Blackstone Inc (BX) 2010 Q3 法說會逐字稿

Welcome to the Blackstone Group third-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 of Public Markets.

And now, I'd like to turn the call over to Joan Solotar, Senior Managing Director of Public Markets.

Please proceed.

So good morning, everyone, and welcome to our third-quarter 2010 conference call.

As Tawanda mentioned, I'm joined today by Steve Schwarzman, Tony James, and Laurence Tosi.

So earlier this morning, we issued our press release announcing results and that's available on our website.

And then we expect to file our 10-Q report at the end of next week on Friday.

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.

For a discussion of some of the risks, please check the risk factors section of our 10-K.

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

So we will refer to non-GAAP measures on the call, and you will find reconciliations to those in the press release.

And this audiocast is copyrighted material of the Blackstone Group and cannot be duplicated, reproduced, or rebroadcast without consent.

So to get to the earnings, we reported Economic Net Income or ENI of $0.30 for the third quarter.

That's up from $0.18 in the second quarter of this year and $0.25 in the year-ago third quarter.

The sequential increase was due to pretty sharp rise in performance and incentive fees that was in all of the businesses, as well as higher investment income, and that was partly offset by lower advisory fees.

For the third quarter, our distributable earnings totaled $166 million.

That's $0.15 per unit.

And that was up from $0.13 in the second quarter of this year and $0.09 in the third quarter of 2009.

So, we will pay the $0.10 per unit distribution related to the third quarter to holders of record as of November 15.

And as we have outlined, we intend to pay a flat distribution in the first three quarters of each year, and that's based on our anticipated annualized net fee-related earnings only.

And then we will have a true-up in the fourth quarter, and that will be based on our full-year, after-tax distributable earnings.

So if you have any questions on anything in the press release or just any other questions, you can follow up with me or Weston Tucker after the call.

And with that, I'm going to turn it over to Laurence Tosi.

Thanks, Joan.

Thank you, everyone, for joining the call.

In the third quarter, Blackstone reached a record $104.3 billion in fee earning assets under management, up 8% from the same period a year ago.

This excludes $17 billion of committed capital that we have raised that is pending the commencement of the investment period or deployment depending on the fund.

As these assets come online, they will drive further growth and earnings.

Economic Net Income for the third quarter was $339 million after-tax, helped by our best quarter performance fees in over three years.

ENI for the first nine months of 2010 was up almost threefold from the same period a year ago to just over $900 million.

Net fee related earnings for the quarter of $113 million were up 19% year over year.

The quarter included a $16 million credit to cash taxes related to prior years.

Excluding that adjustment, net fee related earnings would have been up slightly as growth in the investing businesses was mostly offset by a decline in advisory fees.

Distributable earnings were also up sharply year over year to $166 million, a 67% increase.

The biggest contributor was realized performance fees of $66 million, predominantly from private equity and our credit platform, GSO.

As you review Blackstone's results, it is important to think about what these different metrics tell you about current earnings and future earnings potential.

Distributable earnings give you the best snapshot of what cash earnings are today, while ENI is an indicator of earnings power over time as accrued gains become realized cash earnings.

While the over $900 million of ENI generated in the first nine months of this year is substantial, it does not reflect the potential contribution of the $25 billion of fee earning assets that we have in private equity and real estate that will accrue carry with a 10% or less change in total enterprise value.

Collectively, the firm manages were as commitments to manage $60 billion on performance fee eligible assets that are not currently earning performance fees.

For example, the firm earned $2 billion of ENI in 2007 when our fee earning asset base was only $83 billion at the end of that year, including commitments as of September 30 of this year that are not yet part of our fee earning AUM.

Our fee earning asset base is now up nearly 50% from that 2007 level to $121 billion.

A quick word on the business segments.

In private equity, revenue and ENI rose from the last quarter as we recorded appreciation in all of our investment funds.

All of the funds are marked above cost including realized proceeds.

For the year-to-date period, private equity revenues were up 17% and ENI up 4%.

Our largest fund, BCP V, is now a 10% change in total enterprise value from accruing full carry.

In real estate, both revenues and ENI rose sharply sequentially and year over year, driven by higher investment income and performance fees which totaled $161 million.

As the fund's carrying values continued to increase, all of our real estate investment funds appreciated materially in the quarter.

In our Credit and Marketable Alternatives business or CAMA, both revenues and ENI were up sequentially and year over year due to higher management and performance fees.

ENI for the year-to-date period rose 46% while net fee related earnings rose 86%.

All of our major funds have positive returns and outperformed benchmarks in the quarter, and more assets moved above their relevant high watermarks.

The CAMA segment had a 26% growth in fee-earning assets over the past year if you include our commitments.

Our advisory business declined sequentially and year over year due to lower revenues in restructuring and M&A.

However, year-to-date net fee-related earnings were up 8%, mostly reflecting the sharp recovery we are seeing in our Park Hill placement business as the fund-raising environment for high-quality alternatives continues to improve.

A few points on balance sheet and liquidity -- during the quarter, the firm issued $400 million of 10.5-year notes at a 5.875% coupon.

S&P and Fitch affirmed our A, A+ ratings, respectively, the highest of any manager of alternatives.

We plan to use the proceeds for a combination of investment and organic growth and for opportunistic investments, such as our recently announced 40% stake in Patria, a leading Brazilian alternatives platform, and the Callidus acquisition by our credit platform.

We ended the quarter with cash and liquid investments of $2.2 billion against $1 billion in borrowings.

The value of the firm's investments in our own funds grew by an estimated 10% in the third quarter to $3.8 billion.

I will now turn it over to Steve.

Thanks, LT.

During the third quarter, we saw the continuation of a muted economic recovery in the US and Europe that remains characterized by better than average growth in corporate earnings, but also sustained high unemployment and below average growth in consumer spending.

The pace of the recovery and output in employment has slowed in recent months.

This has kept alive some fears of a double-dip scenario in the US, which we do not believe is likely.

Unlike the US and Europe, economic growth remained robust in Asia and South America.

Global markets were volatile during the quarter, reacting to mixed economic data, although a sharper [owning] in September, which is historically the market's worst month, put equity indices up 10% to 20% for the quarter.

This upswing has continued into October as investors are widely expecting further Fed intervention to bolster a faltering economy.

The dollar has declined sharply.

Several nations around the globe are easing their policies to counter their strengthening currencies.

This liquidity was driving markets higher.

Global debt markets remained strong in the third quarter, reacting positively to good corporate earnings and a strong new issuance calendar.

Blackstone continued to navigate the choppy and uncertain environment and built upon the positive momentum in all of our businesses, as LT has told you.

Ongoing appreciation in our investment funds and successful fund raising drove our total AUM to $119 billion at the end of the quarter.

In private equity, we will soon complete the investment period of our BCP V fund, and then we will launch BCP VI, which should increase AUM by at least another $13 billion.

In real estate, our carry funds appreciated 19% in the quarter and are up 59% year to date.

It's pretty good performance for sure.

Our $11 billion global flagship fund, BREP VI, which was carried at $0.46 on the dollar a year ago, is now valued in excess of cost.

I'm going to do that one again, just so you understand how powerful this is and why marked-to-market accounting is something you have to review with caution.

Our $11 billion global flagship fund, BREP VI, which was carried at $0.46 on the invested dollar a year ago, is now [in] valued in excess of cost.

The gains accruing to our investors are in sharp contrast to other opportunistic real estate managers.

Our credit and marketable business continues to see strong inflows, take share.

And our advisory business is expanding to take advantage of a slowly increasing M&A environment globally.

On October 1, as LT mentioned, we closed on the acquisition of a 40% ownership stake in Patria, a leading alternative asset manager in Brazil.

Patria currently manages $3.2 billion in total assets with a similar business mix to our own -- private equity, real estate, infrastructure and hedge funds as well as a corporate advisory business.

In fact, the founding partners of Patria refer to Patria as a mini Blackstone.

We have known the Patria team for more than 10 years, and there's a very strong cultural fit between the two firms.

Like Blackstone, Patria has generated outstanding investment returns for its limited partners, some of whom are ours by the way.

Aside from owning part of a very high-quality business, the benefit to our limited partners is that we will have a very strong partner on the ground in the largest economy in Latin America.

We expect this to enable all of our businesses to be much more active in this exciting region of the world.

Now, I would like to briefly discuss each business segment.

In our private equity portfolio, the vast majority of our companies grew both revenue and EBITDA.

Improved earnings projections across the portfolio helped drive appreciation of 6% for the quarter and 26% year-to-date period.

Most of this increase was in BREP VI, which is now valued above cost.

This is the fund that people were worried about because it was invested at the top of the market, and now we have protected all of our money and average equity indices are probably down 20%.

So private equity compared to liquid equities looks like an awfully good thing, and this is just the start of an economic recovery cycle.

We remain active in terms of new investments and deployed over $700 million of capital in the quarter, almost entirely in Asia.

This included an investment in Japan's leading wireless broadband provider, eAccess.

In addition, we acquired a stake in Moser Baer, an independent power producer in India, which was our largest investment to date in India, and our second commitment in the India power sector.

In terms of (technical difficulty) focus (technical difficulty) in energy, committing to three new transactions in this space.

We also continued to invest in platform deals, identifying an industry opportunity and a capable management team, and building up a company.

In the US we completed five more acquisitions for a portfolio company summit.

Our platform in rolling out the heavy side building materials companies, which brings our total investments to date in this company to $340 million of equity.

We paid an average of 5.7 times EBITDA for these assets and plan to create scale and synergies to build a stronger company and attractive return for our LPs.

We committed additional funds to [BPF] Energy Partners, our platform for acquiring refineries and associated terminals and pipeline assets, to acquire a second refinery at an attractive multiple.

In total, we've invested or committed $3.2 billion so far in private equity.

We have $6 million of investment realizations during the quarter, which brings us to year-to-date realizations of $1.3 billion at a multiple of original invested capital of 2.7 times our money.

This is another one of these issues that people always worry about when we have our marked-to-market accounting.

And I think we have said in the past and that when we finally realize these investments, even though they sometimes get marked low in time of difficulty for the overall economy, they usually end up being extremely strong.

And here we have our realizations at 2.7 times our money.

While we have other dispositions in process, and we generally expect the pace of realizations to pick up, the timing and number will depend on conditions in the public markets, as well as activity levels of strategic buyers.

And we're just starting to come out of the caves right now.

As we have stated in the past, we are under no pressure to sell assets.

Our portfolio company capital structures are solid with the average industrial company leveraged to only 4.5 times debt to EBITDA.

Our funds' locked-up capital allows us to be patient investors and wait until the time is right.

One final note on our private equity business.

Last week, we gathered all of our portfolio of companies' CEOs at our annual CEO conference, which was held outside the US for the first time, and it was in Shanghai, China.

We've had a similar meeting each year for the CFOs.

At these conferences, we discuss trends we're seeing in the economy and global markets, share best practices, and network so our company's senior management can get the maximum benefit from being part of a diverse and global organization of over 60 companies with aggregate revenues of over $110 billion, which is a really formidable size business, which, taken together, would be probably one of the top 12 or 13 including oil companies in the United States.

The scale and collaboration sharing of knowledge is one of the keys to Blackstone's success.

And this meeting was a terrific, terrific success.

And we had our company CEOs talking with companies in China, with plans to open plants.

And it certainly opened the eyes of companies that weren't as active to that growing economy.

Moving on to our real estate business, which has emerged from a terrible environment with no material realized losses, unlike literally all of our competition.

I'm going to do that one again.

We have emerged from a terrible market environment with no material realized losses, unlike literally all of our competition.

Our current portfolio is benefiting from the recovery.

It's been underway in commercial real estate.

We feel very good about the $15 billion of investments we made during the 2004 to 2008 period, which are now valued above cost including realized proceeds.

Our office markets have generally stabilized.

And certain markets such as New York and London are seeing improvements in both leasing activity and asking rents.

New supply remains extremely limited with construction starts 80% below historical averages.

In hospitality, RevPAR has been positive for six straight months, benefiting from both improving occupancy and more recently, higher room rates.

As I mentioned, our funds appreciated 19% in the third quarter and are up 59% in 2010.

This is the result of continuing improvement in operating fundamentals, increasing transaction values for high-quality real estate assets in major markets, and the benefits of portfolio company debt purchases to date.

I actually think this is a pretty amazing achievement since the average commercial real estate is probably down around 25% from the top, and we are in the positive zone.

Our real estate business also has the largest pool of committed and uninvested opportunistic capital in the world, with dry powder of over $9 billion.

We've been active in the new investment front, taking advantage of the distress that exists in the marketplace today.

We invested or committed $1.2 billion just in the third quarter, and over $4 billion since the fourth quarter of last year.

And we have a full and active pipeline of additional opportunities.

Last quarter, we announced our agreement to assume asset management of the Merrill Lynch Asia Real Estate Opportunity Fund.

This is proceeding on schedule, and we expect to close in the fourth quarter.

This transaction will add over $2 billion in AUM to our platform, and very importantly, will substantially expand our presence and capabilities in the Asian real estate market.

Lastly, our real estate debt strategies business has grown to $2.2 billion in total AUM, which is double last year's level.

As we take in new commitments and diversify the platform.

Of this amount, we have $500 million in dry powder to put to work that will earn fees as it's invested.

Our real estate debt hedge funds were up 4.5% gross in the quarter and 17% for the year-to-date period.

We're seeing many opportunities to make new loans to borrowers as the demand for capital exceeds supply.

We're building a significant origination platform that will provide GAAP financing for new borrowers.

There is significant growth potential in this business, leveraging the firm's knowledge of real estate and credit.

On to BAAM, which is our solutions provider to large institutional clients using hedge funds.

They further built on their market leadership position in the third quarter.

BAAM grew 10% sequentially, driven by significant net inflows as well as positive performance.

Including October 1 subscriptions, we had external net inflows of $2.2 billion, bringing the business to a record $31.9 billion in total assets.

A significant portion of this growth has been in BAAM's long-only substitute products, [with] hedge funds managers [seeding] platform and its customized separate account business.

And the pipeline remains very promising.

BAAM's composite gross return was 3.5% in the third quarter, driven by a positive performance across all of BAAM's major sub strategies.

For the nine months ended September 30, BAAM returned 5.3%, outperforming the S&P total return index.

At the same time, BAAM had one-fifth the volatility of the index, in line with its traditional emphasis on capital preservation.

BAAM also outperformed the [Hefry] fund of funds composite and the HFRX Global Hedge Fund Index by over 3%.

At the end of the quarter, 70% of incentive fee eligible assets were above their respective high watermarks or within 1% of that threshold.

So things are going well at BAAM.

Our credit performance -- our credit platform GSO continues to grow and diversify across its four primary lines of business.

In an environment where banks remain protective of their balance sheets, our Capital Solutions Fund is seeing attractive opportunities to put capital to work.

During the quarter, we deployed nearly $400 million, which brings us to over $800 million to date.

The fund is off to a great start in terms of performance, and as of September 30, had already appreciated by 27%, in less than a year.

And this is just supposed to be primarily fixed income with a little bit of equity.

There remains $2.4 billion in dry powder capital, but [learned] fees as it is put to work.

Second, our mezzanine business is performing well, driven by underlying operating company performance.

We've invested $1.6 billion to our flagship fund Capital Opportunities [I] and have started marketing process for our second fund.

We can have our first closing on the new fund as early as the first quarter of next year.

We continue to build out our customized credit strategies business, which includes our diversified loan-only platform for investing in leverage loans.

We are raising the first new money CLO since the collapse of Lehman.

When you talk about green shoots, this has got to be a green shoot, our first new money CLO since the collapse of Lehman, which we expect to total approximately $400 million.

This will expand upon our market leadership in this space as we now manage over $17 billion in CLO assets in separately managed accounts.

Lastly, our credit-oriented hedge funds rose 7% gross in the third quarter and are up 13% year to date, outperforming the relevant benchmarks.

Over 90% of the eligible assets were above their applicable high watermarks at the end of the quarter.

Our funds produced meaningful gains as we transition to a longer bias early in the quarter, taking advantage of the positive trends in the market following second-quarter results announcements.

GSO manages nearly $30 billion in AUM, which is up 20% from last year.

Really nice growth in that business.

In our advisory segment, as LT has told you, revenue has declined from very strong second quarter, but increased 10% for the year-to-date period.

Declining revenues in our M&A and restructuring businesses were largely offset by a fivefold increase in revenues at Park Hill, which is approaching more normalized levels of activity after fund raising was really locked up the previous year.

In M&A, activity increased in the third quarter compared to last quarter with 10 new transactions announced.

We're seeing most activity in the consumer, energy, FIG, metals and mining, chemicals and technology sectors.

While activity is increasing, revenues declined sequentially and year over year, as there is a meaningful lag from deal announcement to closing, driving variability in quarter-to-quarter revenues.

We remain focused on building our global capabilities, and we are seeing the benefits of our platform when competing for large, complex mandates.

Half of our revenues and deal backlog involves an international component.

In restructuring, revenues declined from record levels the last year as strength in the high-yield markets has provided many companies with refinancing opportunities and limited new restructuring assignments as the economy gets healthier.

However, our backlog remains promising and we expect to find a number of new assignments as the economy exhibits ongoing slow growth.

In conclusion, the track record of outperformance of each of our businesses continues to support our organic growth and market share gains.

Fee earning assets are up 8% year on year or 26% if we include the committed capital as of September 30 that is yet to start earning assets.

26% growth for a firm of our size and its businesses I think is really, really very good.

This inflow of assets should drive growth in our fee earnings.

And as more of our investment funds move over the levels required to earn performance fees, the earnings power of our business model should then become increasingly apparent.

Our balance sheet and liquidity enable us to pursue and execute selective acquisitions, such as our interest in Patria, which we're all really proud of, which fit well with our firm and complement our ongoing growth and diversification.

While the outlook on the US economy's recovery remains somewhat cloudy, we are well positioned to capitalize on opportunities and generate superior returns for our investors.

Thank you for joining the call and we look forward to your questions.

Tawanda, if you can please open it up to questions.

(Operator Instructions).

Howard Chen, Credit Suisse.

Good morning, everyone.

Steve, you noted the continued revenue and EBITDA growth across the portfolio of companies.

As your management teams firm up 2011 business planning and budgeting, could you maybe give us an early sneak peek at expectations for revenue and EBITDA growth in the current portfolio for the next 12 to 18 months?

I'm going to toss that to Tony.

Well, Howard, it varies a lot by region.

So, in emerging markets where you have a lot of our portfolio is now in China and India, and we see continued robust growth there with all the businesses that are driven by domestic consumption, the businesses -- investments we've made that are driven by export-related forces are using much more restrained forecasts, which are consistent with our forecasts for US and Europe, where we are generally saying it's going to be essentially a flattish environment through 2011 and into 2012.

We think we will get continued EBITDA growth through cost cuts, and we have revenue growth programs at each company that are -- or where we are expecting and planning on outgrowing the market and picking up share with new products.

We put in some new talent in revenue growth in our operating platform.

But I think that those businesses in general will be running against pretty heavy headwinds of a continued weak economy.

That's very helpful.

Thanks, Tony.

And then separately, I was hoping to get an update on the financing environment at the investor day.

I believe [Vicran] spoke to the market being able to digest maybe a $10 billion deal with a $5 billion debt stack.

Is that still a reasonable level in your minds?

Absolutely.

And then thoughts on costs of financing for a transaction of that size?

Well, you know the markets -- I mentioned on a call earlier this morning that the market is paying a historic premium for liquidity.

So there is a size that's too big, but within a broad range, they really want liquid markets.

So you don't really have a smooth line of higher costs with bigger deals.

And, we're talking about capital structures where the all-in cost of debt through the whole capital structure would be in the single-digit range, so call it 8%, 9%, on deals of that size.

Okay.

Thanks for taking a stab at it, Tony.

And then finally for me, Steve, you provided a flavor for what we've seen year to date in terms of realizations.

I know there's a lot of variables to this, but just could you give us an update on sense of the pipeline for further realizations as you see it?

Well we've got a number of things that are sort of teed up.

It's really a question of what happens in the public markets.

I think it was interesting -- there was an article in the paper today that basically was talking about venture capital deals and how there's virtually, almost none of them, being done.

But we were involved in one yesterday in terms of IPOs, and there's a booming market in Asia.

And, so we are seeing sort of a rotation in terms of the ability to do IPOs.

And I think we're in a position of some uncertainty now because of elections, tax policy, Basel III's, I mean there's an endless list of things of that type that are making investors more cautious that are slowing down some of the realizations we would want to do.

We've got a variety of discussions, some of which are reported on accurately, some of which aren't, on strategic sales; some of which are caused by us going out to sell; some of which are caused by people contacting us.

So we have a number of those at any point in time.

I wouldn't say it's a exceptionally robust environment for exits in large part because you can always sell something at a price.

I mean it's the way life works.

But to get an optimal price, it's probably a little early in the cycle.

That makes a lot of sense.

Thanks for taking the questions.

Roger Freeman, Barclays Capital.

I guess just reflecting on some of the comments here and on the call this morning, basically said credit has gotten pretty easy again and Tony, I think you gave some examples, some interesting examples earlier where they have gotten similar or more excessive than prior to the credit crisis.

I guess private equity valuations seem pretty full.

There's a lot of competition for deals.

You're putting a good deal of money to work here, but as you kind of think of the go-forward, where does this go?

There's a huge grab for any kind of yield, so it feels like maybe the financing environment could continue.

And how do you sort of deal with the competition?

You mentioned like Summit, this rollup; is this -- could we see you do more of this sort of thing where you could have a proprietary way of coming to market to do deals?

Yes, you'll see a lot more of that, Roger.

I think we've got about a dozen management teams that we've scouted out and wooed and decided to work with and have been paying now for in some cases several years waiting for either to develop transactions in a sector; or waiting for the sector conditions to change until they are truly out-of-favor when no one else is around; or creating companies; or building assets new assets, so it kind of would depend.

Some of those sectors would be, Steve mentioned Summit in the gravel and aggregates area.

We've got a management team in the refineries area, where we have bought two refineries and are now -- have an agreement to buy a third.

We have such a team in power development projects, where one way to get away from the high price for existing assets is to sort of build your own, so to speak.

And the interesting place for that, there are some opportunities in developed markets, but a lot of that is happening in undeveloped markets where we have facilities being built in Uganda, in Philippines, and in India.

And, obviously there, if you are building it yourself, you are getting in at book value.

The flip side of that is of course, you are taking some kind of development risk.

We try to mitigate that with offtake contracts, take-or-pay construction contracts, and in some cases, if you will, sovereign insurance, particularly for certain of those jurisdictions I mentioned.

You can guess which.

So, we do a lot of that.

And so we are -- as I say, avoiding the plain-vanilla deals.

We're still able to put a bunch of money out this way.

We do, of course -- we do have a large deal in the pipeline for Dynegy, which is a public to private.

Again, it was -- we think it's an interesting transaction.

It seemed like it was a very out-of-favor company at the time.

We paid a huge premium to the pre-existing market, 62%.

Now one of the shareholders that was actually selling at $2.50 right before our offer is saying that our offer of $4.50 is too low.

Actually don't see how they can sustain that logically or fairly, but nonetheless, they're entitled to their opinion.

So I don't know whether that happens or not.

But we're trying to do off the run, out of the favor stuff that other people aren't touching.

One other thing on that.

Historically, we've done well over 50% of our transactions as sort of non-auction type stuff.

And if you just go to the auction house, you can't pay the highest price in the world on a given day for a given object.

And sometimes that works if you have a really terrific plant.

But, what we've found historically is if we focus on areas that are of interest to us, custom tailored transactions, that we have very good outcomes, terrific performance.

So, when you ask that kind of question, it gets heard in the context of people who don't normally just go to auctions.

I guess we are dealing -- [maintainings] from private dealers sought directly from customers.

So, yes, just to quantify that, Roger, so, as Steve mentioned, for a long time, we have had more than half have been totally exclusive.

I'm not talking about only one or two other bidders or like some people talk about.

This is totally exclusive.

In the last couple of years, we're up to between 75% and 80% of the money we put out is totally exclusive.

And we're trying to push that for obvious reasons, and it is a way to avoid the overheated competition.

One thing I would also like to add, not to prolong this, but I just want to thank everybody for attending our investor day that we had, and it was a terrific opportunity for us to display what we do.

We don't have -- we think we have a simple company, but by the time you get through certain accounting policies from the SEC, it's probably not as simple to understand as it might be in actuality.

And, Joan did a terrific job teeing up the people around the firm to show you what's really going on in our businesses.

A lot of you on this phone call took an entire day to listen to that.

And from all of us we want to thank you for your time, attention and care on that because we think it makes us better partners with you.

Great.

Thanks.

That's very helpful and full commentary.

Just one quick follow-up here, from the competition standpoint, do you think that there's a lot of pressure right now because of other private equity firms that supposedly have expirations coming up on having to put money to work?

Is that having much of an impact?

And secondly, Europe versus the US, how do you think the competitive sort of -- or valuation environment is?

Because in the past you've said that Europe was highly competitive and fully valued.

Is it still more so versus the US?

I think Europe is still more competitive than the US, although the US -- Europe hasn't cooled off, but the US is catching up.

Europe has the added problem in my view of, with the exception of Germany, a lot of the other economies in Europe I think have an even tougher road than the US.

And you have some structural problems with the euro which just added an element of risk that's hard to price.

And then thirdly, the debt markets in Europe are not as robust.

So if you get to the same price in Europe, you tend to have less advantageous debt financing and higher cost of capital.

So, it's still got some elements that make Europe a harder place for us to get enthusiastic about.

Some of that I think we will work through.

With respect to your first part of your question, I do think that the press is basically circulating a number of about $0.5 billion of raised but uninvested private equity capital.

I think that kind of overstates the overhang because a whole lot of that, at least in my view, 25% of that will be reserved for follow-on investments, will never be invested in new deals and whatnot.

And they've whittled away at a bunch of it.

But there's still a lot of capital out there and I think the -- and in many cases, particularly for those firms that didn't too much in 2008 and 2009, which is most firms, they're looking at the amount of capital they have to divest and the entire remaining investment period.

And I think there is probably some pressure coming from that.

One of the reasons I think we can afford to be a little more disciplined here is we are through our fund that was raised before the bubble.

It's basically fully invested at this point.

And, the new capital we have, BCP VI, which we're about to commence, we've got a new six years on, so we feel we can be very patient, very disciplined, and very selective about what we do.

And I think that's a luxury that we have that some other firms don't.

Okay.

Great.

Thanks a lot.

Chris Kotowski, Oppenheimer Company.

Good morning.

I thought it was interesting that you said that almost all of the private equity funds you deployed were in Asia this time around.

And I'm wondering if you are thinking ahead about plans to invest BCP VI.

On balance, how do you weigh the opportunities that -- to position yourself I guess for secular growth in Asia and Latin America versus in the United States where it might be more kind of value distressed, position yourself for a cyclical rebound?

And any guesses on where we should expect you to deploy most of BCP VI?

Well I think most of BCP VI will be deployed inevitably in developed markets, primarily the US.

We are actually limited in terms of BCP VI under the terms of our LP agreement to no more than 20% or 25%, I don't remember exactly, being in non-OECD countries.

Now, some of the Asia that I mentioned includes Japan, where we did a deal this year.

And for our convenience sake, I also include Australia in that, just heads up.

On the other hand, with Patria, we haven't done much in Brazil lately, and I expect that will be quite active.

We've got a number of very interesting transactions that we've been working on lately in Brazil.

So, we will shift some from Asia to -- but it will still be emerging markets and secular growth driven.

All in all though, these things go in cycles, and emerging markets are getting quite expensive.

So, that will look as great, but we're in the business of having to get the right price for assets.

And we're fundamentally, more often than not, we're value buyers.

So I think that will lead us to have most of our capital in the developed markets.

Okay.

And just out of curiosity, does it ever make sense to do targeted regional private equity funds?

Or does that just compete too much with BCP VI, and it's not worth it?

Well, I think historically, one of the strengths of BCP VI is that we have been able to instantly allocate market capital from one market to another, based not only on the Outlook, but the valuations at the time.

Having said that, we've build up really full-fledged, very high quality operations, particularly in India and in the sort of Pacific Rim area, China, Australia and whatnot.

And it's pretty clear now, and they're sort of full-fledged firms with operating people and everything.

It's pretty clear now that I think we have a gathering network of interesting deal flow in those regions, which will probably run up against the 20%, 25% limit we have in BCP VI.

So I think it's likely that what we will do is probably have to take a hard look at having an Asian sleeve, if you will, for -- which would share deals with BCP VI in Asia.

And there's enough LP appetite for Asian investments that I think that would be well received.

And at least, while they don't have the benefit of us allocating assets across the countries, frankly, they know what they're getting and what they want is Asia.

So I think they will be happy either way.

Okay, great.

Thank you.

Marc Irizarry, Goldman Sachs.

Great, thanks.

Tony, maybe you can give us an update on the private equity debt maturity schedule, like sort of what's coming up here?

And I know you've done a lot over time.

But maybe give us an update on the debt maturity.

And then also, can you speak to what the change in valuation this quarter was attributed to, i.e.

how much came from operating profit versus delevering (multiple speakers) multiples?

Sure.

Well, so, in a nutshell, as I think I mentioned, our basic company is at about 4.5 times debt to cash flow today.

You know, in a market where new deals are being set up at 6 routinely, there's obviously no refinancing issue, first of all.

Secondly, in terms of maturities, we've extended or lowered the cost of about 50% of the maturities that we once had.

And only about a third of all the outstanding debt across all the portfolios comes due in the next five years.

So, two-thirds of it is out beyond five years.

Thirdly, in terms of valuations, it's awful.

We didn't increase our multiples at all in private equity, so it's all driven by progression of operating income.

And, I can't actually tell you how much of that comes from debt paydown, but the debt paydown would come from operating income.

We're not -- in the last quarter, we did not do any extinguishment of principal.

We don't have any debt, frankly, trading at very much -- big discounts to par because our companies are healthy.

That's one of the opportunities that some other firms have that we never had because we didn't have any defaults or bankruptcies in our portfolio.

So, but, so it's almost all driven by growth of EBITDA.

Okay.

And then Steve, can you comment on some of the fund-raising activity and what you are seeing from US versus non-US institutions in terms of committing assets to alternative strategies?

Yes, sure.

Fundraising just sort of generally is, as you know, is still significantly below the market tops in 2007, I mean significantly, so.

And, for some firms, not ours thank goodness, but for some firms, that's going to have a really very adverse impact.

So, to answer your question, you sort of have to look at the different business lines.

In private equity, if you're looking in the states, there's going to be a greater emphasis towards alternatives.

Endowments are basically by asset class and type of investor, you're going to find -- endowments are basically virtually out of business in terms of making allocations to relatively small investors, the prestige investors, we haven't had that many of them at Blackstone compared to other types of investors.

State funds, which represent about 50% of our investors in private equity are active.

You know, they are going to be winnowing down, in some cases severely, the number of general partners or firms they do business with.

I mean we've had some of these investors tell us that they really want to go from 120 relationships to 30 or something like that.

So, there are going to be a lot of left-outs in this area.

And so for firms like us which are sort of the core investment firms for these kinds of investors, there are significant flows, although typically not the same as 2007.

There's a little bit of fee pressure on some of that, particularly on transaction fees, not so much management fees or carry.

Real estate, it's sort of too early to tell.

People have been devastated in that area, but real estate remains a really big asset class, you know.

And, so I think there's going to be a huge shakeout in that business.

We have, we think, sort of the best record in the developed world, pretty much.

And so we are anticipating a very good response to our next fundraising, although it will be at the expense of some people who won't even get to market again.

So I think that's -- I also think that there's going to be more emphasis with a really good manager like ourselves in real estate for all types of investments, pensions and others for the cash flow that comes from real estate to meet their actuarial assumptions.

In a hedge fund of funds area, we see more and more investors wanting to go into that class, because if you look at what happened through the cycle, the hedge funds are back to par pretty much from the market tops.

And the "conservative," which turned out not to be conservative, long-only equity managers are down 20%, 25%.

And so, people actually are aware of this distinction, and so they are putting more money, and that's one reason why we are continuing to grow that business.

So I think that will be a pretty enduring trend in credit.

There is a desperation, which would be the only way to characterize it, I think, for yield.

And as a lot of these investors have hurdle rates of 8% in pension funds and sometimes a little bit lower, but with treasuries where they are, the need for credit products -- and we have a variety of those type of products, particularly in a mezzanine area; just take mezzanine as an asset class where you can deliver a 9% to 10% current yield after all the fees and a 13% to 15% expected return in a world where sort of treasuries are yielding 2% or something -- this is going to bring out big flows, I think, from institutional investors and retail investors.

And it doesn't have to be our product; it could be anybody's product.

But that asset class is going to show like really well and bring out flows.

So I think you have to look at each of the business lines and then it varies a bit from place to place.

And I'm giving you a complete answer because unfortunately you asked a complete question.

That in Asia, their continual flows into their sovereign funds -- not so much individuals, but the big funds there -- are getting increasingly active.

And so that's a place where more and more money is coming.

The US, I've more or less described.

Europe has a steady flow of investment, but the size commitments in Europe are much, much lower and always have been, except for a few investors, institutional investors.

And the Europeans are more cautious now as a rule.

And, surprisingly, the Middle Eastern investors, which used to be potentially really, really big, have cut back, and they have cut back for some odd reasons.

Even though energy prices are up, a lot of their economies in the Middle East have gotten hit by speculation in real estate.

And as the value of real estate generally has gone down, including in the Middle East, and people are really leveraged up, their equity has gotten crushed, which has led to enormous conservatism.

And all the sovereign funds in the area of are the ultimate sort of last place to go for the government to make sure they can keep their economies healthy.

And they're also putting a lot of money into their local economies, which is quite different than they did in the last cycle.

So there is between conservatism, wanting to protect their economies and growing their own economic base, there is less capital to export in that area.

And that may change at some point, but with oil at $82 a barrel, you would expect more flows from that region, and that hasn't happened.

So, that's a little mini tour of the world and also by asset class.

Thanks for the tour.

Just more specifically, we've seen one of your competitors look at the financial regulatory changes as it relates to the banks as an opportunity to maybe pick up some talent or try and build some capabilities.

Do you have sort of in your plans building out more direct hedge fund strategies?

Or how should we think about sort of the landscape for acquisitions for you guys?

Yes, we're always looking for unusual talent and opportunities to expand the firm in a way that's consistent with having absolutely first-rate people.

And whatever we do, just making the overall firm better and better in creating more intellectual capital.

We are, as a firm, a lot more advanced than a lot of our competitors in terms of doing this.

We've been doing this really for 25 years.

And, so it has to be a pretty special opportunity for us to do things.

Conceptually, one would think that with the Dodd-Frank and Volcker stuff, you are going to see a variety of spin-outs and some of the regulated institutions not raising an X fund or doing it a lot smaller.

And in that kind of situation, talent is going to shake loose because people can't get paid the same if they're operating from a lot smaller base.

And so we've looked at a variety of things that have come out in the market.

As Tony told you, we've -- or LT, I forget which -- we've done two things just in the last quarter.

We got an active monitoring, but we don't get seduced easily.

And you have to keep absolutely rigid criteria -- for top-notch talent.

That's like really key.

So, would I find it surprising that we do something out of this cycle?

No.

Do we have to?

No.

This is really opportunistic.

And the reforms are going to give us significantly more opportunities to do this than we have seen in the past.

Great, thanks.

Patrick Davitt, Bank of America Merrill Lynch.

Good afternoon, guys.

You touched on this a couple of times on the investment pace and that relative to where BCP VI would start earning fees.

But is it -- you have $1.6 billion of committed -- of capital committed to deals on the private equity side.

Is it fairly safe to assume that BCP VI is going to start investing this quarter?

Yes.

I mean look, it depends on things like Dynegy for example.

(multiple speakers) close or not, so it's lumpy.

But, in the ordinary course for the flow, we've got things on the docket and things we signed up, the answer to that would be yes.

Okay, great.

And then in real estate, you've seen two quarters of pretty significant positive performance, and you've said in the past that you typically don't mark an investment in its first year of holding.

Are we seeing some of the very distressed real estate investments you made kind of hitting that one-year mark and now getting marked?

Is that part of that?

Not really.

Not really?

No.

And the vast bulk of the real estate marks is also just like in private equity, comes from increased cash flows.

So at some point, you will get the slingshot effect of the new investments coming on, the increased cash flows which we think are just starting to -- they're run up -- and lower cap rates.

And I think that is why we are so optimistic about the ultimate returns in all these real estate funds.

I think investors will do very well in every fund.

Okay, great.

You divide it between hospitality and office.

You've probably seen more of a stabilization on the office side, but you have seen a real improvement in hospitality.

So even if you looked at Post reported today, and obviously we have a little bit different mix, but you just see RevPAR moving up probably a lot more than what expectations were.

And if you look at some of the deals that have been done recently in the marketplace in part because rates are so low, the cap rates have come down a lot.

So a recent deal of Boston properties buying the Hancock building in Boston with a four handle on that, we're certainly not marking to anything like that, but you've just seen values rise.

Okay.

And then in restructuring, you mentioned that you still have a pretty solid pipeline there.

But, across the board, we have seen a pretty significant decline in corporate defaults.

You mentioned liquidity in financing.

Could you speak to maybe what's driving the sustainability of that pipeline?

Do you think that there are enough credits out there that can't tap the markets despite the amount of demand there is?

Well, there's always a certain amount of noise in that.

But we -- but I'm not sure -- I don't want to leave the wrong impression.

We think that business is in a downturn and will continue to a decline.

Okay.

One thing that --

M&A that's got the strong backlog that looks like it should be going the opposite direction.

Together, those businesses historically have been of approximately -- of similar size and almost perfectly countercyclical, so they provided a growing and pretty steady revenue stream for us if we look at it together.

Yes; one thing about the restructuring area is that they continue to get mandates.

As economy gets better, what tends to happen is the size of the mandate gets smaller.

It's the really big companies that were in trouble as the economy is just sort of collapsing.

Those companies tend to find their own way as the economy recovers.

And they are smaller companies with less access to capital and so forth that provide more of a steady diet going up, which results in smaller fees for us, even though the people remain -- who are working on things -- remain quite active.

Okay.

Thanks a lot.

Roger Freeman, Barclays Capital.

Hi, just a couple follow-ups.

The comments you made on the origination platform in real estate sounded kind of interesting.

Would you say that's a business that -- opportunity that's arising for you coming out of the credit crisis because banks have pulled off on bridge financing and maybe also because the securitization market remains nonexistent there?

Yes, I mean, it's a great opportunity because they are -- for the -- you can get real estate financing to banks, but you can't get it to narrow the loan to value that you used to be able to get, so there's a gap between what we consider to be a very safe loan and what the banks are lending.

So that's what we're stepping into that breach.

There aren't securitizations really going on anymore, although they will come.

And, so we think loan to value, it's great.

We are actually getting sort of low teens returns for a loan to value of -- of the pre-meltdown value of 50%.

So we think that we are well covered and also getting attractive returns.

And it's a little bit like corporate, where there is -- these are loans that are sort of one-off and not traded, and therefore not liquid, and, therefore, we think there is a missed pricing in the market for fixed income that's illiquid.

Okay.

That's helpful.

In terms of capital raising, I just wanted to sort of ask you how you think about the business longer term.

You obviously raised some debt this quarter, used part of that for an acquisition.

In a normalized environment, if you're generating a, like I said, in sort of midcycle level of cash from realizations, is that in your mind probably enough to fund commitments alongside your private equity and real estate funds?

Or do you anticipate they are sort of always, given your growth rate at an external (multiple speakers)?

No, we think that the business can be self financing and we can still pay out all or the vast bulk of our earnings.

We probably re -- when we liquidate investment, we will be retaining the original cost.

And so I think going forward, we could see lower percentage commitments to new funds than we've had historically, and so we will be able to manage the cash flows without being dependent on external financing.

Although, frankly, getting sub 6% ten-year financing looks to us like a pretty good thing to do.

Yes.

Actually that comment, lower commitments going forward, do you think that's because of Dodd-Frank limiting the banks at 3% so they can't compete as aggressively on that?

No, I think pre-meltdown, we signed up for a fair amount -- we committed a fair amount to both BREP VI and BCP VI, $750 million, up to $750 million each fund.

The world was flush with capital and so on and so forth.

Realizations were coming down, and now, I think going forward, we probably wouldn't do it at that level again, and nor do we need to under a limit.

There's no other fund -- no other firm -- independent firm that has committed near that much capital to any of their fund.

So, we're a little bit of an outlier there.

We will just get back to our normal range of 1% to 3% of the capital.

Okay.

And then just lastly, coming back to your comment, Tony, on the earlier call about your sort of your views around the counterproductive impact of quantitative easing, I'm not sure that's so radical.

I think it actually makes a lot of sense.

But does that influence the way you guys are approaching investing across your businesses, the impact of that over maybe the next couple or three years?

Well --

I guess it factors into your view that growth rates are going to be low, it's just kind of (multiple speakers)

Yes, I don't think -- we don't think there's a silver bullet.

So that's -- it's definitely -- and if that's what they are pushing on as a solution, we're pretty pessimistic about it working.

So it does factor into our sustained of -- but it's not just that.

I think they're -- business has got a lot of uncertainty stemming out of Washington.

There's no sense for what the cost of health care is going to be; what the cost of labor is going to be; what your tax rates are going to be; are you going to have R&D credits or not; are you going to bring it back foreign earnings or not?

What's the environmental laws?

Are there going to -- what's the energy cost?

Are there going to be carbon credits?

It's -- so, American businessmen in our experience are uncertain about the future and they're not going to go out on a limb and do a lot of investing and a lot of new initiatives until that is clarified.

Yes.

So -- and then the quantitative easing will, obviously, be good for debt for awhile, but we think we're going to pay the piper eventually in inflation.

And so that's one of the reasons that means that while we are not in a rush, we think now is probably a good time to sell credit, whether that means issuing it out of our portfolio of companies, our own balance sheet or selling it out of our debt portfolios to the extent it is liquid and long-term and fixed rate.

So, it's in forming our view, but it is a little odd that we have a negative tips yield and yet, we have Google showing deflation, the Google price index.

So, a real dichotomy there, and we're at a very uncertain juncture I think in economy, the American economy, European economies, and markets.

And so I would say that our conviction about the future is less than it's been all the way back to 2006 when we had conviction that we are at a peak.

And as a result, we are just being very cautious now.

Great.

Thanks a lot.

Ladies and gentlemen, this concludes our question and answer session.

I would like to turn the call over to Joan Solotar for closing remarks.

Great.

Thanks, everyone, for joining and feel free to follow up.

Have a good day.

Thanks.

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect and have a great day.