Blackstone Inc (BX) 2008 Q4 法說會逐字稿

Welcome to the Blackstone Group's fourth-quarter and 2008 year-end earnings conference call. Our speakers today are Stephen A. Schwarzman, Chairman, CEO, and Co-Founder; Tony James, President and Chief Operating Officer; Joan Solotar, Senior Managing Director, Public Markets; and Laurence Tosi, Chief Financial Officer.

I would now like to turn the call over to Joan Solotar, Senior Managing Director, Public Markets.

Thank you. Good morning everyone. Thanks for joining us today for our fourth-quarter and full-year 2008 conference call. As Lauren mentioned, I'm joined here by Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer: and Laurence Tosi our CFO.

Earlier this morning we issued the press release announcing the results which is available also on our website and we will be releasing the 10-K on Monday afternoon. I would 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 uncertain and outside of the firm's control. Actual results may differ materially from these forward-looking statements due to many factors and for a discussion of some of the risks that could affect the firm's results, please see the risk factors section of our 10-K report. All of our statements are qualified by those and other disclosures in our reports filed with the SEC and we don't undertake any duty to update any forward-looking statements. We will refer to non-GAAP measures on this call and for reconciliations to the most directly comparable measures in GAAP, you should refer to the press release that we issued this morning, which is also available on the website Blackstone.com. This audiocast is copyrighted material of The Blackstone Group and may not be duplicated, reproduced or rebroadcast without consent.

I will just touch on a couple of highlights. We reported negative economic net income or ENI of a loss of $0.68 per unit for the fourth quarter and $1.03 per unit for the full year 2008. This compares with negative ENI of $0.44 in the 2008 third quarter and positive ENI of $0.08 in the fourth quarter of 2007. Negative ENI continues to be driven by unrealized losses mostly in private equity and real estate. You will hear more detail on that. Adjusted cash flow from operations or ACFFO totaled $129 million or $0.12 per unit for the year. For the quarter we had negative adjusted cash flow of $19 million or $0.02 per unit, and that compares with a negative $9 million or $0.01 in the third quarter of 2008 and against a positive $0.22 in the fourth quarter of 2007.

So based on the lack of ACFFO generated in the fourth quarter, we will not be paying a distribution with respect to the fourth quarter, and as we indicated on the third quarter call in November, we would not distribute more than the $0.90 already distributed to the public holders unless we actually earned it. Employees who own about 75% of the Company did not receive any distributions on their holdings units, but based on changes that were made to Blackstone's liquid investments towards the end of the year and in January, we currently expect to generate enough cash flow in 2009 to be able to pay the full preference distribution to the public of $1.20 in 2009.

So now I'm going to turn the call over to Laurence Tosi, our CFO.

Thank you, Joan. Good morning and thank you all for joining the call. I will begin by walking through some of the key highlights from the fourth quarter and full-year results and then focus on some key measurements of the firm's cash flow, balance sheet and liquidity.

There are several operating metrics management uses to measure the performance of the firm. One of those key measures is net fee related or operating earnings. Operating earnings reflects the firm's cash P&L before the impact of gains and losses related to the portfolios and the firm's investments. We've enhanced our disclosures so investors can see our net fee related earnings in Exhibit 5 to our 8-K and our press release, and we will later break those out in our 10-K.

There are three strategic components of our business model that afford Blackstone's staying power. It's cash generation, business diversity, and balance sheet strength.

First, cash generation. The firm's business model is such that we can cover our operating expenses including compensation and generate positive cash flow for our unit holders from our management and advisory fees alone. In 2008, the firm had cash fees of $1.6 billion which drove record fee or operating related earnings of $428 million, up 11% from the prior year. Fee related or operating earnings for 2008 represent $0.38 a share.

Of the $1.6 billion in fees, $1 billion represents the management fees under long-term contracts, and is a locked-up recurring revenue source. Growth and operating revenues in earnings is driven in part by fee-paying assets under management which were up $8 billion or 10% for the full year of 2008 to $91 billion. Blackstone's consistent cash generation across the cycles allows the firm to continue to invest in its portfolio companies and create value, explore new opportunities in any business environment, and expand our existing business and retain our talented team.

Second, our business diversity. Blackstone operates in four distinct business segments, private equity, real estate, marketable alternatives, and advisory, each driven by distinct, macroeconomic and market factors. As the real estate and private equity businesses strategically slowed investing capital in 2008, the BAAM fund of funds and GSO credit platforms experienced net inflows, and asset management fees grew -- revenues grew sharply, posting a 48% gain year-over-year.

We also experienced strong revenue growth in our restructuring practice which was up 80% in 2008 versus 2007, and our corporate advisory and M&A business which also grew strong at 17% in 2008, in a down year for the industry as a whole.

And third, our balance sheet strength. We have undertaken several actions to ensure that the firm's balance sheet and liquidity is optimized to further underscore the firm's stability. The firm operates with no net debt and typically limits its capital investment in any one investment or fund to a fraction of the total assets. In the second half of 2008, we began to reposition the firm's cash from liquid investments to limit volatility and enhance liquidity.

We ended the year with a cash balance of $504 million. Additionally, we had a cash receivable from our own liquid fund redemptions and have since received $660 million. As of January 31, we had paid off our $250 million revolving debt. We have no net debt and $768 million in cash. Additionally, the firm now has $2.14 per unit of cash and investments.

In closing, while 2008 was one of the most difficult years for financial markets in history, the Blackstone business model is designed to not only weather difficult markets but in fact to capitalize on them. We think Blackstone's unique strategic combination of businesses combined with our cash generation, our business diversity and our balance sheet strength will continue to drive outperformance across cycles and provide superior returns for our investors.

I will turn it over to Steve.

Good morning. This is Steve Schwarzman. We ended 2008 and begin 2009, one of the most challenging equity, credit, and economic environments in the last century. Despite the inevitable mark to market write-downs of our funds based on global asset value declines, we believe Blackstone is in a strong position in each of its businesses and well prepared for a challenging year ahead.

Each market we invest in -- private equity, real estate, credit, and hedge funds -- has experienced tremendous market dislocation, with many of our competitors impaired, some merged. Our advisory business on the other hand has benefited from their ability to advise on complex strategic and restructuring transactions. We had a record advisory revenues in 2008, as LT told you, against the backdrop of a down year for the industry.

We are not like most companies in the financial services industry. We are genuine, long-term investors, and we are patient. It means holding existing investments until markets are high and liquid, and exiting at full value and not being forced to panic and sell into a rapidly deleveraging world. And it means becoming aggressive in a declining environment, in which we will deploy capital to the maximum benefit for our investors when the time is right. We are already seeing once in a generation investments in the credit markets, with private equity expected to provide similar opportunities over the next several years.

With an eye towards challenging markets we made some personnel changes at the end of the year, reducing staff modestly and relocating others to busier areas such as restructuring. We have also benefited from the current dislocation at competitive firms and hired selectively in our advisory business where we are seeing a big flow of inquiries from top professionals who are seeking roles here at Blackstone.

At the end of the year, we also made some changes in our single manager hedge fund business. We decided to spin out the management team of our long-short equity fund as we view those operations as sub scale relative to the whole of Blackstone. We consolidated our distressed business into GSO, eliminating duplication and giving the limited partners in the fund the option to move over to the better performing GSO funds.

In terms of our specific business units, private equity generated net fee related earnings of $31 million in the fourth quarter and $82 million for the full-year 2008. These compare with 444 million in the fourth quarter of 2007 and the full-year of $83 million.

ENI was negative for the quarter and the year as we recognized unrealized marks of $3.9 billion on the portfolio of funds we manage and $6.4 billion for the full year, equal to a 29% reduction in carrying value for the year. We had modeled the recession in our projections. We re-evaluated our future year assumptions through the lines of a deeper and longer recession than previously estimated, with exit multiples that don't assume recovery to the levels that prevailed recently.

This had the impact of decreasing our carrying values, even for portfolio companies that remain healthy and which have grown EBITDA in 2008 and we anticipate in 2009. The markdowns are disappointing but don't necessarily represent permanent loss of value. And it is important that you recognize that.

For historical context, we analyzed our earlier funds during the 2002 to 2003 downturn, and marked those companies as we would today under FAS 157 which we didn't have to do that. 43% of that portfolio had been purchased ahead of the market's decline and would have suffered reductions in carrying value of 70% to a value equal to only 30% of the multiple of our invested capital. Ultimately, those companies were sold for an average of 2.3 times invested capital or 8 times what they were at the trough value using FAS 157. Eight times increase.

This very successful investment outcome never could have been anticipated looking just at FAS 157 mark to market accounting. And we would caution investors to understand that markdowns under FAS 157 do not necessarily reflect what the ultimate investment results will be based on our past experience.

Our portfolio companies are generally in good shape. 77% of our private portfolio companies achieved flat or higher earnings in 2008 compared to 2007, and approximately 75% are expected to have higher earnings in 2009, which is pretty remarkable. Our portfolios are not representative of the market as a whole. It is important that you understand this. This is not a random S&P 500 that has been leveraged.

Since 2006, we focused on defensive sectors such as health care and food distribution and sold a lot of our cyclicals. We certainly are not recession proof, and our reductions and projections of future cash flows show that. But on the whole, we have significantly reoriented our portfolio. Our capital structures for our portfolio companies are strong, and were also designed for the longer term with 60% of our companies having no covenants. I repeat that, 60% of our companies have no covenants. And 90% of our debt maturities fall after 2012.

So we have several years to deal with the current situation before we deal with debt maturities. While we believe we have one of the best portfolios of companies coming through this cycle, one advantage of today's credit markets which are so depressed is the opportunity they give us to work to lower our purchase multiple and delever the companies by buying debt at substantial discounts to pay for them.

In terms of the opportunities we're looking at currently, we believe we will be able to set up deals at close to 5.5 times EBITDA with modest leverage that will ultimately yield large returns. In fact we bought one fairly recently at 4.3 times EBITDA. It is still too early, but later in this cycle we will consider buying cyclicals where we've had great success in the past buying at low multiples on depressed earnings. We are opportunistically buying back debt in our portfolio companies, as I mentioned, where we see very attractive return opportunities or meaningful deleveraging opportunities.

While we are unable to talk for legal reasons about specific fund raising activities, I would like to give you some color in the current environment. I am sure you will ask some questions about it. Tony handled this really well in our press call. As in prior down cycles, investors are most hesitant to invest when the values are most attractive to buy. Somewhat of a conundrum. We continue to meet with LPs and they recognize the opportunities not just in private equity but in credit, which is really a favored class right now in other areas that will present themselves over the next several years. We are out in the market on BCP VI as you know, and expect that we will begin investing that fund beginning in late 2009 or early 2010.

Now on to real estate where we generated net fee related earnings of $44 million in the fourth quarter and $120 million for the full-year 2008. These compare with $48 million in the fourth quarter of '07 and the full year of $183 million. Similar to private equity, ENI was negative due to, again unrealized marks on portfolio of $4.4 billion in the fourth quarter, and $6.4 billion for the full year. These represented a 30% reduction in the quarter and 39% for the full year which is quite significant.

Interim unrealized valuation adjustments will move up or down over time as you know, but we believe we own very high quality properties. During the most recent quarter, vacancy rose and net operating income softened in our office segment. In addition, capital markets further deteriorated with no net debt and size available for real estate commitments, virtually around the world.

Government programs such as the new TALF could be helpful to the real estate securitization markets in terms of reestablishing them, but it is too early to know what the eventual benefits will be.

Within the hotel markets, weakness has become increasingly evident in the fourth quarter and we expect it to continue during the year. That said, our largest hotel investment, Hilton, significantly outperformed the industry in 2008. Remarkably, this produced flat EBITDA in the fourth quarter and was up 9.2% for the full-year 2008, despite all of the headwinds against the hotel industry. We do however expect 2009 to be much more challenging for this business.

The office market cycle tends to lag other real estate cycles as leases have long tails. The magnitude of slowing will vary by market but generally we expect rent rollovers and occupancy erosion. We substantially delevered the office portfolio through asset sales, particularly in 2007, which as you know we were the largest seller of assets in the world and continue to own excellent assets in good markets. We have more than $12 billion just in real estate of dry powder in our funds, which are by far the largest amount of available capital in the industry and gives us significant flexibility and great opportunity over the next several years. Where we are seeing the most attractive opportunities in real estate today is in debt, where we can get high yields with very little risk. For example, we can purchase senior debt where our cost is covered but the underlying properties are worth only 20% to 40% of the original cost of the asset and earn returns in the 15% to 20% range. We are patiently remaining on the sidelines on real estate equities virtually worldwide, which we expect will become more attractive later in the year or in 2010, or maybe even later as there will be numerous fore sellers in this asset class.

In terms of our marketable alternatives business which is comprised of BAAM, Blackstone Alternative Asset Management, we call it BAAM, our fund of funds in the hedge fund area and GSO, our credit business. They had significant growth in net fee related earnings to $131 million in 2008 from $50 million in 2007, as Tony also reported on the earlier call.

In the fourth quarter, net fee related earnings totaled $22 million compared to $23 million in 2007 fourth quarter. In terms of BAAM they outperformed peers in both performance and redemptions. The BAAM composite return was down 10.3% in the fourth quarter and 19.7% for the year, only the second year in our 18-year history in this business that we had a down year.

Some of the things we did well were early recognition of potential industrywide liquidity issues and implementation of appropriate defensive portfolio strategies, keeping higher cash levels and avoiding leverage in the fund of hedge funds. Our due diligence processes allowed us to avoid Madoff. I will repeat that. Our due diligence processes allowed us to avoid Madoff and the other people involved in Ponzi schemes, and the other implosions in the hedge fund universe.

While we outperformed peers in markets, in hindsight there are things we would have done differently, mainly limiting our exposure to niche markets which suffered disproportionately in the liquidity squeeze. And we would have waited longer before increasing exposure to the dislocated corporate credit market; we were just simply too early.

For 2008, we experienced positive asset inflows of $7.6 billion and gross outflows of $3.3 billion, leading to net inflows of $4.2 billion for the year, our second strongest ever behind 2007 when we experienced net inflows of $8.2 billion. This net inflow number is against the backdrop of industry redemptions in the range of 20%. It is actually pretty remarkable performance.

Fee paying assets under management declined modestly to $21.7 billion from $24.2 billion at year end '07. We began 2009 with positive performance, despite large declines in equity markets. This is -- I have to repeat that again because I don't think you will see it many places. We've had positive performance in our hedge fund of funds despite the dreadful start to 2009 for the general markets. We have a healthy backlog of inflows and a robust pipeline of new products and services in development, including building out a distressed fund of hedge fund product, a long-only equities product and an advisory business focused on assisting our institutional clients in directing their hedge fund allocations. This last product is leveraging off our due diligence and risk management services, and we believe this translates into even stickier assets.

In terms of our credit business, GSO, they're also having a good start to '09, both in terms of performance and opportunities for investment. They're actually up so far in the year nicely despite again, the overall negative segment, at least in the equity markets.

Fourth quarter credit market performance as you know was stressed by unprecedented deleveraging on a global basis and technical pressures in the marketplace. While DSO's main hedge fund outperforms its peer group as well as broader credit and equity benchmarks, it was not immune. And it took unrealized marks in the quarter.

Bank loan pricing industrywide, as you probably do know, reached record lows and was seemingly disconnected from its historical relation to bond pricing. For example, the Credit Suisse leverage loan and high yield indices were down 29% and 26% respectively to yield approximately 14% for senior loans and 20% for junk. Credit markets to date this year while still volatile are stable to improving. We are not anticipating a quick recovery, but we do believe the worst of the technical selling has passed.

Gross inflows in GSO totaled $5.3 billion in 2008, and gross outflows were only $700 million, bringing net inflows to $4.6 billion. In terms of where we are investing, right now we like higher quality, senior secured debt, bank debt where we can generally get attractive returns with quite low risk. We also believe there's a huge supply of very attractive restructuring opportunities on the way.

In the distressed arena, we are launching a new fund that will provide focus on rescue financing solutions to companies in need of liquidity, particularly a good thing with very limited bank debt available. The GSO investment team will work very closely with our private equity group and our portfolio operations group to leverage their collective expertise. We expect to structure these investments with strong covenant protections and to minimize downside risk with substantial equity upside potential to warrants or conversion features. Generally speaking there is tremendous interest in the institutional community in credit products, and we are extremely well positioned in these markets and with these products.

Finally, our advisory business. Against a tough market backdrop, our advisory business finished with a record year in revenues, $411 million compared to $368 million in '07. We generated $106 million in the fourth quarter, down from $161 million in the third quarter, and up from $91 million in the fourth quarter of '07. While this business will continue to be lumpy quarter to quarter, we anticipate another strong year in 2009.

We have one of the leading restructuring businesses in the world, and a top quality advisory boutique. Both businesses have a good backlog of business for the coming year. We tend to focus on large and complex assignments, and given the economic and business environment, our corporate advisory restructuring businesses have increased their coordination.

Our most active sectors of course are FIG, energy, consumer and real estate, in addition to our role as global coordinator for AIG. We are advising countries now like the Ukraine and serving as one of General Motors' advisors. We have added several other clients such as Chinalco which has just announced this large deal with BHP, Flextronics. Blackstone is a very attractive place for top talent based on our franchise value and lack of the issues that many of our competitors face.

We removed some resources from elsewhere in the firm to our advisory businesses to add capacity where it is needed. We have also built a very terrific team in Asia. We anticipate more senior hires this year as many talented people are looking for new homes in a troubled environment.

In summary, while the global economic environment remains tough, we believe we are very well positioned for the next several years of investment activity. Our competitive position remains very strong in all of our businesses. As LT described, financially we have a rock solid balance sheet and an income model with management and other recurring fees that more than cover our expenses, including appropriate incentive compensation.

We have substantial dry powder in all of our funds. We think there will be excellent investment opportunities looming, particularly in debt now, and selective great buys in private equity over time. Our long term investment record positions us at the top of the peer group in every business that we are in.

Many of our competitors are impaired either in terms of investment record or declining assets under management, but we do not expect much in the way of near term realizations needing to drive sizable earnings per unit. This environment will turn the way it always does, and when it does, we think we will have the opportunity to harvest very substantial gains.

That's a lot of listening to me, and I appreciate you taking the time. Now we will open for questions.

Thank you. (Operator Instructions) Your first question comes from the line of Roger Freeman with Barclays Capital.

Hi. Good morning. Can you update us on I guess how much of your private equity portfolio is currently marked above versus below cost? I think last quarter only like a third of it was below cost. Where does that stand now?

It is Tony, Roger.

Hi, Tony.

I don't think it has changed very much. I'm not sure off the top of my head though.

I guess what I am, where I am trying to go just in terms of being able to forecast a little bit better, how much is left in terms of incentive fees that could be reversed? Because if you look at your embedded gains now, actually both in private equity and real estate, they're negative. It is very hard to figure out how much of a cushion you still have there on some of the older funds. I know BCP V, I think you said, was already below cost last quarter.

As you know, it is fund by fund. Roughly speaking, it is about -- at the fund level, there's about $355 million left on the real estate side. That would translate into about $150 million at the BX level, and then in private equity it is about $100 million.

At what, which level?

At the BX level.

That's helpful. I guess as you look at the magnitude of the markdowns, at what point do auditors require reserving for any sort of clawbacks? In other words, what's the tipping point between how far below cost you are and the time until a fund is expected to unwind since that's obviously a long period of time?

Roger, this is LT. It's a couple things. For the most part clawbacks do not accrue until you're at the end of the fund or when there's a realization of loss. So the unrealized losses that we've been talking about are adjustments to value or actually do not trigger a clawback liability. Once it is triggered at the end of the fund or the realization, it is only to the extent that the distributions prior to that on a cash basis exceeded 20% and adjusted for taxes, and right now that's a de minimis amount and we don't foresee any clawbacks.

Okay.

You are going to still see -- you will see disclosure when we file the K which will give you a total amount that assumes if you've sold everything out in 12/31.

Well, yes.

Yes, what the clawback would.

So when we file the 10-K you will see that, and it is about $110 million for the firm if we were to sell every investment at its current mark right now. But as I said, you have to realize the losses at the end of the fund you are looking at half a dozen years or more since that.

Right. Okay, and as you think about -- as we think about the marks in private equity in the fourth quarter, I think you said it was marked down about 20%. Obviously that's about the same amount the global stock markets are down. And typically you mark down less that that. Is there to some extent a catch-up as you think about the fourth quarter?

No, I don't think we mark down less than the market. We mark down based on every company as it should be marked every quarter.

Well, I mean but your EBITDAs are up; right? So I mean that would imply that you would actually mark down less than the stock market unless you were going to mark the multiples down further?

Yes. We adjust multiples based on the market conditions at the time, of course.

Okay.

Just to give you one example that I think will help (inaudible) for you. In real estate, so to use the Hilton example where for the year EBITDA was still up over 9% and we took a meaningful markdown on that asset, the -- we do DCFs on all of them. We reduce our future cash flows, and for a lot of companies, we assume lower exit multiples than what -- the recent multiples. So the combination of that. So I would actually argue it is anticipatory rather than backward looking, because the two big drivers would be exit multiples and then assumptions in our future cash flows.

Yes. That was actually where I was going with that. That's helpful. And actually, on that point, in terms of your portfolio companies, it is obviously sort of impressive that you think 75% of your companies will have positive earnings next year. Can you just help us think about that a little bit because S&P consensus numbers are down 10%? That's actually probably way too low. I mean it will get worse than that. Can you maybe give us an update on the industry groupings or the weightings that -- you talked a little about health care and food distribution, but is there anything more to help us think about that?

We could take that offline. But you have to remember that amongst other things -- first of all, they're not all US companies. We have Asian companies in there, and whatnot. We have been avoiding cyclical industrials for a long time, going on three years. So, I don't think it is surprising at all. And a lot of times when we buy these companies, and you're in the early stage, every company we buy we expect to be able to create significant value. That's the only way we can justify the purchase price. We are not just buying and letting it sit there, which seems to be implicit in your question.

Many of these companies we have identified cost savings going in as a very, very high percentage of a full year's EBITDA. So in the most recent deal we took public, we had, Apria, we identified low hanging fruit of $200 million on the $350 million EBITDA basis. So, and also, it is a very -- it is a noncyclical company. You know, home oxygen; you need oxygen, you need oxygen. So, what you have got is a combination of a stable mix of industries but a lot of value coming through the operating improvements that we put through our companies, and those two things together I think are what drives it.

Got it. Do you think those earnings are going to be up like in the single digits in your model?

I don't remember what the percentage is on average. And I don't, we don't look at it that way because it is hard -- an Indian company and a Chinese company and the turnaround, it doesn't -- we don't think that's a meaningful statistic.

This is Steve. What I would say on that is that you imagine huge growth in earnings in the kind of really negative environment that you have would be unrealistic. But if we can perform at this kind of level is pretty amazing and as Tony said, it really shows the power of what we actually do for a living which is not always well understood, apparently. But if we come in with big cost savings where other types of synergies and revenues are off, then we won't get what we were really looking for, which is more than single digits, if you will. We're affected by other people -- like other people in that sense.

We come into the deals typically with a huge buffer of business plans of what we are doing. We have been looking for recession for quite some time and been, as Tony has said repeatedly on different communication platforms, since '06 we have been talking to our companies about the recession. And they have been making plans.

So our ability to get ahead of this is not perfect. But it is really much better than you would expect from regular companies. But I think you cover, as well as the way different mix of cyclicality in our portfolio compared to a normal scatter from the S&P.

Okay. Thanks for the comment.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Great. Thanks, just Steve a big picture question for you. If you look at the capital raising environment out there now, there's a lot of talk about where some of these secondary LP interests are trading. Is that altering your ability to go out and form new capital? There's a lot of discussion about it, but I am curious what you are seeing. Is that at all affecting your ability to raise new funds?

I think the secondary phenomena is driven by illiquidity at a lot of the limited partners, and because there are firms that do buy private equity secondaries, all of a sudden there was a rush to put these up for sale just to get liquidity. The problem that occurred is there's at least 4 or 5 to 1 sellers to buyers because you have people who really want liquidity, and you only have so much money. And what that is doing is artificially driving the price way below what I think fair value is. And as a result of that, most of the sellers are not selling.

There's like a real big gap between buyers and sellers, and so this was an opportunistic sale in a rapidly global deleveraging environment. And what it has done is driven the value so low that fundamentally you can't transact. Now I think we have -- to our knowledge, we haven't been involved with any of those sales on our stuff.

But, I think the issue for limited partners is really more about confidence and not vis-a-vis us in particular, but really vis-a-vis their whole portfolio. When you've had sort of 40% to 45% of the world's global wealth destroyed in a year and a half, that obviously affects investment behavior. Just for a start, there's that much less money available. So people are cautious about it.

They're concerned about further losses with almost whatever they do. People tend to freeze when they've been through this kind of period, they tend to reassess what their asset allocation should be. And we see all of that type of behavior through our investment platforms because we are in most of the major investment areas in the alternative class.

So there is real interest in the credit space. Even with people who are concerned about what is going on, the risk return in that area now is so visible that if you are a really capable manager who can lead limited partners through that thicket to develop really 20% type returns with virtually no risk, that does bring out limited partners. There's no doubt about it. We have a variety of products in those kinds of areas. On equity oriented products, there's just much more concern because nobody knows where the bottom is, and usually buying equity and guessing where the bottom is has turned out historically to be a bad approach to investing. So you see some caution there.

We are seeing a trend also, not to spend too much time on your question, but you asked sort of a general question, of more interest on the part of large institutional investors in separate accounts as opposed to just investing in a fund per se, which is one way of addressing what has happened to some of them as part of investing in individual hedge funds where gates have been put up and some of them are concerned about that. So that's a longer answer than perhaps you wanted, and a broader one.

No. That's a good one. I appreciate it. Just a little more specifically on real estate. Can you just talk about the debt maturity schedule on the real estate specifically? I think you did refer to your private equity debt maturities. And then also the clawbacks, I guess we can wait for the filing but is that also the clawback provision on the real estate side?

The clawback number I gave you, Marc, is for both private equity and real estate. And the real estate debt is not so different from private equity, frankly. I think it's 90% after -- 2012 and after.

Okay. Great. One more balance sheet question. Can you break down the investments by bucket on your balance sheet, what your GP call invests are or sort of the breakdown of the investment bucket?

Mark. It's LT, I will give you a general. If you look at between private equity and real estate right now, we have about $1.3 billion of investments which we would describe as BX investments, which are effectively our GP investments. Our liquid investments which are primarily in BAAM are about $300 million. And then we have about $767 million in cash. So all together you add that up, you're at about $2.14 of investments that belong to the firm in those various vehicles.

Okay. Great. Thanks.

Your next question comes from the line of Dan Fannon with Jefferies.

Good morning. I wanted to talk about the BAAM segment for a little bit. Specifically in the fourth quarter if you could let us know what the redemptions were. And then, I think Steve you mentioned you have a healthy backlog of inflows. I just wanted to get a little bit more color around that because it seems to be different than what we are seeing for the rest of the industry.

Yes.

Yes. First on the redemptions, we really think about it from a full year perspective since most redemptions are fourth quarter. So it is kind of like looking at your quarterly compensation and then you get a bonus in the fourth quarter. So actually we do look at it as full year. That said, the growth outflows for the fourth quarter were $2.5 billion of the $3.5 billion total for the year. That would be a very typical seasonal pattern.

Okay. Is there any lock-up I guess because you guys had pretty strong growth earlier in the year? Is there a period of lock-up that might be delaying some redemption requests because I think what is going on in the fund of funds world it seems as if you guys are outperforming pretty significantly here.

Yes. It had nothing to do with the lock-up which are generally 95 day notice within BAAM. So our next big redemption period would be the first half, the end of June. So really nothing unusual driving it. Frankly, the conversations that we've had with our investors are that this relates to some of the future inflows that when the gates are removed to some of our competitors, we expect we are actually going to gain share.

So why is it better? It is two things. One we had much better performance and we continue to avoid a lot of the blow-ups in the marketplace. And finally, sorry, we are institutional not retail. A lot of funds you are referring to are retail funds. We had no leverage in the funds. There are just a lot of qualitative differences in our business versus what you would generally consider fund of funds.

I think in, to completely answer your question, we've had indications of like roughly $1 billion of inflows already, and expect sort of a guess -- you never know, you're in dialogue with people -- several billion more. And these types of inflows for us come as a result of discussions over a long period of time. I think what is going to happen to this business with us is that the hedge fund asset class is obviously shrinking, pretty dramatically, because of performance in redemptions.

The good hedge funds or even not so good ones basically lost half of the money on the downside that long-only portfolios did in equities. And that if you make the same on the upside, and you lose half on the downside, from a risk adjusted point of view if you are managing a big institutional portfolio that has just seen long equities go down 40%, a well managed hedge fund of funds program is a good thing. And also a number of institutions as the hedge fund industry was evolving felt they can pick their own managers just as well as folks like ourselves.

All you need is like one made up in a portfolio at an institution. They come to a pretty rapid conclusion that they don't have the due diligence scale at their institution to deal with those problems, and I think we have shown over a long period of time that that type of risk is substantially reduced or in fact in our case eliminated.

And so I think the model to look at for our business is that there will be more concern about hedge funds generally in institutions for reflexive reasons, that many of them will understand that the risk/reward characteristics performance wise are extremely good compared to long-only equities. And that our market share will go up because some of our competitors have had a tough time so that from a performance perspective -- and we are in the custom tailoring business in our BAAM business. We work with large institutions, develop sort of specific kind of mixes that they want in terms of the kind of performance versus the kind of underlying funds, and that we think this should be a nicely growing business for us against all the trends that you will see. And it's turning out to be just that way.

In fact, if we can hold our performance this year in this -- it's pretty dreadful out there for equities. We're up. If we can do that kind of stuff along with the kind of procedures we use that really engender a lot of confidence in the institutional area, in the consultant community, that we could really turn this into a very very nicely growing business which it has been, frankly, over many years. I think it is a complex story. But when you understand it, the force is with us.

Thank you. That was very helpful. And just in terms of the dividend for the cash distributions, we kind of look at 2009 and where we are through the first couple months of this year. If we see a negative adjusted cash flow for you guys are you, given the improvement in your liquidity situation and whatnot, do you still expect to pay the dividend -- a distribution as you start the year?

Yes. We expect we will make dividend this year. As LT was saying, our fee related earnings, which really managing fees and the deal fees that chug along on a recurring basis, cover all of our operating expenses and enough cash flow to pay the dividend in full. It is actually not a dividend, it's a distribution. But to pay the distribution in full absent markdowns in the liquid investments, and at this point we've moved almost all our cash out of -- all of the resources from out of the liquid investments and it's sitting in cash and equivalents where we won't have those kinds of marks. So I think it makes distribution look pretty secure for this year.

It is a little frustrating being us because if we do pay that for the stock at this kind of dimwitted price, you almost say why even pay the thing because nobody cares. But from our perspective the numbers say we ought to be able to do that, and we would hope that somebody out there appreciates it. It is frustrating.

Okay. Thank you very much.

Your next question comes from the line of Hojoon Lee with Morgan Stanley.

Thanks for the additional information on flows and performance at [NAM]. I was wondering if you could walk us through how much of the 18% quarter-over-quarter decline in fee earning assets came from net redemptions versus performance in other factors, such as is Kalix's AUM still included?

Okay. So Kalix -- well, I will just take you through the inflow, outflow then, and market activity for the quarter.

Okay.

So -- and these are again, growth. This is all of the -- this is actually the entire firm. So this will reconcile you from the end of September, 99.7 to end of year 91.1. So growth inflows were up 2.55. Gross outflows were 5.23. The largest portion of that as I mentioned was the year-end BAAM redemption and then also the equity -- the liquidation of the equity hedge funds. And then that gets you to -- oh, and then we had market change of 5.9 negative and that gets you to the 91.1. So it includes the liquidation on the equity side.

Okay. Great. Thanks. I know you touched on BAAM's composite performance numbers in 2008. Would it be possible to give us an update on longer term three and five year performance numbers for some of the key products at BAAM and GSO?

I don't have it handy but we can certainly get it for you.

Okay. Great. And just my final question here, would it be possible to break out your transaction fees that you earned in 2008 versus monitoring and more recurring fees, just to get a sense of the run rate for fees that aren't dependent so much on investment base and purchase price?

You'll actually see that in exhibit 4A to the press release we put out.

Okay.

We put out base management fees and transaction fees.

But he wants within transaction.

He wants within--.

The break between--.

Right.

We don't--.

We don't break that out. Let me say this on the deal fee side. As it, there isn't much deal fee or any really to speak of in private equity or real estate. So you got nothing there. The other deal fees really relate to the advisory business. I think you will find over the years that they're pretty steady. One of the reasons they're growing now is because there's so much going on in the restructuring and bankruptcy advisory practice. And so, they're not dependent on a lot of, a rash of new deals so to speak. In fact it is probably good for the advisory business if the world gets worse. And you find that the balance between M&A -- the M&A business and the restructuring advisory business, where we shift resources back and forth depending on where the need for the capacity is, to be surprisingly steady.

Okay. So these are more like retainers?

Well, there's a lot of retainers in there too, but we don't break out retainers versus contingent fees in our financials.

If I may just one last question. Could you -- you updated us on the dry powder in real estate. Could you update us on dry powder in private equity and just generally if you can talk to the areas, whether thematically by sector or geographically, where you think there will be opportunities over time in private equity.

We have about $13 billion of dry powder in private equity at this point. Thematically, we are I think -- let's define it first of all by region of the world. I think the United States is the most interesting region today, followed by parts of Asia, not all of Asia, followed by Europe. Europe in our view is, frankly, right now the least interesting and from an investment perspective.

In terms of type of investment, we are focused, well, first industry sector we are focusing on noncyclicals clearly. It is still, I think too early to play the cyclicals as Steve mentioned and too hard to predict where the bottom is. We feel like as an investor, we don't have to do that. We can actually wait for a bottom to happen and an upturn to begin before we have to start investing in cyclicals. And so no cyclicals. And noncyclical in industries would be the industry focus.

In terms of type of deals, our heavy focus now is on medium-sized buyouts, number one. Number two, a lot of credit related investments. Buying in debt or rescue financings or different forms of credit related investments. Number three, financing for corporations that want to go do things whether that be build a new plant or make an acquisition or otherwise, that can't otherwise access capital markets when they're closed. We are getting some wonderful investments through that route. And then our corporate partnership activity is staying strong. So those would be the type of different transactions that we are doing.

Great. Thank you. And anything on the real estate side that you would be looking at in this environment, whether hospitality or office?

As I mentioned, we basically think real estate is -- still has farther to fall before we get very active. We are actually looking at some interesting things in, I would say, assets or areas that have already hit bottom, but they for the most part take the form today of rescue financing. By category, usually in real estate, different sectors of real estate turn down at different stages in the cycle. Hotels tend to turn down quickest, retail turns down after that, office after that and apartments last. So, but I think all of it has more to go. So, we are not really -- there's nothing to be said about one sector over another right now.

Thank you.

Your next question comes from the line of Robert Lee with KBW.

Thanks. Good afternoon at this point. I have a question with the LPs, there's obviously been a lot written about the stress a lot of LPs are facing in their own cash flow and reluctance by some to either pony up to commitments or sell them in a third market. Could you maybe talk a little bit about what you are seeing there from your LPs? And then also to the extent some of -- maybe you allow some of your participations to be sold in a third market and how do you get comfortable with potential buyers of those?

There has been a lot of focus on LP problems, but we haven't seen any at this point in general. The drawdowns that we have made have all been funded, and in our funds I don't think there have been any secondary trades as Steve mentioned. In real estate, we have a couple of retail investors that are at the very small end of what we do, one of which was burned in the Madoff scandal who have indicated they would like to find a way to reduce their commitments. But it is de minimis in terms of size and impact on real estate. Private equity, we haven't had any.

We do have LPs that are stressed, we do have LPs that have taken licks in the market, we do have LPs that have different -- either allocation issues or liquidity issues. But for the most part it is not translating in any of them, either backing away from the funds or not living up to their commitments or anything else, and nor have we had much pushback to that effect.

Maybe a follow-up question on the dry powder in the private equity. If I heard you correctly, I think you mentioned it was about $13 billion of dry powder currently. And I may have it wrong in my notes but that seems to be a pretty significant increase from I think last quarter, I had in my notes around $5 billion or so.

Yes. That's combined of the 5 -- something over $5 billion left in BCP V and the amounts we have closed on already for BCP VI.

That was my question. Thank you very much.

Your next question comes from the line of Mitch Taylor with Wells Fargo.

Good morning. Thanks for taking the call. I would like to touch on Hilton a bit. You had great performance in the fourth quarter, when you compare that to other public companies, which were down in the 25% range on EBITDA, and you had flat performance. I'm just kind of curious what you expect in 2009 given that others are kind of guiding to more of the same?

We are not giving projection for 2009, but generally speaking, Tony alluded to we would expect a declining trend across real estate, and hotels being one of the earlier sectors to move, but we would expect that in Hilton as well. That said, we still think we are going to perform better than the industry. But we would expect the trend to be negative.

Thank you.

Next question comes from the line of Jon Glick with JHL Capital Group.

Jon, go ahead.

He disconnected. We will now go to a follow-up question from the line of Roger Freeman.

Hi. Just had a couple of follow-ups. You made an interesting comment about buying up portfolio company debt at a discount. Are the portfolio companies buying that back or are you buying that up in your funds?

Both. It depends a little bit on, depends on a variety of things whether you are buying the junior most portion of debt or whether you are moving up the balance sheet and buying debt where there are intervening classes of creditors. In the latter case, then we would probably have the fund buy it so we preserve the relatively senior status of the debt. It also depends on whether we have co-investors in the investment who are able to -- will fund their portion of that once again, if so. And if a junior partially put it in -- put equity into the Company and have the Company buy it in generally and delever the Company. If not, we might do that through the fund.

Okay. Is this pretty widespread at this point, that you are doing this in one form or another?

Well, we are doing a lot of it. I'm not sure exactly. I would rather not get into specifically where we are doing it obviously because some of these instruments trade publicly.

Right.

I would say without commenting on us, but just for understanding our industry, that this is a major use of dry powder for the private equity industry generally. And it is one of the things as Tony made the point in the press call that corrects for higher payment of prices near the top of the cycle. It lowers your overall value for the Company, and it makes it more conservative and helps the industry deal with potential default issues if you can retire debt, whether it is from the banks or from the subordinated debt market.

So given that the debt markets have really collapsed, it has presented some very interesting low risk opportunities for the private equity community.

I want to just comment that the most interesting ones are on the healthy companies that are performing that have no credit issues.

Right.

Because, that is where, you know as an owner of that Company you are going to have to pay that off at par plus full interest in whatever, four or five, six years, if you can have a chance to buy that in today at $0.25 to $0.50 on the $1, it is pretty compelling. So don't be confused that this is actually troubled companies necessarily. It is a great opportunity for healthy companies.

Right now, the world says that every private equity company is a troubled company. That's just complete garbage and they have treated a lot of the debt securities that way. And our job for our limited partners is to pick our way through that thicket and come up with the conservative things to be doing.

That makes an incredible amount of sense. A lot of companies are doing that and companies are buying in converts as well. That makes sense. Can you just, on the fund raising side, can you just help us sort of prioritize where to think about where you are having the most success? You talked about a few different areas. Obviously we know about BCP VI. Last quarter there were nine funds you were raising money for. Can you help us think about where you are getting the most traction right now? I assume a lot of it is in the GSO area.

We always have a number of funds in the market, but I would say and I think Steve touched on this in his comments. The area of most interest to investors around the world right now are credit related areas, most particularly we hear a lot about people interested in distressed. So, that is what investors have the natural appetite for today. And I would say that the other areas are all -- will all trail it. I think the big focus right now or the big level of interest is credit.

And credit breaks as Tony said, it doesn't have to be distressed. It can simply be stressed. It can be a healthy company whose debt is collapsed, that's like the easiest way to do something. Real distress is when the company is sort of a mess, and you're trying to pick a fulcrum security in terms of what to buy that you think is conservative or puts you in a good position, and there are all kinds of different types of investments within the credit spectrum ranging from both corporate to real estate as well. And so there's a lot of opportunity there and it is easy to display that opportunity to investors.

Right.

So we have a number of different products that take advantage of that.

Got it. And actually speaking of credit, Tony, on the media call earlier you made an interesting comment about -- I think somebody asked you about the public/private investment vehicle that the Fed and Treasury are looking at putting together. It sounds like you've had some discussions with them and I understand there's questions around the amount of leverage in terms of leverage that you can get, but do can you have a sense on when some of those details are actually going to be available?

Some were issued today or last night, and I think they're unfolding as we speak. They're racing around. I think that were it not for staffing issues at the Treasury, this would come out quicker. They would like to get it out. I expect we will know a lot of -- it will take a lot of form in the next week or two.

Okay. Just lastly I have asked you this in the past, Tony, in terms of the proprietary indicators that you get out of your portfolio companies. Can you give us an update on what you are seeing? I mean is there any bottom in sight for -- in the economy from the indicators you are looking at?

I think we are -- I'm not going to tag this to our portfolio companies necessarily because they're actually doing pretty well but they're -- their actions are an input but only one input. Our view is the economy is going to continue to deteriorate sharply this quarter and next quarter, and be pretty weak the third quarter and maybe sort of see stability fourth quarter, and then I think you will have a pretty -- and a weak 2010, although I don't think it will keep declining. I think 2011 will show some growth but still be well below the levels of 2006 and '07.

My own view is you may not get back to 2006 and 2007 a long time unless we have sort of an emotional and psychic shift going on in America which is back to basics, don't live on leverage, live within your means, more humble lifestyles, less extravagant consumption, savings and all of that sort of stuff. I think you go through, I think -- I believe that a lot of people in America are legitimately scared and have seen their life savings or what they perceived as their net worth largely either wiped out or cut in half. That's going to forge fundamental behavioral differences and we think that will retard the growth.

So, our own view is, if I had to -- given that there have been a couple of things promulgated out there publicly, I think our view as to what will happen is much closer to the stress test for the banks than to the President's budget scenario. And if I were stressed to the banks, I frankly would put a little bit of more negative scenario and want to see how they did in that.

Got it. Just actually one real quick one. On real estate the 30% markdown in the third quarter, how much of that would you say is due to the illiquidity in the market? In other words, if you get more liquidity, if the securitization picks up, if CMBS can be bought (inaudible), does that potentially help you raise that -- eliminate that portion of the discount?

It was about 30% in the fourth quarter.

Right.

There's no way two ways about the fact that cap rates in real estate have gone up a lot and they are very much a function of the availability of credit. And so if the securitization market, CMBS market comes back, that will help real estate values in general. I can't off the top of my head unscramble how much of the 30% were markdowns of cap rates versus projected operating income, but cap rates were a big part of it.

Okay. Thanks.

That's all the time we have for questions. I will now turn the call back over to Joan Solotar for closing remarks.

Thanks everyone for joining, and feel free to call with any follow-ups that you have.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.