Blackstone Stock Pitch

1. Blackstone Stock Pitch By Financial Sector Group 1

2. Brief Description Four segments 1) Corporate Private Equity, (2) Real Estate, (3) Marketable Alternative Asset Management(funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and publicly-traded closed-end mutual funds) and (4) Financial Advisory Segment

3. Porter’s Five Forces Rivalry: improved product differenciation: Ex: 1. agreed to buy GSO Capital Partners as it seeks to build its credit operations amid tough market conditions.January 11, 2008 Creatively using channels of distribution 2. focus on strengthening the language in takeover contracts to help ensure that transactions are completed.January 4, 2008 bypass banks and deal directly with hedge funds, pensions funds, etc. Slow market growth/industry shakeout: The Blackstone Group reported third-quarter earnings that were lower than in the period a year earlier, as troubles in the credit market shook up its real estate business. reported strong second quarter results, but acknowledged that the freeze in the credit markets could drag on its future earnings.

4. Porter’s Five Forces Threat of Substitution? Yes. advantages: The Blackstone Group seems to have picked the right property to sell itself at the ideal time. July 7, 2007 The Blackstone Group, the big buyout firm, has devised a way for its partners to avoid paying taxes on $3.7 billion. July 13, 2007 Buyer Power: weak Executives of private equity companies said that increasing levels of leverage in the financial markets should stir caution among investors. July 4, 2007

5. Porter’s Five Forces Supplier Power: strong Non-standarized service Integration of suppliers Cost to switch: high Barriers to Entry: high Government Asset Specificity World stock markets rose Wednesday and European indexes were buoyed after Hilton Hotels agreed to be bought by the equity firm the Blackstone Group. July 5, 2007 Proprietary Knowledge

6. Strengths Actively Growing Company Assets Under Management of $102.43 billion, a 47% increase from $69.51 billion a year ago. Total management fees were 54% of total revenue in 2007, vs. 46% in 2006 Shown commitment to diversification and strengthening of company away from private equity In proportion to total assets under management, private equity has decreased from 53% to 31% while marketable alternative investment segment has increased from 33% to 43% between 2005 and 2007.  Blackstone has built strong relationships with prominent companies. Serving as advisor to Microsoft as it tries to buy Yahoo Reuters as it merges with Thomson. Advising accounts for 20% of revenue Consolidating alternative asset division $910 million acquisition of GSO Capital. Credit platform of company GSO will provide significant competitive advantages and synergies Blackstone's guaranteeing of its cash distribution of $1.20 per unit to public unit holders through 2009.  That's essentially an 8% dividend yield for the next two years at the current stock price

7. Weaknesses profit margins are thin as ratio of revenue / cost of revenue = 0.9 The change reflected higher Compensation and Benefits of $2.01 billion, principally resulting from an increase in equity-based compensation of $1.77 billion During credit crisis banks are holding $230 billion in debt, they will be unlikely to provide loans for private equity firms like Blackstone Many private equity deals have stalled Competition fierce in alternative asset management Blackstone lacks large scale capital or vast diversification that exists among alternative asset management vehicles that are part of larger financial institutions like JP Morgan

8. Opportunities Blackstone  finding alternative sources of funding Blackstone planning to bypass banks and deal directly with hedge funds, pensions funds, etc.  Such a plan would reduce borrowing costs significantly, which is a primary cost for private equity firms. In the past two years, Blackstone spent more than $1.3 billion in fees to banks. Chinese Government spent $3bn buying a 10% stake in Blackstone, a link expected to provide the company with potentially lucrative access to China’s market last year Blackstone emerged as a bidder for a 30% stake in the chemicals business China National BlueStar corporation, a state-owned company Taking advantage of credit crisis by buying company and debt cheap Nine new private equity commitments totaling $2.8 billion since the credit crunch began One of nine new funds the company has in reserve is a $1.4 billion fund created specifically to take advantage of the turmoil in the credit markets.  Blackstone’s ratio of cash/total equity = 0.25

9. Threats Continued stress in financial markets Losses of leveraged financial institutions thus far total $120 billion(month ago), but the consensus expectation of losses is somewhere around $400 billion. Little room for private equity deals With LBO leverage multiples at a historic high of 6.2 times earnings and debt service cushions at a record low in 2007 Tax policy may change for alternative asset funds This could mean a jump from around 15% to closer to 40% of net income going towards taxes Founding member of the company Paul Peterson plans to step down as Chairman by the end of the year

10. Income Statement Cost of Revenue/Total Revenue=199% Operating Income: (716,425) Interest Expense: 3,520 Income Tax Expense: 8,576 Net Income: (170,000)

11. Balance Sheet Solvency: Cash+ Equivs=1032,325 Short/Current Long Term Debt: 1,196,858 Cash/Stockholder Equity = 24% Good Will and Intangibles = 2202155 Long term Debt = 130,389

12. Cash Flow Statements Depreciation: 117,607 Changes in Accts. Receivable: (1,045,284) Capex: 32,307 Net Borrowings: 242,326 Sale/Purchase of Stock: 7,699,802

13. Conclusions on Income Statements This past quarter is clearly an anomaly for the Blackstone group In the banking Industry it is currently very difficult to estimate earnings Arguably, a better way is to look at the price to book value and the company’s exposure to risky debt This Analysis will be evident in the Ratio Slides

14. Standard Valuation Metrics The Blackstone Group (BX) Return on Equity (RoE) – 46.71% Return on Assets (RoA) – 0.84% Debt-to Equity Ratio (D/E) – 0.031 (Low for Financials) Trailing P/E – 12.85 (Average for Financials) Forward P/E – 12.49 (Average for Financials) PEG Ratio – 1.03 (Growth Prospects are appropriately priced) Price/Sales – 1.47 (Low relative to competitors, attractive investment) Price/Book – 1.09 (Low P/B Ratio – possibly undervalued?)

15. DCF Final Assumptions YOY growth starts at around 8% and slowly decreases to 4%. Total Expenses are around 50% Other Expenses = 15% Goodwill Revenue = 0% Net Interest Expense = 1.25% Other Interest Expense = 0% Tax Rate = 35%

16. DCF Final Assumptions and Conclusion Amortization of Intangible Assets = 3% Changes in Working Capital = 10% Capital Expenditures = 1% Discount Rate 10% Current Value per share = $18.35 DCF generated value per share = $19.64

17. Competitor Analysis: Private Equity and Financial Advisory Goldman Sachs - competitor in financial advisory and private equity Strength relative to Blackstone: Greater diversification of assets, and stronger global reach, with half of profits coming from abroad Stronger client base, advantage in financial advisory

18. Competitor Analysis: Private Equity and Financial Advisory Weaknesses relative to Blackstone: Greater volatility, more susceptible to market fluctuations More regulation, greater disclosure required

19. Drawbacks Credit Crisis Competition in financial industry Change in management Recent lawsuits against Company

20. Conclusions Although it is risky in the short term, we believe Blackstone is cheaply valued with long term growth potential Actively diversifying and consolidating their company to increase competitiveness Downside risks are mitigated We recommend a long term buy of 3-4 year window