Blackstone Inc (BX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the full year and fourth quarter 2007 Blackstone Group earnings conference call. My name is Tanya, and I'll be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Joan Solotar, Senior Managing Director. Please proceed.

Thank you, Tanya. Good morning, everybody, and welcome to Blackstone's full year and fourth quarter 2007 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO, Tony James, President and Chief Operating Officer, and Mike Puglisi, Chief Financial Officer. Earlier this morning we issued a press release announcing full year and fourth quarter 2007 results which is available on our website www.blackstone.com. We'll be released our 10K report tomorrow March 11th. On this call Steve Schwarzman will talk about the current environment, and highlight the year. Mike Puglisi will comment on the full year and fourth quarter 2007 financial results, and Tony James will take you through what is happening in the business segments and talk about earnings sensitivity.

Before we review the year-end -- the quarter and the year, and take your questions, I'd like to remind you that today's call may include forward-looking statements which are based on current expectations and assumptions and are, by their nature, inherently uncertain and outside the firm's control. Actual results may differ materially from these forward-looking statements due to many factors. And please see our risk factors sections of the IPO perspective, which is accessible on the SEC's website at www.sec.gov. We do not undertake any duty to update any forward-looking statements, and for reconciliations of the nonGAAP financial measures that we'll talk about during this call, with the most directly comparable GAAP measurements, you should refer to the press release that we issued this morning. This audiocast is copyrighted material of The Blackstone Group and may not be duplicated, reproduced or rebroadcast without consent.

Turning to the press release, hopefully you've had time to review it. We've added some new disclosures this quarter throughout including segment information on pages 11 through 13 in the hopes that it will give you greater clarity on eight quarters beginning with the first in 2006. So importantly these tables are nonGAAP, they are ENI, which means they exclude the noncash charges associated with the IPO in the second, third, and fourth quarters of 2007 and their pro forma for the periods before the IPO. Our goal is to provide you with as close to an apples-to-apples comparison as we could. We reported $1.62 ENI per unit for the full year 2007, that's up from $1.27 in 2006. We reported $0.08 per unit in the fourth quarter 2007, that compares with $0.72 in the '06 fourth quarter. As I look through the analyst models, the single biggest driver of any difference between our reported numbers and those estimates was the carried interest income, also terms performance fees which is just driven off of changes in the carry value of our underlying portfolios. Performance revenues will likely be the lumpiest and the most challenging to project.

And as we stated in our prior call, in the current environment, one should not expect much in the way of increases to the carrying value of the underlying portfolios and we could have some decreases. In addition to ENI many analysts and investors track cash results, pro forma, adjusted cash flow from operations for the year was up 38% to roughly $1.5 billion. If you divide that by the number of units used in this calculation, which was 1.09 billion, you derive a per unit number of $1.40 versus $1.01 in 2006. For the fourth quarter 2007, adjusted cash flow was $245 million and using that same 1.09 billion share count, you derive $0.22 per unit and that compares with $0.26 in the comparable 2006 period. So I will now turn it over to Steve to provide his thoughts on the environment and our business.

Good morning. As we had articulated on an earlier call, we believe the market's credit woes would worsen. On this front we were unfortunately proven correct. Clearly, we are in the midst of a severe financial crisis that has rolled from sub prime loans to CDOs, to panicked selling of even investment-grade assets.

Last week was Fannie Mae and Freddie Mac securities, week before it was Mooneys, week before that [CMBF]. [Average] loan markets were hit even before the others I've mentioned. And they took another leg down when the fed lowered interest rates again. So relatively recently this has been primarily a United States issue and to some degree Europe, mostly in the debt markets. Now stock markets have been impacted across the U.S., Europe and Asia. The unwinding of credit has forced funds to dump assets and we're also seeing banks dump assets or just stop lending at all. We think this environment creates enormous future opportunities for firms like ours to buy assets cheaper and it is a set of circumstances we have experienced before, in 1987, in 1991, '92 and in 2002. It is uncomfortable while in the midst of a credit crisis, and assets are repricing lower as investors flee. It was during these disruptive periods when we typically make our best performing investments. I expect this cycle frankly to be no different in terms of the opportunities it brings and the others. How long will it last? I am not certain, no one knows the answer. Generally this kind of severe unwinding and panic, anxiety and heightened overreaction doesn't tend to last very long. It then takes time for credit to be restored and we see that the fed is working particularly hard at that.

At times like this, I'd like to highlight several points before we go into our results which were terrific, although we had a weaker fourth quarter of course. First, we always have been and will continue to be a conservative firm, designed so that we can withstand any kind of shock. As you can see, at year-end we had virtually no debt at BX, other than some employee loans, although we took on a small amount of debt at year-end to purchase GSO. We are the best capitalized and most diverse alternative asset firm in the world. We have no leverage in our distressed hedge fund. And we have only modest leverage in our long short hedge fund and we run very little in the way of net long positions. Our private equity and real estate portfolios are basically in very good shape. We switched our investment philosophy a year and a half to two years ago to avoid buying cyclicals and we sold our existing cyclicals as much as possible. And we bought instead, defensive companies, such as consumer staples, food, health care. We do not have financing for our companies coming due for years. We began preparing for softer operations beginning nine months ago.

We have changed 12 of our CEOs out of our 53 companies, choosing where necessary, professionals, who can execute operational change in the difficult environment. One of the great things about the private equity and real estate businesses is that investors commit capital through the life of the fund. So there is no conceivable run on the bank. And we are never forced to sell any assets at the wrong time. We'd buy companies with the intent of holding them for an average of five years. And we anticipate their value will rise through the economic cycle, although not every year in an economic cycle. Importantly none of our portfolio companies face any meaningful refinancing needs. Therefore choppy capital markets don't adversely affect existing capital structures. Many have covenant light or no covenants at all, which will allow us greater flexibility in addressing significant issues if they should arise or ride out different parts of the cycle. Perhaps as importantly for you and us, let us not forget that Blackstone, historically, has been one of the best investment managers in the world, with track records that place us at the top levels across virtually every asset class in which we operate.

Investors may be throwing securities, including BX with its $1.20 cash distribution policy out the door in a panic. But we are contrary investors. We do the opposite. When a year ends with as much disruption as 2007, and conditions worse thereafter, it's easy to forget that 2007 was a year of major milestones for Blackstone. Number one, it went panic -- we went public in June 22. The fifth biggest IPO in U.S. history. We grew assets under management by approximately 50% to record levels of $102 billion. With our best year in revenues and economic net income, $3.1 billion of revenues and $1.8 billion of economic net income. We invests $14.5 billion of limited partners and our own money in all time highs. We had record earnings in real estate, marketable alternatives, and our advisory business. Management and monitoring fees rose 50% for the year, and reached and all time high. These fees are designed to more than cover our expenses, and as our assets grow, our management fees should grow.

And finally, our funds collectively have dramatically more invested at any time in our history which should mean to meaningfully greater profits in the future. Down cycles are not fun. But they form the basis for enormous future profitability at Blackstone. Our interests are certainly aligned with you. Rest assured my personal efforts and the efforts of all of us at Blackstone are focused on enhancing value for all of us. Now I'd like to turn this over to Mike Puglisi to run through the fourth quarter and full year results.

Thank you, Steve. Good morning. I will take you through some of our financial results for the full year and the fourth quarter of 2007. We finished 2007 with record results across several metrics, but in many ways it was a tale of two halves, particularly in private equity and real estate. In the first half of 2007, we had an operating environment back drop of robust global markets and ample liquidity leading to high transaction fees and carried interest revenues. These highly favorable conditions evaporated in the second half as evidence by the lower carrying values and transaction fees in our revenues. As we begin 2008, difficult conditions remain. This will change, but we do not know when.

The GAAP results, as outlined in our press release, include the noncash compensation charges related to our IPO transaction and those will continue at meaningful levels for five plus years. Our pro forma adjusted financial results for calendar 2007 assumed that the IPO took place at the beginning of 2006. It excludes the noncash charges and accounts for [SMD] compensation as an expense whereas prior to the IPO we accounted for these costs as a partnership distribution. For calendar year 2007, we achieved a 24% growth in revenues, at $3.1 billion as compared to $2.5 billion in 2006. Three of our four segments drove that increase for real estate, marketable alternative asset management and our financial advisory segments, while private equity revenues declined 18% mostly related to less appreciation and the value of underlying investment portfolio.

For the fourth quarter 2007, revenues declined sharply to $367 million from $1.2 billion in 2006, mostly related to the decrease in performance fees and carried interest revenues of approximately $800 million. As you are aware, generally 20% of the marks to the portfolio flow through to our income statement as carried interest revenues or when negative as an offset to carried interest. Our economic net income after taxes for 2007 totaled $1.8 billion or $1.62 per unit as compared to $1.4 billion or $1.27 per unit in 2006. Our ENI after taxes for the fourth quarter 2007 totaled $88 million or $0.08 per unit as compared to $808 million or $0.72 per unit for the prior year. While our tax rates for the full year were approximately 15% in '07 and '06 for the fourth quarters of 2007 and 2006, our effective tax rates were 31% and 10% respectively. The higher effective tax rate for the fourth quarter of 2007 is attributable to carried interest unrealized losses. Basically the income that flows up to the partnership levels that are subject to corporate level taxes are our management and transaction fee revenues and in this fourth quarter, those items accounted for more than 100% of total revenues due to negative performance [fees]. We saw good asset growth in 2007 with assets under management reaches $102.4 billion at year-end, a 47% increase from $69.5 billion the prior year.

Let's run through the segment financials. With respect to our private corporate equity segment, it reported a decline in revenues of 18% largely driven by a decrease in revenues which we classify as performance fees and allocations. While we had 16% appreciation for the year, it was less than the appreciation in 2006. Our fourth -- in our fourth quarter, in private equity, it was disappointing with negative revenues of $15 million, down from revenues of $534 million in the fourth quarter of 2006. The biggest driver of the negative quarterly results was the write down in the value of FGIC guarantor. As we indicated previously on our conference call announcing the GSO transaction to substantial disruption in the markets in which FGIC operates coupled with rating agencies down grades as caused the value of companies such as FGIC to drop precipitously. Lower transaction fees also pressured revenues, but to a lesser degree than did the lower carrying value of the underlying investment portfolios.

For the year in our corporate private equity segment, we deployed [LP] capital totaling $6.3 billion as compared with $7.5 billion in 2006. Industry-wide capital deployment was down a bit in the second half of 2007, though for Blackstone it was up. More specifically, we deployed $4.7 billion in the second half of 2007 which includes our investment in Hilton. We were quite pleased with the results in our real estate segment this year. It reported record revenues for the year of $1.3 billion up 48% from 2006. We had strength across the board with growth in transaction and base management fees, as well as an increase in fund value. We raised roughly $10 billion for Blackstone real estate partners [Six] which commenced in February of 2007 and lifted our average fee earning assets quite substantially. LP capital deployed in real estate in 2007 totaled $8.2 billion up from $3.1 billion in the prior year.

During the fourth quarter, our real estate segment reported a decline of revenues to $113 million from $461 million in the 2006 fourth quarter. Most of the decline was due to lower carried interest fees from fewer mark ups and some mark downs on the carrying value of the underlying portfolio which offset an increase in base management and transaction fees. With respect to our MAAM or marketable alternative assets management segments, which houses or hedge funds and single manager fund businesses, we reported record 2007 revenues of $628 million an increase of 97% over 2006 levels. Management fees, performance fees and investment income all rose for the year. Particularly notable was the increase in management fees driven by a 61% increase in B-earnings assets under management. A bright spot in the fourth quarter, MAAM revenues rose 36% to $178 million reflecting an increase in management fees and investment income.

Financial advisory, which includes M&A, restructuring and reorganization and our fund placement with private equity firms reported 2007 revenues of $368 million in 2007 an increase of 41% from 2006. We achieved year-over-year increases in our restructuring and reorganization advisory business and [Park Hill] fund placement businesses. However, M&A revenues dropped off in the second half and were lower for the year. Our financial services segment reported fourth quarter revenues of $91 million a 7% increase compared with 2006 fourth quarter with increases in restructuring partially offset by lower M&A fees. Our compensation ratios in the fourth quarter were 42% and 22% respectively for 2007 versus 2006. As we reported previously, we anticipate that the compensation ratios will move to the 45% to 50% range and that is still the case. We have declared a quarterly dividend of $0.30 per unit for holders of record at of March 31st, 2008, which will be paid on Friday, April 11th, 2008. With that I'd like to turn the call over to Tony James.

Okay, thanks, Mike. Alright. I'm going to talk a little about what's happening in each segment to the extent that Steve or Mike hasn't hit on it. Walk you through that, and then I want to talk a little bit about sort of the earnings drivers and the ranges that investors might expect. I know it's hard to understand new types of businesses like ours. And this is specially true in volatile business conditions. We'd like to provide as much help as possible to get people comfortable with how our results will move. But first, the segments, within private equity, our largest segment, the lack of credit is meant there are few large LBOs. Those are big complicated transactions that also happen to have the highest deal fees associated with them. The less activity here means lower transaction fees.

Having said that, we're still funding a lot of new investments that are very interesting. I think Steve mentioned since the meltdown -- nine new commitments that were not in the pipeline at that time for a total of $2.8 billion. Current transactions in the pipeline include a variety of different kinds of investments that do not depend on leverage. The include minority investments in companies for various reasons, just like your typical LBO can't get capital, so too, smaller companies needing growth capital have a harder time financing today. So we're talking to a number of companies that have given them the growth capital they need to continue to expand.

Secondly, number of our -- a number of companies are looking at the stock prices of their competitors and seeing real bargains and view this as a historic opportunity to maybe consolidate the industry and they're coming to us to for capital. And finally, a number of companies whose stocks are beaten down, are feeling vulnerable and feel they need to do something with the shareholders and talking about various kinds of recapitalizations. So we're in a number of discussions like that also. We have been extremely active in Asia, and lots going on there, those markets tend to -- those economies are still doing well. There's still even leverage in those markets. As you know, we're awaiting approval for a special company in China called BlueStar. We committed $515 million. We've also recently closed on one of the leading infrastructure companies in India called [Ovacargo]. Another theme that we're working on now is portfolio company acquisitions. Many times these companies have existing credit lines and significant synergies around which to make acquisitions and drive equity returns. An example of a transaction like this is the acquisition of Performance Food Group, a public company by our portfolio company is [this star].

And then finally, we are very interested in purchasing high quality debt securities at discounts driven not by the performance of the underlying companies, but by market indigestion. Often we're able to do that on leverage, being offered by the seller of those securities, most particularly financial institutions. So we're looking at a lot of transactions like that. Many times these are companies we know very well that we have done due diligence on, even if we weren't the high bidder. In some instances, we're providing capital to portfolio companies to buy in bonds at very attractive rates which drives up equity returns while simultaneously lowering the capital structure risk associated with those portfolio companies. The activity level of new investments very high, we're currently running at a rate of $4 billion to $5 billion a year in private equity. Historically, investments made in this part of the cycle have been the best vintage years and as Steve mentioned, you go back to 90 -- 1990, 91, 1987, 2001, 2002, and that's been true. The on -- in terms of realizations, the lack of leverage in a soft economy, the weak equity markets combined to make this a less than ideal time to sell assets if you don't have to, we're fortunate we don't have to, but the flipside of that from investors standpoint is that gains from carried interests in the underlying funds will be modest until financial institutions -- sorry, until market conditions stabilize.

Having said that, the portfolio's performing well, as Steve mentioned. Last year it appreciated 16% overall which is not bad in any market environment. We have a defensive portfolio, again, Steve touched on that. Concentration in noncyclical industries and regions that are poised for strong growth even in a recession. And our report comes out strong flexible capital structures without looming debt maturity. Out of 50 significant portfolio companies, only three of ours are not either on or ahead of plan. Two of those three will be fine long-term, have good positive momentum at this point. The one exception is FGIC which has been touched on already. A deal with did in 2003 and is in our, one of our older funds, BCP4. FGIC is a monoline insurance, been caught in the same down draft associated with sub prime and structured debt securities like the rest of the industry and of course it has gotten plenty of press. In FGIC we have written it down to a few cents on the dollar, which cost us $120 million in revenues in the fourth quarter, or in terms of earnings impact, $0.09 per unit in the quarter.

Even including that write down though, BCP4 is a fantastic fund which is returning, including that write down, a net IRR of about 50% per year for the life of the fund to its investors. Overall the competitive position of private equity business has never been stronger, we're looking forward to an investment environment where we sow the seeds from wonderful future gains. The picture in real estate is similar to that in private equity. The availability of leverage for large Real Estate deals is also restricted, especially large multiasset deals, public to private, which have been a hallmark of Blackstone real estate over the past couple years. As with private equity, this will mean lower pace of investment and reduced transaction fees. In addition, rising capitalization rates will also pressure values. And we'll likely reduce our disposition activity and the performance fees from a -- portfolio appreciation will probably be lower this year.

Last year our real estate investments appreciated in value an average of 35% for the year. So it'll be hard to top that this year. We're very happy with our real estate portfolio overall and it's performing extremely well. We had one small investment exposed to residential housing, but its less than 1/2% of the overall portfolio and we have almost no development projects which require financing and leases. We generally have top quality assets that were purchased well below replacement costs and are doing well. Our office buildings are in the best markets in the United States with low vacancies and limited new supply coming to the market. Replacement costs are escalating rapidly and are basically prohibitive in terms of building new buildings. In addition, the in place rents that we're receiving from existing leases are generally below prevailing market levels in these markets. And so our rents continue to rise as leases rollover. Our hotel assets are running ahead of budget and continue to experience attractive revenue per average room growth, or RevPAR, as it's called in the industry, in the mid single digits.

New investment activity in Real Estate is focused on international markets were credit is available. Most particularly Asia where we've opened three new offices in the last year. Japan, India and China. We're also spending a lot of time in the U.S. on deals where owners of assets are overlevered or having a hard time rolling over their financing. With respect to our marketable alternative asset segment, called MAAM, as you've heard, we had a very strong performance for both the year and the fourth quarter. AUM appreciated -- increased at an annual rate of 55% for the year and 42% for the fourth quarter. The biggest business, which is our BAM fund -- hedge fund subsidiary, great performance for 2007 ending up 12% overall for the year with very low volatility and very little market correlation. All of our propriety hedge funds were up for the year and several new hedge funds are in the market right now as we speak. Our mezzanine and corporate debt businesses had strong performances in 2007 and are continuing to grow in 2008. We've completed one new CLO already this year and have others in the pipeline, which is only possible for the top tier managers in the space at this point. Return from the corporate debt market are particularly attractive now. So we've raised a new $1.4 million debt fund to take advantage of credit market dislocation. With leverage, this fund gives us billions of dollars of buying power at an ideal time.

Perhaps most significant, we closed on the acquisition of GSO this week. GSO is a credit opportunity manager with about $10 billion of assets under management. We have known the GSO managers for a long time and think they are fantastic. They were the top of the heap that we invest in through our fund to funds. We are folding our own credit businesses into GSO under their leadership and together it gives us a $22 billion credit business perfectly poised to take advantage of the incredible opportunities in today's credit markets.

Our final segment is our advisory segment that and that has had a very good year, and has very strong back logs and we are anticipating an excellent 2008. M&A, which softened a little in the U.S. in the second half has rebounded with noteworthy assignments such as representing Microsoft and Yahoo and robust growth of European business. Restructuring and reorganizations business is booming as the economy turns down and corporations access to capital drives up. The main problem we have there is lack of capacity. Park Hill group, our fund placement business continues its rapid growth phase with many fantastic new assignments for 2008 and strongest backlog they've ever had. Overall we feel very good about the way our businesses are positioned for this environment. We have strong downside protective portfolios and continue to gather assets with nine new funds in the marketplace as we speak. There are terrific investment opportunities in private equity and real estate and in credit and we are well poised to capitalize on them all. Back logs in our advisory business are up across the board and all of our businesses are in their strongest competitive position ever.

Now shifting to help understand the drivers of our business a little, we did a couple of things this, this quarter. First of all, we provided a lot more data on pages 11 to 13 of the press release, where we've given segment P&Ls by quarter for each of the last eight quarters. In this period we've seen the best of times and worst of times. So it's a very interesting microcosm of what can happen in a short period of time and you can see it business by business. The only exception is there hasn't been much in the way of normal mid cycle conditions. We've gotten the head and the tail of the dog, but we don't have the body in between, I'm afraid. Nonetheless, it'll give you a much better feel for how our business can vary by quarter.

I'm going to talk verbally about another way to think about the drivers of our business. And this is this by type of earnings as opposed to by lines of business. We have five sources of earnings, and different -- which have different drivers and moves somewhat differently. Those are fund management fees, transaction fees, the regular performance fees from our marketable securities, investment returns on our own capital and then the carried interest on private equity and real estate. As I mentioned these move somewhat differently with different times in response to different cycles, although there's obviously some correlation amongst them.

I'm going to talk a little about what to expect from each source of revenues, in a sort of more normal kind of environment, and I'll be focusing on ENI, not distributable cash flow. Distributable cash flow is a function of liquidations of investments and the distributions of gains in the form of dividends to investors. As you know, we guaranteed the $1.20 dividend through '09, and it's unlikely that it will, so that's pretty well set. So I'm going to focus my comments on ENI, our economic net income, per unit. The first source of earnings is our fund management and monitoring fees. These are -- we received these pursuant to long-term contracts, so they're very steady. With our current mix of funds, we -- these should be expected to generate something like $0.40 per unit of ENI on an annual basis, and it's pretty even, because of the steadiness on a quarterly basis is about $0.10 a quarter.

The second component is transaction fees. These are deal fees associated with closing new deals in the advisory business and the acquisition fees from making new investments in private equity and real estate. These are lumpy and can be quite variable, especially quarter-to-quarter and are driven by new deal activity levels. While variable, though, we have a number of different deals and the mix of businesses we have has something of a smoothing effect, especially over the course of a full year. Given our current business mix, these transaction revenues should deliver about $0.10 to $0.15 per year in ENI or $0.02 to $0.05 per quarter.

The third source of earnings is performance fees from our public market vehicles, most particularly our hedge funds in the MAAM segment. These are a function of overall market conditions, but most tend to be -- but most of our funds tend to be quite hedged or focused on areas other than U.S. stock and bond markets, particularly our largest business, BAM, which is extremely low volatility and a beta close to zero. So while variable, there's not necessarily a high correlation with these performance fees to broad market averages. This source of earnings should generally fall in the $0.10 to $0.30 a share of ENI per year and anywhere from zero to $0.10 per quarter.

Fourth source of earnings is the return on the firms own capital, about $3 billion. The bulk of this is invested side-by-side with our funds which assure strong alignment of interest with our LPs. As a result, it's quite diversified reflecting the returns on the full spectrum of products that we offer. This dampens period to period volatility. Generally this source of profits can be expected to contribute ENI per share in the range of $0.05 to $0.20 annually and zero to $0.10 per quarter.

Our final source of profits is the carried interest on our real estate and private equity funds. This is our largest and most volatile source of earnings. It's driven by the mark-to-markets of our underlying investments, but will also inevitably be affected by our harvesting activity, where we are selling a lot of investments and distributing those proceeds to shareholders. Because these carries entitled us to 20% of the profits earned by LPs, we can't actually net lose money on them over the full life cycle of a given investment.

On the other hand, we can have write downs in a given period such as we had with FGIC in 2004 -- I'm sorry, in fourth quarter of 2007, to the extent these investments have been written up in prior periods. As a result major moves in the markets can have a material effect on the underlying asset values and by extension a magnified effect on our carry, since it's just a portion of the embedded gain in an investment, not the whole investment. This can lead to considerable variability of mark ups and mark downs from period to period, despite the fact that over the life of the investment the carry can never be less than zero. We have $31 billion of net asset value of LPs from invested capital in our carry fund. Now these are generally not hedgable positions, because many of them are either [illiquid], or not public or are unique assets. Over the long haul, we have delivered very attractive returns and reasonably consistent returns by funds in both private equity where our long-term IRR is -- gross IRR is 30% a year since inception in 1987 and in real estate it's 38% gross IRR since inception in the early '90s.

But in a given year, our mark to market on our carry can be anywhere from slightly negative, the low end to $1.50 of ENI per share at the high end. And quarterly variations can be more extreme ranging from negative something like $0.30 to a positive $0.50. To help you model this a little better, and it's somewhat artificial, but because the $30 billion of portfolio investments we have in our carry funds are spread across many different asset classes, a lot of individual companies or properties, a variety of different industries and regions of the world, but if we were to have a 10% across the board, broad change in the portfolio, up or down, you can expect that to engender something like a $0.50 swing in ENI in the period in which it happens. So if you add all this up, what that says is depending on where you are in the ranges, then in a sort of normal kind of year, our ENI per share could be anywhere from about $0.60 to about $2.50.

I give you these numbers to help you understand the company as it is now configured. But I must warn you, these are just indicative levels and they'll change over time, and will vary at the function, mix of businesses, our AUM as we gather more AUM, our harvesting of carry and distributing cash to shareholders, the carrying value of our investments in relation to cost and other factors. Also market extremes or unusual events, to large portfolio companies can clearly drive outcomes outside these ranges. Nevertheless, I thought it would be helpful for you to understand Blackstone, where we earn our money, what it's affected by, and how it would be expected to vary today. With that, I'll turn it back to Joan.

Well thank you for your time. and now we're happy to open the line up for questions. Tanya?

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Guy Moszkowski with Merrill Lynch. Please proceed.

Good morning. You commented on conditions in the commercial real estate market which was helpful in terms of how you characterize the performance of your portfolio properties, but maybe you can give us a sense for how what we're seeing unfolding there in the financing markets is impacting your ability to transact new business in that market both the plus side and the down side.

Guy, it's Steve. I think those markets are, for larger transactions, as Tony mentioned, it's pretty much dead at the moment. The system is locked up. And you can buy individual properties and finance those, but the bigger the deal gets, the more it -- the system just won't do anything with it.

It sounds like the lack of finance hasn't extended yet to valuations of properties in the commercial property market yet, so you're not really seeing a pick-up in opportunity to do less leverage deals, is that fair?

Yes. think you're right on that. For example, [Harry Maclow] has got the GM building for sale as a result of his need to be selling assets, and all of the intelligence that we get -- and from reading the press and talking to people in the industry is that the value for that property will be over $3 billion, pretty close to a record in terms of the value per square foot. GM isn't a normal building because of its location, right on the Park and so forth here in New York, but that gives you some idea that, the values haven't moved a heck of a lot, because one, there's nobody buying and selling, particularly with any regularity, but a lot of these markets remain in extremely good health in terms of the cash flows, commercially, of those buildings. And one of the things coming into this cycle, compared to others in commercial real estate is that building has been very, very low.

And unless people are going to be moving out of a lot of these buildings, which did happen in Orange County, as one of the few places in the country where that happened as a result of the sub prime mortgage services being centralized there, in a diversified kind of good urban economy, where we own properties, we don't expect the fundamentals to dramatically change.

Hey, Guy, let me add a little color to that. We have actually raised the cap rates in terms of valuing all of our portfolio. So the 35% increase that I gave you was not withstanding higher cap rates, in other words, higher discount rates or lower values assumed, but what happened with the real estate properties that have a lot of leverage on them, that's artificially profiting up the values, if you will, because as long as the owner can service the leverage, it's not likely the new buyer will be able to replace that leverage and necessarily get to the same value the current owner puts on it if you will. So as Steve said, there's not a lot of transactions going on, because there's not a lot of leverage available, but we are assuming higher cap rates.

And as you assume those higher cap rates in the quarter, did that actually drive market to market on some of the properties? I just want to make sure I understand what actually went into your calculation of ENI.

Absolutely. Every increase in the cap rate lowers the assumed value we're using and lowers our carrying value.

Just to be clear on that as well, there's an offset if cash flows are going up. So although it definitely reduced the carrying value, all things being equal, I wouldn't want to suggest that everything was brought down, because certainly on a lot of the properties, the cash flow was brought up and that more than offset the higher cap rate carrying value.

Right, I understand. You tweak two different things in the cash flow model.

Correct.

Maybe if we can turn just for a minute to the financial advisory segment. I was wondering if you could give us a bit more granularity on the change in revenue mix and give us a sense for how much more relative to the prior year or to prior quarters in 2007 was on the restructuring side versus a decline on the M&A side, and also how much was an increase in the funds placement side?

Sure, I'm going to ask Mike Puglisi to answer that.

Yes. Guy, on the round numbers -- on the restructuring side, year-over-year, revenues were up about $15 million. On the --

Give percentage.

-- we've been around $15 million, so -- which would have been roughly 30% increase. On the M&A side, our revenues as I recall were down, they were down 12% year-over-year. That was basically, we were around $150 million we were down to around $130 million for 2007, and Park Hill, we were actually more than doubled our revenues. We went from $38 million up to $125 million in revenues.

And maybe you can give us a little bit of flavor for whether you are seeing nonU.S. buyers on the M&A side start to get more intrigued by collapse in U.S. valuations especially in dollar terms, or are you finding that currency isn't really entering into it that much?

Our European business is up a lot, but it's all European to European. It's generally not, I'd say, if anything the collapse of the dollar worries Europeans, because anything they buy over here could erode value quicker. And in general, our, our M&A business now, the back logs as I mentioned, turned up a lot. We're looking for a much, significant increase in 2008. But it's more from growth of the European business, which was -- which we started last year, than the overall market. The overall market, I would say, with a couple exceptions, obviously, Microsoft is a big exception and is driving all the M&A totals, but you take out a couple of lumpy deals and generally speaking it's our view that corporations are pulling in the horns. They're conservative, they're piling up cash, they're a little less expansionary and are making fewer acquisitions in general.

Thank you, appreciate it.

Our next question comes from the line of Roger Freeman with Lehman Brothers. Please proceed.

Hi. Good morning. Was wondering if you could talk about more in the commercial real estate business, your investing style over time. I think during the IPO you talked about how that business migrated from investing in either public companies to assets to loans. I guess given what I'm hearing about the environment, it looks like the loan side is probably where you see some of the biggest opportunities right now, is that a fair characterization?

I'd say that's probably a good conclusion. There'll be a number of things to do on the real estate side. People who are in trouble, basically those are people who need to refinance, is the issue. It's not the value of the properties, it's the lack of liquidity. And that can be solved either by putting in a very interesting layer of mezzanine or putting in equity. So it'll have two types of solutions.

And, Roger, we kind of -- the evolution was start off with a single asset, right, they then got priced to the moon in '06 and '07, so we turned to public entities, which are a collection of assets. You can buy a collection of assets at sort of a wholesale discount if you will, to what the individual retail value of the properties would be and then we attempted in that knowing that the market was near the peak to very quickly lay off the assets that we didn't want to hold longer term at retail to try to manage down the risk. Now I think if anything were back to a one-off asset kind of market.

With the exception being that some of the [reefs] around the world doesn't have to necessarily be in the United States of really starting to collapse in value, and that may also provide, over the next parts of the cycles, some interesting places to invest money.

Okay, that's helpful. And then I guess on the private equity side, can you maybe talk more about the deals you have, I think you said nine since the credit crunch began for $2.7 billion. The average deal size here is still fairly meaningful in terms of your equity. I think that works out to about $300 million. Is -- first of all, what percentage of this is outside the U.S.?

Okay. Of that, of that $2.7 billion about 1/3 is outside the U.S., and we're seeing plenty of deals in the -- plenty of opportunities to write equity checks up to $750 million a pop. The ones in the U.S. tend to average, or U.S. and Europe tend to average more. They're probably averaging between $500 million and $1 billion, and the ones in Asia, most particularly are tending to average a couple hundred million.

So how do you think about the return potential on these types of deals? Obviously these aren't leverage deals, like the public to private, but they are probably deals in sort of earlier stages of company's development. So there's almost like an implied leverage in there. I guess if you go back and look at prior low, bottom of the cycle periods like you talked about, did you do more of these minority investments, and what were multiples on invested capital like?

We think the returns and multiples on invested capital will be at least as attractive as what we've seen the last couple years. If we look at the last five years, there'll be comparable. If anything, we've raised our return requirements in the last six months. And at the same time I think we're actually doing lower-risk deals, because there's less leverage, there's lower prices, we're getting companies when the -- they lose operations and the operating environment is not at a peak. And we're able to do all that and often move up the capital structure a little bit, in the form of a preferred stock, convertible preferred stock or preferred stock with warrants, and still get equity returns comfortably into the [20%s].

Okay, and lastly I'll jump back in the queue. If you look across total opportunity set, across private equity real estate, distressed credit fund etc., where do you think the best values are, the best dislocations are, specifically around leverage loans, CMBS and parts of ABS?

I think the -- this is Steve -- each one of these presents some interesting opportunities and they'll develop at different rates in terms of opportunities. The real estate comes a little slower because, just their cycle is slower. Right now the opportunities in the senior bank debt and the junk area, leverage loans is very interesting and getting more interesting as the fed keeps lowering rates and these loans keep dropping in value. A lot of this stuff is senior debt. these are very good deals. It's trading at levels, going to start trading at stress debt levels. It's a distressed debt market, rather than distressed credits. And I think there'll be interesting things. Part of that's a function of how much leverage you can get from sellers, just going out and buying unleveraged securities like that, is a different kind of business. And so I think you'll look back on this stuff, the way it always happens and people say, well, geez, why didn't I do that? I was frozen, I was scared, I had a negative view of the world.

Roger, in terms of where the most biggest location is, it's clearly in the residential mortgage or structured products area. That's just -- those areas have been nuked. The problem is -- not pliable yet. It's not clear where defaults go, what the ultimate value of those securities are. It's very hard to analyze. And it's premised on a lot of assumptions. And given the fact that we're sort of in a new world, your old assumptions and your old models may not be all that predictive. So as Steve mentioned, we like the leverage loan area in some of the corporate debt, particularly with companies where we know them well, because we can assess value there and how it will all perform through the whole cycle. But the real true bargain, if you want to go bargain hunting, is probably somewhere else.

Yes. And in fact in that area, we have a major exposure in that by way of a potential investment through our BAM group that's funded initiative to buy those types of dislocated securities, and it's hard to put money out at this point, but when that market reaches the right point, then I think that could be a really, really, good upside opportunity.

And we've just hired another team from a hedge fund a large team of nine people. They are specialized in structured products and we're out also raising funds now to take advantage of this.

What tends to happen in this type of purchase is that you -- it's easy to be too early. It's harder to be patient. And historically as we looked at things like that, the biggest mistake is being too early, not too late.

Are firms giving you pretty much one-to-one financing on this -- on the loan? Sorry.

Roger, it's not just how much leverage get, although we like to think we'll get more than that. It's the terms of that leverage. And what's important to us is not having mark to market kinds of things that can blow up on you. We're confident we can make the credit judgement and underline the fundamentals. And if need be have our operating people go in there and help the company's perform. But we have no control over what happens outside in the market and how things are marked. And we don't want to lose control over our own destiny.

Okay. That's helpful. Thanks.

Our next question comes from the line of Prashant Bhatia with Citi. Please proceed.

Hi. Just I guess based on prior cycles, how long does it typically take for the lower prices to set in at the board room level on the private equity side for the seller?

There's always the war between buyers and sellers to lower prices and it, it would take probably, and we've all had different experiences and different parts of the corporate world, but as you go into a recession or economic slowness or credit crunches, you're good for -- it takes six months to nine months before people really stop fighting and start capitulating, and then it can take another year or so to really reflect fully what's going on. And those cycles can move a little bit on either end.

Prashant, I always think when a public board looks at their latest 12 month high or where the stock was within the last 12 months, and it's way above what they could sell the company for itself. If nothing falls out the window, it gets a lot easier. We're already seeing some movement on that and it'll, it depends a little on the pressure the sellers are under. Public boards often aren't under much, but owners of private companies, for whatever reason, there are other factors and their sellers, and then at some point you also get the balance between fear and greed changing. And if people get fearful enough, there's a desire to say, gee, I'd rather have my network in treasury bonds than ride this roller coaster. So we're seeing some of that as well.

Okay, that's helpful. And then in terms of sources of financing, do you think it could become more for reality to get financing from firms outside of the investment banking arena, whether it be wealth funds or other areas? Is that something that you think you might end up tapping into over the next year or two?

I think that's less likely. The financing mechanism developed by the bank, banking system, investment banks is quite efficient, and the extent that there's money available, the job of those firms is to hunt it down and charge a little bit of a fee on it and give it to those who need it, and those firms will be even more aggressive in terms of looking as they have less for themselves of their own money to put up. So they've got an army of people out there sourcing for any individual , private equity firm or real estate firm, finding financing away from that organized system is always possible, but it's more a one-off type of a thing. For example, if you're looking at buying a business, or part of a business, and you happen to have either one of the big pension funds or one of the big sovereign funds as a partner in that operation, could you ask them and might they provide some other types of security, other than just the security that you're using down in the equity to help purchase the business? Yes, that could happen if it meets their needs, but I think one has to be really cautious about getting too far ahead on this type of

The other thing is sovereign wealth funds are leery about plunging into the United States right now because of the--

Protection is --

-- political and social back lash that seems to be building. So they're quite nervous about all that.

Okay, okay. And then just on the leverage lending side, just a view on when you think that can finally clear? I know the fed isn't helping the cause in that marketplace, at least, do you have just kind of an update on where we stand?

I think that's really too hard to know. The system's really locked up right now. Whoever you ask always asked what somebody else thinks because they don't have a view. And I think the leverage lending dilemma is really not about leverage lending. It's really about the whole lock-up of the credit markets of which leverage lending is one piece, and by far not the biggest. It's an okay-size piece, but it's not dominant in terms of the thinking by the people who are running the financial institutions. And if that portfolio could move out and they knew where the rest of their losses would aggregate, then I think you'd get sort of pretty nice movement, although slowly, back into that system. As other things are basically getting worse and worse for them, it's hard for them to focus on clearing out enough of that leverage loan book to start lending again. It's really deeply integrated into the overall problem and not a separate problem that is taking enormous focus.

Okay. Okay. And just one last question on the fund raises planned for the year. Can you just give an update there? I think you might have said there's nine new funds in the marketplace right now.

Yes. All different sorts. Yes.

Can you elaborate on --

Well, as you know, Prashant,these are pursuant to private placements. I can't get into any one individual fund without some -- without creating some legal issues, but I'll say they include private equity type and hedge -- public market type, i.e. hedge funds, more of them are obviously in the latter category. And we're -- I think we've given you guys a target for fund-raising in the past. We think we'll certainly meet our targets.

Okay, great, thank you.

Our next question comes from the line of Hojoon Lee with Morgan Stanley. Please proceed.

Thanks. Aside from FGIC, could you talk more about which factors such as the changes in market multiples or operating performance at the portfolio companies, where the main drivers of the performance fee reversals we saw in the corporate private equity segment?

Hojoon, it's almost all FGIC, first of all. I think that accounts for the vast bulk of it. As I mentioned, the performance fee operation, the portfolio company operations are doing fine. It's market multiples for the most part and -- but we do a multi-dimensional analysis when we're valuing our companies and -- but no matter what you do, you can't get away from market multiples, if it's not the comps today, it's what your exit assumptions are in five years. That's been the biggest factor of it. Some of our companies, maybe we've adjusted the projections down slightly, but they're still all performing very well in relation to our expectations.

Okay, great, thanks.

FAS 157 puts you through a very complex valuation approach when using a variety of other sort of metrics, discounted cash flows, as well as the types of things that Tony was mentioning.

And it won't surprise you to hear that the accountants are extremely vigilant on valuations today.

I'm sure they are, thanks. And just a follow-up, could you give us an update on how much dry powder the corporate and real estate funds have today and in terms of your pipeline of unfunded commitments, is that $2.7 billion across private equity in real estate?

No, that was, that was just private equity.

Okay.

Private equity, we have -- the current fund we have $5.7 billion uninvested. We usually terminate a fund when we have about 10% of it or in this case, $2 billion, left for follow-on investments, because we do do a lot of investing and things like that, companies that continue to need capital, and are attractive investments, so that will leave about $3.7 billion in private equity. In real estate, in BREP six we have about $6 billion and we're just about to close BREP International, which should have another call it $4.5 billion. So all in we'll have $10 billion to $11 billion in dry power and real estate.

And then just in terms of MAAM, could you talk about demand for the fund of hedge funds and organic flows at BAM in your proprietary hedge funds, perhaps in the context of where demand was last year?

I think just in a general sense, BAM has had a terrific run, and their results last year were great, and as you know, they're the largest institutional hedge fund and fund business in the world. And they're continuing to see very good levels of inflows, and their performance has been quite good in this very adverse environment. They have a lot of happy folks who are investors and people looking. So, I don't think we can give the exact numbers according to sort of the legal guidance we've got, but this is a very healthy business with very positive momentum.

The -- I think I mentioned the growth rate and asset under management in the MAAM segment in the fourth quarter was largely driven by BAM, and that continues today. The BAM investment approach is a port in a storm. So to have the kind of safety, lack of market correlation, lack of voluntarily that they offer and still deliver 12% returns last year across all their -- that's an average across many products, of course, but nonetheless, you can imagine that investors are pretty darn happy .

Thank you very much.

Our next question comes from the line of Roger Smith with FPK. Please proceed.

Yes. Thanks very much. I'm really just a little bit interested in trying to get your perspective on sort of where this credit cycle or turmoil in the market compares to prior cycles that you guys have lived through and invested with. And where might we be in terms of their fear and concern, and what sort of needs to then happen to get that balance between being patient and being too early, kind of more in line and to the point where you'd start to aggressively want to invest money?

This one's different, they're all the same, they're all different. This one is different in the sense that, that it's migrated in a much broader way, starting with sub prime and then going to leverage loans, and the idea that this actually has made it to investment grade and really impacted those markets is pretty unusual. I mean, usually you'd have something like '92, which would be primarily, sort of a real estate blow-up that backed into hitting the junk bond area. But this is quite different in the sense that they've got so many sectors involved and people who are affected are being affected. People around the world buying AAA credits who find themselves completely locked up, sort of shocks them and so that adds another dimension to the thing. So this is interesting also because you haven't really had sort of recessions going on. Usually these kinds of onsets have impressions sometimes leading you. Sometimes it causes it, but here we've had the capital markets creating this kind of, of a problem.

So I think this one will take a while, and when you get this kind of panic selling and in response to the the very large amounts of leverage that have basically infiltrated the system, which is somewhat unprecedented compared to other crunches where you had leverage in an area that got hit. But here this whole category of areas that are overleveraged and have to unwound, and that unwinding hurts confidence as you can see in all the financials and ultimately gets into the system. Until that leverage is rung out of the economy, the game goes on. And it keeps migrating to different places. And so that -- I don't know what inning we're in, whether it be a baseball game, whether we're in the fourth inning of it, or the fifth inning, but when you get these kinds of frenzies where people are throwing government supported securities out the door, and spreads gap to very large, unique sort of spreads, you know that that won't continue for a long time. Just won't. And so we're seeing somewhat of a peak of it, whether that peak lasts for sort of another month or two, I don't think you can stay at this kind of level for a year of destruction, of value, and destruction of confidence. And when things get beaten down to certain levels others come out of the wood work and start buying again. And so, I -- no one's smart enough to know exactly when, it's just accelerating in here at such a degree that you just can't straight line this, it just won't keep going and going and going like that, and intensifying.

Let me answer it another way. I don't think we'd load the boat and get aggressive until we really felt things had bottomed out. And there's no evidence right now that it's bottomed out yet. And we don't like to guess, we're not just shooting from the hip here. We like something susceptible to analysis in terms of have we hit bottom. What are the forces that stopped the value erosion. That sort of stuff. And until we can get our hands analytically around those things and prove to ourself if you will that we're at least narrow bottomed, and even, maybe even there's positive trends a little bit starting to show, the shoots of the new plants, then I think we'd be cautious.

One example of what Tony's saying is, there's pretty good sized recession in 1982, it was actually pretty scary if you remember living through that. And there were those who wanted to buy real estate in Houston in 1982, and 10 years later, they basically wouldn't have made much money, because there was no evidence that real estate in Houston was actually going up, it was sort of pancaked out it's energy. It hit a peak and went down. It's important when you decide to take a position, there is reason to believe that you're in good shape for an upward ride.

Okay, great. And I think you guys mentioned that you raised a credit fund. I didn't get the total amount there, but have you started to deploy that money? Is it starting to be invested?

It's $1.4 billion is the new one that we just raised. Although we have lots of different credit funds in Blackstone as you know.

Right.

We just raised a new one specifically to take advantage of this dislocation in big lumpy chunks. And we have -- our position has been that we closed it in the fourth quarter, we had a lot of tempting and offers of things, but we've always felt like things would continue to get worse and we'd see better values. So far we haven't invested any of it. I think so far that's been the right judgment. The temptation is growing however. We feel like sometimes in the next 90 days might be the right time to do something significant.

Great, thanks very much. I appreciate all the answers.

Our final question comes from the line of Matthew Fischer with Deutsche Bank.

Hi. Good afternoon. Just a couple follow-ups. First, can you remind me what your target corporate private equities fund is for the new fund, and kind of how far along are you in raising capital?

Matt, I'd like to do that, but that's getting, that's getting on David's ground to our preserving a private consumption.

Okay, and I guess equity then. When you look back at some of the other cycles '87, '91, '92 or --

Matt, by the way, I'll say our last one was $21.7 billion, so we don't like to shrink as a business.

What we've said in aggregate is a target across funds over the next year of $15 million to $20 billion.

Okay. Okay. And you have begun to raise capital for that fund?

Kevin commented on specific funds. We've just said we're out on various funds in private equity and hedge funds in other areas.

Okay, thanks. And when you look back at prior cycles, I mean, given where we are, where you think we are in this cycle, what are typically the duration on investments made during this period? So kind of how long until you start to -- whether it's distressed assets or on the corporate PE side?

What happens depends how you hit the recession. If you're buying at the bottom of a recession, it takes a year to turn, you'd like to own those assets ideally for three, four, five, six years, because you get an enormous whip coming off of the bottom of an economy. And what also happens is the amount of leverage that you get is very little when you're buying the investment initially and keeps going up. Every year you get away from the bottom of a recession and confidence returns. So time is your friend. And you can ride that investment up for as long as you think that, that up leg of the economic cycle is going to happen and , that, that tends to be sort of at least three, four years, sometimes makes it out to sort of six, seven years. And so just function of what kind of company you own as to how long you want to take the risk that you've overstayed your welcome and fallen into the next economic down

Okay. And then I guess just last question. In terms of evidence that things are near bottom or at bottom, is it just a matter of some large pools of assets coming to market which we start to see last week, or what other things do you sort of -- are you looking at to try to identify that?

I think we look at a lot of things. We look at whatever there is to look at. And it's never the same. We certainly look at -- we look at the overall economy, we look at what's happened to order rates and pricing for our 50 portfolio companies, what happens to their bookings and their customers. We have certain leading indicators that we like to look at that we can see through the eyes of our companies. We track those. We would look at and try to assess the attitude of the banks and lending community towards the advancing of new credit and the willingness to take risks and that sort of thing, and it would all go into the mix. And there's -- and what we, what we try to do is be smart and creative about finding information that's insightful and analyzing it, and then synthesizing it into a conclusion. That's what we do for a living. And if we do that well, we're superior investors and if we don't, we're not. So that's what we do.

Yes. Fortunately for us, we have so many different , flows of intelligence that come from all of these companies that we own all over the world, all the real estate and where that's located, all over the world. The hedge funds that we have and those we invest in, but we know what also is going on through a variety of sources. And any one of these firms like ourselves is a question of how many capital can you manufacturer and how much can you capture? Every large firm knows a lot of stuff, but does it ever find its way to anybody who can make a decision, who sees the whole picture. And that's one of the advantages that we think we have at our size is that we've been able to do that historically. We view that as an asset of the firm and we think we ought to be able to do that in the future as

Okay, thank you very much.

This concludes all the time that we have for questions. I would now like to turn the call back over to Joan Solotar for closing.

Thank you, and thanks, everyone, for your attention. If you have follow-up calls, just please call me directly. Thanks.

This concludes this presentation, you may now disconnect, and have a great day.