Blackstone Inc (BX) 2012 Q1 法說會逐字稿

Welcome to The Blackstone Group first-quarter 2012 earnings 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 Manager Director External Relations and Strategy.

And now I would like to turn the call over to Joan Solotar.

Please proceed.

Great.

Thank you.

Good morning and welcome to Blackstone's first-quarter 2012 conference call.

I'm here today with Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; and Laurence Tosi, CFO.

Earlier this morning we issued a press release announcing our results, and you can get that on our website.

We expect to file our 10-Q in a few weeks.

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

Actual results may differ materially.

You can see a discussion of some of the risks that could affect the firm's results in 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, and for reconciliations back to GAAP, you should refer to our press release.

I would also like to remind you that nothing that we say on this call constitutes an offer to sell or a solicitation of an offer to purchase any of our Blackstone funds.

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

So we reported economic net income, or ENI, of $0.39 per unit in the first quarter.

That was down slightly from $0.40 in the fourth quarter and $0.51 in the first quarter of last year.

If you recall, last year's first quarter included the catchup in the real estate fund.

For the first quarter of 2012, our distributable earnings were $162 million or $0.15 a unit, and that was down slightly sequentially as higher management fees were offset modestly by lower performance fees.

So, even though we had appreciation in the funds, we had less appreciation than we did in the prior period.

So we will be paying out $0.10 per unit distribution related to the first quarter to common holders of record as of May 15.

So, as always, if you have any questions related to the release or any earnings within, just follow up with me or Weston Tucker after this call, and with that, I will turn it over to Steve Schwarzman.

Good morning.

As you know, global equity and credit markets moved sharply higher in the first quarter, continuing their strong run off the October market lows with double-digit percentage increases in both the global and emerging markets indices.

In the US the S&P rose above the psychologically important 1400 level for the first time since the summer of 2008, and NASDAQ rose above 3000 for the first time since the tech bubble burst in 2000.

Volatility declined with the VIX near a five-year low.

Investors' increasing appetite for risk was driven by better than expected economic data in the US, including weekly jobless claims, housing consumer sentiment data, as well as some relief in Europe following the positive participation in the first LTRO program.

Late in the quarter, however, and into the second quarter, economic data began to fall short of rising expectations, including the latest US jobs report.

While the unemployment rate continued to decline, falling to the lowest level in three years, it remains well over its historical norm at this point in an economic recovery with over 20 million people currently unemployed or underemployed in the United States.

The Federal Reserve has indicated continued commitment to accommodative monetary policy, although it has taken a wait and see approach towards any QE3.

Capital inflows into equity mutual funds remain anemic.

Europe remains an area to watch as manufacturing output has slumped, particularly in countries where governments are applying austerity measures to battle the debt crisis, which actually is not fully over.

The number of people without jobs in the eurozone rose to a fresh high in February as the unemployment rate reached 10.8%.

Against the current unpredictable economic and political backdrop, investors continue to search for yield and safety.

Our focus on generating outstanding returns for our investors in any market environment has translated to continued success in attracting new capital.

In the first quarter, our limited partners again entrusted us with net capital inflows in every one of our businesses.

We experienced gross organic inflows across the firm of nearly $12 billion and nearly $22 billion, including our acquisition of Harbourmaster.

We ended the quarter again with a record level of total assets under management.

In this case $190 billion, up 27% year over year.

If we exclude acquisitions, AUM was still up nearly 20%.

We have a record $38 billion of dry powder or capital across the firm to put to work over the next several years.

I actually remember when we had no assets under management when we started the business with two people.

And getting to $190 billion is actually in our alternative asset class with excellent performance of all of our principal businesses is actually quite something.

In private equity the carrying value of our portfolio increased 4.9% in the first quarter.

This appreciation was driven by a 6.4% increase in our public holdings and a 4.4% increase in our private holdings.

The greatest appreciation occurred in the retail consumer, industrial and leisure segments.

Our Companies continue to perform well in an environment of slow economic growth and high uncertainty with an estimated average revenue growth of about 5% in the first quarter.

We invested or committed $760 million in the quarter, primarily into follow-up investments in the energy sector.

We remain very active in energy on a global basis and across subsectors with a backlog of over $3 billion in potential transactions.

Blackstone is well-positioned to invest in this capital-intensive industry given our large pool of flexible dry powder, our deep industry knowledge and our very strong track record of compelling returns over the past 15 years in energy investments.

In addition, we have a local presence both in industrialized countries that need to develop production capabilities, as well as in more mature economies that are converting from fossil-based fuel generation to renewable resources.

We have also committed hundreds of millions of dollars into growth areas in North America such as the production of oil and gas from shale.

An example of this is our pending investment in Cheniere Energy Partners, which would fund the construction of a natural gas liquefaction export facility that you probably read about and heard about through the media.

We have had a long-standing relationship with Cheniere through both our private equity team and more recently our GSO credit business.

This project is expected to create approximately 3000 jobs during construction and indirectly support over 30,000 jobs at US E&P companies.

As is the case with our other recent energy investments, Cheniere would be funded by both our BCP VI global fund, as well as our newly dedicated energy fund.

To date we have completed $1.2 billion in joint investments from these funds.

Our energy fund raise is near completion with approximately $1.5 billion in commitments towards our goal of $2 billion, which we expect to reach by our final close this summer.

With regard to the environment for new financings, in the first quarter, we saw record new issuance levels of US high-yield and leveraged loans, but proceeds were primarily used for maturity extensions and for opportunistic refinancings rather than funding new LBOs, which is an industrywide type phenomena.

Notwithstanding ongoing concerns regarding European sovereign debt issues, financing conditions for US leveraged buyouts are quite favorable at the current time, which unfortunately keep prices somewhat high.

Defaults remain at historically lows, but spreads continued to be above midcycle norms, driving strong inflows and creating a very attractive cost of financing for LBO-related issuances, but again driving prices a bit higher.

The European credit outlook is more bearish generally, although we have seen a significant rally in the secondary markets and to a lesser extent the new issue market.

The environment for realizations remains volatile.

In the first quarter, greater investor risk appetite drove increased capital markets activity and better new issue pricing performance.

However, M&A volumes have remained muted as strategic buyers have not meaningfully stepped into the market despite historically high cash balances.

Against this mixed backdrop, we have had $800 million of investment realizations in the first quarter, primarily in BCP V, which is not yet earning carry.

These included successful secondary offerings for TDC and Nielsen, as well as cash dividends from SeaWorld and AlliedBarton.

We took five companies public last year, but did not sell down any of our interests until the first quarter this year with Nielsen as an IPO is usually the first step in a multiyear exit cycle.

We also recently filed the IPO for Michaels.

We will continue to monitor equity and M&A conditions to further monetize mature investments.

Moving on to real estate, we remain in a unique market-leading position both in terms of our current portfolio, as well as our ability to deploy capital.

We now manage over $48 billion in assets, up nearly 40% from the prior year.

That is a huge increase in an asset class where most people cannot raise any money, including capital raises for our new flagship global fund.

We had a very successful closing for this fund in February, bringing us to over $10 billion of total capital raised.

While the fund raising is mostly complete, we would expect a couple of billion dollars more in commitments over the course of the year, which will make it the largest real estate opportunity fund ever raised and multiples in terms of size of our nearest competitors where that multiple of size gives us the ability for competitive purposes to do larger and more complex deals.

With little new supply and slowly increasing demand for commercial space, fundamentals continue to improve from the lows of the cycle.

This has resulted in occupancy improvement and rent growth in most of our core markets.

For our key office assets in the United States, occupancy is up 300 basis points versus the prior year.

In Northern California, our strongest office market, the site of the tech boom in the United States, office rents are up more than 15% from the prior year.

This gives you some sense of what happens when the law of supply and demand reasserts itself.

In hospitality we are seeing similar trends as virtually no new supply and modest increases in demand have led US RevPAR to rise 8%.

Positive absorption and declining vacancy is also evident in our industrial, retail and senior living assets.

Brixmor, which was formerly called Centro, which is -- actually I like the Centro name better, but nonetheless we are going with Brixmor, which is the large portfolio of grocery-anchored shopping centers that we acquired last year.

Remember, that was the largest deal in the world of any of the leverage type since the Lehman collapse.

Occupancy is at its highest level since 2009 due to accelerating leasing activity.

Overall steadily improving fundamentals drove an increase in the carrying value of our portfolio of 4% in the first quarter or over $1 billion in value.

The majority of this value appreciation came in our office and retail properties.

Deal flow is robust as the investing environment has remained favorable given the amount, distressed assets and the need to deleverage around the globe.

In fact, Tony and I spent a lot of our Sundays reading investment committee meetings and real estate for our Monday morning meetings, and it is really big volume of activity.

Although improving, debt markets are still constrained in real estate.

In addition, competition for large complex transaction remains limited, which is a good thing for us.

Two weeks ago the Wall Street Journal published an article illustrating an 80% decline in commitments to closed-end private real estate fund since the peak of 2008, and the number of funds in the market has also sharply declined.

The US and Europe continue to be the most attractive places to deploy capital, and in Europe specifically entry valuations are looking increasingly compelling.

We deployed or committed $2.3 billion in capital so far this year across our platform.

That is $2.3 billion in three months with 40% of this in Europe.

This is this distressed wave that people have been talking about.

Notable recent transactions include a large retail power center portfolio acquired in an off-market transaction from a highly leveraged seller, high quality real estate portfolios in the US and the UK and the recapitalization of a 1000 room hotel in San Francisco, one of the nation's strongest hotel markets.

All are being purchased at a significant discount to replacement cost.

In terms of dispositions, we have sold or have under contract to sell nearly $800 million in assets so far in 2012, which includes the sale of Pearlridge, a mall in Hawaii which should close in the second quarter.

The Pearlridge sale is expected to generate a multiple of invested capital of 2.4 times our money in approximately 18 months, and that shows you the power of what we do both in terms of leveraged real estate, the power inherent in the right types of deals in leverage equity.

In this case good timing, great asset, good purchase price, 2.4 times your money, 18 months.

We have sold approximately $1 billion in assets in the last 12 months, and on average sales were completed at significant premiums to the prior quarter's carrying value.

Although we were delayed in the second half of last year with some of our plans for realizations due to market turbulence, the market appears to be opening up more, particularly for properties that are stabilized.

As such, we expect more asset sales in the second quarter half of this year and into next year.

Moving on to BAAM, our Hedge Fund Solutions business, which continues to distance itself from our competitors and continues to take share.

Our institutional clients, consisting primarily of pension funds, government institutions and corporations are consolidating their allocations with leading providers who are able to deliver customized portfolios and value-added services.

BAAM has been a clear winner against this backdrop and the biggest winner in the world.

In the first quarter, BAAM reported net inflows of $1.6 billion, including April 1 subscriptions.

This positive momentum continued from 2011 when BAAM had $7.5 billion of inflows against a backdrop of $70 billion of combined net inflows for the fund of funds and hedge fund industry in total, according to HFR, which means that we have raised about 10% of the entire monies raised in the fund of funds industry and the actual hedge fund industry, which is pretty substantial market share.

Our team remains focused on delivering customized programs, which now account for half of our AUM, as well as focusing on providing additional services such as advisory, due diligence, technology and knowledge transfer.

Our culture of product innovation is also broadening our investor base beyond the traditional fund of funds audience, paving the way for substantial future growth.

BAAM's composite return was about 4% in the first quarter, generating approximately $1.7 billion in appreciation for investors.

Importantly, during the quarter, an additional $9 billion in fee paying assets moved above high water marks and have started to accrue incentive fees.

Our solid performance in inflows resulted in record total assets under management as of April 1 of $44 billion.

Moving on to our credit platform, GSO, which remains one of our fastest growing businesses, a combination of organic growth and selective acquisition drove total AUM to $51 billion at the end of the quarter, up 61% from the prior year or 23% year over year on an organic basis.

Since Blackstone's combination with GSO in early 2008, we have more than doubled the assets under management in our credit platform, and in fact, it is now our largest AUM business at the firm.

We held the final closing on our second mezzanine fund during the quarter, which hit its $4 billion cap -- we actually could have sold more -- and is the largest mezzanine fund to be raised since the financial crisis began.

This fund is twice the size of our first mezzanine fund, which we raised in 2008.

Our scale and size allow us to focus on high-quality upper middle-market borrowers where there exists a substantial gap in available financing following the retreat of many of this segment's traditional competitors such as banks.

Since we started investing the fund in early November, we have already deployed or committed $1 billion.

Our first and second mezzanine firms have performed very well, generating combined gross annualized returns of 23% since inception, which is actually more than most private equity funds have generated during that period, and we are doing it at a lower level in the capital structure with much -- excuse me, a higher level of the capital structure with much more security.

Our rescue lending platform was also active in the first quarter and is now 66% invested or committed.

This is down slightly from the first quarter simply due to realizations of roughly $400 million for which the invested capital is recallable, which is a good thing.

This strategy has generated a gross annualized return of 22% since inception in 2009.

It is again a very high level of performance, and we plan to start raising a successor fund later this year.

This will add to the $6 billion in dry powder we currently have on our credit platform to take advantage of opportunities we are seeing globally.

In January we closed the acquisition of Harbourmaster with approximately $10 billion in CLO assets.

We have had a very smooth integration to date.

This acquisition furthers our strategy of building scale and diversity in Europe and exposes us to an LP base with little overlap.

This is a good net expansion of the firm and its relationships.

Without a significant credit capability and large capital base, we see a big opportunity to provide solutions to good quality middle-sized credits in Europe as the banks have reduced their non-core lending activity, and unlike in the US, there is not a deep public high yield market in Europe.

Finally, our flagship credit-oriented hedge fund performed well in the quarter, up 4.6% gross, and we experienced moderate net inflows of $50 million, including April 1 subscriptions.

In our advisory segment, first-quarter revenues rose 7% from last year, but were down from a seasonally strong fourth quarter as expected.

Our M&A business, despite a slowing of industry volumes in the quarter, revenues were up over 60% from the prior year, which is pretty remarkable given the slowdown in M&A.

But it is a lumpy business, as you know.

While the M&A environment generally remains weak, our 2012 backlog is healthy with an increase in deals versus the same period last year.

In restructuring we continue to be busy, despite a slowdown in the restructuring market and again revenues rose over 40%.

Part of the reason for that is we had a really interesting assignment, representing the banking system in the negotiations with the Greek government which closed.

Finally at Park Hill, while revenues declined due to the lumpiness of the business, our pipeline is very robust as fundraising market conditions are challenged and placement services are in high demand.

In summary, we are seeing positive trends across all of our businesses.

Each is well-positioned to take advantage of opportunities in the market.

While each of our businesses has leading scale and strong performance, it is in their combination that sets Blackstone apart from the world of alternative investing.

Our portfolio of companies and investments are seeing steady appreciation in value.

We will continue to opportunistically monetize as markets heal, converting value creation to both returns from our limited partners, as well as cash earnings for our public unit holders.

With that, I would like to turn the call over to Laurence Tosi, L.T.

to us, who will close with some comments on our financial results.

Thank you, Steve.

Good morning, everyone, and thank you for joining the call.

Over the last year, Blackstone continued a trend of strong, consistent, best-in-class growth.

In just the last 12 months alone, Blackstone grew fee paying assets by 26%, despite the fact that at the same time we returned $12 billion to our investors.

Blackstone's growth is twice the average growth rate of the leading alternative managers and against a backdrop where the top 10 traditional asset managers showed net contraction in 2011.

Our growth is reflective of, first and foremost, our fund returns and attractive and expanding offerings to investors, as well as market share gains across our investing platforms.

More generally, it is also reflective of the long-term positive trends in global allocations to alternatives and the concentration of investors with fewer market-leading names.

Blackstone's asset growth is a leading indicator of our earnings potential, and the first quarter of 2012 demonstrated that increasing momentum.

Over 70% of fee-earning assets are under long-term locked up contracts, driving pure management fee revenue growth of 29% year over year.

Against a backdrop of difficult markets and fund-raising challenges, Blackstone's pure fee stream has doubled since the time of the IPO in 2007, creating a solid base of consistent cash earnings.

Our total fee revenues, which includes transaction fees, were up 17% over the last year, despite the fact that transaction levels were significantly down in more uncertain markets in the first quarter of this year compared to the year earlier period.

Our potential for fee revenue upside and earnings leverage from transaction fees from the industry's largest transaction fee-eligible asset base is a distinguishing characteristic of Blackstone's earnings outlook.

Even with muted realization levels, Blackstone's fee revenue growth drove significant operating leverage as net fee-related earnings rose 40% to $138 million in the quarter, and our fee margin expanded by 5 percentage points to 27%.

The expansion was driven in part by the 55% growth in fees our credit segment enjoyed, which now reflects the full earnings of that segment, following our purchase of the remaining 15% profits interest from the GSO principals at the end of last year.

Blackstone's credit segment is now its largest and the first to surpass the $50 billion threshold in total assets.

Included in that number is $6 billion of committed assets in credit not yet paying fees.

A few other fee-related items worth mentioning largely for clarification.

In our real estate segment, fee revenues benefited from a $19 million one-time catchup related to the fund raise for our new global real estate fund.

Additionally, in our advisory segment, the expense accruals in the first quarter reflect that, under GAAP, expenses should be calculated on a full-year basis and, therefore, includes fees related to deals that are announced but have not yet closed.

This fact, combined with a seasonally lower first quarter, impacted results.

On a full-year basis, we expect margins will be similar to last year.

ENI for the quarter of $432 million reflected one of the best quarters Blackstone has had since going public as each of our investment businesses posted strong fund performance.

Looking past the difficult comparison to the unusually strong first quarter of 2011, which had both a catchup in real estate carry and several significant realizations in private equity, we achieved $469 million in performance fees and investment revenue in the quarter.

The firm currently has $1.6 billion or $1.49 per unit of net accrued performance and incentive fees on the balance sheet, up 63% from the same period last year.

One additional detail driving these numbers and the growth in performance fees, the performance fee comp ratio for some of our pre-IPO legacy private equity and real estate funds is lower than the 40% we project for the current funds.

Specifically BCP IV, which is in full carry, 85% of the performance fees will go to the unit holders.

That compares to 99% in BREP V and 70% in BREP VI.

In total, of the $1.6 billion of net performance fees on the balance sheet, $1.4 billion can be attributed to those three funds.

The unique diversity of Blackstone's growing performance fee stream is a key earnings driver that is often overlooked.

This is particularly true in Blackstone's less volatile or countercyclical strategies like BAAM, credit and our real estate debt strategies business where we have $46 billion in performance fee-eligible assets and $98 billion of total assets growing at a 26% CAGR, which are designed to generate low beta returns or current income yield.

If you add the net performance fees from these businesses that were realized in the last 12 months to our fee-related earnings, the run-rate is $800 million of fee-related EBITDA.

In total, Blackstone now has $120 billion of total performance fee-eligible assets, up 21% year over year with $49 billion already earning performance fees.

Despite investing $2.8 billion in the quarter and $15.7 billion over the last 12 months, the firm's growth outpaced that investment spend.

In the quarter dry powder grew to a record $38 billion, net of -- which includes $12 billion of committed assets that are not yet paying fees.

At Blackstone one of the key drivers of our business is our culture of innovation, which results in a constant development of new businesses and vehicles, which we think will give our fund investors the opportunity to achieve best-in-class returns.

The tangible impact of this culture can be seen in the quarter's results and our consistently high growth.

Blackstone had $50 billion in gross inflows over the last 12 months, and that growth was spread evenly across products that were newly innovated over just the last few years, strategic acquisitions and the organic growth of our existing businesses.

That growth in the last year comes on top of pure organic inflows of $74 billion from 2008 to 2011 -- a difficult time in the markets -- and that excludes the impact of any acquisitions.

We believe that growth and the gross inflows is roughly 2 times the nearest alternative manager.

We ended the quarter with cash and liquid investments of $1.1 billion, illiquid investments of $2.2 billion and net accrued performance fees of $1.6 billion, which equates to $4.46 per unit combined value on the balance sheet.

We retained our AA+ ratings from S&P and Fitch, the highest in the industry.

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

(Operator Instructions).

Michael Kim, Sandler O'Neill.

First, just in terms of fund raising, you have obviously benefited from bringing online new flagship private equity, real estate and mezz funds.

But just beyond that, where do you see the biggest opportunities to raise capital maybe over the next couple of years?

Is it more regional funds or alternative credit or what have you?

Any color there would be helpful.

Actually I think there's a number of different directions we can go.

We definitely have the possibility to do some regional funds, most particularly Asia and an emerging markets focus where there is a lot of investor interest and not many high-quality vehicles, and investors tend to be underweighted to emerging markets, first of all.

Secondly, in places like real estate, we can go to core real estate and some things like that, where there are huge asset classes, investors are hungry for yield, they are hungry for inflation hedge, and we, of course, have tremendous market knowledge and ownership of assets throughout all the major regions.

And that could be a very large asset class.

The GSO guys have all kinds of opportunities to create new credit vehicles, new yield vehicles.

So they have a very complicated product slate already.

But one of the fastest-growing areas there is their long only business.

In the BAAM areas, they have got a new opportunistic fund.

There is a lot of demand for their seed fund, and they are creating proprietary products, again a lot of growth areas.

So I don't think there is any one direction that this could go.

As you know in private equity, we are raising a sector-specific fund now, energy.

There could be other sector-specific funds.

I think we have a lot of choices, and the key thing to do is just not get too distracted with go in too many directions at once, and whatever we do do is to do it really well.

Okay.

That is helpful.

And then it seemed like unit holders are maybe focusing more on distributable earnings.

So when you just think about this transition from economic net income to distributable earnings, has that timeline maybe been extended to some degree just given the macro environment, and then where do you think we are in that process?

Do you still feel like we could see that transition ramp-up later this year or more 2013?

Is that the timeline you are thinking about?

Well, we started last year thinking that that would be a fairly big year based on the early part of the year markets that were robust.

And then, of course, European worries rippled through the system and the markets were pretty ugly until the end of the year.

And I am a bit concerned we will have that again.

So it is market dependent, but we lost -- we did not do as much last year as expected because of the market backup.

In our portfolio we have some things that are ready to go, if we thought the time was right, across the board, and we have some assets that are fairly new where a lot of value is still being created, and we think it is premature.

So it is kind of a mix.

I think that to answer your question more specifically, if markets hang in there generally like we see them now, I think you will see realizations ramp up starting late this year, and next year will be a much stronger year, as will that following year or two.

Okay.

Just, finally, I understand there were some timing issues as it relates to the expenses in the advisory business.

I know you continue to generate strong AUM growth and build out the franchise.

So just where do you think we are in that process, and how do you think about incremental spending, as well as fee-related margins going forward just as you maybe start to realize more revenues from some of these growth initiatives?

It is L.T.

Let me start with, I think we saw a period during the downturn when we were pretty aggressive with expanding our global footprint.

We were investing in some new products, and we were investing in marketing in the platform.

I think that the heavier period of that has probably come down a little bit.

If you notice, we had fee earning leverage both on a comp ratio, as well as in our fixed cost ratio, our non-compensation ratio.

So while I don't know that I expect it to expand that much more, it is continuing momentum in reflecting the growth.

With respect to advisory, it is seasonal.

So, over the last five years, we typically recognize about 20% of a full year's revenues in the first quarter.

But because under GAAP you accrue to a full year, you would have 25% of the year's expenses.

And this year, in particular, we had some deals that were announced but not closed, so we had the expense associated with them but not the revenues.

So I would expect that as it has in prior years to iron itself out.

Bill Katz, Citigroup.

Just a couple of questions.

Staying on the fee-related earnings L.T.

perhaps, are you seeing any pressure from LPs around two things within fee-related earnings, either the absolute level of fee-related earnings, i.e.

the management fee or even the mix of the components within it between monitoring and transaction fees, etc.?

I think there is a general sort of pressure on different elements of a fee structure, particularly in private equity much more than any of our other businesses.

That takes the case.

In really very large investors, it is not an across-the-board phenomenon.

We are already quite low on management fees, as Tony mentioned, compared to most other firms.

He mentioned that in the press call.

And we see little pressures on different parts of the structure, not normally in the carry element of it, not in the hurdle rates.

Sometimes the largest investors in the world want a special discount for size and a management fee breaks.

That is something that has occurred in the private equity area really for at least the last 10 to 15 years.

But those breaks are a little more accentuated.

I would also say the dollars involved are larger than they were 10 or 15 years ago.

So there is sort of a sensitivity by some of the largest investors, which comes from the fact that a lot of the big investors in the asset class, pension funds and other institutional investors, that because of performance, not necessarily in private equity, but in their general portfolios, with almost no increase in equities over a 10-year period, they are having trouble meeting their actuarial returns.

And, as a result of that, they are looking for different ways to try and increase returns.

Some focus on fees as part of that, but what also goes along with it is generally across the alternative spectrum is increasing more allocation to alternatives, and that benefits us as a firm with this very significant growth that I think L.T.

has mentioned and I have also mentioned.

Okay.

Thank you.

Just my second question, when you look at the $12 billion of -- I think you mentioned gross inflows in the first quarter -- so two questions, two parts.

The first part is, could you sort of digress those a little bit between the different businesses?

And then secondarily, Steve, just in terms of you mentioned allocations going up, is that still true at this point in time, or with the market sort of bouncing a little bit here since the late fall, is there maybe a rotation away from private equity given the increase in the assets?

It is L.T.

So let me just start with your point about gross inflows.

So the gross inflows in fee-earning assets in the first quarter were about $19.5 billion.

Half of that was from the GSO acquisition.

Outside of that, real estate had about $6 billion, private equity $500 million, and there was about $900 million in other parts of the credit business, as well as $1.5 billion in hedge fund solutions.

So consistent with our pattern over time, it was very broad-based once you back out the particular acquisition, if that is helpful.

It is helpful.

Thank you.

And on the second point, if you talk to the major consultants in the alternative areas, what you will see is that in the private equity area, the allocations are going up of the institutions.

It is more centered on the midmarket buyouts rather than the large class, but the entire sector is going up because they need that return.

In opportunity real estate, it is going down.

We are like the major exception, and that has happened because of performance problems with a number of the firms who are now no longer in the business.

In the credit sector, that is going up because, as you guys all know, people are desperate for yield.

If you can manufacture very high returns in an absolute sense and a relative sense, in the credit sector, you are doing well.

In the fund of funds area, that is going down across the board.

But we are, again, an exception on that one because of performance in customized products.

So that breaks it down for you by area, and it is important to also recognize that we are not a private equity firm.

We are a broad-based alternative firm, and that really works to our advantage in a whole bunch of different ways for performance of products, for joint marketing to limited partners, and it is a very good model.

Michael Carrier, Deutsche Bank.

The first question from a capital-raising standpoint, you have got a lot of dry powder and I guess mostly focusing on the private equity segment, it seems like given where evaluations are, and maybe slightly tougher financing conditions, particularly in Europe.

But when we think about deployment of that capital for attractive opportunities, should we expect that to be slowing here, or do you still see opportunities?

I think you mentioned a little bit in some of the -- like the natural resources energy section, but it just seems like you have a lot of capital.

But just given the fundamentals in the market, should we expect some pullback, or are you still seeing opportunities to deploy that?

No, we are still -- I would say our deal list is shorter, but we are still seeing opportunities to deploy it, and I think we will put to work $3 billion to $4 billion a year in this environment, which is about what we planned for.

Okay.

All right.

That is good.

And I guess then the same thing on the credit side.

It seems like you have got different trends in the market.

You have got a lot of the banks that are pulling back.

You have got de-leveraging so it creates significant opportunities, particularly in certain regions and certain categories of the market.

Yet it also seems like most alternative managers and even some of the traditional managers are launching products that go after those opportunities.

So when you see, like, the size of that opportunity versus the competitive environment, is it still -- when you look at those two and balance them -- still more attractive, meaning you still think that there is a lot of growth ahead and still attractive returns?

Yes.

I mean I think there has been a lot of money raised to play the European de-leveraging thing that has been pushed off by the LTRO, and so in that sense, there is a bit of imbalance.

But we are still -- there is still almost a historic premium, historically high premium that investors get paid to take illiquidity.

So the spread and rates from a liquid bond to an illiquid bond of the same credit is extremely high, as high as it has ever been.

We think there is a lot of very attractive -- that if you can tolerate illiquidity, there is a lot of very attractive investments to be made.

And our mezz guys and our rescue financing guys are, frankly, putting money out very fast, faster than I would -- well above midcycle, so to speak.

I mean structurally the opportunity is very big, and the banks are being disintermediated by Basel III and particularly in Europe where banks make up about two-thirds of the credit extension as opposed to about one-third in the United States.

There is a really big opportunity there.

There is going to be difficulty refinancing companies' maturities as they come due with Basel III where the regulation is directing money into refinancing sovereigns instead of companies, and in real estate there is almost no liquidity in terms of credit extension.

People just are lending very, very little money to that.

And this provides a lot of opportunities.

And also in the States, in the real estate business, there is very little financing available by historic standards, which creates more opportunities for our types of products.

And so if you view some of what we do as a replacement for the shrinking of massive size, hundreds of billions of dollars of the banking system, that to the extent that we can continue to raise money, I think we are going to find really interesting opportunities to deploy that to replace people who no longer can do it because of changes in regulation.

Dan Fannon, Jefferies.

I guess, on the private equity side, if you could talk about your portfolio companies and generally how they are tracking when compared to your budgets and forecasts internally and compare that to the marks we saw this quarter?

Well, the portfolio companies are generally growing.

Revenues are up mid-single-digits.

That is about as expected.

I would say the growth is less robust than late last calendar year, so the economy is not strengthening at least as seen through the eyes of our portfolio companies.

I mentioned in the press call that margins are under a bit of pressure because costs are rising, mostly commodity-based costs.

But it is very hard for these companies to pass that through because they don't have the pricing power in a weak demand environment to do so.

So EBITDA is growing also, but somewhat less than revenues.

It does not have a big effect on marks, frankly, because the cash flow is still paying down debt.

The fundamental outlooks for the Company -- companies have not changed.

I do think the economy is somewhat weaker though than it was on many dimensions at the end of last year.

If the economy weakens further obviously, that will push out realizations, and it will -- it will push out realizations, primarily we still expect to get the same ultimate value.

In terms of the marks, if you disaggregate the public markets, our -- the values of our portfolio was up comparably to that of comparable industries.

The big run-up in the stock market was a lot of it was concentrated in financials and in tech kind of companies.

We don't have a lot of those in our portfolio.

If you look at how industrials performed, our Company -- our marks are in line with the public markets.

And then you have to remember, too, that because of the stronger dollar, all of our foreign investments lost value just in terms of currency translation, not that they feel it.

In the local currencies they're doing fine.

But, as translated through our statements, that was a bit of a drag in private equity.

So I would say the picture in the economy is improvement but slow improvement.

Okay, that is helpful.

And then I guess at a corporate level, I would just like to get a sense of are you looking at potential deals from an investment perspective similar to what we saw at a Harbourmaster or on a portfolio level like Allied?

Is that something you view as a pretty good opportunity in this environment?

Well, it's a good opportunity when they come up.

There is not a huge crop of them out there to do.

So we keep looking, and we consider those things all the time, but we try to be very, very selective.

Yes, some of those we could have bought but we let go that other people have done for price reasons.

We are pretty disciplined about these things.

As Tony said, there are not a bundle of them anymore, but things happen.

We also tend to focus -- just one point on that -- we tend to focus not just obviously on the financial side, which is very important, but on the strategic side.

So when you look at Harbourmaster, we had 80% overlap in the credit names they cover and less than 5% LP overlap.

So there was a compelling strategic fit to give us exposure to not only build out the platform over time, to have leverage with the credits that we are investing in, but also a LP base that really we did not have a lot of exposure to.

So we really look at both.

It has to be compelling on a financial and on a strategic basis, and that is what drives us.

And that also makes the opportunities few and far between, but we don't stop looking.

Matt Kelley, Morgan Stanley.

So when you were talking about the exit environment and your expectation for it to pick up more later this year and into next year and the years beyond, I'm just curious to get by segment in terms of the assets that you said are ready to go, is that primarily in real estate or pretty split between real estate and private equity at this point?

Well, you have some of both obviously, as well as some of our credit assets, which have had a tremendous run in the mezzanine area.

But the biggest bulk of that in the near term will be real estate related assets.

Okay, that is helpful.

And, also, can you guys give us an update on where you have the BCP V fund marked at the end of the quarter and just your expectations for ultimate multiple on invested capital there, if that has changed or is still pretty consistent with what you said at your Investor Day?

Yes, it is still pretty consistent.

We have got that marked at about 1.1 now.

We expect it to be somewhere -- projecting is hard, but we all have our views, but 1.8, 1.9, something like that.

Okay, great.

And then just one follow-up for me.

In terms of growth going forward, I know you talked about organic growth.

Any platform extensions you think are most likely including on the BAAM platform?

What do you mean platform extensions?

I'm wondering if you guys could potentially expand to or would be interested in expanding to private equity fund of funds as well given what you have set up on the hedge fund side?

Well, we have looked at a lot of those businesses, and we actually have decided that we don't add much to that, and there are some conflicts.

The conflicts would be a) we would not be able to invest in our own funds for obvious reasons, and b) other fund of funds are investors in our private equity fund, and we just don't believe in competing with our customers.

So that is probably not likely, but there are other businesses that we look at.

We've looked at secondaries.

That is a somewhat better fit, I think, and it does not necessarily come through the BAAM platform, but we might consider something along those lines for the right vehicle.

And we have looked at a number of other kinds of things.

But nothing is imminent, and nothing is, I think -- we don't feel any strategic necessities to be anywhere.

And then if I can just ask one more question, and then I will get off.

But, on the real estate side, I know you mentioned and you mentioned in the past that it is very hard for the average firm to raise money there, and you guys obviously have a long track record and a large platform.

I'm wondering what is your sense for LP demand for that product?

Is it increasing a lot, and if so, is that increasing on a 2012 or 2013 and beyond, or is it just kind of a steady increase?

I think the LPs have been basically traumatized by their experience in opportunity real estate.

A large number of our competitors have gone out of business.

They have gone out of business because they were buying leveraged real estate at very high prices, and that real estate market went down, they hit maturities, and those maturities could not be refinanced because the lending ratios have changed.

Tony and I spend a bunch of our weekends reading investment committee meetings like it is not endless, but it is about enough to ruin a day reading these memos for approval.

It is almost the same deal with different names where some piece of real estate was bought by somebody.

Its valuation is in some cases down 20%.

It needs sometimes more.

It needs way more equity to refinance it to the extent that they can live in a world of changed ratios.

The equity is out of -- which was highly leveraged.

The equity is worthless.

Who is going to put that money up?

And there are very few people around who actually will do that, and we are the dominant group left in the world that will do that.

And so people come to us all the time.

Now the people who gave -- the people at these institutions who gave the money to these other firms who destroy the equity values are really still extremely cautious.

And the consultants who represent them are also cautious about exposing more money to this sector.

Now we have been quite fortunate for a variety of reasons with a terrific group of people and a lot of experience, and we avoided those types of issues and have the best record according to what the consultants have told us in the developed world.

And so we are like an off the page three standard deviation kind of moment for these people, and they want a certain amount of exposure, and they are doing it through us.

They have moved as a category, the institutions, into what is called core real estate, which is buying regular buildings that don't need a lot of fixup, don't put debt on them at all or a modest amount of debt because what they are worried about is not maximizing return; they want some exposure to the asset class.

They just don't want to live through these losses again.

And I don't know that that is going to change in any significant degree.

There are a few people out there raising money who are new, but they basically take in people who more or less have been involved, not in every case but often, with some of these other failures.

And their firms have disbanded, and then they are reforming and displaying themselves as real estate experts.

Unfortunately for these new attempts, some of which will be successful, the consultants remember who the people were.

And so I think this asset class is going to stay underinvested in, even though the opportunities are actually terrific.

And there will be a few firms that raise funds as they have, but those will be relatively small funds compared to what most of them had done previously.

Robert Lee, KBW.

A quick question back on BCP V.

I guess, year-end you needed about a 12% appreciation that would get to a carry.

I mean would we be correct in just simplistically assuming just given the performance of the overall PE portfolio that is down to around 7%?

And given your outlook for the underlying corporate performance, you would expect to get to carry Q3, Q4 some time and, therefore, catch --?

It is L.T.

The math really does not work that way.

The number that we gave you was the gross appreciation number for the fund for the quarter.

We gave you for the whole segment.

BCP is an element of that.

So it is not the -- BCP V is not the only driver.

The metric that you are referring to is the one that we put in the 10-Q, which refers to a change in total enterprise value that it would take to across the threshold.

Last quarter that was 12; this quarter it is 11.

The reason why you don't have a net for net reduction in that, of course, is you have accrual of the hurdle in fees as well.

But we will put that number in the 10-Q, and it will be 11% change in total enterprise value.

And from a modeling standpoint, just make sure you are modeling on a fund by fund basis.

So we give you the fund by fund breakdown.

Thanks.

Just one follow-up, I mean if we look across the platform of various carry style funds and PE and real estate, it seems that the only fund, if I go through the K that looks like it is at risk of not actually ever generating some carry, would be the BREP International II.

Am I thinking about that correctly, or are there any other funds that you worry about that may not ultimately generate some carry?

I think if you look at the K, which reports through the end of last year, you do see that that particular fund is out of the money by a decent amount.

I think they are still thinking that that fund will return positive capital, but whether or not it returns carry remains to be seen.

But you are correct in identifying that as the one that we are concerned about.

Well, I think PCOM would be in question as well, frankly.

PCOM was above at one point, so it is the performance since the time you accrued some --

Okay.

Well, all right, whatever.

Guy Moszkowski, Bank of America/Merrill Lynch.

Tony, you mentioned on the press call that most of the large PE funds are probably going to be smaller in the future.

And I was just wondering does that mean that when you get to your next large fund raising cycle, you would anticipate significantly changing your approach to fund raising?

Would you take a more targeted approach with more smaller funds and maybe a smoother fund raising cycle?

I think over time we will probably head in that direction.

I think the first step in that has been the energy fund that we are doing.

Over time we consider regional funds or other sector funds.

Investors like the more targeted strategies these days.

If you look at the evolution of the industry, it started off with just generalist funds, and there are more and more specialist funds, and specialist funds are taking more and more of the assets that investors have to put out.

So we will go along with the industry trend on that, I would expect.

Jeff Hopson, Stifel Nicolaus.

Your results in the hedge fund area seem to be distinctly different from the overall hedge business, which has had some, I guess, inconsistent disappointing returns in some respects.

So --

Can you speak up a little bit?

It is not translating as well over the mic system.

Okay.

So my question is, regarding your hedge fund to funds business, your results have been distinctly different relative to the general perception that hedge funds are not generally performing as well as they could or should.

So the question is, what would you attribute that to specifically in the more recent quarters?

Is that your particular allocation to funds, particular sectors or more some of the more unique proprietary products that you have developed?

We do a number of things that are different.

First of all, roughly around half of what we do are custom-made products to solve a particular opportunity or a problem that a large investor has, and that helps from a performance point of view.

Secondly, we have created whole new products to invest in new hedge funds where we have had great performance, identified the right people, have an effect and ownership position in their business that has not even been triggered yet in terms of a buyout.

We have in addition to that other interesting ways of focusing on individual areas whether it is the commodity area, being in the right place at the right time.

And we negotiate very good fees with the underlying managers because, as the largest group in the world, we can get capacity at really good managers on a very advantageous basis which adds to performance that other people cannot get because they cannot put up the money.

We also have a lot of people doing this.

There is some sense probably that there are two or three people sitting in a room picking funds or something, and it is not that difficult -- underlying funds it is not that difficult a business.

In point of fact, we have got this sort of small army of people doing this, and we have been doing it for 20 years.

This involves diligence of the back office, as well as the trigger pullers, as well as assessing strategy.

We have also -- we have now got an overlay strategy that we have been doing for probably -- I don't know, Tony -- the last five or six years, which has dramatically accelerated where we will pick themes of what we think are going to happen to different sectors of the asset allocation spectrum and enhance underlying portfolios with that type of bias, and we are able to, as a result of the shakeout from the investment banking firms, again, because of regulation, that there are people available who are working on prop desks and doing other types of things where we can bring them in to make more of these type of concentrated directional type of investments as opposed to just investing in the underlying manager.

So there's tons of stuff going on that makes a business a terrific business, and when I say terrific, I'm talking for the customer.

Because if it is terrific for the customer, it is ultimately going to be terrific for us and reflect in other ways.

So those are just some of the reasons that we have a differentiated product.

Okay, great.

And just a numbers question.

On the credit business, do the first-quarter financials, I guess, accurately reflect the Harbourmaster or anything unusual there, or is that a good run-rate on some of the expense basis?

It is a good run rate number.

It is missing only five days of Harbourmaster because we closed on January 5.

So, other than that, it is a good reflection.

There is one element I would just point out.

If you look at the realized performance fee, compensation versus realized performance fees in the quarter, there was a bit of a catchup in the first quarter.

So naturally we would not have more than 100% comp ratio.

That will iron itself over the course of the year.

But 100% of Harbourmaster and, by the way, the remaining 15% of GSO are reflected in the March 31 number, so that is a good run rate to go with.

Howard Chen, Credit Suisse.

Just following up on your realization outlook, you have noted a few times now to look towards the back half of this year and into 2013.

I'm just curious, why not sooner?

The market does seem fairly open.

We are seeing some peers active on the monetization front.

Is your outlook driving -- it is more just unhappiness with the prices you could get today, conservatism on your part or maybe something to do with your specific portfolio?

We are sitting on investments that are appreciating rapidly.

Why give that away now?

I don't get it.

A lot of it is real estate.

We have got a wonderful compounding going on.

We have got rents going up, we have got occupancies going up, we have got debt going down, and they are leveraged.

So the value that falls to the equity, it is creating very rapidly.

Sure, we can take something public.

We could get a double here, a double there.

We are playing for more than that.

I don't understand this, frankly, the focus on premature liquidations.

We are in the business of managing money.

That means like having the money and managing it and creating value and that is what we are doing.

Great.

Understood.

Thanks, Tony.

And then just digging into real estate for a minute, you know, the underlying portfolio performance is really robust.

Some of the metrics that Steve spoke to, like RevPAR, appear to be accelerating.

One, would you agree with that assessment, and if you do, maybe do you see any disconnect with the level of fund depreciation that we saw this quarter?

Well, I do agree with it.

And what you have got in real estate is you have got an improving economy -- it does not need to be robust -- and no new supply.

And that is important because as an economy we make obsolete about 0.8% of our commercial real estate each year and new supplies below that.

So we have got a shrinking stock in America of commercial real estate actually, yet you have an inexorably growing population, and you have an economy coming back.

And you have a bit of a catchup from 2008, 2009, 2010 when no one signed leases and no one expanded or anything else.

So you have got all that coming through now, and I think it is going to be good.

Now I hope it will be even better.

I would love to think that the economy will actually be on a nice -- you know, at some point, we will get a bit more robust growth.

One of the reasons we want to not accelerate right now we want to wait for that to happen if it is going to.

And so a bit of your question is sort of, well, why was real estate only up 4% then, and we try to be conservative in our marks.

I think if you look at our marks, particularly in real estate, you try and be accurate.

It is always hard when you are marking to a disposition, and the firm has always been conservative in our approaches to things.

And I don't know the exact number, L.T., but in terms of our realizations in real estate, just for example just use real estate and though it is quite similar in private equity, that we tend to actually realize significantly more than that mark.

And that, given the volatility of market, it is very hard to get this right, a very complex evaluation that we go through with a lot of assumptions.

We have it verified with different outside groups and internal groups, and we try and do a really thorough job.

But the way this tends to break historically has a bias for lower marks and higher realizations.

Although in a really adverse market environment, of course, that would not be the case.

But I think that when you look at a 4% mark and I cannot really address what happened in an individual quarter, but the trends Tony is talking about and there is one more trend, when you hold this stuff in a recovering environment for financial institutions, that if you imagine an environment at some future time where credit extension in real estate in the United States, for example, goes back to more historic ratios on properties, that additional value that will accrue from the increased value of those properties will go almost dollar for dollar to us as the holder of the real estate.

So, in other words, if you thought the properties were appreciating at a certain rate but you could finance at a 75% or 80% as opposed to a 60% to 65%, so the return on equity for the owner, the new owner will be about the same.

That will push the price up on what people can pay beyond just the fundamentals of increasing rents and increasing occupancies.

And giving that up to satisfy some type of target for realizations is something we just would not do.

It is sort of like being a farmer.

When you plant the seeds and the stuff is coming up and you know where you stand, you got another two months to grow your crop, but you sort of just decide to wake-up and whack it because somebody wants you to do it.

I mean why would you do that as a farmer, unless you thought that the price for that crop was going to completely collapse, and you are better off just hitting the market.

We don't see that happening.

And part of what we do is try and figure out that equation, if you will, and sell at the optimal time.

I have got just two quick points to what Steve just said.

I don't know if it is helpful.

It is intrinsic in the way you mark things under GAAP that you don't have takeover premiums, etc.

So that is the conservatism that Steve is talking to or that is one aspect of it.

So typically over time both in private equity and real estate, you will have a jump in marks upon disposition because you can consider them the exit price relative to your intrinsic carrying value.

That is one point I would make.

The second point, and this will follow on what Tony just said, the 4% growth -- of course, that's a 16% annual rate -- that is pure fundamental growth in the portfolios.

Meaning it is cash flow accretion and increase in the carrying value of those assets and not marks to the market or expansions of multiples, which usually take a longer sustainable recovery in the markets for you to do.

So, as a pure mark, it is actually a pretty strong indicator of really good fundamentals in the real estate portfolio.

Okay, great.

I guess you all have been through so many different cycles.

I guess just a follow-up to this broader point, at what point does LP's desire for you to right them a check and monetize an asset, where does that play a factor in all of this?

Certainly you don't want to sell something premature or before it's time, but I have to think that that is part of the thinking over time?

I think you are absolutely right, and it is part of a flaw in sort of the model of going back and raising funds simply because you spent or invested the last one.

And in different points in the firm's 26.5-year history, we have actually faced the dilemma where LPs want some money from realizations, and sometimes it is at a period where there is relatively low liquidity or values in the world and they need money.

And they cannot commit to new funds if they don't have any money, and they want the money just generally, and we do work for them after all.

Right?

They are the customer.

And when you hit that point in the cycle, occasionally you accelerate things because it is good for the LPs, and you can tell them you think you can get more, and sometimes they say, well, that is fine.

But that happens more around that moment in the life of a fund.

I think everybody is sort of frustrated with that a little bit.

I mean if I did not have to go on the road being a Hare Krishna, I would be just as happy.

In fact, I think my wife would be happier.

And the LPs complain about having these endless meetings with people like Tony or me or whatever and all the other Tony and me's that show up.

On the other hand, nobody quite knows how to break that cycle.

They love those meetings, Steve.

Yes, so I'm glad Tony loves them.

I actually love them when I am there.

It is just getting there and transporting your body around the world that is not completely as much fun.

But if we had a different model for this business of keeping money forever and letting it compound for people, I think that ultimately would be a better model.

But that is not the way the industry grew up.

LPs actually don't like losing control of that measurement system.

We have thought about other ways to go about it, but we have not been able to come up with anything that totally works for LPs and works for ourselves yet.

But if you have got any ideas, we are open-minded on that one.

I will give it some thought.

Let me just eat some lunch first.

But --

To put it another way, the pressure to liquidate comes right before you do a fund raise.

Right, not right after.

Okay.

The final question for me actually like the opposite side of the spectrum, credit.

The return is a bit phenomenal.

You have already deployed about a quarter of the new mezz fund within six months.

Tony, you mentioned some of those returns should be ready to harvest soon.

Just given the opportunity set that is there, how are you thinking about just cranking the engine much faster here within credit?

I think that is going to happen.

Credit is actually a business where because of Basel III and that is not going to stop.

Almost forget Basel III.

You have got individual countries that are way tighter than Basel III, really severely constraining credit extension that our ability to like put money out at a terrific rate compared to where central banks have jammed rates down to on a risk-adjusted basis, this stuff is like really fantastic.

And I think that that zone for mezz whether it is stated as 2012, 2013, 2014, when people go out to raise money, we have been doing like dramatically better.

Risk-adjusted that is a great, great place to be, and I can see us very rapidly refilling that bucket because we keep pouring it out into new really interesting investments.

So that investment cycle, I think, is going to be shorter certainly than the private equity cycle.

The real estate bucket, you could have the same thing happen because we are seeing so much stuff.

Now, from the perspective of you modeling the firm, this is like -- this is really wonderful for us.

And it is great for our investors, and it is great for the firm.

Because that velocity is really -- it is a right point in the cycle for this stuff.

You know, having said that, it is a tailor's business in the sense that each deal you cannot just go buy it and buy it on the screen.

Each deal is a deal.

It is individually negotiated.

They take time.

You have got to diligence them, and you got to put it out one at a time.

So it is not something you can just crank up like a dial at all.

What we have done, though, is to facilitate this is one of the three founders of GSO has moved over to London because we do think it will be a big European opportunity, and his mandate is to bring leadership closer to where we think there will be a lot of action and to build up our team and our capabilities in London.

And with Harbourmaster, we not only got the assets, we got a very good team.

We are the largest owner, non-bank owner, of credit in Europe, of loans in Europe, and we have a very good team there now.

It is much expanded.

We have got five partners now in credit and I think 57 support people, which is up in Europe working on European credit.

And that is up a lot from where it was a few years ago.

So we are trying to gear up, but it is not the kind of thing you just flick a switch.

Yes, just to add to that because we get asked about that opportunity in particular quite frequently.

I think there are a lot of competitors out there talking about buying big pools of credit from European banks.

If that happens, great.

I mean GSO can certainly participate.

But the opportunity they are very focused on is leveraging their single credit expertise, and Harbourmaster gave them insight into something like half the credits in Europe.

And unlike the US where there is a deeper public market for high-yield credit, that does not exist in Europe.

So we think that is going to be a really exciting opportunity, and we are positioned, I think, much better than almost anyone given the credit expertise that we have.

There will be on the corporate side relatively -- I hate to predict things.

Because sometimes I say things that are true, but I'm not really looking for this to be reported.

But I think there will be relatively low large portfolios of corporate loans that Joan was talking about.

And from spending time in Europe myself and a lot of that, the corporate loan stuff spend, which is much more liquid, has either been already sold, or they are prepared to live with that.

The real estate side is different, and that comes in different countries and different ways.

But the approach that we are having, because there is not really a junk market and we put out money at the bottom.

And because you are going to have a general refinancing problem in Europe because of Basel III and supplementary regulations from countries, that that is where the action is, and that is what we do.

We do it in the States through a rescue lending fund in mezz and we will be doing it there as well, and that is going to be a very big market.

Our partner, Winter, is actually -- I was back at our board meeting we had on Tuesday, and I would say trip Tony was like really excited about it -- what he is doing there and all the opportunities and how we can deploy things.

And unlike some other people who compete with us who are "raising a fund" or moving to Europe and staff, I mean we are there in huge size.

So it is good for us.

And another thing that is good for us is that because we are borrowing from all these banks, both in real estate and private equity and have ongoing business relationships, we also do some advisory work for some of these people.

It is very easy for us to get to a lot of these sellers as opposed to just showing up and being a new person in town saying, I have got some money, do something with me.

The European world is on the margin of more relationship community than the US, which on the margin is more transactional.

So I think that also works for us in this area.

Great.

Many thanks for all the thorough answers, and I will come back to you on that one, Steve.

Okay.

You can measure it.

I am always glad to be measured.

That is all the time we have for questions.

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

Great.

Well, thanks, everyone, for dialing in, and I look forward to catching up after the call.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.