Blackstone Inc (BX) 2010 Q4 法說會逐字稿

Welcome to The Blackstone Group's fourth-quarter and 2010 year-end 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, External Relations and Strategy.

And now, I'd like to turn the call over to Joan Solotar, Senior Managing Director, External Relations and Strategy.

Please proceed.

Thank you.

Good morning and welcome to our fourth-quarter 2010 conference call.

So I'm here today with Steve Schwarzman, Chairman and CEO, who's actually joining the call from Europe; Tony James, President and Chief Operating Officer; and Laurence Tosi, our CFO.

So earlier this morning, we issued a press release announcing results, which you can find on our website, and we expect to file the 10-K later this month.

I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the firm's control.

Actual results may differ materially, and for a discussion of some of the risks that could affect the firm's results, please see the risk factors section of our 10-K.

We don't undertake any duty to update forward-looking statements and we will refer to non-GAAP measures on the call.

For reconciliation of those, you should refer to the press release.

The audiocast is copyrighted material of The Blackstone Group and can't be duplicated, reproduced, or rebroadcast without consent.

So with that, we reported economic net income, or ENI, of $0.46 per unit for the fourth quarter.

That was up from $0.30 in the third quarter of 2010 and $0.29 in the fourth quarter of 2009.

The sequential improvement principally reflected a sharp increase in performance fees and incentive fees really across all of the businesses, as well as higher transaction fees from greater deal volume and higher (technical difficulty) advisory fees.

We reported ENI of $1.26 per unit for the full year, and that compared with $0.63, so about a double from 2009.

For the fourth quarter of 2010, distributable earnings were $0.20 per common unit, and that brings the full-year distributable to $0.62 per common unit, which is up about 41% over the prior year.

So we'll be paying the $0.32 distribution as it relates to the fourth quarter as a true-up, as we mentioned, bringing the full year up to the $0.62.

So if you have any questions on anything in the release or on this call, just 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.

Good morning, and thank you for taking the time to join our call.

At the end of 2010, Blackstone reached a record $109.5 billion of fee-earning assets under management, up 14% from the year ended 2009.

Our total AUM was $128 billion, up 30%.

Blackstone's continued strong growth drove revenues up 75% to a record $3.14 billion, slightly more than our revenues in 2007, which was our prior peak.

Blackstone generated $1.4 billion in economic net income for the full year, which more than doubled the ENI generated in 2009.

2010 was also a record year for fee revenues for Blackstone, despite the fact that investment activity levels remain less than half of what they were in 2007 and transaction fees are less than 25% of those peak levels.

Blackstone's distributable earnings were $702 million for the year, up 50%, as Blackstone continued to see strategic opportunities to harvest gains for our investors across our funds.

While a significant increase from 2009, however, these levels of cash earnings are still less than 50% of our 2007 earnings, when we had almost 45% less committed fee-paying assets.

In total, Blackstone created over $17 billion of value for our investors across our funds in 2010.

ENI is a leading indicator for distributable earnings as we convert value creation into value realization.

Blackstone has now had seven straight quarters of positive ENI and established valuation levels that we can harvest if and when markets provide those opportunities.

Two additional leading indicators are our committed but uninvested capital, or dry powder, which was $30 billion at the end of 2010, and our total amount of assets eligible for performance fees, which was a record $90 billion, also at the end of 2010.

Turning to the businesses, private equity revenues were up 7% to $828 million for the year.

Despite revenue growth, ENI was flat in private equity, due in part to our continued investment in our portfolio operations group, our growth in our international presence, as well as an increase in marketing expenses.

We've now closed the investment period for BCP V, our 2005 and 2006 vintage fund, and began our successor fund, BCP VI, which we will expect will have a final total fund size of over $15 billion.

BCP VI will increase fee-paying AUM in private equity over 40% to $35 billion by the end of the first quarter of this year.

Realized performance fees in private equity and investment income nearly tripled for the year to $172 million.

In real estate, both revenues and ENI gained momentum over the course of 2010 to end the year with over $1 billion in revenues and $640 million in ENI.

This increase reflects gains in the carrying value of our real estate holdings of 69%, which drove higher investment income and performance fees.

Our largest real estate funds, BREP V and VI, are just 1% increase in total assets away from earning carry.

Both our real estate debt strategies business and our new Asian platform, which we took over in the fourth quarter, contributed meaningfully to performance fees for the quarter and the year, as the global real estate markets continued to strengthen.

Fee-paying AUM for real estate was up $3.1 billion for the full year, due largely to the rapid growth in these two new strategic businesses.

Turning to our credit and marketable alternatives business, or CAMA, in our continuing effort to offer investors increasing transparencies, I would like to highlight a new set of disclosures which we will be adding to our public filings.

Beginning in the first quarter of this year, we are separating CAMA into two separate segments -- Hedge Fund Solutions, which includes our BAAM funds, and our Credit Businesses, which includes GSO Capital Partners.

In anticipation of the change in Blackstone's reporting segments, we provide expanded financial and performance details for each business in today's press release, both in the text and the additional exhibit seven to the release.

Assets, revenues, and ENI were all up sharply for the fourth quarter and for the full-year 2010 for both of these businesses.

In our Hedge Fund Solutions business, which includes BAAM, all of our major funds had positive returns, which, combined with substantial net inflows and increases in realized incentive fees, drove ENI growth of 16% year over year.

In our Credit business, we raised and invested more capital, which drove fee-earning AUM growth of 24% in 2010, and ENI followed, up 83%, as we saw opportunities to capitalize on gains in very favorable market conditions across credit.

Total fee-paying AUM for the CAMA segment was up $10.6 billion in 2010 to $58.5 billion, which does not include $7.6 billion of committed capital that has been raised that has not yet started to earn fees.

Finally, our advisory business reported record revenues in 2010 of $432 million, driven by growth in both our M&A and our fund placement businesses, which was partially offset by a decline in our U.S.

restructuring business.

Overall, ENI in this segment was roughly flat versus the prior year, reflecting our continued investment in those businesses in what we see as an opportune time in the cycle.

A couple of thoughts about balance sheet and liquidity.

We ended the year with cash and liquid investments of $2 billion against $1 billion in borrowings, with an additional $1 billion in undrawn committed credit facility.

The total value of the firm's investments in our funds grew 55% during the year to $4.3 billion.

We think 2010 gives us a solid base from which to grow our businesses over the upcoming years.

And with that, I'll turn it over to Steve Schwarzman.

Thanks, LT.

Good morning and thank you for joining our call.

During the fourth quarter, global markets moved sharply higher as an accumulation of positive economic data pointed to improving demand and output and a sustained economic recovery.

Emerging markets, which now make up well over one-third of the world's GDP, economic growth beginning in 2010 was robust, partly supported by growing domestic consumption.

In the developed world, however, improvement has been more muted.

In the U.S.

specifically, the pace of the recovery has been limited by persistent high unemployment.

The net increase in the number of jobs in 2010 was insufficient to offset the impact of new employees entering the workforce and materially reduce unemployment and underemployment rates.

The fourth quarter, the government responded with further fiscal stimulus, initiated another round of quantitative easing to help support the markets move higher, but created adverse impacts on certain other currencies.

We also saw some resolution to the political and regulatory uncertainty that plagued investors for much of 2010 as a result of the U.S.

midterm elections and the apparent shift of the administration to a more pro-business and strong U.S.

competitiveness theme.

The significant changes in Congress should also provide a much more pro-business environment.

Despite the somewhat sluggish pace of economic recovery in the U.S.

for much of 2010, which we expect to improve in 2011, the fourth quarter capped a pivotal year for Blackstone.

We reported our best quarterly earnings in nearly four years.

Asset values continued to increase across the portfolio, as you've heard, driven by improving cash flows and healing markets.

In 2010, our private equity portfolio increased by 29% and our real estate portfolio rose 69%, truly extraordinary performance.

Our $11 billion global real estate fund, BREP VI, is now valued at 123% of original cost and could be accruing performance fees later this year, if trends continue.

Our LPs entrusted us with nearly $18 billion of new capital across the firm in 2010.

A combination of these inflows and asset appreciation drove our total assets under management to $128 billion at year-end, or $142 billion if we include BCP VI.

We opened the investment period for this fund on January 7; it's now earning full management fees.

The market dislocation provided Blackstone with a greater number of investment opportunities, most of them exclusive.

During the year, we drew on our record levels of dry powder to invest nearly $10 billion in transactions.

That's the equity value of what we've put in, $10 billion, and that we believe will yield excellent returns for our investors.

We also continued to invest the firm's resources in extending our presence and capabilities globally.

In the fourth quarter, we closed on our investment in Patria, which we told you about last quarter, the leading alternative asset manager in Brazil, and we assumed management of the Merrill Lynch Asia Real Estate Opportunity Fund, which added over $2 billion in fee-paying AUM to our platform, as well as greatly strengthening our depth in the region.

Overall, I believe the firm is entering 2011 in the strongest position I've seen during our 25-year history.

Now, I'd like to briefly review each business segment, starting with real estate.

We continue to see sharp upward movement in the value of our real estate portfolio.

Funds appreciated 19% in the quarter and, as I mentioned, 69% in 2010, driven in part by the recovery that's underway in both office and hospitality.

However, most importantly, we own higher-quality assets in good markets and we manage those assets well.

We were aggressive sellers of real estate prior to the downturn, holding onto the best-in-class assets in those portfolios.

We also have the right long-term capital structures heading into the downturn, with no recourse financing and no covenants.

The result has been no material realized losses in any of our funds.

In fact, the unrealized value and cumulative realized proceeds from our real estate funds represented 1.4 times investors' original capital at the end of the year.

We expect to deliver additional solid returns for our investors above and beyond this.

These results are in sharp contrast to almost all other investors in this asset class in the developed world.

We have been extremely active in terms of new investments, committing $1.1 billion in the fourth quarter and nearly $5 billion, as Joan mentioned, in 2010.

The vast majority of the capital has been invested in bankruptcies, recapitalizations, and debt acquisitions.

Notable investments included Extended Stay Hotels and General Growth Properties.

Heading into 2011, despite the recent dramatic increases in real estate public and private values, there remains hundreds of billions of dollars of overleveraged properties and loans in the U.S.

and Europe from the bubble period which will need to be recapitalized over the coming years.

We are extremely well positioned to play a major role in this and we expect to continue to aggressively deploy capital.

We have over $9 billion in dry powder, plus our funds, real estate, and we'll likely begin raising, as you've probably heard, our next global funds this year.

Final note on our real estate business.

Our debt strategies platform, which provides badly-needed mezzanine capital to the real estate industry, has grown to nearly $4 billion in size since 2008, despite the negative headwinds faced by the industry over the past few years.

We believe this success speaks to the power of the Blackstone franchise.

We've been generating very favorable risk-adjusted returns for our investors, and our real estate debt hedge funds were up 4% gross in the quarter and 24% in 2010.

This is really great business for us, leveraging our intellectual capital across both real estate and credit markets.

In our private equity portfolio, which includes over 60 companies, we continue to see both revenue and EBITDA growth at the majority of our holdings.

There is divergence between what we're seeing by region and sector, with better topline performance in regions where economic activity has more fully recovered.

Overall, excluding high-growth regions, portfolio company revenue and EBITDA are improving 2% to 10% year over year, on average.

Earnings projections continue to rise, driving portfolio appreciation of 2.6% in the quarter and 29%, as we mentioned, in 2010, with appreciation in both our public and private holdings.

We committed to invest $1.1 billion in the fourth quarter, our most active quarter of 2010.

New commitments in the quarter included Mivisa, Europe's third-largest metal food packaging company, and publicly-traded Polymer, a global leader in non-woven fabrics.

We also committed additional funds to PDF Energy Partners, our platform for acquiring refinery and associated terminal and pipeline assets, to acquire a third refinery at an attractive multiple.

In 2010, we deployed or committed $3.5 billion in new and follow-on investments.

Over 80% of the capital deployed during that period went into new investments in Asia.

Sample transactions include Moser Baer, an independent power producer in India, and eAccess, Japan's leading wireless broadband provider.

The environment for new deals and refinancings is quite favorable, given the base rates and substantial money flows into non-investment-grade asset managers.

In terms of cost, our yield spreads are tightening toward historical midcycle norms, while LIBOR and treasuries remain at historic lows.

We believe LBO transactions requiring $5 billion or more in financing can be executed on attractive terms.

In fact, we're pretty sure it's higher.

We had approximately $740 million of investment realizations during the fourth quarter and $2 billion in total in 2010 at a multiple of original invested capital of 2.5 times.

Last week, we successfully completed the IPO for Nielsen, which priced above the range and was several times oversubscribed and is trading at approximately 1.7 times our original investment during a time period where stock market indices had no appreciation.

Proceeds from the offering will be used to pay down debt at the company.

We also completed the IPO of BankUnited with even more favorable results.

Similar to Nielsen, this transaction was many times oversubscribed and priced above its expected range.

Both of these successes were attributable to the remarkable new management teams and major changes in corporate strategy and execution by Dave Calhoun and John Kanas, respectively.

We expect more realizations as our portfolio companies mature.

BAAM, Blackstone Alternative Asset Management, which designs custom solutions for large institutional clients using hedge funds, saw continued strong net inflows in the fourth quarter, as LT mentioned, as well as positive performance across all of its major substrategies.

Including January 1 subscriptions, BAAM had net inflows of $4.3 billion in 2010, resulting in a record $34 billion in total assets.

A significant portions of BAAM's inflows has been in its customized separate account business, as well as long-only substitute products.

In January, we completed the fund-raise for our second hedge fund manager seeding platform, which should add $2.2 billion to fee-paying AUMs as the capital is drawn over time.

Our initial program was $1.1 billion in total size and has yielded a gross return of 55% since its inception in 2007, which is pretty remarkable since 2007.

BAAM's composite gross returns with 3.9% in the fourth quarter and 9.6% for the full year.

As of year-end, nearly 80% of BAAM's $16 billion of incentive fee-eligible assets were above their respective high-water marks, or within 1% of that threshold.

Moving on to our credit platform, GSO continues to grow and diversify its product offerings, and now has over $31 billion in total assets under management.

This is one of our fastest-growing businesses, and we believe it has significant untapped potential.

2010 was a particularly strong year for our credit business from the perspective of both absolute and relative returns.

Our mezzanine and rescue financing funds performed very well, driven by strong underlying portfolio company performance.

One-third of our $3.3 billion Capital Solutions Fund has been deployed, earning fees as invested.

In just over one year, this fund has already appreciated by 24%, and the pipeline remains full of interesting opportunities to put the rest of the capital to work.

Our flagship mezzanine fund is now roughly 80% invested and returned 24% gross in 2010, with 20% annual returns for inception, which is really truly remarkable for a mezzanine fund.

We've been raising our second mezzanine fund and we expect an initial closing this quarter.

Our credit-oriented hedge funds also performed very well this year and were up 7% gross in the fourth quarter and 21% for the full year, outperforming the relevant benchmarks.

These funds' long/short orientation works well to produce meaningful gains in a volatile market environment.

In our customized credit strategies business, which includes our long-only platform for investing in leveraged loans, we continue to expand our product offerings and our investment base.

Increasingly, GSO is being sought out as a solution provider for credit investors.

We are seeing this translate into a greater number of separately-managed accounts with diverse mandates.

Also within this segment, in January we launched a $250 million closed-end fund focusing on floating-rate bank debt with a long/short overlay, which trades under the ticker EGX.

This follows the successful launch of our first closed-end fund, ESL, in the second quarter of last year.

In our advisory segment, revenues rose sharply in the fourth quarter, helping drive record year-end -- full-year revenues of $432 million, up 9% over last year.

Our M&A business, which made up roughly 40% of 2010 segment revenues, is seeing increased levels of activity and should continue to benefit from the cyclical upswing in global M&A activity expected in 2011, as well as our targeted expansion into new regions and sectors.

Our U.S.

restructuring business, which was approximately 30% of 2010 segment revenues, declined as expected, as many companies have been able to take advantage of the attractive refinancing opportunities available in the market today.

Lastly, in our Park Hill fundraising business, activity has returned to more normalized levels with markets' appeal driving extremely strong growth in revenues.

In conclusion, I believe our 2010 results demonstrate each business we operate is a world leader, both in terms of scale and performance.

I believe it's clear that each of our businesses built upon its leadership position during the difficulties of the past few years.

As we move into 2011, they are better positioned than ever before.

While each of our businesses is a leader in its own right, it is their combination which differentiates us from any other firm and provides Blackstone with our distinct ability to deliver consistent outperformance across cycles and to attract new capital and grow our business.

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

(Operator Instructions).

Robert Lee, Keefe, Bruyette & Woods.

I guess a first question, mainly for Laurence.

Just in thinking about ENI this quarter, to what extent was the sharp ramp maybe partially driven by, I guess I'd call it, some kind of catch-up accruals, I mean as you move past some hurdle rates of return in maybe either some PE or real estate funds, and I assume that would come into play, assuming you -- in the real estate funds and maybe going forward, assuming those values continue to appreciate.

Actually, Robert, one thing.

It actually isn't related to the catch-up because the major real estate funds and BCP V are still below their hurdle, and that catch-up only applies to the first few percentage points above the hurdle.

What it is related to is the first part of your question, which was, you're right, there was a very sharp increase in values in the fourth quarter.

There was some reversal of clawback, which occurs when you have those sharp increases, and that's really what drove some of the ENI, and you'll see that in the real estate segment (multiple speakers)

One or two questions related to BCP V and VI.

Can you remind us the proportion that -- of capital that you guys committed to number VI, and then, just from a kind of a modeling, accounting question, just also remind us of kind of the step-down in fees on V as it moves towards the kind of invested phase?

Sure.

Our capital commitment in BCP VI is smaller as a percentage.

It depends on what the final numbers would be, but we'd assume it's going to be around $600 million, down from the $750 million that was in BCP V.

That's the first piece.

Some of that is give and take between insiders, as well as the firm itself.

But that's the firm commitment.

The step-down in fees is that when -- on January 7, when BCP V closed, it went down in fees and BCP VI began, which has full fees at that point, and that's how the step-down works.

The $600 million and $750 million that LT talked about is the combination of the firm, plus the employees, just to clarify that.

And the step-down, BCP V -- actually, the fee goes to 0.75 based -- 0.75% or 75 basis points once the investment period finishes, which it has.

(Multiple speakers).

It will be higher fees going in.

So, the higher fee on BCP VI, and even with the step-down, net net, you'll have higher management fees going into 2011.

Right.

Thank you.

And one last question.

I would be interested in getting a little bit of color, if you could -- if you think of your capital raising this past year and where you see the opportunities, and kind of the mix between U.S.

and non-U.S..

Is it really -- are you seeing it really come predominantly from investors outside the U.S., that they have kind of been more active, and is it U.S.

institutional lagging somewhat, or is it pretty evenly split?

Just try to get a sense of that.

You know, most of our money still comes from U.S.

investors.

However, they are probably down somewhat overall, while international investors are up somewhat overall.

So, the mix is shifting towards more international LPs.

Chris Kotowski, Oppenheimer & Co..

The $2 billion new investments on the real estate front, that was a big number compared to recent quarters.

I wonder if you can break that down a little bit, and kind of geographically size the number of projects and give us some color on that.

Yes, most of the new real estate investments are U.S., and for the most part, they're investments in troubled situations.

They may be bankruptcies or they may be capital structures that are maturing and can't be refinanced or that sort of thing.

And they are almost all U.S..

And in terms of sectors, it's got warehouses in there.

It's got hotels in there.

It's got retail in there, malls, and it's got -- for the most part, that's what it's been, those three sectors.

Okay.

And I mean, I don't remember seeing any major big announcements, so it must be lots of little things?

No.

I think it's fewer larger things, actually.

They tend to be portfolios of assets as well as opposed to single assets.

So, the kinds of things we're doing are General Growth, Extended Stay.

We have a major -- one of the largest warehouse portfolios across the country.

They tend to be collections of -- they tend to be large transactions.

But there are the one-off.

We've done some shopping centers one-off.

We've done some hotels, or groups of hotels, one-off.

There are a few of those, but --

Okay, great.

Those transactions.

And then, just in trying to model the fees on BCP VI coming up onstream, should one basically assume, okay, you've got like roughly $21 billion in fee-earning AUM on BCP V going down by 50 basis points, and then, say, roughly $14 billion coming in at 125 basis points?

You know, there are a bunch of ins and outs here.

Why don't you take that off-line with Joan and Weston, and they will take you through that because it's got a lot of moving parts to it in both funds (multiple speakers)

Marc Irizarry, Goldman Sachs.

I guess this is for Steve and/or Tony.

Can you just talk a little bit about the PE re-up rate in your latest fund?

And then also for your real estate fund, obviously the environment -- the competitive environment seems like it sort of lends itself to you guys raising even more assets, given all the opportunity and also the fact that some of your competitors maybe are on the heels.

Can you just talk about the re-up rate and the PE fund and sort of the expectations for the next real estate fund?

I think -- I don't have that exact number in front of me.

It sort of feels like in the 70% to 80% range.

Typically, we will run at 90, and the reason for that is that a number of investors just didn't have money.

We were out there, really, right over the Lehman period, and the world really froze for at least a year, and where we've ended up is -- everyone could make their own judgment on that, but it certainly has been the largest fund raise in the last 2.5, three years, and my expectation is that it will probably be -- stay as the largest fund raised for at least another year or two.

So, it's part of what's happened with the cycle, although you can definitely see thawing there, and outside of private equity per se, you are seeing, really, big flows coming into GSO as well as into BAAM.

So those markets are really looking for what we've got to offer, as they are in private equity.

It's just a tougher environment.

Now, real estate is something -- we'll have to see how any fundraising comes out there.

What I would say is that we have an exceptionally strong and almost unique record for our existing funds, and when you think that the overall sort of generic real estate would probably be off 20% from the high, and we're showing significant gains, and most of our funds had gains everywhere, with what we expect that the trends continue.

It should be very health returns on these funds and almost in a pretty unique position.

So, it's going to be an interesting go to market.

We are -- the fundamentals look quite good.

For different areas of the real estate market around the world, particularly in the U.S., Europe at what looks to be a bottom, and Asia is always a little more difficult because the markets there have run since the last few years, but as a manager with quite a unique record, particularly at this time in the developed world where there is a lot of activity, I think we would expect to have quite a good reception, although we have to see how many people share our enthusiasm for the real estate class.

I think from, just talking with people in the marketplace on a regular basis, that a lot of investors are looking for a way to take advantage of this asset class.

So, we'll answer your question fully after we've been in the market for a while and know what's going to happen.

Let me just add, there is a lot of appetite now for real assets in general because I think people are becoming increasingly worried about inflation, and real estate is one of the beneficiaries of that.

Marc, if I could just add, I wouldn't take our fundraising or inflows and extrapolate that, necessarily, to an industry trend.

So, for example, BAAM had really strong inflows, but if you looked at the fund of funds business in 2010, it actually net had outflows, and came off of something Steve said earlier.

For us, as our LPs are looking to consolidate the number of firms that they are choosing, given performance across all of our asset classes, we are clearly a beneficiary of that, but that won't be true for, generally speaking, all the competitors in all of our different asset classes.

One thing I think we mentioned last quarter, as limited partners have gone through the last few years, what most of them, I would say the vast majority of them, have concluded is that they have too many managers.

They not only have too many managers, but they have too many managers with too much diversity of performance, and not always wonderful.

And I think one of the things that really positions Blackstone very well is that -- the experience that virtually every LP has had with our products has been very, very favorable compared to alternatives, and as you put that together on the short list of terms that LPs would want to concentrate on as they go through the winnowing down of what most of them are doing, we think that that trend is pretty good for us, frankly.

And then, can you just talk about your shadow AUM?

I know you referred to how much capital you have committed but that's not earning fees yet.

Can you break that down between the various segments?

How much is in private equity, real estate, and then in CAMA I guess you have some drawdown capital that hasn't been drawn down yet that's not earning fees yet.

Can you just spell out the shadow AUM a little bit?

Marc, it's LT.

You're talking about capital committed that's not yet earning fees, right?

Not dry powder?

Yes.

So, if you look at BCP VI, it's just around $13 billion.

There is $1 billion in [breads], and then there's about $7.5 billion in the CAMA segment.

Some of that is the BAAM subscriptions since the beginning of the year, which Steve referred to.

That brings us to a total of $21.64 million across the firm.

Roger Freeman, Barclays Capital.

Just a couple in real estate here.

The clawback reversals in the quarter, so it sounds like that was responsible for the majority of the performance fees in real estate in the quarter.

Actually, no.

The performance fees, if you look at exhibit 2A, which is page 12 in the press release, what you'll see on the performance fees is there's unrealized performance fees.

That is largely a -- as you said, the reversal of clawback, but you also have realized performance fees related to the breads business and related to the new now Bank of America assets in Asia.

So, if you put it all together, it's about $300 million.

It's about half realized in the breads in Asia business and half is the reversal of clawback, or about $150 million.

Yes, but just to be clear, the reversal of clawback just relates to appreciating values.

So, you can categorize it how you want, but it's the same driver.

I understood.

I just hadn't factored that piece into the model.

How much of that is left to potentially flow through in future quarters?

Very little.

Across the whole firm, it's less than $100 million, and $35 million of that is in real estate and $60 million is in private equity.

Because you're moving closer to the hurdle.

So the largest real estate funds now is actually pretty close to moving into carry.

Yes, actually that was my second question.

If I heard correctly, the BCP V and VI are within 5%, if I heard that right.

Can you give me each of those separately?

Sure, we'll break it out when you get our 10-K, and the way we express it is we show a change in total equity value that it would take to get to the -- above the hurdle.

For BREP V and BREP VI, that's a single percentage point, and for BCP V, it's 12 percentage points.

On the mark out there on the quarter, the 19%, what drove that mostly?

Is it lower cap rates?

Is it more activity in the private markets space where you're actually getting deal values to comp against?

What was it?

Any color there?

It's a little bit of both.

A lot of it's driven by just operating performance across the different assets, frankly, strengthening, which can be expressed in RevPar or occupancy levels, and as well as some impact on cap rates.

And it was across older vintage, newer vintage, et cetera.

In all segments of the real estate market -- office, retail, industrial, hotel.

Okay.

Just -- you had mentioned a couple of specific ones.

I think Extended Stay and General Growth.

Was that the majority of the $2 billion or so of equity commitments during the quarter -- deployment?

Not necessarily.

I don't actually have handy the breakdown by investment of all -- of what we did during the quarter.

We'll -- maybe we'll go onto another page and come back to that answer, Roger.

That's fine.

I was just trying to get a sense of what you think the investing rate is here.

As you said, it's chunkier investments (multiple speakers)

More generally (multiple speakers)

(Multiple speakers) opportunities.

We're looking at quite a robust forward pipeline.

So, I don't see -- if anything, it looks like it will be -- it's actually growing.

In real estate talk.

Dan Fannon, Jefferies & Company.

Was wondering, LT, if we could talk a bit about the P&L and kind of leverage within that as you look at items such as kind of transaction fees, and then maybe compensation.

As we are starting to see investment activity pick up, obviously management fees are going.

I'm wondering if we look back at historical levels, has anything changed to where we shouldn't see the flowthrough in the P&L all the way down to the bottom line, based on either kind of sharing of those fees or going to be some comp catch-ups that need to occur?

Actually, what you'll see in the results right now is a little bit the opposite.

So you'll see that the performance fee compensation ratio is lower than it should be on a historical average, and that's largely related to a deal-by-deal analysis at the time of the IPO and certain partners converted carry into shares.

But we don't see anything across the business that would be anything different than the dynamics we saw, let's say, in 2007 when you saw the operating leverage over time, and the margins, really -- the comp margins haven't changed.

If you look at the fee-related comp margins that are plus or minus 150 basis points year over year, there's leverage in that over time.

And now in the performance fee comp, as I said, it has been trending a little bit lower than you should expect it to be, and that's related to the IPO allocation of different deals, but that will get back to more normalized levels, which we usually see between 40% and 45%.

Okay, that's helpful.

And then, in the transition or, I guess, the AUM, you discussed the $7.5 billion or so and in the CAMA that's going to flow through, potentially, to fee-paying AUM.

Is there any lumpiness to that?

Or is that something we should just assume over time as kind of the investment period picks up?

It's really two pieces, and one is BAAM, which has certain subscription periods that come in, and Steve went through that in his numbers.

That's about half of it.

The other half are the mezzanine funds and the cap solutions rescue fund inside of GSO, and that's really deal by deal and tends to be relatively steady over time.

So, it's not as lumpy as the BAAM subscriptions or the beginning of a new fund in private equity.

So, that's about half.

About 7.5 or 7.6 that I gave you, half is BAAM, half is GSO, and I think the GSO portion will play out over (multiple speakers)

But half of the BAAM portion is like GSO.

It's the Strategic Alliance Fund that accrues as it's drawn down over time.

So it's really -- of that 7.5, it's really like about $1 billion that came in around January 1, right, that you'll see right away, and the rest will layer in over time.

[Diane Zyafi], [PCW].

You've been talking a little bit about the refinery business for the past couple of calls, and I was wondering if you could just go a little bit more into detail of how far you are in that.

And I know your timeframe is a long one for this, but if you could just give a little bit more detail.

And then, the second question is for Steve.

I was just curious how much time you're spending in Europe.

I'll start with the refining.

We've made -- we've closed on two large refineries on the East Coast, and have a third one under contract and are anticipating a closing sometime this quarter on that third one.

That will make us collectively one of the biggest refiners on the East Coast, and each of those refineries has somewhat different dynamics.

One of them was -- the first one that we bought was actually mothballed, so we're in the process of opening it.

That's a fairly elaborate process and has another year or so to run.

The other two are both operating refineries.

On the second one, we are optimizing a little bit the product mix and the configuration and some things like that.

And it's got some real synergies with the first one we bought.

And the one that's now under contract is in a slightly different market.

It's in Ohio, as opposed to really being on the East Coast, and it's a very fine refinery that's chugging along, doing its thing, and we don't anticipate a lot of operational differences there.

I think what's happened with the purchase price is each refinery has gotten a little more expensive as the cycle has healed, but we still think we're at the low part of the refinery cycle and a lot of upside.

And where it goes from here in terms of holding periods and what we do will be determined.

(Multiple speakers).

That's perfect.

On your second question, which regards me, last year I was traveling about half the year, and I'm going to be spending the next four months basically based in Europe, and I'll be doing my travels in the Middle East and Asia and back to New York once or twice a month.

And so, I have a pretty active type of life, and still working on all the investment committee stuff and everything to do with the firm.

So, it's a bit of a change of location, which actually may make life a little bit easier because traveling from Europe is actually a little bit more convenient when you're going to the Middle East or Asia than leaving from New York.

But it's -- I get to stay up later at night here.

It's fun getting phone calls at two in the morning, and then getting to work at normal time.

So I think somebody is getting an extra six hours out of me, you know, in this trade.

So that's really sort of what's up with me.

Patrick Davitt, Bank of America Merrill Lynch.

Just kind of an extension of Marc's question on the real estate fundraising.

Given how strong you've been there and a lot of the competitors that have fallen out, from your perspective do you really feel like there's anyone that could possibly raise a fund of that size out there from a competitive standpoint?

I think that the only one who has a shot at it is us, and -- but I don't think even for us it's going to be easy, frankly.

Okay.

Then on the corporate PE side, the amount of LP capital you've been able to put to work the last couple of years has been fairly low relative to what I think your target has been, which I think is $3 billion or $4 billion a year.

Now you have $15 billion to put to work.

Could you speak to maybe what's holding back more sizable deals?

You keep talking about funding is more available.

Are valuations too high?

Is there too much competition in the corporate deals relative to your position on the real estate side?

There's a couple of questions embedded in that.

We've actually made new commitments each year of -- over the last three years, I think it's averaged about $3.5 billion, which is just a fine investment rate, particularly considering where we were in the cycle.

We do see things picking up now, and so I think it'll actually be higher than that going forward, but I think we have a very -- at the pace we are going, it's very comfortable to invest the whole new fund in sort of four years, which is kind of what we target.

We have six years to invest it, by the way, but we'll invest it much quicker than that, I'm sure.

And then, as the market swings up, there will be a lot more.

So I don't feel there is anything holding it back.

It is a business where we do try to be very disciplined, and where, even once we get a handshake on a deal, or we figure -- we think we've got a great deal -- take Dynegy for example, extraneous events can jump in there and mean you just don't close.

So, I think at the end of the year, we had a couple of deals fall off, Dynegy amongst them, for that reason, but then early this year, we've already closed or signed up a couple of large deals.

So we're off to a great start on this year, so that December 31 date is sort of arbitrary.

I think we're running at a very good rate, [four] plus a little bit of annual investment, and there's nothing holding that back.

I do think you will see some bigger transactions, but nothing I can -- I want to talk about today, but there is definitely some really large ones in the pipeline.

However, you said it's not -- at the end of your question, Patrick, you had mentioned, of course, it's not as attractive as BREP in a way, as real estate.

I think that's true.

I do think that real estate has -- our position in that is sort of a privileged position in the sense of we are by far larger than anyone else, and it's inherently a business with a lot more targets of opportunity in the sense of the value of real property in the world dwarfs that of equities in the world.

And there are many fewer competitors for that.

There is thousands of private equity firms and there's a few dozen real estate opportunity funds.

So, the supply and demand and the competitive dynamics of real estate is -- and our position in that relative to others are all almost unique in the alternative world, and not to save private equity is a bad business at all, and we're very proud of what we've done and our position there, but real estate is just a great business.

What's the disconnect between the $3.5 billion per year investment rate you're talking about and the roughly $1.6 billion numbers you have on page 23 of the press release?

You know, it's kind of lumpy, and as I say, when we commit, they don't always close.

So, and then I'm averaging that over the last three years, so it's -- last year, at the end of the year, we lost two big transactions which collectively would've been over -- well over $1 billion, and that would've put us up close to three.

So, unfortunately these things happen.

But then, again, a couple of things that we were working on last year flopped into early this year and are done.

(Multiple speakers).

That's the other thing is a deal that's delayed two weeks that was supposed to sign up in December, it closes in January and it moves from one year to another.

And that's what I mean by the [bait] is kind of arbitrary.

Then Steve mentioned the new mezzanine fund.

Do you have any idea how big that initial close could be?

I kind of hate to get into that because it's a product placement, if you don't mind, but our old -- our last one was $1.5 billion, and we expect and hope it will be substantially larger.

Roger Freeman, Barclays Capital.

Just actually following on that last question there, Tony, maybe, one of the things you talked about last quarter is acquiring sort of around platform companies within the organization.

I think there were like three or four.

Just wondering if the deals you committed to this quarter, how many of those were around platforms.

I don't have a ready number off the top of my head, but the refinery deal that I -- the refineries I talked about were definitely a platform deal, and as I say, we're just moving on our third transaction.

We should close this quarter.

We have a very important platform in building materials and we've done a bunch on -- of that during the end of the year.

And we've done a number of -- we continue to do a number of energy things under our energy platform.

Most of what we -- a lot of what the new -- and these are power development things, and virtually all of those are under our platform, and that's also a big push.

One of the reasons that -- I think Steve said over 80% of our investing was in Asia, a lot of that is in India and a lot of that is in power development, and all of that's through our platform.

Okay.

So I mean, that's still -- you still look at that as a differentiating or strategic advantage, and your ability to source deals and also find value in competitive situations.

Yes, and create value once you own it, and so, yes, absolutely the answer to that is yes, and we've put on a new platform team just this week in another segment and we continue to push hard on that.

It takes a remarkably talented team for us to want to get behind it.

It's not just cookie-cutter.

But once we find it, we're very excited about that approach to investing.

I might have missed this earlier.

Did you talk about what your overall pipeline for IPOs is?

You kind of talked about Japan, I think.

In the past, you did a couple; there's a couple in the pipeline that we know of.

But is it -- what's that look like now over the next, say, year or so, assuming markets hold up?

In general, both private equity and real estate, the pipeline is up significantly.

Okay.

I mean, is it like a dozen?

I don't think I've ever quantified it.

I don't know -- I don't think I've ever used the 10 number, have I?

I'm looking around.

I think you have.

Some are nodding yes and some are nodding no.

So if I did, let me take it back because I don't --

But to be clear (multiple speakers)

Just let me finish.

I can't ever think when we had only 10 things in the pipeline.

But it's not IPOs.

That's what I was saying.

We talked about realization events.

Oh, are you talking new deals, Roger, or realizations?

I'm talking about realizations.

Not new deals.

Okay, realizations.

Well, I don't -- yes, okay.

In terms of realizations, I think we did talk about the 10 IPOs that were in the pipeline.

Absolutely.

And we've now completed six or seven of them, and we've got several more coming.

I think there was some press around Freescale this week, and we filed a deal for Kosmos, and there are some others there.

So, we'll be over that number at the end of the day.

And then, we've got a number of other realization events which we're looking forward to this year.

Last question, then.

Just around all these proprietary data points you get out of your company, there is always some interesting commentary about how the executives are feeling about the environment going into this -- into the next year.

Is it more, less, same sort of level of optimism as a quarter ago?

I would say that there is more optimism now.

There's certainly more optimism now on the part of our executive teams, but whether they are reading the same newspaper as we all are and economists are saying we should all be more optimistic, or whether their results are actually better is less clear, actually.

To me, the businesses -- let me separate real estate from private equity.

In private equity, the portfolio is still improving, but it's not like accelerating improvement.

It's steady improvement like it's been in the last few quarters and somewhat slower rebound, if you will, than in the fourth quarter of 2009 and the first quarter of 2010, which were actually the fastest percentage [claims].

However, real estate, which tends to lag, is now showing for the first time really quite good strength across the board.

And when we've talked in the past, it was primarily -- the rebound was primarily reflected in RevPar in the hotels, and somewhat lower vacancies in some of the office markets, but now it's pretty much across market, across asset classes in both vacancies or occupancy and rates.

So it's much more extensive in real estate now, so that -- we look at that as kind of more meaningful of the pace of change because the private-equity portfolio hasn't really changed that much from the last quarter.

That's all the questions we have for today.

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

Great.

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

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect, and have a great day.