Blackstone Inc (BX) 2010 Q1 法說會逐字稿

Welcome to the Blackstone Group's first-quarter 2010 earnings conference call. Our speakers today are Stephen A. Schwarzman, Chairman, CEO, and Co-Founder; Tony James, President and Chief Operating Officer; Laurence Tosi, Chief Financial Officer; and Joan Solotar, Senior Managing Director, Public Markets. And now, I'd like to turn the call over to Joan Solotar, Senior Managing Director, Public Markets. You may proceed.

Great. Thanks, Tawanda.

Good morning, everyone. Welcome to our first-quarter 2010 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO; Tony James, President; and Laurence Tosi, CFO.

Earlier today, we issued the press release announcing our results, and that's also available on the website. As you've probably noticed, we've moved up our reporting date for this quarter, and that will be true for future quarters as well, so we want to report and get the results to you closer to the quarter end, but that also means the 10-Q will be out a couple of weeks post the report.

So I'd like to remind you that today's call may include forward-looking statements which are uncertain and outside the Firm's control. Actual results may differ, and for further discussion of risks that could affect the Firm's results, you can look at the risk factors in our 10-K. We don't undertake any duty to update forward-looking statements and we will refer to non-GAAP measures on the call. For reconciliations, you should refer to the press release.

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

So we reported economic net income, or ENI, of $0.32 per unit for the first quarter. That compares with $0.29 in the fourth quarter and negative ENI of $0.07 in the first quarter of 2009.

The results were up modestly on a sequential basis, benefiting from higher investment income in private equity and real estate as values were materially impacted by the improved operating and market environment, and this was partially offset by lower transaction and advisory fees.

As mentioned last quarter, we will be basing distributions to all unitholders on a distributable earnings calculation. So for the first quarter 2010, distributable earnings totaled $149 million, or $0.14 per unit. That compared with $0.19 in the fourth quarter and $0.07 per unit in the first quarter of 2009. So we will be paying $0.10 per unit for each of the first three quarters of the year, and then we will have a true up in the fourth quarter. If we were to look back at last year's results and assume we were paying a distribution on the same methodology, we would have paid $0.48 to all unitholders, both public and the Blackstone personnel.

As we outlined last year, the preference ended in the fourth quarter, so this will be the go-forward methodology.

If you have any questions on that or anything in the press release, you can just follow up with me or Weston Tucker after the call. And with that, I'll turn it over to Laurence Tosi.

Thank you, Joan. Good morning and thank you all for joining the call. First, a few financial highlights, and then some thoughts about Blackstone's liquidity position and balance sheet.

The Firm had its fourth straight quarter of positive ENI, at $360 million, our best since 2007. The Firm again reached fee-paying AUM records of $98 billion, continuing our growth at a 15% compound rate for the past 10 years.

In private equity, we grew ENI both sequentially and year over year. ENI rose 9% from the fourth quarter, driven by higher principal investment income, partly offset by lower performance fees. Investment income benefited from a 16% gross increase in the carrying value of our funds, the majority of which was in BCP V. Two-thirds of our private equity portfolio experienced an increase in value from either cash-flow accretion or an improved operating outlook, or both.

In real estate, similar to private equity, revenues and ENI were driven by higher principal investment income and performance fees, also reflecting improved conditions. In addition, real estate benefited from the higher performance fees in its debt strategies business. That business, which was started 18 months ago, now has a total of $1.7 billion in AUM and returned more than 20% annualized in 2009, a pace that it has continued in the first quarter of this year.

In CAMA, or our credit and marketable alternatives business, revenues, ENI, and fee earnings were all up sharply year over year. Fee-paying AUM increased 12% versus the first quarter of last year, benefiting from strong returns and inflows across most funds.

Finally, our advisory business declined sequentially and year over year, due mostly to declines in restructuring revenues, which we expected following a record year in 2009, and the impact of several very large transaction in the first quarter of last year effected comparability.

Our M&A business grew revenues year over year, but was down slightly from a seasonally-strong fourth quarter. Our fund placement business began to see a more normalized business level and was up sharply from the same period last year.

Net fee-related earnings for the Firm were $99 million in the first quarter, down from last quarter due mostly to lower advisory and transaction fees, but up 10% year over year, primarily reflecting AUM growth and an increase in transaction levels since the comparable period. Realized performance fees of $54 million, primarily driven by private-equity realizations, resulted in the distributable earnings of $149 million for the first quarter this year.

Finishing with a few comments on our financial position. Blackstone recently renewed and upsized our revolving credit facility, which is now $1.07 billion and matures in three years, versus the one-year facility we had prior. Despite the greater size and term, the new facility is half the cost of our prior facility, which reflects the soundness of our balance sheet. The new facility contributes to our net liquidity position of over $2.2 billion.

Similarly, Blackstone's 10-year bond issuance last August continues to trade very well with an almost 30 basis-point tightening of spreads over the past few months.

Our financial flexibility enabled us to do a cash acquisition of Allied Capital's CLO business, which added $3.5 billion in fee-paying AUM just after the end of the first quarter. An attractive -- we added with that deal an attractive LP base with marginal incremental and expense. With that, I'd like to turn it over to Steve.

Good morning. Since our last call with you about two months ago, the global economic climate has continued to improve, which is positively impacting most asset categories and almost all of our businesses.

In developing economies, GDP growth is robust, while in developed markets, there are mixed signs in terms of the pace and magnitude of the recovery. However, in the United States specifically, it appears that the risk of a double-dip recession, which we have often said publicly is not a realistic possibility, has abated.

GDP growth in the fourth quarter was finalized, as you know, at 5.6%. The consensus view for 2010 continues to improve. The Fed has remained committed to accommodative policy, and inflation is tracking at low levels. It doesn't seem to pose any near-term risk. Investor appetite for risk has been increasing across markets, in part due to a search for yield in a sustained low interest rate environment.

Perhaps most importantly, the March employment report was the first meaningfully positive report since the beginning of the recession, showing an increase in payrolls as well as an increasing average workweek, which indicates that firms are finally feeling the need to start increasing the amount of labor hired. However, we have a long, long way to go to materially reduce the unemployment rate. But it seems we are at least moving in the right direction.

Both equity and credit markets benefited from positive funds flows and improving fundamentals. The high yield index rose another 4.5% in the first quarter, following a record year last year, and the S&P 500 rose for the fourth consecutive quarter. Investors expect most companies in the S&P 500 to grow revenue and earnings in 2010. And what a change that is from where we were one year ago.

In our private equity portfolio, we expect a similar trend of increasing revenues and earnings.

I'll review the business segments in more detail in a moment. But first, I'd like to specifically highlight the increased valuations in our private equity and real estate portfolios in the first quarter. These were the largest in several years, and almost entirely driven by improving cash flows.

As I said last quarter, there is some degree of conservatism in our valuations in relation to where public comps trade based on our valuation methodology, which incorporates very long-term multiples. In line with this, our private equity portfolio valuations increased by 16% in the first quarter, versus 7% in the fourth quarter of 2009 and more than the whole of last year.

Our real estate portfolio -- our real estate valuations increased by 12% in the first quarter, versus 1% in the fourth quarter of 2009, and following over two years of declines. For the funds that were marked below the levels required to start accruing performance fees again, we continue to move closer to those thresholds.

We also continue to make tremendous progress in improving and enhancing the balance sheets across the portfolio. A few weeks ago, we announced the completion of the repurchase and conversion of approximately $4 billion of Hilton debt, as well as the extension of debt maturities until 2015. Including the Hilton transaction, since the beginning of last year we have now undertaken capital market transactions in which we've reduced, refinanced, or extended over $50 billion of portfolio company debt -- that's $50 billion -- which we believe places our companies in a very safe position.

Private equity, our portfolio overall is in great shape. On last year's call, we talked about steps we were taking to cut costs and ensure earnings stability or growth despite the challenges of the global recession.

Now I'm pleased to say that we are seeing both revenue and earnings growth across virtually all of our companies in 2010, which, as I mentioned, is the principal driver to value appreciation this quarter. The majority of this appreciation was in BCP V, our latest private equity fund, and the mark on that fund is now 95% of cost with more than $3 billion in dry powder remaining to invest. Based on what we know about the portfolio performance, we expect the fund will ultimately generate returns within our historic performance range.

The strategic sales we've accomplished since the beginning of last year have generated more than twice the value at which we were holding those assets at year-end 2008. I'm going to tell you that one again. The strategic sales we've accomplished since the beginning of last year have generated more than twice the value at which we were holding those assets at year-end 2008. This illustrates the risks to investors by placing undue emphasis on FAS 157 mark-to-market accounting when applied at the bottom of the economic cycle to a long-term asset class like private equity.

In terms of new investments, our partners are very busy with a number of potential deals in the pipeline. In the first quarter, we invested or committed $1.3 billion to new and follow-on transactions, including a timber-related platform start-up in Brazil which will actively pursued forestry and carbon commercialization investment opportunities; Dili, a leading operator and consolidator of agricultural produce markets in China; and an investment in an India media company.

From a regional perspective, India currently is quite active for us. We've built a strong franchise there. In fact, we've done more deals in India since 2007 than any of our global peers. To date, we've signed 10 deals and have a pipeline of approximately $1 billion of transactions we are exploring, largely focused on key sectors such as infrastructure. While not all of these potential opportunities will come to fruition, the opportunity set is certainly bigger than it's ever been before.

In China, as I mentioned, we've made a new commitment to invest in Dili and we also deployed additional capital to BlueStar, a specialty chemicals company that operates as a subsidiary of China National Chemical Corporation. We are also partnering with a group of Chinese banks and engineering firms to construct a greenfield power plant in the Philippines.

During the first quarter, we had a total of investment realizations of $540 million, primarily through a secondary sale of a portion of our holdings in TRW Automotive, as well as dividends received from several portfolio companies.

The TRW secondary was completed at an attractive price, roughly 19 times higher than where the stock was trading a year ago, representing a multiple of 2.6 times our initial investment. I'm going to do that again because some of these increases, when you're dealing with the kind of companies we have, are really pretty remarkable. The TRW secondary was completed at a price that was 19 times higher than where the stock was trading a year ago. I am glad to not be back where we are -- we were a year ago, and you should be, too.

We still retain roughly one-third of our ownership in TRW.

In February, as discussed on our last call, we completed an initial public offering for Graham Packaging at a price of $10, with proceeds used to pay down debt for the company. Since the IPO, this stock is up materially to $13, or nearly two times our investment price.

Similarly, we had a successful IPO of TeamHealth in the fourth quarter at an offering price of $12, which has since traded up to over $16, representing 2.2 times our investment price. Neither IPO did we sell any of our own interest in the company.

We look back at our performance of our private equity IPOs over the past six years, and the average Blackstone IPO outperformed the market by 28% in its first 12 months and by 42% from IPO to date. Our IPOs have also been more consistent than the market with far fewer issues that declined.

So this is like really interesting stuff. You know, when people ask us about exits, and one of our methods of exiting our IPOs, and they wonder how they perform, the idea that we have remarkably and consistently outperformed IPOs of non-private equity companies is actually a pretty impressive thing, I think.

In real estate, the fundamental picture is continuing to show improvement. In office, which tends to lag the broader economy, our major markets are each recovering at a different pace, although we are seeing better trends generally. Markets such as New York and London are showing the most improvement with better occupancy trends and continued pick-up in leasing activity. In hospitality, industry RevPAR grew 4% in March, which was the first month of growth in nearly two years.

In our business, we believe we've turned the corner, and after taking significant unrealized -- and I want to stress the word unrealized -- valuation reductions from mid-2008 through the middle of last year, we recorded a 12% appreciation across our carry funds. The valuation on Blackstone Real Estate Partners VI -- we call it BREP VI -- improved substantially, and there remains $5.6 billion of dry powder to deploy, or 50% of the fund.

Our BREP Europe III fund remains mostly uninvested, with $4.2 billion in dry powder. Unlike virtually all of our major competitors in opportunistic real estate investment, we now project that every one of our 2004 to 2007 vintage funds will be profitable for our investors. That puts us in a pretty unique category. This is primarily the result of our significant asset sales of $60 billion completed prior to the downturn, the high quality of the assets we acquired, and the structure and flexibility of the debt that was utilized.

Our pipeline of deal activities is extremely active for the first time in over 2.5 years. We have invested or committed $1.1 billion to new opportunities in real estate transactions since the beginning of the fourth quarter. The pace of activity continues to pick up.

Our focus remains on situations where either the assets or the seller are overleveraged or in bankruptcy. We committed to acquire the majority of the assets of Sunwest, a national operator of assisted living facilities, out of bankruptcy in partnership with Emeritus.

We also are partnering with Glimcher Realty Trust and provided equity to acquire major interests in two malls at historically attractive cap rates.

Now, real estate debt strategies business, we took in $500 million of new commitments and our hedge funds were up 11% gross in the first quarter, bringing us to total AUM of $1.7 billion.

The current market environment is continuing to create new investment opportunities, both in terms of loan originations as well as legacy loan positions, as large banks and insurance companies continue to exit from positions at a discount in order to free up their balance sheets, creating buying opportunities for us.

Now in terms of BAAM, moving on to our marketable alternatives business -- it's our hedge fund to funds business, it continued on its path of growth. Inflows combined with positive performance resulted in 16% year-over-year growth in total assets to $28.6 billion, and we remain firmly the market leader in this space.

In the first quarter, including April 1 subscriptions, we had gross inflows of $1.4 billion, resulting in net inflows of $1.2 billion, reflecting both greater commitments from existing investors as well as flows from new investors. BAAM's portfolios delivered a gross composite return for the quarter of 3%, with substantially less volatility than the broader market in most asset classes.

While BAAM's emphasis is on asset protection, which has been consistently delivered, our composite return has been over three times greater than the S&P total return index over the past five years with less than half the volatility. Worth repeating because there is always a blizzard of numbers that seem to be coming at you in these calls. But the idea that we have delivered a composite return of over three times the S&P in our hedge fund of funds business over the last five years with half of the volatility makes this a really terrific product for major institutions, as well as the relatively few but large individuals who invest with us.

Of BAAM's $14 billion in external client assets that were eligible to earn incentive fees, over half are above their high-water marks in generating performance fees. Nearly one-third of assets that are still below their high-water marks are within 5% of that threshold.

Our credit performance -- platform, GSO, continues to evolve and grow products where we see the most compelling investment opportunities. Our new rescue financing fund has reached $1.5 billion in total commitments, and we've committed approximately $250 million already to three different transactions.

These investments include Crosstex, an energy services company in which we purchased convertible preferred units with an $8.50 conversion price and a 10% coupon. Our capital infusion was a critical component of the company's balance sheet restructuring. The company's price closed yesterday at $12, and an increase of over 40% since we injected the money into the company three months ago. I think it's pretty neat that you can be up 40% in three months, and part of the reason for that is when you free up impediments to a company's growth by injecting money at the right level of the capital structure, you can get some remarkable results, both for that company and its existing investors, as well as for our investors as well.

Our mezzanine business is performing well, driven by stable operating company performance and high current income. We're making new investments in conservative capital structures, with high coupons and equity participation. Our flagship mezzanine fund has returned nearly 20% per year from inception. Now think about that. Mezzanine earning 20% since inception, going through the incredibly difficult economic climate that we have had over the last several years. We believe that is significantly ahead of our competitors.

Our credit-oriented hedge funds were up approximately 6% gross just in the first quarter, following a record year in 2009, driven by strong gains in several of our distressed investments, as well as appreciation in our bank debt portfolios.

The vast majority of the assets in these funds have passed the relevant high-water marks and are earning incentive fees. We are optimistic about the risk-adjusted returns that our event-driven investment style can generate in the current environment.

We are also developing a great number of customized credit offerings. In addition to separately managed accounts, this category will include in the near term a listed closed-end fund focused primarily on senior loans, which we plan to launch in the next few weeks. We're also getting good traction with the BDC-type permanent capital vehicle we launched last year, which is focused on the leveraged finance marketplace. And we see the opportunity to further grow this fund and potentially launch additional vehicles over time.

I'd say that the GSO platform has an enormous number of opportunities to significantly expand our assets in that field with really excellent performance opportunities, which is the most important aspect of them.

Now our advisory segment, business volumes remain healthy and are trending as expected. As the historical pattern would suggest, as the economy heals, restructuring tapers off and M&A picks up. We started seeing this in the first quarter.

In our M&A business, our pipeline is nearly doubled from where we were last year. Do it again. The pipeline has doubled from where we were last year, driven by our international and sector activity, particularly in metals and mining, technology, chemicals, and financial services, as well as recovering industry volumes. Our focus remains on pursuing high-profile complex projects, rather than a strategy of more is better.

Nevertheless, we were in the top 10 globally in the M&A league tables for announced deals through our role as advisor to AIG on its sale of AIA to Prudential and Alico to MetLife, both of which are pending.

Following a second consecutive record year in 2009, our restructuring business has likely reached a near-term plateau. Although backlogs remained strong, levels of new restructuring activity are starting to decrease as expected, due to the recovery of the credit markets and the stabilization and improvement of the economy. However, we've remained successful in landing more than our fair share of new business. As in the case of every cycle, the significant increase in new high-yield bond issuance is likely setting the stage for a new restructuring cycle, which is always delayed by several years.

Lastly, Park Hill, our third-party distribution business, appears to have bottomed early last year, as revenues were up over three times what they were this year. While fundraising remains challenging generally, we're definitely seeing signs of greater activity and a thaw as we progress through 2010.

In summary, if there's one central theme across our businesses, it's that Blackstone is well positioned to benefit as the economic recovery progresses. Diversity and depth of our various business segments resulted in stability during the recession, and now provide a really terrific ability to strategically deploy capital as we identify, analyze, and take advantage of investment opportunities across all of our asset classes and across different geographies.

We grew the Firm's total assets by 6% sequentially to $104.5 billion, and if you count funds that we've raised where the management fees start after we start making investments, it gets up to $115 billion. And this number excludes commitments to our newest private equity fund, which will have a final close this summer.

We have $42 billion of investments in the ground and another $27 billion in dry powder capital, ready to invest. We expect to close and launch several new funds and we'll invest both in the funds and at the GP level against a growing global economy, particularly the U.S. and Asia, South America, the Middle East, and a dynamic regulatory and political environment that adds a little bit of complexity.

Thank you very much for joining our call and we look forward to answering any questions you may have.

(Operator Instructions) Howard Chen, Credit Suisse.

Steve, you touched on this right at the end of your comments in terms of the regulatory landscape more broadly, but I guess just given the current regulatory and political landscape, I was hoping you could comment on the recent scrutiny of the CDO -- synthetic CDO industry and the SEC charge of a major firm?

I can't really comment on that specific transaction. We obviously had no involvement with any aspect of that.

What I can say is that we've been working with Goldman Sachs since Blackstone was founded almost 25 years ago, and I've been personally working with them for over 40 years, and we have never had any circumstance where there's been any question about their ethical character or their behavior on any transaction we were involved with. So that's really all I can say about that. We are a major client of Goldman's and we will continue to remain a major client of Goldman's.

Okay, great, thanks. Steve, maybe taking a step back, more broadly. The President is speaking in a bit. Your current view of political changes in the landscape impacting the private equity industry?

I think this particular set of proposals, which is dynamic in the Congress, addresses an important element, which is making sure that the financial system has an appropriate level of regulation, and I think it's important that that be done in the right way. It's clear that the system itself didn't perform well through the whole subprime crisis. It needs to be addressed.

And if there is a bipartisan discussion and resolution of these issues, overall that is something that we could get on board with that would be positive for the economy.

Great, thanks. We saw very good improvement in unrealized losses within the total private equity portfolio. I know we'll get the fund-by-fund breakout when the 10-Q files. But I guess, could you speak generally to how the different funds performed and where they sort of stood at quarter end?

Sure. LT, you want to handle that?

Sure. Howard, I think the big mover was really in BCP V, where we saw close to 19% appreciation, and then in BCP IV we had about 6%. So that's really how it broke out.

And I think the reason for that being that BCP V, it's mostly privates and it takes some time for improved operating projections and accretions to take hold, and that's why you'll see it this quarter versus last quarter. BCP IV tends to be more heavily weighted towards the public markets, which were stronger in the fourth quarter than they were in the first.

BCP IV is an older, more mature portfolio, too, which doesn't have the same upside potential. And there also, a number of the realization events that Steve referenced came out of BCP IV, so that that's sort of -- some of those were in the prior fourth quarter, where BCP IV (multiple speakers) you saw a pretty good increase in the fourth quarter.

So, now the wave of improvement is really rolling more through the BCP V, the newer portfolio.

Howard, that is also true on the real estate side. So, very similar trends to what LT pointed towards. It would be the later vintages that were marked down the most initially and are seeing the biggest recovery now.

Thanks. That's really helpful color. And then, finally, could we just get a little bit more detail on the current fundraising environment, maybe timeline and sizing of some of the major funds you've been updating us on in the past few calls?

The fundraising environment, and I think Tony discussed this on the press call, was really quite locked up for certainly a year after the Lehman collapse. And we are seeing a significant change in the market, which is coming from the economic turn that is happening in most geographic locations in the world, as well as a ameliorization of the denominator effect. In other words, as the overall performance of funds that invest in our types of products has gotten better and better, it's easier from an asset allocation perspective to provide more money to businesses of our type.

In addition, there's another factor, which is that most of the pension funds in the world have suffered a pretty good-sized hit to their long-only equity portfolios, which leave their overall net worth lower than it started out before Lehman. But their benefits continue unchanged, and there is increasing concern in the pension fund community about how one meets those benefit obligations, and that means the way you solve this kind of problem is you either have new money put into your pension fund, and many states and municipalities are not in financial shape to really do that, or you cut your cost of operations or you cut your benefits, all of which are pretty unattractive. And so, the most logical way out of this dilemma is to increase the returns of the fund, and alternatives tend to provide the greatest amount of stability, along with highest upside.

So it's an ideal class to be investing more money in, and we can see people already starting to -- to look at the world that way. Not everyone, of course, but we're starting to see it. I thought it would take several years longer for that to start happening, but I've been out on the road and there have been numerous people talking to me about the overall dilemma and that's how you solve it.

So I think there has been a really significant shift in the last three to six months in terms of the fundraising environment.

Great, thanks for the color, Steve, and for taking the questions.

Celeste Brown, Morgan Stanley.

Good morning. In light of the improving fundamentals in the real estate market and the strength of the public markets, which I know are separate, very separate, from what goes on in your businesses or in your properties, have you reconsidered the timing of potential realizations? A year ago, people were -- or six months ago, people were talking about revaluations as being a bit ahead of themselves. It seems like they've only gone up from there.

You know, Celeste, not really. I think it's still early in the real estate recovery, and we've got some great assets that have held their value well, but I think they're going to participate sharply on the upswing. And cap rates have definitely come down some, which is helpful, but the operating cash flows haven't really popped yet.

And we'd just as soon let that latter part of the cycle play out a little bit because we think we'll -- our assets will gain more in value through that than they lose from potentially higher cap rates, which I actually don't think will happen. I think as the world mends, you may have a higher general level of interest rates, but you'll also have more confidence and the spreads will come in a little bit. So, we think there's more upside than down side at this point, and don't see a lot of liquidations in the near term.

Usually, Celeste, in our business you wait until you're farther out in the economic cycle where there is more leverage in the economy generally (technical difficulty) pay higher prices, so it matures -- to do anything. To do anything different than we're already doing.

Right. Well, you've positioned your portfolio well with the debt issues. One other quick question for you. There's been a lot of speculation in the press about the return of some of these more massive LBOs. Do you see that as too quick given everything we've been through, and does that potentially crimp the potential upside in terms of returns that you would expect from investments at this point in the cycle?

I think the size of the companies that you can buy, obviously, is going up as the debt markets normalize.

The rate of return on any individual deal has to be looked at from the perspective of the numbers in that deal, not just in asset categories. And if there is a terrific company that is larger that can be purchased at a good value proposition that works for all parties, then that is a good thing to do.

What we have been doing over the last 10 years is actually investing 75% in the private equity sector in medium- and smaller-sized companies because that's where the value has basically been. And even though people perceive us as a large buyout Firm, just because we have a large fund, most of that fund goes to different places in the world where we think the ability to do excellent deals with very little risk and high upside is where we go, and we do the size deal that gives you that outcome. It's often not large deals. Sometimes it is.

So I think what's happening is that there is another -- increasingly, there is another arrow in our quiver that we'll be able to do deals in the $10 billion or $15 billion range, which were simply not even vaguely possible a year ago. A year ago, if you could raise $1 billion of debt, or $1.5 billion of debt, you were pretty much of a hero. That's dramatically changed. And the pricing of debt has gone down as well, dramatically.

Celeste, let me just add to that. We have looked at historically the returns we've gotten by size of deal, and they're just as attractive on the large deals as they are in the smaller ones.

And so, you have to be selective. You can't chase everything that's big because ego has a way of intruding, but it's not a part of the activity that we think is inherently less attractive. And I would point out that as the big deals are doable, it will absorb some fairly large amounts of the equity that's been raised, so the -- sometimes they'll be focused on the committed but uninvested equity out -- still out in private equity as overhang, and I think the larger deals will help whittle away at some of that pretty quickly.

Great. Thank you. Apologies for the phone ringing. It was buried under paper on my desk.

Actually, it added a certain je ne sais quoi to the phone call. So thank you very much (multiple speakers)

Marc Irizarry, Goldman Sachs.

Great, thanks. Steve, can you comment on the types of investors where you are seeing the most demand for the illiquid portion of your alternative offerings? And then also, can you just think -- can you sort of talk maybe a little bit regionally like where you are seeing the breakdown of sort of the illiquid versus the liquid buckets and the demand there by investor type. Thanks.

Yes, sure. I think that sovereign wealth funds are really increasingly interested in this asset class because they're long-term investors and most of them have strong cash inflows, and they're patient and they're looking for overall rate of return with low amounts of risk.

And that is both in the Middle East and Asia. That the state pension funds and municipal pension funds system in the United States is selectively starting to loosen up, and whereas that group was almost effectively shut a year ago, that is no longer the case at all.

The endowment area is still pretty much shut for illiquids in the United States. European institutions are overall pretty cautious, we're finding, by different types. Some of the insurance companies have more money there, as do some of the actual corporate pension funds in Europe are quite liquid and interested in the asset class. So we're seeing potential demand really all over the world, in that sense.

Okay, great, and then just in terms of the -- of BAAM. Obviously, it sounds like you're net flow positive, and it seems that the BAAM is obviously one of the bigger players, if not the biggest player, out there right now. What is the trade-off between growing that business and fees right now? Are you -- what are sort of the fee structures looking like in the hedge fund to funds business for you? Are you willing to sort of trade off fees for growing that business to remain the largest in it?

There's actually not been a reduction in fees in that business, and it's a trade-off that the BAAM team has not been willing to make.

So Tom Hill would tell you that over their entire history, there are definitely clients who haven't given them money because their fees are higher than peers, but if you look at their market share, it continues to grow, and that is just a result of the performance. Ultimately, their clients are institutional investors who are looking at the net results and the volatility, and they've just been at the top. So, we really have not seen that kind of fee pressure.

I want to jump in there, Marc, a little bit, too, because we would never -- our goal isn't to be the largest for the sake of being the largest in any product, and we would never cut fees to do that. And we'd never take in more money that we could invest well to do that.

Our goal is to be, frankly, the best investors. It's what gets us excited, it's what gets us our professional and personal pride. If you do that well long enough, you'll get big. But you'll only get big within the reach of your ability to continue investing money well because every one of our investors can pull their money out of a BAAM every six months and out of the -- in the drawdown funds, we've got to go back every few years and beg for money again, starting from zero. So it's all performances as far as we're concerned. It's never size.

Okay, just following along with that, Steve, can you comment on your appetite -- I mean, obviously the business has become more diversified over time through growing and extending existing asset classes at your end? But can you talk about how maybe acquisitions planned to growing your -- the CAMA segment? I guess GSO is one, but as other entities, be it banks or other financial firms, look to exit out of hedge fund to funds or hedge fund businesses, how do you think about acquisitions?

We have sort of an opportunistic look at that, just the way we do when we start new businesses, and with the exception of GSO where we were trying to hire sort of the three partners there over a four- to five-year history before they even started GSO, it just started up in Blackstone. We always look and see where the world is going.

If there's something that's really interesting that improves our ability to make better investments in the rest of the firm, so it's a net add in terms of the intellectual capital of our business, and you can do it with a sense of partnership and with people who have a similar value system, then you can pursue things like that. When you start putting all of those barriers up so you don't hurt your own internal culture, that becomes a relatively small list of eligible things because the most important thing, as Tony said, is really make sure that you continue to do whatever we're doing here, whether it's investing money or advising people, up to a standard of excellence.

Now I don't know what's going to happen out of regulatory reform. There may be some situations where there are forced divestitures on some basis where we know those people, we like them, they would fit well with our culture. The business would fit well with us or that would be a logical thing to do where it's a positive-sum game for our existing investors, as well as assorted shareholders in the firm, which are all the people at our table here and our outside shareholders and so forth.

The chance that that all happens is sort of really threading the needle, right? You've got to have changes and people have got to be exiting businesses they don't really want to be exiting. You have to have certain governmental actions.

I'm sure, by the way, if that were to happen that there would be a pretty long tail on requiring that -- that to happen, and there are a bunch of different ways somebody could exit for that, as opposed to doing something with us.

That being said, we regularly look at things. We mostly reject them. We have a pretty strong level of discipline on that and we don't want to do anything that's going to really change the culture of our firm. Tony, I don't know if you --

No, I think that's right. I think we -- the standard that we always apply is does it make our existing businesses better for investors, and do our existing businesses make this entity that we would look at acquiring more effective at serving its customers? And if we can't answer yes to both of those, we don't do it. So, we're not going to be looking at acquisitions, again, for scale, for diversity, for multiple arbitrage, for that sort of financial engineering orientation.

The other thing is that when you do something like this, there's a business philosophy issue, and everybody on the call is working at a financial institution, and when we go into a slightly different area or whatever, we want the people who are in charge of that business, you want them to be 10s on a scale of 10 because in finance, that's sort of what gets you excellence.

So that also narrows the funnel a bit. The people who have to be terrific because if they're not, you won't get a great outcome and it will be a burden on you administratively and so forth. There are things that can meet all those criteria, but you have to be pretty discerning when you do this type of strategic thinking.

Okay, and then just a quick one for you, LT. It looks like sequentially the other operating expenses tick down. That would presume you're out there trying to take market share of flows, if you will, and investing in the business. Anything there on the operating expense side?

I'm not sure I follow you. Are you looking at operating expenses for the full Firm year over year? Marc?

Sequentially.

Sequentially, right. I think typically a fourth quarter you do tend to have, because of activity levels -- there were more expenses, there were also recruiting fees and nonrecurring. So I look at the first quarter as more of a run rate and the fourth quarter as just being seasonally higher. And the better comparison is to look at the first quarter of last year versus the first quarter this year, and that probably shows you, Marc, just our run rate increase, which is largely a result of growth in the businesses.

Roger Freeman, Barclays Capital.

Hi, good morning. Thanks. Actually, Steve, I wanted to just follow up on something you were just commenting on with respect to opportunities in a changing world. I guess one of the things I've wondered in covering the deal or is it -- are we ultimately going to see basically the whole structured financing business either -- maybe significantly reduce inside the dealers because of higher capital requirements or outside BAAMs. I just wondered whether firms like yours could end up filling some of that void, particularly as you're not a bank holding company?

I don't really have a view on that, frankly.

Roger, I don't think it's a business we hanker to be in.

I guess -- maybe let me ask it a different way because I'm thinking of it with respect to, like, GSO, some of the financing solutions that those funds provide, whether it's mezzanine or otherwise. It's not -- I'm not talking about CDO type of structuring, but just sort of innovative debt financing to help -- to either provide capital for growth or acquisitions?

Remember, I mean, it's possible, but our -- we try to stick to what we're good at and focus on our skill sets.

And GSO's skill set is corporate, first of all, not mortgage and not -- basically other kinds of asset-backed securities. And it's credit, not structure. And so, I'm not sure that -- their focus very much is credit-intensive stories, putting up capital to support those companies in their success or growth or recapitalization, or as it may be.

The kinds of things that the huge dollars you're talking about on -- which tend to be mostly asset-backed where the underlying assets are not typically corporate credits, or at least not credit-intensive corporate credits, is pretty far outside our current skill set, and while we may find a team to do, I think it's kind of unlikely that we'd have that plus all the derivatives capability and the trading capabilities and the distribution capabilities that you'd need to have to be effective in that business.

Okay, fair point. And then, okay, so on the valuation of the -- BCP V, you mentioned, is around 95% of valuation. Just when -- you have to clear the hurdle rate, right, before you collect performance fees again on that?

Yes.

And so, what would that be at this point? Because when was that fund launched? In 2007? So 7% a year? 20% or so? 22%, 23%?

This is LT. With respect to BCP V, the way to look at this, and you'll see this in our Q when we file on May 7, what we'll give you is the change in total enterprise value needed to get to the threshold, and that's about 11%.

Portfolio value.

Yes.

Okay, so is the -- so the preference, that hurdle rate, is that an annual CAGR?

No, it's an annual rate, but we had a series of closings. So all of the money wasn't in place from late 2005. So it's got different weighted average outstandings.

As you look at that, just thinking it through, an 11% increase in the portfolio, if we have a reasonably robust economic recovery, which you know we're seeing some really pockets in different industries now, and if markets stay pretty good, and there's no assurance on that, but you could find yourself catching up on that (multiple speakers) 11% pretty quickly.

There's also capital in that fund that's still not invested, so you have to (multiple speakers) total funds, not just the current.

Okay. So, then, just on the mark-up in the first quarter, driven, I guess -- it sounds like mainly on improved outlook on operating metrics, I guess mainly cash flow. So, do you -- has your view in the last three months with respect to cash flow for your portfolio [amounts] has increased at that sort of rate or are you kind of looking further out and lowering discount rates and -- I'm just trying to think about how you're coming up with those (multiple speakers)

This is LT again. The way that we look at that is when we look at long-term discount to cash flow, we don't really -- it's not a change in multiples, it's not a change in methodology. It's just simply operating results for the companies, and that takes some time. And as I answered before, we have now seen several months of improved operating conditions in the portfolio companies. When that starts to play through and you push on the management teams to see what their forecast would be, and that's really the impact.

And then, of course, you have the movement in the public (technical difficulty)

Right, okay. And then, lastly, actually, Steve, I think you were talking about -- it sounded like you were saying sort of the era of $10 billion to $15 billion deals could be in the not too distant future. And Tony, I think last quarter you were saying that you could do deals comfortably in the -- I think it sounded like sort of $3 billion to $4 billion range, four to five times levered. Is that the way to sort of think about the level of improvement we've gotten to from a financing perspective?

I think the answer to that is more or less right. You know, there has been a major ability in the last three to four months to increase the size of transactions that one would want to do.

And the level -- the quantum of debt available as a multiple of EBITDA as well. Not just absolute dollars, but multiple, too.

So you can get up to 5.5 to 6 times cash flow now in terms of multiple. Now, a year ago, just -- lest we get lost in quarterly reporting. Step back for a minute. You know, there -- you were at 2.5 to 3 times cash flow a year ago. So you've over doubled where you were a year ago, and the cost of money has come down significantly. Significantly.

You remember a year ago, you'll probably get this righter than I have, but at the worst of the financial crisis, which wasn't quite a year ago, it was a little earlier than that, you know, you had junk bonds at 19% or 20%. And now, you can do junk bonds somewhere in the -- pick the name and whatever, whether it's 8%, 9%, something like that. Now, that's like 1,000 basis points of decline. I mean, this is like a really very significant thing.

And if you look at a firm like ours, with today's cost of money, if you assume that we could set up a capital structure in a 8% type of range, something like that, that's -- is a little cheaper. That's not, by historic standards, a real high cost (multiple speakers)

Right. One other quick one, your IPO outlook, it sounds like it hasn't changed. I think, Tony, on the media call this morning, you were saying something like 8 to 10, I think, or was that about what you said last (multiple speakers)

I think I said I didn't have it, and I didn't have it account, but we still have a number of them still in the pipeline.

But your outlook -- is it sort of a similar pipeline [a lot]? I'm just wondering because your cash flow outlook on the company is improving. Are you looking at potentially monetizing -- or IPOing more of them?

I'd say at this point, it's a similar outlook as before. We were anticipating some kind of improvement before and it's kind of playing along (multiple speakers). It's a little ahead, but we really haven't changed that outlook very much.

Chris Kotowski, Oppenheimer & Co..

Good morning. In looking at your likely pipeline of investments in real estate, the last couple of deals you've done has been where you've mainly injected equity into companies that were already levered and gotten 50% or 60% of the equity. Is that opportunity still alive or is that beginning to dry up?

It's still alive, but it's clearly getting -- you've got to be more selective. There's less of it out there.

There never were huge amounts of it out there to start with -- let's just be clear about that, though, because while a number of assets were overlevered and arguably distressed, the creditors weren't forcing the owners to sell. They were sort of amending, extending, waving, kicking the can down the road, and then if you're the equity holder, there's no reason for you to try to do anything because you don't really have any value. You're not going to get any thing for it. It's like an out of the money call option.

So I think one of the things that was interesting about this cycle was that despite all the amount of overleverage in the real estate sector, not actually huge amounts of assets actually traded hands. And really, once again, because the lenders didn't enforce their remedies.

So, anyway, we're continuing to see some things. It's getting pricier, for sure, and some of it is injecting equity, but some of it is buying the senior positions or subordinate or mezzanine positions in properties and capital structures where we think we have a likely route to the equity, but we've got to work through our status as a creditor first.

Okay, and that's still what we should -- for the next 12, 18 months, that's still mainly what we should be expecting rather than outright purchase of property?

Yes, I wouldn't -- I don't want to predict a particular timeframe. It's certainly true today, and that's -- as we look at our future pipeline, that's more what we're seeing. The world could change in 12 or 18 months, so I wouldn't want to predict when that happens or how that happens.

Okay, and then, on the flip side of that, if you can say, did you have to give up any of the equity in the Hilton restructuring?

No, we didn't, but we did put in some more equity.

Right, okay. And then, finally, just on the -- your IPO outlook. Is it still safe to say that that -- for 2010 or the things in the near term, that it will be mainly generating growth capital and deleveraging capital for the portfolio companies, as opposed to exits for the fund holders? And does that distinction have an impact on distributable cash flow for the full year?

I think it will be both exits and growth capital or deleveraging capital. I think -- we've done in the last six or nine months, we've done four equity offerings. Two were money we took off the table as distributable and two were IPOs.

We're actually -- we were initially planning to sell some secondary shares in the IPO. But frankly, we didn't really like the price ultimately it came at, so we pulled out the secondary shares and just did a primary. And given that those stocks are up something like -- let's see, I'm being handed something, 30%, 35%, I think that was a good decision because that was like a month ago -- two months ago or something.

So there isn't -- that's not really a distinction that I think you should spend too much time worrying about because most IPOs -- most equity offerings, and they'll be primary and secondary, you can expect us to get -- in a decent market, you can expect us to get some proceeds off the table.

Patrick Davitt, BofA Merrill Lynch.

Hi. Good afternoon, guys. Steve, I think earlier in the year you mentioned you felt like you are seeing a lot of pricing power in real invest investing, given the size that you have in that market. Over the last few weeks, I feel like we've seen a few notable players re-emerge in that market. Have you seen any of that pricing power erode as these new funds get into investing mode?

Well, it depends how you're approaching life. If you're trying to buy things in open auctions, then the answer is yes. If you are buying things directly where you're adding value to (multiple speakers), then the answer is pretty much no.

And that -- we're approached and we approach institutions all the time for negotiated transactions where that institution likes to work with us because we have an operating capability. And if we're buying a security below them, they think that we can help protect their capital senior to us better than some other way of dealing with their problem.

So, overall there is obviously some increase in liquidity, and the markets, as Tony mentioned, have tightened. On the other hand, the number of people in the world who can step up to something at the kind of scale that we can is infinitesimal. So in that regard, I think strategically that we're still in a very, very good place.

Let me add, you shouldn't think of it as pricing power, really. We don't have pricing power, so there's a lot of capital out there. It's a competitive market. But what you should think of it as is a privileged position to see deal flow. So we see just about everything of scale and we see it early, and for good investors we will be able to convert rich deal flow into superior returns without having to have pricing power.

Okay, that makes sense. And Tony, on the last quarterly call, you kind of gave us an average amount of capital you thought you could put to work in a year. Over the last few weeks, there has been a pretty significant uptick of chatter, it seems like, and a lot of that chatter has included your name. Do you feel like this could be an above-average year in terms of the amount of capital you've put to work?

I don't know. It's a good question. We kind of committed or invested about $1.3 billion in the first quarter. That's kind of a $5 billion run rate. I actually think that's above what we'll do for the year.

And I think that we're likely to be closer to, if I had to guess -- I hate to hazard a guess, frankly, but I will say that our fund size is such that we'd be doing, sort of, from my own thinking, sort of if you average about $4 billion a year, it's about right for the fund size. I'm talking private equity here.

Just in corporate?

Yes, just in corporate. So in real estate, it is definitely less active than that kind of run rate now. I think over the next few years, we should be able to put to work about that amount of money per year again.

But the market has a ways to improve yet. We're going to have to see more merchandise coming to market before we can get to that level of investment.

Okay, great, thanks. And then, finally, on the distribution, there was kind of a $0.04 discount to the distributable earnings this quarter, and you're going to pay that $0.10 for the next two quarters, and then have a true up. Is it fair to assume that that $0.04 would show up in that fourth-quarter true up or was there some cash needs that you pulled out of there?

You should assume that the payout will equal distributable earnings this year.

Dan Fannon, Jefferies & Company.

Thanks. With regards to fees, I think, Tony, you mentioned it briefly on the media call. Can you give us some additional color on how any changes to either new or existing funds would impact your economics? I think you mentioned mostly the debate for you guys is on transaction fees potentially being renegotiated with your LPs, but a little color there would be helpful.

Okay, well, I want to clarify because (multiple speakers) we're not -- we don't have any -- an existing fund is an existing fund. We have binding agreements with our LPs in that there's no changes to any of that.

When I was talking about the deal fees being under pressure, I was really speaking about this is an industrywide issue, not so much a Blackstone issue. And it's not that we don't have discussions about that, but, for example, the private equity fund that we are in the process of still raising, the fees were -- we've had a lot of closings, so the structure of the fund is set, so it's not really sort of a open topic, if you will.

So what I was talking about was more generally in private equity when you hear from LPs, you meet with them around, their hot button is fee splits and generally over time, those fee splits have moved, as I mentioned, from 100% in the pocket of the GP heavily towards 100% of the pocket of the LP. And we're kind of 80% of the way through that shift, I would say, on average. But I'm speaking industrywide, not just necessarily as it affects us.

And what that is is it's a more complex issue that, on the one hand, it may be about money, but on the other hand, it's also about alignment of interest. There are some LPs just conceptually who would be just as happy to have that particular fee go away completely and pay you a higher management fee. Let the general partner have the same amount of funds to run their operation in a first-class way. But they just don't like the incentive structure, that when you do something, you make more money.

So I think a lot of -- you know, there are various motives that different limited partners have, and so I think you have to think the issue through from that kind of lengths, as well as just looking at quote fee pressure, per se. That may not be what is totally or even actually going on.

Okay, that's very helpful. And then lastly here, just in terms of capital deployment, are there several opportunities out there that you guys see today similar to the Allied portfolio that you purchased during the quarter? Is that a potential use of capital here going forward?

Absolutely. We'd like to do, obviously, a lot more of that and we've got several similar transactions that we're looking at now.

Thanks, everyone, for joining. If you have any follow-up questions, as I mentioned, just call me or Weston Tucker directly.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.