Blackstone Inc (BX) 2008 Q2 法說會逐字稿

Welcome to the Blackstone Group second quarter 2008 earnings conference call.

Our speakers today are Tony James, President and Chief Operating Officer; Michael Puglisi, Chief Financial Officer; Joan Solotar, Senior Marketing Director, Public Markets.

And I now will turn the call over to Joan Solotar, Senior Marketing Director, Public Markets.

Thank you, Katina.

Good morning everyone and welcome to Blackstone's second quarter 2008 conference call.

I'm joined today by Tony James, President and Chief Operating Officer, and Mike Puglisi, our CFO.

Steve Schwarzman will not be on the call today, as he's actually traveling overnight in Asia.

Earlier this morning we issued a press release announcing our second quarter results and that's available on our Web site.

And we will be releasing the 10-Q report this week.

On the call, Mike Puglisi will comment on the second quarter 2008 financial results, and then Tony will talk about the current environment and each of 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.

And actual results may differ materially from these forward-looking statements due to many factors, including those that we've described in the "Risk Factors" section of our 10-K.

We don't undertake any duty to update forward-looking statements.

And for reconciliations of the non-GAAP financial measures, to which we will refer during this call, to the most directly comparable measures that are calculated in accordance with GAAP, 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.

So, as you review our GAAP results, please take note that the transaction-related charges will continue to flow through at meaningful levels for approximately five years, and we've highlighted this the last couple of quarters.

In the current quarter, those totaled $858.7 million.

And, second, that changes in fair value of our fund investments will flow through the income statement as changes in carried interest as well as on the investment income line.

So, therefore, in the past quarter, when we had a net reduction in value, we recorded negative revenues in that line item, which reduces the overall revenue line.

And, as we talked about last quarter as well, performance fees are a meaningful driver of revenue.

Over time they can be positive, they could be negative.

And I wanted to mention in this quarter specifically within private equity, though we had positive carried interest accrual, the net value of the segment's underlying portfolio decreased by about 1% in the second quarter.

So, essentially, we reduced the carrying value of one fund that didn't have accrued carried interest to reverse and then we had positive performance in another fund and that led to an increase in the overall accrual.

We reported ENI per unit for the second quarter of $0.15.

That compares with negative ENI of $0.06 in this year's first quarter, and last year, $0.58 positive.

Pro forma adjusted cash flow from operations for the second quarter 2008 was $161.5 million.

That compared with a loss of $4.4 million in the first quarter.

And if you divide the units used in the calculation, you derive a per-unit cash number of $0.15 in this year's second quarter and a loss of less than $0.01 in the first quarter.

Last quarter, well, that's actually it on the cash side, sorry.

And, as always, please feel free to call me with any follow-up questions.

And I'll now turn it over to Mike to take you through the financial highlights.

Thank you, Joan.

Good morning.

As to the financial highlights from our second quarter BX financial results, as compared to this year's first quarter and the second quarter of 2007, I'm pleased to report the following.

Overall, as you'll note, management fees continue to grow as we add products and assets.

Investment opportunities are increasing and global liquidity is constrained and markets are volatile, leading to fewer dispositions.

For the quarter ended June 30, 2008, total net reportable segment revenues were $376.2 million.

ENI after taxes totaled $165.6 million, or, as Joan mentioned, $0.15 per unit.

This is up from an ENI after-tax loss of $66.6 million in the first quarter of this year.

It also compares with pro forma ENI of $655 million, or $0.58 a year ago.

Our adjusted cash flow from operations for the second quarter was $161.5 million, or $0.15 per unit, up basically breakeven in this year's first quarter and compared with $0.61 a year ago.

Our taxes for the quarter were again a net benefit, roughly $0.06 a unit.

We are continuing to recognize tax benefits from the nature of our reorganization in connection with our IPO, the net result of which is over the long term in a normalized environment we would expect our tax rate to be in the range of 15% to 20-plus%.

In abnormally low or high earnings periods, we would expect to see offsetting lower or higher tax rates, as the case may be.

As we have said before, over time we expect our compensation ratios to fall within 45% to 50% on an annual basis in that range.

For the first six months of this year, our comp ratios are running approximately 56%.

As you know, the varying components of revenue will drive that difference.

Speaking to the individual segment performance, as respect to our Corporate Private Equity segment, it generated second quarter revenues of $92.4 million, up from a negative $116.6 million in this year's first quarter.

Although we had overall modest decrease in the net carrying value, as Joan just mentioned, carried interest is on a per fund basis -- that calculation is, and we had positive performance fees in one of our funds.

Weighted-average fee-earning assets under management for the quarter reached $25.1 billion, compared with $23.48 billion in the second quarter of 2007.

LP capital deployed totaled $775.9 million for the second quarter of 2008 and $1.17 billion for the first six months of 2008.

As to respect to our Real Estate segment, it reported net negative revenues of $14.4 million in this quarter, mostly as a result of a modest reduction in the carrying value of certain holdings in the funds, which is reflected in both performance fees and investment income.

We reported negative carried interest revenues of $77.1 million, as compared with $30.1 million in this year's first quarter.

Base management fees were up 1.5% sequentially and 13.5% year over year.

We announced the $10.9 billion closing of our REP VI Fund on April 1, 2008.

Weighted-Average Fee-Earning Assets Under Management in our Real Estate segment for the quarter increased 25% or $3.88 billion to $19.17 billion.

LP capital deployed totaled $209.8 million for the quarter ended June 30, and on a year-to-date basis totaled $579 million.

Our Marketable Alternative Asset segment, our MAAM segment, reported in the second quarter, which now reflects GSO fully included in its results, it generated $225.2 million in revenues, significantly above the $30 million in revenues in the first quarter and $168.6 million a year ago.

There were positive trends across all revenue lines in this segment.

Versus the first quarter, management fees rose to $130.34 million, up from $104.3 million.

Performance fees and allocations increased to $45 million from $5.1 million, and investment income was $49.9 million, as compared with a loss of $79.4 million in the first quarter.

Weighted-average fee-earning assets under management, as of June 30th, totaled $52.12 billion, including $10 billion relating to GSO, compared with $32.68 billion for the prior year period, a 59% increase.

With respect to our Financial Advisory segment, ENI in the advisory businesses, M&A, restructuring and fundraising declined modestly to $11.8 million from $13.1 million in the first quarter.

Total revenues rose to $72.9 million versus the first quarter but were down from $98.6 million a year ago.

Revenues in Blackstone's Restructuring and Reorganization Advisory businesses increased year over year, while revenues in the Fund Placement business, Park Hill, were flat and the Corporate and Mergers and Acquisitions Advisory businesses declined.

The pipeline remains higher across all three businesses in this segment.

We have declared a quarterly distribution of $0.30 per unit to common unit holders of record as of August 29, 2008.

I'll now turn the call over to Tony.

Okay, Mike, thank you.

Thanks all of you for joining the call.

Before I turn to the core, I'd like to welcome the arrival of our new CFO, Laurence Tosi, who will be joining us in September from Merrill Lynch.

I also want to thank Mike Puglisi for the heroic efforts he's put in in the last two years watching our IPO, shepherding us through our first year as a public company.

Going forward, Mike's focus will shift back to working with me and Steve on strategic initiatives, where I desperately need the help, so I'm looking forward to that.

As you recall from prior calls, our outlook on the economy and on the markets has been much more bearish than most ever since the meltdown started.

And we still don't see things improving for a while.

We expect the economy to continue to be weak well into 2009, possibly into early 2010.

And we believe that any U.S.

recovery will be slow.

Inflationary pressures, we think, will force the Fed to raise rates once the financial system has stabilized, and this means that any recovery will be grudging.

Capital markets and the economic backdrop remain challenged elsewhere in the world as well, with signs of slowing growth cropping up in Europe and Asia.

But from any period of dislocation there comes opportunity, and we are seeing a growing flow of interesting investment opportunities across all of our businesses, particularly in private equity and our credit businesses, and I'll talk more about that later.

We're also adding a bunch of new products for our LPs in each of our investment segments.

As you can see in our release, we've been able to continue to gather assets.

AUM, as of the end of the quarter, was up to $119 billion from $113 billion and change at the end of March, an annual growth rate of about 20%, notwithstanding the market difficulties.

What is not yet in the numbers is over $9 billion of additional funds we've already raised across Private Equity, Real Estate, and GSO since March that will not be included in our AUM until their precursor funds are fully invested.

The largest of these new funds is our next private equity fund, which will roll out in a similar way to past private equity funds, which is sequential closings continuing through '08 and into the first half of '09.

As you know, we're finishing up investing BCP V, Blackstone Capital Partners V, at this time.

And have -- we expect that to end up late this year.

Okay, turning to Private Equity, within Private Equity, the ability to borrow large amounts of debt is still difficult, but credit markets have opened up again to some degree.

This has driven a pickup of activity, although transaction size remains limited.

Pricing of the assets, particularly in the U.S.

and Asia, is lower and the number of opportunities is substantial.

During the second quarter and through the end of July, we have committed or invested roughly $2.5 billion in new deals.

Over the past really 13 months, since the market turmoil began last summer, we have committed to 22 new investments in Private Equity and are getting nearly $8 billion of equity capital.

And this represents a near record pace for any 12-month period in our history.

In July alone, we announced the acquisition of the Weather Channel; security firm L.I.

Barton; a partnership to build an offshore wind farm in Germany; and a strategic investment in Bayview, a distressed mortgage servicer and fund manager focused on so-called scratch-and-dent subprime mortgages.

The Weather Channel is an interesting example of the power of Blackstone's integrated model.

It was one of our signature corporate partner deals with General Electric as our partner.

Incidentally, this is the sixth time we have worked with General Electric as our partner.

Weather Channel is the largest new private equity deal of the year in the U.S.

and was done despite the market for subordinated debt being effectively closed because we were able to secure $450 million of mezzanine debt from GSO, as well as a portion of the senior debt facility.

We've also been investing in our current portfolio of companies where there is an opportunity to do so.

We and our partners invested another $500 million in Cosmos, an energy exploration company, which has found meaningful success in its drilling program offshore West Africa.

Other follow-on investments are being made in the United Biscuits, Sithe Power, and possibly our theme park business, Merlin, to fund growth and acquisitions.

In general, our portfolio in Private Equity continues to perform very well despite economic headwinds.

Most of our companies are on or ahead of budget and growth and operating cash flow continues to offset generally lower multiples prevailing in the public market.

With solid portfolio company performance and stable long-term capital structures, we are under no pressure to liquidate investments and will be waiting for more favorable market conditions before harvesting our gains.

We are expanding our product offering in Private Equity to LPs with two new funds.

We have hired fantastic teams to lead us in the two new businesses, one to focus on U.S.

and European developed infrastructure and one to focus on clean tech and renewable energy.

Fundraising for both of these new businesses will commence later this year.

We also announced this week the opening of a new office in Beijing.

Turning to Real Estate, throughout the downturn, the real estate market has lagged the corporate cycle.

The financing markets close later and deal volumes there turn down with the delay.

While there has been a recent pickup in activity of financing and deal flow at lower prices in the corporate sector, U.S.

real estate markets remain slow, with credit markets essentially closed.

In addition, prices have adjusted but not yet to the degree we believe they will.

Our strategy in this environment is to wait for sellers to adjust their expectations to the new reality or have their hands forced by their own liquidity crises.

Our real estate funds are young and we can afford to be patient.

Our Real Estate business is exceedingly well positioned.

In the last several years, we have avoided making virtually any investments in the residential space or in development deals.

Our portfolio companies and our portfolio investment balance sheets are strong with no material near-term maturities and we have a large amount of available capital.

The asset base we own is extremely high quality.

The fundamentals in our portfolio are well ahead of those in the broader landscape, even though we see and expect further moderation of recent growth trends.

Largely, this has to do with the fact that we focus on purchasing really high quality properties in strong supply-constrained markets.

As an example, our offices holdings in Boston, Manhattan, West Los Angeles, and Northern California continue to roll leases over at higher rents than are in place today, and therefore, operating cash flows are increasing despite soft market fundamentals.

Supply in these markets is also -- new supply, is also almost nonexistent.

Hilton, our biggest equity investment, had double-digit EBITDA growth in the second quarter and for the year to date versus reports of declining EBITDA at its competitors.

The difference we believe relates to the tremendous strength of Hilton internationally, to the fact that its own locations are irreplaceable, things like the Waldorf here in New York, and to the growth of the franchise business, which continues very strong.

In other parts of the hotel market, we are seeing weakness in resort travel destinations, such as Fort Lauderdale, Puerto Rico, and Hawaii, as well as suburban business hotels around the U.S.

We have lowered the carrying values of some of these assets.

Europe is slowing but still exhibiting stronger growth than the U.S.

Generally, though, our Real Estate business remains extremely well positioned, having sold over $40 billion of assets at peak prices last year and having almost no exposure to the residential sector.

Within Real Estate, we have commenced the operation of a new distressed debt fund run by Mike Nash.

The flow of interesting opportunities to buy real estate debt securities is huge right now, many promising equity-like returns.

We're also in the final stages of a very successful fundraising for our third international real estate fund.

To date, we have closed on approximately $3 billion for this BREP Europe III.

Turning to our MAAM segment for a moment, that's our Marketable Alternatives business, the largest pieces of that are BAAM, our hedge fund fund of funds, and GSO, our credit platform.

At a time when the industry is experiencing outflows, BAAM continues to gather assets.

At quarter-end, BAAM's AUMs were up 40% year over year to $31 billion.

With an 8% growth in the last quarter alone, the momentum continues unabated even in the current environment.

BAAM now manages money for over 100 public and private pension funds and 8 sovereign wealth and monetary authority funds.

BAAM recently won the 2008 Institutional Firm of the Year award from InvestHedge and the 2008 Institutional Manager of the Year award from Alternative Investment News.

BAAM's approach to capital preservation with uncorrelated returns provides welcome shelter to many investors from the decline and volatility of the broader market averages and we believe this is what's continuing to fuel the AUM growth.

For GSO, this is a fantastic period.

GSO is performing well and continuing to gather assets.

It has raised almost $5 billion of new capital this year, including four new CLOs.

We believe we are one of the very few firms who have the investor following to be able to raise new CLOs in this market, which is testimony to our franchise and credit capabilities in this area.

There have been other unique opportunities created by the debt market's dislocation.

Portfolio trades and bank debt through our credit liquidity funds and other funds have allowed us to buy three large portfolios of leveraged loans last quarter, aggregating $7.8 billion from the original underwriters whose syndication of these transactions was caught in the market downdraft.

Generally, these trades have been done at prices of about $0.85 on the dollar, long-term financing from the sellers of 75% to 80% of the purchase price.

We expect these transactions to generate 20% to 30% returns, with very low risk loss of principal.

GSO also closed on its new mezzanine fund last quarter, reaching its cap of $2 billion of total commitments.

The timing of this fund is propitious, as they're awash in opportunities because the public market for subordinated debt is effectively shut down.

Typical mezz terms today deliver 14% to 15% yields, with a cushion of 40% to 50% of the enterprise value of the company underneath you in equity.

The combined buying power of the mezz fund, in conjunction with its core hedge fund, makes GSO one of the top few mezz players in the world.

There are very few competitors who can fund the large-scale deals that GSO can today.

The GSO credit opportunity hedge fund continues to thrive as well, with strong performance relative to its peer group by any measure.

GSO has ambitious plans to expand its business.

Most recently, we opened a Hong Kong office under Tim Donahue, who ran leverage finance and fixed income proprietary trading in Asia for J.P.

Morgan.

GSO has also commenced raising a mortgage fund run by Najib Canaan and his team from Brevan Howard.

Within our other single manager hedge fund businesses, we hired Aaron Nieman from SAC to launch an Asian Equities Event Fund.

He has hired his team and opened an office in Hong Kong and is in the process of fundraising.

We expect his fund to launch early in 2009.

In our Advisory segment, business remains strong across our groups, those being restructuring, M&A, and fund placement.

Within restructuring, we expect 2008 to be a record year.

And looking at the fundamentals in the U.S.

and Europe, I'm sorry to say we don't see a slowdown in this business anytime soon.

With the economic and financing backdrop we have currently, rescue financing is scarce and defaults are rising.

This is a great environment for the restructuring group.

They have expanded into Europe under the leadership of Martin Gudgeon and have already built one of the leading practices there.

Recent assignments include representing SIM Group and its bankruptcy, Northern Rock in the U.K., and Excel Capital here.

We've seen a dramatic pickup in the activity for financial institutions, particularly in the U.S.

and the U.K, as these institutions reassess their strategies, consider their balance sheet options and need restructuring advice.

In M&A, closed deals were down along with the market.

However, the nature of the business has changed in the last few months, with morehostiles, more companies moving to consolidate their strategic objectives in what is viewed as an accommodating anti-trust environment and more divestitures from companies with credit issues.

In the pipeline, we see an increase in hostiles among big-cap corporate, which we would expect to flow through to revenues over the next 6 to 12 months.

Some of our most visible pipeline deals, like Microsoft's effort to acquire Yahoo, may not happen.

Nevertheless, backlog remains strong in our M&A business.

We continue to build out our footprint.

We recently added an SMD, a partner, to cover West Coast Technology and an SMD in New York to broaden our Financial Services coverage.

We've also filled out our European M&A team and we anticipate opening in Asia our M&A presence later this year or early next.

Finally, our fund placement business is having a robust year with many marquee assignments, including fundraising for leading private equity firms, investment banks who want to start private equity and other alternative businesses, energy capital, and various others.

So they're having a great year there.

I would say that the difficult fundraising environment for LPs is actually helping our fund placement business.

In sum, I am pleased with our performance across all of our businesses and the growing number of products and services we can provide to LPs and clients.

The market dislocation is providing many exciting new investment opportunities.

Historically, our largest returns have come from periods of market turmoil.

It is these opportunities which provide the seeds for robust gains to be harvested in future years.

I thank you for your time and we'd be happy to take your questions now.

Thank you.

Operator, why don't you open the call -- line for questions?

Thank you.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Roger Freeman representing Lehman Brothers.

Please proceed.

Hi, good morning, Tony.

Within the private equity business, can you help us think about the contribution to marks during the quarter?

Obviously, there's continued improvement, as you pointed out, in underlying portfolio companies, I guess, measured in EBITDA terms.

There's also probably valuation declines from a market standpoint.

Can you maybe help us parse that out a bit and think about what that sort of market negative contribution was and what the operating improvement positive contribution was?

Well, I don't actually have that broken down by -- separately, so maybe you can work with Joan after the call and get some more color on that.

But, in general, they sort of offset.

I guess the bottom line there is that our portfolio is doing really well and obviously the market was soft.

So -- and we saw that particularly in the public securities.

Our private investments, we take a little bit longer-term view, a little bit more of a net present value view.

We tend to use long-term exit multiples.

We re-underwrite every company every quarter with their projections.

We've just been through an intensive analysis of that.

And I feel very good that our marks are appropriately conservative shall we say.

Got it, okay.

And also, can I just -- let me just add something to that.

Sure.

Which is, as we talked about last quarter, the market may be up or down 10% and our movements would likely be much more muted than that, first.

And then, second, just to use Hilton as the example, the market comps are down but their EBITDA is also down double digit, whereas for Hilton it was actually up double digit.

So it's very hard to just look at the market and make that assessment.

Got it.

Okay.

And then, I mean, within real estate, the marks sounds like are primarily around some of the lodging?

Investments in the hotels?

Yes.

I mean, it's actually a pretty similar pattern in the sense that the operating cash flow is growing at our properties, but we've increased the cap rates --

Yes.

-- in some places.

And in other places, a couple of -- sort of the hotel markets that I highlighted, the RevPARs are weakening there, so we've actually reduced our projections.

Okay.

And I guess around the capital commitment rates this past quarter continued to be another strong one.

I guess, can you talk to, geographically, I mean we sort of see some of the pieces that have gotten reported, but sort of geographically where that -- how that has spread out.

I think you said --

Sure, sure.

-- a quarter ago --

The most active --

-- more than half of it was Asia.

The most active region recently has been the United States by a lot because I think sellers' expectations have suddenly ratcheted down.

The least active remains Europe because prices are still pretty high there and we've been anticipating Europe to lag the U.S.

but follow it down in terms of economic activity.

I think with Germany's announcement of a down 1% GNP last -- just this morning.

That's starting to happen.

I think when that happens, European price expectations will come down, but in the meantime we're waiting patiently on the sidelines for that to happen.

Asia, as you probably know, Roger, the stock prices are down 40%, 50% from their peaks.

And while there's definitely slower growth, there is still definitely quite positive growth there.

So we're finding some interesting things to do in Asia as well.

It seems like there's maybe some concentration around energy in some of the announced deals.

Is that a fair assessment?

With energy and alternative energy?

Yes.

It's kind of lumpy.

Because when you're talking about five deals or whatever it is, it's kind of lumpy.

But you're right, that's a good observation.

We have announced a couple of energy deals lately and we continue to -- I think we're close to a couple more announcements in that same sector.

We've got a very, very active flow of interesting energy transactions right now.

Okay.

Lastly, I'll jump back in the queue, the -- what do you think about some of the proposed rule changes around private equity, being able to take larger positions in financial institutions like banks?

Has that been a constraining factor for you today?

It's been an issue because what we do when we invest in the companies is we need the ability to materially improve their operations.

We don't live -- a fund our size doesn't live off finding things that the markets overlook.

The markets are too efficient for that given our scale.

Maybe small funds could live off that stuff, but we can't.

So we have to pay market clearing prices for quality assets.

And the only way we can make our return is to get in there, upgrade the management team and help that new management team run its company better.

That is, grow it faster, increase its margins, and increase its return on capital.

It's really hard to do that if you're constrained by federal law to a 24.9% position.

And there's lots of other constraints on your ability to influence operations.

So I think if the government addressed that, it would help the flow of private equity into financial institutions.

And I think you're going to need -- I think, as an economy, we will all need as much equity capital flowing into, particularly the smaller and regional banks, as possible.

I mean it's great for the money center banks to have the sovereign wealth funds making major investments and so on.

They have wonderful brand names and wonderful franchises and so on, but it's going to be much harder for the regional banks to appeal to that type of investor.

And I would also note that of the dozens of transactions that have been done most of them, most of the investors, are under water.

I think at some point that flow of capital to financial institutions will dry up and we'll still have -- and we have most of, I believe, most of the issues for regional banks, in terms of defaults and credit problems, still ahead of us.

So I think, I mean, maybe I'm giving an advertisement for our own business, but I think that the economy would be well suited to find ways to bring private capital, private equity capital, into the financial sector.

All right.

Thanks, a lot.

The next question will come from the line of Hojoon Lee representing Morgan Stanley.

Please proceed.

Good morning.

Could you remind us again what happens to the fee rate on BCP V once that's largely invested and you have a first closing on BCP VI?

Sure.

Would it drop down to 75 bps?

Simply put, yes, but I just want to clarify the question a little bit.

It's not when we have a first closing of BCP VI, we've had a first closing of BCP VI.

It's when the investment period for BCP V ends.

And that ends when we've -- usually when we're about 90% invested, because we reserve about 10%.

We have some flexibility as to decide how much to reserve and we might reserve a little more or a little less than that.

So right now we're having a series of closings, as I mentioned before, of BCP VI, but the investment period is still running for BCP V.

So what that means is we have the full fee rate for BCP V.

When that -- and we're getting no fees on BCP VI yet, on any of that money, and that money is not included in our AUM either for that reason, even though we've closed on it.

And then, you're right, when the investment period for BCP V ends and we start investing in BCP VI, the fee rate drops down to about 75 basis points.

Great, thanks.

And in terms of the investment pace in real estate in this environment, can you help us bracket kind of where you're seeing opportunities in terms of geographies or types of assets and how we should think about capital invested in the second half versus first half '08?

Well, I think the main message should be it's very quiet right now and -- in our main fund.

Most of the activity that we're close to has occurred recently in Europe or Asia.

But in the U.S., we're really sitting on the sidelines right now because we just think prices are going to come down.

And anything we could buy now will be cheaper later.

And we've looked at a couple of things with distressed sellers or people running out of money and I think to the extent you see us doing things over the -- I hate to pick a particular time, but as long as this present environment continues, it will be investing in distressed properties or with distressed sellers who have capital crises.

Okay.

And just a final question.

With respect to the common units covered by your recent registration statement, I believe some units can be transferred and sold after August 12.

I just want to understand will these units also be covered by the 120 priority distribution through 2009?

No, they won't be.

Okay, thank you.

Well, no, no.

Any unit held by a public holder will get the priority distribution, absolutely.

But if a partner were to sell those units in exchange for common units, he or she would not receive the --

So, if an employee -- it's a question of who the holder is.

If an employee holds it, they have no guarantee.

Right.

If a member of the public holds it, they have the guarantee.

Okay, thank you.

The next question comes from the line of Prashant Bhatia representing Citi.

Please proceed.

Hi.

Just curious, with your comments about the economy being slow until potentially early '10, what do you look for to kind of mark the turn or what do you look for to make -- when you feel it's safe to go in and put capital to work and how do you balance being -- not being too early, but not missing the opportunity either?

Well, that -- Prashant, that's the question that we sit there and talk about day in, day out and toss and turn all night over.

And, obviously, in private equity, we've made a bet that -- for some of these companies that we're buying, we're somewhere near the bottom and it's a good time to jump in with serious capital.

I mean, we've put a lot of private equity to work here recently.

With real estate, we've made the opposite decision.

We've made a very conscious decision to wait and let things fall further.

So, for example, in private equity, we're purchasing a company called Apria.

We think it's a -- it's a health care business, so we think it's not inherently a cyclical business so we're not as worried about what an economy does to it.

It delivers oxygen and fusion in the home to patients.

If you need that, you need it, regardless of where the economy is.

In fact, if the economy gets really bad, I think more of us will need it.

So -- and we looked at that -- we've looked at this company three times.

We started looking at it when the price was in the 30's, well into the 30's and couldn't quite get there, and then at the high 20's.

And we got a deal to buy it at 21, which is less than 6 times EBITDA.

So I think -- and I think -- and we see a lot of upside potential for the business.

So what we're looking for is -- we're relying on our sense for not so much -- for an investment like that, not so much calling the turn, because that's hard, as you all know, as our sense for absolute value, first of all.

So we look at a very long context.

To us, a company like Apria, with the prospects it has looks cheap taking a 20-year view.

So we think we'll be okay in the long term on that.

And the other thing we're looking for with a company like Apria is the ability to bring our portfolio operations team in there and actually create a lot of value.

And that gives us some control over our own destiny, if you will, not just dependent on market cycles or economic cycles.

With other businesses, like cyclicals, that -- those you've got to actually make a call about the economy.

Those are different kinds of investing.

And we did a lot of that in 2002 where the investment committee got together and decided it was just a great time to be loading up on big chunky industrial assets that are cyclical.

I think we were about the first private equity firm to get back into the market in a big way.

And that proves to be a really good bet as well.

We don't see that yet and we don't really have to figure out when it will be in the future, we just have to feel it when it starts to happen, if you will.

So we're taking that sort of month to month or day to day.

I suspect that we're -- we will be looking more at those kinds of investments in '09.

You never quite get to bottom, of course, nor do you have to if you get somewhere near there because we're buying assets that we're going to hold for five-plus years.

And so sometimes we'll be a little early and sometimes we'll be a little late, but it doesn't really matter if we're somewhere near the bottom in terms of -- in the context of a five-year hold with a good company and where we can add value as long as we exit somewhere near the top.

And so we don't try to pick it perfectly.

You can't do that in private equity.

You can't move quick enough.

In a public market, of course, you can.

You can buy 100 shares at the drop of a hat.

But you clearly can't do that with whole companies.

Right.

I guess one of the things I'm trying to get at is there something that you see within the 50 or so portfolio of companies?

Is that what helps give you an edge on, at least, calling the economy that -- what you're seeing?

Well, we -- oh, yes.

I mean, we have our special little Blackstone leading indicators that we look at.

For example, tonnage of trash collected by Allied Waste has been very, very highly correlated over the years to general economic activity.

And so if their tonnage is down, it's a simple calculation of the amount of garbage they pick up.

But -- so we look at those things.

We look very hard with our companies in terms of prices, supply lead times, inventory levels, and all of that, and we try to -- we get together quarterly, and this is run by our Portfolio Operations Group too, and they give us a picture that comes from inside the portfolio company looking at those kinds of things.

Is that a perfect crystal ball?

No.

Okay.

But we think it's helpful.

Okay, great.

And just on the fundraising environment and LP appetite, do LPs, in general, get more nervous in this environment or do you find there's even a greater desire to put capital to work here?

Well, I think all human beings get more nervous in this environment, LPs included.

We have, I think, compelling data, and it's not even our data, it's industry data, that shows this is the best time to be throwing incremental capital into the private equity and alternative space.

And, frankly, the good -- the worst times are things like late '06, early '07, the peaks.

Yet, notwithstanding all that, the easiest time to raise money is late '06, early '07, and the hardest times are environments like this.

It's been like that since the industry started in the early '80s.

Okay.

Okay, and then just on the deals that you have done, just curious about the board of director dynamics in this new environment.

Are they more willing to accept deals where financing may not be guaranteed or some of the MAC clauses and so on or is that changing or is that more going to take time?

Well, that's an interesting question.

I think there's still a lot of variety on that.

Some boards, it's sort of the attitude is very similar to the pre-meltdown approach and other boards are, frankly, very leery about what they've read about deals falling apart, financing not being there, and one thing and another.

So there's not a consistent pattern.

But at the end of the day, we're not finding that an impediment to getting deals done.

Okay.

Any interest in bulk asset purchases like we've seen out of BlackRock, and more recently, Merrill Lynch-type transactions?

Yes.

We've done a lot of that.

I guess outside of the leveraged loan side.

I was thinking more on the -- on the mortgage side.

Yes.

We're in discussions with several institutions about mortgages now around our mortgage team.

Because we have our mortgage team run by Najib from Brevan Howard.

And we're in discussions with several institutions now.

We have a lot of interest in that at the right price and with the right terms.

Okay.

And just one final question.

The returns in your fund of funds business, where are they year to date?

They're about flat year-to-date.

Yes, about flat.

They have a lot of different products, so it's a little hard to give you one index, but about flat is fair.

Okay.

I think, if I had to pick a number, it would be sort of down, a little over 1%.

Okay, great.

Thank you.

The next question comes from the line of Dan Fannon representing Jefferies.

Please proceed.

Hi, and thanks for taking my questions.

Can you -- Joan, I think you mentioned at the outset you moved one private equity fund up 1% and I think another one down 1%, and the overall portfolio is down a certain amount.

Can we just get a little bit more specific in terms of which funds and then maybe which areas of industry or investments are underperforming?

Yes.

I wasn't speaking about specific funds, so I was saying, in general, we had moved down 1%.

But because some portion of that was in a fund that didn't have carry to reverse, the offset was that in another fund where we accrued positive carry that's what flowed through to the income statement.

So, just to explain further, if you have a new fund and you have an investment and you lower the carrying value, you have an accrued carry to reverse.

And it's not that we would pay the LPs back carry.

So there's no negative that flows through on the incentive fee line.

Where you'll see it is in our investment income line, which was negative in Private Equity.

Yes.

For the life of a fund, you can't have negative carry net/net.

You can -- it can only be positive.

That's one of the beauties of our business.

And the only way we get mark downs of carrying a fund is if we previously marked it up.

So, obviously, we mark our investments to market rigorously each quarter.

We have outside parties review the investments and so on and so forth.

So when we -- so if you -- but our newer funds, where you don't necessarily -- you haven't marked up any carry yet, even if you have some investments you mark down, there's no negative there.

Some of our older funds, where you have more mature investments, those companies might be doing good things and driving increased value through operational improvement.

And you could have -- we could have -- pick up some carry.

So you've got to -- it's kind of a confused picture because we have a lot of funds and they don't always net the way you expect.

Okay.

That's helpful.

And then in terms of your guys backlog and what you're seeing today, can we talk about that in comparison to, say, what you saw in the first quarter and then also maybe a year ago in terms of the overall environment, and then your rates of return that you look to get on some of these investments?

Okay.

Are you talking about Private Equity, Dan?

Yes.

Okay.

In Private Equity, the backlog is up dramatically.

We have a real circuit of very interesting investments where the returns are higher than they've -- the returns we're shooting for and underwriting and getting are higher than they've been in several years.

And the purchase prices are lower and the assumed economic environment in which our companies will operate is quite conservative.

So very, very big backlog in private equity, way up where it was a year ago, way up where it was last quarter.

Okay.

In the Asset Management side, the portfolio, you talked about three large portfolios you guys purchased for about I think $7.8 billion in size, it was in the first quarter.

How did that perform just in the -- I know it's a short time period and you guys give a much longer term horizon, but how did that perform --

We purchased it in the second quarter, Dan, actually.

and it's up 20% so far.

Okay, great.

All right.

Thank you very much.

The next question comes from the line of Guy Moszkowski representing Merrill Lynch.

Please proceed.

Good morning.

It's actually Patrick Davitt filling in.

We're curious if there are actually any areas globally where you may be seeing an opportunity to start harvesting investments or are we really just in a kind of a global holding pattern?

I think we're pretty much in a global holding pattern.

The premise of your question a little bit is the opportunity to harvest.

We could harvest now, but our attitude is we're supposed to wait and pick the absolute peak, not just harvest when it's acceptable, if you follow me.

And it's very hard to right now find -- to finding those sort of frenzied over-priced environments into which we like to harvest.

Right.

There are the occasional investments we harvest where -- and there's -- sometimes we're approached by a strategic investor and things like that.

It's more we're more reacting to an opportunity that falls into our lap rather than going and seeking one.

Okay, thanks.

And you didn't really mention the pure hedge fund business.

I know it's still small, but any idea on how the performance is going there and any investor interest and inflows?

Well, I think I mentioned that, or if I didn't, I should have.

We are out raising the Asian Event Fund.

Right, right.

And we're, for the most part -- and GSO is gathering assets in its hedge fund.

There's considerable investor interest in putting money in the debt markets right now.

There's not that much interest, investor interest, in putting money into those traditional long-short equities.

Our performance has, year to date on that product, has been quite good.

We're up year to date in that product nicely.

But investors are I think a little jumpy.

We have a three year lock.

When people come they want -- most investors kind of want to keep their liquidity and wait for things to feel better before they make a long-term commitment.

So that business, we're obviously growing assets under management through the appreciation of the fund, but we're not anticipating -- we've been closed in that investment for six months and we're not anticipating reopening to new investors in the environment just because we don't just think it's a fairly fruitful use of time as much as anything.

Okay.

And could you give us an idea of how much of the performance fee in Private Equity was driven by the realization of something like a Gerresheimer?

Boy, I wouldn't know that off the top of my head.

Okay.

It's very small.

Very small?

Gerresheimer was -- even though Gerresheimer was a 7-to-1 return, we had marked it up already, so the increment wasn't much at all.

So I would say (inaudible).

So it really just drives more on the cash side, not so much on the ENI side?

Correct.

Yes, okay.

Okay.

That's right.

It doesn't affect ENI, but it does convert -- but it all flows to cash, so --

Right, exactly.

Okay.

And then just real quick, why would you not have a compensation reversal in Real Estate with the negative revenues like you did in Private Equity last quarter?

Is there some kind of loss threshold you have to meet first or --?

No.

What happened in that particular case is it really gets back to the investments to which it related.

Okay.

And in this case, it was all of that depreciation has been ascribed to the public company, or the lion's share of it.

And, therefore, it was really just the public company that was -- that we were reversing.

It didn't apply to individuals, because they originally didn't share when it was written up.

It wasn't part of their share of the profits.

Because it was on older deals that were contributed into the public company.

And so it was those investments that were written up but are subsequently again being [unvalued]or written down.

Okay.

Okay.

Perfect.

Just to explain -- when carry has been paid out, the public doesn't share in that reversal.

That just hits the employees who had previously been paid.

But this was different from that.

So last quarter in Private Equity you had negative carry because we were accruing in the event of a claw-back.

And that wasn't the case in this quarter.

Right.

Okay.

All right.

Thank you very much.

The final question comes from the line of Jackson Turner representing Argus Research.

Please proceed.

Good afternoon.

I just have a quick couple of questions for you.

On private equity, I believe it was Tony mentioned that deals are smaller than they had been.

I'm just curious.

Is that leading to a higher number of interested parties in doing the deals?

It seems like as things get smaller you're going to start bringing in companies like BDCs and that sort of thing that would be able to participate in those transactions.

And then the other one is on the Asian Event Fund, which I believe you referred to in a presentation from June as the Asia-Pacific Fund.

Your target launch was November 2008.

And, if I'm correct, now you're saying early 2009.

Just curious if that's just because fund-raising is taking longer or is there something else going on there?

Thanks.

Okay.

First of all, no, we're not seeing any -- smaller deals, what I'm talking about there is no deals over $20 billion, about the largest today is $5 billion, but plenty of deals over $1 billion.

So you're still talking about only large-cap players, let's just be clear about it.

It's just not the true mega deals that we saw before.

And we're actually seeing less competition, in general, both because other people are gun shy, maybe wisely, we'll see, but -- or focused on problems in their portfolio, which, knock wood, so far we've been blessed by not having a lot.

So we don't see a lot of competition from extraneous sources, so to speak.

We do see more competition today from strategics than we saw in '06 and '07.

And I think the strategics really view -- they have access to capital still because investment grade markets are not near as stressed and rates are quite low actually.

And so their costs essentially may have gone down.

And, as I mentioned, a lot of them view that there's a pretty benign anti-trust environment that they ought to take advantage of, and their target stock price is way down off over where it was.

So they -- for that combination of reasons, strategics suddenly got much more active.

So we see more competition, in general, from strategics than what we saw before but less from financials shall we say.

With respect to Aaron's fund, no, there's been no change in our target date.

Fundraising seems to be going well.

Okay.

Thank you very much.

With no further questions in queue, I would now like to turn the call back to Ms.

Joan Solotar for closing remarks.

Thank you very much.

Thanks everyone for joining the call.

And, again, please feel free to call me with any follow-up questions.

Bye.

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

This concludes your presentation.

You may now disconnect.

Good day.