Blackstone Inc (BX) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen.

Thank you for standing by and welcome to the third quarter 2007 Blackstone Group earnings conference call.

Our speakers for today's call are Joan Solotar, Senior Managing Director, Public Markets; Michael Puglisi, Chief Financial Officer; and Tony James, President and Chief Operating Officer.

At this time, all participants are in a listen-only mode.

We will facilitate a question-and-answer session toward the end of today's conference, at which time you may press -- (OPERATOR INSTRUCTIONS).

I will now turn the presentation over to our host for today's call, Ms.

Joan Solotar, Senior Managing Director, Public Markets.

Thanks, [Vanessa].

Good morning and welcome to our third quarter conference call.

I am joined today by Tony James, President and Chief Operating Officer, Mike Puglisi, our CFO, and Dennis Walsh, Principal Accounting Officer.

Earlier this morning, we issued a press release announcing third quarter results, which is available on our website.

Before we review the quarter and take your questions, I would like to remind you that today's call may include forward-looking statements, which are not historical facts, but instead represent only Blackstone's beliefs regarding future events, many of which by their nature are inherently uncertain and outside of the Firm's control.

Actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

As well, the Company does not undertake any duty to update any forward-looking statements.

I refer you to the "Risk Factors" section of our S-1 document and the MD&A section of our 10-Q, which we will file later today.

This audiocast is copyrighted material of the Blackstone Group and may not be duplicated, reproduced or rebroadcast without consent.

I will give you a brief overview of the results, turn it over to Mike to discuss the details of the quarter and then to Tony to talk about the business and the environment.

First, I would like to say there seems to be some confusion on the tape related to two points.

One is that we did report a large GAAP loss, but that loss relates to the IPO.

It is a non-cash charge associated with the IPO.

It is not a reflection of earnings or cash, which I will run through.

And second, I saw some of the analysts' reports are mixing apples and oranges, comparing the reported ENI number to the consensus number, whereas the consensus number actually mixes both cash and ENI.

Some of the analysts used cash as their reported number and other people used ENI.

But to summarize the quarter, we had double-digit growth in revenues.

Adjusted cash flow and assets under management within the segment revenues, and Private Equity, Marketable Alternatives and Advisory were up, while Real Estate declined.

That was a result of lower performance fees, which reflected lower marks in the period.

We are operating in a period of significant debt market turbulence, which will challenge our ability to initiate particularly large, more-traditional corporate and real estate private equity transactions and, therefore, limit our earned transaction fees in the near term.

That said, overall business continues to grow nicely with assets under management up 57% year-over-year, which drove stable management fees considerably higher.

Capital invested and committed to was meaningfully above last year in both Corporate and Real Estate Private Equity and we had the sizable $26 billion Hilton transaction close post the quarter.

Revenues grew 14% year over year to $526.7 million in the third quarter and those were down from $975 million in this year's second quarter.

After-tax economic net income, or ENI, totaled $234 million, or $0.21 per unit.

That was basically flat with last year's $239 million, also $0.21 per unit, and the second quarter's $651 million, or $0.58 a unit.

Both the full-year 2006 and the second quarter 2007 numbers are pro forma so that you can more easily compare with our third quarter, which is actual.

For the nine months ending September 2007, ENI totaled $1.54 per unit.

That is up significantly from last year's $0.55.

Adjusted cash flow, which strips out any unrealized gains and compensation associated with those gains, totaled $311 million.

That is up 87% from last year's third quarter at $172 million and down from the second quarter at $668 million.

We have 1.121 billion units and 1.089 billion for cash purposes, so if you take the $1.00 cash earnings and divide by the number of units you get $0.29 adjusted cash per unit in this year's quarter and that is up from $0.16 last year.

Similar to the second quarter of this year, cash earnings exceeded ENI and that is because actual realizations were greater than marks on the portfolio.

A couple of comments on the release before I turn it over to Mike.

As with last quarter, we have provided GAAP results and then reconciled that to economic net income, or ENI, and just to remind you what ENI is, it is the benchmark that we use to look at performance.

It takes out the non-cash vesting of equity comp as well as the amortization of intangibles from GAAP net income.

Additionally, we have given you the nine-month reconciliation to go from ENI to adjusted cash flow.

And the cash number takes into account only actual realizations, rather than any unrealized gains or losses.

I will now turn it over to Mike to discuss segment results.

Thank you, Joan, and good morning everyone.

I will now take you through some of our financial results, both for the business overall as well as our four business segments and then quickly review with you our capital position.

With respect to our income statement, as Joan mentioned, we reported a third quarter GAAP loss of $113 million, which includes non-cash charges of over $800 million related to the vesting of the IPO unit awards recorded as compensation and the amortization of intangibles as a result of the IPO.

Last year's net income was $372.5 million and this was before our reorganization/IPO and did not include these non-cash charges nor compensation arrangements primarily relating to our Senior Managing Director's, which prior to the IPO were treated as partnership distributions.

With respect to our revenues, our management fees, which will grow with assets under management, but also include transaction-related fees, rose 36% to $329 million.

Assets under management increased 57% to $98 billion from $68 billion last year.

Our fee-earning assets rose 55% to $77 billion from $50 billion.

We saw strong asset growth in the Private Equity, Real Estate and our MAAM segments.

We also held additional closings on Blackstone Real Estate Partners VI, the largest real estate opportunity fund in the world, in the third quarter such now that we have $10 billion of limited partner commitments to this fund.

With respect to our performance fees and allocations, they were down 15% to $150 million from $178 million in the last year's third quarter.

As we have previously advised, these performance fees will move around from quarter to quarter.

With respect to our Private Equity segment, the performance fees in this segment were up significantly, namely by 76%.

In our Real Estate segment, they, on the other hand, were down by 74%.

In our MAAM segment, the performance fees were also down, though those fees are a relatively small contributor to both this year as well as last year's quarters.

With respect to capital put to work in the quarter, it was substantial.

In our Private Equity segment, the investment rate was strong with limited partner capital invested totally $2.34 billion, up from $915 million last year.

In our Real Estate segment, our LP capital invested totaled $270 million, down from last year's $982 million.

And in the fourth quarter -- however, in this quarter, we have invested $5.2 billion of limited partner capital across both Private Equity and Real Estate related to our aggregate equity investment of $5.6 billion in the Hilton transaction.

In our third business segment, our Market Alternative segment, it achieved an 88% increase in revenues driven mostly by increased assets return, which rose from $24 billion to $40 billion at quarter end.

Investment income in the segment also rose to $32.7 million from $15.6 million last year as we invested more of our own capital in this segment.

Our Financial Advisory business realized a revenue increase of 59% year over year to $81.9 million.

However, a $33 million compensation expense related to partners and select employees that prior to the IPO were treated as partnership -- partner distributions had the effect of decreasing economic net income in this quarter, which declined to $20.8 million from $37.6 million in the comparable prior-year period.

Our tax rate for ENI in the quarter was 22%, which is slightly above our guidance of in the range of 15% to 20%.

This tax rate will move around depending on the nature of our revenues, with it decreasing when our performance fees and investment income are a greater percentage of revenues and increasing when our management and advisory fees are a greater percentage of our net revenues.

Our compensation as a percentage of net revenues rose to 33% in his quarter.

As we have previously advised, this will increase over time to the 45% to 50% range.

With respect to our capital position, we have declared a quarterly dividend of $0.30 per unit to holders of record as of Friday, November 30, 2007, which will be paid on December 14, 2007.

As of the quarter end, we have outstanding commitments to our Blackstone funds of $1.3 billion and we continue to expect to opportunistically use some of our capital to invest alongside of our funds.

That is the overview on our financial results and I will turn that over now to Tony.

Okay, well, I will just try to put a little color around this.

This quarter is a little bit like "A Tale of Two Cities." On the one hand, the basic forces driving the long-term growth and profitability of the business were very, very strong.

Gathering the assets under management; the better pricing environment; the market positions the firm has across all its businesses; the geographic expansion, etc., all very strong.

But on the other hand, in the short term, the credit dislocation and weak equity market make it hard to set up big new deals right now and don't make it on optimal time to be harvesting our assets either, particularly, so we are in a little bit of a hiatus there, not that we weren't active.

To the contrary, we were extremely active in terms of putting money out and making new investments.

And incidentally, our doing so at a much higher returns now then we were looking at before and driven effectively by lower prices.

But until the markets stabilize, I don't see a dramatic change in this pattern of sort of long-term growth with not a lot of either big fees or big realizations, big gains in the short term.

With respect to the markets themselves, because the last time I got a lot of questions on this, let me just say I think the banks have made very good progress since Labor Day, when they really began working down the leveraged finance backlog.

Unfortunately, leveraged finance is not really the problem.

Of the write-offs that have been taken, most of the CEOs at the banks I have talked say only 15% of the 20% of those -- this is of the first round -- were leveraged finance-related.

The rest are mortgage related and I think all these added write-downs are essentially 100% mortgage-related.

So leveraged finance is really the tail on the dog, although it got a lot of early focus.

Loans and bonds in leveraged finance have traded up and there are definite signs of [softness] in the availability of capital for new deals, both in commercial Real Estate and in Corporate Private Equity.

On the other hand, the mortgage black hole is I think worse than anyone thought, deeper, darker, scarier than what the banks thought.

They are all now looking at new reserves and my sense is that from conversations I have had recently with executives of most of the big banks is they don't have a clear picture of how this will play out and their confidence is low.

So I think they are going to remain restrained in advancing new credit until they have a better sense of where things really are in the momentum shift and we think that will take into early next year sometime to resolve itself.

Quarter on quarter, as we mentioned, we think revenues were solid up 16%, but not spectacular.

Assets under management of almost 60% increase were pretty spectacular, actually, and ENI was flat for the quarter, notwithstanding a higher tax rate due to a mix shift there of the kind of income that Joan and Mike have talked about.

And our distributable cash was up about 80% I think, something like that.

So all in all, you know, given the environment, I think we feel like we were on really sound footing here.

Institutional investors, we have seven funds in the market as we talk, across all three of our segments.

One in Private Equity, two in Real Estate, two in hedge funds and two debt market -- two debt funds to take advantage of the opportunities that we have out there.

Institutional investors are telling us that they are still increasing their allocations to alternative investments and we expect this to continue to drive steady growth in AUM for us.

Just a word on taxes and Washington, DC, because I am sure I will get that question too.

I don't think there has been any real change since we talked last quarter.

The taxation of most publicly-traded partnerships and carried interest continues to be actively debated.

There is no consensus that has emerged and it is really not predictable as to what ultimately will happen in the areas of particular interest to us, because there are powerful forces on both sides of this issue.

It is clear, I think, in general that taxes are going to go up and our goal remains just to see that we are treated consistently and fairly with other people.

I do think that the tax risk that we in particular face has been fully discounted in the stock price.

Moving to our individual segments for a moment.

Mike talked about the numbers, but in Private Equity, management fees were up significantly due to assets under management.

Yield fees were about flat.

Gains were up a lot and we liquidated something like 1.5 billion of positions during the quarter.

We actually closed on $2.3 billion of new investment.

The main ones being Alliance, Biomet, Klockner Pentaplast and Stiefel.

Those compare to -- that $2.3 billion compares to $900 million last year in the same quarter, so more than double last year's closings.

New commitments for the quarter out of our private equity fund were $3.4 billion.

That compares to $1.8 billion in last year's comparable quarters, so new commitments post-meltdown -- because this whole quarter was essentially post-meltdown -- were very substantial at $3.4 billion.

On a run rate basis, don't multiply that by a four and think we can sustain that run rate.

We can't.

But it was a very good quarter on new closings, which are obviously the seeds for future gains.

Where is that money going?

It is going to India and China, where the economic growth of those countries continues very strong.

A lot of appetite for private equity.

Financing markets are solid and so on.

It is going to minority investment in PIPES.

Those are being done in companies that are either private companies that don't want to go public today, but do want the growth capital.

It is going into public companies that want to go out and do acquisitions that are large in relation to their size, but with the financing markets closed, they can't access capital either.

And it is going into large public companies in turnaround-type situations.

So that minority and investing is the second leg of the stool.

And the third thing is we are still doing a variety of smaller deals.

I mean, you should know that the average investment in BCP V, which is our most recent fund, the largest fund in the world, is $500 million of equity per deal, so it doesn't take a very large investment to put that kind of money to work and those kinds of deals are still financeable in today's market.

Lately deal flow is up and frankly, up significantly.

And prices are down, so that bodes well for both activities levels and on future returns.

Talking about the portfolio for a while, I think our portfolio is in great shape.

We have 52 companies, as I think you know.

We are not seeing at this point any evidence of a slowdown in the economy in our portfolio company results, but partly that is because we intentionally two years ago felt like the economy was getting [toppy] and credit markets were getting frothy.

So we decided to focus our investment effort on a few -- on four themes to drive the Fund that we thought would hold up relatively well if the economy got tough.

Those four are Asia, I have talked a little bit about that, in terms of Asian investments; investments in healthcare, which we felt would, once again, be relatively recession-resistant; investments in consumer products companies, consumables, which we thought would be relatively recession-resistant; and investments in mature technology where we thought they were relatively value -- relatively undervalued in an overvalued market.

And I think all four of those themes have played out well and account for virtually all -- they, across the forum, account for virtually all of the investments we have made in the last few years and all those themes are holding up very well in this market.

By the way, each of our companies has capital structures which are very solid.

So they are not looking at refinancing needs and that sort of thing.

So I think, in general, we feel good about the situation in Private Equity.

In Real Estate, once again, as Mike mentioned, we closed during the quarter on BREP VI, it is the largest real estate fund in history at over $10 billion.

And that has driven a big increase in management fees.

They have almost doubled in the quarter.

Yield fees, yield fees were down because our closings this quarter were only about $300 million, down from about $1 billion on the comparable quarter last year where we did the car deal, which was a very large deal with $720 million of equity put to work.

Similarly, gains in the portfolio were down this quarter over the comparable period last year because the market is in -- the real estate market, in general, isn't seeing the same sort of price appreciation that was happening last year.

Indeed, if I had to say, I would say prices in commercial real estate, in general, are somewhat softer, although in the areas and property types that we are in, they are holding up very well, which I will talk more about in just a minute.

Deal flow in Real Estate is up also lately and it tends to be characterized by overlevered property or real estate owners that were planning on refinancing and now can't do it, so they are coming to us.

And we have got some very interesting opportunities of that sort.

In terms of the property, the portfolio itself, where we are predominantly concentrated on major cities in the coasts.

Rents are increasing very rapidly right now.

If anything, they are starting to spike up faster than was true before.

As you know, we own a lot of hotels.

RevPAR are -- that is revenue per average room -- are holding up very well and increasing still.

And then replacement costs are still rising rapidly with the cost of building materials, which provide a fundamental underpinning of value and keep new supply out of the market.

So as with Private Equity, we feel very good about the Real Estate portfolio and how that is holding up.

Just a note, which we just want to be clear about, we own essentially no housing assets.

It counts for less than half a percent of our total assets, so it is de minimis.

And then as Mike and Joe mentioned, we closed Hilton on October 24 and interestingly, has kept the market.

We closed it on the originally-negotiated debt terms.

Moving to our Marketable Alternative segment, the big story there has been asset management growth, which is up 70% quarter over quarter, driving revenues of almost 100%.

The engine here was BAM, where AUM was up 75% to $24 million.

That is our hedge fund fund-of-funds business and basically, all of our public market vehicles, all of our proprietary hedge funds, as well as BAM, are all up year to date, notwithstanding the choppy market, and the range of year to date performance on a gross basis for all of our funds ranges from a low of 5% this year to a high of about 70%.

And generally speaking, relative performance has been truly excellent this year for all of our public funds.

The other part of MAAM that's not a public market fund, quite, is our debt businesses and there, our mezzanine fund is seeing significant increase in deal flow as the high-yield markets have closed up and our CLO business is also earning much higher spreads as the market is backed up.

So they are benefiting from the credit dislocations, as expected.

We closed another CLO last quarter in Europe and -- with another -- for another $500 million.

On the advisory business, revenues are up substantially driven primarily by Park Hill, which had a very big quarter, which is our fund placement business.

M&A is a little soft as not only private equity buyers put corporate buyers pull in their horns a little bit.

It is a little softer in the U.S., but Europe's deal flow continues very strong and our restructuring business is up a lot.

So that -- our advisory business is -- our backlogs are holding up well.

In terms of new initiatives, and then I'll open it up for questions, we continue to expand geographically.

We are looking hard, most particularly with a focus on Asia, Eastern Europe and possibly the Middle East.

We're looking hard at all those places.

We are in negotiations to lift out teams from other institutions that would come in to -- that would get us into two new fund areas and we are looking at some tuck-in acquisitions which could make us strategically stronger in some of our existing businesses.

So we have got a number of new initiatives that I hope we will have some announcements coming up this quarter.

So that is basically a summary and I would -- I guess we will open up to questions.

(OPERATOR INSTRUCTIONS).

Guy Moszkowski, Merrill Lynch.

Good morning, everybody.

I thought it might be helpful, given that you have couched everything relative to last year, if you could give us a sense of sort of roll-forward in both Real Estate and Private Equity in terms of assets, marks, realized gains and related revenues to those relative to last quarter.

That would be the first question, if you could just sort of just give us that perspective.

That would be very helpful.

In terms of the assets, they are up sequentially across the board.

Private Equity, Real Estate and Marketable Alternatives.

The biggest increase was in Marketable Alternatives quarter to quarter, but pretty much you are seeing movement sequentially up.

The total last quarter was 91 billion about and it is about 98 today.

Yes, it was 91.7 and now it is.

98.2.

98.2.

And in terms of gain realizations and the related revenues broken between Equities and Real Estate?

On the realizations on the carry realizations that we had in this quarter, the actual for the third quarter was $200 million, $207 million of realizations.

Versus the prior quarter, we were at 417.

I'm sorry, is that across both segments or is that just Real Estate?

Both segments.

Okay.

And if you could then just isolate Real Estate for us within that, that would be helpful.

Okay.

The real estate for the third quarter was $91 million of the 207.

And for the second quarter, it was 70 -- call it 80 million of the 417.

78 and then -- so I guess really the significant decline that we saw in the revenue then is, on the Real Estate side, is really driven within sort of economic net income in terms of sort of mark to market or mark to model.

Would that be a fair characterization?

Yes.

Well, the let me just make -- yes.

Having said that, it wasn't actually -- I just want to be clear because the markets go up and down here -- it was lower appreciation, not a decline in the carrying values.

Right.

There was less mark to market or mark-to-model gain.

Correct.

Right, you see that --

But there was still a net gain.

Right, there was still the net gain of $28 million for the quarter in Real Estate.

And, Guy, importantly, the cash flows were up across Real Estate, but given the environment when we evaluated the mark, we opted to mark at rates that were actually higher than properties that we have sold.

Right.

So that --

Meaning they were appropriately marked, but we opted not to take [aim] even though the cash flows were up just given the current environment and our view of the environment.

So it's basically sounds that although --

And were not.

Sorry.

Go ahead.

We are also not liquidating a lot of properties right in here.

Right.

So that is to the sort of realize gains elements or the cash?

Yes.

And then the --

But well --

With respect to the ENI, I think what I hear you saying is that despite the fact that the underlying rent rolls actually improved, it didn't seem like the right time to assume, therefore, that the underlying property values were higher.

That's correct, but I just want to make a distinction.

Usually when we actually have a liquidation, it is not just cash.

It also has a positive ENI effect.

Yes, that's fair.

Given that, you know, usually the marks are reasonably conservative around here.

There was some discussion in your prepared remarks, Tony, that you were seeing improved deal flows both in Private Equity and in Real Estate and I was just wondering if you could give us a slightly finer point in terms of relative to what period?

Are you talking about relative to the prior quarter or relative to a year ago?

No, relative to the prior -- relative to prior quarter, relative to where we were when we last talked in, what was it, August.

So you know, it was -- and I would say the pickup, it's pretty -- it is pretty recent.

I would say most of it in the last few weeks.

You also made a comment about in your debt business that you were seeing some opportunity out of the dislocation, which makes sense, but on the other hand, it certainly gives rise to the thought that given that you do have large amounts of invested capital here, that you might also might have some asset marks arising out of the dislocations, as well.

Why isn't that something that we should be concerned about?

These are -- I don't think we have any of that issue actually, Guy, and some of what we are doing is setting up new vehicles to take advantage of the dislocation.

But, Guy, if you are referring to the CLOs, those are funds that we manage that have not actually -- we have not had to take negative marks.

They are still paying, cash is current, etc.

And to be clear, those aren't on our balance sheet, but those are funds that we manage.

Right.

And it sounds like, for the most part, to the extent that there have been negative marks that you would have to take if you had residential real estate exposures and the like within some of those, you really just don't have much in the way of exposure there.

Is that a fair characterization, or should we be thinking that you do?

As I say, we have almost none of that.

To the extent we have residential mortgage, we are net short.

Thanks.

I guess the final question I would have is if you could comment on your plans at this point and how they might have evolved versus last quarter to raise new funds across different parts of the business and there has also been some commentary in the press about how you might be re-jiggering your fee structure for new funds raised and I wondered if you could comment on any of that?

Well, the fund-raising plans are about as expected, frankly, and as I think I mentioned, we have seven funds in the market, we expect to raise at least $20 billion from those funds.

It cuts across all the segments.

The only -- we have added a couple of new funds -- we finished BREP VI and we have added a couple of new funds in the debt area, so a little bit of change of there, but only as we work through the different funds.

In terms of the fee structure, we have increased slightly the breakpoints at which level fees step down in Private Equity is the main change.

And just to -- that is not significant.

I don't think you will see that as a significant change to unit holders.

And just to finalize that point, in terms of the breakpoints, are those breakpoints more favorable to the Company or to the LPs?

They would be more favorable to unitholders.

Okay, great.

Thanks very much.

I appreciate your taking the time.

Roger Freeman, Lehman Brothers.

Good morning.

I guess coming back to the commitments you have made this quarter in Private Equity, I think you said $3.4 billion and you talked a little bit about where that has been going.

Tony, could you maybe comment a little bit further on how much of that is overseas versus, say, in the U.S.

in the form of a minority investments or PIPEs?

Well, okay.

Off the top of my head, it would seem that I'm going to have to guess here a little bit.

I would guess about -- do you have it, Mike?

Okay, thank you.

All right, we don't actually have the data cut quite that way.

Well, I guess the question is just sort of how do you -- I mean, how are you looking at that opportunity right now, how do you break it down?

Well, I think it is close on 50-50 the way I look at it.

And actually last quarter, the 3.4 wasn't that high because, you know, the biggest one was Hilton, which, of course, is a control investment, and then we had some others.

We closed on something called ReAble, which is an orthopedic company, and that was the second-biggest commitment during the quarter.

So that has taken you to about half on control investments.

Our investment in Bluestar Group in China, Stiefel Labs and several of the Indian ones are minority investments, so they are probably one-third.

And then the rest, there is a various of things here and there in the others.

Okay.

So as you see the stepped-up opportunities for some of these types of non-control types of investment, how much of the gap do you think that can fill in terms of the rate of investment that we have seen coming from these larger control-oriented transactions?

How do you see the rate of investments going into next year on a dollar basis?

Well, I think we are in a lumpy business and we are in an unpredictable business and I think -- I don't think there is going to be a lot of big new control investments when the credit markets stay shutdown or at least stay impaired.

Not to say there won't be any, there will be some.

We chip away at it and in particular, a lot of our portfolio companies are looking at things where we can put up some more equity.

So I am not even sure how you classify those, but the rate of investment will be down over where it has been the last year or so.

Okay.

And Tony, can you comment maybe on what some of the executives within your portfolio of companies are saying with respect to the outlook?

I think you said that their businesses were performing well right now, but I think a lot of times CEOs are very focused on the near-term.

As you --

Yes, our -- sure, we got 50 of our 52 CEOs together about three weeks ago for what we call the CEO Summit, which we do each year, where we have two in-depth days with all of them talking about the environment, best practices across portfolio companies and various other things like that, how to do business together and other things.

We spent a lot of time on that given the economic outlook and had some outside economists and other things to make sure we mined as much as there was to mine there.

And the consensus was slower GNP growth next year, but not a recession.

The consensus was 1% GNP growth early in the year and I would point out since that is not enough to absorb all the new jobs, that involves some rising unemployment, which will feel sort of recession-like.

And know that number may be more specific than you should take away, but call it one to 2% was what they thought would happen.

And that is a view that you share, as well?

I think that is consistent with our own views.

Okay.

Lastly, where do you think -- can you just talk about where you see some of the opportunities in the credit markets?

Specifically, do you think that some of the higher tranches within the ABS/CDO space are oversold at this point, everybody is focused on the ABX Index, in particular.

Is that representative of what you think underlying values are worth?

We think there are -- we think there are some very -- there are starting to be some real values in subprime.

I would say our focus has been more on the mortgages themselves than the structures and the pieces of the CDOs.

But we think there is some substantial value.

You can buy them now at almost as interest-only and if -- so we are getting focused on doing some things to take advantage of that view, right or wrong.

The indices themselves you have got to be a little careful about.

A lot of people use them as hedges and don't necessarily buy them and sell them as reflections of the underlying fundamental values.

And we have found a lot of times we think when the indices gets out of whack with fundamentals.

And that is true of both ABX as well as the indices are round some of the leveraged loan stock.

Okay.

But it is your view that we are going to see pricing continue to come in on the mortgage side before a bid really steps in from you or others?

Well, I think we are somewhere near the bottom, but my own feeling is there is another shoe to drop.

Okay.

Thanks for your comments.

Hojoon Lee, Morgan Stanley.

Good morning.

If possible, could you comment on how the disruption in the structured credit market is affecting your holding in FGIC, more specifically the impact on how this would be valued or how you look at the business going forward?

Okay.

Well, we spent a lot of time with FGIC and, you know, we think they are fundamentally in very good shape.

However, we note that Fitch has put the company on credit watch and I don't know how this will play out.

It may require additional capital, I suppose, to sustain the company's growth rate.

I think it is all kind of a combination of the rate of growth that FGIC wants to accomplish given its capital base.

Without growth, I don't think there would be additional capital needs, but we will see and we are monitoring the situation closely.

I will say that the spreads that FGIC is able to write the guarantees on are up a lot and that is a good part of this and so we are paying close attention.

We have been all over the actual -- their exposure.

I don't think they are going to have material losses, so it is just kind of a question of what the rating agencies do in terms of their view of adequate capital.

Okay.

Could you comment on whether there were any negative marks related to FGIC in the last quarter or was the downturn more kind of the fourth quarter event?

Well, I am not sure there is a downturn at all, first of all, nor that a negative mark would be appropriate, but I am not going to answer your question directly because we don't get into talking about our marks on specific inventory, specific portfolio of companies.

Okay.

That's fine.

And just a follow-up question for MAAM --

But I think if you listen to my comments about FGIC, you know, the situation is certainly not as negative as your question seemed to infer or imply.

I was just pointing it out, given how MBIA and [AMBAK] sold off in the fourth quarter.

Just in terms of MAAM, could you give us an update on -- I know you touched upon this during your prepared remarks, but on how the senior debt vehicles and the mezzanine funds are raising in this environment, maybe remind us of how the economics of this business works for Blackstone in terms of do you guys hold any residual interests and how should we think of AUM growth in future periods?

With respect to the senior debt and the mezz businesses?

Yes.

Is this just more of a management-fee-earning business for you guys, or --?

No, no.

On both businesses we get management fees and carries just like our other businesses.

And we just, as I think I mentioned, we raised a new senior debt vehicle.

We just closed on it, which was a European CLO and we have a mezz fund and get its activity level is up a lot.

So that business is chugging along.

I'm not sure I answered your question, but it does have both carry and management fees.

I guess in terms of the assets under management there, you haven't actually seen a decline in the asset base given the downturn in corporate credit markets?

No.

It depends on the period it depends on the period you are looking at.

The mezzanine is locked up, so the real decline there, because they are not -- I don't think there have been any write-downs in the mezz, so the declines there come as liquidate positions like private equity.

Right.

You rate the fund, you lock it in for 10 years, you invest that money and then the AUM will decline -- might decline -- move around slightly as you liquidate positions until you raise the next fund and then you have that big step up.

Sure.

So it's like a stair step, if you will, that is in the mezzanine area.

And in the CLO area, similarly when you raise a new CLO, you add an AUM and then as an old CLO matures, you sell it off.

But the marks to us are not really driving AUM on that and so you will periodically see step ups and then gradual slight declines and then a step up and then a gradual slight decline given that pattern.

Right.

So it is more new capital raises and paydowns of the assets that are driving the movement?

Paydowns and liquidations of the underlying, yes, investments.

Thank you.

George Denninghoff, Vista Research.

Hello, gentlemen.

I think that one of the biggest threats that seems to come to your guys' eventual profitability going forward seems to come from the stuff going on in Congress.

I was wondering if you could talk a little bit about how you guys are looking at positioning yourselves with regards to the tax legislation that doesn't want to seem to go away.

Well, I don't -- thanks, George.

I knew I would get the question, which is what why I tried to say whatever I know up front.

We are very focused on this.

We spent time with lots of people on both sides of the aisle down there.

And there is a lot of debate.

There is not a consensus on either the Republican side or the Democratic side as to how to handle these issues, whether it be carried interest or publicly-traded partnership.

So even within the parties, they can't really agree, which is why -- you haven't even had enough consensus emerge since some of these things were first proposed back in May to have a bill emerge from the Senate Finance Committee, for example.

The one thing that is for sure is they need tax revenues down there and they are going to get it from somewhere and I suppose the good thing about private equity is it is not a big enough industry to have them raise much in the way of tax revenues on some of these things they are talking about.

And actually some of the things they are talking about would actually cost tax revenues.

If they discouraged private equity funds and hedge fronts from going public, it would actually cost the government a lot of tax revenues.

So between that and concern about mucking around with how carried interest -- not just for our industry, but for real estate, oil and gas, venture capital and others -- what that would do to entrepreneurialism and capital formation, which are the engines of the U.S.

growth, you have a lot of people down there that have really serious concerns about what the right thing to do is here that aren't just politically driven.

And so once again, as I say, I talk to a lot of people down there and it is -- there is no consensus and it is not just along party lines.

So we will see how it plays out.

I honestly don't know.

I do honestly don't know.

I do think, though, that the Grassley proposal is what most of the analysts are using in terms of expecting us to pay full corporate income tax in five years in their models.

So I think if that is in there, I think that is fully reflected in the present values and analysis that they do.

Okay.

My other question is in regards to, you know, with the credit crunch coming into play, it seems like alternative sources of financing are becoming more and more popular and I was wondering if you could discuss the role of sovereign wealth funds and your raising of capital?

Well, sovereign wealth funds are a major source of growth for us in terms of investors in our funds.

They are -- they have a lot of cash flow.

They are moving increasingly from just simply buying U.S.

debt into buying alternative investments.

They are doing that for a lot of reasons.

First of all, the returns are obviously higher on alternatives than they are on U.S.

government bonds.

In addition, U.S.

government bonds, with the dollar weakening, have not been a particularly good place to have money.

Indeed, you could argue in their currencies, they have been losing investment.

And then other financial theorists will go and tell them that even though alternatives sound like a riskier asset class, actually if you add it as part of your portfolio in your sovereign wealth fund, you lower overall portfolio risk.

So they are starting to listen to those kinds of people.

So whether it is Middle East, Asia or the big European sovereign wealth funds, like Norway, they are all spending much more time focused on shifting assets into alternatives and that is one of the drivers that is driving our business in addition to the traditional aging demographics, growing pension funds and the shift to pension funds to a greater percentage alternatives.

So that is a fundamentally good trend for us.

Okay.

Well that answers my question.

Thank you.

Michael Hecht, Banc of America Securities.

Hey guys, good morning.

How are you doing?

Good morning.

Hello, Michael.

Okay, so let's see, you guys note you have about $5.3 billion in deals where capital has been committed on the Corporate Private Equity side but not closed and I guess about $4 billion on the Real Estate side.

I mean, how should we think about the returns you expect to earn on those deployments, I mean, with a tougher financing environment, presumably lower kind of leverage levels, I mean, will this pressure the returns you earn on those investments toward the lower end of historical ranges?

I think this is a really important point.

The lowest returns that we were looking at when we were setting up deals were early last -- early this year, last spring, when there was so much money chasing every deal and the leverage ratios were so high and there was so much competition for deals.

I just want to be really clear about this.

When leverage ratios go up the benefit -- all that benefit is instantly reflected in a higher price and it instantly goes to the seller of the asset, not to the buyer of the asset.

The buyer of the asset takes more risk, arguably, because there is more leverage for either a comparable return.

And actually last spring it got even worse than that, which is why we sort of pulled back from the market is people were actually taking more risk and a lower return because they were simultaneously increasing the financing risk a lot in their deals by taking these eight, 10 times leverage while be willing to accept a lower equity return.

We did not want to make the compromises on either front, so we didn't take all the leverage offers I think in any instance and we also didn't lower our equity return here.

But we did pay the price by actually being the losing bidder in 90% of the things that we went to look at, but we wanted to stay disciplined.

In this environment, it is the other way around.

Leverage ratios are lower, so risk is lower.

But the sellers that we are dealing with are already proposing and accepting lower prices and our returns that are penciled in on our models are higher with lower financial risk.

Okay, great.

That's helpful.

And then thinking about the kind of backlog of kind of unrealized value you guys have -- and I'm actually looking at a table on page 14 of your earnings release where you kind of have the unrealized value in the Corporate Private Equity business along with the cost, as well as the same thing for the Real Estate side -- if we just kind of do some simple math and say with $16.5 billion of unrealized value and just under $13 billion of cost, that is about a 1.3 times at multiple, when you guys have seen of multiples historically kind of much higher than that.

Are we thinking about that the right way, that there is a lot of conservatism that seems to be baked into how you are valuing some of these things today?

Not quite, Michael.

In Private Equity, for example, don't forget that BCP V, the average investment has been out about a year.

The fund is sort of two years old and so, you know, we had a lot of investment rate.

As you know, we are about 70%, a little more maybe, invested in that fund, but the average investment has only been out of year.

So there is not a lot of reason -- there has not been a lot of events or changes since we bought the company that would justify mark-ups, particularly.

To the extent we have had realization events or they are public stocks that we mark to market or whatnot, actually unrealized deals out of that fund were already up over two to one even though, once again, the average holding period is only about a year.

But most of the rest of them are still held at cost is what you're seeing there.

Okay.

That's helpful.

And then you partially answered one of my questions and you guys kind of said last quarter that BCP V was just about 70% invested and I think the Real Estate private equity fund was going to be a 40% invested.

Is it possible to kind of get an update on where you stand today?

Well, let's see.

Real Estate hasn't changed much because they didn't make much in the new commitments other than Hilton, which was already in that number because that was invested and committed.

And Private Equity has not gotten into the sort of three quarters to 80% range.

Okay, great.

And then maybe switching over little more to the Financial Advisory, M&A business, I know you talked about kind of a healthy backlog, but is it possible to get a little more color on how your backlog looks today versus, say, maybe the beginning of the year and maybe if you can talk a little bit about where you think we are in the M&A cycle and kind of outlook for that business?

And then I guess also as part of that, just any outlook on the restructuring side of your business and you guys noted you had a good quarter at Park Hill this quarter, so just wondering about how we should think about the outlook for that business, as well.

Okay.

Well, the speculation was when the leverage of markets had the trouble that financial buyers would pull back somewhat, but corporations would still be able to do a lot of M&A volume.

That is not actually what we are seeing, although, obviously, you look at the BHP/Rio Tinto you see some huge, huge deals out there, but generally speaking, most corporations are pretty cautious.

I think Boards have gotten concerned about liquidity.

They want to keep their balance sheet strong.

They are concerned about where the economy is going and they have pulled in their horns on the acquisitions side just like financial buyers have and this is more true -- this is particularly true in the U.S., so US M&A business in general has softened.

Our backlog is down there, but the revenues are holding up because of the stuff in the pipeline.

The restructuring business is sort of the opposite.

That business is on a tear and it is backlog revenues and everything are up substantially and reflecting not only the companies -- well, reflecting three things, A, in some cases, particularly housing-related or auto-related, just softer earnings, softer results.

B, for the last couple of years, even troubled companies could finance out of the trouble, so to speak, and buy themselves a couple more years.

You can't do that anymore, so if you are a troubled company and you run out of money, you are not getting it anywhere.

So you need to sort of hire a restructuring advisor.

And then the third thing is they have done got an interesting business around -- or two interesting little new parts of their business.

One is advising hedge funds and investment vehicles that get troubled in this market.

That has been an interesting source of business for them and they also have some domain expertise in VEBA trusts and things like that, which is getting a lot of look and they're having a lot of conversations around that.

So those factors have driven the restructuring business up nicely.

And then Park Hill, they're basically, while they are growing capacity and adding to their team, they are at capacity in both real estate and on the corporate side.

And the hedge fund business continues to ramp up.

Okay, great.

And then just last question on the dividend.

You guys have earned I think now around $1.20 of adjusted cash flow from operations the first nine months, so you guys are still targeting around 100% payout of this dividend over time and now that you have kind of earned 100% of what you have kind of committed to pay out on an annual rate, I mean, at what point should we start thinking about for next year maybe revisiting the dividend level?

Michael, as you know, it is really more of a distribution than a traditional dividend, so the way you should think about it is essentially mimicking your cash estimate, but we have put a floor at $1.20 on an annualized basis.

So likely what you will see is that we declare $0.30 a unit in the first three quarters and then we have a true up in the fourth quarter.

And I don't think we are going to be changing that $0.30 level through the end of '09 when we basically promised people it would be the floor that they would receive it.

Okay, fair enough.

But again, I think you should think about it more just the way it is intended, which is the distribution of earnings rather than a typical corporate dividend.

But we do remain committed to payout essentially 100%

Yes.

Okay, thanks.

Matt Fischer, Deutsche Bank.

Good morning.

Are there any differences in the holding periods and multiples level of invested capital in the smaller emerging-market deals that you were discussing a little bit earlier?

Well, that's an interesting question, Matt.

Of course they're early days.

I would say that the multiples in invested capital that we are targeting are substantially higher because our -- because we use a dynamic risk and return equation in terms of thinking about investments and the combination of some of them are located in emerging markets, where you have a sort of a sovereign risk or currency risk element that you don't in sort of a homegrown, U.S.-leveraged buyout.

In addition, any company that's premised on growth, you are making more of a bet on the future than on the present and so anytime you are betting on the future, you know, it is our perception that you need to be paid a risk premium for that on some measure.

So we are thinking that we will have, in general, in each of these deals we go into is targeted to give a substantially higher multiple of our money than the traditional, mainstream U.S.

buyout.

So if your normal kind of benchmark is a 20% IRR, we are talking about 30%, what are we talking about?

I think that varies.

It varies by the investment and by the country and by the story and other things.

Truthfully, it is not -- I am not ducking, but it would to you a disservice to think we are just using one number.

Right.

Okay.

And then also the split between -- you know, you said 50-50 split U.S./non-US.

This is assuming that I guess some of these larger deals are going to take a little bit of a while to get back into the pipeline or to start doing some of these big leveraged deals again.

But looking forward, what is a reasonable split in terms of U.S.

and non-U.S., I guess, specifically?

That was -- the question was -- you know, that was sort of the question and I suppose maybe we are talking timeframe, but one thing I want to say is these are necessarily small deals.

We just committed $600 million to Bluestar Group in China in one equity investment, one of our Indian investments is over 300 that is pending approval.

And then I think there was a deal last week announced, [Newpharm], which is another very large equity check.

So they don't have to be small just because they are based outside the United States and I want to be clear about that.

And we are looking at a number of other very large deals outside of the U.S.

and Western Europe right now that would have equity checks well above our average.

And I wanted to mention the 500 million average check just to indicate that our fund has always been a full spectrum of sizes, so I don't think it has to -- we are not a one-trick pony, if you will, focused only on megadeals and nor are we dependent on those to put money out.

But in terms of -- so that's just color.

I actually don't know what percentage of our capital go into U.S.

versus non-U.S.

because one thing we have to do is be flexible to go where there is the right risk return and opportunities and not be locked into that.

There were times when Europe versus the U.S.

was, you know, where Europe was a small fraction of the U.S.

and then there were a couple of years where Europe was bigger than the U.S.

And right now, we have got more going on in Western Europe than we do in the United States and more going on in Asia than we do in the United States, but I don't know that that is a sustainable state of affairs.

But nor would I want to predict exactly where it will shake out.

The power of being a global business is the ability to put your resources where the opportunities are and not be constrained into individual markets.

Okay, thanks.

And then I guess lastly the distressed opportunities, we are reading about a lot of hedge funds and different pools of assets that are waiting to start taking advantage of some of the distressed opportunities that are out there.

So does this have an impact on returns and when do you expect -- when can we expect some of these investments?

I guess you said we are near a bottom, but generally speaking, when do these sort of payoff?

What kind of time period are we looking at from you make an investment tomorrow until you start to realize some benefit?

If we were making an investment in either distressed corporate securities or hung bridges or residential mortgages today, we expect the payoff will be very fast and we will be getting right out of the box very high yield, so that is part of the payoff.

And don't forget a lot of those securities will be sort of yield-driven, not capital-gain-driven and we will start accruing that right away, basically.

Great.

Thank you.

Okay.

Thank you very much everyone.

I appreciate your attention and time.

Joan, anything?

No, that's it.

Thanks, everyone.

Ladies and gentlemen, thank you for your participation in today's call.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.