S-1/A 1 a2177304zs-1a.htm FORM S-1/A
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As filed with the Securities and Exchange Commission on May 1, 2007.

Registration No. 333-141504



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


The Blackstone Group L.P.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  6282
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification No.)

345 Park Avenue
New York, New York 10154
Telephone: (212) 583-5000

(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)


Robert L. Friedman
Chief Administrative Officer and Chief Legal Officer
The Blackstone Group L.P.
345 Park Avenue
New York, New York 10154
Telephone: (212) 583-5000

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:
Joshua Ford Bonnie
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
  Phyllis G. Korff
Jennifer A. Bensch
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Telephone: (212) 735-3000
Facsimile: (212) 735-2000

        Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the Registration Statement is declared effective.


        If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

        If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o


CALCULATION OF REGISTRATION FEE


Title Of Each Class Of
Securities To Be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)

  Amount of
Registration Fee


Common Units Representing Limited Partner Interests   $4,000,000,000   $122,800(3)

(1)
Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)
Includes common units subject to the underwriters' option to purchase additional common units.

(3)
Previously paid.


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 1, 2007

PRELIMINARY PROSPECTUS

                Common Units
Representing Limited Partner Interests

GRAPHIC


        The Blackstone Group L.P. is offering all of the                        common units representing limited partner interests in this offering. This is our initial public offering of common units and no public market currently exists for our common units. We anticipate that the initial public offering price will be between $                               and $                              per common unit. We intend to use a portion of our net proceeds from this offering to purchase interests in our business from our existing owners, including members of our senior management. We have applied to list the common units on the New York Stock Exchange under the symbol "BX."

        Our founders want to make these important observations:

    Our corporate private equity and real estate businesses have benefited from high levels of activity in the last few years. These activity levels may continue, but could decline at any time because of factors we cannot control.

    While we believe the long-term growth trends in our businesses are favorable, there may be significant fluctuations in our financial results from quarter to quarter. Our common units should only be purchased by investors who expect to remain unitholders for a number of years.

    We intend to continue to follow the management approach that has served us well as a private firm of focusing on making the right decisions about purchasing and selling the right assets at the right time and at the right prices, without regard to how those decisions affect our financial results in any given quarter.

        Investing in our common units involves risks. See "Risk Factors" beginning on page 31. These risks include the following:

    The Blackstone Group L.P. is managed by our general partner, which is owned by our senior managing directors. Our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors.

    Immediately following this offering, our existing owners will generally have sufficient voting power to determine the outcome of those few matters that may be submitted for a vote of our limited partners, including any attempt to remove our general partner.

    The partnership agreement of The Blackstone Group L.P. limits the liability of, and reduces or eliminates the duties (including fiduciary duties) owed by, our general partner to our common unitholders and restricts the remedies available to common unitholders for actions that might otherwise constitute breaches of our general partner's duties.

    We depend on our founders and other key senior managing directors, and our future success and growth depends to a substantial degree on our ability to retain and motivate our senior managing directors and other key personnel and to strategically recruit, retain and motivate new talented personnel.

    We believe that The Blackstone Group L.P. will be treated as a partnership for U.S. federal income tax purposes and that you therefore will be required to take into account your allocable share of items of income, gain, loss and deduction of The Blackstone Group L.P. in computing your U.S. federal income tax liability. You may not receive cash distributions equal to your allocable share of our net taxable income or even the tax liability that results from that income.



PRICE $            A COMMON UNIT


 
  Price to Public
  Underwriting
Discounts

  Proceeds to
The Blackstone
Group L.P.

Per Common Unit   $                      $                      $                   
Total   $                      $                      $                   

        We have granted the underwriters the right to purchase up to an additional                        common units to cover over-allotments.

        Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the common units to purchasers on or about                         , 2007.


Morgan Stanley   Citi
Merrill Lynch & Co.   Credit Suisse   Lehman Brothers

Deutsche Bank Securities

                         , 2007


GRAPHIC



Table of Contents

 
  Page
Summary   1
  Blackstone   1
  Investment Risks   12
  Organizational Structure   13
  The Offering   18
  Summary Historical Financial and Other Data   24
  Summary Pro Forma Financial Data   28
Risk Factors   31
  Risks Related to Our Business   31
  Risks Relating to Our Asset Management Business   40
  Risks Related to Our Financial Advisory Businesses   50
  Risks Related to Our Organizational Structure   51
  Risks Related to Our Common Units and this Offering   58
  Risks Related to United States Taxation   59
Forward-Looking Statements   63
Market and Industry Data   63
Organizational Structure   64
  Reorganization   64
  The Blackstone Group L.P.   67
  Offering Transactions   67
  Holding Partnership Structure   70
Use Of Proceeds   72
Capitalization   73
Dilution   74
Cash Distribution Policy   75
Unaudited Pro Forma Financial Information   78
Selected Historical Financial Data   92
Management's Discussion and Analysis of Financial Condition and Results of Operation   94
  Overview   94
  Business Environment   95
  Market Considerations   95
  Key Financial Measures and Indicators   98
  Combined Results of Operations   102
  Segment Analysis   104
  Liquidity and Capital Resources   114
  Operating Activities   116
  Investing Activities   116
  Financing Activities   116
  Critical Accounting Policies   118
  Recent Accounting Pronouncements   122
  Off Balance Sheet Arrangements   123
  Contractual Obligations, Commitments and Contingencies   124
  Qualitative and Quantitative Disclosures About Market Risk   125
Industry   128
  Asset Management   128
  Advisory Services   133
Business   135
  Overview   135
  Competitive Strengths   135
  Our Growth Strategy   141
  Business Segments   142
  New Business and Other Growth Initiatives   155
  Investment Process and Risk Management   157
  Structure and Operation of Our Investment Funds   159
  The Historical Investment Performance of Our Investment Funds   162
  Competition   168
  Employees   169
  Properties   172
  Legal Proceedings   172
Management   173
  Directors and Executive Officers   173
  Composition of the Board of Directors after this Offering   174
  Management Approach   175
  Committees of the Board of Directors   175
  Compensation Committee Interlocks and Insider Participation   176
  Executive Compensation   176
  Director Compensation   178
  Non-Competition, Non-Solicitation and Confidentiality Agreements   178
  2007 Equity Incentive Plan   180
  IPO Date Equity Awards   183
  Minimum Retained Ownership Requirements and Transfer Restrictions for Existing Owners   183
  Charitable Contributions   185
     

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Certain Relationships and Related Party Transactions   186
  Reorganization   186
  Tax Receivable Agreement   186
  Registration Rights Agreement   188
  Blackstone Holdings Partnership Agreements   188
  Exchange Agreement   190
  Firm Use of Our Founders' Private Aircraft   191
  Expense Reimbursements   191
  Side-By-Side and Other Investment Transactions   191
  Statement of Policy Regarding Transactions with Related Persons   191
  Indemnification of Directors and Officers   192
  Non-Competition, Non-Solicitation and Confidentiality Agreements   192
Principal Unitholders   193
Conflicts of Interest and Fiduciary Responsibilities   194
  Conflicts of Interest   194
  Fiduciary Duties   197
Description of Common Units   201
  Common Units   201
  Transfer of Common Units   201
  Transfer Agent and Registrar   201
Material Provisions of the Blackstone Group L.P. Partnership Agreement   202
  General Partner   202
  Organization   202
  Purpose   202
  Power of Attorney   202
  Capital Contributions   203
  Limited Liability   203
  Issuance of Additional Securities   204
  Distributions   204
  Amendment of the Partnership Agreement   204
  Merger, Sale or Other Disposition of Assets   206
  Election to be Treated as a Corporation   207
  Dissolution   207
  Liquidation and Distribution of Proceeds   207
  Withdrawal or Removal of the General Partner   208
  Transfer of General Partner Interests   209
  Limited Call Right   209
  Sinking Fund; Preemptive Rights   209
  Meetings; Voting   209
  Status as Limited Partner   210
  Non-Citizen Assignees; Redemption   210
  Indemnification   211
  Books and Reports   211
  Right to Inspect Our Books and Records   212
Common Units Eligible for Future Sale   213
  Registration Rights   214
  Lock-Up Arrangements   214
  Rule 144   215
Material U.S. Federal Tax Consequences   216
  United States Taxes   216
Underwriters   232
  Directed Sale Program   234
  Pricing of the Offering   235
Legal Matters   236
Experts   236
Where You Can Find More Information   237
Index to Financial Statements   F-1
Appendix A—Form of Amended and Restated Agreement of Limited Partnership of the Blackstone Group L.P   A-1

        You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to provide you with additional or different information. We and the underwriters are offering to sell, and seeking offers to buy, our common units only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common units.

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        Until                        , 2007 (25 days after the date of this prospectus), all dealers that effect transactions in our common units, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


        Except where the context requires otherwise, references in this prospectus to "Blackstone," the "Company," "we," "us" or "our" refer (1) prior to the consummation of our reorganization into a holding partnership structure as described under "Organizational Structure", to Blackstone Group, which comprises certain consolidated and combined entities under the common control and ownership of (a) our two founders, Mr. Stephen A. Schwarzman and Mr. Peter G. Peterson, and our other senior managing directors, (b) selected other individuals engaged in some of our businesses and (c) American International Group, Inc., whom we refer to collectively as our "existing owners," and (2) after our reorganization, to The Blackstone Group L.P. and its consolidated subsidiaries. References in this prospectus to the ownership of our founders and other senior managing directors and of selected other individuals engaged in some of our businesses include the ownership of current and future personal planning vehicles of these individuals. Completion of our reorganization will occur prior to this offering.

        "Blackstone funds," "our funds" and "our investment funds" refer to the corporate private equity funds, real estate opportunity funds, funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and closed-end mutual funds that are managed by Blackstone. "Our carry funds" refer to the corporate private equity funds, real estate opportunity funds and mezzanine funds that are managed by Blackstone. "Our hedge funds" refer to the funds of hedge funds and proprietary hedge funds that are managed by Blackstone.

        "Assets under management" refers to the assets we manage. Our assets under management equal the sum of:

    (1)
    the net asset value, or "NAV," of our carry funds plus the capital that we are entitled to call from investors in those funds pursuant to the terms of their capital commitments to those funds (plus the NAV of co-investments arranged by us that were made by limited partners of our corporate private equity and real estate opportunity funds in portfolio companies of such funds and as to which we receive fees);

    (2)
    the NAV of our funds of hedge funds, proprietary hedge funds and closed-end mutual funds; and

    (3)
    the amount of capital raised for our senior debt vehicles.

        Our calculation of 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. Our definition of assets under management is not based on any definition of assets under management that is set forth in the agreements governing the investment funds that we manage. See "Business—Structure and Operation of Our Investment Funds—Incentive Arrangements / Fee Structure".


        Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of the option to purchase up to an additional                        common units from us and that the common units to be sold in this offering are sold at $                                           per common unit, which is the midpoint of the price range indicated on the front cover of this prospectus.

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SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before investing in our common units. You should read this entire prospectus carefully, including the section entitled "Risk Factors" and the financial statements and the related notes before you decide to invest in our common units.


Blackstone

        We are a leading global alternative asset manager and provider of financial advisory services. We are one of the largest independent alternative asset managers in the world, with assets under management of approximately $78.7 billion as of March 1, 2007. Our alternative asset management businesses include the management of corporate private equity funds, real estate opportunity funds, funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and closed-end mutual funds. We also provide various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

        We seek to deliver superior returns to investors in our funds through a disciplined, value-oriented investment approach. We believe that this investment approach, implemented across our broad and expanding range of alternative asset classes and investment strategies, helps provide stability and predictability to our business over different economic cycles. Since we were founded in 1985, we have cultivated strong relationships with clients in our financial advisory business, where we endeavor to provide objective and insightful solutions and advice that our clients can trust. We believe our scaled, diversified businesses, coupled with our long track record of investment performance, proven investment approach and strong client relationships, position us to continue to perform well in a variety of market conditions, expand our assets under management and add complementary businesses.

        We currently have 57 senior managing directors and employ approximately 335 other investment and advisory professionals at our headquarters in New York and our offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, San Francisco, London, Paris, Mumbai and Hong Kong. We believe that the depth and breadth of the intellectual capital and experience of our professionals are key reasons why we have generated exceptional returns over many years for the investors in our funds. This track record in turn has allowed us to successfully and repeatedly raise additional assets from an increasingly wide variety of sophisticated investors.

        We generate our income from fees earned pursuant to contractual arrangements with the investment funds that we manage, with the investors in these funds and with these funds' portfolio companies (including management, transaction and monitoring fees), as well as from fees earned for the provision of mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. In most cases, we receive a preferred allocation of income (a "carried interest") from an investment fund in the event that specified cumulative investment returns are achieved by the fund. Our ability to generate carried interest and incentive fees is an important element of our business and these items have historically accounted for a very significant portion of our income.

        We have grown our assets under management significantly, from approximately $14.1 billion as of December 31, 2001 to approximately $78.7 billion as of March 1, 2007, representing compound annual

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growth of 39.5%. The following table sets forth our assets under management by segment and fund type as of March 1, 2007.

 
  Assets Under Management as of March 1, 2007
 
  (in billions)

Corporate private equity funds         $ 31.1
Real estate opportunity funds           17.7
Marketable alternative asset funds           29.9
  Funds of hedge funds   $ 17.1      
  Mezzanine funds     1.5      
  Senior debt vehicles     6.9      
  Distressed securities hedge fund     1.2      
  Equity hedge fund     1.3      
  Closed-end mutual funds     1.9      
   
     
    Total         $ 78.7
         

        Our business is organized into four business segments:

    Corporate Private Equity.  We are a world leader in private equity investing, having managed five general private equity funds as well as one specialized fund focusing on media and communications-related investments. We established this business in 1987. The corporate private equity fund we are currently investing is the largest fund of its kind ever raised, with aggregate capital commitments of over $18.1 billion as of March 1, 2007. We pursue transactions throughout the world, including not only typical leveraged buyout acquisitions of seasoned companies but also transactions involving start-up businesses in established industries, turnarounds, minority investments, corporate partnerships and industry consolidations. Our corporate private equity business has grown assets under management significantly, from approximately $7.6 billion as of December 31, 2001 to approximately $31.1 billion as of March 1, 2007, representing compound annual growth of 31.4%. For the year ended December 31, 2006, our corporate private equity segment generated income before taxes of $1,009.9 million.

    Real Estate.  Since 1991, our real estate business has been a diversified, global operation, with investments in a variety of sectors and geographic locations. We have managed six general real estate opportunity funds and two internationally focused real estate opportunity funds. Taken together, the two real estate opportunity funds we are currently investing would represent one of the largest real estate funds ever raised, with aggregate capital commitments of over $6.7 billion as of March 1, 2007. Our real estate opportunity funds have made significant investments in lodging, major urban office buildings, residential properties, distribution and warehousing centers and a variety of real estate operating companies. Our real estate business has grown assets under management significantly, from approximately $3.0 billion as of December 31, 2001 to approximately $17.7 billion as of March 1, 2007, representing compound annual growth of 41.1%. For the year ended December 31, 2006, our real estate segment generated income before taxes of $902.7 million.

    Marketable Alternative Asset Management.  Our marketable alternative asset management segment, established in 1990, comprises our management of funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and publicly-traded closed-end mutual funds. Our marketable alternative asset management segment has grown assets under management significantly, from approximately $3.5 billion as of December 31, 2001 to approximately $29.9 billion as of March 1, 2007, representing compound annual growth of 51.3%. For the year ended December 31, 2006, our marketable alternative asset management segment generated income before taxes of $191.7 million.

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      Funds of hedge funds.    We manage a variety of funds of hedge funds, which are investment funds that invest in third-party hedge funds. Our funds of hedge funds are designed as risk-mitigation products that are generally expected to have relatively low volatility and limited correlation with the equity markets. The funds of hedge funds that we manage comprise a wide range of different portfolios and investment strategies, including broadly diversified funds, strategy focused funds, opportunistic funds and client customized funds. We are one of the ten largest independent fund of hedge fund managers in the world with approximately $17.1 billion in aggregate assets under management as of March 1, 2007 in a variety of fund of hedge funds vehicles, which are invested with over 170 different hedge fund managers.

      Mezzanine funds.    We manage funds that invest primarily in the mezzanine debt of middle-market companies arranged through privately negotiated transactions. These investments are generally structured to earn current income through interest payments and may also include return enhancements including warrants or other equity-linked securities.

      Senior debt vehicles.    We manage vehicles that invest primarily in senior secured loans and other debt instruments. These vehicles are of the type commonly referred to as collateralized debt obligation or collateralized loan obligation funds.

      Proprietary hedge funds.    We have two proprietary hedge funds:

      Distressed securities hedge fund.    Our distressed securities hedge fund invests primarily in distressed and defaulted debt securities and related equities, with an emphasis on smaller, less efficiently traded issues.

      Equity hedge fund.    Our equity hedge fund invests primarily in equity investments on a long and short basis.

      Closed-end mutual funds.    We are the investment manager of two publicly-traded closed-end mutual funds—The India Fund, Inc. and The Asia Tigers Fund, Inc. The India Fund's investment objective is long-term capital appreciation through investing primarily in the equity securities of Indian companies. The India Fund is the largest India-focused closed-end mutual fund in the United States. The Asia Tigers Fund's investment objective is long-term capital appreciation through investing primarily in the equity securities of Asian companies.

    Financial Advisory. Our financial advisory segment comprises our mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. Over the last five years, our financial advisory business revenues have grown at a compound annual rate of 22.7%. For the year ended December 31, 2006, our financial advisory segment generated income before taxes of $193.9 million.

    Mergers and Acquisitions Advisory.    Since 1985, our mergers and acquisitions advisory services operation has advised on transactions with a total value of more than $275 billion. Professionals in this area have a wide array of specialized industry knowledge and experience and provide all types of corporate and financial advisory services with a wide range of transaction execution capability.

    Restructuring and Reorganization Advisory.    Our restructuring and reorganization advisory operation is one of the leading advisers to companies and creditors in restructurings and bankruptcies. Since 1991, we have advised on more than 150 distressed situations, both in and out of bankruptcy proceedings, involving more than $350 billion of total liabilities.

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      Park Hill Group.    Park Hill Group is our fund placement business. Since its inception in 2005, Park Hill Group has assisted its clients in raising a total of $42.6 billion for 18 corporate private equity, real estate, venture capital and hedge funds.

Key Aspects of Our Organizational Structure and this Offering

        Organizational Structure.    Prior to this offering we will effect our reorganization into a holding partnership structure described in "Organizational Structure." Following the reorganization and this offering, The Blackstone Group L.P. will be a holding partnership and, through wholly-owned subsidiaries, will hold controlling equity interests in five Blackstone Holdings partnerships (which we refer to collectively as "Blackstone Holdings"), which in turn will with limited exceptions own each of the operating entities included in our historical combined financial statements.

        Each of the Blackstone Holdings partnerships will have an identical number of partnership units outstanding, and we use the terms "Blackstone Holdings partnership unit" or "partnership unit in/of Blackstone Holdings" to refer collectively to a partnership unit in each of the Blackstone Holdings partnerships. The Blackstone Group L.P. will hold, through wholly-owned subsidiaries, a number of Blackstone Holdings partnership units equal to the number of common units that The Blackstone Group L.P. has issued in this offering. Immediately following this offering, The Blackstone Group L.P. will hold Blackstone Holdings partnership units representing            % of the total number of partnership units of Blackstone Holdings, or    % if the underwriters exercise in full their option to purchase additional common units, and our existing owners will hold Blackstone Holdings partnership units representing        % of the total number of partnership units of Blackstone Holdings, or        % if the underwriters exercise in full their option to purchase additional common units. The Blackstone Holdings partnership units that will be held by The Blackstone Group L.P.'s wholly-owned subsidiaries will be economically identical in all respects to the Blackstone Holdings partnership units that will be held by our existing owners, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy". Accordingly, the income of Blackstone Holdings will benefit The Blackstone Group L.P. to the extent of its equity interest in Blackstone Holdings.

        Distributions.    Our intention is to distribute to our common unitholders on a quarterly basis, commencing in the            quarter of 2007, substantially all of The Blackstone Group L.P.'s net after-tax share of our annual adjusted cash flow from operations in excess of amounts determined by our general partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our common unitholders for any one or more of the ensuing four quarters. Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year. The declaration and payment of any distributions will be at the sole discretion of our general partner.

        We intend to cause Blackstone Holdings to make distributions to its partners, including The Blackstone Group L.P.'s wholly-owned subsidiaries, in order to fund any distributions The Blackstone Group L.P. may declare on the common units. If Blackstone Holdings makes such distributions, our existing owners, as limited partners of Blackstone Holdings, will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings (except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy"). In addition, with respect to our actively investing carry funds and proprietary hedge funds as well as any future carry funds and proprietary hedge funds, we intend to continue to allocate to the senior managing directors, other professionals and selected other individuals who work in these operations a portion of the carried

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interest or incentive fees earned in relation to these funds in order to better align their interests with our own and with those of the investors in these funds.

        Cash distributions to our existing owners in respect of the fiscal and tax year ended December 31, 2006 are expected to be approximately $                  in the aggregate (of which approximately $                  has been distributed to date). Cash distributions to our existing owners in respect of the current fiscal and tax year have aggregated approximately $                  to date. In connection with the reorganization, prior to this offering, we intend to make one or more distributions to our existing owners representing all of the undistributed earnings generated by the businesses to be contributed to Blackstone Holdings prior to the date of the offering. If the offering had occurred on March 31, 2007, we estimate that the aggregate amount of such distributions would have been $                  . However, the actual amount of such distributions will depend on the amount of earnings generated by the contributed businesses prior to the offering.

        In addition, our existing owners will receive $                   billion of the net proceeds from this offering, or approximately $                   billion if the underwriters exercise in full their option to purchase additional common units, as a result of our purchase from them of interests in our business at the time of this offering.

        Tax Consequences.    We believe that The Blackstone Group L.P. will be treated as a partnership and not as a corporation for U.S. federal income tax purposes. An entity that is treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its U.S. federal income tax liability, regardless of whether or not cash distributions are then made. Investors in this offering will become limited partners of The Blackstone Group L.P. See "Material U.S. Federal Tax Consequences" for a summary discussing certain United States federal income tax considerations related to the purchase, ownership and disposition of our common units as of the date of this prospectus.

        Deconsolidation of Blackstone Funds.    Investors in our common units should note that Blackstone's corporate private equity and real estate opportunity funds have historically been consolidated into Blackstone's financial statements, notwithstanding that Blackstone has only a minority interest in these funds. Consequently, our historical financial statements do not reflect the net asset value of our investments in such funds, but reflect rather on a gross basis the assets, liabilities, revenues, expenses and cash flows of these funds. We intend to deconsolidate all of our funds that have historically been consolidated in our financial statements with the exception of four of our funds of hedge funds. Accordingly, we will no longer record the non-controlling interests' share of these fund's partners' capital and net income. These adjustments will change our 2006 financial statement items as follows: assets—decrease of 87%; liabilities—decrease of 62%; revenues—increase of 3%; expenses—decrease of 26%; other income—decrease of 77%; non-controlling interests in consolidated entities—decrease of 97%; and non-controlling interest in income of consolidated entities—decrease of 97%. We believe that the deconsolidation of these funds by means of granting investors in these funds general partner removal rights or liquidation rights, as the case may be, will result in our financial statements reflecting our alternative asset management business, including our management fee, incentive fee and performance fee revenues, in a manner that reflects both how our management evaluates our business and the risks of the assets and liabilities of our firm. Accordingly, we believe that deconsolidating these funds will provide investors reviewing our financial statements an enhanced understanding of our business. Because we are initiating these steps, we are not seeking or receiving any consideration from the investors in these funds for granting them these rights. There will be no change in either our equity or net income as a result of the deconsolidation. See "Unaudited Pro Forma Financial Information" for a more detailed description of the deconsolidation of our investment funds from our financial statements.

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Competitive Strengths

        World Leader in Alternative Asset Management.    Alternative asset management is the fastest growing segment of the asset management industry, and we are one of the largest independent alternative asset managers in the world. From the time we entered the asset management business 20 years ago through March 1, 2007, we have raised approximately $59.4 billion of committed capital for our corporate private equity funds, real estate opportunity funds, mezzanine funds and senior debt vehicles, and we managed approximately $21.5 billion in our funds of hedge funds, proprietary hedge funds and closed-end mutual funds as of March 1, 2007. Our assets under management have grown from approximately $14.1 billion as of December 31, 2001 to approximately $78.7 billion as of March 1, 2007, representing compound annual growth of 39.5%. We believe that the strength and breadth of our franchise, supported by our people, investment approach and track record of success, provide a distinct advantage when raising capital, evaluating opportunities, making investments, building value and realizing returns.

        One of the Largest Managers of Corporate Private Equity and Real Estate Opportunity Funds.    We have been one of the largest private equity fund managers since we entered this business in 1987. From that time through March 1, 2007, we had invested total capital of $19.8 billion in 109 transactions with a total enterprise value of over $191 billion through our corporate private equity funds and total capital of $13.2 billion in 212 transactions with a total enterprise value of over $102 billion through our real estate opportunity funds. Both the corporate private equity fund and the two real estate opportunity funds (taken together) we are currently investing are among the largest funds ever raised in their respective sectors, with aggregate capital commitments of $18.1 billion and $6.7 billion, respectively, as of March 1, 2007. We believe that our long-term leadership in private equity has imbued the Blackstone brand with value that enhances all of our different businesses and facilitates our ability to expand into complementary new businesses.

        Diversified, Global Investment Platform.    Our asset management businesses are diversified across a broad variety of alternative asset classes and investment strategies and have global reach and scale. We benefit from substantial synergies across all of these businesses, including the ability to leverage the extensive intellectual capital that resides throughout our firm. We believe that the extensive investment review process that is conducted in all of our asset management businesses, involving active participation by Stephen A. Schwarzman and Hamilton E. James across all of our businesses, is not only a significant reason for our successful investment performance but also helps to maximize those synergies. In addition, we believe our financial advisory segment further increases the diversification of our business mix.

        During our 21-year history, we have grown by entering new businesses that were complementary to our existing asset management and financial advisory businesses. For example, in 1988 we entered into a partnership with the founders of Blackrock, Inc. and helped those individuals develop an asset management business specializing in fixed income. We sold our interest in Blackrock in 1994. We have invested in complementary new areas because they offered opportunities to deploy our financial and intellectual capital and generate superior investment returns, attractive net income margins and substantial cash flow. We believe that our ability to identify and successfully enter new growth areas is a key competitive advantage, and we will continue to seek new opportunities to expand our asset management franchise and our advisory business.

        Exceptional Investment Track Record.    We have an exceptional record of generating attractive risk-adjusted returns across all of our asset management businesses, as shown in the table below. We believe that the superior investment returns we have generated for investors in our funds over many years across a broad and expanding range of alternative asset classes and through all types of economic conditions and all cycles of the equity and debt capital markets are a key reason why we have been

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able to successfully and consistently grow our assets under management across our alternative asset management platform.

 
  Year of Inception
  Combined Fund Level Annualized IRR or Return
Since Inception(1)

  Annualized IRR or Return,
Net of Fees,
Since Inception(2)

 
Corporate private equity   1987   30.8 % 22.8 %
Real estate opportunity   1991   38.2 % 29.2 %
Funds of hedge funds   1990   13.0 % 11.9 %
Mezzanine   1999   16.0 % 9.3 %
Senior debt vehicles:              
  Equity tranche   2002   21.2 %(3) 14.3 %(3)
Distressed securities hedge   2005   11.5 % 7.9 %
Equity hedge   2006   11.6 %(4) 8.9 %(4)
Closed-end mutual funds:              
  The India Fund   2005     43.9 %(5)
  The Asia Tigers Fund   2005     42.5 %(5)

(1)
Through December 31, 2006.

(2)
Through December 31, 2006. The annualized IRR or return, net of fees, of an investment fund represents the gross annualized IRR or return applicable to limited partners net of management fees, incentive fees, organizational expenses, transaction costs, partnership expenses (including interest incurred by the fund itself) and the general partner's allocation of profits, if any.

(3)
Our senior debt vehicles are typically capitalized with investment grade debt and tiers of subordinated debt and equity securities, the most subordinated of which benefit from residual amounts. These most subordinated securities typically represent approximately 10% of a vehicle's total capitalization. Gross annualized return represents the gross compound annual rate of return before management fees, but after deducting interest expense and administrative expenses.

(4)
Reflects returns from October 1, 2006 (the date operations commenced) through December 31, 2006 only (in contrast to all other results in the table above, which are annualized).

(5)
A subsidiary of ours has been the investment manager of The India Fund and The Asia Tigers Fund since December 5, 2005. The current portfolio manager has managed The India Fund since August 1, 1997 and has managed The Asia Tigers Fund since July 1, 1999. The net annualized returns, based on net asset value, have been calculated since December 5, 2005.

        See "Business—The Historical Investment Performance of Our Investment Funds" for information regarding the calculation of investment returns, valuation methodology and factors affecting our investment performance. The historical information presented above and elsewhere in this prospectus with respect to the investment performance of our funds is provided for illustrative purposes only. The historical investment performance of our funds is no guarantee of future performance of our current funds or any other fund we may manage in the future.

        Diverse Base of Longstanding Investors.    We have a long history of raising significant amounts of capital on a global basis across a broad range of asset classes, and we believe that the strength and breadth of our relationships with institutional investors provide us with a competitive advantage in raising capital for our investment funds. During our two decades of asset management activities, we have built long-term relationships with many of the largest institutional investors in the world, most of which invest in a number of different categories of our investment funds. For example, of those of the 50 largest corporate and public pension funds in the United States as measured by assets under management that to our knowledge invest in alternative assets, approximately 72% have invested in our funds. In addition, investors representing approximately 87% of the total capital invested in all of our carry funds since 1987 have invested in successive funds in the same category. Furthermore, our investor base is highly diversified, with no single unaffiliated investor in our current corporate private

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equity or real estate opportunity funds accounting for more than 10% of the total amount of capital raised for those funds. Our Park Hill Group business further enables us to grow our investor base through its expanding network of relationships with potential investors. We believe that our strong network of investor relationships, together with our long-term track record of providing investors in our funds with superior risk-adjusted investment returns, will enable us to continue to grow our assets under management across our investment platform.

        Strong Industry and Corporate Relationships.    We believe that the strength of our relationships with investment banking firms, other financial intermediaries and leading corporations and corporate executives provides us with competitive advantages in identifying transactions, securing investment opportunities and generating exceptional returns. We actively cultivate our relationships with major investment banking firms and other financial intermediaries and are among the most significant clients of many of these firms. For example, our investment professionals meet regularly with investment bankers and other personnel of all of the major investment banking firms regarding potential investment opportunities, and we will often seek to work with many of the same financial institutions that we have worked with on previous transactions when seeking financing arrangements for potential investment opportunities. We believe our repeated and consistent dealings with these firms over a long period of time have led to our being one of the first parties considered for potential investment ideas and have enhanced our ability to obtain financing on more favorable terms. We believe that our strong network of relationships with these firms provide us with a significant advantage in attracting deal flow and securing transactions, including a substantial number of exclusive investment opportunities and opportunities that are made available to only a very limited number of other private equity firms. We also have a broad range of relationships with senior-level business executives whom we use to generate investment opportunities, analyze prospective investments and act as directors of and advisers to our corporate private equity and real estate opportunity funds' portfolio companies. Moreover, private equity investing in partnership with leading corporations is a signature form of investing for us. Through March 1, 2007, we had invested in 42 corporate partnerships, including transactions with AT&T Inc., General Electric Company, Northrop Grumman Corporation, Sony Corporation, Time Warner Inc., Union Carbide Corporation, Union Pacific Corporation, USX Corporation and Vivendi SA. We believe that the depth and breadth of our corporate partnerships will lead to a significant number of opportunities for our corporate private equity and real estate opportunity funds over the next several years. As a result of these various relationships, we believe that we are less reliant on auction processes in making investments than many of our competitors, thereby providing us with a wider array of attractive investment opportunities.

        Our People.    We believe that our senior management and our talented and experienced professionals are the principal reason why we have achieved significant growth and success in all of our businesses. Since our firm's founding in 1985, Stephen A. Schwarzman has served as our firm's Chief Executive Officer and Peter G. Peterson has served as either Chairman or Senior Chairman. Hamilton E. James serves as our President and Chief Operating Officer, oversees our corporate private equity operation directly and, along with Mr. Schwarzman, oversees and serves on the investment committees or oversight committees for all of our other businesses. Jonathan D. Gray and Chad R. Pike are senior managing directors overseeing our real estate operation. J. Tomilson Hill is our Vice Chairman and the head of our fund of hedge funds business. Howard Gellis leads our corporate debt business, John D. Dionne manages our distressed securities hedge fund, Manish Mittal manages our equity hedge fund and Punita Kumar-Sinha manages our closed-end mutual funds. Our mergers and acquisitions advisory operation is led by John Studzinski, our restructuring and reorganization advisory operation is led by Arthur B. Newman and our fund placement business is overseen by Kenneth C. Whitney. Our 57 senior managing directors have an average of 22 years of relevant experience. This team is supported by approximately 335 other professionals with a variety of backgrounds in investment banking, leveraged finance, private equity, real estate and other disciplines. We believe that the extensive

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experience and financial acumen of our management and professionals provide us with a significant competitive advantage.

        Alignment of Interests.    One of our fundamental philosophies as a privately-owned firm has been to align our interests, and those of our senior managing directors and other professionals, with the interests of the investors in our funds. Since inception, Blackstone, its senior managing directors and other professionals have committed over $2.6 billion of their own capital to our carry funds and as of March 1, 2007, our hedge funds managed an additional $2.0 billion of Blackstone's senior managing director and employee capital. In structuring this offering, we have sought to achieve the same alignment of interests between our common unitholders and our senior managing directors and other employees through their significant and long-term ownership of our equity. Our senior managing directors and other existing owners who are our employees will own in excess of            % of the equity in our business immediately following this offering. In addition, we intend to make equity awards to all of our employees at the time of this offering and to use appropriate equity-based compensation to motivate and retain our professionals in the future. The equity held by our senior managing directors and other employees will be subject to vesting and minimum retained ownership requirements and transfer restrictions as described in "Organizational Structure—Reorganization—Blackstone Holdings Formation", "Management—IPO Date Equity Awards" and "—Minimum Retained Ownership Requirements and Transfer Restrictions".

        Distinct Advisory Perspective.    We are not engaged in securities underwriting, research or other similar activities that might conflict with our role as a trusted financial advisor. We believe that this makes us particularly well-suited to represent boards and special committees in the increasing number of situations where they are looking to retain a financial advisor who is devoid of such conflicts. In addition, we believe that our ability to view financial advisory client assignments from both the client's and an owner's perspective often provides unique insights into how best to maximize value while also achieving our clients' strategic objectives.

Our Growth Strategy

        We intend to create value for our common unitholders by:

    generating superior investment performance across our asset management platform;

    growing the assets under management in our existing investment fund operations;

    expanding our asset management base by raising new investment funds;

    increasing our investment of our own capital in our funds;

    expanding our advisory business; and

    entering into complementary new businesses.

Why We Are Going Public

        We have decided to become a public company:

    to access new sources of capital that we can use to invest in our existing businesses, to expand into complementary new businesses and to further strengthen our development as an enduring institution;

    to enhance our firm's valuable brand;

    to provide us with a publicly-traded equity currency and to enhance our flexibility in pursuing future strategic acquisitions;

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    to expand the range of financial and retention incentives that we can provide to our existing and future employees through the issuance of equity-related securities representing an interest in the value and performance of our firm as a whole; and

    to permit the realization over time of the value of our equity held by our existing owners.

We Intend to be a Different Kind of Public Company

        We have built a leading global alternative asset management and financial advisory firm that has achieved success and substantial growth. While we believe that becoming a publicly traded company will provide us with many benefits, it is our intention to preserve the elements of our culture that have contributed to our success as a privately-owned firm. In particular, as described below, we intend to continue to manage our business with a long-term perspective, to focus at all times on seeking to optimize returns to the limited partner investors in our investment funds and to retain our partnership management structure and culture of employee ownership of our business.

        Management with a Long-Term Perspective.    As a privately-owned firm, Blackstone has always been managed with a perspective of achieving successful growth over the long-term. Both in entering and building our various businesses over the years and in determining the types of investments to be made by our investment funds, our management has consistently sought to focus on the best outcomes for our businesses and investments over a period of years rather than on the short-term impact on our revenue, net income or cash flow. We intend to maintain this long-term focus after we become a public company even though this approach, together with the fact that our financial results will be significantly affected by the timing of new investments and realizations of gains, may result in significant and unpredictable variances in these items from quarter to quarter. In addition, while the management fees we receive from our investment funds are payable on a regular basis in contractually prescribed amounts over the life of each fund, transaction fees earned by our corporate private equity and real estate operations and fees earned by our advisory business are subject to greater variability from quarter to quarter.

        Our largest businesses—corporate private equity and real estate—have benefited greatly in recent years from public companies accepting going-private acquisition offers in order, among other reasons, to avoid the public markets' focus on short-term earnings performance. As a public company we do not intend to permit the short-term perspective of the public markets to change our own focus on the long-term in making investment, operational and strategic decisions. Because our businesses can vary in significant and unpredictable ways from quarter to quarter and year to year, we do not plan to provide guidance regarding our expected quarterly and annual operating results to investors or analysts after we become a public company.

        Continued Focus on Limited Partner Investors in Our Investment Funds.    Serving the investors in our investment funds has been our guiding principle, and we remain fully committed to our fiduciary and contractual obligations to these investors. We do not intend to permit our status as a public company to change our focus on seeking at all times to optimize returns to investors in our investment funds. Accordingly, we expect to take actions regularly with respect to the purchase or sale of investments and the structuring of investment transactions for our investment funds to achieve this objective, even if these actions adversely affect our near-term results. We believe that optimizing returns for the investors in our funds will create the most value for our common unitholders over time.

        Use of Leverage to Enhance Returns.    In order to generate enhanced returns on equity for our owners, we have historically employed significant leverage on our balance sheet. As a public company, we intend to continue using leverage to create the most efficient capital structure for Blackstone and our public common unitholders. We do not anticipate approaching significant leverage levels during the first one or two years after this offering because the net proceeds we will retain from this offering are

10



expected to be our principal source of financing for our business during that period. However, we anticipate that our debt-to-equity ratio will eventually rise to levels in the range of 3:1 to 4:1 as we attempt to increase our return on equity for the benefit of our common unitholders. This strategy will expose us to the typical risks associated with the use of substantial leverage, including affecting the credit ratings that may be assigned to our debt by rating agencies. See "Risk Factors—Risks Related to Our Business—Our use of leverage to finance our business will expose us to substantial risks, which are exacerbated by our funds' use of leverage to finance investments".

        Partnership Management Structure.    Throughout our 21-year history as a privately-owned firm, our management structure has reflected strong central leadership and active involvement by our senior management. For example, members of our senior management, including Messrs. Schwarzman and James, have served on the investment committees of many of our funds and intend to continue to serve on those investment committees, which are responsible for approving or overseeing all investment decisions made on behalf of those funds. We believe that the continued active involvement of our senior management in the deliberations of our investment committees will preserve a critical element of our management structure that has contributed to our achievement of superior returns for our funds. We believe that this management structure has meaningfully contributed to our significant growth and the successful performance of all our businesses. Although our business has been managed as a private partnership since its founding, we also have extensive experience with the management and ownership of public companies. As a public company, we intend to continue to employ our current management structure because we believe this structure will best enable us to continue to achieve the level of success we have achieved as a private partnership.

        No Golden Parachutes/CEO Compensation.    We have no severance arrangements with any of our professionals. Accordingly, unlike in the case of many public companies, the departure of an executive officer or other senior managing director would not trigger any contractual obligation on our part to make any special payments to the departing professional. Moreover, following this offering Mr. Schwarzman will receive no compensation other than a $350,000 salary (and will own a significant portion of the carried interest earned from our carry funds).

        Equity Awards to All Employees.    Because we believe that the talents and dedication of all of our employees contribute to our success, we intend to make equity awards to all of our approximately 710 non-senior managing director employees at the time of this offering. See "Management—IPO Date Equity Awards". We believe this will preserve and strengthen our historical emphasis on aligning the interests of our personnel with those of our investors.

        Charitable Contributions.    Our senior managing directors intend to contribute an aggregate of $150 million of our equity (calculated based on the initial public offering price per common unit in this offering) to The Blackstone Charitable Foundation, a new charitable foundation that will serve as the primary vehicle for our future charitable giving. The foundation's philanthropy will extend to a wide range of charitable organizations that serve the communities in which Blackstone operates and other worthy charities with which our employees are personally involved.

Our Common Units Are Not an Appropriate Investment for Investors With a Short-Term Focus

        Our businesses have achieved substantial growth, particularly over the past five years, in no small part due to the successful investment performances of our investment funds. While the long-term growth trends in our businesses are favorable, our financial results are subject to significant volatility and we are unable to predict them from quarter to quarter or year to year. Our corporate private equity and real estate businesses have benefited from high levels of activity in the last few years. These activity levels may continue but they could decline at any time (along with activity levels in any of our other businesses).

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        We focus closely on actual and expected changes in the economic conditions and conditions in the debt and equity capital markets in all of the geographic regions in which we conduct our business, and we try to accelerate or reduce (or on occasion suspend entirely) the rate of our investment—or disposition—activities in response to changing economic and market conditions. In the past, changing economic and market conditions and our investment actions in response to those changes have led to swings in investment activity from year to year. We expect these swings to occur in future years as well, which is one of the reasons why there may be significant volatility in our revenue, net income and cash flow. However, we believe that if we continue to follow the management approach that has served us well as a private firm focusing on making the right decisions about purchasing and selling the right assets at the right time and the right prices, without regard to how those decisions affect our financial results in any given quarter, our businesses will continue to prosper. See "—Competitive Strengths—Exceptional Investment Track Record" above.

        Because of the nature of our businesses and the long-term focus we employ in managing them, our common units should only be purchased by investors who expect to remain unitholders for a number of years.


Investment Risks

        An investment in our common units involves substantial risks and uncertainties. Some of the more significant challenges and risks include those associated with our susceptibility to conditions in the global financial markets and global economic conditions, the volatility of our revenue, net income and cash flow, our dependence on our founders and other key senior managing directors, our ability to retain and motivate our existing senior managing directors and recruit, retain and motivate new senior managing directors in the future and risks associated with adverse changes in tax law and other legislative or regulatory changes. See "Risk Factors" for a discussion of the factors you should consider before investing in our common units.


        The Blackstone Group L.P. was formed in Delaware on March 12, 2007. Our principal executive offices are located at 345 Park Avenue, New York, New York 10154, and our telephone number is (212) 583-5000.

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Organizational Structure

        Our business is presently owned by our founders and other senior managing directors, selected other individuals engaged in some of our businesses and American International Group, Inc., or "AIG," whom we refer to collectively as our "existing owners."

        Our business is presently conducted through a large number of entities as to which there is no single holding entity but which are separately owned by our existing owners. In order to facilitate this offering, prior to this offering we will effect the reorganization into a holding partnership structure as described in "Organizational Structure" whereby our existing owners will contribute to Blackstone Holdings each of the operating entities included in our historical combined financial statements, with the exception of the general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of Blackstone's investment funds, which entities will not be contributed to Blackstone Holdings and will continue to be owned by our existing owners. The legacy funds whose general partners will not be contributed to Blackstone Holdings represent in the aggregate less than 7% of the Blackstone funds' total investments as of December 31, 2006. In addition, the separate investment vehicles for our existing owners and other third parties that will not be contributed have an aggregate of approximately $212 million of investments in or alongside of the Blackstone funds as of December 31, 2006.

        Accordingly, subsidiaries of Blackstone Holdings will generally be entitled to:

    all management fees payable in respect of all of our current and future investment funds (with the exception of our proprietary hedge funds, where the professionals who work in those operations are entitled to a portion of the management fees), as well as transaction and other fees that may be payable by these investment funds' portfolio companies;

    % –        % (depending on the particular fund investment) of all carried interest earned in relation to investments made prior to the date of the reorganization by our actively investing carry funds (that is, the Blackstone Capital Partners V, Blackstone Real Estate Partners VI, Blackstone Real Estate Partners International II and Blackstone Mezzanine Partners II funds), as well as by all of our historical carry funds that still have a meaningful amount of unrealized investments (that is, the Blackstone Capital Partners IV, Blackstone Communications Partners, Blackstone Real Estate Partners IV, Blackstone Real Estate Partners V, Blackstone Real Estate Partners International I and Blackstone Mezzanine Partners funds). This includes the carried interest in these funds that had been allocated to substantially all of our existing owners prior to the date of the reorganization;

    all carried interest earned in relation to investments made from and after the date of the reorganization by our actively investing and future carry funds, other than the percentage we determine to allocate to our professionals as described below;

    all incentive fees payable in respect of all of our current and future investment funds, other than the percentage we determine to allocate to our professionals as described below;

    all returns on investments of our own capital in the investment funds we sponsor and manage; and

    all fees generated by our financial advisory business.

        With respect to our actively investing carry funds and proprietary hedge funds as well as any future carry funds and proprietary hedge funds, we intend to continue to allocate to the senior managing directors, other professionals and selected other individuals who work in these operations a portion of the carried interest or incentive fees earned in relation to these funds in order to better align their interests with our own and with those of the investors in these funds. Our current estimate is that

13



approximately      % of the carried interest earned in relation to our carry funds and approximately      % of the incentive fees earned in relation to our proprietary hedge funds will be allocated to such individuals, although these percentages may fluctuate up or down over time.

        The income of Blackstone Holdings (including management fees, transaction fees, incentive fees and other fees, as well as carried interest) will benefit The Blackstone Group L.P. to the extent of its equity interest in Blackstone Holdings. See "Business—Structure and Operation of Our Investment Funds—Incentive Arrangements/Fee Structure".

        Following the reorganization and this offering, The Blackstone Group L.P. will be a holding partnership and, through wholly-owned subsidiaries, hold controlling equity interests in the Blackstone Holdings partnerships. Through wholly-owned subsidiaries, The Blackstone Group L.P. will be the sole general partner of each of the Blackstone Holdings partnerships. Accordingly, The Blackstone Group L.P. will operate and control all of the business and affairs of Blackstone Holdings and will consolidate the financial results of Blackstone Holdings and its consolidated subsidiaries. The Blackstone Group L.P. is itself managed and operated by its general partner, Blackstone Group Management L.L.C., to whom we refer as "our general partner," which is in turn wholly-owned by our senior managing directors and controlled by our founders.

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        The diagram below depicts our organizational structure immediately following this offering.

FLOWCHART

15


        Throughout our history as a privately-owned firm, we have had a management structure involving strong central management by our founders and have been managed with a perspective of achieving successful growth over the long term. Our desire to preserve our current management structure is one of the principal reasons why we have decided to organize The Blackstone Group L.P. as a limited partnership that is managed by our general partner.

        The Blackstone Group L.P. has formed a number of wholly-owned subsidiaries to serve as the general partners of the Blackstone Holdings partnerships: Blackstone Holdings I GP Inc. (a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes), Blackstone Holdings II GP Inc. (a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes), Blackstone Holdings III GP L.L.C. (a Delaware limited liability company that is a disregarded entity and not an association taxable as a corporation for U.S. federal income tax purposes), Blackstone Holdings IV GP L.P. (a Delaware limited partnership that is a disregarded entity and not an association taxable as a corporation for U.S. federal income tax purposes) and Blackstone Holdings V GP L.P. (an Alberta limited partnership that is a foreign corporation for U.S. federal income tax purposes).

        The Blackstone Group L.P. intends to conduct all of its material business activities through Blackstone Holdings. Each of the Blackstone Holdings partnerships was formed to hold our interests in different businesses. We expect that our U.S. fee-generating businesses will be held by Blackstone Holdings I L.P. We expect that our interests in many of the investments by our corporate private equity funds and real estate opportunity funds in entities that are treated as partnerships for U.S. federal income tax purposes will be held by Blackstone Holdings II L.P. We anticipate that Blackstone Holdings III L.P. will hold a variety of assets, including interests in entities treated as domestic corporations for U.S. federal income tax purposes. We expect that our interests in certain investments made by our corporate private equity funds and real estate opportunity funds in certain non-U.S. entities and certain other investments will be held by Blackstone Holdings IV L.P. We expect that our non-U.S. fee-generating businesses will be held by Blackstone Holdings V L.P.

        We believe that The Blackstone Group L.P. will be treated as a partnership and not as a corporation for U.S. federal income tax purposes. An entity that is treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss and deduction of the partnership in computing its U.S. federal income tax liability, whether or not cash distributions are then made. Investors in this offering will become limited partners of The Blackstone Group L.P. However, our partnership agreement does not restrict our ability to take actions that may result in our being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. We believe that The Blackstone Holdings partnerships will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the holders of partnership units in Blackstone Holdings, including The Blackstone Group L.P.'s wholly-owned subsidiaries, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of Blackstone Holdings. See "Material U.S. Federal Tax Consequences—United States Taxes—Taxation of our Partnership and the Blackstone Holdings Partnerships" for more information about the tax treatment of The Blackstone Group L.P. and Blackstone Holdings.

        Each of the Blackstone Holdings partnerships will have an identical number of partnership units outstanding. The Blackstone Group L.P. will hold, through wholly-owned subsidiaries, a number of Blackstone Holdings partnership units equal to the number of common units that The Blackstone Group L.P. has issued. Immediately following this offering, The Blackstone Group L.P. will hold Blackstone Holdings partnership units representing    % of the total number of partnership units of Blackstone Holdings, or    % if the underwriters exercise in full their option to purchase additional common units, and our existing owners will hold Blackstone Holdings partnership units representing    % of the total number of partnership units of Blackstone Holdings, or    % if the underwriters exercise in full their option to purchase additional common units. The Blackstone Holdings partnership units that will be held by The Blackstone Group L.P.'s wholly-owned subsidiaries will be economically identical in all respects to the Blackstone Holdings partnership units that will be held by our existing

16



owners, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy". Accordingly, immediately following this offering, investors in this offering will own    % of the equity in our business and our existing owners will own    % of the equity in our business. If the underwriters exercise in full their option to purchase additional common units, immediately following this offering, investors in this offering will own    % of the equity in our business and our existing owners will own    % of the equity in our business.

        Under the terms of the partnership agreements of the Blackstone Holdings partnerships, all of the Blackstone Holdings partnership units received by our existing owners in the reorganization described in "Organizational Structure" will be subject to restrictions on transfer and, with the exception of AIG and our Senior Chairman, Peter G. Peterson, minimum retained ownership requirements. In addition, approximately    % of the Blackstone Holdings partnership units received by our existing owners who are our employees will not be vested and, with specified exceptions, will be subject to forfeiture if the employee ceases to be employed by us prior to vesting. See "Management—Minimum Retained Ownership Requirements and Transfer Restrictions" and "Certain Relationships and Related Person Transactions—Blackstone Holdings Partnership Agreements".

        The Blackstone Group L.P. is managed and operated by our general partner. We will reimburse our general partner and its affiliates for all costs incurred in managing and operating us, and our partnership agreement provides that our general partner will determine the expenses that are allocable to us. There are no ceilings on the expenses for which we will reimburse our general partner and its affiliates. Unlike the holders of common stock in a corporation, our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors, which will be elected by our founders. In addition, on those few matters that may be submitted for a vote of our common unitholders, the limited partners of Blackstone Holdings (other than AIG) will hold special voting units in The Blackstone Group L.P. that provide them with a number of votes that is equal to the aggregate number of vested and unvested partnership units of Blackstone Holdings that they then hold and entitle them to participate in the vote on the same basis as our common unitholders. Accordingly, immediately following this offering, on those few matters that may be submitted for a vote of the limited partners of The Blackstone Group L.P., investors in this offering will collectively have    % of the voting power of The Blackstone Group L.P. limited partners, or    % if the underwriters exercise in full their option to purchase additional common units, and our existing owners will collectively have     % of the voting power of The Blackstone Group L.P. limited partners, or    % if the underwriters exercise in full their option to purchase additional common units.

        Although our general partner has no business activities other than the management of our business, conflicts of interest may arise in the future between us and our common unitholders, on the one hand, and our general partner and its affiliates, on the other. The resolution of these conflicts may not always be in our best interests or that of our common unitholders. In addition, we have fiduciary and contractual obligations to the investors in our investment funds and we expect to regularly take actions with respect to the purchase or sale of investments in our investment funds, the structuring of investment transactions for those funds or otherwise that are in the best interests of the limited partner investors in those funds but that might at the same time adversely affect our near-term results of operations or cash flow.

        Our partnership agreement limits the liability of, and reduces or eliminates the duties (including fiduciary duties) owed by, our general partner to our common unitholders. Our partnership agreement also restricts the remedies available to common unitholders for actions that might otherwise constitute breaches of our general partner's duties (including fiduciary duties). By purchasing our common units, you are treated as having consented to the provisions set forth in our partnership agreement, including the provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. For a more detailed description of the conflicts of interest and fiduciary responsibilities of our general partner, see "Conflicts of Interest and Fiduciary Responsibilities".

17



The Offering

Common units offered by The Blackstone Group L.P.                   common units.

Common units outstanding after the offering

 

            common units (or            common units if all outstanding Blackstone Holdings partnership units held by our existing owners were exchanged for newly-issued common units on a one-for-one basis).

Use of proceeds

 

We estimate that our net proceeds from this offering, at an assumed initial public offering price of $                  per common unit and after deducting estimated underwriting discounts and offering expenses, will be approximately $                  billion, or $                  billion if the underwriters exercise in full their option to purchase additional common units.

 

 

We intend to use approximately $                  billion of the net proceeds from this offering, or approximately $             billion if the underwriters exercise in full their option to purchase additional common units, to purchase interests in our business from our existing owners, including certain members of our senior management, as described under "Organizational Structure—Offering Transactions". Accordingly, we will not retain any of these proceeds.

 

 

We intend to use all of the remaining proceeds from this offering, or approximately $                  billion, to purchase newly-issued Blackstone Holdings partnership units. We intend to use approximately $                  million of these net proceeds to repay all outstanding borrowings under our revolving credit facility and the remainder:

 

 


 

to provide capital to facilitate the growth of our existing asset management and financial advisory businesses, including through funding a portion of our general partner capital commitments to our carry funds;

 

 


 

to provide capital to facilitate our expansion into new businesses that are complementary to our existing asset management and financial advisory businesses and that can benefit from being affiliated with us, including possibly through selected strategic acquisitions (see "Business—New Business and Other Growth Initiatives"); and

 

 


 

for other general corporate purposes.

 

 

Pending specific application of these net proceeds, we expect to invest them primarily in our funds of hedge funds and additionally in our distressed securities hedge fund and our equity hedge fund.
         

18



 

 

Affiliates of certain of the underwriters are participating lenders in our revolving credit facility and will accordingly receive a portion of the offering proceeds we use to repay the borrowings under that facility. See "Underwriters".

Voting rights

 

Our general partner, Blackstone Group Management L.L.C., will manage all of our operations and activities. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business and will have no right to elect our general partner or its directors, which will be elected by our founders.

 

 

On those few matters that may be submitted for a vote of our common unitholders, the limited partners of Blackstone Holdings (other than AIG) will hold special voting units in The Blackstone Group L.P. that provide them with a number of votes that is equal to the aggregate number of partnership units of Blackstone Holdings that they then hold and entitle them to participate in the vote on the same basis as our common unitholders. Accordingly, immediately following this offering our existing owners will generally have sufficient voting power to determine the outcome of those few matters that may be submitted for a vote of the limited partners of The Blackstone Group L.P., including any attempt to remove our general partner. See "Material Provisions of The Blackstone Group L.P. Partnership Agreement—Withdrawal or Removal of the General Partner" and "—Meetings; Voting".

Cash distribution policy

 

Our intention is to distribute to our common unitholders on a quarterly basis, commencing in the            quarter of 2007, substantially all of The Blackstone Group L.P.'s net after-tax share of our annual adjusted cash flow from operations in excess of amounts determined by our general partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our common unitholders for any one or more of the ensuing four quarters. Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year. See note (3) under "—Summary Historical Financial and Other Data" for a reconciliation of our adjusted cash flow from operations to our cash flow from operations presented in accordance with generally accepted accounting principles.

 

 

The declaration and payment of any distributions will be at the sole discretion of our general partner, which may change our distribution policy at any time. Our general partner will

 

 

 

 

 

19



 

 

take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, legal, tax and regulatory restrictions, restrictions and other implications on the payment of distributions by us to our common unitholders or by our subsidiaries to us and such other factors as our general partner may deem relevant.

 

 

The Blackstone Group L.P. will be a holding partnership and will have no material assets other than its ownership of partnership units in Blackstone Holdings held through wholly-owned subsidiaries. We intend to cause Blackstone Holdings to make distributions to its partners, including The Blackstone Group L.P.'s wholly-owned subsidiaries, in order to fund any distributions The Blackstone Group L.P. may declare on the common units. If Blackstone Holdings makes such distributions, the limited partners of Blackstone Holdings will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings, except as set forth in "—Priority allocation for the benefit of common unitholders prior to December 31, 2009".

 

 

In addition, the partnership agreements of the Blackstone Holdings partnerships will provide for cash distributions, which we refer to as "tax distributions," to the partners of such partnerships if the wholly-owned subsidiaries of The Blackstone Group L.P. which are the general partners of the Blackstone Holdings partnerships determine that the taxable income of the relevant partnership will give rise to taxable income for its partners. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant partnership allocable to a partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). The Blackstone Holdings partnerships will make tax distributions only to the extent distributions from such partnerships for the relevant year were otherwise insufficient to cover such tax liabilities.

Priority allocation for the benefit of common unitholders prior to December 31, 2009

 

The partnership agreements of the Blackstone Holdings partnerships will provide that until December 31, 2009, the income (and accordingly distributions) of Blackstone Holdings will be allocated:

 

 


 

first, to The Blackstone Group L.P.'s wholly-owned subsidiaries until sufficient income has been so allocated

 

 

 

 

 

20



 

 

 

 

to permit The Blackstone Group L.P. to make aggregate distributions to our common unitholders of $                  per common unit on an annualized basis;

 

 


 

second, to the other partners of the Blackstone Holdings partnerships until an equivalent amount of income on a partnership interest basis has been allocated to such other partners on an annualized basis; and

 

 


 

thereafter, pro rata to all partners of the Blackstone Holdings partnerships in accordance with their respective partnership interests.

 

 

Accordingly, until December 31, 2009, our existing owners will not receive distributions in respect of their Blackstone Holdings partnership units unless and until our common unitholders receive aggregate distributions of $                  per common unit on an annualized basis. We do not intend to maintain this priority allocation after December 31, 2009. After December 31, 2009, all the income (and accordingly distributions) of Blackstone Holdings will be allocated pro rata to all partners of the Blackstone Holdings partnerships in accordance with their respective partnership interests.

Cash distributions prior to this
offering

 

Prior to this offering, we intend to make one or more distributions to our existing owners representing all of the undistributed earnings generated prior to the date of the offering by the entities being contributed to Blackstone Holdings. If the offering had occurred on March 31, 2007 we estimate that the aggregate amount of such distributions would have been $             million. However, the actual amount of such distributions will depend on the amount of earnings generated by these entities prior to the offering.

Exchange rights of holders of Blackstone Holdings partnership units

 

Prior to this offering we will enter into an exchange agreement with the holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries) so that these holders, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. If and when an existing owner exchanges a Blackstone Holdings partnership unit for a common unit of The Blackstone Group L.P., the relative equity ownership positions of the exchanging existing owner and of the other equity owners of Blackstone (whether held at

 

 

 

 

 

21



 

 

The Blackstone Group L.P. or at Blackstone Holdings) will not be altered.

Tax receivable agreement

 

The purchase of interests in our business from our existing owners with a portion of the proceeds from this offering as described in "Organizational Structure—Offering Transactions" and future exchanges of Blackstone Holdings partnership units are expected to result in increases in the tax basis of the tangible and intangible assets of Blackstone Holdings that would not otherwise have been available. These increases in tax basis will increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that the wholly-owned subsidiaries of The Blackstone Group L.P. that are taxable as corporations for U.S. federal income tax purposes would otherwise be required to pay in the future. These wholly-owned subsidiaries will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of these increases in tax basis. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to our existing owners in respect of the initial purchase will aggregate $                   million and range from approximately $                   million to $                   million per year over the next 15 years (or $                   million and range from approximately $                   million to $                   million per year over the next 15 years if the underwriters exercise in full their option to purchase additional common units). A $1.00 increase (decrease) in the assumed initial public offering price of $                              per common unit would increase (decrease) the aggregate amount of future payments to our existing owners in respect of the initial purchase by $                              million (or $                   million if the underwriters exercise in full their option to purchase additional common units). See "Certain Relationships and Related Person Transaction—Tax Receivable Agreement".

Risk factors

 

See "Risk Factors" for a discussion of risks you should carefully consider before deciding to invest in our common units.

New York Stock Exchange symbol

 

"BX"

        Common units outstanding and the other information based thereon in this prospectus do not reflect:

    common units issuable upon exchange of the                        Blackstone Holdings partnership units held by our existing owners, which are entitled, subject to vesting and

22


      minimum retained ownership requirements and transfer restrictions, to be exchanged for our common units on a one-for-one basis;

    common units issuable upon exercise of the underwriters' option to purchase additional common units; or

    interests that may be granted under our 2007 Equity Incentive Plan, consisting of:

    unvested deferred restricted common units that we expect to grant to our non-senior managing director employees at the time of this offering (                        of which are settleable in common units and                        of which are settleable in cash); and

    additional common units or Blackstone Holdings partnership units covered by our 2007 Equity Incentive Plan, subject to automatic annual increases.

            See "Management—2007 Equity Incentive Plan".

23



Summary Historical Financial and Other Data

        The following summary historical combined financial and other data of Blackstone Group should be read together with "Organizational Structure", "Unaudited Pro Forma Financial Information", "Selected Historical Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus. Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering.

        We derived the summary historical combined statements of income data of Blackstone Group for each of the years ended December 31, 2004, 2005 and 2006 and the summary historical combined statements of financial condition data as of December 31, 2005 and 2006 from our audited combined financial statements which are included elsewhere in this prospectus. We derived the summary historical combined statements of income data of Blackstone Group for the years ended December 31, 2002 and 2003 and the summary combined statements of financial condition data as of December 31, 2002, 2003 and 2004 from our unaudited combined financial statements which are not included in this prospectus. The unaudited combined financial statements of Blackstone Group have been prepared on substantially the same basis as the audited combined financial statements and include all adjustments that we consider necessary for a fair presentation of our combined financial position and results of operations for all periods presented.

        The summary historical financial data is not indicative of the expected future operating results of The Blackstone Group L.P. following the reorganization and this offering. In particular, following this offering The Blackstone Group L.P. will no longer consolidate in its financial statements the investment funds that have historically been consolidated in our financial statements, with the exception of four of our funds of hedge funds. In addition, the general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of Blackstone's investment funds will not be contributed to Blackstone Holdings. See "Organizational Structure—Reorganization" and "Unaudited Pro Forma Financial Information".

24


 
  Year Ended December 31,
 
 
  2006
  2005
  2004
  2003
  2002
 
 
  (Dollars in Thousands)

 
Statement of Income Data                                
Revenues                                
  Fund management fees   $ 852,283   $ 370,574   $ 390,645   $ 304,651   $ 173,538  
  Advisory fees     256,914     120,137     108,356     119,410     141,613  
  Interest and other     11,082     6,037     4,462     2,635     2,972  
   
 
 
 
 
 
    Total Revenues     1,120,279     496,748     503,463     426,696     318,123  
   
 
 
 
 
 
Expenses                                
  Employee compensation and benefits     250,067     182,605     139,512     114,218     94,412  
  Interest     36,932     23,830     16,239     13,834     13,418  
  Occupancy and related charges     35,862     30,763     29,551     23,575     20,064  
  General, administrative and other     86,534     56,650     48,576     44,222     37,614  
  Fund expenses     143,695     67,972     43,123     42,076     24,094  
   
 
 
 
 
 
      Total Expenses     553,090     361,820     277,001     237,925     189,602  
   
 
 
 
 
 
Other Income                                
  Net gains (loss) from investment activities     7,587,296     5,142,530     6,214,519     3,537,268     (438,684 )
   
 
 
 
 
 
  Income (loss) before non-controlling interests in income of consolidated entities and income taxes     8,154,485     5,277,458     6,440,981     3,726,039     (310,163 )
Non-controlling interests in income (loss) of consolidated entities     5,856,345     3,934,535     4,901,547     2,773,014     (358,728 )
   
 
 
 
 
 
Income before taxes     2,298,140     1,342,923     1,539,434     953,025     48,565  
Income taxes     31,934     12,260     16,120     11,949     9,119  
   
 
 
 
 
 
  Net Income   $ 2,266,206   $ 1,330,663   $ 1,523,314   $ 941,076   $ 39,446  
   
 
 
 
 
 
Statement of Cash Flows Data                                
Net cash (used in) provided by operating activities   $ (4,396,614 ) $ 2,709,258   $ 52,682              
   
 
 
             
Other Data                                
Total reportable segment fee related earnings(1)   $ 747,419   $ 237,367   $ 303,626   $ 259,124   $ 175,553  
   
 
 
 
 
 
Carry Dollars Created(2)   $ 2,179,471   $ 568,627   $ 686,100   $ 440,019   $ 285,107  
   
 
 
 
 
 
Adjusted cash flow from operations(3)   $ 1,680,651   $ 1,444,597   $ 1,845,225              
   
 
 
             
Total assets under management   $ 69,503,052   $ 53,919,326   $ 31,701,828   $ 27,032,739   $ 21,701,504  
   
 
 
 
 
 
 
  As of December 31,
 
  2006
  2005
  2004
  2003
  2002
 
  (Dollars in Thousands)

Statement of Financial Condition Data                              
  Total assets   $ 33,891,044   $ 21,121,124   $ 21,253,939   $ 14,937,386   $ 10,348,829
  Total liabilities   $ 2,373,271   $ 2,082,771   $ 1,930,001   $ 1,458,512   $ 891,263
  Non-controlling interests in consolidated entities   $ 28,794,894   $ 17,213,408   $ 17,387,507   $ 12,398,271   $ 9,043,808
  Partners' capital   $ 2,722,879   $ 1,824,945   $ 1,936,431   $ 1,080,603   $ 413,758

25


(1)
Total reportable segment fee related earnings is the aggregate of a profit measure reported by each of our four segments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Segment Analysis" and Note 12 of Blackstone Group's combined financial statements included in this prospectus. The difference between total reportable segment fee related earnings and income before taxes calculated in accordance with accounting principles generally accepted in the United States of America, or "GAAP," is that the total reportable segment fee related earnings represents income before taxes adjusted to (1) exclude expenses of consolidated Blackstone funds, (2) include management fees earned from such funds that were eliminated in consolidation and (3) eliminate net gains and losses from investment activities and non-controlling interests in income of consolidated entities.

    Management uses total reportable segment fee related earnings as a supplemental non-GAAP measure of operating performance. Management makes operating decisions and assesses the performance of our businesses based on financial and operating metrics and data that are presented without the consolidation of any of our investment funds. Current operations are managed based in part on total reportable segment fee related earnings which is comprised principally of revenue earned from fund management and advisory fees. These revenues are reduced by all operating expenses, including but not limited to employee compensation, interest and occupancy costs. It has been, and remains, a key objective of ours to maximize fee related earnings as such amounts directly affect the profits from the business. On an annual basis, as a public company, we will continue to focus on positive fee earnings generation and utilize this metric to make operating decisions and assess the performance of our business, as total reportable segment fee related earnings will directly affect the returns to our investors. However, unlike net income presented in accordance with GAAP, a limitation of total reportable segment fee related earnings is that it is not a complete view of amounts that will ultimately accrue to investors as it excludes net gains (losses) from investments which could be significant.

    As detailed below, total reportable segment fee related earnings is reconciled to income before taxes in accordance with GAAP. However, total reportable segment fee related earnings should not be considered in isolation or as an alternative to income before taxes.

 
  2006
  2005
  2004
  2003
  2002
 
Income before taxes   $ 2,298,140   $ 1,342,923   $ 1,539,434   $ 953,025   $ 48,565  
Expenses of consolidated funds     143,695     67,972     43,123     42,076     24,094  
Management fees earned from funds     36,535     34,467     34,041     28,048     22,936  
Net (gains) loss from investment activities     (7,587,296 )   (5,142,530 )   (6,214,519 )   (3,537,039 )   438,684  
Non-controlling interests in income of consolidated entities     5,856,345     3,934,535     4,901,547     2,773,014     (358,728 )
   
 
 
 
 
 
Total reportable segment fee related earnings   $ 747,419   $ 237,367   $ 303,626   $ 259,124   $ 175,551  
   
 
 
 
 
 
(2)
"Carry Dollars Created," which is sometimes referred to as "Carry Dollars," is calculated by multiplying the aggregate amount of limited partner capital invested in new transactions during the year by our carry funds by the contractual percentage rate of the profits that we can earn as carried interest from such investments (generally 20%). Carry Dollars Created is a measure of the productivity of our investment activities and is measured at the time of investment by a carry fund. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Financial Measures and Indicators—Operating Metrics—Carry Dollars Created" on page 101 for a discussion of Carry Dollars Created.

(3)
Adjusted cash flow from operations is used as a supplemental non-GAAP measure by us to assess liquidity and amounts available for distribution to our existing owners. See "Cash Distribution

26


    Policy". In accordance with GAAP, certain of the Blackstone funds are consolidated into the combined financial statements of Blackstone Group, notwithstanding the fact that Blackstone Group has only a minority economic interest in these funds. Consequently, Blackstone Group's combined financial statements reflect the cash flow of the consolidated Blackstone funds on a gross basis rather than the cash flow attributable to Blackstone.

    Adjusted cash flow from operations is therefore intended to reflect the cash flow attributable to Blackstone and is equal to cash flow from operations presented in accordance with GAAP, adjusted to exclude cash flow relating to (1) the investment activities of the Blackstone funds, (2) the realized and unrealized income attributable to the non-controlling interest of the Blackstone funds and (3) changes in our operating assets and liabilities. We believe that adjusted cash flow from operations provides investors with useful information on the cash flows of the Blackstone Group relating to our required capital investments and our ability to make annual cash distributions. However, adjusted cash flow from operations should not be considered in isolation or as alternative to cash flow from operations presented in accordance with GAAP.

    Following is a reconciliation of Net Cash (Used In) Provided By Operating Activities presented on a GAAP basis to Adjusted Cash Flow from Operations:

 
  2006
  2005
  2004
 
 
  (Dollars in Thousands)

 
Net Cash (Used In) Provided By Operating Activities   $ (4,396,614 ) $ 2,709,258   $ 52,682  
  Changes in operating assets and liabilities     1,154,680     4,139     205,642  
  Blackstone funds related investment activities     3,776,325     (2,608,412 )   (84,620 )
  Net realized gains on investments     5,054,995     4,918,364     2,029,266  
  Non-controlling interests in income of consolidated entities     (3,950,664 )   (3,631,179 )   (420,561 )
  Other non-cash adjustments     41,929     52,427     62,815  
   
 
 
 
Adjusted Cash Flow from Operations   $ 1,680,651   $ 1,444,597   $ 1,845,224  
   
 
 
 

27



Summary Pro Forma Financial Data

        The following summary unaudited condensed consolidated pro forma financial information should be read together with "Organizational Structure", "Unaudited Pro Forma Financial Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus.

        The unaudited pro forma financial information contained herein is subject to completion as a consequence of the fact that information related to our reorganization and the offering is not currently determinable.

        The following unaudited condensed consolidated pro forma statement of income data for the year ended December 31, 2006 and the unaudited condensed consolidated pro forma statement of financial condition data as of December 31, 2006 are based upon our historical financial statements included elsewhere in this prospectus. These pro forma financial data present the consolidated results of operations and financial position of The Blackstone Group L.P. to give pro forma effect to all of the transactions described under "Organizational Structure" and this offering as if such transactions had been completed as of January 1, 2006 with respect to the unaudited condensed consolidated pro forma statement of income data and as of December 31, 2006 with respect to the unaudited pro forma statement of financial condition data. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions and this offering on the historical financial information of Blackstone Group. The adjustments are described in the notes to the unaudited condensed consolidated pro forma statement of income and the unaudited condensed consolidated pro forma statement of financial condition in "Unaudited Pro Forma Financial Information".

        The pro forma adjustments principally give effect to:

    the deconsolidation of those of our investment funds that have been consolidated in our historical combined financial statements with the exception of four of our funds of hedge funds;

    the elimination from consolidation of the general partners of certain investment funds that are no longer actively making new investments and a number of investment vehicles through which our existing owners and other related parties have made commitments to or investments in or alongside of our investment funds because such entities will not be contributed to Blackstone Holdings;

    an adjustment to reflect the change in fair value which would occur in a manner similar to the application of Statement of Financial Accounting Standard 159 ("SFAS 159") in the pro forma financial statements as we intend to elect the application of SFAS 159 to our general partnership interests in our corporate private equity and real estate opportunity funds substantially concurrently with this offering;

    increases to employee compensation and benefits expense associated with (1) payments to our existing owners that work in our businesses of salary and bonus following this offering; (2) ownership by our existing owners that work in our businesses and certain employees of a portion of the carried interest earned in respect of certain of the funds; (3) issuances of unvested Blackstone Holdings partnership units as part of the Blackstone Holdings formation; and (4) grants of unvested deferred restricted common units at the time of this offering;

    a provision for corporate income taxes on the income of The Blackstone Group L.P.'s wholly-owned subsidiaries that will be taxable as corporations for U.S. federal income tax purposes, which we refer to as the "corporate taxpayers";

    the effect of one or more distributions to our existing owners representing all of the undistributed earnings generated by the contributed businesses prior to the date of the offering;

28


    the purchase by The Blackstone Group L.P.'s wholly-owned subsidiaries of interests in our business from our existing owners with a portion of the proceeds from this offering and the associated effects of income tax and the tax receivable agreements; and

    the application of a portion of the net proceeds from this offering to repay our outstanding borrowings under our revolving credit agreement as described in "Use of Proceeds".

        Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. Because our existing owners own and control the legal entities and general partners which comprise Blackstone Group before and after the reorganization, we will account for the reorganization as a transfer of interests under common control. Accordingly, except for the non-contributed entities described above and the valuation adjustments attributable to reflecting the effect of reporting certain assets at fair value under SFAS 159, we will carry forward unchanged the value of assets and liabilities recognized in Blackstone Group's combined financial statements into our consolidated financial statements.

        The unaudited condensed consolidated pro forma financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of The Blackstone Group L.P. that would have occurred had the transactions referenced above occurred on the dates indicated or had we operated as a public entity during the periods presented or for any future period or date.

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  The Blackstone Group L.P.
Consolidated Pro Forma

 
  Year Ended December 31, 2006
 
  ($ in thousands, except per common unit data)

Statement of Income Data    
Revenues    
Fund Management Fees    
Advisory Fees    
Interest and Other    
   
  Total Revenues    
   
Expenses    
Employee Compensation and Benefits    
Interest    
Occupancy and Related Charges    
General, Administrative and Other    
   
  Total Expenses    
   
Other Income    
Net Gains from Investment Activities    
   
Income Before Non-Controlling Interests in Income of Consolidated Entities and Income Taxes    
Non-Controlling Interests in Income of Consolidated Entities    
   
Income Before Taxes    
Income Taxes    
   
Net Income    
   

Net Income Per Common Unit:

 

 
  Basic    
  Diluted    
Weighted Average Common Units:    
  Basic    
  Diluted    
 
  As of December 31, 2006
 
  Blackstone
Holdings
Pro Forma

  The Blackstone
Group L.P.
Consolidated
Pro Forma

 
  ($ in thousands)

Statement of Financial Condition Data        
Total Assets        
Total Liabilities        
Non-Controlling Interests in Consolidated Entities        
Total Partners' Equity        

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RISK FACTORS

        An investment in our common units involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our common units.

Risks Related to Our Business

Difficult market conditions can adversely affect our business in many ways, including by reducing the value or performance of the investments made by our investment funds, reducing the ability of our investment funds to raise or deploy capital and reducing the volume of the transactions involving our financial advisory business, each of which could materially reduce our revenue and cash flow and adversely affect our financial condition.

        Our business is materially affected by conditions in the global financial markets and economic conditions throughout the world that are outside our control, such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions. In the event of a market downturn, each of our businesses could be affected in different ways. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in revenue relating to changes in market and economic conditions.

        Our investment funds may be affected by reduced opportunities to exit and realize value from their investments and by the fact that we may not be able to find suitable investments for the investment funds to effectively deploy capital, which could adversely affect our ability to raise new funds. During periods of difficult market conditions or slowdowns in a particular sector, companies in which we invest may experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. During such periods, these companies may also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including expenses payable to us. In addition, during periods of adverse economic conditions, we may have difficulty accessing financial markets, which could make it more difficult or impossible for us to obtain funding for additional investments and harm our assets under management and operating results. A general market downturn, or a specific market dislocation, may result in lower investment returns for our investment funds, which would adversely affect our revenues. Furthermore, such conditions would also increase the risk of default with respect to investments held by our investment funds that have significant debt investments, such as our mezzanine funds, senior debt vehicles and distressed securities hedge fund.

        In addition, our financial advisory business would be materially affected by conditions in the global financial markets and economic conditions throughout the world. For example, revenue generated by our financial advisory business is directly related to the volume and value of the transactions in which we are involved. During periods of unfavorable market or economic conditions, the volume and value of mergers and acquisitions transactions may decrease, thereby reducing the demand for our financial advisory services and increasing price competition among financial services companies seeking such engagements.

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Our revenue, net income and cash flow are all highly variable, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our common units to decline.

        Our revenue, net income and cash flow are all highly variable, primarily due to the fact that we receive carried interest from our carry funds only when investments are realized and transaction fees received by our carry funds and fees received by our advisory business can vary significantly from quarter to quarter. In addition, the investment return profiles of most of our investment funds are volatile. We may also experience fluctuations in our results from quarter to quarter due to a number of other factors, including changes in the values of our funds' investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. Such variability may lead to volatility in the trading price of our common units and cause our results for a particular period not to be indicative of our performance in a future period. It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our common units or increased volatility in our common unit price generally.

        The timing and receipt of carried interest generated by our carry funds is uncertain and will contribute to the volatility of our results. Carried interest depends on our carry funds' performance and opportunities for realizing gains, which may be limited. It takes a substantial period of time to identify attractive investment opportunities, to raise all the funds needed to make an investment and then to realize the cash value (or other proceeds) of an investment through a sale, public offering, recapitalization or other exit. Even if an investment proves to be profitable, it may be several years before any profits can be realized in cash (or other proceeds). We cannot predict when, or if, any realization of investments will occur. If we were to have a realization event in a particular quarter, it may have a significant impact on our results for that particular quarter which may not be replicated in subsequent quarters. We recognize revenue on investments in our investment funds based on our allocable share of realized and unrealized gains (or losses) reported by such investment funds, and a decline in realized or unrealized gains, or an increase in realized or unrealized losses, would adversely affect our revenue, which could further increase the volatility of our quarterly results.

        With respect to our proprietary hedge funds and many of our funds of hedge funds, our incentive fees are paid annually, semi-annually or quarterly if the net asset value of a fund has increased. Our hedge funds also have "high water marks" whereby we do not earn incentive fees during a particular period even though the fund had positive returns in such period as a result of losses in prior periods. If a hedge fund experiences losses, we will not be able to earn incentive fees from the fund until it surpasses the previous high water mark. The incentive fees we earn are therefore dependent on the net asset value of the hedge fund, which could lead to significant volatility in our quarterly results.

        We also earn a portion of our revenue from financial advisory engagements, and in many cases we are not paid until the successful consummation of the underlying transaction, restructuring or closing of the fund. As a result, our financial advisory revenue is highly dependent on market conditions and the decisions and actions of our clients, interested third parties and governmental authorities. If a transaction, restructuring or funding is not consummated, we often do not receive any financial advisory fees other than the reimbursement of certain out-of-pocket expenses, despite the fact that we may have devoted considerable resources to these transactions.

        Because our revenue, net income and cash flow can be highly variable from quarter to quarter and year to year, we plan not to provide any guidance regarding our expected quarterly and annual operating results. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in our common unit price.

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We depend on our founders and other key senior managing directors and the loss of their services would have a material adverse effect on our business, results and financial condition.

        We depend on the efforts, skill, reputations and business contacts of our founders, Messrs. Schwarzman and Peterson, our President and Chief Operating Officer, Hamilton E. James, our Vice Chairman, J. Tomilson Hill, and other key senior managing directors, the information and deal flow they and other senior managing directors generate during the normal course of their activities and the synergies among the diverse fields of expertise and knowledge held by our professionals. Accordingly, our success will depend on the continued service of these individuals, who are not obligated to remain employed with us. Mr. Peterson has informed us that he intends to retire from our firm and relinquish his role as a founder by no later than December 31, 2008. In addition, all of the Blackstone Holdings partnership units that Mr. Peterson will receive, and a portion of the Blackstone Holdings partnership units that each of our other senior managing directors will receive, in the reorganization described in "Organizational Structure" will be fully vested upon issuance. We have experienced departures of several key senior managing directors in the past and may do so in the future, and we cannot predict the impact that Mr. Peterson's departure or the departure of any other key senior managing director will have on our ability to achieve our investment objectives. The loss of the services of any of them could have a material adverse effect on our revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing funds or raise additional funds in the future.

        Our senior managing directors and other key personnel possess substantial experience and expertise and have strong business relationships with investors in our funds, clients and other members of the business community. As a result, the loss of these personnel could jeopardize our relationships with investors in our funds, our clients and members of the business community and result in the reduction of assets under management or fewer investment opportunities. For example, if any of our senior managing directors were to join or form a competing firm, that could have a material adverse effect on our business, results and financial condition.

Our transition to a publicly-traded structure may adversely affect our ability to retain and motivate our senior managing directors and other key personnel and to recruit, retain and motivate new senior managing directors and other key personnel, both of which could adversely affect our business, results and financial condition.

        Our most important asset is our people, and our continued success is highly dependent upon the efforts of our senior managing directors and other professionals. Our future success and growth depends to a substantial degree on our ability to retain and motivate our senior managing directors and other key personnel and to strategically recruit, retain and motivate new talented personnel, including new senior managing directors. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive. As part of the reorganization we will effect prior to this offering, our current senior managing directors will receive partnership units in Blackstone Holdings. Distributions in respect of these equity interests may not equal the cash distributions previously received by our senior managing directors prior to this offering. Until December 31, 2009, the income (and accordingly distributions) of Blackstone Holdings will be allocated on a priority basis to The Blackstone Group L.P.'s wholly-owned subsidiaries as described in "Cash Distribution Policy", which may reduce the amount of distributions received by our senior managing directors. Additionally, ownership of a portion of the Blackstone Holdings partnership units to be received by our senior managing directors is not dependent upon their continued employment with us as those equity interests will be fully vested upon issuance. Moreover, the minimum retained ownership requirements and transfer restrictions to which these interests are subject in certain instances lapse over time, may not be enforceable in all cases and can be waived. There is no guarantee that the non-competition, non-solicitation and confidentiality agreements to which our senior managing directors are subject, together with our other arrangements with them, will

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prevent them from leaving us, joining our competitors or otherwise competing with us or that these agreements will be enforceable in all cases. In addition, these agreements will expire after a certain period of time, at which point each of our senior managing directors would be free to compete against us and solicit investors in our funds, clients and employees. See "Organizational Structure—Reorganization—Blackstone Holdings Formation", "Management—Non-Competition, Non-Solicitation and Confidentiality Agreements" and "—Minimum Retained Ownership Requirements and Transfer Restrictions". For example, if legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders would be required to pay, thereby adversely affecting our ability to recruit, retain and motivate our current and future professionals. See "—Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis."

        Following this offering, we might not be able to provide future senior managing directors with equity interests in our business to the same extent or with the same tax consequences as our existing senior managing directors. Therefore, in order to recruit and retain existing and future senior managing directors, we may need to increase the level of compensation that we pay to them. Accordingly, as we promote or hire new senior managing directors over time, we may increase the level of compensation we pay to our senior managing directors, which would cause our total employee compensation and benefits expense as a percentage of our total revenue to increase and adversely affect our profitability. In addition, issuance of equity interests in our business to future senior managing directors would dilute public common unitholders.

        We strive to maintain a work environment that reinforces our culture of collaboration, motivation and alignment of interests with investors. The effects of becoming public, including potential changes in our compensation structure, could adversely affect this culture. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain this culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations.

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis, including changes to treat all or part of certain capital gains as ordinary income.

        The U.S. federal income tax treatment of common unitholders depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. Changes to the U.S. federal income tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and commitments, affect the tax considerations of an investment in us, change the character or treatment of portions of our income (including, for instance, the treatment of carried interest as ordinary income rather than capital gain) and adversely affect an investment in our

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common units. For example, members of the U.S. Congress may be considering legislative proposals to treat all or part of capital gain that is recognized by an investment partnership and allocable to a partner affiliated with the sponsor of the partnership as ordinary income rather than as capital gain to such partner for U.S. federal income tax purposes. Depending on the specific provisions, the enactment of any such legislation could (1) materially increase taxes payable by holders of our common units who are individuals, non-U.S. persons or tax-exempt persons and/or (2) cause such gain to be non-qualifying income under the publicly traded partnership rules, which could preclude us from qualifying as a partnership for U.S. federal income tax purposes or require us to earn such gain through corporate subsidiaries, thereby increasing our tax liability and reducing the value of our common units. In addition, members of Congress may be considering other legislative proposals that would preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules, again thereby increasing our tax liability and reducing the value of our common units. It is unclear whether any such legislation will be introduced or enacted and, if enacted, whether and how the legislation would apply to us.

        Our organizational documents and agreements permit our general partner to modify our amended and restated limited partnership agreement from time to time, without the consent of the common unitholders, to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all common unitholders. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to common unitholders in a manner that reflects such common unitholders' beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, those assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated or disallowed in a manner that adversely affects common unitholders.

The requirements of being a public entity and sustaining our growth may strain our resources.

        As a public entity, we will be subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, or "Exchange Act," and requirements of the U.S. Sarbanes-Oxley Act of 2002, or "Sarbanes-Oxley Act." These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting, which is discussed below. In order to maintain and improve the effectiveness of our disclosure controls and procedures, significant resources and management oversight will be required. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements of the Securities and Exchange Commission, or "SEC," transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

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Our use of leverage to finance our business will expose us to substantial risks, which are exacerbated by our funds' use of leverage to finance investments.

        It is our intention to eventually use a significant amount of borrowings to finance our business operations as a public company. See "Summary—We Intend to be a Different Kind of Public Company—Use Leverage to Enhance Returns". That will expose us to the typical risks associated with the use of substantial leverage, including those discussed below under "—Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments". These risks are exacerbated by our funds' use of leverage to finance investments. Our use of substantial leverage as a public company, coupled with the leverage used by many of our investment funds to finance investments, could also cause us to suffer a decline in the credit ratings assigned to our debt by rating agencies, which might well result in an increase in our borrowing costs and could otherwise adversely affect our business in a material way, particularly if our credit ratings were to fall below investment grade.

Operational risks may disrupt our businesses, result in losses or limit our growth.

        We rely heavily on our financial, accounting and other data processing systems. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to our investment funds, regulatory intervention or reputational damage.

        In addition, we operate in businesses that are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.

        Furthermore, we depend on our headquarters in New York City, where most of our personnel are located, for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

        Finally, we rely on third-party service providers for certain aspects of our business, including for certain information systems and technology and administration of our hedge funds. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of the funds' operations and could impact our reputation and hence adversely affect our businesses.

Our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and common unit price.

        Our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that we will eventually be required to meet. We are in the process of addressing our internal controls over financial reporting and are establishing formal policies, processes and practices related to financial reporting and to the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.

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        Additionally, we have begun the process of documenting our internal control procedures to satisfy the requirements of Section 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. Because we do not currently have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. As a public entity, we will be required to complete our initial assessment in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, and result in a breach of the covenants under our revolving credit facility. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements could also suffer if our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in our common unit price.

The time and attention that our senior managing directors and other employees devote to assets that are not being contributed to Blackstone Holdings will not financially benefit us and may reduce the time and attention these individuals devote to our business.

        The general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of Blackstone's investment funds are not being contributed to us and will continue to be owned by our senior managing directors and third parties. Accordingly, following this offering we will no longer receive any carried interest income from, or any gains (or losses) arising from, such non-contributed assets. As a result, the time and attention that our senior managing directors and employees devote to these non-contributed assets will not financially benefit us and may reduce the time and attention these individuals devote to our business.

Extensive regulation of our businesses affects our activities and creates the potential for significant liabilities and penalties. The possibility of increased regulatory focus could result in additional burdens on our business. Changes in tax law and other legislative or regulatory changes could adversely affect us.

        Our asset management and financial advisory businesses are subject to extensive regulation. We are subject to regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which we operate around the world. Many of these regulators, including U.S. and foreign government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct investigations and administrative proceedings that can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or investment adviser from registration or memberships. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing clients or fail to gain new asset management or financial advisory clients. In addition, we regularly rely on exemptions from various requirements of the U.S. Securities Act of 1933, as amended, or "Securities Act," the Exchange

37



Act, the U.S. Investment Company Act of 1940, as amended, or "1940 Act," and the U.S. Employee Retirement Income Security Act of 1974, as amended, in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected. See "—Risks Related to Our Organizational Structure—If The Blackstone Group L.P. were deemed an "investment company" under the 1940 Act, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business". Lastly, the requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our investment funds and are not designed to protect our common unitholders. Consequently, these regulations often serve to limit our activities.

        In addition, the regulatory environment in which our asset management and financial advisory clients operate may affect our business. For example, changes in antitrust laws or the enforcement of antitrust laws could affect the level of mergers and acquisitions activity and changes in state laws may limit investment activities of state pension plans. See "Business—Regulatory and Compliance Matters" for a further discussion of the regulatory environment in which we conduct our businesses.

        The regulatory environment in which we operate is subject to further regulation. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

        Legislative proposals have recently been introduced in Denmark and Germany that would significantly limit the tax deductibility of interest expense incurred by companies in those countries. If adopted, these measures would adversely affect Danish and German companies in which our corporate private equity and real estate opportunity funds have investments and limit the benefits to them of additional investments in those countries. Our corporate private equity and real estate opportunity fund businesses are subject to the risk that similar measures might be introduced in other countries in which they currently have investments or plan to invest in the future, or that other legislative or regulatory measures might be promulgated in any of the countries in which we operate that adversely affect our business. For example, if legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals. See "—Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis, including changes to treat all or part of certain capital gains as ordinary income". In addition, U.S. and foreign labor unions have recently been agitating for greater legislative and regulatory oversight of private equity firms and transactions. Labor unions have also threatened to use their influence to prevent pension funds from investing in private equity funds.

        Recently, it has been reported in the press that a few of our competitors in the private equity industry have received information requests relating to private equity transactions from the Antitrust Division of the U.S. Department of Justice. In addition, the U.K. Financial Services Authority recently published a discussion paper on the impact that the growth in the private equity market has had on the

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markets in the United Kingdom and the suitability of its regulatory approach in addressing risks posed by the private equity market.

        In addition, regulatory developments designed to increase oversight of hedge funds may adversely affect our business. In recent years, there has been debate in U.S. and foreign governments about new rules and regulations for hedge funds. For example, the SEC had recently adopted a rule, which was later struck down by a federal court, that would have required registration under the Investment Advisers Act of 1940, or "Advisers Act," of hedge fund managers if they had 15 or more clients. While all of our entities that serve as advisers to our investment funds are already registered with the SEC under the Advisers Act as investment advisers, other new regulations could constrain or otherwise impose burdens on our business.

We are subject to substantial litigation risks and may face significant liabilities and damage to our professional reputation as a result of litigation allegations and negative publicity.

        The investment decisions we make in our asset management business and the activities of our investment professionals on behalf of portfolio companies of our carry funds may subject them and us to the risk of third-party litigation arising from investor dissatisfaction with the performance of those investment funds, the activities of our portfolio companies and a variety of other litigation claims. For example, from time to time we and our portfolio companies have been subject to class action suits by shareholders in public companies that we have agreed to acquire that challenge our acquisition transactions and attempt to enjoin them. In addition, thirteen private equity firms, including Blackstone, were recently named as defendants in a purported class action complaint by shareholders in public companies recently acquired by private equity firms. The complaint alleges that the defendant firms engaged in certain cooperative behavior during the bidding process in going-private transactions in violation of antitrust laws and that this purported behavior suppressed the price paid by the private equity firms for the plaintiffs' shares in the acquired companies below that which would otherwise have been paid in the absence of such behavior. The complaint seeks treble damages of an unspecified amount. We believe that this suit lacks any merit.

        In addition, to the extent investors in our investment funds suffer losses resulting from fraud, gross negligence, willful misconduct or other similar misconduct, investors may have remedies against us, our investment funds, our senior managing directors or our affiliates under the federal securities law and/or state law. While the general partners and investment advisers to our investment funds, including their directors, officers, other employees and affiliates, are generally indemnified to the fullest extent permitted by law with respect to their conduct in connection with the management of the business and affairs of our investment funds, such indemnity does not extend to actions determined to have involved fraud, gross negligence, willful misconduct or other similar misconduct.

        Our financial advisory activities may also subject us to the risk of liabilities to our clients and third parties, including our clients' stockholders, under securities or other laws in connection with corporate transactions on which we render advice.

        If any lawsuits were brought against us and resulted in a finding of substantial legal liability, it could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously harm our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain investors and advisory clients and to pursue investment opportunities for our carry funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the private equity industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.

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Employee misconduct could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.

        There is a risk that our employees could engage in misconduct that adversely affects our business. We are subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. The violation of these obligations and standards by any of our employees would adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to companies in which we may invest or our financial advisory clients. If our employees were improperly to use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If one of our employees were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be adversely affected.

Risks Relating to Our Asset Management Businesses

Poor performance of our investment funds would cause a decline in our revenue, income and cash flow, may obligate us to repay carried interest previously paid to us, and could adversely affect our ability to raise capital for future investment funds.

        In the event that any of our investment funds were to perform poorly, our revenue, income and cash flow would decline because the value of our assets under management would decrease, which would result in a reduction in management fees, and our investment returns would decrease, resulting in a reduction in the carried interest and incentive fees we earn. Moreover, we could experience losses on our investments of our own principal as a result of poor investment performance by our investment funds. Furthermore, if, as a result of poor performance of later investments in a carry fund's life, the fund does not achieve certain investment returns for the fund over its life, we will be obligated to repay the amount by which carried interest that was previously distributed to us exceeds amounts to which we are ultimately entitled. Poor performance of our investment funds could make it more difficult for us to raise new capital. Investors in carry funds might decline to invest in future investment funds we raise and investors in hedge funds or other investment funds might withdraw their investments as a result of poor performance of the investment funds in which they are invested. Investors and potential investors in our funds continually assess our investment funds' performance, and our ability to raise capital for existing and future investment funds and avoid excessive redemption levels will depend on our investment funds' continued satisfactory performance.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds.

        There are no readily ascertainable market prices for a very large number of illiquid investments of our corporate private equity, real estate opportunity and mezzanine funds. We determine the value of the investments of each of our corporate private equity, real estate opportunity and mezzanine funds on a periodic basis based on the fair value of such investments. The fair value of investments of a corporate private equity, real estate opportunity or mezzanine fund is determined using a number of methodologies described in the investment funds' valuation policies. We have made valuation determinations historically without the assistance of an independent valuation firm, although an independent valuation firm will participate in valuation determinations following this offering.

        There is no single standard for determining fair value in good faith and, in many cases, fair value is best expressed as a range of fair values from which a single estimate may be derived. The types of factors that may be considered when applying fair value pricing to an investment in a particular

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company include the historical and projected financial data for the company, valuations given to comparable companies, the size and scope of the company's operations, the strengths and weaknesses of the company, expectations relating to investors' demand for an offering of the company's securities, the size of our investment fund's holding in the portfolio company and any control associated therewith, information with respect to transactions or offers for the portfolio company's securities (including the transaction pursuant to which the investment was made and the period of time that has elapsed from the date of the investment to the valuation date), applicable restrictions on transfer, industry information and assumptions, general economic and market conditions, the nature and realizable value of any collateral or credit support and other relevant factors. Fair values may be reestablished by multiplying a key performance metric of the investee company or asset (for example, EBITDA) by the relevant valuation multiple (for example, price/equity ratio) observed for comparable companies or transactions. Private investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value, or, in some cases, a cost basis or a discounted cash flow or liquidation analysis. In addition, we determine the fair value of a number of the investments in our investment funds based on a variety of valuation methodologies. Because valuations, and in particular valuations of investments for which market quotations are not readily available, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, determinations of fair value may differ materially from the values that would have resulted if a ready market had existed. Even if market quotations are available for our funds' investments, such quotations may not reflect the value that we would actually be able to realize because of various factors, including the possible illiquidity associated with a large ownership position or legal restrictions on transfer. Because many of the illiquid investments held by our investment funds are in industries or companies which are cyclical, undergoing some uncertainty or distress or otherwise subject to volatility, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments.

        Because there is significant uncertainty in the valuation of, or in the stability of the value of illiquid investments, the fair values of such investments as reflected in an investment fund's net asset value do not necessarily reflect the prices that would actually be obtained by us on behalf of the investment fund when such investments are realized. Realizations at values significantly lower than the values at which investments have been reflected in prior fund net asset values would result in losses for the applicable fund, a decline in asset management fees and the loss of potential carried interest and incentive fees. Changes in values attributed to investments from quarter to quarter may result in volatility in the net asset values and results of operations that we report from period to period. Also, a situation where asset values turn out to be materially different than values reflected in prior fund net asset values could cause investors to lose confidence in us, which would in turn result in difficulty in raising additional funds or redemptions from our hedge funds.

The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our common units.

        We have presented in this prospectus the annualized IRRs and returns relating to the historical performance of all of our investment funds, including certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments, the general partners of which are not being contributed to Blackstone Holdings in the reorganization described in "Organizational Structure". The historical and potential future returns of the investment funds that we manage are not directly linked to returns on our common units. Therefore, you should not conclude that continued positive performance of the investment funds that we manage will necessarily result in positive returns on an investment in our common units. However, poor performance of the investment funds that we manage would cause a decline in our revenue from such investment funds, and would therefore have a negative effect on our performance and in all likelihood the returns on an investment in our common units.

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        Moreover, with respect to the historical returns of our investment funds:

    the rates of returns of our carry funds reflect unrealized gains as of the applicable measurement date that may never be realized, which may adversely affect the ultimate value realized from those funds' investments;

    in the past few years, the rates of returns of our corporate private equity and real estate opportunity funds have been positively influenced by a number of investments that experienced rapid and substantial increases in value following the dates on which those investments were made, which may not occur with respect to future investments;

    our investment funds' returns have benefited from investment opportunities and general market conditions that may not repeat themselves, including favorable borrowing conditions in the debt markets, and there can be no assurance that our current or future investment funds will be able to avail themselves of comparable investment opportunities or market conditions; and

    the rates of return reflect our historical cost structure, which may vary in the future due to factors beyond our control, including changes in laws.

        See "Business—The Historical Investment Performance of Our Investment Funds". In addition, future returns will be affected by the applicable risks described elsewhere in this prospectus, including risks of the industries and businesses in which a particular fund invests.

Dependence on significant leverage in investments by our funds could adversely affect our ability to achieve attractive rates of return on those investments.

        Because many of our corporate private equity and real estate opportunity funds' investments rely heavily on the use of leverage, our ability to achieve attractive rates of return on investments will depend on our continued ability to access sufficient sources of indebtedness at attractive rates. For example, in many private equity investments, indebtedness may constitute 70% or more of a portfolio company's or real estate asset's total debt and equity capitalization, including debt that may be incurred in connection with the investment. An increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments. Increases in interest rates could also make it more difficult to locate and consummate private equity investments because other potential buyers, including operating companies acting as strategic buyers, may be able to bid for an asset at a higher price due to a lower overall cost of capital. In addition, a portion of the indebtedness used to finance private equity investments often includes high-yield debt securities issued in the capital markets. Availability of capital from the high-yield debt markets is subject to significant volatility, and there may be times when we might not be able to access those markets at attractive rates, or at all, when completing an investment.

        Investments in highly leveraged entities are inherently more sensitive to declines in revenues, increases in expenses and interest rates and adverse economic, market and industry developments. The incurrence of a significant amount of indebtedness by an entity could, among other things:

    give rise to an obligation to make mandatory prepayments of debt using excess cash flow, which might limit the entity's ability to respond to changing industry conditions to the extent additional cash is needed for the response, to make unplanned but necessary capital expenditures or to take advantage of growth opportunities;

    limit the entity's ability to adjust to changing market conditions, thereby placing it at a competitive disadvantage compared to its competitors who have relatively less debt;

    limit the entity's ability to engage in strategic acquisitions that might be necessary to generate attractive returns or further growth; and

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    limit the entity's ability to obtain additional financing or increase the cost of obtaining such financing, including for capital expenditures, working capital or general corporate purposes.

As a result, the risk of loss associated with a leveraged entity is generally greater than for companies with comparatively less debt.

        Our hedge funds, many of the hedge funds in which our funds of hedge funds invest and our mezzanine funds may choose to use leverage as part of their respective investment programs and regularly borrow a substantial amount of their capital. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss in the value of the investment portfolio. The fund may borrow money from time to time to purchase or carry securities. The interest expense and other costs incurred in connection with such borrowing may not be recovered by appreciation in the securities purchased or carried, and will be lost—and the timing and magnitude of such losses may be accelerated or exacerbated—in the event of a decline in the market value of such securities. Gains realized with borrowed funds may cause the fund's net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund's net asset value could also decrease faster than if there had been no borrowings.

        Increases in interest rates could also decrease the value of fixed-rate debt investments that our investment funds make.

        Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

The asset management business is intensely competitive.

        The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, brand recognition and business reputation. Our asset management business competes with a number of private equity funds, specialized investment funds, hedge funds, corporate buyers, traditional asset managers, commercial banks, investment banks and other financial institutions. A number of factors serve to increase our competitive risks:

    a number of our competitors in some of our businesses have greater financial, technical, marketing and other resources and more personnel than we do;

    several of our competitors have recently raised, or are expected to raise, significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

    some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

    some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make;

    our competitors that are corporate buyers may be able to achieve synergistic cost savings in respect of an investment, which may provide them with a competitive advantage in bidding for an investment;

    there are relatively few barriers to entry impeding new investment funds, including a relatively low cost of entering these businesses, and the successful efforts of new entrants into our various

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      lines of business, including major commercial and investment banks and other financial institutions, have resulted in increased competition;

    some investors may prefer to invest with an investment manager that is not publicly traded; and

    other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

        We may lose investment opportunities in the future if we do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased rates of return and increased risks of loss if we match investment prices, structures and terms offered by competitors. In addition, if interest rates were to rise or there were to be a prolonged bull market in equities, the attractiveness of our investment funds relative to investments in other investment products could decrease. This competitive pressure could adversely affect our ability to make successful investments and limit our ability to raise future investment funds, either of which would adversely impact our business, revenue, results of operations and cash flow.

The due diligence process that we undertake in connection with investments by our investment funds may not reveal all facts that may be relevant in connection with an investment.

        Before making investments in private equity and other investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence investigation that we will carry out with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.

Our asset management activities involve investments in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of our principal investments.

        Many of our investment funds invest in securities that are not publicly traded. In many cases, our investment funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our investment funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration is available. The ability of many of our investment funds, particularly our corporate private equity funds, to dispose of investments is heavily dependent on the public equity markets. For example, the ability to realize any value from an investment may depend upon the ability to complete an initial public offering of the portfolio company in which such investment is held. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the intended disposition period. Accordingly, under certain conditions, our investment funds may be forced to either sell securities at lower prices than they had expected to realize or defer—potentially for a considerable period of time—sales that they had planned to make. We have made and expect to continue to make significant principal investments in our current and future investment funds. Contributing capital to these investment funds is risky, and we may lose some or all of the principal amount of our investments.

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We have increasingly engaged in large-sized investments, which involve certain complexities and risks that are not encountered in small- and medium-sized investments.

        Our corporate private equity and real estate opportunity funds have increasingly been investing in very large transactions. The increased size of these investments involves certain complexities and risks that are not encountered in small- and medium-sized investments. For example, larger transactions may be more difficult to finance, and exiting larger deals may present challenges in many cases. In addition, larger transactions may entail greater scrutiny by regulators, labor unions and other third parties. Recently, labor unions have been more active in opposing certain larger investments by our corporate private equity funds and private equity firms generally.

        Larger transactions may be structured as "consortium transactions" due to the size of the investment and the amount of capital required to be invested. A consortium transaction involves an equity investment in which two or more private equity firms serve together or collectively as equity sponsors. We have participated in a significant number of consortium transactions in recent years due to the increased size of many of the transactions in which we have been involved. Consortium transactions generally entail a reduced level of control by Blackstone over the investment because governance rights must be shared with the other private equity investors. Accordingly, we may not be able to control decisions relating to the investment, including decisions relating to the management and operation of the company and the timing and nature of any exit, which could result in the risks described in "—Our investment funds make investments in companies that we do not control".

        Any of these factors could increase the risk that our larger investments could be less successful. The consequences to our investment funds of an unsuccessful larger investment could be more severe given the size of the investment.

Our investment funds make investments in companies that we do not control.

        Investments by most of our investment funds will include debt instruments and equity securities of companies that we do not control. Such instruments and securities may be acquired by our investment funds through trading activities or through purchases of securities from the issuer. In addition, our corporate private equity and real estate opportunity funds may acquire minority equity interests (particularly in consortium transactions, as described in "—We have increasingly engaged in large-sized investments, which involve certain complexities and risks that are not encountered in small- and medium-sized investments") and may also dispose of a portion of their majority equity investments in portfolio companies over time in a manner that results in the investment funds retaining a minority investment. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of investments by our investment funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

We expect to make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States.

        Many of our investment funds generally invest a significant portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States. Investments in non-U.S. securities involve certain factors not typically associated with investing in U.S. securities, including risks relating to:

    currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

    less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity;

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    the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation;

    differences in the legal and regulatory environment;

    less publicly available information in respect of companies in non-U.S. markets;

    certain economic and political risks, including potential exchange control regulations and restrictions on our non-U.S. investments and repatriation of profits on investments or of capital invested, the risks of political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

    the possible imposition of non-U.S. taxes or withholding on income and gains recognized with respect to such securities.

        There can be no assurance that adverse developments with respect to such risks will not adversely affect our assets that are held in certain countries or the returns from these assets.

Investments by our investment funds will in most cases rank junior to investments made by others.

        In most cases, the companies in which our investment funds invest will have indebtedness or equity securities, or may be permitted to incur indebtedness or to issue equity securities, that rank senior to our investment. By their terms, such instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our investment. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which an investment is made, holders of securities ranking senior to our investment would typically be entitled to receive payment in full before distributions could be made in respect of our investment. After repaying senior security holders, the company may not have any remaining assets to use for repaying amounts owed in respect of our investment. To the extent that any assets remain, holders of claims that rank equally with our investment would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, the ability of our investment funds to influence a company's affairs and to take actions to protect their investments may be substantially less than that of the senior creditors.

Third-party investors in our investment funds will have the right to dissolve the investment funds and investors in our hedge funds may redeem their investments in our hedge funds. These events would lead to a decrease in our revenues, which could be substantial.

        In connection with this offering, we are amending the governing agreements of all of our investment funds (with the exception of four of our funds of hedge funds) to provide that, subject to certain conditions, third-party investors in those funds will have the right to remove the general partner of the fund or to accelerate the liquidation date of the investment fund without cause by a simple majority vote, resulting in a reduction in management fees we would earn from such investment funds and a significant reduction in the amounts of total carried interest and incentive fees from those funds. Carried interest and incentive fees could be significantly reduced as a result of our inability to maximize the value of investments by an investment fund during the liquidation process. Finally, the applicable funds would cease to exist. In addition, the governing agreements of our investment funds enable investors in those funds to vote to terminate the investment period by a simple majority vote in accordance with specified procedures or accelerate the withdrawal of their capital on an investor-by-investor basis in the event certain "key persons" in our investment funds (for example, both of Stephen A. Schwarzman and Hamilton E. James in the case of our corporate private equity funds) do not remain active managing the fund. In addition to having a significant negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our investment funds would likely result in significant reputational damage to us.

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        Investors in our hedge funds may also generally redeem their investments on an annual, semi-annual or quarterly basis following the expiration of a specified period of time when capital may not be withdrawn (typically between one and three years), subject to the applicable fund's specific redemption provisions. In a declining market, the pace of redemptions and consequent reduction in our assets under management could accelerate. The decrease in revenues that would result from significant redemptions in our hedge funds could have a material adverse effect on our business, revenues, net income and cash flows.

        In addition, because all of our investment funds have advisers that are registered under the Advisers Act, the management agreements of all of our investment funds would be terminated upon an "assignment," without investor consent, of these agreements, which may be deemed to occur in the event these advisers were to experience a change of control. We cannot be certain that consents required to assignments of our investment management agreements will be obtained if a change of control occurs. In addition, with respect to our publicly-traded closed-end mutual funds, each investment fund's investment management agreement must be approved annually by the independent members of such investment fund's board of directors and, in certain cases, by its stockholders, as required by law. Termination of these agreements would cause us to lose the fees we earn from such investment funds.

Certain policies and procedures implemented to mitigate potential conflicts of interest and address certain regulatory requirements may reduce the synergies across our various businesses.

        Because of our various lines of asset management and advisory businesses, we will be subject to a number of actual and potential conflicts of interest and subject to greater regulatory oversight than that to which we would otherwise be subject if we had just one line of business. In addressing these conflicts and regulatory requirements across our various businesses, we have implemented certain policies and procedures (for example, information walls) that may reduce the positive synergies that we cultivate across these businesses. For example, we may come into possession of material non-public information with respect to issuers in which we may be considering making an investment or issuers that are our advisory clients. As a consequence, we may be precluded from providing such information or other ideas to our other businesses that might be of benefit to them.

Risk management activities may adversely affect the return on our funds' investments.

        When managing our exposure to market risks, we may (on our own behalf or on behalf of our funds) from time to time use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument, the position being hedged, the creditworthiness of the counterparty and other factors. As a result, while we may enter into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

Our real estate opportunity funds are subject to the risks inherent in the ownership and operation of real estate and the construction and development of real estate.

        Investments in our real estate opportunity funds will be subject to the risks inherent in the ownership and operation of real estate and real estate-related businesses and assets. These risks include those associated with the burdens of ownership of real property, general and local economic conditions, changes in supply of and demand for competing properties in an area (as a result for instance of overbuilding), fluctuations in the average occupancy and room rates for hotel properties, the financial

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resources of tenants, changes in building, environmental and other laws, energy and supply shortages, various uninsured or uninsurable risks, natural disasters, changes in government regulations (such as rent control), changes in real property tax rates, changes in interest rates, the reduced availability of mortgage funds which may render the sale or refinancing of properties difficult or impracticable, negative developments in the economy that depress travel activity, environmental liabilities, contingent liabilities on disposition of assets, terrorist attacks, war and other factors that are beyond our control. In addition, if our real estate opportunity funds acquire direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-income producing, they will be subject to the risks normally associated with such assets and development activities, including risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost and timely completion of construction (including risks beyond the control of our fund, such as weather or labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms.

Certain of our fund investments may be concentrated in certain asset types or in a geographic region, which could exacerbate any negative performance of those funds to the extent those concentrated investments perform poorly.

        The governing agreements of our investment funds contain only limited investment restrictions and only limited requirements as to diversification of fund investments, either by geographic region or asset type. For example, over 85% of the investments of our real estate opportunity funds are in office building and hotel assets. During periods of difficult market conditions or slowdowns in these sectors, the decreased revenues, difficulty in obtaining access to financing and increased funding costs experienced by our real estate opportunity funds may be exacerbated by this concentration of investments, which would result in lower investment returns for our real estate opportunity funds.

Our hedge fund investments are subject to numerous additional risks.

        Our hedge fund investments, including investments by our funds of hedge funds in other hedge funds, are subject to numerous additional risks, including the following:

    Certain of the funds are newly established funds without any operating history or are managed by management companies or general partners who do not have a significant track record as an independent manager.

    Generally, there are few limitations on the execution of our hedge funds' investment strategies, which are subject to the sole discretion of the management company or the general partner of such funds.

    Hedge funds may engage in short-selling, which is subject to the theoretically unlimited risk of loss because there is no limit on how much the price of a security may appreciate before the short position is closed out. A fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions.

    Hedge funds are exposed to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the fund to suffer a loss. Counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the fund has concentrated its transactions with a single or small group of counterparties. Generally, hedge funds are not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. Moreover, the funds' internal consideration of the creditworthiness of their counterparties may prove insufficient. The absence of a regulated market to facilitate settlement may increase the potential for losses.

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    Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This "systemic risk" may adversely affect the financial intermediaries (such as clearing agencies, clearing houses, banks, securities firms and exchanges) with which the hedge funds interact on a daily basis.

    The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position in a combination of financial instruments. A hedge fund's trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the funds might only be able to acquire some but not all of the components of the position, or if the overall position were to need adjustment, the funds might not be able to make such adjustment. As a result, the funds would not be able to achieve the market position selected by the management company or general partner of such funds, and might incur a loss in liquidating their position.

    Hedge funds are subject to risks due to potential illiquidity of assets. Hedge funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes in industry and government regulations. It may be impossible or costly for hedge funds to liquidate positions rapidly in order to meet margin calls, withdrawal requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time or the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise. Moreover, these risks may be exacerbated for our funds of hedge funds. For example, if one of our funds of hedge funds were to invest a significant portion of its assets in two or more hedge funds that each had illiquid positions in the same issuer, the illiquidity risk for our funds of hedge funds would be compounded.

    Hedge fund investments are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances, including if the fund writes a call option. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the commodities underlying them. In addition, hedge funds' assets are subject to the risk of the failure of any of the exchanges on which their positions trade or of their clearinghouses or counterparties. Most U.S. commodities exchanges limit fluctuations in certain commodity interest prices during a single day by imposing "daily price fluctuation limits" or "daily limits," the existence of which may reduce liquidity or effectively curtail trading in particular markets.

Certain of our investment funds utilize distressed debt and equity investment strategies which involve significant risks and potential additional liabilities.

        Our distressed securities hedge fund invests in issuers with weak financial conditions, poor operating results, substantial financial needs, negative net worth and/or special competitive problems. This fund also invests in issuers that are involved in bankruptcy or reorganization proceedings. In such situations, it may be difficult to obtain full information as to the exact financial and operating conditions of these issuers. Furthermore, some of our distressed securities hedge fund's distressed investments may not be widely traded or may have no recognized market. Depending on the specific

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fund's investment profile, a fund's exposure to such investments may be substantial in relation to the market for those investments and the acquired assets are likely to be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such investments to ultimately reflect their intrinsic value as perceived by us.

        A central strategy of our distressed securities hedge fund is to predict the occurrence of certain corporate events, such as debt and/or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions. If we do not accurately predict these events, the market price and value of the fund's investment could decline sharply.

        In addition, these investments could subject our distressed securities hedge fund to certain potential additional liabilities that may exceed the value of its original investment. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed, or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in substantial litigation.

We are subject to risks in using prime brokers, custodians, administrators and other agents.

        Many of our funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds, closed-end mutual funds and other investment funds depend on the services of prime brokers, custodians, administrators and other agents to carry out certain securities transactions. For example, in the event of the insolvency of a prime broker and/or custodian, the funds might not be able to recover equivalent assets in full as they will rank among the prime broker's and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the funds' cash held with a prime broker or custodian will not be segregated from the prime broker's or custodian's own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

Risks Related to Our Financial Advisory Businesses

Financial advisory fees are not long-term contracted sources of revenue and are not predictable.

        The fees earned by our financial advisory business are typically payable upon the successful completion of a particular transaction or restructuring. A decline in our financial advisory engagements or the market for advisory services would adversely affect our business. Our financial advisory business operates in a highly competitive environment where typically there are no long-term contracted sources of revenue. Each revenue-generating engagement typically is separately solicited, awarded and negotiated. In addition, many businesses do not routinely engage in transactions requiring our services. As a consequence, our fee-paying engagements with many clients are not predictable and high levels of financial advisory revenue in one quarter are not necessarily predictive of continued high levels of financial advisory revenue in future periods. In addition to the fact that most of our financial advisory engagements are single, non-recurring engagements, we lose clients each year as a result of a client's decision to retain other financial advisors, the sale, merger or restructuring of a client, a change in a client's senior management and various other causes. As a result, our financial advisory revenue could decline materially due to such changes in the volume, nature and scope of our engagements.

        The fees earned by Park Hill Group, our fund placement business, are generally payable upon the successful subscription by an investor in a client's fund and/or the closing of that fund. To the extent fewer assets are raised for funds or interest by investors in alternative asset funds declines, the fees earned by Park Hill Group would be adversely affected.

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We face strong competition from other financial advisory firms.

        The financial advisory industry is intensely competitive, and we expect it to remain so. We compete on the basis of a number of factors, including the quality of our employees, transaction execution, our products and services, innovation and reputation and price. We have always experienced intense competition over obtaining advisory mandates, and we may experience pricing pressures in our financial advisory business in the future as some of our competitors seek to obtain increased market share by reducing fees. Our primary competitors in our financial advisory business are large financial institutions, many of which have far greater financial and other resources and much broader client relationships than us and (unlike us) have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage and a wide range of investment banking services, which may enhance their competitive position. They also have the ability to support investment banking, including financial advisory services, with commercial banking, insurance and other financial services revenue in an effort to gain market share, which puts us at a competitive disadvantage and could result in pricing pressures that could materially adversely affect our revenue and profitability. In addition, Park Hill Group operates in a highly competitive environment and the barriers to entry into the fund placement business are low.

Risks Related to Our Organizational Structure

Our common unitholders do not elect our general partner or vote on our general partner's directors and will have limited ability to influence decisions regarding our business.

        Our general partner, Blackstone Group Management L.L.C., which is owned by our senior managing directors, will manage all of our operations and activities. The limited liability company agreement of Blackstone Group Management L.L.C. establishes a board of directors that will be responsible for the oversight of our business and operations. Our general partner's board of directors will be elected in accordance with its limited liability company agreement, which provides that our founders, Messrs. Schwarzman and Peterson (or, following the withdrawal, death or disability of one of them, the remaining founder), will be vested with the power to elect and remove the directors of our general partner. Actions by our founders in this regard must be taken with their unanimous approval. Following the withdrawal, death or disability of both of our founders, the power to elect and remove the directors of our general partner will vest in the members of our general partner holding a majority in interest in our general partner.

        Our common unitholders do not elect our general partner or its board of directors and, unlike the holders of common stock in a corporation, will have only limited voting rights on matters affecting our business and therefore limited ability to influence decisions regarding our business. Furthermore, if our common unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Our general partner may not be removed unless that removal is approved by the vote of the holders of not less than 662/3% of the voting power of our outstanding common units and special voting units (including common units and special voting units held by the general partner and its affiliates) and we receive an opinion of counsel regarding limited liability matters. As discussed below, immediately following this offering our existing owners will collectively have            % of the voting power of The Blackstone Group L.P. limited partners, or            % if the underwriters exercise in full their option to purchase additional common units. Therefore, they will have the ability to remove or block any removal of our general partner and thus control The Blackstone Group L.P.

Our existing owners will be able to determine the outcome of those few matters that may be submitted for a vote of the limited partners.

        Immediately following this offering, our existing owners will beneficially own            % of the equity in our business, or            % if the underwriters exercise in full their option to purchase

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additional common units. On those few matters that may be submitted for a vote of our common unitholders, the limited partners of Blackstone Holdings (other than AIG) will hold special voting units in The Blackstone Group L.P. that provide them with a number of votes that is equal to the aggregate number of partnership units of Blackstone Holdings that they then hold and entitle them to participate in the vote on the same basis as our common unitholders. Accordingly, immediately following this offering our existing owners will generally have sufficient voting power to determine the outcome of those few matters that may be submitted for a vote of the limited partners of The Blackstone Group L.P., including any attempt to remove our general partner.

        Our common unitholders' voting rights are further restricted by the provision in our partnership agreement stating that any common units held by a person that beneficially owns 20% or more of any class of The Blackstone Group L.P. common units then outstanding (other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates) cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of our common unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the ability of our common unitholders to influence the manner or direction of our management. Our partnership agreement also does not restrict our general partner's ability to take actions that may result in our being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. Furthermore, the common unitholders are not entitled to dissenters' rights of appraisal under our partnership agreement or applicable Delaware law in the event of a merger or consolidation, a sale of substantially all of our assets or any other transaction or event. In addition, we have the right to acquire all our then-outstanding common units if not more than 10% of our common units are held by persons other than our general partner and its affiliates.

        As a result of these matters and the provisions referred to under "—Our common unitholders do not elect our general partner or vote on our general partner's directors and will have limited ability to influence decisions regarding our business", our common unitholders may be deprived of an opportunity to receive a premium for their common units in the future through a sale of The Blackstone Group L.P., and the trading prices of our common units may be adversely affected by the absence or reduction of a takeover premium in the trading price.

We are a limited partnership and as a result will qualify for and intend to rely on exceptions from certain corporate governance and other requirements under the rules of the New York Stock Exchange.

        We are a limited partnership and will qualify for exceptions from certain corporate governance and other requirements of the rules of the New York Stock Exchange. Pursuant to these exceptions, limited partnerships may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including the requirements (1) that a majority of the board of directors of our general partner consist of independent directors, (2) that we have a nominating/corporate governance committee that is composed entirely of independent directors and (3) that we have a compensation committee that is composed entirely of independent directors. In addition, we will not be required to hold annual meetings of our common unitholders. Following this offering, we intend to avail ourselves of these exceptions. Accordingly, you will not have the same protections afforded to equityholders of entities that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us and our common unitholders, which may permit them to favor their own interests to the detriment of us and our common unitholders.

        Conflicts of interest may arise among our general partner and its affiliates, on the one hand, and us and our common unitholders, on the other hand. As a result of these conflicts, our general partner

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may favor its own interests and the interests of its affiliates over the interests of our common unitholders. These conflicts include, among others, the following:

    our general partner determines the amount and timing of our investments and dispositions, indebtedness, issuances of additional partnership interests and amounts of reserves, each of which can affect the amount of cash that is available for distribution to you;

    our general partner is allowed to take into account the interests of parties other than us in resolving conflicts of interest, which has the effect of limiting its duties (including fiduciary duties) to our common unitholders. For example, our subsidiaries that serve as the general partners of our investment funds have fiduciary and contractual obligations to the investors in those funds and certain of our subsidiaries engaged in our advisory business have contractual duties to their clients, as a result of which we expect to regularly take actions that might adversely affect our near-term results of operations or cash flow;

    because our senior managing directors hold their Blackstone Holdings partnership units directly or through entities that are not subject to corporate income taxation and The Blackstone Group L.P. holds Blackstone Holdings partnership units through wholly-owned subsidiaries, some of which are subject to corporate income taxation, conflicts may arise between our senior managing directors and The Blackstone Group L.P. relating to the selection and structuring of investments;

    other than as set forth in the non-competition, non-solicitation and confidentiality agreements to which our senior managing directors are subject, which may not be enforceable, affiliates of our general partner and existing and former personnel employed by our general partner are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us;

    our general partner has limited its liability and reduced or eliminated its duties (including fiduciary duties) under the partnership agreement, while also restricting the remedies available to our common unitholders for actions that, without these limitations, might constitute breaches of duty (including fiduciary duty). In addition, we have agreed to indemnify our general partner and its affiliates to the fullest extent permitted by law, except with respect to conduct involving bad faith, fraud or willful misconduct. By purchasing our common units, you will have agreed and consented to the provisions set forth in our partnership agreement, including the provisions regarding conflicts of interest situations that, in the absence of such provisions, might constitute a breach of fiduciary or other duties under applicable state law;

    our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered, or from entering into additional contractual arrangements with any of these entities on our behalf, so long as the terms of any such additional contractual arrangements are fair and reasonable to us as determined under the partnership agreement;

    our general partner determines how much debt we incur and that decision may adversely affect our credit ratings;

    our general partner determines which costs incurred by it and its affiliates are reimbursable by us;

    our general partner controls the enforcement of obligations owed to us by it and its affiliates; and

    our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

See "Certain Relationships and Related Person Transactions" and "Conflicts of Interest and Fiduciary Responsibilities".

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Our partnership agreement contains provisions that reduce or eliminate duties (including fiduciary duties) of our general partner and limit remedies available to common unitholders for actions that might otherwise constitute a breach of duty. It will be difficult for a common unitholder to successfully challenge a resolution of a conflict of interest by our general partner or by its conflicts committee.

        Our partnership agreement contains provisions that waive or consent to conduct by our general partner and its affiliates that might otherwise raise issues about compliance with fiduciary duties or applicable law. For example, our partnership agreement provides that when our general partner is acting in its individual capacity, as opposed to in its capacity as our general partner, it may act without any fiduciary obligations to us or our common unitholders whatsoever. When our general partner, in its capacity as our general partner, is permitted to or required to make a decision in its "sole discretion" or "discretion" or that it deems "necessary or appropriate" or "necessary or advisable," then our general partner will be entitled to consider only such interests and factors as it desires, including its own interests, and will have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of or factors affecting us or any limited partners and will not be subject to any different standards imposed by the partnership agreement, the Delaware Limited Partnership Act or under any other law, rule or regulation or in equity. These modifications of fiduciary duties are expressly permitted by Delaware law. Hence, we and our common unitholders will only have recourse and be able to seek remedies against our general partner if our general partner breaches its obligations pursuant to our partnership agreement. Unless our general partner breaches its obligations pursuant to our partnership agreement, we and our common unitholders will not have any recourse against our general partner even if our general partner were to act in a manner that was inconsistent with traditional fiduciary duties. Furthermore, even if there has been a breach of the obligations set forth in our partnership agreement, our partnership agreement provides that our general partner and its officers and directors will not be liable to us or our common unitholders for errors of judgment or for any acts or omissions unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that the general partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct. These modifications are detrimental to the common unitholders because they restrict the remedies available to common unitholders for actions that without those limitations might constitute breaches of duty (including fiduciary duty).

        Whenever a potential conflict of interest exists between us and our general partner, our general partner may resolve such conflict of interest. If our general partner determines that its resolution of the conflict of interest is on terms no less favorable to us than those generally being provided to or available from unrelated third parties or is fair and reasonable to us, taking into account the totality of the relationships between us and our general partner, then it will be presumed that in making this determination, our general partner acted in good faith. A common unitholder seeking to challenge this resolution of the conflict of interest would bear the burden of overcoming such presumption. This is different from the situation with Delaware corporations, where a conflict resolution by an interested party would be presumed to be unfair and the interested party would have the burden of demonstrating that the resolution was fair.

        Also, if our general partner obtains the approval of the conflicts committee of our general partner, the resolution will be conclusively deemed to be fair and reasonable to us and not a breach by our general partner of any duties it may owe to us or our common unitholders. This is different from the situation with Delaware corporations, where a conflict resolution by a committee consisting solely of independent directors may, in certain circumstances, merely shift the burden of demonstrating unfairness to the plaintiff. If you choose to purchase a common unit, you will be treated as having consented to the provisions set forth in the partnership agreement, including provisions regarding conflicts of interest situations that, in the absence of such provisions, might be considered a breach of fiduciary or other duties under applicable state law. As a result, common unitholders will, as a practical matter, not be able to successfully challenge an informed decision by the conflicts committee. See "Conflicts of Interest and Fiduciary Responsibilities".

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The control of our general partner may be transferred to a third party without common unitholder consent.

        Our general partner may transfer its general partner interest to a third party in a merger or consolidation without the consent of our common unitholders. Furthermore, at any time, the members of our general partner may sell or transfer all or part of their limited liability company interests in our general partner without the approval of the common unitholders, subject to certain restrictions as described elsewhere in this prospectus. A new general partner may not be willing or able to form new investment funds and could form funds that have investment objectives and governing terms that differ materially from those of our current investment funds. A new owner could also have a different investment philosophy, employ investment professionals who are less experienced, be unsuccessful in identifying investment opportunities or have a track record that is not as successful as Blackstone's track record. If any of the foregoing were to occur, we could experience difficulty in making new investments, and the value of our existing investments, our business, our results of operations and our financial condition could materially suffer.

We intend to pay regular distributions to our common unitholders, but our ability to do so may be limited by our holding partnership structure, applicable provisions of Delaware law and contractual restrictions.

        After consummation of this offering, we intend to pay cash distributions on a quarterly basis. The Blackstone Group L.P. will be a holding partnership and will have no material assets other than the ownership of the partnership units in Blackstone Holdings held through wholly-owned subsidiaries. The Blackstone Group L.P. has no independent means of generating revenue. Accordingly, we intend to cause Blackstone Holdings to make distributions to its partners, including The Blackstone Group L.P.'s wholly-owned subsidiaries, to fund any distributions The Blackstone Group L.P. may declare on the common units. If Blackstone Holdings makes such distributions, the limited partners of Blackstone Holdings will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy".

        The declaration and payment of any future distributions will be at the sole discretion of our general partner, which may change our distribution policy at any time. Our general partner will take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, including payment obligations pursuant to the tax receivable agreement and restrictions pursuant to our revolving credit facility, legal, tax and regulatory restrictions, restrictions or other implications on the payment of distributions by us to our common unitholders or by our subsidiaries to us and such other factors as our general partner may deem relevant. Under the Delaware Limited Partnership Act, we may not make a distribution to a partner if after the distribution all our liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of our assets. If we were to make such an impermissible distribution, any limited partner who received a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Partnership Act would be liable to us for the amount of the distribution for three years. In addition, the terms of our revolving credit facility require us to maintain a minimum level of partners' capital, which may prohibit us from making certain distributions. Subject to a notice period and a cure period, distributions in violation of the terms of our revolving credit facility would result in a default under our revolving credit facility. In addition, Blackstone Holdings' cash flow from operations may be insufficient to enable it to make required minimum tax distributions to its partners, in which case Blackstone Holdings may have to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we risk slowing the pace of our growth, or not having a sufficient amount of

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cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

We will be required to pay our senior managing directors for most of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we receive in connection with this offering, subsequent exchanges of our common units and related transactions.

        As described in "Organizational Structure", we intend to use a portion of the net proceeds from this offering to purchase interests in our business from our existing owners as described in "Organizational Structure—Offering Transactions". In addition, holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries), subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis. The purchase and subsequent exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Blackstone Holdings that otherwise would not have been available. These increases in tax basis may increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that The Blackstone Group L.P.'s wholly-owned subsidiaries that are taxable as corporations for U.S. federal income tax purposes, which we refer to as the "corporate taxpayers," would otherwise be required to pay in the future, although the IRS may challenge all or part of that tax basis increase, and a court could sustain such a challenge.

        The corporate taxpayers will enter into a tax receivable agreement with our existing owners that will provide for the payment by the corporate taxpayers to our existing owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the corporate taxpayers actually realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This payment obligation is an obligation of the corporate taxpayers and not of Blackstone Holdings. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our common units at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the increases in the tax basis of the tangible and intangible assets of Blackstone Holdings, the payments that we may make to our existing owners will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to our existing owners in respect of the purchase will aggregate $                      million and range from approximately $                      million to $                      million per year over the next 15 years (or $        million and range from approximately $        million to $        million per year over the next 15 years if the underwriters exercise in full their option to purchase additional common units). A $1.00 increase (decrease) in the assumed initial public offering price of $                              per common unit would increase (decrease) the aggregate amount of future payments to our existing owners in respect of the purchase by $                              million (or $        million if the underwriters exercise in full their option to purchase additional common units). Future payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial. The payments under the tax receivable agreement are not conditioned upon our existing owners' continued ownership of us. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise.

        Although we are not aware of any issue that would cause the IRS to challenge a tax basis increase, our existing owners will not reimburse us for any payments previously made under the tax receivable agreement. As a result, in certain circumstances payments to our existing owners under the tax

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receivable agreement could be in excess of the corporate taxpayers' cash tax savings. The corporate taxpayers' ability to achieve benefits from any tax basis increase, and the payments to be made under this agreement, will depend upon a number of factors, as discussed above, including the timing and amount of our future income.

If The Blackstone Group L.P. were deemed an "investment company" under the 1940 Act, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

        A person will generally be deemed to be an "investment company" for purposes of the 1940 Act if:

    it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

    absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

        We believe that we are engaged primarily in the business of providing asset management and financial advisory services and not in the business of investing, reinvesting or trading in securities. We also believe that the primary source of income from each of our businesses is properly characterized as income earned in exchange for the provision of services. We hold ourselves out as an asset management and financial advisory firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that The Blackstone Group L.P. is, or following this offering will be, an "orthodox" investment company as defined in section 3(a)(1)(A) of the 1940 Act and described in the first bullet point above. Further, following this offering, The Blackstone Group L.P. will have no material assets other than its equity interests in certain wholly-owned subsidiaries, which in turn will have no material assets (other than intercompany debt) other than general partner interests in the Blackstone Holdings partnerships. These wholly-owned subsidiaries will be the sole general partners of the Blackstone Holdings partnerships and will be vested with all management and control over the Blackstone Holdings partnerships. We do not believe the equity interests of The Blackstone Group L.P. in its wholly-owned subsidiaries or the general partner interests of these wholly-owned subsidiaries in the Blackstone Holdings partnerships are investment securities. Moreover, because we believe that the capital interests of the general partners of our funds in their respective funds are neither securities nor investment securities, we believe that less than 40% of The Blackstone Group L.P.'s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis after this offering will be comprised of assets that could be considered investment securities. Accordingly, we do not believe The Blackstone Group L.P. is, or following this offering will be, an inadvertent investment company by virtue of the 40% test in section 3(a)(1)(C) of the 1940 Act as described in the second bullet point above.

        The 1940 Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose certain governance requirements. We intend to conduct our operations so that The Blackstone Group L.P. will not be deemed to be an investment company under the 1940 Act. If anything were to happen which would cause The Blackstone Group L.P. to be deemed to be an investment company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure, ability to transact business with affiliates (including us) and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among The Blackstone Group L.P., Blackstone Holdings and our senior managing directors, or any combination thereof, and materially adversely affect our business, financial condition and results of operations. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our business in a manner that does not subject us to the registration and other requirements of the 1940 Act.

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Risks Related to Our Common Units and this Offering

There may not be an active trading market for our common units, which may cause our common units to trade at a discount from the initial offering price and make it difficult to sell the common units you purchase.

        Prior to this offering, there has been no public trading market for our common units. It is possible that after this offering an active trading market will not develop or continue, which would make it difficult for you to sell your common units at an attractive price or at all. The initial public offering price per common unit will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which our common units will trade in the public market after this offering.

A portion of the proceeds from this offering will be used to purchase interests in our business from our existing owners. Accordingly, we will not retain such proceeds.

        We estimate that our net proceeds from this offering, at an assumed initial public offering price of $                  per common unit and after deducting estimated underwriting discounts and offering expenses, will be approximately $                  billion. We intend to use approximately $                  billion of these net proceeds, or approximately $                  billion if the underwriters exercise in full their option to purchase additional common units, to purchase interests in our business from our existing owners as described under "Organizational Structure—Offering Transactions". Accordingly, we will not retain such proceeds and they will not be used to invest in and grow our business. See "Use of Proceeds".

Our common unit price may decline due to the large number of common units eligible for future sale and for exchange.

        The market price of our common units could decline as a result of sales of a large number of common units in the market after the offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell common units in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of                        of our common units outstanding, or                        common units assuming the underwriters exercise in full their option to purchase additional common units. All of the common units will have been sold in this offering and will be freely tradable without restriction or further registration under the Securities Act by persons other than our "affiliates." See "Common Units Eligible for Future Sale". Subject to the lock-up restrictions described below, we may issue and sell in the future additional common units.

        In addition, upon completion of this offering our existing owners will own an aggregate of                        Blackstone Holdings partnership units. Prior to this offering we will enter into an exchange agreement with holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries) so that these holders, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. The common units we issue upon such exchanges would be "restricted securities," as defined in Rule 144 under the Securities Act, unless we register such issuances. However, we will enter into a registration rights agreement with the limited partners of Blackstone Holdings that would require us to register these common units under the Securities Act. See "Common Units Eligible for Future Sale—Registration Rights" and "Certain Relationships and Related Person Transactions—Registration Rights Agreement". While the partnership agreements of the Blackstone Holdings partnerships and related agreements will contractually restrict our existing owners' ability to transfer the Blackstone Holdings partnership units or The Blackstone Group L.P. common units they hold and will require that they maintain a minimum amount of equity ownership during their employ by us, these contractual provisions may lapse over time or be waived, modified or amended at any time. See "Management—Minimum Retained Ownership Requirements and Transfer Restrictions".

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        Under our 2007 Equity Incentive Plan, we intend to grant                        unvested deferred restricted common units, which are subject to specified vesting requirements, to our non-senior managing director employees at the time of this offering. An aggregate of                        additional common units and Blackstone Holdings partnership units have been covered by our 2007 Equity Incentive Plan. In addition, beginning in 2008 the aggregate number of common units and Blackstone Holdings partnership units covered by our 2007 Equity Incentive Plan will be increased on the first day of each fiscal year during its term by the excess of (a) 15% of the aggregate number of common units and Blackstone Holdings partnership units outstanding on the last day of the immediately preceding fiscal year (excluding Blackstone Holdings partnership units held by The Blackstone Group LP or its wholly-owned subsidiaries) over (b) the aggregate number of common units and Blackstone Holdings partnership units covered by our 2007 Equity Incentive Plan as of such date (unless the administrator of the 2007 Equity Incentive Plan should decide to increase the number of common units and Blackstone Holdings partnership units covered by the plan by a lesser amount). See "Management—2007 Equity Incentive Plan—IPO Date Equity Awards". We intend to file one or more registration statements on Form S-8 under the Securities Act to register common units covered by our 2007 Equity Incentive Plan (including pursuant to automatic annual increases). Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, common units registered under such registration statement will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover                        common units.

        In addition, our partnership agreement authorizes us to issue an unlimited number of additional partnership securities and options, rights, warrants and appreciation rights relating to partnership securities for the consideration and on the terms and conditions established by our general partner in its sole discretion without the approval of any limited partners. In accordance with the Delaware Limited Partnership Act and the provisions of our partnership agreement, we may also issue additional partnership interests that have certain designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to common units.

The market price of our common units may be volatile, which could cause the value of your investment to decline.

        Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of common units in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response the market price of our common units could decrease significantly. You may be unable to resell your common units at or above the initial public offering price.

Risks Relating to United States Taxation

If we were treated as a corporation for U.S. federal income tax or state tax purposes, then our distributions to you would be substantially reduced and the value of our common units would be adversely affected.

        The value of your investment in us depends largely on our being treated as a partnership for U.S. federal income tax purposes, which requires that 90% or more of our gross income for every taxable year consist of qualifying income, as defined in Section 7704 of the Internal Revenue Code and that The Blackstone Group L.P. not be registered under the 1940 Act. Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We may not meet these requirements or current law may change so as to cause, in either event, us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject to U.S. federal income tax. Moreover, the anticipated after-tax benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the U.S. Internal Revenue Services, or "IRS," on this or any other matter affecting us.

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        If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributions to you would be substantially reduced, likely causing a substantial reduction in the value of our common units.

        Current law may change, causing us to be treated as a corporation for U.S. federal or state income tax purposes or otherwise subjecting us to entity level taxation. For example, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity, our distributions to you would be reduced.

You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash dividends from us.

        As long as 90% of our gross income for each taxable year constitutes qualifying income as defined in Section 7704 of the Internal Revenue Code and we are not required to register as an investment company under the 1940 Act on a continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly-traded partnership taxable as a corporation. As a result, you may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on your allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow through basis) for each of our taxable years ending with or within your taxable year, regardless of whether or not you receive cash dividends from us. See "Material U.S. Federal Tax Considerations".

        You may not receive cash dividends equal to your allocable share of our net taxable income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings, if any, in a Controlled Foreign Corporation, or "CFC," and a Passive Foreign Investment Company, or "PFIC," may produce taxable income prior to the receipt of cash relating to such income, and common unitholders that are U.S. taxpayers will be required to take such income into account in determining their taxable income. In the event of an inadvertent termination of our partnership status for which the IRS has granted us limited relief, each holder of our common units may be obligated to make such adjustments as the IRS may require to maintain our status as a partnership. Such adjustments may require persons holding our common units to recognize additional amounts in income during the years in which they hold such units.

The Blackstone Group L.P.'s interest in certain of our businesses will be held through Blackstone Holdings I GP Inc., Blackstone Holdings II GP Inc. or Blackstone Holdings V GP L.P., which will be treated as corporations for U.S. federal income tax purposes; such corporations may be liable for significant taxes and may create other adverse tax consequences, which could potentially adversely affect the value of your investment.

        In light of the publicly-traded partnership rules under U.S. federal income tax law and other requirements, The Blackstone Group L.P. will hold its interest in certain of our businesses through Blackstone Holdings I GP Inc., Blackstone Holdings II GP Inc. or Blackstone Holdings V GP L.P., which will be treated as corporations for U.S. federal income tax purposes. Each such corporation could be liable for significant U.S. federal income taxes and applicable state, local and other taxes that would not otherwise be incurred, which could adversely affect the value of your investment. Those additional taxes have not applied to our existing owners in our organizational structure in effect before this offering and will not apply to our existing owners following this offering to the extent they own equity interests directly or indirectly in the Blackstone Holdings partnerships.

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Complying with certain tax-related requirements may cause us to invest through foreign or domestic corporations subject to corporate income tax or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

        In order for us to be treated as a partnership for U.S. federal income tax purposes and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the 1940 Act. In order to effect such treatment, we (or our subsidiaries) may be required to invest through foreign or domestic corporations subject to corporate income tax, or enter into acquisitions, borrowings, financings or other transactions we may not have otherwise entered into. This may adversely affect our ability to operate solely to maximize our cash flow.

Tax gain or loss on disposition of our common units could be more or less than expected.

        If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those common units. Prior distributions to you in excess of the total net taxable income allocated to you, which decreased the tax basis in your common units, will in effect become taxable income to you if the common units are sold at a price greater than your tax basis in those common units, even if the price is less than the original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to you.

We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. federal income tax purposes.

        Certain of our funds' investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. Common unitholders indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences. See "Material U.S. Federal Tax Considerations—Passive Foreign Investment Companies" and "—Controlled Foreign Corporations".

Non-U.S. persons face unique U.S. tax issues from owning common units that may result in adverse tax consequences to them.

        In light of our intended investment activities, we may be, or may become, engaged in a U.S. trade or business for U.S. federal income tax purposes in which case some portion of our income would be treated as effectively connected income with respect to non-U.S. holders, or "ECI." Moreover, dividends paid by an investment that we make in a real estate investment trust, or "REIT," that are attributable to gains from the sale of U.S. real property interests and sales of certain investments in interests in U.S. real property, including stock of certain U.S. corporations owning significant U.S. real property, may be treated as ECI with respect to non-U.S. holders. In addition, certain income of non-U.S. holders from U.S. sources not connected to any such U.S. trade or business conducted by us could be treated as ECI. To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on their allocable shares of such income, would be required to file a U.S. federal income tax return for such year reporting their allocable shares of income effectively connected with such trade or business and any other income treated as ECI, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on their allocable share of such income. In addition, certain income from U.S. sources that is not ECI allocable to non-U.S. holders will be reduced by withholding taxes imposed at the highest effective applicable tax rate.

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Tax-exempt entities face unique tax issues from owning common units that may result in adverse tax consequences to them.

        In light of our intended investment activities, we may derive income that constitutes "unrelated business taxable income," or "UBTI." Consequently, a holder of common units that is a tax-exempt organization may be subject to "unrelated business income tax" to the extent that its allocable share of our income consists of UBTI. A tax-exempt partner of a partnership could be treated as earning UBTI if the partnership regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner, if the partnership derives income from debt-financed property or if the partnership interest itself is debt-financed.

We cannot match transferors and transferees of common units, and we will therefore adopt certain income tax accounting positions that may not conform with all aspects of applicable tax requirements. The IRS may challenge this treatment, which could adversely affect the value of our common units.

        Because we cannot match transferors and transferees of common units, we will adopt depreciation, amortization and other tax accounting positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our common unitholders. It also could affect the timing of these tax benefits or the amount of gain on the sale of common units and could have a negative impact on the value of our common units or result in audits of and adjustments to our common unitholders' tax returns.

The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for U.S. federal income tax purposes.

        We will be considered to have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all common unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. See "Material U.S. Federal Tax Considerations" for a description of the consequences of our termination for U.S. federal income tax purposes.

Common unitholders will be subject to state and local taxes and return filing requirements as a result of investing in our common units.

        In addition to U.S. federal income taxes, our common unitholders will be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if our common unitholders do not reside in any of those jurisdictions. Our common unitholders likely will be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, common unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each common unitholder to file all United States federal, state and local tax returns that may be required of such common unitholder. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

We do not expect to be able to furnish to each unitholder specific tax information within 90 days after the close of each calendar year, which means that holders of common units who are U.S. taxpayers should anticipate the need to file annually a request for an extension of the due date of their income tax return.

        It will most likely require longer than 90 days after the end of our fiscal year to obtain the requisite information from all lower-tier entities so that K-1s may be prepared for the Partnership. For this reason, holders of common units who are U.S. taxpayers should anticipate the need to file annually with the IRS (and certain states) a request for an extension past April 15 or the otherwise applicable due date of their income tax return for the taxable year. See "Material U.S. Federal Tax Considerations—Administrative Matters—Information Returns".

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FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements, 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 "Risk Factors". These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


MARKET AND INDUSTRY DATA

        This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

        Our internal data and estimates are based upon information obtained from investors in our funds, trade and business organizations and other contacts in the markets in which we operate and our management's understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

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ORGANIZATIONAL STRUCTURE

Reorganization

        Blackstone Holdings Formation

        Our business is presently owned by our founders and other senior managing directors, selected other individuals engaged in some of our businesses and AIG, to whom we refer collectively as our "existing owners."

        Our business is presently conducted through a large number of entities as to which there is no single holding entity but which are separately owned by our existing owners. In order to facilitate this offering, prior to this offering, our existing owners will contribute to Blackstone Holdings I L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P., Blackstone Holdings IV L.P. or Blackstone Holdings V L.P., which we refer to collectively as "Blackstone Holdings," each of the operating entities included in our historical combined financial statements, with the exception of the general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of Blackstone's investment funds, which entities will continue to be owned by our existing owners. The legacy funds whose general partners will not be contributed to Blackstone Holdings represent in the aggregate less than 7% of the Blackstone funds' total investments as of December 31, 2006. In addition, the separate investment vehicles for our existing owners and other third parties that will not be contributed have an aggregate of approximately $212 million of investments in or alongside of the Blackstone funds as of December 31, 2006. More specifically, our existing owners will contribute to Blackstone Holdings the intellectual property rights associated with the Blackstone name and the indicated equity interests in the following businesses, which we refer to collectively as the "Contributed Businesses":

    100% of the investment advisers of all of Blackstone's investment funds (other than our proprietary hedge funds as described below), which provide investment management and services to, and are entitled to any management fees payable in respect of, these investment funds, as well as transaction and other fees that may be payable by these investment funds' portfolio companies;

    100% of the entities that are the managing members of the general partners of all of our actively investing carry funds (that is, the Blackstone Capital Partners V, Blackstone Real Estate Partners VI, Blackstone Real Estate Partners International II and Blackstone Mezzanine Partners II funds), as well as all of our historical carry funds that still have a meaningful amount of unrealized investments (that is, the Blackstone Capital Partners IV, Blackstone Communications Partners, Blackstone Real Estate Partners IV, Blackstone Real Estate Partners V, Blackstone Real Estate Partners International I and Blackstone Mezzanine Partners I funds), which entities will be entitled to:

      % -            % (depending on the particular fund investment) of all carried interest earned in relation to investments made prior to the date of the Reorganization (as defined below) by our actively investing carry funds, as well as by all of our historical carry funds that still have a meaningful amount of unrealized investments. This includes the carried interest in these funds that had been allocated to substantially all of our existing owners prior to the date of the reorganization; and

      all of any carried interest earned in relation to investments made by our actively investing carry funds from and after the date of the contribution other than the percentage we determine to allocate to our professionals (as described below);

    100% of the entity that is the manager of our senior debt vehicles;

    100% of the entities that are the managing members of the general partners of our funds of hedge funds, which are entitled to any management and incentive fees payable in respect of such funds;

    100% of the entities that are the managing members of the general partner and the investment adviser of our distressed securities hedge fund, which entities are entitled to a portion of the management fees and a portion of the incentive fees payable in respect of such fund;

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    100% of the entities that are managing members of the general partner and the investment adviser of our equity hedge fund, which entities are entitled to a portion of the management fees and a portion of the incentive fees payable in respect of such fund;

    100% of Blackstone Advisory Services L.P., through which Blackstone provides mergers and acquisitions and restructuring and reorganization advisory services; and

    100% of Park Hill Group, which provides placement services to corporate private equity funds, real estate funds, venture capital funds and hedge funds.

        Accordingly, subsidiaries of Blackstone Holdings will generally be entitled to:

    all management fees payable in respect of all of our current and future investment funds (with the exception of our proprietary hedge funds, where the professionals who work in those operations are entitled to a portion of the management fees), as well as transaction and other fees that may be payable by these investment funds' portfolio companies;

    % -        % (depending on the particular fund investment) of all carried interest earned in relation to investments made prior to the date of the Reorganization by our actively investing carry funds, as well as by all of our historical carry funds that still have a meaningful amount of unrealized investments;

    all carried interest earned in relation to investments made from and after the date of the reorganization by our actively investing and future carry funds, other than the percentage we determine to allocate to our professionals as described below;

    all incentive fees payable in respect of all of our current and future investment funds, other than the percentage we determine to allocate to our professionals as described below;

    all returns on investments of our own capital in the investment funds we sponsor and manage; and

    all fees generated by our financial advisory business.

        With respect to our actively investing carry funds and proprietary hedge funds as well as any future carry funds and proprietary hedge funds, we intend to continue to allocate to the senior managing directors, other professionals and selected other individuals who work in these operations a portion of the carried interest allocated or incentive fees earned in relation to these funds in order to better align their interests with our own and with those of the investors in these funds. Our current estimate is that approximately    % of the carried interest earned in relation to our carry funds and approximately    % of the incentive fees earned in relation to our proprietary hedge funds will be allocated to such individuals, although these percentages may fluctuate up or down over time.

        The income of Blackstone Holdings (including management fees, transaction fees, incentive fees and other fees, as well as carried interest) will benefit The Blackstone Group L.P. to the extent of its equity interest in Blackstone Holdings. See "Business—Structure and Operation of Our Investment Funds—Incentive Arrangements / Fee Structure".

        In exchange for the contribution of the Contributed Businesses described above:

    our founders will receive                        vested and                        unvested Blackstone Holdings partnership units;

    our non-founding senior managing directors and selected other individuals engaged in some of our businesses will receive                        vested and                         unvested Blackstone Holdings partnership units; and

    AIG will receive                        Blackstone Holdings partnership units, all of which will be fully vested.

We use the terms "Blackstone Holdings partnership unit" or "partnership unit in/of Blackstone Holdings" to refer collectively to a partnership unit in each of the Blackstone Holdings partnerships.

        We refer to the above-described transactions, collectively, as the "Blackstone Holdings Formation."

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        See "Certain Relationships and Related Person Transactions—Blackstone Holdings Partnership Agreements" for information regarding vesting of the Blackstone Holdings partnership units. In addition, under the terms of the partnership agreements of the Blackstone Holdings partnerships, all of the Blackstone Holdings partnership units received by the limited partners of Blackstone Holdings in the Reorganization will be subject to restrictions on transfer and minimum retained ownership requirements. See "Management—Minimum Retained Ownership Requirements and Transfer Restrictions" and "Certain Relationships and Related Person Transactions—Blackstone Holdings Partnership Agreements". Subject to vesting and minimum retained ownership requirements and transfer restrictions, all of the Blackstone Holdings partnership units to be received by our existing owners in the Blackstone Holdings Formation will be entitled to be exchanged for The Blackstone Group L.P. common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications, as described below in "—The Blackstone Group L.P." See "Certain Relationships and Related Person Transactions—Exchange Agreement".

        The vested Blackstone Holdings partnership units received by our existing owners in the Reorganization will be reflected in our financial statements at the historical cost basis of the businesses contributed. We intend to accrue for the unvested Blackstone Holdings partnership units as compensation paid to our non-founding senior managing directors in accordance with Statement of Financial Accounting Standards No. 123(R) "Share-Based Payments", or "SFAS 123(R)." The unvested Blackstone Holdings partnership units will be charged to expense as the Blackstone Holdings partnership units vest over the service period. The expense will be based on the grant date fair value of the Blackstone Holdings partnership units, which will be the initial public offering price of The Blackstone Group L.P. common units into which these partnership units are exchangeable.

        Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. Because our existing owners own and control Blackstone Group before and after the Reorganization, the Blackstone Holdings Formation will be accounted for as a reorganization of entities under common control. Accordingly, except as described below in respect of the deconsolidation of our investment funds, we will carry forward unchanged the value of the assets and liabilities of the Contributed Businesses recognized in Blackstone Group's historical combined financial statements into our consolidated financial statements.

        Deconsolidation of Blackstone Funds

        In accordance with GAAP, a number of our investment funds have historically been consolidated into our combined financial statements. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these investment funds on a gross basis rather than reflecting only the value of our principal investments in such investment funds.

        The Contributed Businesses that act as a general partner of a consolidated Blackstone fund (with the exception of four of our funds of hedge funds) are taking the necessary steps to grant rights to the third-party investors in that fund to provide that a simple majority of the fund's investors will have the right, without cause, to remove the general partner of that fund or to accelerate the liquidation date of that fund in accordance with certain procedures. The granting of these rights, which will occur substantially concurrently with the Blackstone Holdings Formation described above, will lead to the deconsolidation of such investment funds from our consolidated financial statements as of and for periods following such event. In addition, because the general partners of certain other legacy Blackstone funds will not be contributed to Blackstone Holdings as part of the Blackstone Holdings Formation as described above, we will also no longer consolidate those funds in our consolidated financial statements following this offering.

        Because the interests of the limited partner investors in our investment funds, which are reflected as "non-controlling interests in consolidated entities" on our historical combined statements of financial condition and as "non-controlling interests in income of consolidated entities" on our historical combined statements of income, will also be eliminated in connection with the deconsolidation of these investment funds, the deconsolidation of these investment funds will not result in a change in our partners' equity or

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net income in our consolidated financial statements. See "Unaudited Pro Forma Financial Information" for a more detailed description of the deconsolidation of our investment funds from our financial statements.

        Distribution of Earnings Generated by Contributed Businesses Prior to Offering

        Prior to this offering, we intend to make one or more distributions to our existing owners representing all of the undistributed earnings generated by the Contributed Businesses prior to the date of the offering. If the offering had occurred on March 31, 2007, we estimate that the aggregate amount of such distributions would have been $                              million. However, the actual amount of such distributions will depend on the amount of earnings generated by the Contributed Businesses prior to the offering. We may need to draw on our revolving credit facility to make such distributions.

        We refer to the Blackstone Holdings Formation, the deconsolidation of most Blackstone funds and the distribution to our existing owners of the pre-offering earnings of the Contributed Businesses, collectively, as the "Reorganization".

The Blackstone Group L.P.

        The Blackstone Group L.P. was formed as a Delaware limited partnership on March 12, 2007. The Blackstone Group L.P. has not engaged in any business or other activities except in connection with its formation, the Reorganization and this offering. The Blackstone Group L.P. is managed and operated by its general partner, Blackstone Group Management L.L.C., to whom we refer as "our general partner," which is in turn wholly-owned by our senior managing directors and controlled by our founders. Prior to this offering we will enter into an exchange agreement with holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries) so that these holders, subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. The amended and restated partnership agreement of The Blackstone Group L.P. will also provide that on those few matters that may be submitted for a vote of our common unitholders the limited partners of Blackstone Holdings (other than AIG) will hold special voting units in The Blackstone Group L.P. that provide them with a number of votes that is equal to the aggregate number of partnership units of Blackstone Holdings that they then hold and entitle them to participate in the vote on the same basis as our common unitholders. See "Material Provisions of The Blackstone Group L.P. Partnership Agreement".

Offering Transactions

        Upon the consummation of this offering, The Blackstone Group L.P. will contribute the net proceeds to its wholly-owned subsidiaries, Blackstone Holdings I GP Inc. (a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes), Blackstone Holdings II GP Inc. (a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes), Blackstone Holdings III GP L.L.C. (a Delaware limited liability company that is a disregarded entity and not an association taxable as a corporation for U.S. federal income tax purposes), Blackstone Holdings IV GP L.P. (a Delaware limited partnership that is a disregarded entity and not an association taxable as a corporation for U.S. federal income tax purposes) and Blackstone Holdings V GP L.P. (an Alberta limited partnership that is a foreign corporation for U.S. federal income tax purposes). See "Material U.S. Federal Tax Considerations—United States Taxes—Taxation of our Partnership and the Blackstone Holdings Partnerships" for more information about the tax treatment of The Blackstone Group L.P. and Blackstone Holdings. The wholly-owned subsidiaries of The Blackstone Group L.P. will, concurrently with the Reorganization and may from time to time thereafter, enter into intracompany lending arrangements with one another.

        The Blackstone Group L.P.'s wholly-owned subsidiaries will then use all of these net proceeds to (1) purchase            vested Blackstone Holdings partnership units from our existing owners (or                        vested Blackstone Holdings partnership units if the underwriters exercise in full their option to purchase additional common units) and (2) purchase                         additional newly-issued Blackstone

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Holdings partnership units from Blackstone Holdings. Accordingly, The Blackstone Group L.P. will hold, through wholly-owned subsidiaries, a number of Blackstone Holdings partnership units equal to the number of common units that The Blackstone Group L.P. has issued in connection with this offering. In connection with their acquisition of partnership units in Blackstone Holdings, these wholly-owned subsidiaries of The Blackstone Group L.P. will become the sole general partners of the Blackstone Holdings partnerships.

        The purchase by The Blackstone Group L.P.'s wholly-owned subsidiaries of interests in our business from our existing owners with a portion of the proceeds from this offering is expected to result in an increase in the tax basis of the tangible and intangible assets of Blackstone Holdings that would not otherwise have been available. This increase in tax basis will increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that the wholly-owned subsidiaries of The Blackstone Group L.P. that are taxable as corporations for U.S. federal income tax purposes would otherwise be required to pay in the future. These wholly-owned subsidiaries will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of this increase in tax basis, as well as 85% of the amount of any such savings these entities actually realize as a result of increases in tax basis that arise due to future exchanges of Blackstone Holdings partnership units. No payments will be made if a limited partner elects to exchange his or her Blackstone Holdings partnership units in a tax-free transaction involving a charitable contribution. See "Certain Relationships and Related Person Transaction—Tax Receivable Agreement".

        At the time of this offering, we intend to grant to our non-senior managing director employees awards of deferred restricted common units as described under "Management—IPO Date Equity Awards".

        We refer to the above-described transactions as the "Offering Transactions." We intend to use the remaining net proceeds from this offering as set forth under "Use of Proceeds".

        As a result of the Reorganization and the Offering Transactions, immediately following this offering:

    The Blackstone Group L.P., through its wholly-owned subsidiaries, will hold                        partnership units in Blackstone Holdings (or                        partnership units if the underwriters exercise in full their option to purchase additional common units) and will, through its wholly-owned subsidiaries, be the sole general partner of each of the Blackstone Holdings partnerships and, through Blackstone Holdings and its subsidiaries, operate the Contributed Businesses;

    our founders will hold                        vested partnership units and                        unvested partnership units in Blackstone Holdings, our non-founding senior managing directors and selected other individuals engaged in some of our businesses will hold                        vested and                        unvested partnership units in Blackstone Holdings and AIG will hold                        vested partnership units in Blackstone Holdings; and

    on those few matters that may be submitted for a vote of the limited partners of The Blackstone Group L.P., the common unitholders of The Blackstone Group L.P. will collectively have            % of the voting power of The Blackstone Group L.P. limited partners (or            % if the underwriters exercise in full their option to purchase additional common units) and the limited partners of Blackstone Holdings will collectively have            % of the voting power of The Blackstone Group L.P. limited partners (or            % if the underwriters exercise in full their option to purchase additional common units).

The Blackstone Holdings partnership units that will be held by The Blackstone Group L.P.'s wholly-owned subsidiaries will be economically identical in all respects to the Blackstone Holdings partnership units that will be held by our existing owners, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy". Subject to the vesting and minimum retained ownership requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, holders of Blackstone Holdings partnership units may exchange these units for The Blackstone Group L.P. common units on a one-for-one basis, subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. See "Certain Relationships and Related Person Transactions—Exchange Agreement".

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        The diagram below depicts our organizational structure immediately following the Reorganization and the Offering Transactions.

GRAPHIC

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Holding Partnership Structure

        The Blackstone Group L.P. will be a holding partnership and, through wholly-owned subsidiaries, the sole general partner of each of the Blackstone Holdings partnerships. The Blackstone Group L.P. will operate and control all of the business and affairs of Blackstone Holdings. Through Blackstone Holdings, we will continue to conduct the Contributed Businesses. The Blackstone Group L.P. will consolidate the financial results of Blackstone Holdings and its consolidated subsidiaries, and the ownership interest of the limited partners of Blackstone Holdings will be reflected as a minority interest in The Blackstone Group L.P.'s consolidated financial statements.

        The Blackstone Group L.P. intends to conduct all of its material business activities through Blackstone Holdings. Each of the Blackstone Holdings partnerships was formed to hold our interests in different businesses. We expect that our U.S. fee-generating businesses will be held by Blackstone Holdings I L.P. We expect that our interests in many of the investments by our corporate private equity funds and real estate opportunity funds in entities that are treated as a partnership for U.S. federal income tax purposes will be held by Blackstone Holdings II L.P. We anticipate that Blackstone Holdings III L.P. will hold a variety of assets, including interests in entities treated as domestic corporations for U.S. federal income tax purposes. We expect that our interests in certain investments made by our corporate private equity funds and real estate opportunity funds in certain non-U.S. entities and certain other investments will be held by Blackstone Holdings IV L.P. We expect that our non-U.S. fee-generating businesses will be held by Blackstone Holdings V L.P.

        Following the reorganization and the offering:

    The Blackstone Group L.P. will be a holding partnership;

    through wholly-owned subsidiaries, The Blackstone Group L.P. will hold controlling equity interests in, and be the sole general partner of, each of the Blackstone Holdings partnerships;

    each of the Blackstone Holdings partnerships will have an identical number of partnership units outstanding;

    The Blackstone Group L.P. will hold, through wholly-owned subsidiaries, a number of Blackstone Holdings partnership units equal to the number of common units that The Blackstone Group L.P. has issued;

    the Blackstone Holdings partnership units that will be held by The Blackstone Group L.P.'s wholly-owned subsidiaries will be economically identical in all respects to the Blackstone Holdings partnership units that will be held by the existing owners (except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy"); and

    The Blackstone Group L.P. intends to conduct all of its material business activities through the Blackstone Holdings partnerships.

        Accordingly, and similar in many respects to the structure referred to as an "umbrella partnership" real estate investment trust, or "UPREIT," that is frequently used in the real estate industry, if and when an existing owner exchanges a Blackstone Holdings partnership unit for a common unit of The Blackstone Group L.P., the relative equity ownership positions of the exchanging existing owner and of the other equity owners of Blackstone (whether held at The Blackstone Group L.P. or at Blackstone Holdings) will not be altered.

        We believe that The Blackstone Group L.P. will be treated as a partnership and not as a corporation for U.S. federal income tax purposes. An entity that is treated as a partnership for U.S. federal income tax purposes is not a taxable entity and incurs no U.S. federal income tax liability. Instead, each partner is required to take into account its allocable share of items of income, gain, loss

70



and deduction of the partnership in computing its U.S. federal income tax liability, regardless of whether or not cash distributions are then made. Investors in this offering will become partners in The Blackstone Group L.P. Distributions of cash by a partnership to a partner are generally not taxable unless the amount of cash distributed to a partner is in excess of the partner's adjusted basis in its partnership interest. However, our partnership agreement does not restrict our ability to take actions that may result in our being treated as an entity taxable as a corporation for U.S. federal (and applicable state) income tax purposes. See "Material U.S. Federal Tax Consequences" for a summary discussing certain United States federal income tax considerations related to the purchase, ownership and disposition of our common units as of the date of this prospectus.

        We believe that the Blackstone Holdings partnerships will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the holders of partnership units in Blackstone Holdings, including The Blackstone Group L.P.'s wholly-owned subsidiaries, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of Blackstone Holdings. Net profits and net losses of Blackstone Holdings will generally be allocated to its partners (including The Blackstone Group L.P.'s wholly-owned subsidiaries) pro rata in accordance with the percentages of their respective partnership interests, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy". Because The Blackstone Group L.P. will indirectly own            % of the total partnership units in Blackstone Holdings (or            % if the underwriters exercise in full their option to purchase additional common units), The Blackstone Group L.P. will indirectly be allocated             % of the net profits and net losses of Blackstone Holdings (or            % if the underwriters exercise in full their option to purchase additional common units), except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy". The remaining net profits and net losses will be allocated to the limited partners of Blackstone Holdings. These percentages are subject to change, including upon an exchange of Blackstone Holdings partnership units for The Blackstone Group L.P. common units and upon issuance of additional The Blackstone Group L.P. common units to the public. The Blackstone Group L.P. will hold, through wholly-owned subsidiaries, a number of Blackstone Holdings partnership units equal to the number of common units that The Blackstone Group L.P. has issued.

        After this offering, we intend to cause Blackstone Holdings to make distributions to its partners, including The Blackstone Group L.P.'s wholly-owned subsidiaries, in order to fund any distributions The Blackstone Group L.P. may declare on the common units. If Blackstone Holdings makes such distributions, the limited partners of Blackstone Holdings will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings, except that The Blackstone Group L.P.'s wholly-owned subsidiaries will be entitled to priority allocations of income through December 31, 2009 as described under "Cash Distribution Policy".

        The partnership agreements of the Blackstone Holdings partnerships will provide for cash distributions, which we refer to as "tax distributions," to the partners of such partnerships if the wholly-owned subsidiaries of The Blackstone Group L.P. which are the general partners of the Blackstone Holdings partnerships determine that the taxable income of the relevant partnership will give rise to taxable income for its partners. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant partnership allocable to a partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). If we had effected the Reorganization on January 1, 2006, the assumed effective tax rate for 2006 would have been approximately 46%. The Blackstone Holdings partnerships will make tax distributions only to the extent distributions from such partnerships for the relevant year were otherwise insufficient to cover such tax liabilities.

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USE OF PROCEEDS

        We estimate that our net proceeds from this offering, at an assumed initial public offering price of $                  per common unit and after deducting estimated underwriting discounts and offering expenses, will be approximately $                  billion, or $                  billion if the underwriters exercise in full their option to purchase additional common units. A $1.00 increase (decrease) in the assumed initial public offering price of $                      per common unit would increase (decrease) the net proceeds to us from this offering by $            million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and offering expenses payable by us.

        We intend to use approximately $                  billion of the net proceeds from this offering, or approximately $                  billion if the underwriters exercise in full their option to purchase additional common units, to purchase interests in our business from our existing owners, including certain members of our senior management, as described under "Organizational Structure—Offering Transactions". Accordingly, we will not retain any of these proceeds.

        We intend to use all of the remaining proceeds from this offering, or approximately $                  billion, to purchase newly-issued Blackstone Holdings partnership units. We intend to use approximately $                  million of these net proceeds to repay all outstanding borrowings under our revolving credit facility and the remainder:

    to provide capital to facilitate the growth of our existing asset management and financial advisory businesses, including through funding a portion of our general partner capital commitments to our carry funds;

    to provide capital to facilitate our expansion into new businesses that are complementary to our existing asset management and financial advisory businesses and that can benefit from being affiliated with us, including possibly through selected strategic acquisitions (see "Business—New Business and Other Growth Initiatives"); and

    for other general corporate purposes.

Pending specific application of these net proceeds, we expect to invest them primarily in our funds of hedge funds and additionally in our distressed securities hedge fund and our equity hedge fund.

        Our revolving credit facility is a $1 billion revolving credit facility that matures on February 1, 2012. As of December 31, 2006, we had outstanding borrowings of $340 million bearing interest at a weighted average rate of 6.13%. Proceeds from these borrowings have been used for working capital purposes.

        Affiliates of certain of the underwriters are participating lenders in our revolving credit facility and will accordingly receive a portion of the offering proceeds we use to repay the borrowings under that facility. See "Underwriters".

72



CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2006:

    on a historical basis;

    on a pro forma basis for Blackstone Holdings giving effect to the Reorganization described in "Organizational Structure"; and

    on a pro forma as adjusted basis for The Blackstone Group L.P. giving effect to the Blackstone Holdings pro forma adjustments, as well as to the Offering Transactions described in "Organizational Structure" and the application of a portion of the net proceeds from this offering to repay all outstanding borrowings under our revolving credit facility, which were approximately $340 million as of December 31, 2006, as described in "Use of Proceeds".

        You should read this table together with the other information contained in this prospectus, including "Organizational Structure", "Use of Proceeds", "Unaudited Pro Forma Financial Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and related notes included elsewhere in this prospectus.

 
  December 31, 2006
 
  Blackstone
Group
Combined
Historical

  Blackstone
Holdings
Pro Forma

  The Blackstone
Group L.P.
Pro Forma
as Adjusted(1)

 
  (Dollars in thousands)

Cash and cash equivalents   $ 129,443   $     $  
Cash held at consolidated entities     810,725            
   
 
 
Total cash and cash equivalents   $ 940,168            
   
 
 
Loans payable     975,981            
Amounts due to non-controlling interest holders     647,418            
Non-controlling interests in consolidated entities     28,794,894            
Partners' capital     2,712,605            
Accumulated other comprehensive income     10,274            
   
 
 
  Total Capitalization   $ 33,141,172   $     $  
   
 
 

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $                              per common unit would increase (decrease) total partners' capital and total capitalization by $                              million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and estimated expenses payable by us.

73



DILUTION

        If you invest in our common units, your interest will be diluted to the extent of the difference between the initial public offering price per common unit of our common units and the pro forma net tangible book value per common unit of our common units after this offering. Dilution results from the fact that the per common unit offering price of the common units is substantially in excess of the pro forma net tangible book value per common unit attributable to the existing equity holders.

        Our pro forma net tangible book value as of December 31, 2006 was approximately $            million, or $            per common unit. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the Reorganization, and pro forma net tangible book value per common unit represents pro forma net tangible book value divided by the number of common units outstanding, after giving effect to the Reorganization and assuming that all of the holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries) exchanged their units for newly-issued common units on a one-for-one basis.

        After giving effect to the Reorganization and the Offering Transactions and the application of a portion of the net proceeds from this offering to repay all outstanding borrowings under our revolving credit facility, which were approximately $340 million as of December 31, 2006, as described in "Use of Proceeds", our pro forma net tangible book value as of December 31, 2006 would have been $                  million, or $                              per common unit. This represents an immediate increase in net tangible book value of $                  per common unit to existing equityholders and an immediate dilution in net tangible book value of $            per common unit to new investors.

        The following table illustrates this dilution on a per common unit basis assuming the underwriters do not exercise their option to purchase additional common units:

Assumed initial public offering price per common unit         $  
Pro forma net tangible book value per common unit as of December 31, 2006   $        
Increase in pro forma net tangible book value per common unit attributable to new investors   $        
   
     
Pro forma net tangible book value per common unit after the offering            
         
Dilution in pro forma net tangible book value per common unit to new investors         $  
         

        The following table summarizes, on the same pro forma basis as of December 31, 2006, the total number of common units purchased from us, the total cash consideration paid to us and the average price per common unit paid by the existing equityholders and by new investors purchasing common units in this offering, assuming that all of the holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries) exchanged their Blackstone Holdings partnership units for our common units on a one-for-one basis.

 
  Common Units
Purchased

  Total
Consideration

   
 
  Average
Price
Per common
unit

 
  Number
  Percent
  Amount
  Percent
Existing equityholders                    
New investors                    
  Total                    

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CASH DISTRIBUTION POLICY

        Throughout our 21-year history as a privately-owned firm, we have had a policy of distributing substantially all of our adjusted cash flow from operations to our owners. Our intention is to distribute to our common unitholders on a quarterly basis, commencing in the                        quarter of 2007, substantially all of The Blackstone Group L.P.'s net after-tax share of our annual adjusted cash flow from operations in excess of amounts determined by our general partner to be necessary or appropriate to provide for the conduct of our business, to make appropriate investments in our business and our funds, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our common unitholders for any one or more of the ensuing four quarters. Because we will not know what our available adjusted cash flow from operations will be for any year until the end of such year, we expect that our first three quarterly distributions in respect of any given year will generally be smaller than the final quarterly distribution in respect of such year. See note (3) under "Summary—Summary Historical Financial and Other Data" for a reconciliation of our adjusted cash flow from operations to our cash flow from operations presented in accordance with generally accepted accounting principles.

        Because The Blackstone Group L.P. will be a holding partnership and will have no material assets other than its ownership of partnership units in Blackstone Holdings held through wholly-owned subsidiaries, we will fund distributions by The Blackstone Group L.P., if any, in three steps:

    first, we will cause Blackstone Holdings to make distributions to its partners, including The Blackstone Group L.P.'s wholly-owned subsidiaries. If Blackstone Holdings makes such distributions, the limited partners of Blackstone Holdings will be entitled to receive equivalent distributions pro rata based on their partnership interests in Blackstone Holdings (except as set forth in the following paragraph);

    second, we will cause The Blackstone Group L.P.'s wholly-owned subsidiaries to distribute to The Blackstone Group L.P. their share of such distributions, net of the taxes and amounts payable under the tax receivable agreement by such wholly-owned subsidiaries; and

    third, The Blackstone Group L.P. will distribute its net share of such distributions to our common unitholders on a pro rata basis.

        The partnership agreements of the Blackstone Holdings partnerships will provide that until December 31, 2009, the income (and accordingly distributions) of Blackstone Holdings will be allocated:

    first, to The Blackstone Group L.P.'s wholly-owned subsidiaries until sufficient income has been so allocated to permit The Blackstone Group L.P. to make aggregate distributions to our common unitholders of $                              per common unit on an annualized basis;

    second, to the other partners of the Blackstone Holdings partnerships until an equivalent amount of income on a partnership interest basis has been allocated to such other partners on an annualized basis; and

    thereafter, pro rata to all partners of the Blackstone Holdings partnerships in accordance with their respective partnership interests.

Accordingly, until December 31, 2009, our existing owners will not receive distributions in respect of their Blackstone Holdings partnership units unless and until our common unitholders receive aggregate distributions of $                              per common unit on an annualized basis. We do not intend to maintain this priority allocation after December 31, 2009. After December 31, 2009, all the income

75



(and accordingly distributions) of Blackstone Holdings will be allocated pro rata to all partners of the Blackstone Holdings partnerships in accordance with their respective partnership interests.

        In addition, the partnership agreements of the Blackstone Holdings partnerships will provide for cash distributions, which we refer to as "tax distributions," to the partners of such partnerships if the wholly-owned subsidiaries of The Blackstone Group L.P. which are the general partners of the Blackstone Holdings partnerships determine that the taxable income of the relevant partnership will give rise to taxable income for its partners. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the relevant partnership allocable to a partner multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). The Blackstone Holdings partnerships will make tax distributions only to the extent distributions from such partnerships for the relevant year were otherwise insufficient to cover such tax liabilities.

        The declaration and payment of any distributions will be at the sole discretion of our general partner, which may change our distribution policy at any time. Our general partner will take into account:

    general economic and business conditions;

    our strategic plans and prospects;

    our business and investment opportunities;

    our financial condition and operating results, including our cash position, our net income and our realizations on investments made by our investment funds;

    working capital requirements and anticipated cash needs;

    contractual restrictions and obligations, including payment obligations pursuant to the tax receivable agreement and restrictions pursuant to our revolving credit facility;

    legal, tax and regulatory restrictions;

    restrictions and other implications on the payment of distributions by us to our common unitholders or by our subsidiaries to us; and

    such other factors as our general partner may deem relevant.

        Under the Delaware Limited Partnership Act, we may not make a distribution to a partner if after the distribution all our liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specific property of the partnership, would exceed the fair value of our assets. If we were to make such an impermissible distribution, any limited partner who received a distribution and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Partnership Act would be liable to us for the amount of the distribution for three years. In addition, the terms of our revolving credit facility require us to maintain a minimum level of partners' capital, which may prohibit us from making certain distributions. Subject to a notice period and a cure period, distributions in violation of the terms of our revolving credit facility would result in a default under our revolving credit facility.

        In addition, Blackstone Holdings' cash flow from operations may be insufficient to enable it to make required minimum tax distributions to its partners, in which case Blackstone Holdings may have

76



to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

        Cash distributions to our existing owners in respect of the fiscal and tax year ended December 31, 2005 were approximately $                              in the aggregate. Cash distributions to our existing owners in respect of the fiscal and tax year ended December 31, 2006 are expected to be approximately $                              in the aggregate (of which approximately $                              has been distributed to date). Cash distributions to our existing owners in respect of the current fiscal and tax year have aggregated approximately $            to date.

        Prior to this offering, we intend to make one or more distributions to our existing owners representing all of the undistributed earnings generated by the Contributed Businesses prior to the date of the offering. If the offering had occurred on March 31, 2007, we estimate that the aggregate amount of such distributions would have been $                              million. However, the actual amount of such distributions will depend on the amount of earnings generated by the Contributed Businesses prior to the offering.

77



UNAUDITED PRO FORMA FINANCIAL INFORMATION

        The unaudited pro forma financial information contained herein is subject to completion as a consequence of the fact that information related to our Reorganization and the offering is not currently determinable. We intend to complete the pro forma financial information columns labeled Other Reorganization Adjustments and Adjustments for the Offering and the related columns Blackstone Holdings Pro Forma and The Blackstone Group L.P. Consolidated Pro Forma, respectively, at such time that we update this prospectus and such information is available.

        The following unaudited condensed consolidated pro forma statement of income for the year ended December 31, 2006 and the unaudited condensed consolidated pro forma statement of financial condition as of December 31, 2006 are based upon our historical financial statements included elsewhere in this prospectus. These pro forma financial statements present the consolidated results of operations and financial position of The Blackstone Group L.P. to give pro forma effect to all of the transactions described under "Organizational Structure" and this offering as if such transactions had been completed as of January 1, 2006 with respect to the unaudited condensed consolidated pro forma statement of income and as of December 31, 2006 with respect to the unaudited pro forma statement of financial condition. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions and this offering on the historical financial information of the Blackstone Group. The adjustments are described in the notes to the unaudited condensed consolidated pro forma statement of income and the unaudited condensed consolidated pro forma statement of financial condition.

        The pro forma adjustments in the column labeled Deconsolidation and Elimination of Blackstone Funds principally give effect to:

    the deconsolidation of those of our investment funds that have been consolidated in our historical combined financial statements with the exception of four of our funds of hedge funds as described below;

    the elimination from consolidation of the general partners of certain investment funds that are no longer actively making new investments and a number of investment vehicles through which our existing owners and other related parties have made commitments to or investments in or alongside of our investment funds because such entities will not be contributed to Blackstone Holdings;

We have elected to early adopt Statement of Financial Accounting Standard 159 ("SFAS 159"). We have included an adjustment to reflect the change in fair value which would have occurred in a manner similar to the application of SFAS 159 in these pro forma financial statements as we intend to elect the application of SFAS 159 to our general partnership interests in our corporate private equity and real estate opportunity funds substantially concurrently with this offering. The application of SFAS 159 will result in an increase in the amounts included in the line item captions Investments, at Fair Value on our statement of financial condition and Net Gains from Investment Activities in our statement of income, as described below.

        The pro forma adjustments in the Other Reorganization Adjustments column principally give effect to the other elements of the reorganization described in "Organizational Structure" including:

    in the case of the unaudited condensed consolidated pro forma statement of income, increases to employee compensation and benefits expense associated with (1) payments to existing owners of our business of salary and bonus following this offering; (2) ownership by existing owners of our business and certain employees of a portion of the carried interest income earned in respect of certain of the funds; (3) compensation effects related to issuances of unvested Blackstone

78


      Holdings partnership units as part of the Blackstone Holdings formation; and (4) grants of unvested deferred restricted common units at the time of this offering;

    a provision for corporate income taxes on the income of The Blackstone Group L.P.'s wholly-owned subsidiaries that will be taxable as corporations for U.S. federal income tax purposes, which we refer to as the "corporate taxpayers";

    the effect of one or more distributions to our existing owners representing all of the undistributed earnings generated by the Contributed Businesses prior to the date of the offering.

        In addition, the pro forma adjustments in the Adjustments for the Offering column principally give effect to the Offering Transactions described in "Organizational Structure", including:

    the purchase by The Blackstone Group L.P.'s wholly-owned subsidiaries of interests in our business from our existing owners with a portion of the proceeds from this offering and the associated effects of income tax and the tax receivable agreement;

    the application of a portion of the net proceeds from this offering to repay our outstanding borrowings under our revolving credit agreement, as described in "Use of Proceeds".

        Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. Because our existing owners own and control the legal entities and general partners which comprise the Blackstone Group before and after the Reorganization, we will account for the Reorganization as a transfer of interests under common control. Accordingly, except for the non-contributed entities described above and the valuation adjustments attributable to reflecting the effect of reporting certain assets at fair value under SFAS 159, we will carry forward unchanged the value of assets and liabilities recognized in Blackstone Group's combined financial statements into our consolidated financial statements.

        In accordance with GAAP, a number of our investment funds have historically been consolidated into our combined financial statements. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these investment funds on a gross basis rather than reflecting only the value of our principal investments in such investment funds.

        The Contributed Businesses that act as a general partner of all of the consolidated Blackstone funds (with the exception of four of our funds of hedge funds) are taking the necessary steps to grant rights to the unaffiliated investors in that fund to provide that a simple majority of the fund's unaffiliated investors will have the right, without cause, to remove the general partner of that fund or to accelerate the liquidation date of that fund in accordance with certain procedures. The granting of these rights will lead to the deconsolidation of such investment funds from our consolidated financial statements. Accordingly, we believe deconsolidating these funds will result in our financial statements reflecting our alternative asset management business, including our management fee, incentive fee and performance revenues, in a manner that reflects both how our management evaluates our business and the risks of the assets and liabilities of our firm and will provide investors reviewing our financial statements an enhanced understanding of our business. In addition, because the general partners of certain other legacy Blackstone funds will not be contributed to Blackstone Holdings as part of the Blackstone Holdings Formation, we will also no longer consolidate those funds in our consolidated financial statements following this offering. See "Organizational Structure—Reorganization—Deconsolidation of Blackstone Funds".

        We will not deconsolidate four of our funds of hedge funds that have been consolidated in our financial statements because they are variable interest entities and are required to be consolidated into our combined financial statements in accordance with FASB Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN 46"), as revised. As of December 31, 2006, the total assets of these funds included in the combined financial statements is $631 million.

79


        The deconsolidation of these investment funds will only affect the manner in which we account for these funds, which will be to reflect our share of the funds' net assets and our share of the funds' net earnings; this change in accounting will not affect our consolidated net income or partners' capital. The following describes the significant effects on our consolidated financial statements, which are reflected in the accompanying condensed consolidated pro forma financial information presented below.

    We will no longer record on our consolidated statements of financial condition and consolidated statements of income the total assets, liabilities, revenues, expenses and other income of such Blackstone funds. Accordingly, we will no longer record the non-controlling interests' share of these funds' partners' capital and net income. These adjustments will change our 2006 financial statement items as follows: assets—decrease of 87%; liabilities—decrease of 62%; revenues—increase of 3%; expenses—decrease of 26%; other income—decrease of 77%; non-controlling interests in consolidated entities—decrease of 97%; and non-controlling interests in income of consolidated entities—decrease of 97% (based on comparing our combined historical financial information to our pro forma financial information as of December 31, 2006 and for the year then ended).

    We will also remove the cash flow activities of the deconsolidated investment funds from our statement of cash flows and replace them with our cash contributions to and distributions from the consolidated / deconsolidated investment funds. Such amounts were previously eliminated in consolidation. This will not have an effect on our recorded cash balances. However, it will result in significant changes to our cash flows from operations, investing and financing activities.

    Management fees and incentive fees previously billed directly to the funds will be included in our statement of income rather than eliminating the revenue in consolidation.

    We will update our notes to the consolidated financial statements to remove disclosures related to amounts no longer reflected on our consolidated financial statements, including but not limited to:

    the accounting policies of our funds which do not pertain to us following deconsolidation,

    detailed disclosure of investments held by the deconsolidated funds,

    detailed disclosures of amounts due from brokers related to the deconsolidated funds' activities,

    detailed disclosure of loans payable by the deconsolidated funds, and

    commitments and contingencies related to the deconsolidated funds' operations.

    We will update our notes to the financial statements to include disclosures regarding our investments in these funds.

        We intend to elect the application of SFAS 159 to our investments, including our general partner interests in the corporate private equity and real estate opportunity funds that we manage. The application of SFAS 159 will result in the recognition of an increase in the carrying value of our investments currently accounted for using the equity method of accounting due to the fair value of the general partner interests in excess of their current carrying value.

        The unaudited condensed consolidated pro forma financial information should be read together with "Organizational Structure", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus.

        The unaudited condensed consolidated pro forma financial information is included for informational purposes only and does not purport to reflect the results of operations or financial

80


position of Blackstone that would have occurred had the transactions referenced above occurred on the dates indicated or had we operated as a public entity during the periods presented. The unaudited condensed consolidated pro forma financial information should not be relied upon as being indicative of our results of operations or financial condition had the transactions contemplated in connection with the Reorganization and this offering been completed on the dates assumed. The unaudited condensed consolidated pro forma financial information also does not project our results of operations or financial condition for any future period or date.

        We have not made any pro forma adjustments relating to reporting and compliance costs and investor relations costs that we will incur as a public company. No pro forma adjustment has been made for these additional expenses as an estimate of the expenses is not determinable.

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Unaudited Condensed Consolidated Pro Forma Statement of Financial Condition

 
  As of December 31, 2006
 
  Blackstone
Group
Combined
Historical

  Deconsolidation
and
Elimination of
Blackstone Funds(1)

  Blackstone Group
Deconsolidated

  Other
Reorganization
Adjustments(2)

  Blackstone
Holdings
Pro
Forma

  Adjustments
for
Offering(3)

  The Blackstone
Group L.P.
Consolidated
Pro Forma

 
  ($ in thousands)

Assets                                  
Cash and Cash Equivalents   $ 129,443   $   $ 129,443                
Cash Held at Consolidated Entities     810,725     (743,573 )   67,152                
Investments, at Fair Value     31,263,573     (26,930,300 )   4,333,273 *              
Accounts Receivable     656,165     (434,625 )   221,540                
Due from Brokers     398,196     (398,196 )                  
Investment Subscriptions Paid in Advance     280,917     (246,851 )   34,066                
Due from Affiliates     257,225     103,593     360,818                
Other Assets     94,800     (34,834 )   59,966                
   
 
 
               
Total Assets   $ 33,891,044   $ (28,684,786 ) $ 5,206,258                
   
 
 
 
 
 
 

Liabilities and Partners' Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Loans Payable   $ 975,981   $ (492,233 ) $ 483,748                
Amounts Due to Non-Controlling Interest Holders     647,418     (465,547 )   181,871                
Securities Sold, Not Yet Purchased     422,788     (422,023 )   765                
Due to Affiliates     103,428     (46,252 )   57,176                
Accrued Compensation and Benefits     66,301         66,301                
Accounts Payable, Accrued Expenses and Other Liabilities     157,355     (56,418 )   100,937                
   
 
 
               
Total Liabilities     2,373,271     (1,482,473 )   890,798                
   
 
 
 
 
 
 

Non-Controlling Interests in Consolidated Entities

 

 

28,794,894

 

 

(27,847,676

)

 

947,218

 

 

 

 

 

 

 

 

Partners' Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Partners' Capital     2,712,605     645,363     3,357,968                
Accumulated Other Comprehensive Income     10,274         10,274                
   
 
 
 
 
 
 
Total Partners' Capital     2,722,879     645,363     3,368,242                
   
 
 
 
 
 
 
Total Liabilities and Partners' Capital   $ 33,891,044   $ (28,684,786 ) $ 5,206,258                
   
 
 
 
 
 
 

(*)
Primarily represents general partner interests in Blackstone funds. See Note (c).

82


Notes to Unaudited Condensed Consolidated Pro Forma Statement of Financial Condition

1.     Adjustments for Deconsolidation of Blackstone Funds

      The effects of deconsolidation of the investment funds, elimination of non-contributed entities and the application of SFAS 159 to our historical combined statement of financial condition is as follows ($ in thousands):

 
  As of December 31, 2006
 
 
  Deconsolidation
of
Blackstone Funds(a)

  Elimination of
Non-contributed
Entities(b)

  Application of
Fair Value
Option(c)

  Total
 
Total Assets   $ (29,356,239 ) $ (229,410 ) $ 900,863   $ (28,684,786 )
   
 
 
 
 
Total Liabilities   $ (1,479,124 ) $ (3,349 ) $   $ (1,482,473 )
Non-Controlling Interests in Consolidated Entities     (27,877,115 )   29,439           (27,847,676 )
Partners' Capital         (255,500 )   900,863     645,363  
   
 
 
 
 
Total Liabilities, Non-Controlling Interests in Consolidated Entities and Partners' Capital   $ (29,356,239 ) $ (229,410 ) $ 900,863   $ (28,684,786 )
   
 
 
 
 

    The effect of the application of the fair value option is as follows ($ in thousands):

 
  As of December 31, 2006
 
  Blackstone Group
Deconsolidated

  Application
of the Fair
Value Option

  Total
General Partner Interests in Blackstone Funds   $ 2,276,992   $ 900,863   $ 3,177,855
Investments in Blackstone Funds*     1,155,418         1,155,418
   
 
 
    $ 3,432,410   $ 900,863   $ 4,333,273
   
 
 

*
Principally represents assets held in employee funds which have been consolidated as variable interest entities; an offsetting amount is included in non-controlling interests in consolidated entities.

(a)
Reflects the deconsolidation of all investment funds pursuant to EITF 04-5 that have historically been consolidated in our combined financial statements, except for (i) four of our funds of hedge funds that are determined to be variable interest entities where Blackstone is the primary beneficiary and (ii) legacy Blackstone funds the general partners of which are not being contributed to Blackstone Holdings.

      In accordance with GAAP, our investment funds have historically been consolidated into our combined financial statements. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these investment funds on a gross basis, as well as the share which relates to unaffiliated investors in these funds, rather than reflecting only our portion of the investments in, and the revenues and profits earned, from these funds. We believe the deconsolidation of these funds will result in our financial statements reflecting our alternative asset management business in a manner that reflects both

83


      how our management evaluates our business and the risks of the assets and liabilities of our firm.

      The Contributed Businesses that act as a general partner of all of the consolidated Blackstone funds (with the exception of four of our funds of hedge funds) are taking the necessary steps to grant rights to the unrelated investors in those funds to provide that a simple majority of the fund's investors will have the right, without cause, to remove the general partner of that fund or to accelerate the liquidation date of that fund in accordance with certain procedures. The granting of these rights, which will occur substantially concurrently with the Blackstone Holdings Formation, will lead to the deconsolidation of such investment funds from our consolidated financial statements.

      Because the interests of the limited partner investors in our investment funds, which are reflected in the caption Non-Controlling Interests in Consolidated Entities on our historical combined statements of financial condition, will be eliminated in connection with the deconsolidation of these investment funds, the deconsolidation of these investment funds will not result in a change in the statement of financial condition caption Partners' Capital included within our consolidated statements of financial condition.

    (b)
    Reflects the elimination of the financial results of the general partners of certain legacy Blackstone funds and a number of investment vehicles through which our existing owners and other parties have made commitments to or investments in or alongside of our investment funds, as such entities will not be contributed to Blackstone Holdings.

    (c)
    Reflects our intention to elect the application of SFAS 159 to certain of our general partner interests in corporate private equity and real estate opportunity funds that we manage. The application of SFAS 159 will result in the recognition of an increase in the carrying value of our general partner interests currently accounted for using the equity method of accounting. The increase in value reflects the fair value associated with these entities' right to earn a preferential allocation of investment returns (carried interest) on the private equity and real estate funds that we manage in the event specified investment returns are achieved. We are not currently planning to elect fair value option accounting for other general partnership interests entitled to carried interests because the current carrying value of such interests using the equity method of accounting is not expected to be significantly different from its estimated fair value. The valuation of the general partner interests will be a Level 3 valuation pursuant to SFAS 157. Accordingly, we measure the fair value of our general partner interests, and their option-like payoffs, using a valuation model consistent with the Black-Scholes pricing framework, with the following inputs and assumptions:

    (i)
    the expected volatility was estimated based on the underlying assets of the funds; a volatility factor of 35% was used for private equity investments and 25% for real estate investments, for the pro forma fair values determined for the year ended December 31, 2006;

    (ii)
    the assumed termination date was determined on an investment by investment basis for each asset held in the partnership; such termination dates fell within a range of 1.8 to 10.5 years;

    (iii)
    the risk free rate was 5.36%.

We are reflecting the application of SFAS 159 in these pro forma financial statements because we believe that the presentation of our financial condition and results under this method is important information for readers of this prospectus.

84



2.     Other Reorganization Adjustments

    (d)
    Reflects the effect of one or more distributions to our existing owners of cash representing all of the undistributed earnings generated by the Contributed Businesses prior to the date of the offering in an aggregate amount of $             million. The actual amount of such distributions will depend on the amount of earnings generated by the Contributed Businesses prior to the offering. The distributions are to be funded with available cash, with the remainder to be funded by borrowings under our revolving credit facility.

3.     Adjustments for the Offering

    (e)
    Reflects adjustments to give effect to the tax receivable agreement as a result of the purchase of Blackstone Holdings partnership units as described in "Organization Structure—Offering Transactions" of an increase of $             million in deferred tax assets, $             million in liability to existing owners and $             million in partners' capital.

      The effects of the tax receivable agreement as a result of the purchase of interests in our business from existing owners as described in "Organizational Structure—Offering Transactions" on our consolidated statement of financial condition are as follows:

        we will record an increase in deferred tax assets for the estimated income tax effects of the increase in the tax basis of the assets owned by Blackstone Holdings, based on enacted federal and state tax rates at the date of the transaction;

        to the extent we estimate that we will not realize the full benefit represented by the deferred tax asset, based on an analysis of expected future earnings, we will reduce the deferred tax asset with a valuation allowance; and

        we will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to liability to limited partners of Blackstone Holdings under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to partners' capital.

      Therefore, as of the date of the Reorganization, on a cumulative basis the net effect of accounting for income taxes and the tax receivable agreement on our financial statements will be a net increase in partners' capital of 15% of the estimated realizable tax benefit. The amounts recorded for both the deferred tax asset and the liability for our obligations under the tax receivable agreement have been estimated, reflecting the fact that payments under the tax receivable agreement further increase the tax benefits and the estimated payments under the tax receivable agreement. All of the effects of changes in any of our estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income. Future exchanges of Blackstone Holdings partnership units for our common units will be accounted for in a similar manner.

    (f)
    Reflects net proceeds of $                              billion from this offering by us of                        common units at the assumed initial public offering price of $                                           per common unit, less estimated underwriting discounts and offering expenses.

    (g)
    Reflects the use of a portion of the net proceeds from this offering to repay all indebtedness outstanding under our revolving credit facility of $340 million as of December 31, 2006. Our revolving credit agreement is a $1 billion revolving credit facility that matures on February 1, 2012.

85


    (h)
    Represents the use of approximately $                              of the net proceeds from this offering to purchase interests in our business from our existing owners. See "Organizational Structure—Offering Transactions" and "Use of Proceeds".

    (i)
    Reflects the elimination of $                              of costs associated with this offering incurred through December 31, 2006 that have been capitalized.

    (j)
    Reflects an adjustment to record non-controlling interests in consolidated entities of $                               billion relating to the                        Blackstone Holdings partnership units to be held by our existing owners after this offering, which Blackstone Holdings partnership units represent            % of all Blackstone Holdings partnership units outstanding after this offering.

      Holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries), subject to the vesting requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis.

86



Unaudited Condensed Consolidated Pro Forma Statement of Income

 
  Year Ended December 31, 2006
 
  Blackstone
Group
Combined
Historical

  Deconsolidation
and
Elimination of
Blackstone Funds(1)

  Blackstone Group
Deconsolidated

  Other
Reorganization
Adjustments(2)

  Blackstone
Holdings
Pro
Forma

  Adjustments
for Offering(3)

  The Blackstone
Group L.P.
Consolidated
Pro Forma

 
  ($ in thousands, except per common unit data)

Revenues                                  
Fund Management Fees   $ 852,283   $ 35,261   $ 887,544                
Advisory Fees     256,914         256,914                
Interest and Other     11,082         11,082                
   
 
 
 
 
 
 
  Total Revenues     1,120,279     35,261     1,155,540                
   
 
 
 
 
 
 
Expenses                                  
Employee Compensation and Benefits     250,067         250,067                
Interest     36,932         36,932                
Occupancy and Related Charges     35,862         35,862                
General, Administrative and Other     86,534         86,534                
Fund Expenses     143,695     (143,695 )                  
   
 
 
 
 
 
 
  Total Expenses     553,090     (143,695 )   409,395                
   
 
 
 
 
 
 
Other Income                                  
Net Gains from Investment Activities     7,587,296     (5,466,317 )   2,120,979 *              
   
 
 
 
 
 
 
Income Before Non-Controlling Interests in Income of Consolidated Entities and Income Taxes     8,154,485     (5,287,361 )   2,867,124                
Non-Controlling Interests in Income of Consolidated Entities     5,856,345     (5,666,420 )   189,925                
   
 
 
 
 
 
 
Income Before Taxes     2,298,140     379,059     2,677,199                
Income Taxes     31,934         31,934                
   
 
 
 
 
 
 
Net Income   $ 2,266,206   $ 379,059   $ 2,645,265                
   
 
 
 
 
 
 

Net Income Per Common Unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                                  
  Diluted                                  
Weighted Average Common Units:                                  
  Basic                                  
  Diluted                                  

*
Primarily represents the preferred allocation of income (a "carried interest") received by the general partners of Blackstone funds.

87


Notes to Unaudited Condensed Consolidated Pro Forma Statement of Income

1.     Adjustments for Deconsolidation of Blackstone Funds

      The effects of deconsolidation of the investment funds, the elimination of the financial results of non-contributed entities and the application of SFAS 159 to our historical combined statement of income are summarized as follows ($ in thousands):

 
  Year Ended December 31, 2006
 
 
  Deconsolidation
of Blackstone
Funds(k)

  Elimination of
Non-Contributed
Entities(l)

  Application of
Fair Value
Option(m)

  Total
 
Total Revenues   $ 35,261   $   $   $ 35,261  
Total Expenses     (143,695 )           (143,695 )
   
 
 
 
 
Subtotal     178,956             178,956  
Other Income     (5,845,376 )   (216,146 )   595,205     (5,466,317 )
Non-Controlling Interests in Consolidated Entities     (5,666,420 )           (5,666,420 )
   
 
 
 
 
Net Income   $   $ (216,146 ) $ 595,205   $ 379,059  
   
 
 
 
 
    (k)
    Because the portion of the interests of the limited partner investors in our deconsolidated investment funds, which are reflected in the financial statement caption Non-Controlling Interests in Income of Consolidated Entities in our historical combined statement of income, will be eliminated in connection with the deconsolidation of these investment funds, the deconsolidation of these investment funds will not result in a change in net income in our combined statement of income (see above note (a) related to Deconsolidation of Blackstone Funds).

    (l)
    As described in note (b) under "Notes to Unaudited Condensed Consolidated Pro Forma Statement of Financial Condition", reflects the elimination of the financial results of the general partners of certain legacy Blackstone funds and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of our investment funds, because such entities will not be contributed to Blackstone Holdings.

    (m)
    We have reflected the effects of the application of SFAS 159 in these pro forma financial statements as we intend to elect the application of SFAS 159 to our general partner interests in certain of our funds substantially concurrent with this offering. The application of SFAS 159 will result in an increase in the amounts included in the line item captions Investments, at Fair Value on our statement of financial condition and Net Gains from Investment Activities in our statement of income (see above note (c) related to Deconsolidation of Blackstone funds).

2.     Other Reorganization Adjustments

      Historically, payments for services by our senior managing directors have generally been accounted for as partnership distributions rather than as compensation.

    (n)
    Reflects increases to employee compensation and benefits expense associated with (1) payments to existing owners of our businesses of salary and bonus following this offering; (2) ownership by existing owners of our businesses and certain employees of a portion of the carried interest income earned in respect of certain of the funds; (3) compensation effects

88


      related to issuances of unvested Blackstone Holdings partnership units as part of the Blackstone Holdings formation; and (4) grants of unvested deferred restricted common units at the time of this offering. The effects of these items on our unaudited condensed consolidated pro forma statement of income for the year ended December 31, 2006 are summarized as follows ($ in thousands):

 
  Year Ended December 31, 2006
Increase to Employee Compensation and Benefits Expense

Aggregate Salary and Bonus Payments to our Senior Managing Directors(i)    
Issuances of Unvested Blackstone Holdings Partnership Units to our Senior Managing Directors and Selected Other Individuals Engaged in Some of Our Businesses(ii)    
Issuance of Unvested Deferred Restricted Common Units to our Other Employees(iii)    
Carry Plan Awards to our Senior Managing Directors and Selected Other Individuals(iv)    
   
Total Increase to Employee Compensation and Benefits Expense    
   

      (i)
      Reflects an adjustment to reflect salary and bonus of $                         billion for the year ended December 31, 2006, which is    % of            for the period. Prior to the Reorganization and this offering, the entities that comprise Blackstone Group have been partnerships or limited liability companies. Accordingly, payments to our senior managing directors generally have been accounted for as distributions on partners' capital rather than as compensation expense. Following this offering, we intend to pay salary and bonus to our existing owners that work in our businesses that will be accounted for as employee compensation.

      (ii)
      As part of the Reorganization, our existing owners will receive                        vested and                        unvested Blackstone Holdings partnership units. The vested Blackstone Holdings partnership units received by our existing owners in the Reorganization will be reflected in our financial statements at the historical cost basis of the businesses contributed and, therefore, will have no effect on our unaudited condensed consolidated pro forma statement of income.

        We intend to accrue for the unvested Blackstone Holdings partnership units as compensation in accordance with Statement of Financial Accounting Standards No. 123(R) "Share-Based Payments", or "SFAS 123(R)." The unvested Blackstone Holdings partnership units will be charged to expense as the Blackstone Holdings partnership units vest over the service period. See "Certain Relationships and Related Person Transactions—Blackstone Holdings Partnership Agreements."

89


      (iii)
      In addition, at the time of this offering, we intend to grant                        unvested deferred restricted common units to our non-senior managing director employees, which will generally vest over a five-year period. The unvested deferred restricted common units will be charged to expense as the deferred restricted common units vest over the service period.

      (iv)
      Reflects compensation expense charge associated with the ownership by existing owners of our businesses and selected other individuals of a portion of the carried interest income earned in respect of certain of the funds.

3.     Adjustments for the Offering

        

    (o)
    Reflects a decrease to income of $                        billion for the year ended December 31, 2006 associated with Non-Controlling Interests in Consolidated Entities relating to the                        Blackstone Holdings partnership units held by our existing owners after this offering, which Blackstone Holdings partnership units represent                        % of all Blackstone Holdings partnership units outstanding after this offering.

      Holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries), subject to the vesting requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis.

    (p)
    Reflects an adjustment of $                              million to Non-Controlling Interests in Consolidated Entities for the year ended December 31, 2006, to allocate a portion of our pro forma net income to our existing owners' Non-Controlling Interest in Consolidated Entities.

      The adjustment is based on our existing owners' approximately            % interest in Blackstone Holdings applied to our pro forma income before Non-Controlling Interests in Consolidated Entities and income taxes after reduction for Blackstone Holdings' Non-Controlling Interests in Consolidated Entities. This adjustment is based on pre-tax income because income taxes on income allocated to our senior managing directors by Blackstone Holdings will be incurred directly by our senior managing directors.

      For the year ended December 31, 2006, our net income includes equity-based compensation expense with respect to which there is a corresponding paid-in capital and Non-Controlling Interests in Consolidated Entities contribution. In our pro forma statement of income for the year ended December 31, 2006, we have made an adjustment to allocate equity-based compensation expense to Non-Controlling Interests in Consolidated Entities to the extent of the corresponding contribution.

    (q)
    Reflects an increase to our provision for income taxes of $                              million for the year ended December 31, 2006, resulting in an effective tax rate of approximately            %, which assumes that the corporate taxpayers are taxed as corporations at the highest statutory rates apportioned to each state, local and/or foreign tax jurisdiction. Prior to the Reorganization and this offering, the entities that comprise Blackstone Group have been limited liability companies, partnerships or S corporation entities and have not been subject to U.S. federal and state income taxes or foreign income taxes. Following this offering, The Blackstone Group L.P. will hold a portion of its Blackstone Holdings partnership units through the corporate taxpayers.

90


Determination of Earnings per Common Unit

        

    (r)
    For the purposes of the pro forma net income per common unit calculation, the weighted average common units outstanding, basic and diluted, are calculated as follows:

 
  The Blackstone Group L.P.
Pro Forma

 
  Year Ended December 31, 2006
 
  Basic
  Diluted
The Blackstone Group L.P. Common Units Offered in this Offering        
The Blackstone Group L.P. Deferred Restricted Common Units        
Blackstone Holdings Partnership Units(1)        
   
 
Weighted Average Common Units Outstanding        
   
 
      (1)
      Holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries), subject to the vesting requirements and transfer restrictions set forth in the partnership agreements of the Blackstone Holdings partnerships, may exchange their Blackstone Holdings partnership units for Blackstone Issuer common units on a one-for-one basis. Blackstone Holdings partnership units are not included in the calculation of weighted average common units outstanding because to do so would have been anti-dilutive for the periods presented. If these Blackstone Holdings partnership units were to be exchanged for common units, net income available to holders of common units would increase due to the elimination of the Non-Controlling Interests in Consolidated Entities associated with these Blackstone Holdings partnership units (offset by the associated tax effect) by a greater proportion than the corresponding increase in weighted average common units outstanding. Therefore, diluted net income per common unit calculated assuming the exchange of all exchangeable Blackstone Holdings partnership units for common units would be greater than basic net income per common unit.

        Basic and diluted net income per common unit are calculated as follows:

 
  The Blackstone Group L.P.
Pro Forma

 
  Year Ended December 31, 2006
 
  Basic
  Diluted
Net Income Available to Holders of The Blackstone        
  Group L.P. Common Units        
Weighted Average Common Units Outstanding        
Net Income Per Common Unit        

        The special voting units of The Blackstone Group L.P. have no right to receive distributions from The Blackstone Group L.P. The special voting units do not share in the earnings of The Blackstone Group L.P. and no earnings are allocable to such class. Accordingly, pro forma basic and diluted net income per special voting unit have not been presented.

91



SELECTED HISTORICAL FINANCIAL DATA

        The following selected historical combined financial and other data of Blackstone Group should be read together with "Organizational Structure", "Unaudited Pro Forma Financial Information", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus. Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering.

        We derived the selected historical combined statements of income data of Blackstone Group for each of the years ended December 31, 2004, 2005 and 2006 and the selected historical combined statements of financial condition data as of December 31, 2005 and 2006 from our audited combined financial statements which are included elsewhere in this prospectus. We derived the selected historical combined statements of income data of Blackstone Group for the years ended December 31, 2002 and 2003 and the selected combined statements of financial condition data as of December 31, 2002, 2003 and 2004 from our unaudited combined financial statements which are not included in this prospectus. The unaudited combined financial statements of Blackstone Group have been prepared on substantially the same basis as the audited combined financial statements and include all adjustments that we consider necessary for a fair presentation of our combined financial position and results of operations for all periods presented.

        The selected historical financial data is not indicative of the expected future operating results of The Blackstone Group L.P. following the Reorganization and this offering. In particular, following this offering The Blackstone Group L.P. will no longer consolidate in its financial statements the investment funds that have historically been consolidated in our financial statements, with the exception of four of our funds of hedge funds. In addition, the general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments to or investments in or alongside of Blackstone's investment funds will not be contributed to Blackstone Holdings. See "Organizational Structure" and "Unaudited Pro Forma Financial Information".

92


 
  Year Ended December 31,
 
 
  2006
  2005
  2004
  2003
  2002
 
 
  (Dollars in Thousands)

 
Revenues                                
  Fund management fees   $ 852,283   $ 370,574   $ 390,645   $ 304,651   $ 173,538  
  Advisory fees     256,914     120,137     108,356     119,410     141,613  
  Interest and other     11,082     6,037     4,462     2,635     2,972  
   
 
 
 
 
 
    Total Revenues     1,120,279     496,748     503,463     426,696     318,123  
   
 
 
 
 
 
Expenses                                
  Employee compensation and benefits     250,067     182,605     139,512     114,218     94,412  
  Interest     36,932     23,830     16,239     13,834     13,418  
  Occupancy and related charges     35,862     30,763     29,551     23,575     20,064  
  General, administrative and other     86,534     56,650     48,576     44,222     37,614  
  Fund expenses     143,695     67,972     43,123     42,076     24,094  
   
 
 
 
 
 
      Total Expenses     553,090     361,820     277,001     237,925     189,602  
   
 
 
 
 
 
Other Income                                
  Net gains (losses) from investment activities     7,587,296     5,142,530     6,214,519     3,537,268     (438,684 )
   
 
 
 
 
 
Income (loss) before non-controlling interests in income of consolidated entities and income taxes     8,154,485     5,277,458     6,440,981     3,726,039     (310,163 )
Non-controlling interests in income (loss) of consolidated entities     5,856,345     3,934,535     4,901,547     2,773,014     (358,728 )
   
 
 
 
 
 
Income before taxes     2,298,140     1,342,923     1,539,434     953,025     48,565  
Income taxes     31,934     12,260     16,120     11,949     9,119  
   
 
 
 
 
 
Net Income   $ 2,266,206   $ 1,330,663   $ 1,523,314   $ 941,076   $ 39,446  
   
 
 
 
 
 
 
  As of December 31,
 
  2006
  2005
  2004
  2003
  2002
 
  (Dollars in Thousands)

Statement of Financial Condition Data                              
  Total assets   $ 33,891,044   $ 21,121,124   $ 21,253,939   $ 14,937,386   $ 10,348,829
  Total liabilities   $ 2,373,271   $ 2,082,771   $ 1,930,001   $ 1,458,512   $ 891,263
  Non-controlling interests in consolidated entities   $ 28,794,894   $ 17,213,408   $ 17,387,507   $ 12,398,271   $ 9,043,808
  Partners' capital   $ 2,722,879   $ 1,824,945   $ 1,936,431   $ 1,080,603   $ 413,758

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis should be read in conjunction with the historical financial statements and the related notes included elsewhere in this prospectus.

        The historical combined financial data discussed below reflect the historical results of operations and financial position of Blackstone Group. Blackstone Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. These historical combined financial data do not give effect to the Reorganization (including the deconsolidation of the investment funds that have historically been consolidated in our combined financial statements and the elimination of the general partners of certain legacy Blackstone funds that do not have a meaningful amount of unrealized investments and a number of investment vehicles through which our existing owners and other third parties have made commitments) or to the completion of this offering. See "Organizational Structure" and "Unaudited Pro Forma Financial Information" included elsewhere in this prospectus.

Overview

        Blackstone is one of the largest independent alternative asset managers in the world. We have grown our assets under management significantly over the past five years, from approximately $14.1 billion as of December 31, 2001 to approximately $69.5 billion as of December 31, 2006, representing a compound annual growth rate of 37.6%. In addition, we provide various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

        Our business is organized into four business segments:

    Corporate Private Equity. We are a world leader in private equity investing, having managed five general private equity funds, as well as one specialized fund focusing on media and communications-related investments, since we established this business in 1987. Through our corporate private equity funds, we pursue transactions throughout the world, including not only typical leveraged buyout acquisitions of seasoned companies but also transactions involving start-up businesses in established industries, turnarounds, minority investments, corporate partnerships and industry consolidations. Our corporate private equity assets under management have grown significantly over the past five years from $7.6 billion as of December 31, 2001 to $29.8 billion as of December 31, 2006, representing compound annual growth of 31.5%. For the year ended December 31, 2006, our corporate private equity segment generated income before taxes of $1,009.9 million.

    Real Estate. Since 1991, our real estate operation has been a global business, diversified across a variety of sectors and geographic locations. We have managed six general real estate opportunity funds and two internationally focused real estate opportunity funds. Our real estate opportunity funds have made significant investments in lodging, major urban office buildings, residential properties, distribution and warehousing centers and a variety of real estate operating companies. Our real estate assets under management have grown significantly over the past five years from $3.0 billion as of December 31, 2001 to $12.8 billion as of December 31, 2006, representing compound annual growth of 33.7%. For the year ended December 31, 2006, our real estate segment generated income before taxes of $902.7 million.

    Marketable Alternative Asset Management. Established in 1990, our marketable alternative asset management segment is comprised of our management of funds of hedge funds, mezzanine funds and senior debt vehicles, proprietary hedge funds and publicly-traded closed-end mutual funds. These products, other than our mezzanine funds and senior debt vehicles, are intended to provide investors with greater levels of liquidity and current income. Our marketable alternative

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      assets under management have grown significantly over the past five years, from $3.5 billion as of December 31, 2001 to $26.9 billion as of December 31, 2006, representing compound annual growth of 50.3%. For the year ended December 31, 2006, our marketable alternative asset management segment generated income before taxes of $191.7 million.

    Financial Advisory. Our financial advisory segment comprises our mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. Since our inception in 1985, our financial advisory segment has advised on mergers and acquisitions transactions with a total value of over $275 billion, distressed situations involving more than $350 billion of liabilities, and has assisted clients in raising $42.6 billion for different categories of client funds. Over the past five years, revenues in the financial advisory segment have grown to $260.3 million, representing compound annual growth of 22.7%. For the year ended December 31, 2006, our financial advisory segment generated income before taxes of $193.9 million.

        We generate our income from fees earned pursuant to contractual arrangements with funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees), and from mergers and acquisitions advisory services, restructuring and reorganization advisory services and fund placement services for alternative investment funds. In certain management arrangements we receive performance fees when the return on assets exceeds certain benchmark returns or other performance targets. We make significant investments in the funds we manage and, in most cases, we receive a preferred allocation of income (i.e., a "carried interest") in the event that specified cumulative investment returns are achieved. Historically, our most significant expense has been compensation for our non-senior managing director employees, which will increase prospectively due to (1) payments to our senior managing directors of salary and bonus following this offering; (2) grants of unvested Blackstone Holdings partnership units to our senior managing directors and selected other individuals engaged in some of our businesses as part of the Reorganization; (3) awards of unvested deferred restricted common units of our other employees; and (4) ownership by our senior managing directors and selected other individuals of a portion of the carried interest income earned in respect of certain of the funds.

Business Environment

        As an investment management firm our businesses are materially affected by conditions in the financial markets and economic conditions generally in the United States, Western Europe and to some extent elsewhere around the world. Our diverse mix of business and product lines has allowed us to generate attractive returns in different business climates. Generally, business conditions characterized by low inflation, low or declining interest rates and strong equity markets provide a positive climate for us to generate attractive returns on existing investments. We also benefit, however, from periods of market volatility and disruption which allow us to use our large capital base and our experience with troubled companies and distressed securities to make investments at attractive prices and terms. In addition, within our financial advisory segment, our mergers and acquisitions advisory services operation, restructuring and reorganization advisory services and fund placement services benefit from different stages of the economic cycle.

Market Considerations

        Our ability to grow our revenues and income in our corporate private equity, real estate and marketable alternative asset management segments depends on our ability to attract new capital and investors and our ability to successfully invest our funds' capital. Our ability to grow our revenues in

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our financial advisory segment depends on our ability to obtain and successfully complete assignments from existing and new clients. In addition, market factors affecting our performance include:

    The strength and liquidity of the U.S. and relevant global equity markets generally, and the initial public offering market specifically. These markets affect our ability to increase the value of our investments in our corporate private equity and real estate opportunity funds, which in turn affects the carried interest we earn. Furthermore, changes in supply and demand for real estate assets could affect our ability to increase the value of our investments in our real estate opportunity funds.

    The strength and competitive dynamics of the alternative investment management industry, including the amount of capital invested in, and withdrawn from, alternative investments. Our share of this capital is dependent on the strength of our performance relative to the performance of our competitors. The capital we attract and our investment returns affect the level of our assets under management, which in turn affect the fees and the incentive and carried interest income we earn. In addition, strong capital flows to alternative asset investments are also important to the success of our fund placement business.

    The strength and liquidity of the U.S. and relevant global debt markets. We utilize debt to finance our investments in our funds and for working capital purposes. In addition, certain of our funds sometimes utilize leverage in order to increase investment returns, which ultimately affects our current income and ability to attract additional capital. Furthermore, certain of our funds make investments in debt instruments which benefit from a strong and liquid debt market.

    Volatility within the markets. Volatility within the debt and equity markets increases both the opportunities and risks within each of our segments and directly affects the performance of our funds.

    Fluctuations in interest rates or non-U.S. dollar currency exchange rates affect the performance of our funds. Historical trends in these markets are not necessarily indicative of future performance in these funds.

    Revenue trends in certain of our financial advisory businesses are correlated to the volume of mergers and acquisitions activity and restructurings. However, deviations from these relationships can occur in any given year for a number of reasons. For example, changes in our market share or the ability or inability of our clients to close certain large transactions can cause our advisory fee revenue results to diverge from the level of overall mergers and acquisitions or restructuring activity.

        We believe recent market conditions have created favorable environments for our asset management and financial advisory businesses during the periods presented. Changes in these market conditions could have negative effects on our asset management and financial advisory businesses in future periods.

    The U.S. economy and capital markets have been robust during the periods presented, creating a favorable environment for acquiring, growing and realizing value from the investments of our corporate private equity and real estate funds, as well as for the expansion of our marketable alternative asset management and financial advisory businesses. We have also successfully identified and capitalized on opportunities within Western Europe where trends have been favorable for investment and advisory services. Partially as a result of the globalization of our operations (e.g., opening of offices in London, Paris, Mumbai and Hong Kong), we continue to identify what we believe to be attractive opportunities in new markets.

    Institutions and other investors have increased their capital allocations to the alternative investment sector. As a leader in this sector based on the size, diversity and performance of our funds, we have been and expect to continue to be able to attract a significant amount of new

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      capital for our future investment funds. In addition, strong capital flows to this sector have contributed to the growth of our fund placement business.

    U.S. and relevant global debt markets were particularly robust during 2005 and 2006, contributing to our ability to finance acquisitions by our corporate private equity and real estate funds at attractive rates, at attractive leverage ratios and on attractive terms. Current benchmark interest rates and credit spreads remain near long-term historical lows. Increases in rates and spreads could have a negative impact on our returns as the incremental cash flow required to service debt would reduce cash flow available to equity investors, and may require higher equity contributions to effect future transactions. A reduction in leverage ratios or a tightening of covenants and other credit terms could also have a negative impact on us.  

    Allocations of capital to the alternative investment sector are also dependent on the returns available from other investments relative to returns from alternative investments. The primary markets in which we conduct our business have experienced relatively steady growth. In addition, historically low interest rates and tight credit spreads during the periods presented have allowed the portfolio hedge funds in our funds of hedge funds to employ significant leverage to enhance investment returns. However, the performance of our funds has continued to exceed various traditional benchmarks enabling us to raise increasingly larger pools of investment capital. Increases in interest rates could negatively affect future returns. A reduction in leverage or a tightening of covenants and other credit terms could have a negative impact on us.

    The continued strength of the mergers and acquisitions market environment as evidenced by the strong growth rate in mergers and acquisitions volume for the past three years has contributed to the revenue growth in our corporate advisory business. This business has also benefited from the growth of the number of senior managing directors in our corporate advisory business. Conversely, the market for restructuring and reorganization advisory services has been adversely affected by the decline in bankruptcies due to the positive economic environment and general liquidity in the market.

        The market conditions discussed above have been generally favorable to our performance over the periods presented. Future market conditions may not continue to be as favorable.

        For a more detailed description of how economic and global financial market conditions can materially affect our financial performance and condition, see "Risk Factors—Risks Related to Our Business".

        As a privately-owned firm, we have always been managed with a perspective of achieving successful growth over the long-term. Both in entering and building our various businesses over the years, and in determining the types of investments to be made by our investment funds, our management has consistently sought to focus on the best outcomes for our businesses and investments over a period of years rather than on the short-term effect on our revenue, net income or cash flow. We intend to maintain this long-term focus even after we become a public company. This approach will continue to significantly affect our revenue, net income and cash flow as a result of the timing of new investments and realizations of investments by our corporate private equity and real estate opportunity funds. This approach may also result in significant and unpredictable variances in these items from quarter to quarter. In addition, while a significant portion of the management fees derived from our investment funds, fund investors and fund portfolio companies are earned pursuant to multi-year contracts, other fees earned by our corporate private equity funds, real estate opportunity funds and our mezzanine funds, incentive fees earned by our fund of funds and hedge fund businesses and fees earned by our fund placement and advisory businesses are subject to significant variability from quarter to quarter based on transaction volume.

        Our historical combined results of operations are not indicative of the expected future operating results of The Blackstone Group L.P. following the Reorganization and this offering. In particular,

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following this offering The Blackstone Group L.P. will no longer consolidate in its financial statements the investment funds that have historically been consolidated in our combined financial statements, with the exception of four of our funds of hedge funds. See "Organizational Structure—Reorganization" and "Unaudited Pro Forma Financial Information".

Key Financial Measures and Indicators

Revenues

        Fund Management Fees.    Fund management fees are comprised of fees charged directly to funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees). Such fees are based upon the contractual terms of investment advisory and related agreements and are recognized as earned over the specified contract period. In certain management fee arrangements, we are entitled to receive performance fees when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fees are accrued monthly or quarterly based on measuring account / fund performance to date versus the performance benchmark stated in the investment management agreement. See "Business—Business Segments—Structure and Operation of Our Investment Funds—Incentive Arrangements / Fee Structure".

        Advisory Fees.    Financial advisory fees consist of advisory retainer and transaction based fee arrangements related to mergers, acquisitions, restructurings, divestitures and fund placement services for alternative investment funds. Advisory retainer fees are recognized when services are rendered. Transaction fees are recognized when (1) there is evidence of an arrangement with a client, (2) agreed upon services have been provided, (3) fees are fixed or determinable and (4) collection is reasonably assured. Fund placement services revenue is recognized as earned upon the acceptance by a fund of capital or capital commitments.

Expenses

        Employee Compensation and Benefits Expense.    Prior to this offering, our employee compensation and benefits expense reflects compensation (primarily salary and bonus) solely to our non-senior managing director employees. Historically, all payments for services rendered by our senior managing directors and selected other individuals engaged in our businesses have been accounted for as partnership distributions rather than as employee compensation and benefits expense. As a result, our employee compensation and benefits expense has not reflected payments for services rendered by these individuals. Following this offering, employee compensation and benefits will reflect the amortization of significant non-cash equity-based compensation as unvested Blackstone Holdings partnership units received in the Reorganization by our senior managing directors and other individuals engaged in some of our businesses and unvested deferred restricted common units granted to our non-senior managing director professionals at the time of this offering are charged to expense.

        In addition, we intend to implement performance-based salary and bonus arrangements for our existing owners working in our businesses across our different operations designed to achieve a relationship between compensation levels and results that are appropriate for each operation given prevailing market conditions. In addition, the existing owners working in our businesses, other professionals and selected other individuals who work on our carry funds will own a portion of the carried interest earned in relation to these funds in order to better align their interests with our own and with those of the investors in these funds.

        See "Unaudited Pro Forma Financial Information." See also "Certain Relationships and Related Person Transactions—Blackstone Holdings Partnership Agreements" for information regarding the vesting of Blackstone Holdings partnership units issued to our senior managing directors and see "Management—2007 Equity Incentive Plan—IPO Date Equity Awards" for information regarding the award of deferred restricted common units to be made to our non-senior managing director employees at the time of this offering.

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        Fund Expenses.    The expenses of our consolidated Blackstone funds consist primarily of interest expense, professional fees and other third-party expenses incurred in connection with the diligencing of potential investments that do not result in closed transactions. These expenses will no longer be reflected in our future financial statements after we deconsolidate the related investment funds. See "Unconsolidated Pro Forma Financial Information".

        Other Expenses.    The balance of our expenses include interest expense, occupancy and equipment expenses and general, administrative and other expenses, which consist of professional fees, travel and related expenses, communications and information services, depreciation and amortization and other operating expenses.

        Net Gains from Investment Activities.    Blackstone and its consolidated funds generate realized and unrealized gains from underlying investments in corporate private equity, real estate and marketable alternative asset management funds. Net gains (losses) from our investment activities reflect a combination of internal and external factors. The external factors affecting the net gains associated with our investing activities vary by asset class but are broadly driven by the market considerations discussed above. The key external measures that we monitor for purposes of deriving net gains from our investing activities include: price/earnings ratios and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples for benchmark public companies and comparable transactions and capitalization rates ("cap rates") for real estate property investments. In addition, third-party hedge fund managers provide information regarding the valuation of hedge fund investments. These measures generally represent the relative value at which comparable entities have either been sold or at which they trade in the public marketplace. Other than the information from our hedge fund managers, we refer to these measures generally as exit multiples. Internal factors that are managed and monitored include a variety of cash flow and operating performance measures, most commonly EBITDA and net operating income. The management of the companies that our funds invest in are incentivized to maximize these key measures and do so by pursuing strategies to improve the operating performance and the capital structures of the companies. In many cases, our general partner interests in the Blackstone funds entitle us to a preferred allocation of income in the event that the investors in the fund achieve specified cumulative investment returns (a "carried interest"). When we are entitled to a carried interest allocation, we have historically reflected this through a reduction in the income allocated to third-party investors in our carry funds in the determination of the Non-Controlling Interests in the Income of the Consolidated Entities. Following this offering we will no longer consolidate most of our investment funds and, as a result, income related to our carried interest will be explicitly recognized as net gains from investment activities.

        Our corporate private equity, real estate opportunity funds and funds of hedge funds have not historically utilized substantial leverage at the fund level other than for short-term borrowings between the date of an investment and the receipt of capital from the investing fund's investors. Our corporate private equity funds and real estate opportunity funds make direct or indirect investments in companies that utilize leverage in their capital structure, including leverage incurred by the company resulting from the structuring of the fund's investment in the company. The degree of leverage employed varies amongst portfolio companies based on market conditions and the company's financial situation. Our corporate private equity funds and real estate opportunity funds do not monitor leverage employed by their portfolio companies in the aggregate. However, for companies under their control or over which they have significant influence, it is our policy to endeavor to cause the portfolio company to maintain appropriate controls over its liquidity and interest rate exposures.

        In order to obtain additional market exposure, the forms of leverage primarily employed by our funds are purchasing securities on margin or through other collateralized financing and the use of derivative instruments will almost always be used to varying degrees, but generally gross leverage will be in the range of 150% to 250% of the fund's net asset value. The fair value of derivatives generally will encompass 0% to 15% of the fund's net asset value. Our mezzanine funds employ leverage in

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order to increase the limited partners' returns on invested capital. The funds have typically employed leverage of between 0% and 50% of an investment's cost, depending on the nature of the asset acquired, with an overall target of borrowings equating to approximately 33% of the funds' invested assets. The distressed securities hedge fund does not typically borrow money other than for short-term cash needs. It will typically hold both long securities and short securities. Gross investment leverage will generally range from 90% to 130% based on net asset value, and net exposure is generally 60% to 100% based on net asset value. The fund will generally hold 10% to 15% of net asset value in cash and will typically be net long. The fund will generally utilize credit derivatives to buy credit protection.

        The funds' investments are diversified across a variety of industries and geographic locations, and as such we are broadly exposed to the market conditions and business environments referred to above. As a result, although our funds are exposed to market risks, we continuously seek to limit concentration with exposure in any particular sector.

        Income Taxes.    We have historically operated as a partnership or, in the case of certain combined subsidiaries, a S Corporation for U.S. federal income tax purposes and generally as a corporate entity in non-U.S. jurisdictions. As a result, our income has not been subject to U.S. federal and state income taxes. Income taxes shown on Blackstone Group's historical combined income statements are attributable to the New York City unincorporated business tax and income taxes on certain entities located in non-U.S. jurisdictions.

        Following this offering the Blackstone Holdings partnerships and their subsidiaries will continue to operate in the U.S. as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions; accordingly, these entities will in some cases continue to be subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, certain of the wholly-owned subsidiaries of The Blackstone Group L.P. will be subject to additional entity-level taxes that will be reflected in our consolidated financial statements. For information on the pro forma effective tax rate of The Blackstone Group L.P. following the Reorganization, see Note q in "Unaudited Pro Forma Financial Information".

        Non-Controlling Interests in Income of Consolidated Entities.    On a historical basis, non-controlling interests in income of consolidated entities has primarily consisted of interests of unaffiliated third-party investors and AIG's investments in Blackstone funds pursuant to AIG's mandated limited partner capital commitments, on which we receive carried interest allocations and which we refer to collectively as "Limited Partners" or "LPs" as well as discretionary investments by the other existing owners and employees. Non-controlling interests related to the corporate private equity, real estate opportunity and mezzanine funds are subject to on-going realizations and distributions of proceeds therefrom during the life of a fund with a final distribution at the end of each respective fund's term, which could occur under certain circumstances in advance of or subsequent to that fund's scheduled termination date. Non-controlling interests related to our funds of hedge funds and hedge funds are generally subject to annual, semi-annual or quarterly withdrawal or redemption by investors in our hedge funds following the expiration of a specified period of time when capital may not be withdrawn (typically between one and three years). When redeemed amounts become legally payable to investors in our hedge funds on a current basis, they are reclassified as a liability. Such non-controlling interests will initially be recorded at their historical carry-over basis as those interests remain outstanding and are not being exchanged for partnership units of Blackstone Holdings.

        Following this offering, we will no longer consolidate most of our investment funds, as we will grant liquidation rights to the unrelated investors, see Note k in "Unaudited Pro Forma Financial Information", and accordingly non-controlling interests in income of consolidated entities related to the Limited Partner interests in the deconsolidated funds will no longer be reflected in our financial results. However, we will record significant non-controlling interests in income of consolidated entities relating to the ownership interest of our existing owners in Blackstone Holdings and the limited partner interests in our investment funds that remain consolidated. As described in "Organizational Structure",

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The Blackstone Group L.P. will, through wholly-owned subsidiaries, be the sole general partner of each of the Blackstone Holdings partnerships. The Blackstone Group L.P. will consolidate the financial results of Blackstone Holdings and its consolidated subsidiaries, and the ownership interest of the limited partners of Blackstone Holdings will be reflected as a minority interest in The Blackstone Group L.P.'s consolidated financial statements.

Operating Metrics

        The alternative asset management business is a complex business that is unusual due to its ability to support rapid growth without requiring substantial capital investment. However, there also can be volatility associated with its earnings and cash flow. Since our inception, we have developed and used various supplemental operating metrics to assess and monitor the operating performance of our various alternative asset management businesses in order to monitor the effectiveness of our value creating strategies.

        Assets Under Management.    Assets under management refers to the assets we manage. Our assets under management equal the sum of: (1) the net asset value ("NAV") of our carry funds plus the capital that we are entitled to call from investors in those funds pursuant to the terms of their capital commitments to those funds (plus the NAV of co-investments arranged by us that were made by limited partners of our corporate private equity and real estate opportunity funds in portfolio companies of such funds, on which we receive a carried interest allocation); (2) the NAV of our funds of hedge funds, proprietary hedge funds and closed-end mutual funds; and (3) the amount of capital raised for our senior debt funds. The assets under management measure we present in this prospectus also includes assets under management relating to our own and our employees' investments in funds for which we charge either no or nominal management fees. As a result of raising new funds with sizeable capital commitments, and increases in the net asset values of our funds and their retained profits, our fee paying assets under management have increased significantly over the periods discussed.

        Limited Partner Capital Invested.    Limited Partner capital invested represents the amount of Limited Partner capital commitments which were invested by our carry funds during each period presented. Over our history we have earned aggregate multiples of invested capital for realized and partially realized investments of 2.6x and 2.4x in our corporate private equity and real estate opportunity funds, respectively.

        Carry Dollars Created.    Carry Dollars Created is an operating measure of the value created for us when our carry funds make an investment. Carry Dollars Created is calculated by multiplying the aggregate amount of Limited Partner capital invested by the carry funds in transactions during a given period by the contractual percentage (generally 20%) of the profits that we earn as a preferred allocation of income (a "carried interest") from these investments, assuming we achieve specified cumulative investment returns. Carry Dollars Created is a critical operating metric in the management of our businesses, and we focus on growing the annual amount of Carry Dollars Created over time. We closely track Carry Dollars Created as an operating measure of the productivity of our investment activities and as a measure of the value attributable to us that is embedded in our existing investment portfolio. Carry Dollars Created reflects the opportunity to earn a preferred allocation of income on an investment by our carry funds and is established when a new investment is made. We believe that Carry Dollars Created serves as a useful indicator of potential future investment results.

        As a public company, we will continue to manage our business as we have in the past, using traditional financial measures and our key operating performance metrics, since we believe that these metrics measure the productivity of our investment activities. See "—Summary Historical Financial and Other Data".

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Combined Results of Operations

        Following is a discussion of our combined results of operations for the three years ended December 31, 2006, 2005 and 2004. For a more detailed discussion of the factors that affected the results of our four business segments in these periods, see "—Segment Analysis" below.

        The following tables set forth information regarding our combined results of operations and certain key operating metrics for the three years ended December 31, 2006, 2005 and 2004:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Revenues                  
  Fund Management Fees   $ 852,283   $ 370,574   $ 390,645
  Advisory Fees     256,914     120,137     108,356
  Interest and Other     11,082     6,037     4,462
   
 
 
    Total     1,120,279     496,748     503,463
   
 
 
Expenses                  
  Employee Compensation and Benefits     250,067     182,605     139,512
  Interest     36,932     23,830     16,239
  Occupancy and Related Charges     35,862     30,763     29,551
  General, Administrative and Other     86,534     56,650     48,576
  Fund Expenses     143,695     67,972     43,123
   
 
 
    Total     553,090     361,820     277,001
   
 
 
Other Income                  
  Net Gains from Investment Activities     7,587,296     5,142,530     6,214,519
   
 
 
Income Before Non-Controlling Interests in Income of Consolidated Entities and Income Taxes     8,154,485     5,277,458     6,440,981
Non-Controlling Interests in Income of Consolidated Entities     5,856,345     3,934,535     4,901,547
   
 
 
Income Before Taxes     2,298,140     1,342,923     1,539,434
Income Taxes     31,934     12,260     16,120
   
 
 
Net Income   $ 2,266,206   $ 1,330,663   $ 1,523,314
   
 
 
Assets Under Management (at Year End)   $ 69,503,052   $ 53,919,326   $ 31,701,828
   
 
 
Capital Deployed:                  
  Limited Partner Capital Invested   $ 11,041,102   $ 2,843,135   $ 3,430,502
   
 
 
  Carry Dollars Created   $ 2,179,471   $ 568,627   $ 686,100
   
 
 

    Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

    Revenues

        Revenues were $1.1 billion for the year ended December 31, 2006, an increase of $623.5 million or 125.5% versus the year ended December 31, 2005. The increase was primarily due to an increase in fund management fees from a full year of fees generated from our new corporate private equity fund and two new real estate funds, as well as increased assets under management in our marketable alternative asset management segment. In addition, advisory fees increased primarily from increased activity in our fund placement business and increases in mergers and acquisition engagements.

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    Expenses

        Expenses were $553.1 million for the year ended December 31, 2006, an increase of $191.3 million or 52.9% versus the year ended December 31, 2005. The increase was primarily due to an increase in employee compensation and benefits reflecting the increased investment activities in 2006 as well as the net addition of personnel. In addition, fund expenses increased $75.7 million.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $7.6 billion for the year ended December 31, 2006, an increase of $2.4 billion or 47.5% versus the year ended December 31, 2005. The increase was primarily due to increases in unrealized gains in real estate and the increase in the net appreciation of investments in our marketable alternative asset management segment.

    Assets Under Management

        Assets under management were $69.5 billion for the year ended December 31, 2006, an increase of $15.6 billion or 28.9% versus the year ended December 31, 2005. The increase was due to increases in assets under management of $2.5 billion in our corporate private equity segment, $2.3 billion in our real estate segment and $10.8 billion in our marketable alternative asset management segment.

    Capital Deployed

        LP capital invested and carry dollars created were $11.0 billion and $2.2 billion, respectively, for the year ended December 31, 2006, which represents an increase of $8.2 billion (288%) and $1.6 billion (283%), respectively. Such amounts reflect increased levels of investment achieved in both our private equity and real estate segments, as we have grown our investment teams and global presence. Investments were made across a number of sectors in 2006, including semi-conductor manufacturing, telecommunications and healthcare in the corporate private equity segment and office and hospitality in the real estate segment.

    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

    Revenues

        Revenues were $496.7 million for the year ended December 31, 2005, a decrease of $6.7 million or 1.3% versus the year ended December 31, 2004. The decrease was primarily due to the timing of commitments and actual closings for corporate private equity transactions and a resultant decrease in our share of related additional fees of $52.9 million. This decrease was partially offset by $13.9 million and $17.9 million of increases in real estate and marketable alternative asset management fund fees, respectively.

    Expenses

        Expenses were $361.8 million for the year ended December 31, 2005, an increase of $84.8 million or 30.6% versus the year ended December 31, 2004. The increase was due to increased employee compensation of $43.1 million due to increased payments to existing personnel, as well as the net addition of personnel in anticipation of the launching of a new corporate private equity fund and two new real estate opportunity funds. In addition, fund expenses increased by $24.8 million.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $5.1 billion for the year ended December 31, 2005, a decrease of $1.1 billion or 17.2% versus the year ended December 31, 2004. The decrease was due to a decline in realized gains in corporate private equity and real estate, offset by a slight increase in the marketable alternative asset management segment.

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    Assets Under Management

        Assets under management were $53.9 billion for the year ended December 31, 2005, an increase of $22.2 billion or 70.1% versus the year ended December 31, 2004. During 2005, we commenced a corporate private equity fund and two real estate opportunity funds, which increased assets under management in those segments by $14.5 billion and $3.8 billion, respectively. In addition, assets under management in the marketable alternative asset management segment increased by $4.9 billion.

    Capital Deployed

        LP capital invested and carry dollars created were $2.8 billion and $568.6 million, respectively, for the year ended December 31, 2005, which represents a decrease of $587.4 million (17%) and $117.5 million (17%), respectively. Such amounts reflect a decline in our private equity segment offset in part by an increase in the real estate segment. Investments were made across a number of sectors in 2005, including healthcare and technology in the corporate private equity segment and hospitality in the real estate segment.

Segment Analysis

        Discussed below are our results of operations for each of our reportable segments. This information is reflected in the manner utilized by our senior management to make operating decisions, assess performance and allocate resources. Management makes operating decisions and assesses the performance of each of our business segments based on financial and operating metrics and data that are presented without the consolidation of any of the investment funds we manage. Key performance measures used by management are Carry Dollars Created (see "—Operating Metrics—Carry Dollars Created"), Fee Related Earnings and Economic Net Income ("ENI").

        Fee Related Earnings is a profit measure reported by each of our four segments. Management uses Fee Related Earnings as a supplemental measure of operating performance. The difference between Fee Related Earnings and GAAP income before taxes is that Fee Related Earnings represents income before taxes adjusted to (1) exclude expenses of consolidated Blackstone funds, (2) include management fees earned from such funds which were eliminated in consolidation and (3) eliminate net gains and losses from investment activities and non-controlling interests in income of consolidated entities. Current operations are managed in part based on Fee Related Earnings which is comprised principally of revenue earned from fund management and advisory fees. These revenues are reduced by all operating expenses, including but not limited to employee compensation, interest and occupancy costs. It has been, and remains, a key objective of ours to maximize Fee Related Earnings as such amounts directly affect the profits from the business.

        ENI has historically been a key performance measure used by management. ENI represents net income excluding the impact of income taxes as well as the impact of non-cash charges related to vesting of equity based compensation. However, our historical combined financial statements do not include non-cash charges related to vesting of equity based compensation. Therefore, ENI is equivalent to income before taxes in our historical combined financial statements. ENI is used by management for our segments in making resource deployment and employee compensation decisions.

        Segment revenues, expenses and net gains from investing activities are presented on a basis that deconsolidates the investment funds we manage. As a result, segment revenues are greater than those presented on a combined GAAP basis because fund management fees recognized in certain segments are received from the Blackstone funds and eliminated in consolidation when presented on a combined GAAP basis. Furthermore, segment expenses and net gains from investments are lower than related amounts presented on a combined GAAP basis due to the exclusion of fund expenses that are paid by LPs and the elimination of non-controlling interests.

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Corporate Private Equity

        The following table presents our segment results for our corporate private equity segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Revenues                  
  Fund Management Fees   $ 404,296   $ 175,772   $ 226,712
  Interest and Other     871     1,666     919
   
 
 
    Total     405,167     177,438     227,631
   
 
 
Expenses     117,724     78,247     70,561
   
 
 
Fee Related Earnings     287,443     99,191     157,070
   
 
 
Net Gains from Investment Activities     722,410     737,506     871,891
   
 
 
Economic Net Income   $ 1,009,853   $ 836,697   $ 1,028,961
   
 
 

        The following operating metrics are used in the management of this business segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Assets Under Management (at Year End)   $ 29,808,110   $ 27,263,416   $ 15,651,178
   
 
 
Capital Deployed:                  
 
Limited Partner Capital Invested

 

$

7,791,619

 

$

1,615,106

 

$

2,289,592
   
 
 
  Carry Dollars Created   $ 1,529,574   $ 323,021   $ 457,918
   
 
 

        During the periods presented, the investing climate for our corporate private equity segment remained fundamentally positive, with the global economy, particularly in the United States, performing well, corporate sale transactions relatively active, private equity funds increasingly being considered for acquisitions of public and private companies and availability of debt financing on attractive terms. Additionally, as asset allocations to the private equity industry have increased, Blackstone's fund sizes have also grown. Larger funds increased the universe of potential acquisition candidates and allowed the funds to pursue larger transactions.

        The institutional loan and high yield markets experienced unprecedented liquidity. Increasing investor demand for non-investment grade debt has kept interest rate spreads, or the incremental cost a borrower must pay over the interest rate of government securities, at historically low levels. In addition, the growing prevalence of alternative sources of debt financing, including asset-based financing, securitizations and property financings, among others, increased the availability of low-cost financing alternatives for private equity buyers. These market dynamics led to significant growth in leveraged buyouts as the availability of low-cost debt lowered our corporate private equity funds' cost of capital and resulted in higher returns or the ability to offer additional purchase consideration to a seller.

    Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

    Revenues

        Revenues were $405.2 million for the year ended December 31, 2006, an increase of $227.7 million or 128.3% versus the year ended December 31, 2005. The increase in 2006 is due to the net impact of fund related fees of $94.9 million attributable to Blackstone Capital Partners V, a new fund that

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commenced in December 2005, and an increase in portfolio company related fees earned in connection with the increased investment activity in 2006 versus 2005 (our share of 2006 portfolio company related fees totaled $198 million as compared to $65.2 million in 2005).

    Expenses

        Expenses were $117.7 million for the year ended December 31, 2006, an increase of $39.5 million or 50.5% versus the year ended December 31, 2005. The increase was due primarily to increased compensation to employees reflecting the growth of the team and increased investment activity and resultant revenues in 2006. In addition, professional fees and interest expense increased in the aggregate by $15.3 million primarily as a result of increased investment activity.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $722.4 million (including $595.5 million of general partner carried interest allocations) for the year ended December 31, 2006, a decrease of $15.1 million versus the year ended December 31, 2005, primarily attributable to differences in the amount of unrealized gains in certain portfolio investments in 2006 compared to recognition of both unrealized and realized gains in other portfolio investments in 2005. For the year ended December 31, 2006, our funds' investments in the technology, media and telecommunications sector benefited from both operating improvements by the portfolio companies and improvements in exit multiples resulting in an increase in the value of these investments, whereas in 2005 similar net gains were largely generated by our funds' investments in the energy sector primarily due to increased exit multiples within this sector.

    Assets Under Management

        Assets under management were $29.8 billion for the year ended December 31, 2006, a net increase of $2.5 billion or 9.3% versus the year ended December 31, 2005, arising primarily from a subsequent closing of additional commitments to Blackstone Capital Partners V.

    Capital Deployed

        LP capital invested in private equity transactions and Carry Dollars Created were $7.8 billion and $1.5 billion, respectively, for the year ended December 31, 2006, which represents an increase of $6.2 billion or 382.4% and $1.2 billion or 373.5%, respectively. These increases reflect increases in the size and volume of investment activity.

    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

    Revenues

        Revenues were $177.4 million for the year ended December 31, 2005, a decrease of $50.2 million or 22.1% versus the year ended December 31, 2004. The decrease was due primarily to the decrease in investment activity and a commensurate decrease in portfolio company related fees (our share of 2005 portfolio company related fees totaled $65.2 million as compared to $100.6 million in 2004).

    Expenses

        Expenses were $78.2 million for the year ended December 31, 2005, an increase of $7.7 million or 10.9% versus the year ended December 31, 2004. The increase was due primarily to increased compensation expense of $5.0 million as well as costs associated with Blackstone establishing a presence in India.

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    Net Gains from Investment Activities

        Net gains from investment activities totaled $737.5 million for the year ended December 31, 2005, a decrease of $134.4 million or 15.4% versus the year ended December 31, 2004, primarily attributable to realizations of prior year's unrealized gains and an increase in the 2005 unrealized appreciation of energy related fund investments. Included in 2005 and 2004 net gains from investment activities are general partner carried interest allocations of $607.8 million and $709.8 million, respectively. In particular, for the year ended December 31, 2005, our funds' investments in the energy sector increased in value, primarily driven by higher exit multiples, and were offset by a decrease in the value of the remaining investments in the manufacturing sector.

    Assets Under Management

        Assets under management were $27.3 billion for the year ended December 31, 2005, a net increase of $11.6 billion or 74.2% versus the year ended December 31, 2004. The increase reflects primarily the December 2005 commencement of Blackstone Capital Partners V, a new fund with total capital commitments of $14.5 billion.

    Capital Deployed

        LP capital invested in private equity transactions and carry dollars created were $1.6 billion and $323.0 million, respectively, for the year ended December 31, 2005, which represents a decrease of $674.5 million or 29.5% and $134.9 million or 29.5%, respectively, versus the year ended December 31, 2004. These decreases reflect a lower level of investment activity in 2005.

Real Estate

        The following table presents our results for our real estate segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Revenues                  
  Fund Management Fees   $ 263,130   $ 100,073   $ 86,113
  Interest and Other     1,076     835     2,502
   
 
 
    Total     264,206     100,908     88,615
   
 
 
Expenses     96,426     68,428     51,797
   
 
 
Fee Related Earnings     167,780     32,480     36,818
   
 
 
Net Gains from Investment Activities     734,964     292,505     296,439
   
 
 
Economic Net Income   $ 902,744   $ 324,985   $ 333,257
   
 
 

        The following operating metrics are used in the management of this business segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Assets Under Management (at Year End)   $ 12,796,999   $ 10,537,078   $ 4,867,046
   
 
 
Capital Deployed:                  
 
Limited Partner Capital Invested

 

$

3,130,945

 

$

1,105,882

 

$

935,136
   
 
 
  Carry Dollars Created   $ 626,189   $ 221,176   $ 187,027
   
 
 

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        During the periods presented, macroeconomic conditions generally supported continued economic growth. The strength of demand for real estate, particularly in the office and lodging sectors, continued to be heavily correlated with the strength of the U.S. economy, as indicated by gross domestic product and office employment growth. After declining precipitously in 2001, real gross domestic product growth began to steadily improve and continued to grow.

        The office market sector improved during the period and the hotel sector continued to show considerable year-over-year growth, two key sectors for Blackstone real estate fund investments. The improving balance between office supply and demand was further supported by continued job growth, where the growth in the service sector has outpaced the overall growth in employment. On the supply side, with the exception of a handful of markets, there was little new office supply in the pipeline. The lack of new construction enabled landlords to continue reducing concession packages to tenants and overall leasing costs. Furthermore, as vacancies and available sublease space declined, market rental rates exhibited considerable growth. In addition to improving demand fundamentals, hotel supply statistics were favorable.

        While the supply and demand fundamentals for our funds' most important investment classes improved, debt and equity investor demand for real estate assets increased significantly over the past several years, resulting in significantly increased liquidity in the sector. The improved demand was due to a number of factors, including a favorable interest rate environment, the overall performance of the U.S. REIT market, the lack of alternative investments that provided the same levels of expected returns and on the debt side, the ability of lenders to repackage their loans into securitizations, thereby diversifying and limiting their risk. This led to an increase in asset values driven by higher exit multiples and provided the opportunity to dispose of and refinance assets at favorable pricing levels.

    Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

    Revenues

        Revenues were $264.2 million for the year ended December 31, 2006, an increase of $163.3 million or 161.8% versus the year ended December 31, 2005. The increase in 2006 is due to the net impact of a full year of fund related fees earned from our two real estate opportunity funds (Blackstone Real Estate Partners V and Blackstone Real Estate Partners International II), which commenced in the second half of 2005 and an increase in portfolio company related fees earned (our share of portfolio company related 2006 fees totaled $114.9 million as compared to $35.0 million in 2005) due to increases in both the size and volume of investments. The management fees generated from Blackstone Real Estate Partners V and Blackstone Real Estate Partners International II were $76.8 million and $26.8 million, respectively, for the year ended December 31, 2006, representing a year over year increase for Blackstone Real Estate Partners V of $75.7 million and Blackstone Real Estate Partners International II of $20.1 million. These increases in fund related fees were partially offset by a reduction in fees due to capital being returned to investors as a result of portfolio company dispositions.

    Expenses

        Expenses were $96.4 million for the year ended December 31, 2006, an increase of $28.0 million or 40.9% versus the year ended December 31, 2005. Compensation expense increased $20.6 million, which is primarily due to increased compensation to existing personnel and net additions of personnel to drive growth of the portfolio and increases in investment pace. Professional fees and interest expense increased $5.9 million in total for 2006.

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    Net Gains from Investment Activities

        Net gains from investment activities totaled $735.0 million (including $656.7 million of general partner carried interest allocations) for the year ended December 31, 2006, an increase of $442.5 million or 151.3% versus the year ended December 31, 2005. The increase was primarily related to net gains associated with our real estate opportunity funds' hospitality and office portfolio investments. In particular, for the year ended December 31, 2006, the net gains of our funds' limited service hotel portfolios benefited from continued EBITDA growth, reflecting overall improvement in operations at the property level as well as overall improvements in exit multiples. For the year ended December 31, 2006, our funds' recent office portfolio acquisitions appreciated, benefiting from improvements in overall office market fundamentals, especially in high barrier-to-entry markets, and the ongoing improvement in the level of exit multiples.

    Assets Under Management

        Assets under management were $12.8 billion for the year ended December 31, 2006, an increase of $2.3 billion or 21.4% versus the year ended December 31, 2005. The increase was due to a subsequent closing of $3.4 billion of LP commitments in the first half of 2006 in Blackstone Real Estate Partners V partially offset by a reduction in investments due to the disposition of some of our real estate opportunity funds' domestic and European real estate assets in 2006.

    Capital Deployed

        LP capital invested in real estate transactions and the resultant carry dollars created were $3.1 billion and $626.2 million, respectively, for the year ended December 31, 2006, which represents an increase of $2.0 billion or 183.1% and $405.0 million or 183.1%, respectively, versus the year ended December 31, 2005. This increase reflects the size and volume of investment activity in 2006, which included major acquisitions as well as add-on investments in the office and hotel sectors of $1.5 billion each.

    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

    Revenues

        Revenues were $100.9 million for the year ended December 31, 2005, an increase of $12.3 million or 13.9% versus the year ended December 31, 2004, primarily due to the net impact of the commencement of Blackstone Real Estate Partners V and Blackstone Real Estate Partners International II, which generated additional management fees of $1.1 million and $6.7 million, respectively, as well as an increase in our share of portfolio company related fees (our share of 2005 portfolio company related fees totaled $35.0 million as compared to $32.0 million in 2004).

    Expenses

        Expenses were $68.4 million for the year ended December 31, 2005, an increase of $16.6 million or 32.1% versus the year ended December 31, 2004. The increase is due primarily to a $14.5 million increase in compensation for existing personnel, addition of personnel to grow investment activity in Western Europe and hirings required in anticipation of the launching of Blackstone Real Estate Partners V and Blackstone Real Estate Partners International II in the second half of 2005.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $292.5 million for the year ended December 31, 2005, a decrease of $3.9 million, or 1.3%, versus the year ended December 31, 2004. For the year ended December 31, 2005, net gains, both realized and unrealized, are primarily related to hospitality

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portfolio investments. Included in 2005 and 2004 net gains from investment activities are general partner carried interest allocations of $241.6 million and $241.2 million, respectively. For the year ended December 31, 2005, the net gains were generated primarily from appreciation at the funds' hotel investments, due to overall improvement of resort hotel fundamentals and results of our cost savings programs at the property level as well as from improvements in sector exit multiples. For the year ended December 31, 2004, net gains were generated mainly from appreciation in our funds' limited service hospitality portfolio, which experienced significant EBITDA growth, and increases in exit multiples in this hospitality sector. In addition, our funds' retail mall portfolio experienced an increase in value due to increases in exit multiples for the second tier segment of the retail mall sector.

    Assets Under Management

        Assets under management were $10.5 billion for the year ended December 31, 2005, an increase of $5.7 billion or 116.5% versus the year ended December 31, 2004. The increase represents the closing of two new real estate funds in the second half of 2005: Blackstone Real Estate Partners International II with $1.5 billion in LP commitments and an initial closing of $1.8 billion in LP commitments for Blackstone Real Estate Partners V.

    Capital Deployed

        LP capital invested in real estate transactions and the carry dollars created were $1.1 billion and $221.2 million, respectively, for the year ended December 31, 2005, an increase of $170.7 million or 18.3% and $34.1 million or 18.3%, respectively, versus the year ended December 31, 2004. These increases reflect the increase in the investment size and volume activity in 2005, including major acquisitions in the hospitality sector.

Marketable Alternative Asset Management

        The following table presents our results of operations for our marketable alternative asset management segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Revenues                  
  Fund Management Fees   $ 220,450   $ 129,638   $ 111,715
  Advisory Fees             179
  Interest and Other     6,669     2,345     1,081
   
 
 
    Total     227,119     131,983     112,975
   
 
 
Expenses     128,797     92,809     71,485
   
 
 
Fee Related Earnings     98,322     39,174     41,490
   
 
 
Net Gains from Investment Activities     93,347     74,956     67,478
   
 
 
Economic Net Income   $ 191,669   $ 114,130   $ 108,968
   
 
 

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        The following operating metrics are used in the management of this business segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Assets Under Management (at Year End)   $ 26,897,943   $ 16,118,832   $ 11,183,604
   
 
 
Capital Deployed:                  
 
Limited Partner Capital Invested

 

$

118,538

 

$

122,148

 

$

205,774
   
 
 
  Carry Dollars Created   $ 23,708   $ 24,430   $ 41,155
   
 
 

        During the periods presented we have consistently grown our liquid assets under management by both expanding the range of products that we offer and expanding and diversifying our investor base.

        During the periods presented, our funds of hedge funds experienced significant inflows of investments from our predominantly institutional investor base. Pension investors represent a majority of our institutional investors and increased their allocations to hedge funds and funds of hedge funds. Overall, we found that our portfolios were well positioned to take advantage of the broad impact that globalization had on both markets and economies, supporting robust global growth with moderate inflationary pressures.

        The distressed securities market has been cyclical over time. Current market conditions have been impacted by record low "high-yield" default rates and "stressed" bonds trading at tight credit spreads over treasuries. Although the equity markets are also cyclical, the equity long/short strategy may benefit from the ability to shift exposures into a broad range of geographies and industries that offer compelling opportunities on the long or short side of the market. The current market environment of the closed-end mutual funds is based on a variety of factors, including overall investor demand for long-only exposure in the Asia ex-Japan markets, increasing competition from exchange traded funds and index products and the performance of our underlying portfolio holdings relative to other closed-end mutual funds. Volatility of the markets is an inherent risk of investing in Asia.

        The mezzanine market was active due to robust middle-market mergers and acquisition volume, primarily driven by middle-market private equity activity. Recent terms for mezzanine securities have been very aggressive with financial leverage levels increasing and yields being compressed. However, our mezzanine funds continued to find opportunities deemed attractive from a credit and investment perspective.

    Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

    Revenues

        Revenues were $227.1 million for the year ended December 31, 2006, an increase of $95.1 million, or 72.1%, versus the year ended December 31, 2005. The increase was primarily due to an increase of $90.8 million, or 70.1%, in management fees resulting from the growth of assets under management of $10.8 billion, or 66.9%, for the year ended December 31, 2006 versus the year ended December 31, 2005. Included in these revenues was an increase of $16.7 million attributable to the closed-end mutual fund business which commenced operations at the end of 2005.

    Expenses

        Expenses were $128.8 million for the year ended December 31, 2006, an increase of $36.0 million, or 38.8%, versus the year ended December 31, 2005. Compensation expense increased $18.9 million or 33.8% which was due primarily to an increase in personnel to support expansion into new areas and higher compensation for existing employees to support asset growth and the creation of new investment

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products. Professional fees and interest expense increased $8.4 million primarily as a result of increased investment activity.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $93.3 million for the year ended December 31, 2006, an increase of $18.4 million, or 24.5%, versus the year ended December 31, 2005. The increase was related to positive performance in the funds of hedge funds business, which created an increase of $12.6 million, or 26.4%. Additionally, the hedge fund business contributed $22.5 million to the increase due to positive returns for the hedge fund business overall and the launch of the equity hedge fund business in October 2006. The net gains from investment activities were partially offset by a $17.1 million decrease, or 69.4%, which related primarily to losses attributable to the mezzanine funds.

    Assets Under Management

        Assets under management were $26.9 billion for the year ended December 31, 2006, a net increase of $10.8 billion or 66.9% versus the year ended December 31, 2005. The increase was due to increased net capital invested in existing funds of $7.8 billion and net capital invested in new funds of $3.0 billion.

    Capital Deployed

        LP capital invested in mezzanine investments and the carry dollars created were $118.5 million and $23.7 million, respectively, for the year ended December 31, 2006, a decrease of $3.6 million, or 3.0%, and $0.7 million, or 3.0%, respectively, versus the year ended December 31, 2005.

    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

    Revenues

        Revenues were $132.0 million for the year ended December 31, 2005, an increase of $19.0 million, or 16.8%, versus the year ended December 31, 2004. The increase was primarily due to an increase of $17.9 million, or 16.0%, in management fees resulting from the growth of assets under management of $4.9 billion, or 44.1%, for the year ended December 31, 2005 compared to the year ended December 31, 2004. Included in these revenues was an increase of $4.5 million attributable to the distressed securities hedge fund that commenced operations in the second half of 2005.

    Expenses

        Expenses were $92.8 million for the year ended December 31, 2005, an increase of $21.3 million, or 29.8%, versus the year ended December 31, 2004. Compensation expense increased $15.6 million, or 38.8%, which was due primarily to increased compensation to existing personnel as well as the net addition of personnel. Professional fees and interest expense increased in the aggregate by $5.1 million primarily as a result of increased investment activity.

    Net Gains from Investment Activities

        Net gains from investment activities totaled $75.0 million for the year ended December 31, 2005, an increase of $7.5 million, or 11.1%, versus the year ended December 31, 2004. The increase was primarily related to positive performance in the fund of hedge funds business which created an increase of $10.7 million, or 28.8%. The distressed securities hedge fund, which was launched in the second half of 2005, contributed $2.6 million to the increase. The net gains from investment activities were partially offset by a $5.6 million decrease, or 18.5%, which related primarily to losses attributable to the mezzanine funds.

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    Assets Under Management

        Assets under management were $16.1 billion for the year ended December 31, 2005, a net increase of $4.9 billion, or 44.1%, versus the year ended December 31, 2004. The increase was due to increased net capital invested in existing funds of $0.5 billion and net capital invested in new funds of $4.4 billion.

    Capital Deployed

        LP capital invested in mezzanine transactions and the carry dollars created were $122.1 million and $24.4 million, respectively, for the year ended December 31, 2005, a decrease of $83.6 million or 40.6% and $16.7 million, or 40.6%, respectively, versus the year ended December 31, 2004. These decreases are due to less significant investment activity during 2005 versus 2004.

Financial Advisory

        The following table presents our results of operations for our financial advisory segment:

 
  Year Ended December 31,
 
  2006
  2005
  2004
 
  (Dollars in Thousands)

Revenues                  
  Advisory Fees   $ 256,914   $ 120,137   $ 108,178
  Interest and Other     3,408     749     105
   
 
 
    Total     260,322     120,886     108,283
   
 
 
Expenses     66,448     54,364     40,035
   
 
 
Fee Related Earnings     193,874     66,522     68,248
   
 
 
Net Gain from Investment Activities         589    
   
 
 
Economic Net Income   $ 193,874   $ 67,111   $ 68,248
   
 
 

        During the periods presented, in addition to the continuing favorable general conditions in the mergers and acquisitions markets, shareholder activists have generally become more aggressive in their tactics seeking to force corporate action for shareholder value creation. Many of these activists have been successful in attracting attention to undervalued companies and forced strategic reviews, often resulting in divestitures or merger and acquisition activity. As a result, managements and boards of directors increased their focus on shareholder value creation, which has fueled an increase in mergers and acquisitions and strategic initiatives. In addition, the increase in assets under management among private equity funds and the favorable conditions in the debt capital markets led to more acquisition transactions involving private equity firms. During the periods presented, considerable capital flows to the alternative investment sector led to the commencement, and the subsequent growth, of our fund placement business. The market for restructuring and reorganization advisory services has been adversely affected by the decline in bankruptcies due to the strong, positive economic environment and general liquidity in the market.

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    Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

    Revenues

        Revenues were $260.3 million for the year ended December 31, 2006, an increase of $139.4 million or 115.3% versus the year ended December 31, 2005. The increase was due to an increase of $90.6 million in our mergers and acquisitions advisory fees and $48.8 million of fees arising from our fund placement business.

    Expenses

        Expenses were $66.4 million for the year ended December 31, 2006, an increase of $12.1 million or 22.2% versus the year ended December 31, 2005. The increase was primarily due to an increase in compensation of $9.0 million, which included personnel additions in our fund placement business. In addition, operating expenses increased $3.1 million.

    Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

    Revenues

        Revenues were $120.9 million for the year ended December 31, 2005, an increase of $12.6 million or 11.6% versus the year ended December 31, 2004. The increase was due to an increase of $27.9 million in mergers and acquisitions advisory fees, and increased revenues of $9.9 million attributable to the first full year of operations for our fund placement business, partially offset by a decrease of $25.2 million in restructuring and reorganization advisory fees reflecting the significant drop in overall corporate defaults due to a strong economy and high global liquidity.

    Expenses

        Expenses were $54.4 million for the year ended December 31, 2005, an increase of $14.3 million or 35.8% versus the year ended December 31, 2004. The increase was primarily due to an increase in compensation of $8.0 million, which includes personnel additions to our mergers and acquisitions business. In addition, professional fees increased by $4.7 million.

Liquidity and Capital Resources

Historical Liquidity and Capital Resources

        On a historical basis we have drawn on the capital resources of our existing owners together with the committed capital from our Limited Partners in order to fund the investment requirements of the Blackstone funds. In addition, we require capital resources to support the working capital needs of our businesses as well as to fund growth and investments in new business initiatives. We have multiple sources of liquidity to meet these capital needs, including accumulated earnings in the businesses as well as access to the committed credit facilities described in Note 8 to the Combined Financial Statements.

        Our historical combined statements of cash flows reflect the cash flows of the Blackstone operating businesses as well as those of our consolidated Blackstone funds. The assets of the consolidated Blackstone funds, on a gross basis, are much larger than the assets of our operating businesses and therefore have a substantial effect on the reported cash flows reflected in our statement of cash flows. As described above in "Combined Results of Operations," our assets under management, which are primarily representative of the net assets within the Blackstone funds, have grown significantly during the periods reflected in our combined financial statements included in this prospectus. This growth is a result of these funds raising and investing capital, and generating gains from investments, during these

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periods. Their cash flows, which are reflected in our combined statement of cash flows have increased substantially as a result of this growth. It is this growth which is the primary cause of increases in the gross cash flows reflected in our combined statement of cash flows. More specifically, the primary cash flow activities of the consolidated Blackstone funds are (1) raising capital from their investors, which have historically been reflected as non-controlling interests of consolidated entities in our combined financial statements, (2) using this capital to make investments, (3) financing certain investments with debt, (4) generating cash flow from operations through the realization of investments, and (5) distributing cash flow to investors. The Blackstone funds are treated as investment companies for accounting purposes and therefore these amounts are included in cash flows from operations.

        We have managed our historical liquidity and capital requirements by focusing on our deconsolidated cash flows. Our primary cash flow activities on the basis of deconsolidating the Blackstone funds are (1) generating cash flow from operations, (2) funding general partner capital commitments to Blackstone funds (which cash flows are eliminated in consolidation), (3) generating income from investment activities, (4) funding capital expenditures, (5) funding new business initiatives, (6) borrowings and repayments under credit agreements and (7) distributing cash flow to owners.

        We have managed the historical liquidity and capital requirements of the Blackstone Group by focusing on our cash flows before the consolidation of the Blackstone funds and the effect of normal changes in assets and liabilities which we anticipate will be settled for cash within one year. Normal movements in our short term assets and liabilities do not affect our distribution decisions given our current and historically available borrowing capability. We use adjusted cash flow from operations as a supplemental non-GAAP measure to assess liquidity and amounts available for distribution to our existing owners. See "Cash Distribution Policy". As noted above, in accordance with GAAP, certain of the Blackstone funds are consolidated into the combined financial statements of Blackstone Group, notwithstanding the fact that Blackstone Group has only a minority economic interest in these funds. Consequently, Blackstone Group's combined financial statements reflect the cash flow of the consolidated Blackstone funds on a gross basis rather than the cash flow attributable to Blackstone. Adjusted cash flow from operations is therefore intended to reflect the cash flow attributable to Blackstone and is equal to cash flow from operations presented in accordance with GAAP, adjusted to exclude cash flow relating to (1) the investment activities of the Blackstone funds, (2) the realized and unrealized income attributable to the non-controlling interest of the Blackstone funds and (3) changes in our operating assets and liabilities. We believe that adjusted cash flow from operations provides investors with useful information on the cash flows of the Blackstone Group relating to our required capital investments and our ability to make annual cash distributions. However, adjusted cash flow from operations should not be considered in isolation or as alternative to cash flow from operations presented in accordance with GAAP.

        Following is a reconciliation of Net Cash (Used In) Provided By Operating Activities presented on a GAAP basis to Adjusted Cash Flow from Operations:

 
  2006
  2005
  2004
 
 
  (Dollars in Thousands)

 
Net Cash Provided By (Used In) Operating Activities   $ (4,396,614 ) $ 2,709,258   $ 52,682  
  Changes in operating assets and liabilities     1,154,680     4,139     205,642  
  Blackstone funds related investment activities     3,776,325     (2,608,412 )   (84,620 )
  Net realized gains on investments     5,054,995     4,918,364     2,029,266  
  Non-controlling interests in income of consolidated entities     (3,950,664 )   (3,631,179 )   (420,561 )
  Other non-cash adjustments     41,929     52,427     62,815  
   
 
 
 
Adjusted Cash Flow from Operations   $ 1,680,651   $ 1,444,597   $ 1,845,224  
   
 
 
 

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Operating Activities

        Our net cash flow provided by (used in) operating activities was $(4.4) billion, $2.7 billion and $52.7 million during the years ended December 31, 2006, 2005, and 2004, respectively. These amounts primarily include (1) net purchases of investments by consolidated Blackstone funds, after proceeds from sales of investments, of $3.8 billion, $(2.6) billion and $(84.6) million during those years, respectively, (2) net realized gains on investments of the Blackstone funds of $5.1 billion, $4.9 billion and $2.0 billion during each of the years ended December 31, 2006, 2005 and 2004, respectively, and (3) non-controlling interests in income of consolidated entities of $(4.0) billion $(3.6) billion and $(420.6) million during each of the years ended December 31, 2006, 2005 and 2004, respectively. These amounts also represent the significant variances between net income and cash flows from operations and are reflected as operating activities pursuant to investment company accounting. The increasing working capital needs reflect the growth of our business while the fund related activities requirements vary based upon the specific investment activities being conducted at a point in time. These movements do not adversely impact our liquidity or earnings trends because we currently have, and anticipate having, access to available borrowing capability.

Investing Activities

        Our net cash flow (used in) investing activities was $(24.2) million, $(7.3) million and $(18.3) million during each of the years ended December 31, 2006, 2005, and 2004, respectively. Our investing activities included the purchases of furniture, equipment and leasehold improvements.

Financing Activities

        Our net cash flow provided by (used in) financing activities was $4.5 billion, $(2.7) billion, and $(48.9) million during the years ended December 31, 2006, 2005, and 2004, respectively. Our financing activities primarily include (1) contributions made by, net of distributions made to, the investors in our consolidated Blackstone funds, historically reflected as non-controlling interests in consolidated entities, of $5.7 billion, $(1.2) billion and $23.9 million during those years, respectively, (2) meeting financing needs of Blackstone Group through net draws on our credit agreement of $134.9 million, $(313.5) million and $598.3 million during each of the years ended December 31, 2006, 2005 and 2004, respectively, and (3) making distributions to, net of contributions by, our equity holders of $1.3 billion, $1.2 billion and $671.0 million during each of the years ended December 31, 2006, 2005 and 2004.

Our Future Sources of Cash and Liquidity Needs

        We expect that our primary liquidity needs will be cash to (1) provide capital to facilitate the growth of our existing asset management and financial advisory businesses, including through funding a portion of our general partner commitments to and optional side-by-side investments alongside our carry funds, (2) provide capital to facilitate our expansion into new businesses that are complementary to our existing asset management and financial advisory businesses and that can benefit from being affiliated with us, (3) pay operating expenses, including cash compensation to our employees, (4) fund capital expenditures, (5) repay borrowings and related interest costs, (6) pay income taxes and (7) make distributions to our unitholders and the holders of Blackstone Holdings partnership units in accordance

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with our distribution policy. In addition, our own capital commitments to our funds as of December 31, 2006, consisted of the following:

Fund

  Original
Commitment

  Remaining
Commitment

 
  (Dollars in Thousands)

Corporate Private Equity Funds            
  BCP V   $ 300,000   $ 196,207
  BCP IV     150,000     6,952
  BCP III     150,000     6,806
  BCOM     50,000     6,578

Real Estate Funds

 

 

 

 

 

 
  BREP V     52,545     32,768
  BREP International II     26,405     21,344
  BREP IV     50,000     8,987
  BREP International     20,000     3,901
  BREP III     50,000     5,354

Mezzanine Funds

 

 

 

 

 

 
  BMEZZ II     17,693     13,191
  BMEZZ     41,000     2,542
   
 
Total   $ 907,643   $ 304,630
   
 

        Taking into account generally expected market conditions, we believe that the sources of liquidity described below will be sufficient to fund our working capital requirements.

        Our initial source of liquidity will consist of the net proceeds from this offering. Based on the mid-point of the price range per common unit set forth on the cover page of this prospectus, we anticipate that we will receive $                                           billion of net proceeds from this offering, after deducting estimated underwriters' discounts and other expenses and exclusive of amounts we intend to use to purchase interests in our business from our existing owners. See "Use of Proceeds".

        We will also receive cash from time to time from (1) cash generated from operations, (2) carried interest and incentive income realizations and (3) realizations on the investments that we make. We expect to use this cash to assist us in making cash distributions to our common unitholders on a quarterly basis in accordance with our distribution policy. Our ability to make cash distributions to our common unitholders will depend on a number of factors, including among others general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, legal, tax and regulatory restrictions, restrictions and other implications on the payment of distributions by us to our common unitholders or by our subsidiaries to us and such other factors as our general partner may deem relevant.

        In the future, we may also issue additional common units and other securities to investors and our employees with the objective of increasing our available capital which would be used for purposes similar to those noted above.

        Furthermore, in order to generate enhanced returns on equity for our owners, we have historically employed leverage on our balance sheet, and at times it has been significant. This has enabled us to earn enhanced returns on our equity. As a public company, we intend to continue using leverage to create the most efficient capital structure for Blackstone and our public common unitholders. We do not anticipate approaching significant leverage levels during the first one or two years after this offering

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because the net proceeds we will retain from this offering are expected to be our principal source of financing for our business during that period. However, we anticipate that our debt-to-equity ratio will eventually rise to levels in the range of 3:1 to 4:1 as we attempt to increase our return on equity for the benefit of our common unitholders. This strategy will expose us to the typical risks associated with the use of substantial leverage, including affecting the credit ratings that may be assigned to our debt by rating agencies. For a description of our credit facilities, see Note 8 in the Combined Financial Statements.

        We intend to use a portion of the net proceeds from this offering to purchase interests in our business from our existing owners as described in "Organizational Structure—Offering Transactions". In addition, holders of partnership units in Blackstone Holdings (other than The Blackstone Group L.P.'s wholly-owned subsidiaries), subject to vesting requirements and transfer restrictions, may exchange their Blackstone Holdings partnership units for The Blackstone Group L.P. common units on a one-for-one basis. The purchase and subsequent exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Blackstone Holdings that otherwise would not have been available. These increases in tax basis may increase (for tax purposes) depreciation and amortization and therefore reduce the amount of tax that The Blackstone Group L.P.'s wholly-owned subsidiaries that are taxable as corporations for U.S. federal income purposes, which we refer to as the "corporate taxpayers," would otherwise be required to pay in the future. The corporate taxpayers will enter into a tax receivable agreement with our existing owners that will provide for the payment by the corporate taxpayers to our existing owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the corporate taxpayers actually realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This payment obligation is an obligation of the corporate taxpayers and not of Blackstone Holdings. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our common units at the time of the exchange, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the increases in the tax basis of the tangible and intangible assets of Blackstone Holdings, the payments that we may make to our existing owners will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, based on the mid-point of the price range per common unit set forth on the cover page of this prospectus, we expect that future payments to our existing owners in respect of the purchase will aggregate $            million and range from approximately $                  million to $                  million per year over the next 15 years (or $                   million and range from approximately $                   million to $                   million per year over the next 15 years if the underwriters exercise in full their option to purchase additional common units). A $1.00 increase (decrease) in the assumed initial public offering price of $                  per common unit would increase (decrease) the aggregate amount of future payments to our existing owners in respect of the purchase by $                  million (or $                   million if the underwriters exercise in full their option to purchase additional common units). Future payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial. See "Certain Relationships and Related Person Transactions—Tax Receivable Agreement".

Critical Accounting Policies

        We prepare our financial statements in accordance with accounting principles generally accepted in the United States. In applying many of these accounting principles, we need to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions,

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estimates and/or judgments, however, are often subjective and they and our actual results may change negatively or based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. See the notes to our combined financial statements for a summary of our significant accounting policies.

Principles of Consolidation

        Our policy is to combine, or consolidate, as appropriate, those entities in which, we through our existing owners have control over significant operating, financial or investing decisions of the entity.

        For Blackstone funds that are determined to be variable interest entities ("VIE"), we consolidate those entities where we absorb a majority of the expected losses or a majority of the expected residual returns, or both, of such entity pursuant to the requirements of FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), as revised. In addition, we consolidate those entities we control through a majority voting interest or otherwise, including those Blackstone funds in which the general partners are presumed to have control over them pursuant to Financial Accounting Standards Board ("FASB") Emerging Issues Task Force ("EITF") Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5"). The provisions under both FIN 46 and EITF 04-5 have been applied retrospectively to prior periods. All significant intercompany transactions and balances have been eliminated.

        For operating entities over which we may exercise significant influence but which do not meet the requirements for consolidation, we use the equity method of accounting whereby we record our share of the underlying income or losses of these entities.

        In those cases where our investment is less than 20%, 3% in the case of partnership interests, and significant influence does not exist, such investments are carried at fair value.

Revenue Recognition

        Fund Management Fees. Fund management fees are comprised of fees charged directly to funds, fund investors and fund portfolio companies (including management, transaction and monitoring fees). Such fees are based upon the contractual terms of investment advisory and related agreements and are recognized as earned over the specified contract period. In certain management arrangements, we are entitled to receive performance fees when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fees are accrued monthly or quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement.

        Advisory Fees. Financial advisory fees consist of advisory retainer and transaction based fee arrangements related to mergers, acquisitions, restructurings, divestitures and fund placement services for alternative investment funds. Advisory retainer fees are recognized when services are rendered. Transaction fees are recognized when the services related to the underlying transactions are substantially completed in accordance with the terms of their engagement letters. Fund placement services revenue is recognized as earned upon the acceptance by a fund of capital or capital commitments.

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Investments, at Fair Value

        The Blackstone funds are, for GAAP purposes, investment companies under the AICPA Audit and Accounting Guide: Investment Companies. Such funds reflect their investments, including securities sold, not yet purchased, on the combined statements of financial condition at their estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of other income in the combined statements of income. Fair value is the amount at which the investments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Additionally, these funds do not consolidate their majority-owned and controlled investments. We have retained the specialized accounting of the Blackstone funds pursuant to EITF Issue No. 85-12, Retention of Specialized Accounting for Investments in Consolidation.

        The fair value of our investments, including securities sold, not yet purchased, are based on observable market prices when available. Such prices are based on the last sales price on the date of determination, or, if no sales occurred on such day, at the "bid" price at the close of business on such day and if sold short at the "asked" price at the close of business on such day. Futures and options contracts are valued based on closing market prices. Forward and swap contracts are valued based on market rates or prices obtained from recognized financial data service providers.

        We have valued our investments, in the absence of readily observable market prices, using the valuation methodologies described below. The determination of fair value may differ materially from the values that would have resulted if a ready market had existed (see "Qualitative and Quantitative Disclosures About Market Risk—Market Risk" and "Risk Factors—Risks Related to Our Asset Management—Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could adversely affect our ability to raise capital for future investment funds" for a discussion of sensitivity).

        Investments for which there is no market quotation are generally either private investments or investments in funds managed by others. Fair values of private investments are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are observable. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple (e.g., price/equity ratio) observed for comparable companies or transactions. Private investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value. If the fair value of private investments held cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value of such private investments is the discounted cash flow method. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values. The valuation based on the inputs determined to be the most probable is used as the fair value of the investment.

        Direct investments in hedge funds ("Investee Funds") are stated at fair value, based on the information provided by the Investee Funds' management, which reflects our share of the fair value of the net assets of the investment fund.

Sensitivity

        As of December 31, 2006, $27 billion, or 87% of the investments at fair value, represent assets for which market prices were not readily observable.

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        Changes in the fair value of these investments may impact our results of operations as follows:

    Management fees from our funds of hedge funds, equity hedge fund and distressed securities hedge fund are based on their net asset value, which in turn is dependent on the estimated fair values of their investments. The impact of a change in these values would occur only in periods after the change, as opposed to having an immediate impact. Corporate private equity, real estate and mezzanine fund management fees would be unchanged as they are not based on the value of the funds, but rather on either 1) the unaffiliated limited partner capital of the fund if the fund is currently in its investment period or 2) the unaffiliated limited partner invested capital if the fund's investment period has terminated.

    Incentive income from our hedge funds is directly affected by changes in the fair value of their investments. Incentive income from our funds of hedge funds, equity hedge fund, and distressed securities hedge fund is paid by the funds on either a semi-annual or annual basis, subject to hurdles where applicable and subject to high watermark provisions.

    Our net gains from investment activities from our corporate private equity, real estate and marketable alternative asset management funds are directly affected by changes in the fair values of the fund investments.

        Therefore, a 10% net change in the fair value of the investments held by all of our funds would have the following effects on management fees, incentive income and net gains from investment activities:

 
  GAAP Basis
 
  Management Fees
  Incentive Income
  Net Gains from
Investment Activities(1)

Corporate Private Equity Funds   None   N/A   Generally, a 10% immediate change in net gains from investment activities.
Real Estate Funds   None   N/A   Generally, a 10% immediate change in net gains from investment activities.
Marketable Alternative Asset Management Fund (excluding Mezzanine Funds)   10% annual change in income before taxes from these funds, subsequent to the change in value.   Generally, a 10% immediate change in incentive income from these funds.   Generally, a 10% immediate change in net gains from investment activities.
Mezzanine Funds   None   N/A   Generally, a 10% immediate change in net gains from investment activities.

(1)
The effect of a 10% immediate change in net gains from investment activities, if a decrease, is substantially absorbed by the non-controlling interest holders.

        The determination of investment fair values involves management's judgments and estimates. The degree of judgment involved is dependent upon the availability of quoted market prices or observable

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market parameters. The following table summarizes our investments, as presented in our combined financial statements, by valuation methodology as of December 31, 2006:

Fair value based on

  Corporate
Private Equity

  Real Estate
  Marketable
Alternative Asset
Management

  Total
Investment
Company
Holdings

 
Quoted market prices   17 % 3 % 7 % 12 %
Third-party fund managers       75 % 17 %
Public / private comparables and discounted cash flows   83 % 97 % 18 % 71 %
   
 
 
 
 
Total   100 % 100 % 100 % 100 %
   
 
 
 
 

        We intend to retain an independent valuation firm to assist us in valuing our investments and those of our investment funds on an annual basis. While our management will make determinations as to investment values, the independent valuation firm will provide third-party valuation assistance in accordance with limited procedures that we will identify and request it to perform. The valuation information we present in this prospectus has not been prepared with the assistance of an independent valuation firm.

Recent Accounting Pronouncements

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. We intend to early adopt SFAS 157 as of January 1, 2007. The adoption of SFAS 157 is not expected to have a material impact on our combined financial statements.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings. Blackstone intends to early adopt SFAS 159 as of January 1, 2007. Upon adoption of SFAS 159, Blackstone currently intends to elect to apply the fair value option to selected investments in non-consolidated investment entities, which would otherwise be accounted for under the equity method of accounting. In the event we elect to account for such investments at fair value, the initial application of the fair value option to such interests is not expected to have a material cumulative effect on partners' capital or investments, at fair value.

        We are currently planning the Reorganization in contemplation of this offering. In connection with the Reorganization, we intend to grant substantive kick-out, liquidating or other participating rights to the limited partners of our corporate private equity, real estate and selected other Blackstone funds. See "Organizational Structure—Deconsolidation of Blackstone Funds." We currently intend to apply SFAS 159 to all of our corporate private equity and real estate general partner interests in investment partnerships that are expected to be deconsolidated as part of the reorganization. As a consequence of electing the fair value option, net gains from investment activities would potentially increase by a material amount reflective of current market conditions at that time.

        In September 2006, the FASB cleared the AICPA Statement of Position No. 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies ("SOP 07-1") for issuance. SOP 07-1 addresses whether the accounting principles of the AICPA Audit and Accounting Guide Investment Companies may be applied to an entity by clarifying the definition of an investment company and whether those accounting principles may be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. SOP 07-1 applies

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to the later of (1) reporting periods beginning on or after December 15, 2007 or (2) the first permitted early adoption date of the FASB's fair value option statement. The adoption of SOP 07-1 is not expected to have a material impact on our combined financial statements.

        In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The tax benefit recognized is the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 will not have a material impact on our combined financial statements.

        In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments ("SFAS 155"), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133") and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 provides, among other things, that (1) for embedded derivatives which would otherwise be required to be bifurcated from their host contracts and accounted for at fair value in accordance with SFAS 133, an entity may make an irrevocable election, on an instrument-by-instrument basis, to measure the hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings and (2) concentrations of credit risk in the form of subordination are not considered embedded derivatives. SFAS 155 is effective for all financial instruments acquired, issued or subject to remeasurement after the beginning of an entity's first fiscal year that begins after September 15, 2006. Upon adoption, differences between the total carrying amount of the individual components of an existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative effect adjustment to beginning retained earnings. Prior periods are not restated. The adoption of SFAS 155 is not expected to have a material impact on our combined financial statements.

Off Balance Sheet Arrangements

        In the normal course of business, we engage in off-balance sheet arrangements, including establishing certain special purpose entities ("SPEs"), owning securities or interests in SPEs and providing investment and collateral management services to SPEs. There are two types of SPEs—qualifying special purposes entities ("QSPEs"), which are entities whose permitted activities are limited to passively holding financial interests in distributing cash flows generated by the assets, and variable interest entities ("VIEs"). Certain combined entities of the Blackstone funds transact regularly with VIEs which do not meet the QSPE criteria due to their permitted activities not being sufficiently limited or because the assets are not deemed qualifying financial instruments. Under FIN 46, we consolidate those VIEs where we absorb either a majority of the expected losses or residual returns (as defined) and are therefore considered the primary beneficiary. Our primary involvement with VIEs consists of collateralized debt obligations. For additional information about our involvement with VIEs, see Note 3, "Investments—Investment in Variable Interest Entities" in the Notes to the Combined Financial Statements.

        In addition to VIEs, in the ordinary course of business certain combined entities of the Blackstone funds issue various guarantees to counterparties in connection with investments, debt, leasing and other transactions. See Note 11, "Commitments and Contingencies" in Notes to the Combined Financial Statements for a discussion of guarantees.

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Contractual Obligations, Commitments and Contingencies

        The following table sets forth information relating to our contractual obligations as of December 31, 2006 on a combined basis and on a basis deconsolidating the Blackstone funds:

 
  2007
  2008-2009
  2010-2011
  Thereafter
  Total
 
 
  (Dollars in Thousands)

 
Contractual Obligations                                
Operating Lease Obligations(1)   $ 18,311   $ 35,798   $ 44,223   $ 237,730   $ 336,062  
Purchase Obligations     2,601     2,195     341         5,137  
Blackstone Operating Entities Loan and Credit Facilities Payable     425,747     31,168     18,654         475,569  
Interest on Blackstone Operating Entities Loan and Credit Facilities Payable(2)     9,349     3,922     646           13,917  
Blackstone Funds Debt Obligations Payable(3)     500,412                 500,412  
Interest on Blackstone Funds Debt Obligations Payable(4)     19,735                 19,735  
Blackstone Fund Capital Commitments to Portfolio Entities(5)     5,103,862                 5,103,862  
   
 
 
 
 
 
Combined Contractual Obligations     6,080,017     73,083     63,864     237,730     6,454,694  
Blackstone Operating Entities Capital Commitments to Blackstone Funds(6)     338,285                 338,285  
Blackstone Funds Debt Obligations Payable(3)     (500,412 )               (500,412 )
Interest on Blackstone Funds Debt Obligations Payable(4)     (19,735 )               (19,735 )
Blackstone Fund Capital Commitments to Portfolio Entities(5)     (5,103,862 )               (5,103,862 )
   
 
 
 
 
 
Blackstone Operating Entities Contractual Obligations   $ 794,293   $ 73,083   $ 63,864   $ 237,730   $ 1,168,970  
   
 
 
 
 
 

(1)
We lease our primary office space and certain office equipment under agreements that expire through 2024. In connection with certain lease agreements, we are responsible for escalation payments. The contractual obligation table above includes only guaranteed minimum lease payments for such leases and does not project potential escalation or other lease-related payments. These leases are classified as operating leases for financial statement purposes and as such are not recorded as liabilities on the combined statement of financial condition as of December 31, 2006.

(2)
Represents interest to be paid over the maturity of the related debt obligation which has been calculated assuming no prepayments are made and debt is held until its final maturity date. The future interest payments are calculated using variable rates in effect as of December 31, 2006, at spreads to market rates pursuant to the financing agreements, and range from 6.125% to 8.75%.

(3)
These obligations are those of the Blackstone funds, which will be deconsolidated following completion of this offering. See "Unaudited Pro Forma Financial Information".

(4)
Represents interest to be paid over the maturity of the related Blackstone funds' debt obligations which has been calculated assuming no prepayments will be made and debt will be held until its final maturity date. The future interest payments are calculated using variable rates in effect as of

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    December 31, 2006, at spreads to market rates pursuant to the financing agreements, and range from 6.1% to 6.76%.

(5)
These commitments to make capital contributions to portfolio entities, some of which are in the form of guarantees, relate to the Blackstone funds which will be deconsolidated following completion of this offering. These amounts are generally due on demand and are therefore presented in the less than one year category. Our funds will continue to make these commitments in the ordinary course of business. See "Unaudited Pro Forma Financial Information".

(6)
These obligations represent commitments by us to provide general partner capital funding to the Blackstone funds, which are consolidated as of December 31, 2006. Upon completion of this offering, the Blackstone funds will be deconsolidated and these general partner capital commitments to them will remain. (See "Unaudited Pro Forma Financial Information".) These amounts are generally due on demand and are therefore presented in the less than one year category; however, the capital commitments are expected to be called substantially over the next three years. We expect to continue to make these general partner capital commitments as we raise additional amounts for our investment funds over time.

    Guarantees

        We had approximately $175 million of letters of credit outstanding to satisfy various contractual requirements primarily related to portfolio companies at December 31, 2006.

        Certain real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their portfolio companies. At December 31, 2006, such guarantees amount to $2,482 million.

    Indemnifications

        In many of its service contracts, Blackstone agrees to indemnify the third party service provider under certain circumstances. The terms of the indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined and has not been included in the table above or recorded in our combined financial statements as of December 31, 2006.

    Clawback Obligations

        At December 31, 2006, due to the funds' performance results, none of the general partners of our corporate private equity, real estate and mezzanine funds had a clawback obligation to any limited partners of the funds.

Qualitative and Quantitative Disclosures About Market Risk

        Our predominant exposure to market risk is related to our role as general partner or investment adviser to the Blackstone funds and the sensitivities to movements in the fair value of their investments, including the effect on management fee and incentive fee income.

        The fair value of our financial assets may fluctuate in response to changes in the value of securities, non-U.S. dollar exchange and interest rates. The net effect of these fair value changes affects the gains (losses) from investments in our combined statements of income; however, the majority of these fair value changes, if losses, are absorbed by the non-controlling interest holders. The effect of gains from investments is allocated according to fund governing agreements, and in most cases the controlling interests receive an incentive fee or carried interest allocation in excess of their stated

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interest. To the extent the Blackstone funds are deconsolidated, our interests in the funds will continue to affect our net income in a similar way.

        Although the Blackstone funds share many common themes, each of our alternative asset management operations runs its own investment and risk management processes, subject to our overall risk tolerance and philosophy:

    The investment process of our corporate private equity, real estate opportunity and mezzanine funds involves a detailed analysis of potential acquisitions, and asset management teams are assigned to oversee the operations, strategic development, financing and capital deployment decisions of each portfolio investment. These key investment decisions are subject to approval by the applicable investment committee, which is comprised of members of Blackstone senior management.

    In our capacity as advisor to certain of our marketable alternative asset management funds, we continuously monitor a variety of markets for attractive trading opportunities, applying a number of traditional and customized risk management metrics to analyze risk related to specific assets or portfolios. In addition, we perform extensive credit and cash-flow analysis of borrowers, credit-based assets and underlying hedge fund managers, and have extensive asset management teams that monitor covenant compliance by, and relevant financial data of, borrowers and other obligors, asset pool performance statistics, tracking of cash payments relating to investments, and ongoing analysis of the credit status of investments.

        We are sensitive to changes in market risk factors that affect our financial results.

    Effect on Management Fees

        Our management fees are based on (1) capital commitments to a Blackstone fund, (2) capital invested in a Blackstone fund or (3) the net asset value, or NAV, of a Blackstone fund, as described in our audited combined financial statements. Management fees will only be directly affected by changes in market risk factors to the extent they are based on NAV. These management fees will be increased (or reduced) in direct proportion to the effect of changes in the market value of our investments in the related funds. The proportion of our management fees that are based on NAV is dependent on the number and types of Blackstone funds in existence and the current stage of each fund's life cycle. As of December 31, 2006, approximately 20% of our management fees earned were based on the NAV of the applicable funds.

    Market Risk

        The Blackstone funds hold as of the reporting date investments that are reported at fair value and securities sold not yet purchased. Based on the balance as of December 31, 2006, we estimate that the fair value of investments and securities sold not yet purchased, would change by $3.1 billion and $42.3 million, respectively, in the event of a 10% change in fair value of the investments and securities. However, we estimate the affect to our gain (loss) on investments would be significantly less than the changes noted above since we generally have up to an approximately 7% investment in these funds, and the non-controlling interests in income of consolidated entities would correspondingly offset a substantial majority of the change in fair value. As discussed above, this change would also affect our management fees.

    Exchange Rate Risk

        The Blackstone funds hold investments that are denominated in non-U.S. dollar currencies that may be affected by movements in the rate of exchange between the U.S. dollar and non-U.S. dollar

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currencies. We estimate that as of December 31, 2006, a 10% change in rate of exchange against the U.S. dollar would have the following effects (1) management fee revenues would change by $2.0 million and (2) net gains from investment activities would change by $40.7 million.

    Interest Rate Risk

        The Blackstone Group has debt obligations payable that accrue interest at variable rates. Interest rate changes may therefore affect the amount of interest payments, future earnings and cash flows. Based on our debt obligations payable as of December 31, 2006, we estimate that interest expense relating to variable rate debt obligations payable would increase by $5.3 million on an annual basis, in the event interest rates were to increase by one percentage point. However, we estimate the effect to net income of a one percentage point increase in interest rates on the debt obligations payable of the Blackstone funds would be significantly less than the $5.3 million increase in interest expense noted above since we generally have up to an approximately 7% investment in these funds, and the non-controlling interests in income of consolidated entities would correspondingly offset a substantial majority of the increase in interest expense.

    Credit Risk

        Certain Blackstone funds and the Investee Funds are subject to certain inherent risks through their investments.

        Various of our entities invest substantially all of their excess cash in an open-end money market fund and a money market demand account, which are included in cash and cash equivalents. The money market fund invests primarily in government securities and other short-term, highly liquid instruments with a low risk of loss. We continually monitor the fund's performance in order to manage any risk associated with these investments.

        Certain of our entities hold derivative instruments that contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. We minimize our risk exposure by limiting the counterparties with which we enter into contracts to banks and investment banks who meet established credit and capital guidelines. We do not expect any counterparty to default on its obligations and therefore do not expect to incur any loss due to counterparty default.

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INDUSTRY

Asset Management

Overview

        Asset management generally involves the management of investments by third-party managers on behalf of investors. The total value of assets under management worldwide was estimated to exceed $45 trillion in 2006. Asset managers employ a diverse range of strategies, which may be generally divided into two broad categories: traditional equity and fixed income fund strategies, and alternative investment strategies.

        Traditional asset managers manage and trade portfolios of equity, fixed income and/or derivative securities. Assets may be invested in investment companies registered under the 1940 Act (for example, mutual funds and exchange traded funds) or through separate accounts managed on behalf of individuals or institutions. Investors in traditional funds generally have unrestricted access to their funds either through market transactions in the case of closed-end mutual funds and exchange traded funds, or through withdrawals in the case of open-end mutual funds and separate managed accounts. Traditional fund managers are generally compensated with fees that are a percentage of assets under management.

        Alternative asset managers utilize a variety of investment strategies to achieve return objectives within certain predefined risk parameters and investment guidelines. The universe of alternative asset managers includes private equity funds, real estate funds, venture capital, hedge funds, funds of funds (that is, funds that invest in investment funds) and mezzanine and structured debt funds. Many alternative asset managers, particularly private equity managers, limit investors' access to funds once committed or invested until such time as such investments are realized.

        The asset management industry has experienced significant growth in worldwide assets under management in the past ten years, fueled in significant respects by aging populations in both developed and emerging markets around the world, which have increased the pools of savings and particularly pension assets. For example, total pension assets in the United States grew from $6.8 trillion at the end of 1996 to $14.0 trillion at the end of 2006. Alternative asset management vehicles have been the fastest growing segment of the asset management industry in part because many investors have sought to diversify their investment portfolios to include alternative asset strategies and alternative asset managers have generally delivered superior returns with a lower correlation to the broader market than traditional asset management strategies.

Alternative Asset Management

        Private equity funds generally invest in non-public, non-actively traded common equity, preferred stock or mezzanine or distressed debt securities, and a number of private equity transactions consist of going private transactions of then-public companies. Real estate funds generally invest in equity, fixed income, preferred stock or loan securities of real estate companies, mortgage-backed securities or direct investments in real estate properties. Private equity and real estate funds typically have specified terms with provisions to extend the term under certain circumstances. Qualified investors make a commitment to provide capital to the fund, and this capital is typically called by the fund on an "as needed" basis as investments are identified and returned through distributions upon realization of the underlying investments. Private equity and real estate fund managers typically earn management fees on committed or contributed capital, transaction and monitoring fees as capital is invested and carried interest based on the net profits of the fund. Carried interest is often subject to a preferred return for investors and a contingent repayment if actual realized performance of the fund at the time of liquidation does not meet the specified requirements.

        Private Equity.    Private equity funds have experienced significant capital inflows recently, with over $400 billion of capital raised in the United States since the beginning of 2002, according to Private

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Equity Analyst. Capital committed to private equity has accelerated in recent years, as indicated by the following chart, which shows new capital committed to U.S. private equity funds over the last eight years. According to the Russell Investment Group, allocations to private equity are forecast to reach record levels in all markets in 2007.


U.S. Corporate Private Equity Funds Raised

         GRAPHIC

          Source: Private Equity Analyst Plus


(1)
A compound annual growth rate, or "CAGR," represents the annual rate of growth over a period, assuming growth at a steady rate.

        A significant reason why many private equity funds may deliver superior returns on equity relative to traditional equity investments is the benefit of leverage. In the typical transaction effected by a private equity fund—a leveraged buyout acquisition of a company—the private equity fund borrows most of the purchase price and thereby magnifies the gain on its investment if the company's value appreciates (or its loss if the company's value declines). If a private equity fund were to acquire a company today with a total enterprise value of $1 billion, a typical capital structure for the transaction would be an equity investment of $300 million and $700 million of debt (generally consisting of senior loans from commercial banks and high yield bonds issued in the public market). If the private equity fund is successful in its objective of improving the operating performance of the acquired company over the period of its ownership of the company so that five years later it can effect a sale of the company at a total enterprise value of $1.3 billion, a 6% annual appreciation over the price it paid, it will have achieved a doubling of its equity investment or a gross annual internal rate of return of 15%. If over that period of time the company has used its operating cash flow to repay $300 million of the acquisition borrowings, the private equity fund will have tripled its equity investment and achieved a gross annual internal rate of return of 25%. Alternatively, if the acquired company were to encounter operating difficulties resulting in a 15% decline in its total enterprise value to $850 million and had not been able to use operating cash flow to repay any acquisition debt, the private equity fund would lose half of its equity investment if the company were to be sold at that price.

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        Both the dollar volume of private equity transactions and their percentage of all merger and acquisition transactions have increased dramatically over the last eight years, as indicated in the chart below.

Dollar Volume of Private Equity M&A   Private Equity M&A as a Percentage of Total M&A
GRAPHIC   GRAPHIC

Source: Thomson Financial

 

Source: Thomson Financial

        The fastest growing segment of the private equity industry has been large transactions, especially public-to-private transactions. In 2006, there were 151 sponsor-driven public-to-private transactions in the United States and Europe, up from only 67 in 2000, which represents a compounded annual growth rate of 15%.

        Real Estate.    The real estate industry is also experiencing historically high levels of growth and liquidity driven by the strength of the U.S. economy, office employment growth, limited new construction and the availability of financing for acquiring real estate assets. Concurrently, replacement costs of real property assets have continued to escalate substantially. Since 2001, gross domestic product, or "GDP," growth has steadily improved, and GDP is currently predicted to grow at an average annual rate of approximately 3.1% from 2007 through 2009 as indicated by Haver Analytics, World Bank Indicators and Oxford Economic Forecasting. In addition, recent job growth statistics have indicated higher employment levels during 2005 and 2006, which generally produces greater demand for real estate assets. The strong investor demand for real estate assets is due to a number of factors, including persistent, reasonable levels of interest rates, the lack of alternative investments that provide the same levels of expected returns and the ability of lenders to repackage their loans into securitizations, thereby diversifying and limiting their risk. These factors have combined to significantly increase the capital committed to real estate funds from a variety of institutional investors, including

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institutional pension funds. As a result, the amount of global real estate funds raised has increased dramatically in the past four years, as indicated by the following chart:


Global Real Estate Funds Raised

         GRAPHIC

            Amounts include the amount of equity that property funds and real estate debt funds were seeking at the time each annual survey was conducted.
            Source: Real Estate Alert

        Hedge Funds.    Hedge funds seek to generate positive returns under a wide variety of market conditions. Hedge funds differ from traditional asset management vehicles such as mutual funds either by the more heterogenous asset classes in which they may invest or the more varied strategies they employ, including arbitrage, asset-based lending, distressed securities, equity long-short, global macro and other quantitative and non-quantitative strategies. The fee structure of hedge funds is performance driven. Hedge fund managers earn a base management fee based on the net asset value of the fund and carried interest or incentive fees based on the overall performance of the fund that they manage (that is, the net realized and unrealized gains in the portfolio). Some hedge funds set a "hurdle rate" under which the fund manager does not earn an incentive fee until the fund's performance exceeds a benchmark rate. Another feature common to hedge funds is the "high water mark" under which a fund manager does not earn carried interest or incentive fees until the net asset value exceeds the highest historical value on which incentive fees were last paid. Investors can invest and withdraw funds periodically in accordance with the terms of the funds, which may include an initial period of time in which capital may not be withdrawn, allowing for withdrawals only at specified times and other limitations on withdrawals.

        Historically hedge funds have generated positive performance across a variety of market conditions with less correlation to traditional benchmarks. Hedge funds achieve this through a variety of methods, including use of short selling, hedging or arbitrage strategies and inclusion of fixed income-related securities or derivatives into investment portfolios. By employing these strategies, hedge funds have been utilized by an increasing number of institutional asset managers as diversification instruments and in light of the generally positive performance, have experienced significant inflows in recent years. Global assets under management in the hedge fund industry, as reported by HFR Industry Reports, have grown from approximately $456 billion at December 31, 1999 to an estimated $1.4 trillion at December 31, 2006, a 17.7% compound annual growth rate. Set forth below is a chart that shows total assets under management of all hedge funds over the last eight years.

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Hedge Fund Assets Under Management

         GRAPHIC

            Data presented is as of December 31
            Source: HFR Industry Reports

        Fund of Funds.    Fund of funds managers invest in a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. Fund of funds managers are predominantly associated with investments in alternative strategies such as hedge funds and private equity, but some fund of funds managers invest in portfolios of traditional mutual funds. Fund of funds managers generally earn fees on a percentage of net asset value, which may include the value of committed and undrawn funds. Fund of fund managers in alternative assets may also earn carried interest or incentive fees in certain circumstances. Investor liquidity varies by manager and strategy, with many fund of hedge funds managers providing periodic liquidity, while the liquidity terms of funds of private equity funds tend to track the capital commitment, term and distribution models of the underlying private equity funds in which they invest. Funds of funds generally seek to deliver the risk/return profile of the underlying funds' asset category from a diversified group of managers.

        Growth of the fund of funds business is driven by the increasing interest in the underlying alternative strategies of hedge funds and private equity, and by many investors' preference for investing in alternative investments on a broadly diversified basis. Funds of funds help investors reduce risk by limiting exposure to single managers and by closely monitoring manager performance and making allocation decisions. Commitments to fund of funds vehicles have increased substantially over the past several years. According to HFR Industry Reports total assets committed to funds of hedge funds have grown from $76 billion at the end of 1999 to $547 billion at the end of 2006, representing a 32.6% compound annual growth rate. The chart below shows total assets under management over the last eight years.


Aggregate Fund of Hedge Fund Assets Under Management

         GRAPHIC

            Data presented is as of December 31
            Source: HFR Industry Reports

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        Mezzanine Funds and Structured Debt Funds.    Mezzanine funds and structured debt funds invest in diversified portfolios of debt securities. Mezzanine funds invest primarily in high-yielding debt securities and loans that, in addition to interest payments, may include return enhancements such as warrants or other equity-linked securities. Mezzanine securities are used extensively to finance middle-market private companies, and can also be a source of capital for small public companies. Mezzanine activity is most closely correlated to the volume of middle market mergers and acquisition activity, primarily acquisitions of middle market companies by private equity firms.

        Structured debt funds are pooled investment vehicles that invest in senior secured loans, high-yield notes, mezzanine securities and other debt and credit-linked securities. These funds take a variety of forms and often target specific asset classes, such as portfolios of primarily non-investment grade senior credit facilities or portfolios of investment grade and high-yield bonds. These funds finance their purchases of debt securities through issuances of multiple tranches of debt and equity securities that are structured to achieve specific credit rating targets. Structured debt vehicles seek to earn a return for investors in their junior securities by borrowing funds at a lower cost than the yield the vehicles earn on their underlying investments. Set forth below is a chart that shows total U.S. leveraged loan arbitrage activity by collateralized debt obligation funds over the last eight years.


U.S. Leveraged Loan Arbitrage CDO Activity

         GRAPHIC

            Source: Standard & Poor's

Advisory Services

        Advisory services include advice on a variety of strategic and financial matters, such as mergers, acquisitions and divestitures, restructurings and reorganizations and capital raising and capital structure. Advisory services are generally provided by investment banking firms, integrated commercial banks and specialized "boutique" financial advisory firms. Advisors typically earn either a fixed fee or a fee based on a percentage of a transaction's value, generally paid only when the transaction is completed. The total global merger and acquisition deal volume in 2006 was $3.7 trillion according to Thomson Financial, an increase of 36% over $2.7 trillion of deal volume in 2005 and up from $1.7 trillion of deal volume in 2001.

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        The chart below shows the total dollar volume of global merger and acquisition transactions over the last six years.


Dollar Volume of Global M&A

         GRAPHIC

            Source: Thomson Financial

        Restructuring and reorganization advisors provide strategic financial advice with respect to firms in financial distress or bankruptcy. Services may include structuring out-of-court restructurings, assistance with formal bankruptcy proceedings, distressed mergers and acquisitions and capital sourcing. Advisors provide their services to companies, lenders and creditors in distressed or potentially distressed credit situations.

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BUSINESS

Overview

        We are a leading global alternative asset manager and provider of financial advisory services. We are one of the largest independent alternative asset managers in the world, with assets under management of approximately $78.7 billion as of March 1, 2007. Our alternative asset management businesses include the management of corporate private equity funds, real estate opportunity funds, funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and closed-end mutual funds. We also provide various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory and fund placement services.

        We seek to deliver superior returns to investors in our funds through a disciplined, value-oriented investment approach. We believe that this investment approach, implemented across our broad and expanding range of alternative asset classes and investment strategies, helps provide stability and predictability to our business over different economic cycles. Since we were founded in 1985, we have cultivated strong relationships with clients in our financial advisory business, where we endeavor to provide objective and insightful solutions and advice that our clients can trust. We believe our scaled, diversified businesses, coupled with our long track record of investment performance, proven investment approach and strong client relationships, position us to continue to perform well in a variety of market conditions, expand our assets under management and add complementary businesses.

        We currently have 57 senior managing directors and employ approximately 335 other investment and advisory professionals at our headquarters in New York and our offices in Atlanta, Boston, Chicago, Dallas, Los Angeles, San Francisco, London, Paris, Mumbai and Hong Kong. We believe that the depth and breadth of the intellectual capital and experience of our professionals are key reasons why we have generated exceptional returns over many years for the investors in our funds. This track record in turn has allowed us to successfully and repeatedly raise additional assets from an increasingly wide variety of sophisticated investors.

        We have grown our assets under management significantly, from approximately $14.1 billion as of December 31, 2001 to approximately $78.7 billion as of March 1, 2007, representing compound annual growth of 39.5%. The following table sets forth our assets under management by segment and fund type as of March 1, 2007.

 
  Assets Under Management
as of March 1, 2007

 
  (in billions)

Corporate private equity funds         $ 31.1
Real estate opportunity funds           17.7
Marketable alternative asset funds           29.9
  Funds of hedge funds   $ 17.1      
  Mezzanine funds     1.5      
  Senior debt vehicles     6.9      
  Distressed securities hedge fund     1.2      
  Equity hedge fund     1.3      
  Closed-end mutual funds     1.9      
   
     
    Total         $ 78.7
         

Competitive Strengths

    World Leader in Alternative Asset Management.

        Alternative asset management is the fastest growing segment of the asset management industry, and we are one of the largest independent alternative asset managers in the world. From the time we

135


entered the asset management business 20 years ago through March 1, 2007, we have raised approximately $59.4 billion of committed capital for our corporate private equity funds, real estate opportunity funds, mezzanine funds and senior debt vehicles, and we managed approximately $21.5 billion in our funds of hedge funds, proprietary hedge funds and closed-end mutual funds as of March 1, 2007. Our assets under management have grown from approximately $14.1 billion as of December 31, 2001 to approximately $78.7 billion as of March 1, 2007, representing compound annual growth of 39.5%. We believe that the strength and breadth of our franchise, supported by our people, investment approach and track record of success, provide a distinct advantage when raising capital, evaluating opportunities, making investments, building value and realizing returns.

        One of the Largest Managers of Corporate Private Equity and Real Estate Opportunity Funds.    We have been one of the largest private equity fund managers since we entered this business in 1987. From that time through March 1, 2007, we had invested total capital of $19.8 billion in 109 transactions with a total enterprise value of over $191 billion through our corporate private equity funds and total capital of $13.2 billion in 212 transactions with a total enterprise value of over $102 billion through our real estate opportunity funds. Both the corporate private equity fund and the two real estate opportunity funds (taken together) we are currently investing are among the largest funds ever raised in their respective sectors, with aggregate capital commitments of $18.1 billion and $6.7 billion, respectively, as of March 1, 2007. We believe that our long-term leadership in private equity has imbued the Blackstone brand with value that enhances all of our different businesses and facilitates our ability to expand into complementary new businesses.

        Diversified, Global Investment Platform.    Our asset management businesses are diversified across a broad variety of alternative asset classes and investment strategies and have global reach and scale. We benefit from substantial synergies across all of these businesses, including the ability to leverage the extensive intellectual capital that resides throughout our firm. We believe that the extensive investment review process that is conducted in all of our asset management businesses, involving active participation by Stephen A. Schwarzman and Hamilton E. James, across all of our businesses, is not only a significant reason for our successful investment performance but also helps to maximize those synergies. In addition, we believe our financial advisory segment further increases the diversification of our business mix.

        During our 21-year history, we have grown by entering new businesses that were complementary to our existing asset management and financial advisory businesses. For example, in 1988 we entered into a partnership with the founders of Blackrock, Inc. and helped those individuals develop an asset management business specializing in fixed income. We sold our interest in Blackrock in 1994. We have invested in complementary new areas because they offered opportunities to deploy our financial and intellectual capital and generate superior investment returns, attractive net income margins and substantial cash flow. We believe that our ability to identify and successfully enter new growth areas is a key competitive advantage, and we will continue to seek new opportunities to expand our asset management franchise and our advisory business. The chart below

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presents our assets under management for each of our asset management operations as a percentage of aggregate assets under management as of March 1, 2007.


Assets Under Management by Fund Category

         GRAPHIC

        Exceptional Investment Track Record.    We have an exceptional record of generating attractive risk-adjusted returns across all of our asset management businesses, as shown in the table below. We believe that the superior investment returns we have generated for investors in our funds over many years across a broad and expanding range of alternative asset classes and through all types of economic conditions and all cycles of the equity and debt capital markets are a key reason why we have been able to successfully and consistently grow our assets under management across our alternative asset management platform.

 
  Year of
Inception

  Combined Fund Level
Annualized
IRR or Return Since
Inception(1)

  Annualized IRR or Return,
Net of Fees,
Since Inception(2)

 
Corporate private equity   1987   30.8 % 22.8 %
Real estate opportunity   1991   38.2 % 29.2 %
Funds of hedge funds   1990   13.0 % 11.9 %
Mezzanine   1999   16.0 % 9.3 %
Senior debt vehicles:              
  Equity tranche   2002   21.2 %(3) 14.3 %(3)
Distressed securities hedge   2005   11.5 % 7.9 %
Equity hedge   2006   11.6 %(4) 8.9 %(4)
Closed-end mutual funds              
  The India Fund   2005     43.9 %(5)
  The Asia Tigers Fund   2005     42.5 %(5)

(1)
Through December 31, 2006.

(2)
Through December 31, 2006. The annualized IRR or return, net of fees, of an investment fund represents the gross annualized IRR or return applicable to limited partners net of management fees, incentive fees, organizational expenses, transaction costs, partnership expenses (including interest incurred by the fund itself) and the general partner's allocation of profits, if any.

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(3)
Our senior debt vehicles are typically capitalized with investment grade debt and tiers of subordinated debt and equity securities, the most subordinated of which benefit from residual amounts. These most subordinated securities typically represent approximately 10% of a vehicle's total capitalization. Gross annualized return represents the gross compound annual rate of return before management fees, but after deducting interest expense and administrative expenses.

(4)
Reflects returns from October 1, 2006 (the date operations commenced) through December 31, 2006 only (in contrast to all other results in the table above, which are annualized).

(5)
A subsidiary of ours has been the investment manager of The India Fund and The Asia Tigers Fund since December 5, 2005. The current portfolio manager has managed The India Fund since August 1, 1997 and has managed The Asia Tigers Fund since July 1, 1999. The net annualized returns, based on net asset values have been calculated since December 5, 2005.

        The following charts compare the net annualized returns of our two largest businesses—our corporate private equity funds and our real estate opportunity funds—since the inception of those funds in 1987 and 1991, respectively, and the five years ended December 31, 2006, against the S&P 500 for the comparable periods:

Corporate Private Equity Funds
Net Annualized Returns(1) vs. S&P 500(2)
  Real Estate Opportunity Funds
Net Annualized Returns(3) vs. S&P 500(4)

GRAPHIC

 

GRAPHIC

       
(1)   Through December 31, 2006.   (3)   Through December 31, 2006. Our real estate private
(2)   Through December 31, 2006. Total annualized returns for       equity operations commenced in 1991. Returns since
    the S&P 500 adjusted for dividends reinvested.       inception calculated from January 1, 1992.
        (4)   Through December 31, 2006. Total annualized returns for S&P 500 adjusted for dividends reinvested.

See "—The Historical Investment Performance of Our Investment Funds" for information regarding the calculation of investment returns, valuation methodology and factors affecting our investment performance. The historical information presented above and elsewhere in this prospectus with respect to the investment performance of our funds is provided for illustrative purposes only. The historical investment performance of our funds is no guarantee of future performance of our current funds or any other fund we may manage in the future. Investments by us in our funds involve substantial risks. For example, our corporate private equity funds and real estate opportunity funds make direct or indirect investments in companies that have a significant degree of leverage, including leverage incurred by the company in connection with the structuring of the fund's investment in the company. In addition, the investment return profiles of our corporate private equity funds and, to a lesser extent, real estate opportunity funds are relatively volatile as compared to the S&P 500. See "Risk Factors—Risks Related to Our Business".

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        Diverse Base of Longstanding Investors.    We have a long history of raising significant amounts of capital on a global basis across a broad range of asset classes, and we believe that the strength and breadth of our relationships with institutional investors provide us with a competitive advantage in raising capital for our investment funds. During our two decades of asset management activities, we have built long-term relationships with many of the largest institutional investors in the world, most of which invest in a number of different categories of our investment funds. For example, of those of the 50 largest corporate and public pension funds in the United States as measured by assets under management that to our knowledge invest in alternative assets, approximately 72% have invested in our funds. Investors representing approximately 64% of the total capital invested in our funds since the inception of our asset management activities in 1987 have invested across multiple categories of our funds. Our 20 largest unaffiliated investors have invested with us for an average of over 10 years. In addition, investors representing approximately 87% of the total capital invested in all of our carry funds since 1987 have invested in successive funds in the same category. Furthermore, our investor base is highly diversified, with no single unaffiliated investor in our current corporate private equity or real estate opportunity funds accounting for more than 10% of the total amount of capital raised for those funds. We have a group of professionals led by senior managing director Kenneth C. Whitney that is dedicated to managing our relationships with limited partners across our carry funds. This group also markets new funds to potential investors and is actively involved in our new product development. Our Park Hill Group business further enables us to grow our investor base through its expanding network of relationships with potential investors. We believe that our strong network of investor relationships, together with our long-term track record of providing investors in our funds with superior risk-adjusted investment returns, will enable us to continue to grow our assets under management across our investment platform.

        The chart below presents our investors' total committed capital for our carry funds plus the assets under management for our hedge funds as of March 1, 2007 by category.


Investors by Category

         GRAPHIC

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        The graph below presents the growth of net capital flows to each of our asset management operations from January 1, 2002 to December 31, 2006.


Growth in Net Capital Flows

         GRAPHIC

        Strong Industry and Corporate Relationships.    We believe that the strength of our relationships with investment banking firms, other financial intermediaries and leading corporations and corporate executives provides us with competitive advantages in identifying transactions, securing investment opportunities and generating exceptional returns. We actively cultivate our relationships with major investment banking firms and other financial intermediaries and are among the most significant clients of many of these firms. For example, our investment professionals meet regularly with investment bankers and other personnel of all of the major investment banking firms regarding potential investment opportunities, and we will often seek to work with many of the same financial institutions that we have worked with on previous transactions when seeking financing arrangements for potential investment opportunities. We believe our repeated and consistent dealings with these firms over a long period of time have led to our being one of the first parties considered for potential investment ideas and have enhanced our ability to obtain financing on more favorable terms. We believe that our strong network of relationships with these firms provide us with a significant advantage in attracting deal flow and securing transactions, including a substantial number of exclusive investment opportunities and opportunities that are made available to only a very limited number of other private equity firms. We also have a broad range of relationships with senior-level business executives whom we use to generate investment opportunities, analyze prospective investments and act as directors of and advisers to our corporate private equity and real estate opportunity funds' portfolio companies. Moreover, private equity investing in partnership with leading corporations is a signature form of investing for us. Through March 1, 2007, we had invested in 42 corporate partnerships, including transactions with AT&T Inc., General Electric Company, Northrop Grumman Corporation, Sony Corporation, Time Warner Inc., Union Carbide Corporation, Union and Pacific Corporation, USX Corporation and Vivendi SA. We believe that the depth and breadth of our corporate partnerships will lead to a significant number of opportunities for our corporate private equity and real estate opportunity funds over the next several years. As a result of these various relationships, we believe that we are less reliant on auction processes in making investments than many of our competitors, thereby providing us with a wider array of attractive investment opportunities.

        Our People.    We believe that our senior management and our talented and experienced professionals are the principal reason why we have achieved significant growth and success in all of our businesses. Since our firm's founding in 1985, Stephen A. Schwarzman has served as our firm's Chief

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Executive Officer and Peter G. Peterson has served as either Chairman or Senior Chairman. Hamilton E. James serves as our President and Chief Operating Officer, oversees our corporate private equity operation directly and, along with Mr. Schwarzman, oversees and serves on the investment committees or oversight committees for all of our other businesses. Jonathan D. Gray and Chad R. Pike are senior managing directors overseeing our real estate operation. J. Tomilson Hill is our Vice Chairman and the head of our fund of hedge funds business. Howard Gellis leads our corporate debt business, John D. Dionne manages our distressed securities hedge fund, Manish Mittal manages our equity hedge fund and Punita Kumar-Sinha manages our closed-end mutual funds. Our mergers and acquisitions advisory operation is led by John Studzinski, our restructuring and reorganization advisory operation is led by Arthur B. Newman and our fund placement business is overseen by Kenneth C. Whitney. Our 57 senior managing directors have an average of 22 years of relevant experience. This team is supported by approximately 335 other professionals with a variety of backgrounds in investment banking, leveraged finance, private equity, real estate and other disciplines. We believe that the extensive experience and financial acumen of our management and professionals provide us with a significant competitive advantage.

        Alignment of Interests.    One of our fundamental philosophies as a privately-owned firm has been to align our interests, and those of our senior managing directors and other professionals, with the interests of the investors in our funds. Since inception, Blackstone, its senior managing directors and other professionals have committed over $2.6 billion of their own capital to our carry funds and as of March 1, 2007, our hedge funds managed an additional $2.0 billion of Blackstone's senior managing director and employee capital. In structuring this offering, we have sought to achieve the same alignment of interests between our common unitholders and our senior managing directors and other employees through their significant and long-term ownership of our equity. Our senior managing directors and other existing owners who are our employees will own in excess of            % of the equity in our business immediately following this offering. In addition, we intend to make equity awards to all of our employees at the time of this offering and to use appropriate equity-based compensation to motivate and retain our professionals in the future. The equity held by our senior managing directors and other employees will be subject to vesting and minimum retained ownership requirements and transfer restrictions as described in "Organizational Structure—Reorganization—Blackstone Holdings Formation", "Management—IPO Date Equity Awards" and "—Minimum Retained Ownership Requirements and Transfer Restrictions".

        Distinct Advisory Perspective.    We are not engaged in securities underwriting, research or other similar activities that might conflict with our role as a trusted financial advisor. We believe that this makes us particularly well-suited to represent boards and special committees in the increasing number of situations where they are looking to retain a financial advisor who is devoid of such conflicts. In addition, we believe that our ability to view financial advisory client assignments from both the client's and an owner's perspective often provides unique insights into how best to maximize value while also achieving our clients' strategic objectives.

Our Growth Strategy

        We intend to create value for our common unitholders by:

    generating superior investment performance across our asset management platform;

    growing the assets under management in our existing investment fund operations;

    expanding our asset management base by raising new investment funds;

    increasing our investment of our own capital in our funds;

    expanding our advisory business; and

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    entering into complementary new businesses.

Business Segments

        Our four business segments are (1) our corporate private equity segment, (2) our real estate segment, (3) our marketable alternative asset management segment, which comprises our management of funds of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds and publicly-traded closed-end mutual funds, and (4) our financial advisory segment, which comprises our mergers and acquisitions advisory services, restructuring and reorganization advisory services and Park Hill Group, which provides fund placement services for alternative investment funds.

        As of March 1, 2007, our asset management business had raised approximately $59.4 billion of committed capital for our carry funds and senior debt vehicles since 1987, and was managing $21.5 billion in our funds of hedge funds, proprietary hedge funds and closed-end mutual funds. As of March 1, 2007, we had approximately $78.7 billion of assets under management, which included approximately $31.1 billion in our corporate private equity segment, approximately $17.7 billion in our real estate segment and approximately $29.9 billion in our marketable alternative asset management segment, which includes approximately $17.1 billion in assets under management in 72 different funds of hedge fund vehicles, approximately $1.5 billion in our mezzanine funds, approximately $6.9 billion invested across over 450 different senior loans and other debt instruments through our senior debt vehicles, approximately $2.5 billion of total assets under management in two proprietary hedge funds and approximately $1.9 billion of total assets under management in two publicly-traded closed-end mutual funds.

        Since 1985, our mergers and acquisition advisory business has advised on transactions with a total value of over $275 billion. Since 1991, our restructuring and reorganization advisory business had advised companies and creditors in more than 150 distressed situations, both in and out of bankruptcy proceedings, involving more than $350 billion of total liabilities. Since 2005, Park Hill Group has provided placement services to 18 corporate private equity, real estate, venture capital and hedge funds that have collectively raised an aggregate of $42.6 billion of assets under management.

        Information about our business segments should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and related notes included elsewhere in this prospectus.

Corporate Private Equity Segment

        Our corporate private equity operation, established in 1987, is a global business with 83 investment professionals and offices in New York, London, Mumbai and Hong Kong. We are a world leader in private equity investing, having managed five general private equity funds as well as one specialized fund focusing on communications-related investments. From an operation focused in our early years on consummating leveraged buyout acquisitions of U.S.-based companies, we have grown into a business pursuing transactions throughout the world and executing not only typical leveraged buyout acquisitions of seasoned companies but also transactions involving start-up businesses in established industries, turnarounds, minority investments, corporate partnerships and industry consolidations, in all cases in strictly friendly transactions supported by the subject company's board of directors. In total, our corporate private equity operation has raised approximately $32 billion in outside capital since 1987, with each of our corporate private equity funds raised in 1987, 1993, 1997, 2002 and 2005 constituting one of the largest private equity funds raised in that year. As of March 1, 2007, our corporate private equity operation had approximately $31.1 billion of assets under management. Blackstone Capital Partners V L.P., or "BCP V," the only corporate private equity fund that we are currently investing, is the largest corporate private equity fund ever raised, with aggregate capital commitments (inclusive of projected management fees expected to be received over the life of the fund) of over $18.1 billion.

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        Since its inception in 1987 through December 31, 2006, our corporate private equity operation has achieved a combined gross annualized IRR of 30.8% and a combined net annualized IRR of 22.8% on realized and unrealized investments, as compared with a total annualized return of 11.0% for the S&P 500 Index over the same period. Our corporate private equity operation has achieved an aggregate multiple of invested capital for realized and partially realized investments of 2.6x over this same time period. Each of our corporate private equity funds has performed in the top quartile of its peers according to Thomson Financial, and the combined net annualized IRR of each of our private equity funds across a full spectrum of economic and equity and debt capital market conditions has exceeded the return of the S&P 500 Index by 12 percentage points. The S&P 500 is an unmanaged index and its returns assume reinvestment of dividends and do not reflect any fees or expenses. See "—The Historical Investment Performance of Our Investment Funds" for more information regarding the calculation of investment returns, valuation methodology and factors affecting our investment performance. For the five years ending on December 31, 2006, our corporate private equity operation achieved aggregate realized and unrealized gains for investors in these funds of $12.4 billion.

        From 1987 through March 1, 2007, our corporate private equity funds have invested in approximately 109 companies in a variety of industries and geographies in pursuit of their investment objectives. The total enterprise value of all transactions effected by our corporate private equity operations through March 1, 2007 was over $191 billion. As of March 1, 2007, our corporate private equity funds had significant equity investments in 42 different companies. The following table presents selected recent investments made or committed by our corporate private equity funds:

 
  Year of
Investment

  Industry
  Region
  Equity Invested
($MM)(1)

  Transaction
Value ($MM)

Ushodaya Enterprises Limited   2007   Media   India   $ 175   $ 1,250
Freescale Semiconductor, Inc.   2006   Semiconductors   United States     1,200     17,581
Travelport Limited   2006   Travel   United States     757     4,500
The Nielsen Company   2006   Communications   Europe     810     12,700
Center Parcs UK   2006   Lodging   Europe     206 (2)   2,088
Michaels Stores, Inc.   2006   Retail   United States     800     5,970
Deutsche Telekom AG.   2006   Telecom   Europe     1,018     3,510
HealthMarkets, Inc.   2006   Insurance   United States     610     1,871
Cadbury Schweppes plc European Beverages Division   2006   Food & Beverage   Europe     364     2,298
TDC A/S   2005   Telecom   Europe     646     15,797
SunGard Data Systems Inc.   2005   Communications   United States     483     12,007
Celanese Corporation   2004   Chemicals   Europe     406     4,081
Texas Genco Holdings, Inc.   2004   Energy   United States     223     3,738
Extended Stay America, Inc.   2004   Hotels   United States     352 (2)   3,921
Southern Cross/NHP   2004   Care Homes   Europe     324 (2)   2,310

(1)
Amount constitutes equity invested by our corporate private equity funds and does not include equity invested by co-investors.

(2)
Excludes amounts invested by our real estate funds.

    Investment Approach

        We believe that our rigorous investment approach, extensive due diligence focus, global reach, substantial transaction and financing expertise and focus on operational oversight are all key reasons why corporate private equity funds have had attractive performance returns. The following are some of the core investment principles of our corporate private equity funds:

    Large Capitalization Focus. Large-capitalization buyouts are often the most difficult transactions to analyze and execute, given their complexity and geographic scope and the size of the equity investment required. Large-capitalization buyouts often involve more stable and higher quality companies, tend to attract more capable and deeper management teams and yield more options

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      for growth, repositioning, cost reduction and exit. Given our global reach, our network of skilled former senior corporate executives, the size of our capital pool and the depth of our transaction and financing expertise, we believe that we are one of a limited number of firms favorably positioned to participate in this large-capitalization market, which has been the fastest growing segment of the buyout industry. These favorable competitive dynamics and our capabilities and organizational strengths make large-capitalization buyouts particularly compelling opportunities for us.

    Corporate Partnerships. Corporate partnership transactions, transactions in which we invest capital alongside a major corporation, represent a signature form of private equity investing for us. As of March 1, 2007, we had invested $5.5 billion of equity capital, or approximately 28% of total corporate private equity capital invested by Blackstone since 1987, in 42 corporate partnerships. These have included transactions with AT&T Inc., General Electric Company, Northrop Grumman Corporation, Sony Corporation, Time Warner Inc., Union Carbide Corporation, Union Pacific Corporation, USX Corporation and Vivendi SA. As corporations increasingly return to the mergers and acquisitions market, we believe this strategy will lead to a significant number of investment opportunities for our corporate private equity funds over the next several years. We believe that teaming up with corporate partners enables us to benefit from access to their knowledge base and anticipated synergies and to compete more effectively against other bidders.

    Sector Expertise. Our corporate private equity investment professionals have expertise in all major industries. In addition, we have access to the sector expertise of a broad array of former senior corporate executives with whom we have established informal and formal proprietary advisory relationships and who work closely with our private equity professionals, helping us to source and analyze potential investment opportunities.

    Out-of-Favor, Under-Appreciated Industries. We tend to be a contrarian private equity investor. We try to avoid being influenced by swings in conventional wisdom about the relative attractiveness of industries. Instead, we seek to identify out-of-favor, under-appreciated industries, and we have successfully invested in industries such as rural telephony, oil refining, commodity chemicals, coal and automotive parts among others when they were generally perceived to be out of favor with the markets. We also try to identify developing industry trends in order to take advantage of them before they become widely appreciated and to pursue opportunities to change the structure and profit potential of specific industry sectors through consolidation.

    Global Scope. We believe that private equity investing outside the United States provides attractive opportunities, and we are therefore pursuing private equity opportunities throughout the world. In Europe, in addition to our hub office in London, we rely on senior advisors who reside in various European countries to assist our London-based private equity professionals. We plan on using a similar approach to expand our reach in the greater China region and other Asian countries with our new office in Hong Kong, as well as in India with our office in Mumbai. We believe we are one of a limited number of private equity firms with the advantage of access to a full range of cross-regional opportunities. Acquisitions involving non-U.S. companies represented approximately 39% of our corporate private equity funds' investments in the past three years ending December 31, 2006. We also believe our global reach helps us to better assist our portfolio companies in dealing with developments across various regions of the world, sourcing add-on acquisition opportunities, entering new markets and outsourcing operations to reduce costs.

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    Distressed Securities Investing. We believe that we have a competitive advantage in periods of weaker economic conditions or uncertainty in the debt or equity capital markets. Through our restructuring and reorganization advisory business and our distressed securities hedge fund, we have access to investment opportunities and expertise regarding companies in financial distress that many of our competitors lack. We have often invested in distressed securities when those opportunities have presented themselves, including successful investments in securities of Adelphia Communications Inc., Charter Communications Inc. and three German cable television companies in the last five years.

    Significant Number of Exclusive Opportunities. In recent years we have been able to consider and execute a number of transactions that were either presented exclusively to Blackstone or were offered to only a very limited number of private equity firms. We believe this principally resulted from our strong relationships with major investment banks and other financial intermediaries, our extensive network of senior advisors, our leading position in corporate partnership transactions, our ability to avail ourselves of the resources and relationships that reside in all of our firm's different businesses and our ability to arrange the acquisition of very large capitalization companies.

    Superior Financing Expertise. We believe that the broad expertise of all aspects of the capital markets—debt, equity, real estate financing, derivatives and commodities—that resides across all of our firm's businesses enables us to obtain a lower cost of capital for our portfolio companies, reduce risk and uncover hidden asset value. In the three years ended December 31, 2006, we estimate that an aggregate of approximately $98 billion of capital in debt and equity financings was raised by our portfolio companies.

    Operations Oversight. Our portfolio management group consists of professionals with significant operating experience who work with our portfolio companies on operating issues. After a portfolio company acquisition is consummated, our portfolio management group typically works with management of the portfolio company and outside advisors to implement a 100-day plan to enhance the company's operations. Each 100-day plan is reviewed and approved by our investment committee. As part of our portfolio company monitoring program, we enlist our senior advisors to assist our portfolio management group and work closely with portfolio companies to help them improve their operating performance. We believe that the experience of our senior advisors and our own portfolio management personnel, combined with the expertise of our investment professionals in assisting portfolio companies with add-on acquisitions, divestitures, financings and other capital markets transactions, help our portfolio companies enhance value. Our focus on assisting our portfolio companies with operational oversight, as well as our ability to attract, motivate and retain superior portfolio company management teams, are critical to the success of our private equity investments. The majority of our investment gains has resulted from increases in the EBITDA of our portfolio companies.

    CoreTrust Purchasing Group. We seek to unlock incremental value in our portfolio companies through the use of efficiencies of scale. We have established a group purchasing organization called CoreTrust Purchasing Group. CoreTrust administers a procurement program in which our participating portfolio companies combine their purchasing power to purchase various goods and services at discounted prices to thereby achieve savings that they were previously unable to obtain on their own. We are expanding this program to cover additional types of goods and services, and over time we expect to expand it to include other operational areas such as outsourcing and information technology.

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Real Estate Segment

        Our real estate operation has managed six domestic and two non-U.S. real estate opportunity funds and has raised approximately $17.6 billion in capital since its formation in 1991. As of March 1, 2007, our real estate operation had approximately $17.7 billion of assets under management. We recently completed an initial fund-raising round for Blackstone Real Estate Partners VI L.P., or "BREP VI." Taken together, BREP VI and Blackstone Real Estate Partners International II L.P., or "BREP Int'l II," the two real estate funds we are currently investing, would represent one of the the largest real estate opportunity funds ever raised with aggregate capital commitments of over $6.7 billion. Since its inception in 1991 through December 31, 2006, our real estate operation has achieved a combined gross annualized IRR of 38.2% and a combined net annualized IRR of 29.2% on realized and unrealized investments, as compared with an annualized return of 10.6% for the S&P 500 Index over the same period. Our real estate private equity operation has achieved an aggregate multiple of invested capital for realized and partially realized investments of 2.4x over the same time period. The S&P 500 is an unmanaged index and its returns assume reinvestment of dividends and do not reflect any fees or expenses. Each of our real estate opportunity funds has performed in the top quartile of its peers according to Thomson Financial. See "—The Historical Investment Performance of Our Investment Funds" for more information regarding the calculation of investment returns, valuation methodology and factors affecting our investment performance. For the five years ended December 31, 2006, our real estate opportunity funds achieved aggregate realized and unrealized gains for investors of $6.7 billion.

        The total enterprise value of the 212 transactions effected by our real estate operations from 1991 through March 1, 2007 was over $102 billion. The following table presents selected recent investments made by our real estate opportunity funds:

 
  Year of
Investment

  Region
  Equity Invested
($MM)(1)

  Transaction
Value ($MM)

Equity Office Properties Trust   2007   United States   $ 3,501   $ 38,656
Trizec Properties, Inc.   2006   United States     625     9,252
Center Parcs UK   2006   Europe     204 (2)   2,063
CarrAmerica Realty Corporation   2006   United States     778     5,798
MeriStar Hospitality Corporation.   2006   United States     196     2,296
LaQuinta Inns Inc   2006   United States     469     3,435
Southern Cross/NHP