Blackstone Inc (BX) 2009 Q1 法說會逐字稿

Welcome to the Blackstone Group first quarter 2009 earnings conference call. Our speakers today are Stephen A. Schwarzman, Chairman, CEO and Cofounder; Tony James, President and Chief Operating Officer; Laurence Tosi, Chief Financial Officer; Joan Solotar, Senior Managing Director, Public Markets. I'd now like to turn the call over to Joan Solotar, Senior Managing Director, Public Markets.

Thanks, Loren, and good morning to everyone. Welcome to our first quarter 2009 conference call. I am joined today by Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; and Laurence Tosi, CFO. Earlier this morning, we issued our press release announcing first quarter 2009 results and that's also available on our website. We will be releasing our 10-Q this coming Friday.

So 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. 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, and all of the statements are qualified by those and other disclosures in our reports filed with the SEC. We do not undertake any duty to update forward-looking statements. And we will refer to non-GAAP measures on the call. For reconciliation to the most directly comparable measures in GAAP, refer to the press release we issued this morning, which is also available on our webcast. This audiocast is copyrighted material under Blackstone Group and may not be duplicated, reproduced, or rebroadcast without consent.

Getting to the quarter, we reported negative economic net income or ENI of a loss of $0.07 per unit compared with a loss of $0.06 per unit in the first quarter of 2008 and a loss of $0.68 per unit in the fourth quarter of 2008. Drivers of the improvement sequentially were mostly related to fewer negative marks in private equity and real estate and higher performance fees in BAAM and GSO. In the current quarter, you will notice that private equity reported positive ENI of $53 million in spite of overall marks on the portfolios, and this is a function of having no additional performance fees to reverse on certain funds that will impact us while also having a writeup of high performing energy investment in a different fund in the quarter. That's a quirkiness we talked about in the past where it's really fund by fund analysis when we look at performance fees.

Net fee related earnings totaled $89.5 million in the first quarter of 2009. That's 32% higher than it was a year ago. Adjusted cash flow from operations or ACFFO totaled $74.8 million or $0.07 per unit for the first quarter of 2009. That compares with negative ACFFO of $4.4 million in the first quarter of last year and negative $19.3 million or $0.02 per unit in the fourth quarter of 2008. The greatest change was decline in losses on the firm's invested capital in the funds. And as we mentioned last quarter, we redeemed about $700 million out of liquid investments at year end so that we could improve our corporate liquidity by creating a Treasury fund for cash. And to that end, our cash balance ended the quarter at $776 million, and we continue to have virtually no debt outstanding. We will be paying $0.30 per unit distribution related to the first quarter to public unit holders, and I will now turn the call over to Laurence Tosi, our CFO.

Thank you, Joan. Good morning and thank you for joining us the call. I will walk you through some key highlights and update you on our balance sheet and liquidity position, both of which we continue to build on and remain very strong.

This week, Blackstone was awarded its first debt rating from Standard and Poor's -- a single A rating with a stable outlook. Single A is the highest rating S&P has currently assigned to any direct alternative asset management company and reflects the strength of our balance sheet, cash flow generation, and business diversity. The rating gives the firm $3.5 billion of debt capacity and flexibility. The firm currently, as Joan said, has no net debt.

We also renewed our revolving credit line. You may recall we have $1 billion revolving credit facility which expires this month. We received commitments exceeding $1.3 billion from the expanded lists of US and international lenders. We elected however to reduce the size of the revolver to $850 million due to the current strength of the firm's balance sheet. We have no drawdowns on the current facility, but we expect we might use the new facility from time to time to manage seasonal cash flows.

Last quarter, we introduced net fee related earnings in response to investor and analyst desire to look at the company's revenues, expenses, and operating cash profitability, excluding unrealized marks or actual gains on investments in the portfolios. In the first quarter, net fee related earnings from operations totaled $89.5 million. Fee earnings are up 32% from a year ago, due to a sharp growth in advisory fees and the impact of careful management of expenses. Compared with the fourth quarter, net fee related earnings were down $28 million, partly due to lower transaction advisory fees as well as nonrecurring unwinding cost related to the spinout of our long-short equity hedge fund and its investment team.

Our business model is such that we continue to generate solid cash flow by covering our operating expenses including compensation with our fees. We also continue to be disciplined with respect to expenses in the current environment. Evaluating the cash profitability of all of our business units is a continuous process.

Our cash position remains solid. At the end of the first quarter, we had total cash balances of $776 million, our highest balance since 2007. We have created an eternal low risk liquidity or treasury fund to manage the firm's cash by in part by moving cash out of our proprietary funds into cash. Additionally, $400 million remains in our liquid funds such as GSO and BAAM. Importantly, while we remain partners with our limited partners or LPs in all of our funds, both Blackstone as the general partner and the firm's partners' personal investments, we have limited the volatility of the firm's cash income by moving these amounts into the treasury fund. These moves also improve our liquidity position, as they eliminate redemption restrictions. At the end of the first quarter, the firm had cash and liquid investments of $1.05 per unit, other investments in our funds of $0.99 per unit, and equity capital of $4.35.

With our new single A debt rating, higher cash balances and fee income generation from our diverse businesses, we continue to better position ourselves to take market share and manage our businesses for disciplined growth. We remain cautious with our use of capital, which we consider a distinct competitive advantage in this environment. I'll now turn it over to Steve.

Thanks, LT. While the economic background remains almost as challenging as the last time we hosted our quarterly investment call, the global equity and debt markets are vastly different. Liquid markets have decoupled from the real economy by anticipating that we are approaching a bottom. The result is that we have greater stability and improvement of global asset values in both debt and equity.

Since our last call with you, on February 27th, US stock market is up 20%, high grade debt is up 3%, the leverage loan index is up 8%, and high yield spreads have come in 300 basis points during the same period. What we are seeing in the real world is somewhat different, for we continue to see economic softness. Real estate, which tends to lag the economy, fared worst than most sectors, and the hotel business in particular is suffering additionally from corporate fears having conventions and other gatherings. Swine flu is also not a help. Fortunately that doesn't look like it's going to be as bad as people thought. That said, public real estate companies have been issuing large amounts of equity to pay down some of their debt and the values of public real estate companies have risen sharply off their lows.

Fundraising for alternatives is spotty as traditional sources such as pension funds and insurance companies are under pressure from the market declines in 2007, 2008, and the first few months of 2009. The result of their performance declines is that their cautious in allocating new money except to specialty products which we are finding in credit -- both corporate credit and real estate credit. Fortunately, we are active in both of those businesses and are also getting inflows in our hedge fund to funds business due to increase market share there. The recent global market stabilization and appreciation can only help us in terms of additional fundraising across all of our businesses.

In all of our businesses, we're managing for what could be a protracted downcycle, while simultaneously identifying attractive investment opportunities. Generally speaking, debt opportunities and buying healthy noncyclical companies at very low prices currently provide some of the most attractive risk adjusted rewards, though debt markets have risen as we purported since the end of 2008.

We marked down our fund portfolios in the first quarter to a lesser degree than the marks we took in 2008. The first quarter of this year, we reduced the real estate portfolios by an average 19%, and private equity by only about 3%. In the fourth quarter of 2008, we reduced the carrying values of our real estate portfolios by an average of 30% and our private equity portfolio by 20%.

As you know, I have been quite vocal about FAS 157 and the disconnect between quarterly marks and ultimate realizations as they relate to our private equity and real estate portfolios. Last quarter, we highlighted our analysis illustrating that marks in the 2001 to 2003 downturn were far different from the eventual sales prices for these investment, which if you remember what we said, were seven times with the trough marks would have been under current FAS 157.

We have a much more recent case in point with the announcement of the sale of one of our portfolio companies called Stiefel Healthcare Company to GlaxoSmithKline. Stiefel is currently marked at 0.7 times our cost, or a 30% loss under FAS 157. Glaxo agreed to buy Stiefel at a price that is approximately 1.4 times our cost, which is twice the current mark. We outperformed the market and the healthcare index significantly since this company was purchased in August 2007, which was top of the market kind of a purchase, with a 15% IRR, or modestly higher if we achieve the earnouts involved with the deal compared to a 28% IRR decline in the S&P, and a 20% decline in the healthcare index. Basically we have outperformed Stiefel, as an example, by 43% over what's happened in the general market. And that's part of what makes private equity a very very interesting asset class, at least the way we do it.

It's important to remember we buy companies to hold for a long period of time. We control the timing of the sale of our funds holdings. There is no pressure -- I repeat, there is no pressure to sell at inopportune times. In this case, a strong strategic buyer will benefit from the substantial synergies with the company, including a terrific backlog that the company had as well as cost takeouts.

Continuing with private equity, that business generated net fee revenues of $79 million, an increase of 12% from last year's first quarter, attributable to a combination of modestly higher base management fees and transaction fees. Against the fourth quarter of 2008, fee revenues were off $22 million or 21%, largely due to a transaction fee associated with the Apria closing in the Q4.

We continue to feel good about the inherent value in our private equity portfolio of companies. But we are not immune to the current economic hardships. I'd highlight factors that lead me to believe we should achieve favorable results for investors. First, our mix of sectors are towards those as I told you the last time which are defensive, with roughly 60% of our companies falling into noncyclical businesses such as food and healthcare. In other words, we are not a random sample of the S&P index on leverage. Second, our ability to increase EBITDA in hard times through our portfolio management group is very good, which I will tell you a little bit about. Third, we have limited near term debt maturities and further reduction of debt at discounts to face value from what we are buying in the market. From a operating perspective -- this will surprise you -- we are expecting more than two-thirds of our companies to either be above or within 5% of the EBITD levels in 2009 that they had in 2008.

Last week we hosted all day meetings with 24 of our portfolio companies CFOs We held panel discussions focused on the current and future economic environment, debt structures and capital market opportunities, and cash management strategies. We regularly meet with our companies, sit on their boards, and gather the CEOs annually. Our CFO meeting was incredibly well received and we believe beneficial to the operations of our companies.

We took an average markdown of only around 3% across the funds in the first quarter. We will only sell investments when it's beneficial for our fund investors. We do not believe those sales will occur at the currently depressed carrying values reflected in the funds as well as the economic environment. We may hold the investments longer than originally intended, but we will not sell an investment unless we think it reaches a desirable price. In terms of the opportunities we are looking at currently similar to what we talked about at the end of February, pricing has come down considerably, although we remain cautious. We won't expose investors' capital before we are comfortable with the environment. We are buying some debt where it makes sense.

Make no mistake, volumes in the private equity industry have declined dramatically for new deals. First quarter volumes in fact are down roughly 80% industrywide from what they were a year before. We expect the global GDP will recover and with it, our volume of interesting investment opportunities will increase. In current times, we would argue for maximum caution. Pricing is often not low enough and sellers are not yet ready to sell. This is normal. Operating results have shown little resiliency and lenders won't lend on anything other than current operating profits. However, buyers and sellers will find greater common ground in a more stable environment in the future.

In this regard, we are tracking the type of cyclical deal generation pattern those of us who have been in the business for a long time have seen many times before. We are holding our teams to high hurdle investment rates, of 20% at a minimum and in fact we're pushing it a lot higher with potential upside considerably greater than that 20% threshold. The number of opportunities we are screening is rising as more companies are trying to shed assets or becoming more realistic about the pricing of those assets. As we assume long periods for holding of at least five years, it is to the benefit of our investors that we stick to iron discipline that served us so well over the past two decades and remain patient.

Real estate performance fees were down year-over-year to a negative $229 million as LT told you, as compared with negative $30 million in the first quarter of 2008, but improved 44% over the fourth quarter levels from last year. Valuation pressures continued in the first quarter, and we took a negative adjustment of 19%, which is really pretty large, as we lowered operating projections for our assets. There are very few transactions in real estate currently, in large part because things are going down and changes were based on our view of deteriorating fundamental trends. While pressures may continue, we believe we could be nearing a valuation bottom sometime later this year.

Real estate fundamentals turned more negative in the first quarter, as you probably know, in both the office and the lodging sectors. In the lodging sector weakening fundamentals became more evident in the Q4 and accelerated in to the first quarter with overall RevPAR down 17.7%, and the luxury sector down even more. Office cash flows were more stable given the long-term nature of the leases, but rental rates declined significantly and rising vacancies were prevalent throughout the portfolio and frankly, throughout the real estate industry globally. Not surprisingly, companies are hesitant to move forward with new leases, and employment reductions mean less space is needed. The offsetting long-term positive that there is virtually no new development happening, preventing the inventory increases which prolonged past downcycles.

There are important and favorable differences between our portfolios in real estate and those of many industry players. First, we have very limited near term debt maturities. We have just 2% of debt coming due in 2009 and 2010 after some recent refinancings. We also took the opportunity in 2006 and 2007 to sell down properties and reduce leverage in our EOP, Carr, and Trizec portfolios from $40.6 billion to net debt of $10.5 billion, a $30 billion reduction. We have shown extraordinary patience with approximately $12 billion of equity capital available for investment in real estate funds. We expect that the deployment will be numerous and at high returns as we move through the cycle. Currently the most attractive risk reward opportunities lie in senior real estate debt, and we are pursuing these through our special situations fund.

Just to give you an idea of how wonderful this stuff can be when it's done at the right time in the right way, even in an adverse environment, we bought a publicly traded investment grade REIT bond in late March at $0.605 on the dollar. At that price the bonds yielded 23% to maturity. Today which is five weeks later, the bond trades in the market at $0.79, up 31%, in five weeks. This is in a real estate market that's really in a melt. Notwithstanding the negative trends for the company and assets, we believe that the REIT's asset quality and its management capital structure provide a significant mispricing in the market. The company in fact recently began buying back its own debt. Just an example of the types of things that can can a specialty real estate manager like ourselves that you can find.

I mentioned that more public real estate companies have been accessing the equities and convertible markets. Additionally, government programs including TALF, which I guess we could talk about later, could be helpful to loosening up real estate lending markets, but we see a lot of pressure in this sector for quite some time.

In terms of our manageable alternative sectors, which is lovably called MAAM -- our marketable alternatives business which is mainly comprised of BAAM -- Blackstone Alternative Asset Manager, our fund of hedge funds, and GSO our credit business had favorable net income and cash flow, as performance fees turned positive for certain funds in this sector in the quarter. MAAM had net earnings of $14.4 million, which is down from last year's $26.3 million. As we mentioned last quarter, our single manager equity hedge fund business was sub scale and difficult to grow to where it was material to our other businesses. So we made a decision to spin it off to the investment team. We also consolidated our distressed funds into the GSO business.

Competitively, we are fortunately in the sweet spot of the marketable alternatives space. Our BAAM fund of hedge funds has continued to gain momentum. Unlike many of its competitors, some of which have been actually decimated, BAAM has a institutional client base versus a high net worth or retail client base, and due to our rigorous due diligence we avoided the blowups of last year including Madoff and several of the others. While many funds of funds businesses are experiencing outflows and some significantly, particularly those with a retail base, BAAM continues to see net inflows. In the first quarter that trend continued with $1.5 billion of external inflows.

Investment performance in the first quarter across BAAM was up 1.3% net, meaningfully outperforming equity markets, which were down low double digits across the US and Europe, and up modestly in select Asian markets. BAAM ended the quarter with roughly $23.2 billion in fee earning assets, 7% higher than year end and there's almost no one whose had increases of that type in this asset class. GSO, our credit business, is operating in challenging but now fortunately stabilizing and improving market conditions. Most credit indices improved from their record low levels and the highest quality names are performing best. Within GSO's portfolios, bank debt had the best performance from both capital appreciation and interest income. GSO's hedge fund finished the first quarter with flat to slightly positive performance. GSO had net inflows of $515 million in the first quarter of 2009. Though conditions can change, we expect net inflows to continue for the remainder of the year. We see many compelling investment opportunities in credit. We have recently formed a joint venture between GSO and our private equity business to create solutions for companies in need of financing.

You may find it surprising that there will be more $1 trillion in corporate debt maturities over the next five years. We anticipate that there will be insufficient bank and leverage finance markets to absorb it. We will utilize our credit deal structure and sector expertise to create solutions for several of these companies. This new business is just one example of how our range of expertise in various pockets of the firm come together uniquely for the benefit of our clients. While investors generally have less money to invest for sure, credit remains an area of relative interest and we are particularly well positioned to take advantage of this.

In terms of our advisory business, it produced meaningfully higher earnings and cash flow in the first quarter compared with a year ago and in the fourth quarter of 2008. Revenues rose 29% year-over-year. Underlying trends include a record quarter for our restructuring business and a significant increase in our corporate advisory business, both of which offset declines in the Park Hill fundraising business. Sequentially, advisory revenues declined modestly, but were more than offset by a greater decline in expenses, the end result being a 20% increase in earnings.

Revenues in the advisory business will remain lumpy and have always been so. That said, our restructuring and corporate advisory businesses in particular are clearly showing momentum, benefiting not only from the current economic environment, but also from having top quality global franchises while many of our competitors unfortunately are in disarray. We are adding senior talent selectively and recently opened a new advisory office in France.

You may have read about an investigation by the New York State Attorney General, which has placed the whole placement agent business under attack. Legitimate placement agents such as Park Hill at Blackstone Group could not be more different from the political fixers and influence peddlers that is the subject of the New York investigation. Park HIll is regulated by the SEC and FINRA, and its professionals are all licensed security industry professionals. Once an established placement agent takes on a client, it performs the same functions as the underwriter of a public offering, helping to write the offering memorandum, marketing the funds extensively, and never engaging in inappropriate activity.

From the point of view from a public pension plan, a placement agent performs a very valuable service. Many public pension plans receive hundreds of proposals from investment funds every year that simply do not have the staff or the budgets or the expertise to evaluate them. Large well known funds have existing relationships with the large pension funds and need placement agents less. Small sized funds, women controlled funds, minority owned funds, and startup funds need an advocate and a representative to get them noticed. Banning placements entirely disproportionately hurts all of them. We are hopeful that when this area is looked at, that it will resolve by having extensive regulatory licensing requirements as well as disclosures of fees and other things, which is something we believe is a good thing, for the industry, good thing for the people who want to have money raised. It's a good thing for the pension funds, and it's a valuable service that the head of the state of Massachusetts basically echoed with that sentiment in something he announced the day before yesterday.

In conclusion, I'd like to point you to the cover of our IPO prospectus, about two years ago, which read, quote, we intend to continue to follow the management approach that has served us well as a private firm. A focusing on making the right decisions about purchasing and selling the right assets at the right time and at the right prices, without regard to how those decisions affect our financial results in any given quarter, unquote. This is the edict we believe we will continue to yield our investors top returns. We are in a cyclical business, and this is an extreme cycle, but it is nevertheless a cycle, and we will come out of it very well.

We are all operating in an unprecedented business climate, with a combination of sharp economic declines, market gyrations, heavy government intervention. Here at Blackstone, we continue to move forward with a eye towards capturing unusual investment values and opportunities to create our organization created by these dislocations, while at the same time being prudent stewards of investor capital and controlling expenses. We are well positioned in all of our business with approximately $27 billion, and I will repeat that, that's $27 billion in dry powder -- a strong balance sheet with high cash balances and earnings model which gives us incredible staying power in even the toughest environments. While many others are experiencing outflows, our customers are giving us more of their investment dollars. As a nonTARP recipient, without any net debt, we have been able to continue to build our business and importantly hire and retain top talent. Thank you for joining the call. I look forward to answering any questions that you may have.

Loren, if you can please open up the line.

(Operator Instructions). First question comes from Roger Freeman with Barclays Capital, please go ahead.

Hi. Good morning. I guess with respect to your comments across the private equity portfolio, I think you said you expected them to be within 5%, of the EBITDA in 2009 versus 2008. Can you talk about how that's trending in the first quarter and whether there is anticipation of recovery in that outlook?

I think what we said is that --

Two-thirds --

Two-thirds of the company would be in that zone, not all companies.

Sorry. Two-thirds, right.

And the first quarter is consistent with that.

Okay. Great. I guess in terms of your proprietary indicators that you talked about a lot in the past, what are they telling you here? Any indications with respect to how close we are to the end of the inventory liquidation cycle? I know that's not where your portfolio is positioned as much. Are your portfolio companies more optimistic at this point? Your commentary suggests you are pretty cautious about the economy.

Tony will comment independently, but we have different companies that give us different signals. I think it's pretty clear from the signals we are getting the the rate of decline in the companies is abating. That we have one company -- I don't want to disclose which one because some of these report, gives you a sense that the current quarter GDP second quarter might be in a 2% to 3% decline range rather than the 6% that we had. This is in the guess category, because it's projecting off of a quarter that isn't even done, it's off of one or two companies that usually are pretty good predictors of things. If you went from a GDP perspective and said the decline is abated by about a half, that wouldn't be odd at least from my perspective of looking at it.

Roger, a couple of things, the portfolio companies are humans, run by humans at least. They tend to think if things are really bad then we are near the bottom because things are really bad. I would say that the attitude of the executives is more positive than the statistics would show. Of course our job is to keep them focused on the numbers. But as Steve said, the rate of decline appears to be abating somewhat, but the decline itself is still going on. And so in other words things are still getting worse. And I don't consider that green shoots. I consider that the continuation of winter. Having said that, I think that it seems like the inventory liquidation, with those of our portfolio companies that are in that business, has played through I think, and in some cases around we are seeing some inventory restocking, which I think is causing some of the apparent moderation of the decline. But I think that inventory cycle is behind us, I guess.

Okay, that's helpful. With respect to the government programs, Steve, you mentioned TALF as an opportunity. I saw comments from the media interview, Tony, that you didn't want to be a fee pit manager? Is that true, if so, why? Seems to be opposite of what Fortress was saying this morning. Do you think the program is not going to work?

We didn't apply in the first round. We will have a look and see how it develops. We are not so sure about a variety of things -- how active it will be, how expensive it will be to look at the asset pools that are for sale, and how money will really clear the market when the pricing becomes known. And it's a little bit of interplay between that and what Treasury tells the bank they need in terms of capital. If they lean harder on the banks for more capital, then the banks will be more willing to sell at lower prices, so we are watching that. And then capital raised for this purpose looks like it will be fairly low margin in terms of -- low margin business. We are watching all that. So far we elected not to jump in there. That can change.

Also I say on that, that we haven't been in the business of buying securities, and if we were to ahead with that it would be in the loan area, which has not been offered yet. It's more comfortable for us analytically and experientially.

Last question, on your private equity portfolio -- last quarter you said that -- I think I got it right -- two-thirds was above cost and one-third below cost. You gave a interesting statistic about one company where you got bought out above where you were marked. And I guess on the portion below cost, can you aggregate how much below cost that is? 20% to 30% at this point, so we can think about how much of a discount there is from a liquidity standpoint?

You can see, we give you the breakout in the 8-K cost, and then the aggregate unrealized value for both, and we split it out between private equity and real estate.

Do you give it by fund now?

We've never given it to you by fund.

It's by segment. Embedded in your question was assumption that I think two-thirds were above cost and one-third below cost. I don't know that's that still correct. I haven't looked at it from that perspective lately. I just want to mention that. You can see the aggregate dollars, I just don't know the number of individual companies that's going on this [backsell]. That's not how we look at it.

By nature of the fact that you see reduced carrying values in the Q4, and then modestly again in the first quarter, with few additions to the funds, it would suggest that you have more below.

Within 3%, it's pretty modest.

Right, okay, thanks.

Next question comes from the line of Howard Chen with Credit Suisse.

Good morning.

Good morning.

You alluded to the opportunity to buy back operating company debt in your prepared remarks. Can you update on the ability and appetite to do that in the first quarter versus what you saw later in 2008?

I think the opportunity was pretty good, and I guess if we had a generic comment, I wish we had bought back more, because those markets have really strengthened as you know. Without putting a number on it, we were able to buy some stuff at really good prices. We did some significant exchange offers for some of our companies, and overall that period represented a very good time and one never knows what happens in any market, and if we get -- we are continuing to look for certain of the companies at still buying in debt. If there is any further weakness in the debt market, that creates more opportunities. But basically it was a really fantastic period to be buying in debt securities in our companies.

It's much tougher -- you can buy it. It's more liquid now, it's probably easier to buy, it's just prices are higher.

Following up on that, your commentary you wish you could buy more, my sense was that at least later in 2008, the limiting factor was not but rather the limited supply out there.

That's true. The sellers weren't so silly, right? They didn't want to sell at those prices we wanted to buy. In some cases we made a match in other cases we couldn't.

Right. Just my follow-up question, in your prepared remarks, you seem fairly constructive on the adjusted cash flow for an operation in the past few quarter. You've shifted to a more conservative cash management philosophy with that. With all, what's a scenario in which the distribution would fall below the $1.20 for the year? That statement was in the release this morning.

As we said last quarter where it's a distribution not a dividend, it's based on the cash generated. So if we were in a considerably worse environment and we weren't generating the cash flow, then there wouldn't be cash flow that we would want to give out out of our capital base. But based on what we know today, we feel confident in the $1.20.

Howard, your question is trying to get a little bit at like okay if you got, given that you moved your cash to fairly low risk things, what might surprise you if that's the question.

Yes, probably should ask it that way, thanks.

Thing this might surprise us is writeoffs of assets, writeoffs either of investments or if we had a counterparty with receivable that we had to writeoff or something like that that's outside the ordinary course. We don't have a lot of that, but writeoffs of assets that are outside the regular flow business and some bottom falling out of the advisory business.

That's really helpful. Thanks again for taking my questions.

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

Thanks. In terms of the what is left in terms of carry to be reversed, we are thinking around $50 million or so, can you give us a sense of how much carried interest is left to reverse through the P&L?

Right now in real estate, $0, and in private equity it's about $230 million.

The $230 million is an aggregate. So in terms of what would flow through to BX, it's about $120 million.

$120 million total.

Correct. Again, because it's fund by fund. So there are certain funds where there is nothing left to reverse, but at least one fund where you could have another $120 million.

That's private equity and real estate.

Steve, $27 billion in dry powder -- obviously a envious position to be in for a lot of folks. Can you give us more color on the pace of capital deployment, and maybe regionally, where you see sort of putting the capital out first?

The pace of capital deployment is really slow now for reasons that we mentioned, and the private equity business -- other than buying in debt, you can really make a mistake being too early. It's not like the business you're in, which is a lot harder business than the business we are in, where you have to guess what's going to be happening in the world and then be earlier than the guess. And if you miss a big run, your performance looks terrible. When we miss a run it's a like life in slow motion. And that we are much better off putting money out after we see it turned, and trying to pick bottoms. Picking bottoms on leverage is a very unhappy business strategy. And so we are on the whole pretty cautious. We also raised our target return hurdles. It's not that hard to put a lot of money out now, if you want to have returns that are probably lower than the risk.

In terms of the geographic areas of interest, I think this remains consistent from the last call that the area we sort of like the best right now is United States, North America if you will. Very interesting stuff going on here. We will probably get out of the economic downturn a lot faster than Europe, where most analysts looking at their banking system as a example, think they're only like 20% to 30% through whatever the losses they are going to end up taking. And most analysts think that the US is a good deal further than that. And so we are recently negative on Europe, we are quite positive on the US and we are positive on certain areas in Asia. The Asian deals tend to require less money just by the nature of the scale of companies, that you can practically buy into. So I think what we say in summary in this one, is that this looks like a good foregoing money, moment rather for US oriented investments for our funds.

Mark, let me add to that. Last year we put $3.4 billion out in private equity, I think -- I don't think the pace will be so different this year, it would be in the $3 billion range. Real estate -- we're on the sidelines until we see things bottom out. Or the debt markets crack a little bit more. In credit, that I think you will see us quite active there. And I think you will see us putting out I would guess $3 billion to $5 billion in credit this year, if I had to guess. Some depends on how the fundraising goes and different vehicles and whatnot. But those would be the flow sizes. And as Steve mentioned, we don't think the US economy is the best in the world, but the values are pretty darn good, and then Asian economies are doing much better and you still cut companies down 80% to 90% from their highs in India and China, Europe is betwixt and between a little bit.

In terms of MAAM, can you update us on April performance for BAAM and GSO and what the flow trends have looked like so far for the second quarter or the end of the first quarter?

Sure. Without being specific, I would say that they are all modestly positive so far in April, actually looking across all of our funds. In terms of flows, again we wouldn't be specific, but we are still expecting net inflows as we go through the year.

Great, thank you.

Okay.

Your next question comes from Guy Moszkowski with Banc of America.

Good morning. Was wondering first of all if you could give us color on the changes in the carry compensation plan that you referred to in the corporate private equity sector?

I don't think there's been any real changes.

There was a small reversal with respect to the change in the carry plan that had to do with certain funds, whether it contributed at the IPO, but it's not material to the overall results.

The way it was worded, I thought it was more important than it is.

It's not.

Okay. And I was wondering if you could give us a little bit more of a flavor for the performance fees that were positive in one of your private equity funds, which you referred to in the first paragraph of the corporate private equity section of the segment review?

So we had an investment -- well we had one fund where we had net write up, where there is still the carrying values above cost, so we are still accruing performance fees in that fund. So even though we were in aggregate net down about 3%, as you know, it's fund by fund. So we actually had positive performance fees. It was an energy investment that's doing quite well.

Then the rest of the improvement was the fact that the net depreciation in the portfolio more broadly was less negative than it had been?

Correct, and also, as we mentioned, in some of the funds, there are no longer performance fees to reverse.

Right.

And that EBITDA was up for most of the companies.

Right. Fair enough. This is a small thing, but in terms of trying to model out some of the fees, I noticed that the LP capital deployed in private equity was down around 83% versus last quarter, but the transaction fees were only down by about 50%. Maybe you can help me understand that so we get a little bit of help in terms of modeling that line item?

That line item will be lumpy, because certain investments have transaction fees associated with them and certain investments don't. It's like trying to model an M&A fee, and I think it's difficult to give you that much guidance. Particularly if you are buying in debt, or if you are making some of the equity investments in Asia or India for example where you in their minority investments, you typically would not have a transaction fee associated with that.

Let me comment on that. Your traditional LBOs where you are buying control of the a company has typically sizable transaction fees associated with it. Where as, as Joan mentioned, minority investments, Asian investments, debt investments, and other kinds of things don't. That mix has shifted away from the traditional LBOs to more of an eclectic mix of other things, and that's what you are seeing in the lower transaction fees.

One other thing, Guy, it's Steve, I think following up on what Tony said, which is sort of interesting, I think that -- imagine you're in a world of the first quarter with lease US down 6% GDP, and us having somewhere around two-thirds of our companies up from the previous quarter which was also down 6% GDP. Something is going right with the portfolio management of our business. We have a very big aggregate portfolio, with huge annual sales over $100 billion. And part of the story longer term, I believe, for you know a business like ours, is how well can you handle your portfolio and your companies, where is the value at? And I think that type of result, which is counter to I think what would be most people's expectation, shouldn't be lost in the shuffle if you will of a long call like this with tons of numbers and the less sort of talking a blue streak, so something to think about.

I know -- I recognize some of the questions I'm asking are down in the weeds. It's because we try to maintain the model.

As long as they are green shoots, not in the weeds.

Good point. One more of that type of question on MAAM. Your management fees as a percentage of your average fee based assets under management fell by about 10 basis points versus last quarter. Is that because of a mix shift in the assets within MAAM or is there something else that creates seasonality or something?

That's purely a reflection of a shift in mix of assets and not a reflection of change in pricing or any other factor.

Great, thank you.

Next question comes from the line of Robert Lee with KBW.

Good morning. Question I have is looking at our own balance sheet obviously, it's in pristine shape, and you do have history of having acquired at a good time I guess, GSO. You have plenty of debt capacity, single A rating. Strategically, how do you think about further acquisitions for yourselves, particularly since there is so many various types of asset management businesses prospectively on the block?

We think it's a great opportunity longer term. We have as you know we not only have the balance sheet you mentioned, but we got public currency. We're one of the few companies out there in the alternate asset management space that does. And there is a lot of companies that are on the block, there is a lot of companies struggling. There is a lot of alternative asset managers that got started up in the last few years with the idea that the trees would grow to the sky and got partway there, have heavy -- carrying heavy overhead. We tend to be in a high fixed cost low variable cost business, and our -- with the assets being marked down by redemptions or by market moves depending on the business, are now struggling for profitability. We can take the assets on, put them onto the system and our platform and for us those are very profitable ads. So I think you will see us looking hard at consolidating acquisitions, and you will see us also looking hard at stepout acquisitions not of huge scale probably, but do have good adjacency with our existing businesses where we think we can be synergistic. So we think there is an exciting opportunity for us in the next couple of years.

Any interest in expanding in to more long only strategies through acquisition?

Not at the moment. What we would like to take as first priority -- things that logically fit with us, and can spread revenue over fixed base without affecting the management or existing funds or their performance and can be easily absorbed. And as Tony said this is like a great thing, for potentially, if you get some done it's a great thing for a seller who may have a marginally profitable business and can turn it in to something much more valuable in our hands and you split some of that difference and that's a good thing for everybody.

We are in the long only business in a way that shouldn't be lost -- we of course have the Asian funds that we manage, but more particularly in fixed income we run a lot of long only different products. I would expect to see that grow, and there where we can layer stuff in there where we already have all the analysts covering all the companies -- that would be something that would be of interest to us.

As Tony said, we are big buyers of bank loans, leveraged bank loans. It's something where we picked up additional business I guess in the last quarter and could bring on a lot more of that business. So in a curious way, the private equity business is a long only business. In real estate, owning real estate buildings and so forth, it's a long-only business. So we are long-only, and I guess one way to think about it is with carries and without carries. That would be actually a more interesting way of phrasing the question.

But in fixed income, in the GSO business, we are taking on managed accounts, institutional investors with traditional long-only fee structures. And that's been a very attractive area and we continue to have a lot of interest in that. I think we will continue to pursue that.

One follow up -- going back to your comments about participating in the government programs, how much of the reluctance there relative to other asset managers have been more enthusiastic -- how much of that relates to the fact that so much of the details or fear around government restrictions, whether it's compensation or just getting involved, from your perspective -- is that one of the things that's holding you back, too?

I don't think that's a particular driver. For us I think by the time everybody at this table or everybody in the world could have different views that by the time PPIF is actually activated, I think that the people participating in it will require much greater assurances on those issues than exist today. And I think to have a robust series of transaction auctions and things of that type, the government is going to need to deliver that -- and will want to frankly, so that everybody has a more secure position. I think looking at that issue with whatever uncertainty somebody has today is not anticipating where that will ultimately come out.

I think for us and I think Tony said this, is that you got issues with a lot of people coming in with 7 to 1 leverage that certainly ought to be bidding that stuff up to quite high levels, and it's doing it in an auction type format. We don't really particularly like auction formats if we can avoid them. And there's tens of billions of dollars of assets that will be available for sale away from these programs, which is more than enough for us to make good returns for our investors. We don't have some religious belief about this area. We are not rigid about it. And we may come back and look at it when it involves loans. We may as a firm use TALF financing without being involved in PPIF, which has more complexity to it than just simply using TALF. So I think there is more to come in this area and that we have a totally open mind about it. This isn't like a door that's shut and locked and never opening.

Great, thank you very much for taking my questions.

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

Good morning, thanks for taking my questions. Can you talk about the fundraising environment as well as the tone and the outlook for your LPs and appetite for new investment today?

I would say that the tone is not a happy one, for sure. I'm sure you read a lot of the stuff and know yourself there are individual capital pools down 30% as a result of the equity declines and decline in debt securities. If you are down 30%, and your liquids just by the accident of that movement go to a higher percentage of your portfolio, it really potentially puts a crimp on institutions ability to commit new monies almost any place, first of all, and also to the liquid area -- which is why we are seeing more interest in our credit products and so forth here at the firm. I think this is something that's forcing- - one, a pause in commitments and secondly, a relook at what the asset allocation mix should be at a lot of these capital pools. To the extent at the world recovers to a more normalized basis, that takes pressure off of these people and enables them to resume more normal commitments.

If you would have asked this question whatever date it was, March 6th, there were a lot of really, really unhappy folks out there -- because there is only so much pressure you can really take if you're managing a pension fund or an endowment or a foundation and still have enough cash flow to distribute to either your beneficiaries or to the organizations that need the money that you're servicing -- that you're serving as a big part of their budgets, like universities for example.

So I think in terms of LPs, the better the equity market gets in particular, because they're allocated big to equities as a group, the more the situation ameliorates. So if you are planning on looking at it on a continual basis, just monitor the equity markets, the liquid equity markets, and you will get a sense of what will happen with their commitments. They're struggling, there is no doubt about that, as most people would be struggling with a huge drawdown in the equity markets that occurred really since the middle of October in 2007.

Having said that, it's never a uniform picture -- you've got some pension funds that are new or institutional investors that are new that have lots of capital, have money on the sidelines. And they are viewing this to commit capital to the space where the values are low and returns should be high. If you look at the historic cycle of returns in private equity real estate, they're always highest on the investments made in times like this, and lowest in May when everything seems great. A lot of people see that data. It's compelling and there are definitely people out there making new commitments into the space.

If you talk about it in terms of products, there are some product areas which everyone loves, they like credit, they like particularly distressed credit. There's a lot of appetite for that. There is a lot of appetite for secondary funds, although seems to be more talk than action on that. Not a lot of trades crossing, but there is a lot of talk about it. There's a fair amount of interest in places like infrastructure, some different niches like that which are viewed as assets that are more stable and hold their value, longer term holds things like that. So core -- private equity core, real estate relatively harder, but some of those other things still a lot of action.

Okay. Great, that's helpful. I guess can you update us you are raising now on the credit side? Is there any discussion on fee changes on capital that's being raised today, whether on the performance fee or base management fee side?

There is a lot of discussion about fees in the industry. But so far the traditional products have held their fees. And some of the new debt oriented products I think are -- you will see somewhat lower fee structures than what you think as traditional, 2 and 20, it's hard to get new 2 and 20 money raised now, particularly for credit, where the risk on the upside is the same. I think that's appropriate change in the fee structures myself -- or not even change, but some of these new products where you're buying on a unlevered basis bank loans, you are just not going to get 2 and 20 on it.

With -- so there is a lot of discussion, but we don't see a wholesale change necessarily. We have about seven funds in the market now that range from clean tech, to late stage venture funds, to infrastructure, to distressed real estate debt to rescue financing on the corporate side, bank loan funds, and so on, so those -- that's our fundraising pallet.

I would say, one further thing is that uncertain of the more liquid types of funds, there is some discussion on certain of them that management fees would be paid after the money's deployed as opposed to before the money is deployed. So that's one thing on certain of the more liquid ones that we are seeing the market demanding moving towards or discussing. Okay, great, thank you.

Your next question comes from Steven Sampson with Vista Research. Mr. Sampson, your line is open.

Are there any other questions?

That's all the questions we have for today. I would now like to turn the call over to Ms. Joan Solotar for closing remarks.

Thank you, everyone, for joining. If you have followup questions, feel free to give me a call directly.

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