Blackstone Inc (BX) 0 Q0 法說會逐字稿

Welcome to The Blackstone Group's second-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 would like to turn the call over to Joan Solotar, Senior Managing Director, Public Markets.

Please proceed.

Great, thank you, Tawanda, and welcome to our second-quarter 2010 conference call.

I would 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 materially.

To see the risks that could affect the firm's results, please look at the Risk Factors section of our 10-K.

We undertake no responsibility to update any of these forward-looking statements and we will refer to non-GAAP measures on this call.

For any reconciliations, you should refer back to the press release.

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

So we reported economic net income or ENI of $0.18 per unit for the second quarter.

That compared with $0.32 in the first quarter of this year and $0.16 in the second quarter of 2009.

The sequential decline was mostly due to lower net appreciation in the funds that are earning carry as well as lower incentive fees from our marketable businesses and that was partly offset by higher advisory fees.

For the second quarter of 2010, distributable earnings totaled $148 million or $0.13 per unit.

That compared with $0.08 per unit in the second quarter of 2009.

We will be paying a $0.10 distribution related to the second quarter to holders of record as of August 13.

And as we outlined, we intend to pay a flat distribution of $0.10 each of the first three quarters of the year based on our anticipated annualized net fee related earnings and then we will have a true-up in the fourth quarter which will be based on the full year after-tax distributable earnings.

So also want to take this opportunity to let you know we will be hosting an investor day.

It's our first investor day.

We will have the heads of each of the business units and that will occur in New York on September 23.

Hopefully, you have received the save-the-date but if you haven't, just let me know and we'll send that information to you.

And of course if you have any questions on anything in the press release or related to the quarter, just follow up with me or Weston Tucker after the call.

And with that, I will turn it over to Laurence Tosi.

Thanks, Joan.

Good morning and thank you all for joining the call.

A few financial highlights first.

The firm reached $101.4 billion of fee-paying assets under management at the end of the second quarter, up 8% from the same period a year ago.

We have an historical AUM growth rate of more than 25% annualized since inception of the firm.

This total does not include the over $16 billion of committed capital that we've raised that is pending the commencement of the investment period or deployment, depending on the fund.

Our success in asset growth reflects our primary business focus which is best-in-class returns for our investors.

Our real estate funds are up 33% year to date and our private equity funds are up 19%.

In addition to these returns, all of our other remaining continuing funds are up year to date, helping drive total AUM up 19% year over year to $111 billion.

Blackstone's fund returns have generated just under $13 billion in value for our investors in just the last 12 months.

This growth also reflects our ability to develop products to match market opportunities and we've raised nearly $6 billion in newly launched funds in the past year, not including BCP VI, our next private equity fund.

Superior returns in asset growth are leading indicators for our long-term financial performance and are reflected in the year-over-year growth of our second-quarter net fee related earnings which are up 24% to $108 million.

Our distributable earnings were also up sharply year over year to $148 million, a 65% increase.

A few comments on our business segments.

In private equity, the second quarter had more modest valuation gains with a 3% increase in value with compared to a 16% increase in the first quarter of this year.

The majority of the appreciation was in our largest fund, BCP V, which is now marked at cost including realized proceeds but is not yet accruing carry.

We recorded a modest carry reversal in BCP IV due to its mix of public holdings which negatively impacted ENI as markets declined.

Despite a softer second quarter, private equity revenues were up 35% for the first half of this year and ENI up 20%.

In real estate, both revenues and ENI rose sharply sequentially and year over year, driven by higher investment income and performance fees as the fund's carrying values increased $1.7 billion in value during the quarter.

Of note is the fact that our real estate debt business contributed $19 million in realized performance fees on continued strong returns in asset growth as that business is quickly reaching scale.

Steve will discuss the real estate segment in more detail in a moment.

In our credit and marketable alternatives business, or CAMA, ENI declined sequentially year over year due to lower performance fees and investment income, reflecting a more challenged market environment of the second quarter.

However, net fee related earnings grew 37% driven by a 17% growth in fee earning assets under management.

CAMA added $8 billion in fee earning assets over the last years, with another $4.5 billion committed that has not started to earn fees for a total of $12.5 billion.

Our advisory business also grew sharply sequentially and year over year due mostly to higher fees generated from the fund placement and restructuring businesses while revenues in our M&A business remain stable.

Year-to-date net fee related earnings in this segment are up 46%.

A few thoughts on our balance sheet and liquidity.

We ended the quarter with cash and liquid investments of $1.6 billion against $600 million in borrowings.

We estimate the value of the firm's investments in our own funds grew 10% in the second quarter to $3.5 billion.

In closing, Blackstone remains very well positioned to continue to outperform while we pursue strategic growth opportunities as well as launch new and diverse funds for our investors.

With that, I would like to turn it over to Steve.

Good morning and thank you for joining our call.

The second quarter started off much like the first -- strong markets and steady economic growth.

However, beginning in late April, growing concerns over Greece and other European foreign debt, regulatory uncertainty and disappointing economic data led to widespread risk aversion, causing volatility to spike and equity and debt markets to retreat significantly even in growing emerging countries such as China.

The result was that most global equity indices declined 10 to 25% in the quarter, a major decline.

Credit indices were flat to slightly down, spreads modestly widened and volatility increased.

While recent economic statistics still reflect a global economic expansion, investors have become more nervous about the loss of momentum.

In particular in the United States, the past few employment reports showed a lower-than-expected increase in jobs, re-igniting concern that a double-dip recession could still be a possibility which we believe to be very unlikely.

Consumer confidence is weakening as a result the continual battering from these factors and other disturbing one-time events such as the volcanic eruption in Iceland, the oil spill crisis in the Gulf of Mexico, and North Korean sinking of a South Korean warship, and the Turkey-Israeli crisis.

We believe consumer and business confidence have also been affected negatively by the harsh anti-capitalist and anti-wealth creation rhetoric and policy initiatives in the political area.

Simultaneously, global fiscal and monetary policy in most countries is starting to emphasize contraction as governments become more focused on controlling budget deficits, particularly in Europe.

Against this challenging market, political and macroeconomic background, we believe Blackstone's strong firm-wide performance in the second quarter again speaks to the strength of our diversified business model.

Our marketable products as you have heard from LT held out steady against sharp declines and high volatility in global equities as well as challenging credit markets.

And these businesses continue to see substantial inflows into new and existing funds.

We recorded as he mentioned a 3% increase in our private equity portfolio despite the very large downturn in equity markets.

And the vast majority of our companies continue to grow both revenue and EBITDA.

Our real estate carry funds as LT mentioned depreciated 19% in the second quarter alone and are up 33% year to date.

Real estate fundamentals and values appear to have hit bottom or are turning up in most of the world and our advisory business reported good year-over-year growth in revenue.

Fundraising of course remains challenging but we have had some notable successes.

We have had our final close on the GSO Capital Solutions Fund which is our rescue financing fund at $3.3 billion, a tremendous accomplishment in the current environment and significantly more than when we initially went into the market.

GSO also launched a closed-end fund focusing on floating rate debt.

We expect BCP VI which will be finalized in closing documents in the next month or so to approximate $13.5 billion including our own commitment.

Our first Clean Tech Fund had its first closing and will continue to fund raise throughout the rest of the year.

And BAAM, our hedge fund of funds business, had net inflows of $1.7 billion including July 1 subscriptions.

Now to talk a little bit about each of the segments.

In private equity, our portfolio companies continued to perform well.

We expect over 80% to grow both revenue and EBITDA in 2010.

The new investment pipeline remains very full with diversified deal types including some interesting platform buildouts.

We've had great success in the past identifying strong management teams and then buying and building attractive assets with that team.

During the quarter, we committed or invested $680 million to new and follow-on transactions.

This included the purchase of a shuttered refinery, a closed refinery in Delaware on behalf of our investors where we worked with both the union and local government on this transaction.

We had an attractive entry point, equating to only 5% of replacement cost, less than the value of the steel and we will be able to put 500 full-time people back to work.

Summit Materials, our platform for rolling up heavy side building materials companies made its largest acquisition to date, a cement plant located in Missouri.

To date, we've now invested approximately $250 million in our effort to create a company of scale in the heavy side buildings material space.

In Europe where we have found pricing levels too high for the past couple of years, we've now begun to see attractive deals such as ICS, a leading provider of temporary healthcare staff in the UK which we view as an attractive platform from which to consolidate the UK staffing market.

Asian markets continue to offer attractive opportunities and our fund is committed to invest in Japan's leading wireless provider, E Mobile.

After the quarter closed, we committed to invest in an Indian power development company and a Chinese animal care company.

We had roughly $140 million of investment realizations in the second quarter, consisting primarily of the sale of Michaels Stores' notes at over six times original cost.

I think it's worth repeating that.

We bought debt at significant discount in Michaels Stores and sold it for over six times our cost.

We also announced the sale of a 30% stake in Merlin.

The Merlin deal is a good example of how we provide value beyond just giving money into capital.

Our private equity fund purchased the initial asset of London Dungeon in 2005.

This was identified by Joe Baratta who is one of our terrific younger partners.

And with an ambitious and capable management team which he identified, built it out to include Legoland, Madam Tussauds which is the wax museum, and the London Eye among other assets that we purchased, creating the largest operator of visitor attractions in Europe.

The divested interest is valued at 3.8 times our cost in local currency.

We expect the transaction to close in the third quarter.

It's a terrific result based on really good execution and Joe's imagination.

In real estate, our business emerged from the global meltdown fully intact and in a stronger position than ever.

We restructured large amounts of our property level debt across our various funds to ensure our portfolio remains well positioned to benefit from the economic and real estate recovery.

We've seen stabilization in our high-quality office assets as demand has begun to improve in select markets were where we happen to be highly concentrated and where supply has sharply curtailed.

The hospitality industry in general is experiencing a recovery in RevPAR and cash flow off of a lower base.

Industry RevPAR for example grew 6.2% in the second quarter after turning positive in March for the first time in two years.

So I think we are seeing a really major change in the hospitality industry globally.

The continuing improvement in the portfolio's fundamentals, the renewed interest in high-quality real estate assets in major markets and our debt restructurings positively impacted the carrying values of our investment funds and real estate.

I believe it's worth highlighting that our BREP VI fund, which is our large fund raised at the top of the market if you will, which was carried at only $0.46 on the invested dollar at September 30, 2009 is now valued at $0.85 on the dollar and will likely be in excess of a dollar by year end if current trends continue.

It's a pretty remarkable improvement.

Further, roughly 50% of this $11 billion fund remains uninvested in what we think is really an excellent market for investment.

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, our limited partners.

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.

I think this is overall a pretty remarkable achievement.

Looking forward, BREP's competitive position has never been better and we are indeed preferred partner in large complex global transactions.

We have the largest pool of committed and uninvested capital in the world after completing virtually no transactions for 12 months through the third quarter 2009.

We have invested or committed roughly $2.3 billion in transactions which we believe will yield attractive risk-adjusted returns.

These include three bankruptcy situations, the purchase of the Sunwest senior living portfolio, the participation in the General Growth recapitalization and the acquisition of Extended Stay Hotels.

We've also reached an agreement in principle to assume asset management of the Merrill Lynch Asia Real Estate Opportunity Fund and their balance sheet assets.

We expect the transaction to close in the fall.

In total, the portfolios have an equity value of just over $2 billion.

This transaction is in line with our broadest strategic initiative of expanding our presence and capabilities in Asia, which we believe will yield material investment opportunities for our fund investors

Lastly, our real estate debt strategy business as LT has mentioned has grown to $1.9 billion in total AUM.

We continue to take in new commitments and our hedge funds were up 2% gross in the quarter and 14% in the year and I daresay there are very few funds in the world that were up 14% to date.

And we see new investment opportunities in terms of loan originations as well as legacy long positions as large banks and insurance companies exit from positions at a discount.

Moving on to BAAM, our hedge fund to funds business, which focuses on creating customized investment solutions using hedge funds, we continue to take share in a fractured competitive environment.

In the second quarter, including July 1 subscriptions, we had external gross inflows of $2.8 billion resulting in net inflows of $1.7 billion.

We're seeing greater commitments from existing investors as well as flows from new investors as the hardships of 2008 and 2009 have pushed institutions to rethink traditional asset allocation models and increase allocations to liquid alternatives.

Approximately 40% of our $2.8 billion of gross inflows were from existing client relationships.

Our flows from new clients came predominantly from pension funds, governmental entities, insurance companies and corporations in North America, Europe, the Middle East and Asia.

As of July 1, BAAM had grown to approximately $30 billion in assets which I think is really a terrific achievement.

During the quarter we created three new customized accounts, providing innovative solutions for clients with another three created on July 1.

BAAM also launched a long-only equity substitute product in the quarter and expects to launch a similar product in the future.

BAAM's composite gross return was a negative 1.2% in the second quarter but it substantially outperformed the broader market indices.

BAAM's traditional emphasis has been on capital preservation.

In the volatile market environment of the second quarter, this outcome was clearly delivered.

In the 10 worst performing months for the S&P 500 in the past 10 years, BAAM's cumulative outperformance has been approximately 52%.

We are incredibly pleased with BAAM's results.

Our credit platform, GSO, continues to build out its platform by leveraging its strong credit capabilities.

We had notable success raising our Capital Solutions fund which I mentioned, exceeded our targets.

Despite the broad rally in the credit markets that coincided with this fund's launch, we have a very robust pipeline of opportunities to put this capital to work.

To date we've committed approximately $600 million in seven transactions.

We continue to expand our customized credit offerings and launch the Blackstone GSO Senior Floating Rate Term Fund in late May which is a closed-end fund focused primarily on senior loans and trades under the ticker BSL.

We raised $280 million for that fund in its common share offering.

We also had an initial close for a new fund aimed at addressing the need by corporations and other entities to invest their cash conservatively but generate a significantly higher yield than what is available in treasury securities.

We see a lot of potential for this product which will primarily invest in floating-rate, high-quality secured loans, notes and bonds.

Within the customized credit space, we added two senior client managers.

In our mezzanine business, we've invested roughly $1.5 billion of capital including leverage to our flagship fund and we've had the best-in-class returns of over 20% per year from inception -- 20% per year since inception and almost anything over the last few years is pretty terrific.

A few weeks ago rather, we announced a partnership with the management team of Bear Tracker Energy, a midstream oil and gas company formed in 2009, to commit up to $200 million in support of a platform buildup strategy, the development of North American midstream assets.

This is an area where Blackstone and GSO have particular expertise and a very compelling investment track record.

We're very excited about the partnership.

Our credit oriented hedge funds were flat in the second quarter despite declining markets, benefiting from gains from several of our hedges and short positions.

Major credit indices were roughly flat, however, many widely held issues were down significantly more than the indices as credit markets suffered from de-risking and fund outflows.

Against this backdrop, our flagship hedge funds still managed to post net inflows including July 1 subscriptions.

GSO now manages $29 billion in total AUM, up 18% sequentially including both organic growth and the closing of the Callidus transaction on April 1 which added $3.5 billion of profitable AUM to our CLO business.

Now moving onto our advisory segment in M&A, Blackstone Advisory Partners continued to generate year-over-year revenue growth.

Advisory fees in the first half were up 8% over last year and last year included a benefit of two very large assignments.

Our pipeline of activity doubled in the beginning of this year versus 2009 and we continue to work through these assignments.

We can remain focused on building our global capabilities.

This has advantaged us competitively in winning large complex mandates.

Half of our deal backlog now involves an international client or deal component.

In our restructuring practice, our backlog continues to be strong across a diverse group of industries and geographies.

Last year was a peak year.

While we don't anticipate we will hit those levels again this year, results remained strong.

The slowdown off of peak reflects the ability of many troubled companies to refinance rather than restructure.

Particularly following the first quarter, we saw record high-yield issuance.

Despite this, we still only saw modest decline in revenues in the first half versus last year's record levels.

Finally, Park Hill, our third-party distribution business, had its best quarter in nearly two years.

Revenues in the first half this year were up over six times from trough levels.

That is up six times from our trough.

We believe fundraising generally has moved past its trough though it still remains in certain sectors quite challenging.

In conclusion, while we remain cautious regarding the macro environment, we are extremely optimistic about Blackstone's positioning and our ability to capitalize on market opportunities for our customers across regions, sectors and business lines.

We have $44 billion of capital in the ground or committed to new transactions.

Most funds are either already earning incentive fees or moving closer to those thresholds.

The past nine months specifically, we have invested or committed $6.5 billion across our private equity real estate and credit drawdown funds at what we believe are historically attractive valuations.

This should well position us to continue our track record of outperformance which is our most important aspect of the firm for years to come.

We have $29 billion of dry powder capital to invest and this capacity is supported by ongoing success in our fundraising efforts.

And we have undertaken capital market transactions in which we reduced, refinanced or extended over $52 billion of portfolio company debt since the beginning of last year, solidifying the capital position of our companies and our ability to control the timing of our exits.

Thank you for joining the call and we look forward to answering any questions you might have.

(Operator Instructions) Roger Freeman, Barclays Capital.

(technical difficulty)

We have got a real reception problem.

I don't know whether it's our system and I hope it's not everyone asking questions.

But if I understand, the question is the driver for the higher marks in real estate and private equity are primarily growth and operating cash flow, not multiples.

Is that correct?

Is that your question, Roger?

(technical difficulty)

We seem to have lost him.

Yes, I think it was.

Operator, I don't know (multiple speakers)

Are other people on the line still?

Yes, they are on the line.

Okay, well why don't we answer the question even if it was not what he asked?

The answer to that is yes.

The simple answer to that is yes, it's primarily growth and operating cash flow for both real estate and private equity properties and within real estate, both lodging -- well primarily in the lodging area.

In the office area, we are seeing declining cap rates which is taking pressure off those valuations.

So that's a little bit more of a balanced picture.

(technical difficulty)

It's breaking up, we can hear you somewhat.

You can hear me a little bit.

Okay, thanks.

I guess in commercial real estate, how consistent are the marks with transactions that you're observing in the market?

I mean, I haven't seen a lot but is it really more cap rates than transactions across the valuations there?

Yes, I would say that it's -- this is Steve.

To answer your previous question that it's more cap rate driven than transaction driven because in effect, in real estate now we have public markets that are creating values.

There are relatively few trades in the real estate business and we can see pretty clear benchmarks in terms of what real estate is worth because it can be bought and sold, not in huge volumes yet.

But when we look at those kinds of values, we bought something in the UK where cap rates just generally move from wherever we purchased this, somewhere around an 8% cap, to something in the 5.5.

We obviously don't mark it 5.5.

But you've seen some real strengthening of cap rates pretty much across the board.

Just to give you an example, recently there was a trade in New York, 600 Lexington Ave., purchased by SL Green.

And according to Real Capital Analytics, that went at a 4.8% cap rate.

We weren't saying anything like that a year or two ago.

Another driver in some of our valuations over the last 12 months has been the ability to extinguish debt at a discount and take advantage of some of the dislocation of the credit markets to create value for the -- this is both private equity and real estate again -- to create value for the equity holders by taking advantage of the dislocations in the credit markets where we basically felt the debt, as of many of our (inaudible) money good was trading at huge discounts to par.

Some of that was extinguished net values accrued to the equity.

In some cases, the example Steve gave of Michaels Stores was we bought it in and sold it back out.

But either way - but some of that debt value creation is reflected in our equity marks as well.

Howard Chen, Credit Suisse.

Okay, here we go.

I was hoping to get your latest thoughts on regulatory reform, how you're thinking about the impact on what you do, competitive landscape, return characteristics?

Well I think regulatory reform was just passed and there's going to be a lot of stuff in the actual regulations that get promulgated as opposed to just the legislation that was passed.

You know, our suite of businesses done by an independent firm, a non-depository firm, I should say, like ourselves.

[They basically] was not the specific target of that type of regulatory reform.

We don't have access to the Fed window.

We don't take deposits and I think that the result in the private equity world is that defaults and loss of capital was significantly less than almost every commentator two to three years ago believed it would be.

So I think we have to wait and see how things get affected.

I think there are clearly going to be between Basel III and individual regulations of countries, there's going to be more capital required in the banking system.

And exactly how Basel III works out in terms of hair cuts against individual asset classes is under pretty active debate.

So we don't know how that's going to come out yet.

I don't think anybody particularly does at the moment.

And my own personal view is that by the time you do all this regulation for safety and solvency, you will take some amount off of global growth.

And I think the people who are working on this on a technical basis clearly understand that there is a trade-off that you want a safe and sound financial system, because that's critical.

On the other hand if you ramp it up too high and you really decrease global growth, then that defeats a lot of other objectives of society.

So I think it's hard to put a number on it, but it might result in a slight decrease in global growth.

But it's probably worth the cost for having a good system, as long as you don't go too far and decrease growth to the point that it's hurting the people ostensibly that reforms were designed to help.

Great.

Thanks, Steve.

Just following up on that maybe to get more specific on two related topics, if you are able to.

One is latest thoughts on carry interest and two, just implications of the Volcker Rule from an opportunity perspective as a potential hire of talent and buyer of some of these businesses.

So Im thinking about the second one rather than the first one.

Let me talk about the Volcker Rule and so forth.

I think that should not present a huge opportunity for most of the businesses we're in.

I think that the rules were pretty carefully crafted in the private equity and real estate side for investment.

All that really happened there is they're limiting the financial institution's ability to 3% of their equity capital to invest in their own funds.

But they can continue to organize those funds.

So as long as they can organize those funds and manage them and sponsor them which was unaffected by Volcker, they'll remain competitive.

And they've even given them what looks to be as long as 12 years to get out of their illiquid investments.

So I think that doesn't necessarily strengthen our hand.

It only stops massive commitments by those institutions where, not reporting on Blackstone per se, but where that will have an impact is in the hedge fund area.

Because basically the regulated institutions of the type we are talking about put a lot of money into their own hedge funds, sometimes got other people to do it, sort of an overlap with quote prop trading.

And if they are limited severely the way they will end up being, then the people who work in those areas and their ability to basically offer that product will be inhibited.

And so I expect to see a number of people in the human talent, human resource area migrating from the larger companies to more independent types of places.

It helps our BAAM seed fund.

We call it the strategic alliance fund, that helps finance new businesses.

So that's how I think that will work.

The first part of that question was (multiple speakers) what happens with carried interest.

Well I think at the moment, nobody knows.

This was before the Senate a number of times.

It didn't go through.

It's under active kind of consideration and this is actually above my pay grade to predict what really is going to happen.

We have obviously been involved.

It's a highly complex system that you get involved with in Washington that passes legislation and we're just going to have to wait and see what happens with that.

Thanks, very helpful.

And then switching gears, my follow-up, I guess with all that's gone on in the macroenvironment, was hoping to get an update on the financing environment.

Steve, in the past you've provided some helpful stats on what type of debt to EBITDA and what size deals this market could support.

I'm going to throw that to Tony because it's a hard question.

Okay, well, the market is clearly less robust than it was even a few months ago.

We are seeing that in three ways I guess.

The willingness of lenders to stretch for the amount of debt has declined.

So you know I think there were instances a few months ago or earlier this year where we were looking at proposals for six times debt to cash flow.

That has backed off -- I'm using averages of course -- to something like five, I guess more generally.

In addition to that, banks and hedge funds and other willingness to sort of bridge loan these things and then have it refinanced has declined.

And typically when the banks do an underwriting, they give you an indicated level of interest and they say, but it might be as high as X and the cap that they're putting on it has gone way up.

So one of the reasons, one of what they're doing is they're risk shifting the market risk from themselves to the issuer by giving much, much wider caps.

That of course is somewhat of a problem for an equity investor because if you can't pin down your cost of financing, you not only don't know your return so much, but it affects your risk profile of the investment a lot.

So that puts everything a little bit into slow motion.

And then in terms of aggregate demand, we definitely think it's harder to do with the really big deals now, but that really hasn't been tested.

And I would say there's some variation of course by where you are talking about.

The credit markets are easier, more robust here than they are in Europe and particularly you get things like deals in the UK and in British pounds and it gets even more limited.

So that's sort of a few comments.

Chris Kotowski, Oppenheimer & Co.

I wondered, could you -- you said the BCP VI final close was $3.5 billion?

No, that was misspoken by me.

We're expecting it currently around 13.5.

$13.5 billion is what that total BCP VI fund size will be?

Well, that's an approximation.

That's in the general area.

3.5 did sound low to me.

Yes, LT pointed that out to me as I went through these pages of things I was reading.

He said, well you really blew this one.

If we work that hard for $3.5 billion, I think I would find a nice island in the Caribbean to spend my time on.

Now presumably that should close before September 30 and start earning fees in the fourth quarter?

Well you know, it's actually -- first of all, it should wrap up certainly by September 30, before that with the fundraising.

But that is not the trigger for the fees, just to be clear.

The fees are triggered when we commence the investment period for the new fund which is a function of actually concluding the old fund as fully invested and then starting the new fund.

The old fund, we are down to the last sort of billion or so.

So it's a couple of deals away.

And we think that will be sometime this fall for sure but I'm not -- because you're predicting when things close and what closes and what amounts, I can't put a pin in that.

Okay, so that was actually my next question which was that in your Q at March 30, you had about $4.4 billion of available capital in fund five.

So what is the trigger?

Do you just maintain, keep a couple of billion back for follow-on investments?

We typically keep about 10% of the fund in reserve for follow-ons, acquisitions or whatever else because these are living breathing companies.

That would be about $2 billion.

So I think probably since March, we have invested about $1 billion in these or committed about $1 billion.

So we have about $1 billion left for new investments.

Okay, great.

Then can you just give us the other funds that had the July 1 close?

Yes.

Geez, all of our hedge fund related businesses have sort of quarterly closings and redemptions and whatnot on a cycle and they close on the first day of the quarter.

So that would include not just GSO stuff, but some BAAM stuff from real estate debt and so on.

So all of those hedge fund structures.

Also closing on or about June 30, it might've been July 8 but around in there was the Capital Solutions which ended up at $3.3 billion, with Clean Tech which ended up at about $100 million for the first close, with BCP VI which will end up at about $13.5 billion when we finally round up the last few strays.

And I'm just trying to think if there's any of the other drawdown funds that were -- had a (multiple speakers)

(multiple speakers) but we had a GSO closed-end fund as well.

Yes, so it was about $300 million.

There's about $1.7 billion in BAAM that closed on July 1 and in total, there's about $16 billion across the firm that has been committed to but is not starting to earn fees until the beginning of the second quarter or beyond.

Just to give you a feel for how -- and this is total AUM, how it would kind of roll.

So in aggregate if you looked across all of our businesses, there were about $7.7 billion of total inflows and then about $2.6 billion of outflows.

That includes -- when I say outflows, that includes realizations.

And then we also had market appreciation of about $1.5 billion.

So that moves you from the 104, 105 as of the end of March up to 111.1 as of June.

Okay and then you referenced Merlin, is there anything you can say about any of the other potential exits or realizations that have been discussed either by yourselves or in the press?

Well, not really.

I don't think there's anything much that we can say that you don't know already.

I haven't seen a lot in the press reports that are terribly inaccurate.

But there's a bunch that's not in there.

Guy Moszkowski, BofA Merrill Lynch.

This is something that I think LT addressed in his opening comments, but I am not sure I quite got so I'll just ask again.

It has to do with the private equity business and the sort of disconnect between the unrealized performance fee hit of twenty-something million and the fact that we know that the funds actually had positive performance in the quarter.

The reason why you have it is that because BCP IV which is our older fund which is through its investment period has several public assets.

And because the public markets were softer in the second quarter, you had an unrealized performance fee reversal if you will because that fund is in full carry.

So you had about a $24 million reversal and that was the impact.

Net net, BCP V was up.

If you put the two of them together, the overall results for the segment were up to 3% that we discussed.

But we're not accruing carry on the BCP V yet.

Even though it's just at cost, we haven't hit the hurdle.

So that's why you don't yet see that in ENI when it's moving up.

So there's no performance fee impact to BCP V plus or minus for a while.

Got it, thank you for clarifying that.

And then just back to one of the earlier questions on real estate, I was wondering if you could just give us a little bit of a sense for the degree to which those marks might have been either -- distinguishing in those marks between what was essentially recouping marks downward during the negative part of the cycle and really starting to see gains from positions that you put on near the bottom.

It's almost all recouping.

Generally speaking, our mark policy is in the first year of a new investment and all of these -- we don't really change the marks unless absent a significant event affecting the Company.

But we also don't just reflect general market conditions on something we bought within the last 12 months.

And so since real estate didn't really do anything from late 2007 (multiple speakers) until recently, all those are new investments, all those are carried at cost.

I would think we've got some great investments there.

We think we could -- we have some embedded gains, let's put it that way.

But almost all of that reversal was mark-backs from the markdowns.

And then I think -- the final one is sort of a big question then.

We have talked about this before.

But given the amount of dry powder you've been carrying for a while and the amount you are adding now, you're going to have something like over $40 billion essentially of dry powder, and yet the pace of investment that we've been seeing recently is kind of a drop in the bucket relative to the scale of what you have got out there.

Guy, let me just clarify something before you get to the question.

The dry powder includes the anticipated -- well what we've closed on BCP VI, so actually the dry powder has been about static.

The new funds that we've raised and the amounts we put out have been about even.

Now when I look at the -- so when I -- just take most of the dry powder is a combination of real estate and private equity.

In real estate just within the last I would say nine months, we've put out near around $3 billion which is a pretty good pace for less than a year.

In private equity, we will end up with a fund and as Steve said, and about $13.5 billion size.

And I think that we can easily sustain a 4, $4.5 billion investment rate easily and still give a lot of co-investment to our LPs in those same deals.

And when I look at our backlog truthfully, it's way more than that based on things that look very real and very executable today.

But it's a lumpy business, as you know.

We don't do a huge number of transactions and when we do them, it can be a $500 million plus bite.

I don't know if that's helpful.

That was sort of where I was going.

That is helpful.

Just as a follow-up to that, as you look at that backlog of opportunities right now, how much of it would you say is the United States and how much -- or North America -- and how much of it is outside of North America?

Well let's assume we're talking for this purpose about private equity.

Let me just break it out.

In credit which of our dry powder, $4 billion is credit, that's virtually all North America.

In real estate, about $10 billion of dry powder is in real estate and there I'm going to guess maybe, Steve, two-thirds North America, one-third elsewhere.

And in private equity, I would say it's probably 75% North America, 25% elsewhere.

But I don't have that chart front of me, so to speak.

But that's helpful though.

Thanks very much.

Robert Lee, KBW.

I apologize if you had answered this before.

I had to step off the call for a moment.

On the new fund, a couple questions.

The first is, there have been some press reports out there about providing some I guess lower fees for scale investments.

Can you talk a little bit about how maybe [people saying you can't have] if in any way the pricing structure of that fund may have differed from previous funds?

And then also, curious if you saw any change in the makeup of limited partners.

What I mean by that is maybe a bigger global component to the investor base, was there maybe more sovereign wealth funds or public or private pensions?

Just trying to get a feel for how maybe you're broadening the investor base.

Well, okay.

So basically the fee structure of our new fund is extremely similar to our old fund.

The only change really is on the split of the deal fees and that has become a little more favorable to LPs.

But it's a little confused because we've given LPs a couple of options on that.

So some can opt for a better split on deal fees but a slightly higher management fee.

We have the lowest management fee, always have, out there.

So LPs can dial it to a couple different approaches.

But frankly it's not -- those terms also haven't changed for two years.

So that's been static.

There's been no real change in that at least on the basic terms of the fund.

We have added a slight option on the fees for certain investors that wanted a different deal fee split.

As I mentioned, for us it's economic.

We're economically indifferent, shall we say.

The press reports I saw, and I didn't maybe review them all, but the press reports I saw just weren't accurate about what was going on in that.

So that's (multiple speakers)

The mix of investors hasn't changed enormously.

What has happened is that the endowment sector has been really adversely affected which is in the press.

And so our flows from there are significantly diminished.

We were never big in that sector actually.

We were quite underrepresented in the endowments.

But they've been hurt a lot, as the press reports show.

There's a pretty good representation from the normal suspects.

The state funds are still as a whole, active with us.

They may be cutting back with some other people, but they've been good supporters of ours.

We have representation for most of the sovereign wealth funds in the world, and that's not necessarily a new phenomenon for us.

But they're cash flow positive institutions and they'll be growing in the future and that's an important part of our business and our ongoing relationships.

But I don't think there's been any revolution (multiple speakers)

No, it's been evolutionary change a little bit away from North American investors to international investors, most particularly not only sovereign wealth funds that have been around for a while that have positive cash flows, but there are new ones emerging that burst on the scene or at least are more open to investing in Western markets and alternatives.

Great, maybe just a quick follow-up.

Any update on the directive that would've limited in Europe marketing some alternative strategies?

I haven't seen that there's been too much update recently.

But any continued concerns that that at some point down the road could limit your ability to market some of your strategies there?

I think that's going through a pretty detailed negotiation process within the EU system.

We're not sure where that's going to come out.

But there are a number of discussions going on regarding trying to put in what they call a passport system, so that if you comply with certain basic rules of countries where the US certainly would qualify for that, then in that situation, one would be able to get a passport to market broadly through the European community.

If you don't have that type of passport, then you would be going through each of the individual countries for regulatory approval.

All of this is really very much in flux and just learning the rules frankly about how the European Community works on a complex regulatory matter for some of us would require like a PhD.

So it's active.

There's a lot of focus on it and hopefully there will be some compromises reached that are workable for firms like ourselves.

Marc Irizarry, Goldman Sachs.

Just some question on multiples on invested capital by types of deals.

If you think about what the sort of go-forward pipeline of deal activity looks like in the private equity world, what sort of returns on the mix of deals -- it's probably more likely I guess that you're going to do more growth equity investing.

What are sort of the historical multiples on capital of those deals versus buyouts?

We break our return down by different categories of deals.

The highest returns have been the buildup in consolidation plays we've had.

I should take a step back.

Over historic and private equity, we have averaged about 2.5 to 1 for our investors.

Those consolidation plays and whatnot have -- and I'm not sure exactly what you mean by growth equity.

But where we get a good management -- in Merlin type things where we get a really good management team and we build up companies, some of those initiatives are new build, some of those are acquisitions and whatnot where we have synergies.

Those have returned about three times or better historically.

That's been our highest return category.

Traditional buyouts have been in the twos.

I think there's one area where we somewhat underperformed.

It's been minority investments in big companies and that has been -- my recollection is 1.7, 1.6 times investors' money, something like that.

But one other thing, Marc, that happens is there's a cyclical component to that.

In other words, when you're putting money out typically in a recovery phase of an economic rebound, that those returns are higher.

What Tony gave you were average numbers over the cycle.

So one might expect those multiples to be 50 basis points higher, 75 basis points higher than the numbers he gave you for deals being set up starting nine months ago for the next year or two compared to where you would be if you were putting money out in a few years when the recovery cycle would be that much further advanced.

Okay, great.

Steve, some of the -- obviously some of the financial reg reform rules could limit the amount of co-investment activity from general partners and some private equity funds.

Is this a competitive advantage for your business in terms of forming funds?

And if it's not, do you think at all about what the right level of co-investment ought to be in the future for the PE funds?

Well, it's interesting.

Co-investment from limited partners is a somewhat cyclical type of phenomena.

Whenever you go through a recession and returns are down for limited partners, generally they get hit mostly in their liquid portfolios, that they look around for a way to save cost and they usually end up coming up with one way to do that is to put money out through co-investment in their private equity and real estate partnerships.

Because fees charged on co-investments are lower and it also enables them to maintain more control of when they're actually putting the money out which for some of them just from scheduling, their cash flow is important.

And we are seeing that in this cycle, that I guess we're about as current as anybody is now on this type of thing because we're going through the fundraising cycle, just fortunately coming to an end of that in he private placement area and a number of the funds are quite interested in that.

I think that those co-investors have a bias towards firms like ourselves which are independent firms as opposed to firms affiliated with in some cases the investment banking area for a variety of reasons, not exclusively but I'd say it's a modest bias our way.

I think co-investment will probably play a larger role at least for the first half of the investment cycle for us than it would have say three to five years ago.

How enduring that's going to be is a separate question.

And just looking at the world today, you would say there has been certainly more of a shift in that direction.

And as long as these investors don't get hit with adverse selection, if they do a bunch of co-investment and they concentrate in some deals that don't work out too well, then there will be a swing back I think away from that.

But it's hard to predict.

Okay and what about the use of your own general partner capital to co-invest in the funds?

So you have a percentage of your own firm capital that you'll use, your general partner capital, to invest in these funds.

If you think about some of the Fin Reg which would maybe limit that, is it a competitive benefit for you to form funds when you have more of your own capital than the competitors in the funds?

Fin Reg doesn't apply to us (multiple speakers) applies to others.

In that area.

You know, we vary by how much money we put into funds from fund to fund depending upon how we look at the world at that time and look at our own capital availability.

For BCP VI for example, that's got a very heavy component and that probably would be, LT, in the 4.5% area, that kind of general zone, 4.5 to 5.

So that's big for an independent firm and you're raising very large funds.

I have found that sometimes that makes a difference to LPs when you're raising funds and sometimes it doesn't.

In other words, the difference between putting up 2% or 3% of a firm or 4% to 5%, you know in some markets that's viewed as significant and in other markets, it's oh, that's interesting.

We're going to invest wherever we were as LPs anyhow.

Let me put another cut on that.

Generally speaking, first of all in general, we're an asset manager and we're going to be balance sheet light in that sense and we do need -- we do put up some seed capital in each fund for alignment of interest.

But it tends to be 3 to 5%, more particularly, 2 to 4% basically of the LP commitments.

And I don't see us changing that now, although there could be occasional specials.

Now when you turn the clock back a year or so ago, maybe a couple of years ago, we were starting to get a fair amount of pressure from sovereign wealth funds in particular to put up a lot more money than that because they said geez, the banks are streaming in here from United States and Europe and they're saying they'll put up 20% of the capital and we want you guys to do that.

And we had a number of that particularly in the credit space, a number of LPs that we were talking about pressuring us to do that.

I think that pressure is gone now and that's probably a good thing for us.

But our own model won't change much.

Roger Freeman, Barclays Capital.

Tony, one of the things I always like to get a sense from is the proprietary data points that you get out of your portfolio companies.

And, Steve, while you were talking, I think you sounded pretty confident about the notion that we wouldn't go into a double dip which we don't disagree with.

But what are you hearing out of the portfolio company?

What are you seeing that gives you that level of confidence?

Well let me take a whack at that.

Actually, I don't think it's fair to say that what we're seeing out of the portfolio company gives us that confidence, truthfully.

Okay.

I think that is our belief but -- and while we don't see a double dip, we've I think been on the record public for a long time about starting late last year and into the beginning of this year and then sort of a flat line afterwards as the economy stalls out.

So it's pretty much playing out like we expected and like I think we've been saying to this group for a couple of years.

That's different from a double dip because we don't see it going back and testing new lows.

But it's also a lot different from the expansion continuing, just to clarify the picture we see.

In our portfolio companies, I would say we're seeing something consistent with that where frankly the last -- the progression off the bottom sort of flattened out a little bit absent the operating fixes that we're putting in but sort of the inherent business, although sequentially it's still a lot better than it was a year ago and so on and so forth.

But while these portfolio companies grow, their sales and particularly their earnings, what they're not doing a lot of is adding jobs.

Now some industries clearly are but in general, just like what I think you're seeing in the broad economy, we're seeing portfolio companies that have structurally changed how they do business in response to the downturn which allowed them to cut quicker and more sharply their breakevens and their cost structures than I think I've ever seen through -- one of our companies be able to do through a downturn.

And at the same time though because the structural changes -- it's not just like an elastic band which you stretch it and it comes back.

The structural change has meant that now they've got a lot of capacity and an ability to scale back up without adding all those jobs back.

So that's sort of -- that's the picture we're seeing.

We're also seeing some caution from the consumer in some of our consumer-facing businesses.

And caution from our CEOs in CapEx.

So that's consistent with the kind of stuff you're hearing on a broader basis.

Right, it sounds like nothing really inconsistent.

Great productivity on the sort of production side but lack of demand from the consumer.

Okay, and then let's see.

What do you think about the sort of IPO outlook at this point, obviously given capital markets have gotten tougher?

Last quarter you were sort of round numbers thinking maybe 10 or so in the next year?

Is it still sort of 10 or so in the next but pushed out a bit?

For what?

I don't think we --

IPOS.

I don't think it was last quarter we were looking forward to 10.

I think you have got to turn the clock back to some earlier period of time.

I think late last year we were talking about 10 in the pipeline for the next year or two and that picture hasn't changed.

I think if anything, we probably have more prospects for IPOs.

But pricing is -- and execution occasion has been rocky.

And what we did talk about last quarter was a couple of the IPOs we did right at the end of the year, how frankly we thought the market underpriced the equities and how as a result, we had pulled some of the secondary shares out of the IPO and just had the company go public and raise some new money and how in fact those stocks were up notwithstanding the market movements significantly since the IPO date.

And we continue to see a pattern of our IPOs way outperforming the public markets post IPO which makes us more and more think what we should do is focus on getting the companies public, not selling many shares in the IPO and letting true value come out in the stock price over time.

Okay, BCP V, you said it's basically back to cost.

How much further does that have to get marked up before you get over those performance thresholds?

It would take an 11% change in tangible equity value to hit carry.

Okay, isn't that the same amount as it was last -- I thought it was 11% last quarter too.

I don't recall (multiple speakers)

It might be but don't forget the base mark is up.

Fair point.

Last question, you may not want to respond to this, but just -- there have been some media reports about you being interested in AlpInvest and while you probably don't want to comment specifically on that, I guess I'm just thinking from a fund of private equity fund manager perspective, is that something that plays to sort of core competency or would you (multiple speakers)

Well we try not to obviously comment on the rumor but I would say getting into the private equity fund to funds business is not one of our strategic priorities.

That's what I thought.

And it has complications.

Right.

Okay, thanks.

Ladies and gentlemen, that's all the time we have for questions today.

Now I'd like to hand the call back to Joan Solotar.

Great.

Thanks, everyone, for joining us and we look forward to speaking with you soon.

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect and have a wonderful day.