Blackstone Inc (BX) 2008 Q1 法說會逐字稿

Welcome to the Blackstone Group first quarter 2008 earnings call. Our speakers today are Stephen A. Schwarzman, Chairman and Chief Executive Officer, Tony James, President and Chief Operating Officer, Michael Puglisi, Chief Financial Officer, and Joan Solotar, Senior Managing Director, Public Markets. Now I would like to turn the call over to Joan Solotar, Senior Managing Director, Public Markets.

Thank you. Good morning, welcome to our first quarter, 2008 conference call.

I am joined today by Steve Schwarzman, Chairman and CEO, Tony James, President and Chief Operating Officer, and Mike Puglisi, our CFO. Earlier this morning we issued a press release announcing our first quarter 2008 results. That's now available on our website. And we will be releasing our 10-Q report later this afternoon. On the call, Steve Schwarzman will talk about the current environment, Mike Puglisi will comment on the first quarter 2008 financial results and Tony James will take you through what's happening in the business segments.

Before we review the quarter 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 of the firm's control. Actual results may differ materially from these forward-looking statements due to many factors, including those described in the risk factors section of our 10-K report, which is accessible on the SECs website. We do not undertake any duty to update forward-looking statements. For reconciliation of the non-GAAP financial measures which we will refer refer to during this call to the most directly comparable measures calculated in accordance with GAAP, you should refer to the press release we issued this morning, which as I mentioned is available on our website.

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

So to get to the quarter, we reported ENI, economic net income per unit, for the first quarter 2008 of a loss of $0.06. That compares with earnings of $0.08 in the fourth quarter of 2007, and $0.75 in the year-ago quarter. Changes in our performance fees are driven by changes in the fair value of our underlying real estate and private equity investments, as well as our marketable alternative investments; therefore, performance fees or carried interest income may be positive or negative in any one quarter.

For those of you who also study our peers, I just wanted to make one note of distinction. Some of our peers' revenue recognition policy doesn't recognize up or down movements in performance fees until the end of the [fund's] life. As you know, there are two acceptable methods under GAAP. We actually recognize it every quarter. Pro forma adjusted cash flow from operations for the quarter 2008 was a loss of $4.4 million. If you divide that by the 1.1 billion shares, you derive a per unit number, it actually rounds down to zero but we are using negative one. This compares with positive adjusted cash flow of $293 million or $0.27 per unit a year ago. While cash results don't reflect the unrealized gains and losses for private equity and real estate investments, they actually do reflect changes in carrying value for liquid securities. So therefore in the current quarter, the cash results that we reported were hurt by the carrying value of Blackstone's investments in our MAAM products, that's the funded hedge funds and the proprietary hedge funds.

Several of you recently attended our Understanding Blackstone's Financial Statements seminar. Some of you dialed into that as well. But if you've missed it or you want to see a replay, we've just posted that on the website along with the slides and the audio. As always, feel free to call me with follow-up questions after the call.

I'll now turn it over to Steve to provide his thoughts on the environment and our business. Steve?

Good morning and thanks, Joan.

All of us are living through one of the worse financial crises since the Great Depression. First quarter market trends, as you know, accelerated on the down side globally in the first quarter across both equities and fixed income. The S&P index was down about 10%, the European index was around 9.2 and the Pacific index declined 10.3. Fixed income markets and credit extension of course were the areas most damaged, with the dramatic deterioration of the cost and availability of debt, as well as widespread systemic illiquidity. Blackstone has navigated through several down cycles, and in the period soon after the down cycles and market disruptions in 1990/92, 1998/99, 2001/2002, we made our very best investments. This cycle we anticipate will be no different.

In difficult markets, judgment and investment experience matters. It will distinguish the top quartile investors like Blackstone from the rest of the pack. While we hold our investments long-term, we are required by accounting rule FAS 157 to carry them at fair value and report the impact of the change in value on our carried interest or performance fees and investment income. This is what you see in the first quarter. So changes in value will occur up and down in various quarters, and this quarter unfortunately down; our core franchise is stronger than ever.

Since the quarter end, however, markets have stabilized, and we have even seen signs of recovery and improvement. For example, banks that have been holding close to $400 billion of leveraged loans now are down to $140 billion, and most of that amount is tied to a few large transactions which are pending. So that's just Clear Channel, [Cell] Canada and [Tech] National. Another example of improvement is that within the commercial mortgage backed markets, Single A ten-years have gapped out to 1100 basis points at the end of the first quarter from 410 basis points at year end. But since then, spreads have come in 200 basis points to 900. Equity indexes, as you know, have slowly regained some of their losses, and about half of them around the world since the first quarter.

Does this mean we are through the financial crisis? We don't think we are completely through it, but we are seeing signs of improvement. We recently held our annual meeting for approximately 400 limited partners, and reviewed our strategy in this market and introduced them to some of the CEOs of our portfolio companies, and this is in the private equity area. We see tremendous opportunities across several markets. We see real operational improvement and plans across our portfolio, both of which we believe will create significant value for investors.

So what are we doing in the current environment? For Blackstone, despite lower carrying values the first quarter was a fortuitous quarter in several respects. First, we closed the GSO acquisition. GSO, as you may recall, operates cross several debt businesses, and it can [vest] anywhere in the capital structure, giving it flexibility. We are in the process of integrating GSO on to our platform, and are incredibly excited about the opportunities we see in the credit space. We continue to grow assets. Total assets under management were $113.5 billion, up from $83.1 billion a year ago, which is up 37%, and base management fees in the quarter were up over 50% from last year. As you have likely read in the press, we've been involved in transactions in which we purchased bank loans and debt from banks. In all, we have invested approximately $6 billion in credit assets at attractive prices and with attractive financing. We have Blackstone employees from almost every business involved in evaluating these investments. We were able to assemble the team quickly and focus on the names we knew well and have a depth of knowledge. With a terrific effort of collaboration, we placed these investments in several pockets across the firm.

We are a conservative firm with a conservative capitalization. We have over $4 billion of equity and only $450 million in debt, far lower leverage than virtually all financial institutions. As I mentioned last quarter, we are never forced to sell an asset at the wrong time. Our investors are committed to the life of the private equity and real estate funds, and our hedge fund investors have long lockups. We buy companies and properties with the intent of holding them for an average of five years, and we anticipate that their value will rise throughout an economic cycle, and they have historically. We are confident that our current portfolio will yield good returns.

Our franchise is strong. We believe that we will continue to gain momentum globally. But this is a challenging environment, as you know, and as such our reported earnings in the coming quarters are likely to the reflect little in the way of the large transaction fees and increases in [carrying] value of the portfolio. Additionally, we run our firm and our portfolio companies conservatively. Our portfolio companies do not face any meaningful refinancing needs.

We cannot control markets, but we can take an operational approach to our holding. We create our own value through our portfolio management group, which we expanded considerably this year. We will effect change where we can, driving higher EBITDA growth, which will ultimately create greater value. In the face of an adverse climate, we will use this opportunity to leverage our relative strength and build out our businesses geographically; create new products; and hire people from firms that have been destabilized, where topnotch professionals who previously were unavailable are seeking a new home in a stable and growing company. You will see evidence of that build out in the coming quarters.

Now I'd like to turn this over to Mike Puglisi, our Chief Financial Officer, to run through the first quarter results.

Thank you, Steve, and good morning all.

I will take you through BX's financial results for the first quarter of 2008 as compared to the first quarter of 2007. You will hear a few themes echoed throughout our reportable segments, which as you recall excludes the results of the Blackstone funds we are required to consolidate in our financial statements. First, that assets under management grew and drove our base management fees up. Second, that we had fewer markups and some reductions in fair value which caused our performance fee recognition to decline, and in fact turn negative. And third, access to credit was severely reduced in the industry, and therefore our transaction fees were considerably lower.

As you review our GAAP results as outlined in our press release, I would like you to take note of two important items. First, that transaction-related charges will continue to flow through at meaningful levels for approximately five years. In this past quarter, they were approximately $950 million, primarily non-cash related charges; and secondly, that changes in fair value of our fund investments will flow through the income statement. That's changes in carried interest/performance fees as well as investment income. Therefore, in this past quarter, when were we had a net reduction in value, we reported negative revenues in that line item which reduced the overall revenue line. Our pro forma adjusted financial results for calendar 2007, and therefore the first quarter of 2007, assumed that the IPO took place at the beginning of 2006, it excludes the transaction-related charges including the non-cash charges we referred to a moment ago, and account for S&D compensation as an expense, whereas prior to the IPO we accounted for it as a partnership distribution.

In the first quarter of 2008, each of our four business segments experienced a decline in revenues. For Q1 '08, our private equity revenues totaled a negative $116.7 million, as compared to $208.9 million positive in Q1 '07. Our real estate revenues declined by 94%. Our Marketable Alternative Asset Management segment revenues, or MAAM segment, declined by 81%, and our financial advisory revenue segment declined by 25%. We saw good asset growth in Asset Management now totaling $113.5 billion, a 37% increase from last year. We continue to gather assets across several of our businesses, including a number of new funds launched or being raised. The greatest driver of change in the private equity and real estate segments related to the decreases in performance fees/[carried] interest revenues. As mentioned previously, changes in fair value in the portfolio flow through to our income statement as carried interest income or, when negative, as an offset to carried interest/performance fees. Additionally, transaction fees were lower this year, as we have not had large leveraged transaction set-ups in private equity and real estate, whilst last year's first quarter included a substantial transaction fee [to] our EOP transaction.

Within MAAM, first quarter 2008 decreases in the net carrying value of fund level investments, as well as negative returns on our own investments in those funds, pressured both performance fees and the investment income line. Our ENI after taxes for the first quarter 2008 totaled a loss of $66.5 million, or a negative $0.06 per unit, as compared to $838.5 million or $0.75 per unit in the prior year's first quarter. As Joe mentioned earlier, our adjusted cash flow from operations for the first quarter was basically break even, with a loss of less than $0.01 per unit, while changes in fair value on our private equity and real estate holdings are non-cash unrealized losses on our liquid investments are treated as realized for cash purposes. Adjusted cash flow in last year's first quarter totaled approximately $0.27 per unit.

Our taxes for the quarter were actually a tax benefit given the losses noted above. We would still, however, generally guide investors to think about our tax rate in the range of 10 to 25% based on a revenue mix, though it could be lower or higher in any one quarter. Last year for this quarter, our tax rate was 15%. As you look to at our compensation expense, we would suggest you exclude investment income from the revenue lines, as it generally does not factor into this calculation. Our compensation ratio, compensation expense to revenues excluding investment income, was approximately 44% for the first quarter of 2008 versus 22% for Q1 of 2007, and close to the guided range of 45 to 50%.

Let's now run through our business segments. With respect to our corporate and private equity segment, it reported first quarter 2008 negative revenues of $116.7 million, as compared to revenues of $208.9 million for the first quarter of 2007. The swing to a negative was driven by the reduction in fair value as per FAS 157, which led to performance fees and allocations and investment income and other of a negative $163.4 million and a negative $23.1 million, respectively. Deutsche Telekom was a large part of that change, as Tony will discuss in a few moments. One nuance relating to the [reversal] of performance fees on Deutsche Telekom and other investments is the claw back obligation from certain partners who previously received carried interest allocations. This provided some offset to the reported compensation expense, and is the reason that we have a negative $80.8 million of compensation expense in this segment.

Management fees increased to $69.8 million from $59.8 million year-over-year, driven by higher base management fees off of an 8% growth in fee earnings assets under management. The 5% decline you see in the period in assets under management relates to $4.8 billion of realizations, partially offset by $2.4 billion in additional capital raised. Other operating expenses increased to $22.2 million, up from $8.8 million last year, but they were roughly in line, and in fact down slightly, from the run rate of the third and fourth quarters of 2007. Limited partner capital invested was $340 million for the three months ended March 31, 2008, up five-fold from the $57 million invested in last year's first quarter. Our real estate revenues totaled $47.9 million for the three months ended March 31, 2008, compared to - with $766.8 million from last year. That is quite a change, and relates to two main factors. First, a large reduction in transaction fees, as last year's first quarter included the EOP fee and, two, lack of portfolio appreciation or realization this year versus Q1 of 2007. Concurrent with the EOP transaction, we had [pulled] off a large dollar amount of assets of significant gain in last year's first quarter, whereas this year our carrying value declined by 1% in this segment.

Specifically transaction fees declined to $11.8 million from $209.5 million a year ago, and performance fees and allocations totaled a negative $30.1 million from a positive $457.4 million in Q1 of 2007. Our real estate assets grew 35% to $26.3 billion year-over-year, inclusive of capital raised for BREP VI, and $1.25 billion of co-investment. As a result, base management fees roses to $66.8 million from $37.5 million last year. Overall expenses were essentially cut in half to $51.8 million from $103.3 million last year, as loan compensation expense reflected lower revenues.

We have added headcount coincident with our expansion in Asia and the launching of new funds, which increases compensation, but as you know most of our compensation expense is revenue driven. Similar to the trend evidenced in private equity, other operating expenses increased to [$1.16.2 million] up from approximately [$1.00 at 5 million], largely in line with again the third and fourth quarter level. Included in operating expense is a occupancy cost for expanded real estate offices in Hong Kong and Tokyo. Limited partner capital invested was $369.2 million in Q1 of 2008, compared with $3.9 billion last year. Most of last year's first quarter investment related to equity office properties.

In our MAAM segment, revenues totaled $30 million for the three months ended March 31, 2008, down from $156.3 million in last year's first quarter. The greatest driver in the decline lies in the investment income line, which reflects the negative performance of our own investments in the MAAM funds. We are now including GSO in the MAAM segment, but it was included for just the period from March 3, the closing date of the transaction, to March 31 in this year's quarter. Assets under management in this segment rose to $56.6 billion from $31.4 billion last year, and we continue to see a good pipeline. The increase was primarily due to inflows into BAAM, our proprietary hedge fund and debt products, but also includes the addition of GSO funds, which contributed $11.5 billion.

Driven off of higher fee earnings assets, base management fees increased to $103.2 million from $61.1 million in last year's first quarter. Performance fees and allocations declined to $5.1 million from $68.1 million, based on performance in this quarter. Expenses totaled $74.6 million from - up from $68.3 million. Last quarter, compensation and benefits totaled $56.3 million, down from $59.4 million in Q1 of 2007. A combination of growth from new hires was offset by a reduction in lower performance fees that impacted compensation expense. As with our other businesses, as we've mentioned compensation expense continues to be heavily driven off of revenues. Other operating expenses increased to $18.3 million from $8.9 million last year, and consistent with where they were in the third and fourth quarters of 2007.

With respect to our financial advisory segment, which includes our corporate and M&A advisory business, our restructuring and reorganization business, as well as our Park Hill fundraising, reported revenues were $71.2 million for the three months ended March 31, 2008, a decrease from $94.2 million a year ago. Corporate and advisory revenues were down modestly $5 million, reflecting slower M&A activity particularly in the United States. In the quarter, though, backlogs look higher than at year end. Restructuring and reorganization advisory revenues rose meaningfully up threefold, as activity picked up, particularly in the Financial Services sector. Backlog remains strong in this business as well.

The decrease in the quarter came from our Park Hill business, and resulted from the comparison of having a large fee in last year's quarter. This business, like the rest of our other advisory businesses, is lumpy. That said, the pipeline for Park Hill looks strong and the business continues to perform well. Expenses totaled $58 million in Q1 '08, up modestly from $54.7 million in last year's quarter. Compensation expense was down slight to $47 million from $49.9 million, and other operating expenses rose to $11.1 million in line with the third and fourth quarter levels.

We have declared a quarterly dividend of $0.30 per unit to holders of record as of May 31, 2008, to be paid on June 13, 2008. And as of the end of the quarter, we had commitments of approximately $1 billion to Blackstone funds. We expect to continue to opportunistically use some of our capital to invest [alongside] our limited partners in our [performance sheet].

With that, I will turn the call over to Tony James.

All right. Thanks. A blizzard of numbers there, I hope you guys could follow that.

Good morning, and thanks everyone for joining the call. Last quarter I took you through the ranges of ENI and some of the components in varying markets by sort of type of earnings stream, and as I think you may remember, depending on market movements, we could have ENI in a given quarter anywhere from a negative $0.25 to a positive $0.80 in the quarter. As you've heard, this quarter fell towards the bottom of the range, reflecting the sharp drop in global markets, debt and equity around the world. This was - as Mike said, this was due at a combination of three factors. First, due to the vagaries of FAS 157, which forces us to mark companies and real estate assets in our funds to a theoretical value they might fetch in today's distressed environment; despite, by the way, strong operating results and despite our having no intention or obligation to sell. Second, transaction fees were limited while we avoided sort of the falling knife environment, and waited for things to bottom out before making substantial new investments. And, third, sharp declines across the board of local stock and bond markets during the quarter caused modest but universal declines in the hedge fund world, where our MAAM segment lives. This gave us some slight negative performance for the quarter and negative investment income.

That said, the [marks] belie the operating improvements we are making to our portfolio companies and real estate. None of this reflects what we believe will ultimately be realized values within the portfolios, which should be attractive and consistent with those in prior funds. Investors should, however, expect variability on a period-to-period basis. It is the nature of our business and is what we've outlined for you in prior calls. The results in any one quarter have little predictive value about the results of subsequent quarters. They are heavily driven just by movement during that particular period in the level of the market, or not actually the level it stays at but by the movements, and they bear little relation to strength or performance of our firm's business or long-term earnings power.

Currently, we expect to have better results for investors in future quarters. This is eased by the fact that our performance fees can never go net negative for a fund. We can only mark down performance fees that have previously been marked up. We can't actually have a loss in this item over time. We've begun to see a greater number of investment - attractive opportunities in the last few weeks, as the markets have improved, and we really lately, as Steve said, talked about purchasing debt held by banks and leveraged acquisitions. We are most interested in loans from companies we know well, and have utilized the intellectual capital from around the firm to evaluate and select the best investments at the most attractive valuations.

Our outlook on the economy and on the markets remain cautious. We worry about commodities pricing and their impact on inflation in the U.S. We also, of course, worry about fundamental weakness in the economy. We think the current economic malaise could remain in place for several quarters.

Turning to the individual segments for awhile, private equity, we carry our portfolio investments at fair market value and changes in those values impact income by flowing through that carried interest [to] the revenue line. In the environment of the first quarter, we saw reductions in the carrying value, most particularly our equity investment in Deutsche Telekom, which accounted for essentially all of the reduction of carrying value for the entire portfolio. There are other improvements up and down in other names, but Deutsche Telekom was the only significant event. Telecom stocks during the quarter in general were down 20%, as was the German DAX index. Deutsche Telekom was down, along with those trends, accounting for negative ENI of about $0.05 a unit during the quarter. Deutsche Telekom's operating results, however, were solid and continue to perform well on its growth and efficiency initiatives, and is attractively valued today at less than five times EBITDA. We are pleased with the new management team and the new leadership at the supervisory Board level, and continue to believe that the investment will deliver attractive returns to our LPs.

Transaction fees and private equity remain modest. We decided it was wiser to sit on the sidelines and wait for lower prices. While we did invest $340 million in private equity during the quarter, that was primarily in existing portfolio companies to fund their growth initiatives or, in some cases, acquisitions. Since the credit crunch hit, we have invested $4.5 billion in new equity and in new transactions post-credit crunch, which is still a very attractive run rate of investment for our limited partners. This past quarter's investments, as I mentioned, included add-on investment portfolio companies and attractive investments in debt instruments, particularly those leveraged loans held by the banks. We are excited by these returns and we expect these will be excellent investments going forward.

Our group is extremely busy today with new transactions. The deal list is as long as it's been in several years. We are being shown an incredible number of opportunities globally. While credit availability is scarce in the U.S., particularly for transactions requiring debt of $2 billion or more, it is readily available in Asia and other parts of the world, although many of our investments we are making there are growth investments that do not depend on leverage to drive superior returns. We have a long list of transactions we are working on in the U.S. and Asia. About half are control-oriented, and half are minority investments. Asia investments tends to be more growth-oriented, while investments in the U.S. and Europe are more often industry consolidation plays, medium-size buyouts, formations of new entities to take advantage of industry sectors where incumbents are - have been wounded, and investments in attractively-priced debt. We don't plan to have meaningful realizations in this market, as we have no pressure to sell, and believe we will see a more favorable investment - environment to liquidate assets in the future.

I don't think I can overemphasize that our investors are committed for the life of the fund, so we don't have any liquidity or capital pressures or other pressures to sell assets. However, we did recently exit the balance of our Gerresheimer investment, which is a glass maker in Germany, realizing $383 million in proceeds, and over seven times our investors' money. We continue to feel good about the private equity portfolio, and the operational improvements that we are helping to execute within our companies. We began incorporating a recession in all of our planning in 2006, and our companies are well prepared operationally and financially to live through and grow through a recession. We have built out our portfolio management team to a total of 25 senior executives in the U.S., Europe and India. As I mentioned before, our private equity has become an operationally-driven business rather than a financially-driven one.

EBITDA growth and improvement that accounts for about two-thirds of all the gains we realized and delivered to our limited partners. And it is also this EBITDA improvement which drives a multiple expansion and accounts for most of the rest of the value that we create. We have an incredible team of operating executives working with our companies to deliver this value.

In real estate, markets moved in much the same way as in other fixed income markets, dropping sharply during the quarter and rebounding some since the beginning in April. Carrying values in real estate for the year were about flat, and more conservative cap rates were offset by high cash flows from the properties. In terms of transaction fees, a comparison to last year is tough because of the EOP transaction which we completed in the first quarter, as Mike mentioned, and we also had many asset sales during that quarter, no small number of them in connection with EOP. We are not looking to exit many of our real estate investments in this market, either. We own very high quality assets with growing cash flows, and can afford to be patient.

The performance of our office and hotel properties has been excellent, with cash flows continuing at levels above our initial projections. Vacancy levels in key office markets, New York, Boston, West LA and northern California, where most of our properties are located, are less than 10%, and there remains a positive gap between our current lease rate and the market rates on new leases, if they were coming up for renewal today. This implies significant embedded cash flow growth in our properties. Demand is stable and there is very limited new supply of buildings on the horizon. Replacement costs continue to escalate rapidly, and are generally well above the levels that can economically justify new building. Our hotel properties are likely benefiting from a weak dollar. Revenue per average room of our Hilton hotels, as an example, was up 8.5% in the first quarter. We are incredibly excited about the global growth opportunities we see in that particular company. That said, we expect a moderation in trends, but that has not occurred.

Like private equity, financing for large leveraged real estate transactions is very limited, but we are seeing attractive opportunities from distressed sellers with leverage already in place. We are increasingly finding appealing properties outside of the United States also, and we've grown our global capabilities in real estate to execute on those transactions. We now have new offices in Japan, in Hong Kong and in Mumbai in our real estate group. Activity in Europe continues strong, also.

Moving to the MAAM segment the Marketable Alternative Asset Management, for a moment, BAAM, our hedge fund fund-to-funds business continues to see favorable inflows, with assets under management up 6% for the quarter and 55%above where it was one year ago. Though not immune to market movements, BAAM is set up to preserve capital, which it largely did in the first quarter. It is a measure of the breadth and depth of the market correction that occurred during the quarter that BAAM, which is invested in 175 of the highest quality, best-performing hedge funds in the world, and combine in vehicles specifically structured to have low beta and low volatility, was still down 3.5% for the quarter. This decline accounted for about half of the reductions in performance fees and in the value of our own investments in this segment during the quarter. However, BAAM continued during the quarter to outperform the benchmarks and its peers, which is why the flow of assets - new assets continues to be so strong.

Our own proprietary hedge fund businesses experienced declines during the quarter, although they too generally outperformed their benchmarks. The biggest change in our proprietary hedge fund business in the first quarter, as Mike mentioned, was the closing of the GSO merger, which was perfectly timed to allow to us capitalize on today's historic opportunities in credit markets. We now have a $25 billion multifaceted debt business. We see a lot of opportunities, very exciting ones, across the credit markets, and we are already seeing the benefit - the synergistic benefit of having the GSO professionals on board. We have close to $3 billion in new credit liquidity funds, with leverage of three-to-one or four-to-one on that equity, for roughly $10 billion of buying power in new vehicles alone. We have really just begun to see investments that meet our return hurdles, and have have started investing in those post-quarter. As Steve mentioned, we bought $6 billion of debt in the quarter, and have committed already to another $1 billion, and have many other active conversations ongoing.

Last week we also announced the closing of three CLOs, collateralized loan obligations, totaling $1.3 billion. This means we have done four CLOs year-to-date, accounting for something like 25% of all the CLO capital raised globally this year. This is unheard of, and is a testament to the strength of our track record and the power of the brand name and a franchise. Our ability to secure financing for these CLOs in a market that has basically shut down in my view shows the growth potential of the debt business for Blackstone through GSO.

We are opportunistically adding to our own stable of single manager fund businesses. This week, we announced we had hired a portfolio manager from SAC Capital with a long and successful track record of equity invent - investing in Asia. He has assembled a team and will he up and running in the first quarter of 2009, operating out of Hong Kong. We have also put in place a new team of 16 people to build a structured debt business for us, with deep experience and expertise in residential mortgages and in mortgage servicing. And finally, we have a new team in commercial real estate focused on the usual credit and -equity opportunities available in that sector as we speak. Overall, we have four new operations in formation in MAAM's proprietary hedge fund business.

Moving to the advisory businesses for a moment, as - M&A saw, as Mike mentioned saw a decline along with a general market decline in closed M&A transactions, although their backlog is up significantly, driven primarily by our expansion into Europe and Asia. Restructuring had a nice growth year in revenues, more than tripling over last year, and it also has a robust backlog. Our restructuring business has been very active in the financial services industry of late, with what one thinks of as the more traditional restructuring efforts not yet emerging, primarily because there have not been much in the way of defaults yet. We expect those transactions to appear more in 2009 and 2010. The Park Hill group, which raises money for other fund company's, continued to grow the business. The quarter was good, but as Mike mentioned somewhat below last year's first quarter through the absence of one very, very large fee.

In summary, despite the loss for the quarter we feel quite good about our business and even better about our prospects. Competitively, we are in the strongest position ever. We believe that periods of market turmoil, when others are focused on internal issues of their own, is the best time to capitalize on new growth initiatives. It is a time when rare talent becomes available and when competitive forces are at their weakest. There are few other firms which can move as nimbly as we can from one market to the next, and invest across the entire capital structure and all markets geographically. We have the right team in place. We are disciplined, and we are excited about the upcoming investment opportunities which occur in every cycle like this.

We had prepared for this cycle in the choosing of our - starting in 2006, in the choosing of our investments heading into it and being disciplined about prices we were willing to pay in 2006 and 2007; in the operational focus we have applied to our portfolio companies and real estate assets; in the flexible capital structures that we put in place for all our leveraged investments; and in our mix of businesses and people. We have tremendous opportunities in today's market for both individual investments and new businesses. We've been through these cycles many times before and know that it is in these environments that you sew the seeds for the richest future gains and lay the foundation for future growth.

We thank you for your time and are happy to take any questions.

(OPERATOR INSTRUCTIONS)

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

Hi, in terms of the strategy of buying some of the leveraged loans from the investment banks, could you elaborate a little bit? Is that really debt on deals where you hold the equity so are you in essence doubling down? And I guess, second, where are you making those investments from, in the private equity funds or more the credit funds?

Okay, Prashant, it's Tony. Generally when we are talking about that, they are debt of companies that are not our portfolio companies. They are generally debt of companies we looked at when those companies were for sale recently, did intensive inside due diligence, know those companies intimately, but were - most often we were not the high bidder. I think there are two names where we have a little bit of debt in names where we are an equity holder. Generally speaking, if we have a portfolio company that wants to capitalize on repurchasing on - it's own debt, we do that through the portfolio company itself. It buys in its own debt. Sometimes you can't structure it that way if you have a name that's a part of an overall portfolio.

The effort that we've done to buy these debt instruments has been a joint effort between GSO and private equity. Private equity brings with it the inside knowledge of most of these companies as I just mention from having diligence, GSO brings with it the inside knowledge of most of these companies, as I just mentioned, from having diligence done. GSO brings in-depth market knowledge, tremendous feel for how securities will trade, given their structures, and things like that, once the credit crisis is past. They also bring fantastic relationships with the fixed income departments of the bank's that have a responsibility for these instruments, and great relationships there. Finally, they are very, very creative structures on the financing that is part of the acquisition. So it's been a really good merger of intellectual capital that allows - that positions us so well to do this, and the investments - just like the effort is split, the investments are split between private equity and between the GSO vehicles.

Okay. Great. And then on the 50 or so portfolio companies on the private equity side, can you just talk about where you're having an easier time making progress on executing on the business plan, and maybe where, if any, you're having some challenges, maybe by industry or company-specific or however you want to cut it apart?

Well, I've - in general, the companies are operating at or above our expectations, first of all. Interestingly, we do not see, when we look at our portfolio, any general softness in the portfolio. I mean I read about the soft economy; it certainly feels soft but it's quite spotty. There will be - the company will have a bad month and they will swing back to a great month. There's no consistent picture of weakness, I must say, which somewhat surprises us as we expected, anticipate a much weaker operating environment than is happening. The only - the only significant companies with operating problems are really the one we talked about last quarter, which is [FIGIC], you're well aware of that. The others are all in general pretty good shape; some better than others, but we are very comfortable and really like where we're are with our portfolio.

Just one final question. Is there any interest with GSO in the mix to maybe create some of these short-term work out type funds that we're hearing about? I think UBS is trying to create one with Black Rock. Do you have any interest in creating those types of funds?

Well, UBS and Black Rock are doing a - Black Rock is raising a fund, I guess, UBS is a has P-part equity part in it, to buy residential mortgages from UBS. And yes, we have an interest in doing that sort of thing in that sort of sector. Other kind of work out investments, where you actually go and by defaulted bonds as a way of getting control of companies, we've traditionally done that through private equity, and we continue to have a great appetite there and an unusual competitive advantage at that because of the strength of our restructuring advisory business. GSO also - under the GSO umbrella is our distressed debt fund, and the distressed debt fund in GSO's hedge fund also buy and trade in a lot distressed debt.

Okay. Great. Thank you.

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

Hi, good morning. I guess I was wondering if you could sort of help me think about the approach to marking the private equity portfolio? I think, Tony, you said that pretty much all of the negative performance fees were related to Deutsche Telekom, and for the rest of it was basically flat, but markets are down high single to double-digit percentages in the quarter. Is it really a function of I guess the industry concentrations, improvement in EBITDA, that you are applying lower EBITDA multiples [to] higher EBITDAs? How can you reconcile that to what we've seen in the broader markets?

I think, Roger, you know when we by a company it's premised on, and has been for several years, on lower exit multiples but a lot of operating improvement that we can bring together, and you see most of that operating improvement early on in a portfolio, early on in an acquisition. So we generally see growing and growing EBITDA. We've - many of our companies get a lot of working capital and other capital out of the business, and that's freed up some cash flow to basically pay down debt. So that works for us. And we also have baked in here some attractive capital structures, and those have value and sort of mitigate some of the equity multiple movements [that we see].

Okay. That's interesting. So I guess over time, and where we would be in sort of an extended period of market softness, you might see more of the impact of [marks to] market in the marks than you do right now, because you will have gotten through sort of the low-hanging fruit on the cost cutting operational improvement.

No, actually ironically that's not the case I don't think, because with most of our funds now we are getting to the point where there isn't much residual positive carrying value of the performance fee. So - and that gets to the point I made in my comments, that it can't really go negative, it can only be zero on net. We are getting to the point where at some point further marks - I mean our LPs are taking markdowns, but that's not reflected in our P&L through the performance fee, because were carrying the performance fee at zero, if you follow that.

And also, if I could add this, because we are using several inputs, including DCF, et cetera, with the market being one, we will generally have less movement in value up or down than any single or even an aggregate market index.

Right. I guess the way to think about the potential for further negative performance fees is looking at, I guess, the embedded gain in the portfolio, which looks to be something in the $2 billion range in private equity, is that the way to think about that?

That would be a way to think about it. I'm not signing off on the number without some more thought, though, and I don't have that.

Can you maybe talk to - sort of goes back to Prashant's question, what the improvements in your portfolio of companies are? Like maybe just an aggregate, year-over-year, like first quarter, what kind of improvements and what percentage improvement in EBITDA did you see across the portfolio?

Honestly, I don't have that number handy. We don't add up 50 companies and think that's a meaningful measure, and it's - how do you take something in Asia growing at 40% a year versus a turnaround company here? I just don't have a number handy.

Sure. Then just speaking of Asia, you said - so 50% of the deals you've done since the credit meltdown have been over there. As you look - I guess a two-part question, one is your sort of backlog, how does that split geographically? I imagine there's a lot in the U.S. that maybe isn't financeable right now, but then if what you think your doable backlog is over say the balance of the year, do you think that's still 50% to Asia?

When I talked about our deal - our backlog, nothing that's not doable is on there. It's all doable. We just don't lug around a bunch of ideas and consider it backlog. So I would say that Asia continues very strong. I would say it's probably about a third right now of the deals that are in the zone of doability near term. That doesn't mean they all get done, mind you, but they're certainly executable and reasonably close. The U.S. is most of the rest; it's Europe which is quietest right now for us, and in no small measure - there is activity in Europe and the financing markets are better in Europe but the prices are higher and we just don't think that the values have rallied enough yet to turn that around to be as interesting in Europe. In the U.S., the things we are looking at are all doable but a lot of them, as I mentioned, are either more modest-sized buyouts or are minority interest types, that sort of thing, to help companies - help companies accomplish their own strategic goals when their access to capital is just as limited as that in the [buyout] industry.

Okay. What were new commitments in the first quarter in private equity and real estate?

Let's see. I would say new commitments in the first quarter, private equity was about $343 million, and I don't know that real estate did much of anything, did it?

343 would have been the LP capital invested, and [then] for a little bit higher, a little over $1 billion.

All right, thank you, Joan. The actual closings were 300 - the new commitments on new deals was $1.4 billion.

Okay. And lastly, on the leverage loans, what do you expect the returns to be on those versus, say, on those same deals that you were looking at on the equity a year ago?

Hang on, Roger, that was just private equity. Real estate, new commitments was about $300,000 on top of that.

300,000, okay. All right. And just on the leveraged loans, what do you expect returns to be on those versus on some of those same companies that you were looking at as equity investments a year ago? Or as LVOs, from an equity standpoint?

A year ago we weren't finding returns to be attractive as we want - wanted, so I would say we were publishing the limits down into the teens. Now most of what we are looking at is in the 20s.

Okay. All right. Thanks.

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

Hello. Just a question on the middle market space, however would you like to define that. It seems that just hearing from other firms, activity levels are holding up better there. Could you comment about the competitive intensity in the space, and whether you plan on being more active there?

Sure. First thing you need to understand is while we have a megafund, we don't specialize in mega deals. About - less than a third of what we've done in the last seven or eight years has been mega deals, and we've always been an active player in the mid-market. We've also been an active player in diverse other - other diverse types of investing. We do startups out of our big buyout funds. We do Asian growth investments. We do turn arounds. We do distressed debt. We do an eclectic mixture of things, and we think that flexible mandate and skill sets do all those things well is what serves our LPs so well over the cycle, and allows us to not only sustain the investment pace but sustain the returns. And we've had very, very consistent returns over the years. We've never had a fun that didn't deliver at least 2.2 times investors' money. The average over 22 years is 2.6 times investors' money. So it's been a very consistent type band there, and that's partly because we can adapt our approach to investment opportunities to what the market gives you at a time.

In terms of the mid-market, generally speaking I think the prices are still way too high there. There's too much capital chasing relatively few opportunities there, and you are also buying companies which are inherently smaller and therefore are going to be more vulnerable when economic times get choppy in recessions, and in difficult economic times the industry leader always does better than the other participants in the industry, relatively speaking. And it's just like a battleship in a storm, you want to be on a big boat. So we are doing it, but it doesn't mean that that's a more attractive place to be putting money today.

Okay. Great.

And we are doing them very selectively.

And I had trouble following this a little earlier, if I recall I think your pipeline of committed capital was around $2.7 billion at year end. Could you give us an update again between private equity and real estate, where that stands today, or as of the end of the first quarter?

As of the end of the first quarter, this is Mike Puglisi speaking, the aggregate commitments into April were approximately $3.3 billion. Just to run through those in broad strokes, you had a little under $2 billion.

Are you talking about private equity?

I'm talking about private equity first. A little under $2 billion of outstanding commitments. And then we had in real estate it was probably another $100 million, but the big other chunk that arose was our commitment to these various credit market debt products that Tony had touched on earlier. That was $1.3 billion across all the Blackstone funds. Now a portion of that will be going into private equity, but again it's across all the Blackstone funds, including GSO.

Through March 31 includes ADS.

Right, which I am not including in my numbers, I've taken those out now, Joan.

Okay. Great. And for your private equity funds, is it about 20% that you can allocate to these type of debt investments? How should we think about capacity on that side?

Yeah, that's correct, although our LPs have been very - given us a very enthusiastic reception, given the risk in returns that we've walked them through, and I think if we found that that was a limiting factor, we could get that waived. Having said that, our existing funds is something like 75% invested already, and as you know we usually reserve about 10% for follow-on investments. So we certainly won't bump up against that limit in this fund.

Okay. And just a final question, I mean we have clearly seen - it seems like institutions are still interested in allocating their hedge funds and other alternative investments. But we certainly saw a slowdown in flows in the first quarter for the industry and some of the larger players. Could you just give us sense of the demands you are seeing in your fund of funds? It sounds like you guys have having positive flows, and just in terms of the complexion of the demand, foreign versus U.S. investors, and trends you are seeing in redemptions versus gross sales, if possible?

I tell you honestly we are still seeing a lot of interest in our funds.

This is Steve. The hedge fund of funds has got a lot of demand. One of the things that's different than almost all the other hedged fund of funds you would be normally covering is that we are really an exclusively institutional fund, and big institutions as you know make decisions sort of relatively carefully as part of a major asset allocation, and our performance through last year was extremely strong, and we are seeing interest from the Middle East, from the U.S. and from Asia and Europe, and so it's very much of a business as usual, whereas I think I would agree with you that in the regular individual hedge fund space, that that's been, from what we understand, industry-wide inflows really flowed down in the first quarter. So I think there's a major differentiation to be made.

In the first quarter, the hedge fund of funds of business's AUM was up 6%; that's not annualized, that's absolute. So - and you know, that would annualize it at 25 - 24% growth rate, even in the first quarter. So we don't see -- it looks very good to us.

That was with negative performance, you were up 6% in the first quarter?

Correct.

Great. Thank you very much.

Our next question comes from the line of Michael Hecht with Banc of America. Please proceed.

Hi, guys, good afternoon. Can you hear me okay?

Go ahead, Mike.

Sorry about that. I just wanted to try to get a broad sense of how much undeployed capital remains BCP V, your last real estate private equity fund, just trying to get a sense of kind of dry powder, and how close you are to launching your next rounds of funds?

BCP V is about 75% invested, and we sort of stop investing in that and start investing in the next one when it gets to be about 90% invested. In that sense, we have about 15% available of the $21 billion for new investments. Call that -- yeah, call that just between 3 and 3.5 for new investments. BREP VI, which is the latest BREP fund, which is $10.7 billion, is about 40% invested, just over 40% invested. So there we have about $6 billion of dry powder. Incidentally we are - we've had first closings on BREP Europe and so we have some dry powder in BREP Europe as well.

Okay. And then when we think about the 75% and your comment that the ADS deal I guess was in the figures at March 31 but not the more recent ones, that would be excluding that - would that be in the 75%?

No that's all adjusted, that's taking ADS out, and putting anything new in, and that's sort of where we are today.

Okay. And then again, going back to kind of ADS specifically, that's not in - if that was in the March 31st numbers, would we expect to see any kind of breakage fees in the second quarter from that specific transaction?

We don't think there are any breakage fees incoming.

Okay. That's fair enough. Then broadly, I know you guys gave some info on the hedge fund of funds flows; I'm just wondering if we - if it's possible to get a sense of what your overall flows and kind of the capital rates were for the quarter, and I guess what the trend's been the few quarters across the various different businesses? I'm trying to get a better sense across the platform how to strip out capital rates versus market impact in the AUM figures?

Well, you know, it's a - under private placement exemptions, I really can't talk about new funds that are in the market as we speak, so I'm limited to what we can do there. Steve, you want to...?

I think we've been the last year up from $83 billion to $113 billion of assets under management, which is up 37% in that period. That gives you some sense of what's going on with AUM growth.

He wants a breakdown between performance and flows.

Yes.

Why don't you deal with Joan on that offline?

That's fine. Just a couple of housekeeping questions, you guys gave the broad comp expense across the platform. Is there any guidance you can give us in terms of how to think about it by segment? It seems to kind of swing around a fair amounts, especially in the corporate private equity segment with the call backs you guys talked about, and then I guess broadly with head counts, can you just give a sense of where you ended the quarter, total heads versus end of year? You gave a lot of color on where you've been adding people, and I think Steve kind of mentioned the outlook for adding people remains good. Do you plan on continuing to invest in the same areas or just some sense of where you plan on adding people across the businesses?

As to comp, we're basically targeting as we had mentioned that 45% range, and you're right it does bounce around depending on which business you're in, but by - we're again trying to be somewhere in that 45 to 50% range. At the end of the day, I think they were a little higher in some quarters and then lower in other quarters as we've mentioned, it's all very much revenue-driven, our [progress] - arrangements and bonus pools with our different business units. With respect to headcount, we basically - we ended up the year basically around 1,200 people in the quarter.

In the quarter.

In the quarter, we are at 1,200 people. We've probably in this last -

That includes the GSO addition.

Which was 125 people, this GSO component.

As I mentioned in my comments, we have what I consider to be very exciting growth opportunities in every segment. And each segment is - our asset management segments are growing geographically, and they are creating new funds and new fund vehicles, and our advisory businesses are growing geographically and in new product areas. So we will continue to add high quality teams where we think there's attractive business opportunities, and there's a lot of them out there now. It's a great time to hire.

Okay. And then just the last question, in the MAAM segment, the - I guess the realization rate, if you just take kind of the base management fees over average AUM, and I understand there's some noise this quarter because of GSO, but it came down like 85 basis points or something like that versus closer to maybe 100 basis points at the end of the year. Will that continue to come down a little bit from the impact of GSO, or how should we think about the run rate there?

There is no erosion in our fee structures. I think it's really -- I'd have to unpack that for you. I don't think it would continue to come down, and I don't think GSO in general has lower fee structures.

Okay, so maybe it's just mix. Okay.

Mix or sort of - you know, GSO is only there for 30 days, and aberrations to the market and one thing or another playing through that.

Okay. Fair enough. Thank you.

Our next question comes from the line of Roger Smith with Fox-Pitt Kelton. Please proceed.

Thanks very much. In the current difficult market environment within the private equity segment, is there any change that you guys do in terms of managing the portfolio of companies? And I guess what I'm thinking about here is, as this kind of goes, the realizations because of the [optionals] you might be pushed out some, is there some way that you might sell off units or think about the business in a different way, and then really how does that change your view on the assumptions that LP investors can get with your multiple on the cash flow versus the IRR?

I think since we had anticipated going into a slowdown, we had already put the portfolio of companies on an alert, if you will, to sort of be prepared for this kind of slow down. So there's nothing radical that's being done as a result, and we are not taking a different approach of selling pieces, because normally when you have uncertain economic times that's not when you want to be selling something. It's really more of a time for these companies to be buying things, and expanding when prices are lower, and taking advantage of the synergies involved in that type of acquisition, and that's where we are putting money with the companies.

Let me also mention, in terms of exits, markets go up and down but strategic buyers tend to be much more steady in their pricing, and so we adapt our exit to the market that gives us the best value at a point in time. Maybe it's a recap. Maybe it's the sale to another buyout firm or another private equity firm, maybe it's a sale to another strategic buyer, maybe it's the sale on an IPO. Lots of different ways of getting liquid, and usually we have more than one choice.

Thanks very much.

By the way people on the call should realize the average - we do have a bunch of portfolio of companies that we've held, but we went there was a major liquidity wave the last two years on the old funds. So many of those companies are largely exited, and a lot of our portfolio is in the new fund and the average holding period of those investments is still just over a year. So it's still very early in the life of those - of the portfolio of companies. We have a young portfolio [underway], so we weren't expecting to be exiting much. We actually looked at the market environments in '06 as being a good time to exit, and really hit that hard and backed off buying new things. Now we look at it as a good time to buy and a less good time to exit. I think you guys would probably agree.

No doubt, that makes sense. Just on the financing markets, it sounds like - I mean, clearly we all know it's somewhat difficult there, but can you give any insights on how that's changing and maybe what alternative sources might be out there for funding to kind of get deals done? I know you talked about doing a bunch of CLOs this quarter. Is it possibly you guys end up financing your own deals through doing CLOs, or is there any kind of change in the market we could look for there that would particularly give you an advantage to getting back into the market and doing more deals than maybe some of your other competitors?

I think what tends to happen is that in a capital-short environment capital gets rationed, gets allocated, and one of the advantages for our firm is that last year we were one of the largest fee payers in the world to Wall Street. And when capital is available, typically it gets allocated to the firms that really pay the banks the most money and are the best customers. And that has always served us very well and that's a differentiating factor. Everyone is not equal in a credit crunch. And so we rely principally on those sources of capital that are more typical coming from the financial community. What also happens in this stage in the cycle is you typically get companies to take back paper to help finance transactions, which you should probably see at some point as that develops over the next year. We also have our GSO mezzanine funds, which could be useful, but if we are doing very large deals there's only so much that the mezzanine market would give you. But I think it's more of a typical market, where we do have a competitive advantage.

Often what we are doing, if you go to some of these -- it's a great time to be a mezzanine lender because, no there's no junk bond market, and there's a massive demand for that kind of capital, and so they are demanding what I consider to be a very, very high returns to the buyer of the mezzanine, but very costly financing to the issuer, to the company that needs it. So generally speaking when our private equity deals, we are over-equitizing those deals today, not pushing it into - not pushing the capital structures to what - even what the market will give us today, figuring that when the market reopens we will then be able to go recapitalize the balance sheet and get our companies a lower cost of capital.

Okay, great. Then just the last question on the debt purchases that you guys are out doing, I didn't hear, I think you mentioned something about the amount of leverage you are using at the fund level. Was that 4-to-1 that you are using there? And then there was an article out this morning that talked about purchases of this debt potentially giving back some of the upside to sellers. Is that something that's really happening in the marketplace, and how does that kind of work?

First of all, this is - debt provided by the sellers is not at the fund level, it's at the investment level, just like a leveraged buyout would be, if you will. So we are not leveraging up the fund, I just want to make that clear. With respect to the term, each yield, we are in four or five discussions, we've done trades with several different parties, and each one is structured somewhat differently. Some of them involve a lot of seller's debt, as high as 4-to-1; others involve less seller's debt. Sometime it involves pieces of the ups, sometime it doesn't. So there is a lot of variation, and each of these deals is tailored to a specific seller's own view of the future, their need for regulatory capital, and things like that. So there's no - there's not a one-size-fits-all approach by any means. Each deal is intensely negotiated and individually tailored.

Great. Thanks very much.

We have time for one more question.

Our next question comes from the line of Patrick [Devitt] with Merrill Lynch. Please proceed.

Hi, good morning. Most of my questions have been answered, but I was just curious in MAAM, what really caused the big questioner intelligence between performance fees and investment income? Is that simply a result of the particular funds or portfolios that you yourself are invested in relative to the whole portfolio?

Yes.

Okay. Thank you.

This concludes the time allotted for our Q&A session. I would now like to turn the call over to Joan Solotar for closing.

Great. Well, thanks everyone for dialing in, and as I said earlier please feel free to call me with any questions directly. Have a good afternoon.

This concludes the presentation. You may now disconnect and have a great day.