Blackstone Inc (BX) 2011 Q2 法說會逐字稿

Welcome to The Blackstone second-quarter 2011 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; Joan Solotar, Senior Managing Director, External Relations and Strategy. And now I'd like to turn the call over to Joan Solotar.

Great, thank you, Shantalay, and welcome, everybody. Good morning, welcome to our second-quarter 2011 conference call.

I'm here today with Steve Schwarzman, Chairman and CEO -- he's joining us from Europe today -- Tony James, President and Chief Operating Officer; Laurence Tosi, CFO. Earlier this morning we issued our press release announcing Blackstone's results which is available on our website as well, and we expect to file the 10-Q within the next few weeks.

So I'd like to remind you that today's call may include forward-looking statements which by their nature are uncertain and outside of the Firm's control. Actual results may differ materially.

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 report. We don't undertake any duty to update any forward-looking statements and we will refer to non-GAAP measures on this call. For reconciliations, you should refer to the press release.

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

Getting to the earnings, we reported economic net income or ENI of $0.63 per unit for the second quarter. That's up from $0.51 in the first quarter of this year and $0.18 in the second quarter of 2010. ENI benefited from a sharp increase in performance fees, both real estate and private equity, as well as higher transaction fees from a higher level of deal activity.

So LT is going to run through the detail, but as we highlighted last quarter, two of our real estate funds exceeded their preferred return hurdle which means that we started accruing carry and it creates some lumpiness in how the performance fees are accrued in terms of the catch-up. But LT will run through that to give you some greater clarity. But we think it's best to really look at the performance fees over the life of the fund.

For the second quarter of 2011, distributable earnings were $184.5 million or $0.15 per common unit. That compared with $0.18 in the first quarter and then $0.13 in the second quarter of 2010.

So, we'll be paying a $0.10 per unit distribution related to common unit holders of record as of August 15 and as we have outlined in the past, we intend to pay flat distribution for the first three quarters and then we will have a true-up in the fourth quarter. So as always, if you have questions on anything in the press release or other questions, just follow up with me or Westin Tucker after this call. And with that, I'm going to turn it over to Steve Schwarzman.

Thanks a lot for joining our call. The second quarter started off with the broad markets rallying. And in late April, the S&P reached its highest level in three years.

Investor optimism was high due to another good corporate earnings season, the continuation of accommodated fed policy. The market's momentum began to stall and reverse course in May amidst renewed European sovereign concerns, volatility in commodities and tightening measures by central banks around the world.

In the US, specifically, markets were impacted by heightened uncertainty around growth and employment, continued negative housing data and uncertainties around raising the federal debt ceiling. Significant rally in the last week of June brought equity indices in developed worlds to finish mostly flat for the quarter.

But in developing worlds, equity indices declined 5% to 10%. Credit markets were generally more resilient than equities.

Although we have seen a modest correction over the past several weeks, a very weak June jobs number added to the uncertainty around the timing and pace of the economic recovery. We expect improvement in the second half of the year, although that improvement will likely to be gradual and uneven and largely dependent on the labor and housing markets.

Against the challenges of the current backdrop, Blackstone's diversified and patient business model enabled us to again deliver our best quarterly earnings since becoming a public company four years ago. We ended the quarter with total assets under management of $159 billion which is a record.

This is up 43% from the prior year. I just want a repeat this. It was up 43% from the prior year as we saw inflows and market appreciation in every one of our businesses over the past 12 months.

Since our IPO, we have grown fee earning assets plus commitments by 93% and the vast majority of that growth has been organic. In private equity, our portfolio's performing very well as you may have heard from Tony earlier in the day, with over 90% of our companies reporting growth in revenue or EBITDA.

In aggregate, revenues were up 12% year over year and EBITDA was up 8%, tracking ahead of budget. Improving earnings projections and strong performance by our public markets investments helped drive portfolio appreciation up 9% in the quarter and 14% year to date.

We've been actively investing BCP VI across a diverse range of sectors and geographies and have a full and very interesting pipeline of investment opportunities. The fund is now over $16 billion in size, making it the largest fund raised in the industry over the last three years, and likely will be the largest for the next two or three years as well.

Other private equity fund raising includes our energy fund which should have an initial close later this month, and our RMB-dominated fund in Shanghai. In a few weeks, we expect to close an investment made jointly by both our energy fund and BCP VI in Meerwind which is a EUR1.2 billion German offshore wind farm project located in the North Sea.

In terms of new investments, we committed over $550 million in the second quarter and $1.4 billion year to date including July. Competition remains intense in the industry and pricing is higher than we would've expected at this stage in the economic recovery due to rising equity markets, and generally robust debt markets. We've navigated this environment by maintaining our focus on proprietary sourcing of transactions, situations where we have a distinct advantage or platform buildups.

For the leverage transactions that we've done, our average buyout multiple compares favorably versus the industry. In 2010 for example, our average multiple was 5.8 times versus the industry at 8.5 times. This year, the average multiple for the two buyouts we announced in Europe was 7.6 times versus the industry in Europe at 8.8 times.

We've also announced several investment realizations recently and a cumulative multiple of original invested capital of 2.2 times. This includes the two strategic sales which we completed earlier this month, the sale of our remaining interest in Universal Orlando to Comcast, generating a 3.2 multiple of invested capital; and in Intelent, our first sale from our Indian portfolio.

Both of these sales occurred at a 20% premium to their first-quarter valuation. That's an interesting fact that we sold and usually sell most of our realizations at premiums to marks.

The Intelenet transaction is a great illustration of the value that Blackstone's ownership brings to our investments. During our hold period of 3.5 years, Intelenet's enterprise value increased by 250% while the values of most of its publicly traded peer group actually declined sharply in a period of severe multiple compression in the sector. How did we do this?

Blackstone brought value by delivering six of our portfolio companies as customers which contributed meaningfully to revenue. During our ownership, we also created 13,000 new jobs. We ultimately generated a 2.3 multiple of invested capital and a 26% gross IRR in a sector which declined significantly.

We successfully completed three IPOs in volatile markets in the second quarter including Freescale Semiconductor, Vanguard Health Systems and Kosmos Energy. Consistent with our very strong track record of investing in energy, Kosmos priced at a level that equated to a valuation of nearly six times our original cost. We did not sell down any of these interests as IPOs for us usually are the first up in a multi-year exit.

Moving on to real estate, we're seeing the clear benefits of our unique market position both in terms of our existing portfolio as well as our ability to put new capital to work. Despite the tepid economic recovery, the carrying value of our existing portfolio in real estate appreciated by 7% in the quarter and 16% year to date.

Market fundamentals have turned positive in every property sector and real estate values generally have increased due to a combination of demand growth, historically low new supply additions and the start of a recovery in the real estate credit markets. More importantly however, we own premier assets in the strongest markets.

We've managed these assets well. Our two largest global funds, Blackstone Real Estate V which recall BREP V and BREP VI, are now valued at 1.5 times and 1.4 times cost, respectively, and both are accruing as Joan mentioned full carry.

We remain extremely active in terms of new investments in real estate and our carry funds have invested or committed $4.4 billion so far this year at attractive prices relative to historical values and replacement costs. Our primary focus remains on bankruptcies, recapitalizations and debt acquisitions.

On June 28 we closed our acquisition of Centro's US assets, the largest purchase of real estate in the world since start of the financial crisis. Since the fourth quarter of 2009, when we started to see the initial signs that the market hit bottom, our real estate business has invested or committed approximately $9.5 billion, which is really unprecedented in the world.

There still remains significant distress in the system and therefore plenty of opportunities for new investments. Our competitive positioning has never been stronger, as opportunistic capital remains in short supply and most of our large competitors exited or substantially downsized their operations.

We recently started the fundraising for our next global real estate fund and given the favorable response, we anticipate a first close in the third quarter. We fully expect that this fund will be as big as our previous fund and multiples of our nearest competitors. The value of that fund size comes to play as we can quickly respond to distressed opportunity with large amounts of discretionary capital.

While the pipeline of new investment prospects remains very full, we're starting to see opportunities for realizations as well as the market for stabilized assets has improved. Our strategy is to acquire assets that are broken in some way, usually the capital structure or operating issues; fix the problems and sell the stabilized assets to institutional buyers or public companies.

So far this year, we've generated $675 million in realized proceeds, most of which was in the second quarter. The dispositions from our global carry funds occurred at a cumulative multiple of invested capital of 3.3 times which is quite high in the real estate business.

Given the bid in the market for core assets as well as the maturity of some of our portfolio, we expect more realizations in the second half of this year and next year. Let's move on to BAAM, Blackstone Alternative Asset Management, which designs custom solutions for institutional investors using hedge funds.

Despite the fact that the second fourth quarters are the primary redemption quarters for BAAM, we had fee earning net inflows of $2.9 billion for the quarter including July 1 subscriptions. This brings us to $5 billion in net inflows for the first half of the year, our best in several years.

One third of our inflows was from new client relationships. Over one half was raised in BAAM's long-only commodities and equity replacement funds. As we continue to evolve beyond the traditional fund to funds model, we believe these types of innovative products could play a major role in capturing share of our Limited Partners long-only allocation over time. During the quarter including July 1, we also invested roughly $400 million from our hedge fund manager seeding platform into three promising new managers.

Although equity and commodity markets swung dramatically in the second quarter, BAAM preserved capital via its broad diversification across asset types. BAAM had a flat composite return for the quarter and is up about 2% year to date, although returns were stronger in certain specialty products, driving positive performance fees. Over half of BAAM's fee earning assets have performance fee structures which can generate significant additional fees in periods of positive returns.

As of July 1, our substantial inflows and solid performance resulted in total assets under management of over $40 billion, a record for BAAM. But remember in 2001 when I asked Tom Hill to look after this business, we had $500 million at that point which I guess is somewhere around 80 times growth. So congratulations to Tom and the team at BAAM.

Our credit platform, GSO, continued to outperform benchmarks across its various vehicles. We launched or are launching several new funds to take advantage of opportunities in the marketplace.

GSO now manages $34 billion in total assets, up nearly 20% year over year. Most of this growth has come in our customized credit strategies business which includes our long-only platform for investing in leveraged loans and other credit products.

We continue to see inflows into our separately managed accounts and co-mingled funds as GSO is widely viewed as a solutions provider for credit investors. We priced a new $690 million CLO which was the largest CLO in the world since the financial crisis, and we completed our purchase of the management contracts at several CLOs from Allied Irish Banks totaling EUR1.6 billion.

We've also filed for our third closed-end fund focused on floating-rate investments. Our mezzanine and rescue lending drawdown funds performed well in the quarter, driven by strong underlying portfolio company performance.

We invested $160 million in these strategies and ended the quarter with three outstanding commitments from our current mezzanine fund totaling another $350 million of capital. This puts the $2 billion mezzanine fund only a few deals away from being fully invested.

At the same time, we're evaluating a substantial pipeline of investments of over $1 billion as there remains a great opportunity to provide good middle-market borrowers with much-needed capital on favorable terms particularly as the junk bond market has sold off the last several weeks. Last week we had an initial closing for a second flagship mezzanine fund of approximately $1.5 billion.

Our credit oriented hedge fund outperformed benchmarks and were up approximately 2% gross for the quarter and 10% for the year. The current market environment has generally provided favorable backdrop for our analytical event driven investment style.

In our advisory segment which is comprised of three businesses -- M&A, restructuring and our Park Hill fundraising business -- revenues declined from record levels in 2010 but were up sharply from the first quarter. We're seeing a pickup in our M&A business as you might expect.

Revenues rose nearly 20% year over year and the pipeline materially expanded with 30 new mandates earned during the quarter across a diverse array of sectors and geographies. The outlook for M&A activity remains solid and we should benefit from greater global activity expected in 2011.

In restructuring again as anticipated, revenues declined versus the same period last year as many companies have been able to refinance rather than restructure. However, our restructuring group still won several new deals. It was one of the busiest in the world, as our diversification helps generate a wide variety of mandates.

Lastly at Park Hill, our placement business, activity has returned to more normalized levels. Revenues declined in the second quarter versus the prior year, but revenues for the first half of 2011 rose sharply.

The pipeline strengthened materially as we gained share in a challenging fundraising environment. Finally, I would like to mention Patria, the leading alternative asset manager in Brazil which we acquired a 40% stake as you will remember late last year.

Patria now manages $4.5 billion in total assets, up 50% versus the prior year as strong performance has supported success in raising new funds. Patria's assets are not included in Blackstone's asset metrics at the moment.

As one of the benefits of our relationship, we have introduced several key Blackstone investors that were interested in direct middle-market investing in the region to Patria which is going to work out well for them as well as for our friends at Patria.

In summary, I believe Blackstone is operating from a better position competitively than at any other time in our history. We are an investor in more alternative asset classes than any other independent firm and we harness the intellectual capital of our various businesses to identify trends and make better investment decisions than we have ever been doing.

This enables us to continually deliver, as Tony mentioned on the prior phone call to the press, best-in-class returns over the long run to our Limited Partners which is our most important job, who to entrust us with an ever greater and greater share of their capital, and it ultimately drives results for our public market investors.

With that, I'd like to turn the call over to Laurence Tosi who we affectionately call LT. He's not a linebacker, but he's quite good at his job. We'll close with some comments on our financial results.

Thanks, Steve, I guess. Good morning, everyone, and thank you for joining the call. The second quarter of 2011 was a record for Blackstone as a public company for both ENI and assets under management.

AUM reached $159 billion, up 43% year over year, continuing our trend of 25 straight years of growth across all market cycles. In the last year alone, we hit gross asset inflows of $39 billion and generated $22 billion in fund gains for our investors with realizations and return of capital which actually reduced assets by over $9 billion.

Continued fund performance and asset growth were the primary drivers behind this quarter's record ENI of $703 million which is nearly 3.5 times the year ago second quarter. ENI should be viewed as a leading indicator of future cash earnings as we realize the value that we have created.

Realize Performance Fees and Investment Income were $210 million in the first half of this year, up 75% from last year as realizations have been steadily gaining momentum over the last few quarters. In real estate where we had a few accretive realizations during the quarter, as Steve outlined, this trend will likely accelerate over the coming quarters as we see opportunities.

In our private equity segment, realized Performance Fees and Investment Income more than doubled over the first half of last year and we have begun the process of realizing further gains with several scale IPOs so far this year. At the end of the second quarter, Blackstone had $1.7 billion of accrued performance fees which is incentive fees and carry net of compensation on the balance sheet, up over $1 billion from the same time a year ago and up just $500 million in the quarter alone.

In 2005 to 2007 we had three straight years of generating realized performance fees of roughly $1 billion per year at a time when our fee earning assets averaged 50% less than the $129 billion we manage today. Further, we have not yet to begun to accrue performance fees in our largest private equity fund, BCP V, which now requires only an 8% increase in total enterprise value to cross the preferred return hurdle.

In this most recent quarter, $673 million in performance fee revenues includes $194 million related to the catch-up in the two real estate funds. There is also a lower compensation ratio associated with some of the older funds in real estate and private equity of closer to 20% in aggregate which means that a greater percentage of the carry currently being accrued will go to BX investors from realizations in those funds.

Between real estate and private equity, we now have $24 billion of LP capital earning full 20% carry and another $44 billion in the ground or to be invested that is not yet generating performance fees. Turning to expenses, we remain consistently vigilant on expenses and operating margins.

Our growth in non-compensation expense excluding interest continues to be lower than our growth in fees. The net impact of this trend is that we are self funding our global and business growth plans while continuing to gain operating leverage.

Distributable earnings for the second quarter were $185 million, up 25% year over year or approximately $0.15 per common unit, will in excess of our quarterly distribution of $0.10 per common unit. Year to date, we've generated $0.33 per unit in distributable earnings, up 22% over the same period last year.

Distributable earnings were driven by higher management fees from AUM growth and higher transaction activity levels. We're also seeing good opportunities through our unique global reach to deploy capital and have already doubled our deployment of LP capital to $5.1 billion year-to-date versus $2.3 billion for the first half of last year.

A couple thoughts on balance sheet and liquidity. We ended the quarter with cash and liquid investments of $1.8 billion against $1 billion in borrowings with an additional $1 billion in undrawn committed credit facility.

During the quarter, the total value of the Firm's illiquid investments grew to $1.85 billion. Blackstone ended the second quarter with $7.5 billion in partners capital, up 30% from the same period a year ago. Our balance sheet remains strong which affords us the flexibility to pursue opportunities to further grow and diversify our business.

On behalf of all of us on the call and everyone here at Blackstone, we thank you for your time in joining the call and will welcome any questions that you may have.

(Operator Instructions) Howard Chen, Credit Suisse.

Congratulations on the strong quarter. Steve, you have been spending a lot -- the past few months in Europe where a lot of attention is clearly focused today from a macro backdrop. Was just hoping to get your latest thoughts on how you see the environment there are and how you as a firm are weighing both the risks and the opportunities right now in the region.

Sure, there are a number of countries that are doing pretty well economically as you know whether it's Germany or France, the Nordic countries. We are seeing opportunities to make investments in the private equity area there for the first time really in several years, and we have made several investments as people become increasingly negative on the environment here and we think we're buying good companies at very good values.

The real estate area is just starting to become more active as the Basel III guidelines are being published, and so that's been a little slower. But I anticipate and we anticipate a lot more activity there.

It is for sure clear that the problems with Greece, Ireland, and Portugal -- rumblings about other countries are pervasive in all the media and impact the psyche of people in Europe. They seem to be continuing to do business as usual with the expectation that there will be solutions found and that their governments are totally focused on resolving those issues.

The decision-making is necessarily cumbersome given all the different parties who have to make decisions. I think that if Basel III is implemented as expected, there's going to be a lot more capital needed to be raised for financial institutions and there will be generally more caution on behalf of financial institutions and less extension of credit by those institutions which should create a somewhat slower economic growth environment than one would ideally want.

Great, thanks. And then switching over to real estate, you all noted the improving fundamentals within the portfolio. We can certainly see it in the results.

Deployments have been weighted more towards real estate. So on one hand you have fundamental improvement and the world is getting, but on the other hand, there aren't many folks who can deploy the capital and do a Centro as you all can. So how do you expect those two things to balance out?

Tony, you want to take that?

Yes, sure. Well, I think it is -- we're focusing on assets that are kind of unstabalized, shall we say?

So there's a lot of -- what happens in real estate is typically if there's a building and the owner runs out of capital, and he doesn't have the capital to provide tenant improvements to lease up the building. So there are a lot of buildings that are either run down in terms of maintenance or have a lot of vacancy despite the growing demand because the owner doesn't have the capital to entice the tenants to move in.

And what we are trying to do is get the best of both worlds if you will, take advantage of buying those buildings at good prices because they're not fully leased, and then fix up the buildings, provide capital for tenant improvements and lease them up and then sell them into frankly a pretty robust sale market for stabilized assets, really because cap rates or interest rates are so low. So that's kind of how we bridge those two pictures, so to speak.

So, Howard, when you talk about the different parts of real estate investing, we are in the opportunistic space. But there's actually a lot of capital in what would be called core real estate which is generally where we would sell those once they are improved.

That's very helpful, thanks. And then I heard a couple times in the prepared remarks that you all anticipated realizations to sort of pick up in the back half of the year.

Is there anything specific that you are thinking about that's driving that? I guess maybe kind of dovetailing off of that, provide your outlook on M&A activity for both an adviser and a potential source of realizations perspective.

Okay, so, Howard, the realizations we expect to pick up in the second half of the year is really real estate, and that's what we were just talking about. We owned a bunch of these buildings for a while, we thought it was premature to sell. I mean, we weren't under any pressure to sell.

But now as that market has come back, rents have come up, vacancies have come down, and there's this robust market frankly for particular trophy buildings in the best markets is really where it is hot. And we own some of those assets and we expect to be selling those into that market because we've done our thing of fixing up those assets. So I think where you'll -- it's real estate where you will see the pickup in realizations.

Private equity, we chug along a bit, but I don't anticipate a surge in realizations in private equity. In terms of M&A volumes, I realize that the statistics are high in terms of dollar volume, but the number of deals, particularly mid-market deals broadly defined where private equity plays, are not -- is not very robust in terms of just number of deals.

So the aggregate dollar statistics are a bit misleading on that. Notwithstanding that, our M&A guys have done very well and their revenues were up 20% in the quarter and their backlog for the second half is up a lot. So, you know, we're small in that business, we have a high-quality business, but it is small. So we can buck the industry trends somewhat.

Perfect, thanks, Tony, for tying all that together. And then finally for me, maybe one for LT, you tweaked the distribution policy last quarter to retain some of that realized investment income to fund growth. I know it's very early, but could you just give us any early growth around the kinds of opportunities you're currently evaluating?

We continue -- I mean, as you saw in the second quarter, we looked at AIB. I assume, Howard, you're asking about inorganic activity?

I think both, whether it be seed or inorganic, thoughts on both would be helpful.

So let me deal with both those separately. So on the organic side, the businesses have been very busy with rolling out new sets of funds to which we will have committed seed capital in them and we feel good about that.

Steve went through a list; I mean, we get a new mezzanine fund, we're looking at a new real estate fund and then have both between BAAM and GSO, there's a continuous stream of new innovations that they're going through for their clients (multiple speakers)

And an energy and natural resources fund in private equity and an RMB fund in private equity.

Right.

So we have a lot on the plate in organic growth.

Also on the organic side, we continue to invest in our buildout globally. So we're opening new offices and looking at other places where we can expand both the advisory business as well as kind of our sourcing and maintenance of deals.

And on the inorganic side, you saw the AIB deal. That's our second acquisition of a cluster of CLO contracts and we just remained opportunistic. And if we see things we think make sense and will fit well with the firm, then we will take advantage of them. That's why we keep a solid balance sheet.

Great, thanks for answering all the questions.

Tony, you might mention to this group the statistic on employment growth at our companies which you mentioned on the previous call, just because it's so powerful.

Yes, well, as Steve mentioned, everyone, our portfolio -- this was in private equity -- our portfolio is doing pretty well with most of the (inaudible) companies having growth notwithstanding what we see is generally a stagnant economy frankly. But as a -- we do our earnings calls pretty quickly after the quarter ends, so we didn't quite have all these numbers from our portfolio companies.

But during last year, we added 7% to our jobs apples to apples, so job growth in the United States in 2010. So we added on a basis of about 300,000 jobs that we have in our portfolio companies in the US, we added 23,000 new jobs in the US. And you know, our portfolio is not concentrated in growth sectors or in anything else. It's really a microcosm of GDP with companies in all sectors and pretty balanced. So we like to think that's because we're investing in our companies. We typically when we buy a company, increase its R&D, CapEx and marketing expenditures and try to drive growth and we -- it allows us to both have the growth that you've seen and also create jobs which is something I wish the rest of the economy could find a way to do.

Bill Katz, Citigroup.

Two questions. In your conversations with the Limited Partners, I'm just curious, has there been any kind of shift in the economics of the business either in terms of management fee rates, preferred return, or any of the [economic sharing with] some of the monitoring transaction fees given the continued strong growth for the business?

Yes, okay, well, Bill, generally speaking, nothing significant I would say. As you know, there's been a concern on the part of LPs about transaction fees in particular over some period of time.

But our firm funds really haven't changed that over the last couple of years and monitoring fees really haven't changed that over the last couple of years and monitoring fees really hasn't changed that and the carry hasn't changed very much. So the big pieces are in place.

The one thing that you have seen is you have seen new sort of new fundings flowing. In particular there's some very, very big investors that are writing some big checks and big investors are sometimes offered somewhat better terms than small investors [thus no change] but that continues to happen also now and again.

Just on that point before I ask my second question, are you [in turn to] maybe taking on maybe a lower management fee on those assets? Are you in turn getting longer lived relationships with the investors so that the net profits of that contract are up, all else being equal?

Well, we think there's a very important trend amongst the LPs towards strategic partnerships where the relationship you have with these LPs becomes not just a relationship for example as an LP in real estate to real estate, they also -- you also have that relationship, that same capital pool in BAAM, in GSO, and private equity and so on.

And it allows you to both have more enduring relationships to your point, but also to create new products that are a source of growth for the firm and in some instances, particularly in co-investments which actually increase your AUM and increase your ability to earn more money. So for example in Centro, there was something like $1 billion of co-invest that was offered to our LPs that are strategic relationships where they trust us, and that's -- we're positioned to make money on that co-invest. So the closer relationships you have allows you to grow your assets under management with both new products and then outside of the fund through the co-investment.

Okay, that's helpful, thank you. My second question is just given the prolific growth of the business over the last year or so, I recognize your conversation in terms of non-comp growth. But is there any major infrastructure needs necessary right now to support some of that growth or is it still pretty scalable?

I think we keep obviously a close eye on that and we have been able to -- we look at where we are on a fee basis and we gauge that against our buildout. We're pretty patient about it, so I wouldn't expect any change to it.

We look to get some operating leverage on a fee basis and we continue to build it out. We don't see any near-term scale needs that we haven't already addressed through the buildout.

Let me answer that a different way because we invested heavily in the infrastructure of this business in the last three or four years and it's just beginning now to start pay off. So those investments were made.

We have a big operation in Asia that's just beginning to pay off, we have a big operation in India, we have a big operation in our portfolio operations. Those investments have been made already and flown through the P&L. And what you're starting to see now is the revenues that follow from the investment spending.

That's very helpful. Thank you for taking all of my questions.

Roger Freeman, Barclays Capital.

I guess first, just in your private equity business, do you have companies in the portfolio that are in the periphery regions of Europe that we'd need to think about if there's significant economic (multiple speakers)

Roger, are you talking about like Portugal, Ireland --?

Yes, Greece (multiple speakers)

Companies these days tend to be not terribly local in their businesses. So we have one portfolio company headquartered in Spain, but most of its business is actually done elsewhere in Europe.

And we actually like the Spanish location because it will enable us to we think get a much better purchase price on it then we could have otherwise have done. But generally speaking, we don't have a lot in those, so I don't think we have anything at this point that I can think of in Iceland, in Ireland, in Portugal or in Greece. And of course we have -- we're confident that eventually the big countries will make it through.

Right, okay. That's helpful. Just in terms of the IPO pipeline and a realization pipeline ultimately in private equity, can you maybe size how much invested capital within your private equity fund might be up for IPO consideration over the next 12, 18 months, capital markets conditions permitting?

Well, not off the top of my head because frankly -- and I think it would depend so much on market conditions. It's not the kind of thing we plan out 18 months.

Sure, no, I know. Okay, but you commented you didn't really expect a surge of IPOs or surge of realizations. Is that because -- especially as we think about BCP V that it sits at a point and it's -- where it's marked right now that the IRRs just aren't at levels that you'd want to be cashing out in the end?

Yes, I think it's going to be a bit opportunistic, so we are constantly monitoring what's happening in global equity capital markets along with what's happening within the portfolio companies. So if you tie together the comments about private equity and real estate, right now the real estate markets that we sell into, the core real estate markets, are strong. So I think the realizations will happen earlier.

In private equity, when you look at the maturity of the portfolio and you look at equity capital markets currently, those may come a year later, but it's very hard to be definitive. A lot will just depend on capital market strength.

So earlier in the year when things were favorable, we had several favorable IPOs. We didn't realize proceeds from those, but obviously we will do that over time.

Right, you know, I think about 18 months ago we told people that we anticipated seven or eight IPOs forthcoming. I don't remember what it is.

But we're well ahead of that pace. So the market has been pretty good, the results of our Company's been pretty good and we actually had more IPOs than what we told you.

Then of course lately we've had sloppy market, so it's been a market where we kind of pulled back. We just react to it really instantly and don't -- we always try to make our companies optimize their performance whether we're exiting or not, so it's not changing the way we manage our portfolio companies and we're just reacting to market conditions.

And to help us with that, we've recently added a equity capital market specialist whose whole job is just to be really in tune with the market, really focused on the equity markets and really what can be done there and how it should be done and so on and to orchestrate that process. So we get even better reaction time and focus.

We've had that on the debt side for our portfolio companies for a while and it's been really, really successful for us. So we had a new gentleman join us just within the last few weeks to elevate our capabilities on the equity capital market side.

That's interesting. And then as far as private equity fund raising, Steve, I think you mentioned that you didn't think there would be a fund as large as what you just raised in BCP6 VI for the next two to three years.

Do you think it's because other firms have been sort of gravitating more to targeted fund raising or maybe they're doing that because they can't do general purpose funds? Just wondering if there's any change in company approaches to this and whether you think you continue to do large go anywhere funds.

I think you know, larger generalist funds haven't been in the flavor of the year and it's quite interesting that one of the LPs just published a study -- I forget, I think it was one of the Scandinavian LPs, not necessarily ours -- saying that that judgment was in effect incorrect and that performance of those larger funds will be better than people thought. But in any case, until the LPs get sufficient realizations from significant amounts of money that were invested in 2006 and 2007, it's going to be harder for them to make historic large commitments in large part because the size of their funds are down because the stock market has not treated them kindly.

Not their private equity portfolio in particular, which has been typically among their best performing asset classes if not the best class. But when the overall size of an endowment is down or a pension fund is down, they just can't write the same size tickets.

So you're fighting that type of an issue. I think there is some preference to more targeted funds, and there's also one other factor as to why we have concluded what I mentioned in my remarks is that there's enormous competition right now with -- I guess somebody told me it was -- you have to check this -- it's like six out of eight or seven out of eight of the largest European funds being in the market at the same time as well as several of the large US funds being in the market at the same time competing for that resource in the larger end of the market. So you put that all together and that's why it is our conclusion that there probably won't be another fund of our size for the next several years

What I would also like to just mention following up on one of those other questions is -- which Tony answered which was there's going to be and is occurring right before our eyes a concentration by Limited Partners with their best managers and a winnowing out of managers that don't do so well for them. That will happen across the board.

It's also going to happen on the larger end. And the fact that our firm can provide sort of uniquely both private equity, real estate and the Hedge Fund Solutions group and credit allows a Limited Partner who is trying to consolidate relationships and lower their own cost and improve their performance to focus more assets with us and form strategic relationships with us because it's a win-win for them as well as for us. We are seeing that across virtually all of our business lines.

Okay, thanks. Last quick one for (multiple speakers)

Hey, Roger, one other thing that's not directly an answer to your question, but you might be interested to know is that most of the big LPs at this point are having net -- in their private equity portfolios are net cash flow positive. So they're getting more money from realizations from the private equity industry than they are putting out.

Okay. Hey, LT or Joan, just lastly, do you have the split in the $1.7 billion of accrued performance fees between real estate and private equity?

I didn't hear -- part of it cut out. Could you just ask it again, Roger?

Sorry, the $1.7 billion of accrued performance fees, how that splits out between private equity and real estate?

Sure, it's roughly -- one second -- it's roughly equal. It's slightly larger in private equity. It's just under $700 million and in real estate about $625 million.

Great, thanks a lot.

Dan Fannon, Jefferies.

I guess following up some questions on the private equity side I think in the earlier call and you mentioned here -- you've talked about it being competitive for investments. Can you talk about maybe where you see some opportunities and then maybe how aggressive the financing market is with the banks and how accommodative they're being for deals?

Sure, well opportunities first. We think there are some opportunities in Europe. I think -- I don't know if it was Roger or Bill asked a bit about exposure to peripheral European countries.

We actually think some of that worry has made financing in Europe more difficult and made prices somewhat lower and opened up some opportunities for us where we've been cautious for the last few years. So we are seeing some opportunities in Europe particularly for mid-market kinds of companies which aren't subject to the same sort of not only bidding frenzy but they are harder to finance there because they don't have the same sort of developed high-yield market that we have.

In the US, we like a lot -- we've been very active investors in energy. That's been a spectacularly successful place for us.

Our historic realizations in energy are 6 to 1. We've never had a losing investment in energy and we continue to be quite optimistic about what we are seeing in energy.

We've gotten closer to the natural resources itself I would say and more away from the corporate, and we're finding some real value there. The other thing we're doing in the US is what we call platform buildups where we find a really talented management team and then we create -- then we back them to go create companies and it's a combination of buying sort of a platform company, adding to it and then growing organically, and we continue to do -- we continue to like that a lot in the US.

We are very optimistic on Brazil and the growth there and the opportunities. It is I think a great market with frankly -- where they don't have the kind of capital availability information that you have seen in places like China which is you've got great growth in China, but you also have massive amounts of wealth and capital which makes it tough to find interesting things and price is higher. That's something that we -- the long-term future of China is powerful, but you still have to find value and you have to find companies available for sale and that has been a bit more challenging.

Japan has been challenging for us also on the private equity side because of the basic economic growth, and they continue to not want to sell assets. We are intrigued with Russia and are putting some resources there to get closer to the market, start looking at things.

And I think we will -- I'm hopeful that we'll find some very interesting things there. And what part of the world have I forgotten here? I guess Africa -- people are starting to talk a lot about Africa already.

It's 1 billion people, there hasn't been much in the way of private equity there. Many of those companies are growing very rapidly.

We don't have the infrastructure in place now to have a sort of full frontal assault on Africa. But we've had some conversations with affiliate type relationships that might give us an interesting window on the continent. I'd say it's toe in the water there in Africa.

And then with regards to the banks in terms of how the financing (multiple speakers)

Sorry, Dan. The banks have been very accommodating of credit to private equity, and it's backed up a little in the last few weeks, but it's still I would say better than usual in terms of your ability to get credit for the leverage buyouts.

That's helpful, thank you. And then it sounds like the initial feedback from the real estate fund raise that's just started has been pretty positive. Can you maybe give some sense of whether that is coming from new investors or the overlap maybe from LPs that are in your existing funds [where the demand event].

Yes, we're getting a very strong response both from existing investors in the fund and some new investors. But I would say the early closers so to speak -- and we're expecting a closing here shortly -- are existing -- for the most part are existing LPs. Not sure I answered your question there but --.

It's really early. If you remember on the last call, we didn't even have the PPM out yet. So they've only been talking to investors for a very short period of time. And I think what you're hearing in the market from LPs is there is a building momentum around it, but it is very early.

Okay, thanks. That's helpful.

Chris Kotowski, Oppenheimer.

I have a sort of complex of questions around the real estate business. First of all, the $2.8 billion that was deployed this quarter, was that mainly Centro or were there a lot of other transactions in there as well?

Of the 2.8, 2.1 was related to Centro LP.

So I mean is that -- if it's 2.1 -- and I believe in the prior quarter it was somewhere in the $600 million, $700 million that you deployed -- is that kind of the normal pipeline if you don't do big lumpy deals, a pace at which you deploy capital?

Well, Chris, we are focusing on big lumpy deals. That's where -- we are almost uniquely positioned to do them. So it's a bit difficult to pull that out.

Okay -- well, that was it. My next question is the pipeline in the future? Do you think the bigger opportunities are smaller specific properties and individual transactions or --?

At this point, we're still seeing a lot of big ones and more importantly, that's where we're seeing value. If you start breaking these assets up asset by asset and then selling them off retail so to speak, the prices are quite high. We don't think that's the place to find value.

Okay, then in general, is there a way to generalize how long this process takes of refurbishing and leasing up properties? I'm sure it's different market by market and property by property, but is this in general a 18 to 24 month process or a four to five year process?

Well, it's probably an 18 to 24, but that's probably not the right way to answer the question. We got on it right away and we move aggressively to sort of fix up these properties and our typical holding period is three to four years. By the time we pick them up and fix them up and by the time we lease them up and all of that, and then we want to have an exit at a good time. Usually the cycle of investment is typically three to four years.

Know they're generating income during that time. So it's not like buying a house, refurbishing and selling. So during this time, you're getting cash flow and that's what we are seeing happening on the real estate side. So you're happy to hold for a longer period of time.

And you're also getting paydown of debt as you hold the asset, so you are accruing value to the equity that way as well.

And then the new fund, is it intended to be primarily US or global?

It's a global fund just like our prior BREP funds.

And geographically is there any way you'd characterize particular pockets of opportunity?

Well, most of the money probably will be invested in the US just because of the scale of the market. We also have a European real estate fund, so European deals are split. We've been quite active in Asia lately too in real estate.

And then at Investor Day, you said in general -- and I think you were talking about the new private equity fund -- you said you'd like to diversify over time and that one should normally think of putting a new fund out to work over a four, five year period of time.

Should that be the expectation for the real estate fund too? Because I mean obviously with the -- if you put out money in $2 billion chunks, it could go in a hurry.

Yes, it sure could. Real estate tends to be more concentrated in its investments both by time and by number of investments in the portfolio and of course by sector -- I mean it's all in one sector. So you might look at that as a bit more risk because it's got more concentration across all those dimensions.

Don't forget though, when you're buying income producing properties, you're buying hard assets. So the very nature of the asset makes that -- offsets concentration risk by having that sort of [anchored one] or that foundation of hard assets so that if you buy decent assets and you have got staying power in good markets and you wait long enough, you almost always get your money out at least.

So it protects the downside and as a result of that, we feel comfortable taking more concentration risk in real estate. Now I do want to clarify the $2.1 billion that went into Centro, part of that came out of funds, I think $1.1 billion -- LT, you can check me on this -- and another $1 billion or so came from co-investors where we got fees in carry. So when you look at some of these big real estate deals, don't think it's all coming out of the committed capital to the funds.

Okay, and just then as a follow-up, does the $2.8 billion deployed in the quarter, does that include the co-invest?

Yes, it does.

It does, okay. Alrighty, great. That's it for me. Thank you.

Guy Moszkowski, Bank of America.

LT, you might have answered this question in your comments. But if you did, I missed it. Have you now booked 100% of the carry catch-up in real estate?

We have, Guy.

You have, okay, I'm sorry if I missed that. You mentioned 1.3 billion (multiple speakers)

Those two funds.

Yes, of course (multiple speakers)

To those two funds (multiple speakers)

Sorry, say that again?

For the two funds that I mentioned which would be BREP V and BREP VI, we're now through 100% of the catch-up period. There are other funds that are accruing carry which it's unrelated to that.

Got it, okay. You mentioned $1.3 billion of inflows to Hedge Fund Solutions in July, so after the close of the quarter. Can you update us broadly on how much fee earning AUM that you might now have which was not included in the end of quarter AUM number?

Yes.

Sure, so if you take the end of quarter AUM number, which you will see on the back of the press release, you'll see it on fee earning AUM on page 21 -- because what happens is you have redemptions on the last day of the quarter and then contributions on the day thereafter. So you'd add $1.3 billion to what you have right here which is 37.244.

So, Guy, just so -- the way the dates work, you redeem as of June 30 and new money is brought in as of July 1 and that is true each quarter and it's particularly because of the semiannual redemption, particularly aggravated or whatever -- particularly noticeable June 30 and December 31.

Yes, but if you wanted to look at it apples to apples not even including that next date, you would get a 4.2% growth rate sequentially and then year over year it's about 31%.

Great, that's helpful clarity. Thanks.

The positive mark of the traditional PE, would you say that it was driven more high visible price action or by improved profit outlook in your private companies?

Well, it's got three elements to it I would say or maybe four depending on how you want to drill down. The improved performance of the portfolio companies, the growth of EBITDA which I think we said was 8% in the quarter is a very important part of that.

A second important part of that is what happens -- we end up owning a lot of public stocks with these companies that go public. So the price action on those stocks is also very important and of course it's hard to separate out from the Company performance.

If you have a company that's performing well, you except the stock to go up. Is that the market? Is that the Company? You can't really unscramble that egg totally but nonetheless -- but that's another factor.

A third factor is currency and to the extent we have holdings of international companies and the dollar weakens, they appreciate in our financials obviously. And then a very important fourth factor is the actual realization events. Because almost always when we have a realization event, it is at a price well above our marks and therefore creates an accounting gain when that happens.

And to just actually follow up on that last point, can you give us a sense for how much as a percentage or in dollar terms how much below IPO price were the IPOs marked before the IPOs were done in the quarter?

Over time, Guy, we went back -- actually it's both -- it was consistent in this first half of the year as it has been over the Firm's history. It's typically -- and the reason is under what was formerly FAS 157, you can't include things like auction premiums or -- you have to do a fundamental analysis. So it's not atypical to have a rise in price of an APO. So over time it's been about 20% to 30% on average for IPO exits relative to the last quarter's mark immediately preceding the IPO.

And strategic exits have been greater, substantially greater, and the reason -- that's one reason why when we do the IPO, we don't actually sell many shares. So we get a higher mark but we're not selling those shares.

We expect to hold them over several years, let the issues season, let the company perform and then make money with the new public investors in that entity and then over time sell them out. But on the other hand, like [witness graham] which happened last quarter, we had IPO'd it and at a markup and a strategic came in and bought it at a significant premium over that. So we got another markup again on the portfolio.

But again in terms of what you saw in the first half, it sounds like you're saying it was pretty consistent with those historical 20%, 30% on the IPOs and a little bit more on the strategic?

It was, Guy, that's right.

Great, thank you very much.

We have time for one more question and that question comes from the line of Marc Irizarry of Goldman Sachs.

Great, thanks. We'll save the stimulating question for the last one I guess. Can you give us update on the carried interest taxation in Washington and sort of the latest views there?

Joan, do you want to do that?

Sure, so, as you know, there's a lot of discussions happening ongoing in Washington. It's very dynamic, it's changing all the time.

So I would say at this point, we really don't have any new information. It sounds like carry could be a discussion as part of tax reform. But I think really importantly a change in the carry rate doesn't affect our distributions as you know, but just to remind everyone, it really affects the recipient of it based on whatever that recipient's tax status is. So it's pretty fluid. I don't think we have anything new from last quarter.

(multiple speakers) Any of you on the call I suspect have as good a window into that as we do.

And just one comment on enterprise -- you didn't ask but I guess that's the second piece of it. With that, everyone we talked to in DC on both sides, both parties believe that it doesn't make any sense. So I'd say that -- of course we can't say anything definitive on that, but that's the feedback we're getting from both the Democrats and the Republicans.

That's all the questions we have for today. Now I'd like to hand the call back to Joan Solotar.

Great, so thanks everyone for joining and please feel free to follow up with any questions after the call.

Thank you for your participation in today's conference. This concludes The Blackstone Group second-quarter 2011 earnings conference call. Have a wonderful day. You may now disconnect.