, including any costs associated with sale or settlement of those assets and liabilities. The guidance requires disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. The guidance is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013 and interim periods therein. The guidance should be applied prospectively. Adoption is not expected to have a material impact on the Partnership’s financial statements.

In June 2013, the FASB issued guidance to clarify the characteristics of an investment company and to provide guidance for assessing whether an entity is an investment company. Consistent with existing guidance for investment companies, all investments are to be measured at fair value including non-controlling ownership interests in other investment companies. There are no changes to the current requirements relating to the retention of specialized accounting in the consolidated financial statements of a non-investment company parent. The guidance is effective for interim and annual periods beginning after December 15, 2013 and early application is prohibited. Adoption is not expected to have a material impact on the Partnership’s financial statements.

3.	GOODWILL AND INTANGIBLE ASSETS

On August 5, 2013, Blackstone completed its acquisition of Strategic Partners Fund Solutions, a secondary private fund of funds business, which resulted in an increase in Goodwill of $83.8 million and an increase in Intangible Assets, primarily comprising contractual rights to earn future fee income, of $57.9 million. Goodwill arising from the acquisition has been allocated to the Private Equity segment.

Intangible Assets, Net consists of the following:


	September 30, 2013			December 31, 2012
Finite-Lived Intangible Assets/Contractual Rights	$	1,594,128		$	1,536,244
Accumulated Amortization		(1,006,984	)		(937,709	)

Intangible Assets, Net	$	587,144		$	598,535

Amortization expense associated with Blackstone’s intangible assets was $24.8 million and $69.3 million for the three and nine month periods ended September 30, 2013, respectively, and $30.6 million and $115.4 million for the three and nine month periods ended September 30, 2012, respectively.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Amortization of Intangible Assets held at September 30, 2013 is expected to be $95.8 million, $102.2 million, $95.8 million, $85.6 million, and $46.5 million for each of the years ending December 31, 2013, 2014, 2015, 2016, and 2017, respectively. Blackstone’s intangible assets as of September 30, 2013 are expected to amortize over a weighted-average period of 7.6 years.

4.	INVESTMENTS

Investments consist of the following:


	September 30, 2013		December 31, 2012
Investments of Consolidated Blackstone Funds	$	12,328,927	$	14,026,745
Equity Method Investments		2,964,438		2,582,504
Blackstone’s Treasury Cash Management Strategies		1,066,170		1,411,680
Performance Fees		3,705,713		2,780,217
Other Investments		86,138		46,124

	$	20,151,386	$	20,847,270

Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $506.3 million and $500.5 million at September 30, 2013 and December 31, 2012, respectively.

At September 30, 2013 and December 31, 2012, consideration was given as to whether any individual investment, including derivative instruments, had a fair value which exceeded 5% of Blackstone’s net assets. At September 30, 2013 and December 31, 2012, no investment exceeded the 5% threshold.

Investments of Consolidated Blackstone Funds

The following table presents the Realized and Net Change in Unrealized Gains (Losses) on investments held by the consolidated Blackstone Funds and a reconciliation to Other Income (Loss) — Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Realized Gains (Losses)	$	(2,932	)	$	6,162		$	95,403		$	(4,279	)
Net Change in Unrealized Gains (Losses)		46,872			(152,801	)		(36,855	)		235,368

Realized and Net Change in Unrealized Gains (Losses) from Consolidated Blackstone Funds		43,940			(146,639	)		58,548			231,089
Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds		44,012			10,679			137,580			169,323

Other Income (Loss) — Net Gains (Losses) from Fund Investment Activities	$	87,952		$	(135,960	)	$	196,128		$	400,412

Equity Method Investments

Blackstone’s equity method investments include its investments in private equity funds, real estate funds, funds of hedge funds and credit-focused funds and other proprietary investments, which are not consolidated but in which the Partnership exerts significant influence.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Blackstone evaluates each of its equity method investments to determine if any were significant as defined by guidance from the United States Securities and Exchange Commission. As of and for the three months ended September 30, 2013 and 2012, no individual equity method investment held by Blackstone met the significance criteria. As such, Blackstone is not required to present summarized financial information for any of its equity method investments.

The Partnership recognized net gains related to its equity method investments of $71.3 million and $81.4 million for the three months ended September 30, 2013 and 2012, respectively. The Partnership recognized net gains related to its equity method investments of $282.6 million and $125.4 million for the nine months ended September 30, 2013 and 2012, respectively.

Blackstone’s Treasury Cash Management Strategies

The portion of Blackstone’s Treasury Cash Management Strategies included in Investments represents the Partnership’s liquid investments in government, other investment and non-investment grade securities and other investments. These strategies are primarily managed by third party institutions. The following table presents the realized and net change in unrealized gains (losses) on investments held by Blackstone’s Treasury Cash Management Strategies:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Realized Gains (Losses)	$	(6,587	)	$	3,228	$	(4,030	)	$	3,238
Net Change in Unrealized Gains (Losses)		10,126			6,525		(9,041	)		7,351

	$	3,539		$	9,753	$	(13,071	)	$	10,589

Performance Fees

Performance Fees allocated to the general partner in respect of performance of certain Carry Funds, funds of hedge funds and credit-focused funds were as follows:


	Private Equity			Real Estate			Hedge Fund Solutions			Credit			Total
Performance Fees, December 31, 2012	$	780,474		$	1,633,279		$	6,214		$	360,250		$	2,780,217
Performance Fees Allocated as a Result of Changes in Fund Fair Values		165,884			1,156,423			45,520			210,801			1,578,628
Foreign Exchange Gain		—			2,540			—			—			2,540
Fund Distributions		(223,502	)		(273,755	)		(10,875	)		(147,540	)		(655,672	)

Performance Fees, September 30, 2013	$	722,856		$	2,518,487		$	40,859		$	423,511		$	3,705,713

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Other Investments

Other Investments consist primarily of proprietary investment securities held by Blackstone. The following table presents Blackstone’s realized and net change in unrealized gains (losses) in other investments:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Realized Gains (Losses)	$	(168	)	$	111		$	13,938		$	907
Net Change in Unrealized Gains (Losses)		1,331			(912	)		(11,170	)		(722	)

	$	1,163		$	(801	)	$	2,768		$	185

5.	NET ASSET VALUE AS FAIR VALUE

A summary of fair value by strategy type alongside the remaining unfunded commitments and ability to redeem such investments as of September 30, 2013 is presented below:


Strategy	Fair Value		Unfunded Commitments		Redemption Frequency (if currently eligible)			Redemption Notice Period
Diversified Instruments	$	139,008	$	4,925		(a	)		(a	)
Credit Driven		195,787		1,980		(b	)		(b	)
Event Driven		110,442		—		(c	)		(c	)
Equity		611,919		—		(d	)		(d	)
Commodities		59,593		—		(e	)		(e	)

	$	1,116,749	$	6,905

(a)

Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 59% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 34% of the fair value of the investments in this category represent investments in hedge funds that are in the process of liquidating. Distributions from these funds will be received as underlying investments are liquidated. The time at which this redemption restriction may lapse cannot be estimated. The remaining 7% of investments in this category are redeemable as of the reporting date. As of the reporting date, the investee fund manager had elected to side-pocket 21% of Blackstone’s investments in this category.

(b)

The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 94% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. Investments representing 6% of the total fair value in the credit driven category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have exercised such ability) to side-pocket such investments. As of the reporting date, the investee fund manager had not elected to side-pocket any of Blackstone’s investments in this category.

(c)	The Event Driven category includes investments in hedge funds whose primary investing strategy is to identify certain event-driven investments. Withdrawals are not permitted in this category. Distributions will be received as the underlying investments are liquidated.

(d)	The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Investments representing 76% of the total fair value of investments in this category may

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

not be redeemed at, or within three months of, the reporting date. Investments representing 16% of the total fair value of investments in this category are subject to lock-up restrictions. Investments representing 7% of the total fair value of investments in this category are subject to redemption restrictions at the discretion of the investee fund manager who may choose (but may not have elected such ability) to side-pocket such investments or gate such investments, whereby limiting the amount of withdrawals from the fund during a redemption period. Investments representing 1% of the total fair value of investments in this category are in hedge funds that are in the process of liquidating. As of the reporting date, the investee fund manager had elected to side-pocket 1% of Blackstone’s investments in this category.

(e)	The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Investments in this category may not be redeemed at, or within three months of, the reporting date.

6.	DERIVATIVE FINANCIAL INSTRUMENTS

Blackstone and the Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain risk management objectives and for general investment purposes. Additionally, Blackstone may enter into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.

Freestanding Derivatives

Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include interest rate swaps, foreign exchange contracts, equity swaps, options, futures and other derivative contracts.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.


	September 30, 2013								December 31, 2012
	Assets				Liabilities				Assets				Liabilities
	Notional		Fair Value		Notional		Fair Value		Notional		Fair Value		Notional		Fair Value
Freestanding Derivatives
Blackstone—Other Interest Rate Contracts	$	1,914,476	$	44,545	$	1,035,600	$	4,673	$	689,300	$	55,270	$	636,555	$	4,116
Foreign Currency Contracts		68,896		1,490		66,115		1,398		16,771		74		7,025		81
Credit Default Swaps		—		—		41,000		4,534		—		—		—		—
Investments of Consolidated CLO Vehicles
Foreign Currency Contracts		362,841		30,954		236,887		8,775		435,229		37,898		301,551		17,101
Interest Rate Contracts		81,505		3,653		—		—		165,517		6,132		90,500		772

Total	$	2,427,718	$	80,642	$	1,379,602	$	19,380	$	1,306,817	$	99,374	$	1,035,631	$	22,070

The table below summarizes the impact to the Condensed Consolidated Statements of Operations from derivative financial instruments:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Fair Value Hedges — Interest Rate Swaps
Hedge Ineffectiveness	$	—		$	—		$	—		$	548

Excluded from Assessment of Effectiveness	$	—		$	—		$	—		$	(938	)

Realized Gain	$	—		$	—		$	—		$	22,941

Freestanding Derivatives
Realized Gains (Losses)
Interest Rate Contracts	$	359		$	(189	)	$	(596	)	$	(2,740	)
Foreign Currency Contracts		11,847			(1,438	)		8,084			1,357
Other		92			8			(81	)		15

Total	$	12,298		$	(1,619	)	$	7,407		$	(1,368	)

Net Change in Unrealized Gains (Losses)
Interest Rate Contracts	$	(2,512	)	$	1,946		$	(12,005	)	$	9,565
Foreign Currency Contracts		(11,553	)		(11,027	)		1,083			(11,692	)
Credit Default Swaps		211			(5	)		(89	)		(46	)

Total	$	(13,854	)	$	(9,086	)	$	(11,011	)	$	(2,173	)

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

As of September 30, 2013 and December 31, 2012, the Partnership had not designated any derivatives as cash flow hedges or hedges of net investments in foreign operations.

7.	FAIR VALUE OPTION

The following table summarizes the financial instruments for which the fair value option has been elected:


	September 30, 2013		December 31, 2012
Assets
Loans and Receivables	$	98,077	$	30,663
Equity and Preferred Securities		65,614		16,147
Assets of Consolidated CLO Vehicles
Corporate Loans		8,800,348		11,053,513
Corporate Bonds		146,086		162,456
Other		14,348		18,285

	$	9,124,473	$	11,281,064

Liabilities
Liabilities of Consolidated CLO Vehicles
Senior Secured Notes	$	8,641,507	$	10,695,136
Subordinated Notes		605,380		846,471

	$	9,246,887	$	11,541,607

The following table presents the realized and net change in unrealized gains (losses) on financial instruments on which the fair value option was elected:


	Three Months Ended September 30,
	2013						2012
	Realized Gains (Losses)			Net Change in Unrealized Gains (Losses)			Realized Gains (Losses)			Net Change in Unrealized Gains (Losses)
Assets
Loans and Receivables	$	—		$	(897	)	$	(308	)	$	30
Equity and Preferred Securities		(622	)		1,206			—			—
Assets of Consolidated CLO Vehicles
Corporate Loans		(14,533	)		90,412			(2,522	)		163,390
Corporate Bonds		156			1,262			(268	)		708
Other		280			(4,075	)		886			1,382

	$	(14,719	)	$	87,908		$	(2,212	)	$	165,510

Liabilities
Liabilities of Consolidated CLO Vehicles
Senior Secured Notes	$	(2,833	)	$	(127,864	)	$	60		$	(289,500	)
Subordinated Notes		—			19,158			—			(104,325	)

	$	(2,833	)	$	(108,706	)	$	60		$	(393,825	)

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)


	Nine Months Ended September 30,
	2013						2012
	Realized Gains (Losses)			Net Change in Unrealized Gains (Losses)			Realized Gains (Losses)			Net Change in Unrealized Gains (Losses)
Assets
Loans and Receivables	$	43		$	(1,101	)	$	(308	)	$	(366	)
Equity and Preferred Securities		(2,020	)		1,487			—			—
Assets of Consolidated CLO Vehicles
Corporate Loans		28,541			125,284			(27,240	)		465,102
Corporate Bonds		3,809			(4,596	)		450			10,003
Other		1,706			(2,963	)		2,425			11,489

	$	32,079		$	118,111		$	(24,673	)	$	486,228

Liabilities
Liabilities of Consolidated CLO Vehicles
Senior Secured Notes	$	(2,833	)	$	(419,817	)	$	17		$	(335,598	)
Subordinated Notes		—			97,167			—			(38,920	)

	$	(2,833	)	$	(322,650	)	$	17		$	(374,518	)

The following table presents information for those financial instruments for which the fair value option was elected:


	September 30, 2013								December 31, 2012
				For Financial Assets Past Due (a)								For Financial Assets Past Due (a)
	Excess (Deficiency) of Fair Value Over Principal			Fair Value		Excess (Deficiency) of Fair Value Over Principal			Excess (Deficiency) of Fair Value Over Principal			Fair Value		Excess (Deficiency) of Fair Value Over Principal
Loans and Receivables	$	(1,223	)	$	—	$	—		$	(292	)	$	—	$	—
Assets of Consolidated CLO Vehicles
Corporate Loans		(351,515	)		52,986		(143,727	)		(586,450	)		35,322		(73,291	)
Corporate Bonds		(1,216	)		—		—			(984	)		831		(44	)

	$	(353,954	)	$	52,986	$	(143,727	)	$	(587,726	)	$	36,153	$	(73,335	)

(a)	Past due Corporate Loans and Corporate Bonds within CLO assets are classified as past due if contractual payments are more than one day past due.

As of September 30, 2013 and December 31, 2012, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of September 30, 2013, no Corporate Bonds included within the Assets of Consolidated CLO Vehicles for which the fair value option was elected were past due or in non-accrual status.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

8.	FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

The following tables summarize the valuation of the Partnership’s financial assets and liabilities by the fair value hierarchy:


	September 30, 2013
	Level I		Level II		Level III		Total
Assets
Investments of Consolidated Blackstone Funds (a)
Investment Funds	$	—	$	—	$	1,096,331	$	1,096,331
Equity Securities		110,951		16,828		246,489		374,268
Partnership and LLC Interests		—		7,892		652,430		660,322
Debt Instruments		—		1,143,086		59,531		1,202,617
Assets of Consolidated CLO Vehicles
Corporate Loans		—		7,749,081		1,051,267		8,800,348
Corporate Bonds		—		143,415		2,671		146,086
Freestanding Derivatives — Foreign Currency Contracts		—		30,954		—		30,954
Freestanding Derivatives — Interest Rate Contracts		—		3,653		—		3,653
Other		14		994		13,340		14,348

Total Investments of Consolidated Blackstone Funds		110,965		9,095,903		3,122,059		12,328,927
Blackstone’s Treasury Cash Management Strategies		169,860		850,250		46,060		1,066,170
Money Market Funds		229,914		—		—		229,914
Freestanding Derivatives
Interest Rate Contracts		5,007		39,538		—		44,545
Foreign Currency Contracts		—		1,490		—		1,490
Loans and Receivables		—		—		98,077		98,077
Other Investments		63,671		7,204		15,263		86,138

	$	579,417	$	9,994,385	$	3,281,459	$	13,855,261

Liabilities
Liabilities of Consolidated CLO Vehicles (a)
Senior Secured Notes	$	—	$	—	$	8,641,507	$	8,641,507
Subordinated Notes		—		—		605,380		605,380
Freestanding Derivatives — Foreign Currency Contracts		—		8,775		—		8,775
Freestanding Derivatives
Interest Rate Contracts		4,535		138		—		4,673
Foreign Currency Contracts		—		1,398		—		1,398
Credit Default Swaps		—		4,534		—		4,534
Securities Sold, Not Yet Purchased		—		101,581		—		101,581

	$	4,535	$	116,426	$	9,246,887	$	9,367,848

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)


	December 31, 2012
	Level I		Level II		Level III		Total
Assets
Investments of Consolidated Blackstone Funds (a)
Investment Funds	$	—	$	1,799	$	890,465	$	892,264
Equity Securities		95,898		28,654		217,060		341,612
Partnership and LLC Interests		212		12,375		581,151		593,738
Debt Instruments		—		903,123		17,724		920,847
Assets of Consolidated CLO Vehicles
Corporate Loans		—		9,775,070		1,278,443		11,053,513
Corporate Bonds		—		146,625		15,831		162,456
Freestanding Derivatives — Foreign Currency Contracts		—		37,898		—		37,898
Freestanding Derivatives — Interest Rate Contracts		—		6,132		—		6,132
Other		—		1,260		17,025		18,285

Total Investments of Consolidated Blackstone Funds		96,110		10,912,936		3,017,699		14,026,745
Blackstone’s Treasury Cash Management Strategies		672,766		737,708		1,206		1,411,680
Money Market Funds		129,549		—		—		129,549
Freestanding Derivatives
Interest Rate Contracts		486		54,784		—		55,270
Foreign Currency Contracts		—		74		—		74
Loans and Receivables		—		—		30,663		30,663
Other Investments		12,443		6,783		26,898		46,124

	$	911,354	$	11,712,285	$	3,076,466	$	15,700,105

Liabilities
Liabilities of Consolidated CLO Vehicles (a)
Senior Secured Notes	$	—	$	—	$	10,695,136	$	10,695,136
Subordinated Notes		—		—		846,471		846,471
Freestanding Derivatives — Foreign Currency Contracts		—		17,101		—		17,101
Freestanding Derivatives — Interest Rate Contracts		—		772		—		772
Freestanding Derivatives
Interest Rate Contracts		277		3,839		—		4,116
Foreign Currency Contracts		—		81		—		81
Securities Sold, Not Yet Purchased		—		226,425		—		226,425

	$	277	$	248,218	$	11,541,607	$	11,790,102

(a)

Pursuant to GAAP consolidation guidance, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including certain CLO vehicles, and other funds in which a consolidated entity of the Partnership, as the general partner of the fund, is presumed to have control. While the Partnership is required to consolidate certain funds, including CLO vehicles, for GAAP purposes, the Partnership has no ability to utilize the assets of these funds and there is no recourse to the Partnership for their liabilities since these are client assets and liabilities.

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

The following table summarizes the fair value transfers between Level I and Level II for positions that existed as of September 30, 2013 and 2012, respectively:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Transfers from Level I into Level II (a)	$	—	$	288	$	31	$	45,440
Transfers from Level II into Level I (b)	$	41,155	$	45	$	1,308	$	846

(a)	Transfers out of Level I represent those financial instruments for which restrictions exist and adjustments were made to an otherwise observable price to reflect fair value at the reporting date.

(b)	Transfers into Level I represent those financial instruments for which an unadjusted quoted price in an active market became available for the identical asset.

The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of September 30, 2013:

Fair Value

Valuation

Techniques

Unobservable

Inputs

Ranges

Weighted
Average (a)

Financial Assets

Investments of Consolidated Blackstone Funds

Investment Funds

1,096,331

NAV as Fair Value

N/A

Equity Securities

166,586

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Multiple - P/E

8.1% - 25.0%

0.9% - 43.4%

5.0x - 13.0x

8.5x - 19.0x

11.0%

6.0%

9.6x

10.1x

76,633

Transaction Price

N/A

265

Market Comparable Companies

EBITDA Multiple

7.2x - 7.8x

7.3x

Third Party Pricing

N/A

2,947

Other

N/A

Partnership and LLC Interests

635,164

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

5.0% - 22.5%

-0.5% - 39.3%

3.0x - 23.3x

4.3% - 10.5%

8.9%

5.5%

9.9x

7.0%

8,419

Transaction Price

N/A

7,919

Third Party Pricing

N/A

928

Other

N/A

Debt Instruments

14,328

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

8.4% - 20.0%

1.6% - 3.7%

5.8x - 11.5x

6.8% - 7.5%

2.0%

66.0%

12 months

20.0%

LIBOR + 400 bps

16.5%

2.5%

10.6x

6.9%

N/A

44,397

Third Party Pricing

N/A

528

Transaction Price

N/A

278

Market Comparable Companies

EBITDA Multiple

6.3x - 7.9x

6.3x

continued…

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Fair Value

Valuation

Techniques

Unobservable

Inputs

Ranges

Weighted
Average (a)

Assets of Consolidated CLO Vehicles

749,162

Third Party Pricing

N/A

256,496

Market Comparable Companies

EBITDA Multiple

2.0x - 11.4x

6.9x

61,564

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

7.0% - 13.0%

5.6%

7.0x

7.3%

N/A

Transaction Price

N/A

Total Investments of Consolidated Blackstone Funds

3,122,059

Blackstone’s Treasury Cash Management Strategies

19,386

Third Party Pricing

N/A

16,855

Discounted Cash Flows

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

Discount Rate

2.0%

30.0% - 70.0%

12 months

20.0%

LIBOR + 400 bps

5.8% - 7.3%

N/A

66.0%

N/A

6.4%

9,819

NAV as Fair Value

N/A

Loans and Receivables

98,077

Discounted Cash Flows

Discount Rate

12.0% - 13.0%

12.4%

Other Investments

7,898

Transaction Price

N/A

3,738

NAV as Fair Value

N/A

3,627

Discounted Cash Flows

Discount Rate

12.5%

N/A

Total

3,281,459

Financial Liabilities

Liabilities of Consolidated CLO Vehicles

9,246,887

Discounted Cash Flows

Default Rate

2.0% - 3.0%

2.1%

Recovery Rate

30.0% - 70.0%

66.0%

Recovery Lag

12 months

N/A

Pre-payment Rate

5.0% - 40.0%

19.0%

Discount Rate

0.2% - 44.9%

2.7%

Reinvestment Rate

LIBOR + 400 bps

N/A

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of December 31, 2012:

Fair Value

Valuation
Techniques

Unobservable
Inputs

Ranges

Weighted
Average (a)

Financial Assets

Investments of Consolidated Blackstone Funds

Investment Funds

890,465

NAV as Fair Value

N/A

Equity Securities

151,899

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Multiple - P/E

8.4% - 25.1%

0.7% - 83.4%

5.8x - 11.5x

8.5x - 17.0x

11.2%

5.6%

9.2x

10.1x

61,479

Transaction Price

N/A

1,602

Market Comparable

Companies

Book Value Multiple

EBITDA Multiple

0.9x

5.0x - 8.7x

N/A

7.8x

200

Third Party Pricing

N/A

1,880

Other

N/A

Partnership and LLC Interests

562,678

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

5.3% - 22.6%

-8.2% - 62.0%

4.5x - 15.4x

1.0% - 10.5%

8.9%

5.3%

10.0x

7.0%

13,316

Transaction Price

N/A

5,157

Third Party Pricing

N/A

Debt Instruments

13,056

Discounted Cash Flows

Discount Rate

Revenue CAGR

Exit Multiple - EBITDA

Exit Capitalization Rate

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Reinvestment Rate

7.8% - 42.0%

2.9% - 5.1%

9.5x

7.0% - 7.5%

2.0%

70.0%

12 months

20.0%

LIBOR + 400 bps

15.6%

3.8%

N/A

7.1%

N/A

4,004

Third Party Pricing

N/A

664

Market Comparable

Companies

EBITDA Multiple

6.5x - 7.5x

6.7x

Assets of Consolidated CLO Vehicles

900,146

Third Party Pricing

N/A

278,972

Market Comparable

Companies

EBITDA Multiple

Liquidity Discount

2.0x - 13.0x

1.0% - 25.0%

6.5x

8.4%

132,171

Discounted Cash Flows

Discount Rate

7.0% - 15.7%

9.3%

Transaction Price

N/A

Total Investments of Consolidated Blackstone Funds

3,017,699

Blackstone’s Treasury Cash Management Strategies

1,006

Discounted Cash Flows

Default Rate

Recovery Rate

Recovery Lag

Pre-payment Rate

Discount Rate

Reinvestment Rate

2.0%

70.0%

12 months

20.0%

12.0%

LIBOR + 400 bps

N/A

200

Transaction Price

N/A

continued…

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

Fair
Value

Valuation
Techniques

Unobservable
Inputs

Ranges

Weighted
Average (a)

Loans and Receivables

30,620

Discounted Cash Flows

Discount Rate

11.8% - 25.9%

13.7%

Market Comparable

Companies

EBITDA Multiple

8.7x

N/A

Other Investments

17,901

NAV as Fair Value

N/A

5,647

Discounted Cash Flows

Discount Rate

12.5%

N/A

3,350

Transaction Price

N/A

Total

3,076,466

Financial Liabilities

Liabilities of Consolidated CLO Vehicles

11,541,607

Discounted Cash Flows

Default Rate

2.0% - 5.0%

2.1%

Recovery Rate

30.0% - 70.0%

66.0%

Recovery Lag

12 months

N/A

Pre-payment Rate

5.0% - 20.0%

18.0%

Discount Rate

1.1% - 50.0%

3.9%

Reinvestment Rate

LIBOR + 400 bps

N/A


N/A		Not applicable.
CAGR		Compound annual growth rate.
EBITDA		Earnings before interest, taxes, depreciation and amortization.
Exit Multiple		Ranges include the last twelve months EBITDA, forward EBITDA and price/earnings exit multiples.
(a)		Unobservable inputs were weighted based on the fair value of the investments included in the range.

The significant unobservable inputs used in the fair value measurement of the assets, Blackstone’s Treasury Cash Management Strategies, debt instruments and obligations of consolidated CLO vehicles are discount rates, default rates, recovery rates, recovery lag, pre-payment rates and reinvestment rates. Increases (decreases) in any of the discount rates, default rates, recovery lag and pre-payment rates in isolation would result in a lower (higher) fair value measurement. Increases (decreases) in any of the recovery rates and reinvestment rates in isolation would result in a higher (lower) fair value measurement. Generally, a change in the assumption used for default rates may be accompanied by a directionally similar change in the assumption used for recovery lag and a directionally opposite change in the assumption used for recovery rates and pre-payment rates.

The significant unobservable inputs used in the fair value measurement of equity securities, partnership and LLC interests, debt instruments, assets of consolidated CLO vehicles and loans and receivables are discount rates, exit capitalization rates, exit multiples, book value multiples, EBITDA multiples, liquidity discount and revenue compound annual growth rates. Increases (decreases) in any of discount rates and exit capitalization rates in isolation can result in a lower (higher) fair value measurement. Increases (decreases) in any of exit multiples, book value multiples and revenue compound annual growth rates in isolation can result in a higher (lower) fair value measurement.

Since December 31, 2012, there have been no changes in valuation techniques within Level II and Level III that have had a material impact on the valuation of financial instruments.

The following tables summarize the changes in financial assets and liabilities measured at fair value for which the Partnership has used Level III inputs to determine fair value and does not include gains or losses that

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)

were reported in Level III in prior years or for instruments that were transferred out of Level III prior to the end of the respective reporting period. Total realized and unrealized gains and losses recorded for Level III investments are reported in Investment Income (Loss) and Net Gains (Losses) from Fund Investment Activities in the Condensed Consolidated Statements of Operations.


	Level III Financial Assets at Fair Value Three Months Ended September 30,
	2013												2012
	Investments of Consolidated Funds			Loans and Receivables			Other Investments (c)			Total			Investments of Consolidated Funds			Loans and Receivables			Other Investments (c)			Total
Balance, Beginning of Period	$	2,890,319		$	107,731		$	47,914		$	3,045,964		$	2,540,156		$	104,207		$	21,362		$	2,665,725
Transfer In Due to Consolidation and Acquisition (a)		—			—			—			—			1,036			—			2,180			3,216
Transfer Out Due to Deconsolidation		(96	)		—			—			(96	)		—			—			—			—
Transfer In to Level III (b)		226,144			—			8,868			235,012			436,233			—			—			436,233
Transfer Out of Level III (b)		(270,059	)		—			(3,180	)		(273,239	)		(159,482	)		—			—			(159,482	)
Purchases		349,209			127,370			23,225			499,804			209,642			5,956			1,350			216,948
Sales		(154,446	)		(138,937	)		(15,038	)		(308,421	)		(181,324	)		(100,728	)		(99	)		(282,151	)
Settlements		—			2,293			(253	)		2,040			—			(79	)		—			(79	)
Realized Gains (Losses), Net		13,861			—			(157	)		13,704			13,671			(308	)		99			13,462
Changes in Unrealized Gains (Losses) Included in Earnings Related to Investments Still Held at the Reporting Date		67,127			(380	)		(56	)		66,691			76,224			(1,753	)		(479	)		73,992

Balance, End of Period	$	3,122,059		$	98,077		$	61,323		$	3,281,459		$	2,936,156		$	7,295		$	24,413		$	2,967,864


	Level III Financial Assets at Fair Value Nine Months Ended September 30,
	2013												2012
	Investments of Consolidated Funds			Loans and Receivables			Other Investments (c)			Total			Investments of Consolidated Funds			Loans and Receivables			Other Investments (c)			Total
Balance, Beginning of Period	$	3,017,699		$	30,663		$	28,104		$	3,076,466		$	2,103,769		$	8,555		$	20,164		$	2,132,488
Transfer In Due to Consolidation and Acquisition (a)		—			—			11,960			11,960			123,601			—			2,180			125,781
Transfer Out Due to Deconsolidation		(152,823	)		—			—			(152,823	)		(1,599	)		—			—			(1,599	)
Transfer In to Level III (b)		684,621			—			8,868			693,489			575,238			—			—			575,238
Transfer Out of Level III (b)		(377,527	)		—			(4,894	)		(382,421	)		(135,729	)		—			—			(135,729	)
Purchases		673,179			233,890			129,259			1,036,328			564,076			148,864			1,450			714,390
Sales		(959,115	)		(168,399	)		(110,767	)		(1,238,281	)		(464,193	)		(149,979	)		(639	)		(614,811	)
Settlements		—			2,312			(1,822	)		490			—			(46	)		—			(46	)
Realized Gains (Losses), Net		(4,913	)		43			14,472			9,602			(5,772	)		(308	)		738			(5,342	)
Changes in Unrealized Gains (Losses) Included in Earnings Related to Investments Still Held at the Reporting Date		240,938			(432	)		(13,857	)		226,649			176,765			209			520			177,494

Balance, End of Period	$	3,122,059		$	98,077		$	61,323		$	3,281,459		$	2,936,156		$	7,295		$	24,413		$	2,967,864

THE BLACKSTONE GROUP L.P.

Notes to Condensed Consolidated Financial Statements—Continued

(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)


	Level III Financial Liabilities at Fair Value Three Months Ended September 30,
	2013									2012
	Collateralized Loan Obligations Senior Notes			Collateralized Loan Obligations Subordinated Notes			Total			Collateralized Loan Obligations Senior Notes			Collateralized Loan Obligations Subordinated Notes			Total
Balance, Beginning of Period	$	9,189,948		$	618,682		$	9,808,630		$	10,534,253		$	701,648		$	11,235,901
Issuances		1,503			922			2,425			10,844			1,459			12,303
Settlements		(787,918	)		(180	)		(788,098	)		(338,222	)		(572	)		(338,794	)
Realized (Gains) Losses, Net		2,833			—			2,833			(60	)		—			(60	)
Changes in Unrealized (Gains) Losses Included in Earnings Related to Liabilities Still Held at the Reporting Date		235,141			(14,044	)		221,097			405,687			108,789			514,476

Balance, End of Period	$	8,641,507		$	605,380		$	9,246,887		$	10,612,502		$	811,324		$	11,423,826

Level III Financial Liabilities at Fair Value
Nine Months Ended September 30,

2013

2012

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