Blackstone Inc (BX) 2012 Q2 法說會逐字稿

Welcome to the Blackstone Group second-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 Managing Director, Head of External Relations and Strategy.

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

Please proceed.

Great.

Thanks, Shantalay.

Good morning, everyone.

Welcome to Blackstone's second-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 the press release and a slide presentation illustrating our results.

You can get those on the website.

And we'll be issuing out our 10-Q over the next few weeks.

I'd like to remind you that today's call may include forward-looking statements, which are uncertain 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.

We don't undertake any duties to update any forward-looking statements, and will refer to non-GAAP measures on this call.

So, for reconciliations to the GAAP measurements, also look at the press release.

I'd like to remind you that nothing on this call constitutes an offer to sell or a solicitation to purchase any interest in a Blackstone fund.

This audio cast is copyrighted material of Blackstone and can't be duplicated, reproduced, or rebroadcast without permission.

So you'll note, the new and improved format of our earnings release.

We've gotten feedback from several of you.

We'd love to hear more.

Hopefully, you find it more useful.

The idea really was to make it simpler for investors, analysts, press, everyone, to review the results and move up some frequently asked-for information that previously we only had in the 10-Q.

But again, we're looking for continual feedback, so thanks for all who gave us input.

A quick recap of our results.

We reported Economic Net Income, or ENI, of $0.19 per unit for the second quarter.

That's down from $0.44 in the first quarter and $0.73 in the second quarter of last year.

If you recall, last year's second quarter included the performance fee catch-up in real estate that we highlighted at that time.

For the second quarter this year, distributable earnings were $188 million.

That's $0.16 per common unit.

That compares with $0.15 in the first quarter of this year.

And, once again, we'll be paying out the $0.10 per unit distribution related to common unitholders of record as of August 15.

As always, if you have questions on anything in the press release, feel free to follow-up with either me or Weston Tucker after the call.

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

Good morning.

Following a broadly positive first quarter for global markets, macroeconomic concerns, including the intensified eurozone worries, took precedence in the second quarter, driving a pullback, as you know, in equities and increased in volatility.

US stocks did better than most other markets, only being down 3%, while the global indexes declined on balance 6%.

Fixed income prices were mixed with high-grade prices up and high yields flat to down.

The euro weakened against virtually all currencies.

Capital flows into equity mutual funds remain highly challenged.

And what highly challenged means, it's been 14 straight months of outflows from domestic equity funds, and M&A activity also declined -- generally, a pretty miserable situation in the second quarter.

In general, the markets have been dominated by tepid volumes and limited conviction, with short-term momentum trading driving the volatility.

Investors remain apprehensive and hesitant to make decisions.

The dominant perception is that the global economy is slowing but not collapsing, with a drop in both confidence and activity.

The world's growth engines, such as China, India, and Brazil, have been clearly slowing.

In the US, specifically, households and large firms are holding back spending because of worries about Europe and the upcoming US fiscal cliff.

And we expect the second half of the year to be negatively impacted by policy risks.

Europe's sovereign debt issues have remained front and center.

Investors have been hoping for a degree of re-containment and removal of this systemic overhang, which they got, at least temporarily, following the European Leaders Summit the end of June, resulting in a plan for a centralized banking system under the supervision of the ECB, which, by the way, is basically a pretty sound idea.

Critical details of exactly how this will be executed remain to be seen, and introduce more uncertainty until that's all resolved in a satisfactory way.

Blackstone's broadly diversified asset management model is built to outperform over the long-term, particularly in these types of uncertain and volatile markets.

With most of our capital under long-term lockup arrangements, which is very important for our business model, we are largely immune from redemptions driven by market swings in volatility, enabling us to focus our resources on building and improving companies, driving long-term solutions, and creating real and sustainable economic value.

This ultimately drives higher returns that can be achieved through the short-term orientation of the public markets or virtually any other form of investing.

This value creation takes time.

And through market cycles and over our 26-year history, we've generated net annualized returns on our realized investments of 23% in private equity and 27% in real estate.

Our limited partner investors, which represent over half of the pensioners in the United States among others, are increasing their capital with us, driving gross inflows of nearly $6 billion in the second quarter, and over $48 billion in the past 12 months, including our acquisition of Harvester -- Harbourmaster and all of that is much greater than any other firm of our type in the world.

We ended the second quarter with total assets under management of $190 billion, up 20% over a year in what's been a pretty miserable environment.

Now moving on to a brief discussion of each of our business segments, last quarter, in this call, we highlighted for you the slowdown we were seeing in our portfolio companies in private equity.

That commentary was perhaps earlier than that of our peers and others in the marketplace.

And I think you beat us up a little bit because we said that.

But now, however, I believe you're all familiar with the general economic softening that's transpired.

And I'd like to bring to your attention the fact that we knew this earlier than other people, is part of the strength of our model here at Blackstone.

And this helps us make investment decisions in all of our businesses where other people might not have had this type of early warning.

It enables us to avoid certain types of investments and to make others.

It's a really important thing for us.

We've continued to work to position our companies and insulate them against a protracted period of slow global growth, both in our current assets as well as on the investment side.

Overall, despite economic headwinds, our portfolio companies are in good shape.

And the carrying value of our private portfolio remained mostly flat in the quarter despite big down markets.

Our public holdings, however, were down 12%.

And this, combined with the negative impact of foreign exchange due to the weaker euro I talked about before, drove an overall decline in the carrying value of our portfolio and private equity by 4.2%.

On a year-to-date basis, however, our private equity portfolio is still up slightly.

I'd like to step back for a moment and remind everybody about our approach to private equity and the power of the model over time, which we've demonstrated repeatedly over the past 26 years.

We approach all of our investment opportunities as a problem solver, not a passive investor like people in the public markets.

In private equity, this means partnering with a management team to identify and correct underperforming assets; working with a team to inject capital and provide expertise in support of growth, or hiring an outstanding manager to build the company from scratch.

Depending on the type of asset, the region, and market conditions, this could take four to five years, or it could take longer.

Given the long-term nature of our funds with their typical 10-year maturities, sometimes 12, we are in no rush to sell.

And when the time is right, we realize the value we've created and built over several years for both our limited partners and now our public shareholders.

A more extreme example of this is Universal Orlando, the giant theme park down in Orlando, Florida, which we sold to a strategic buyer last year after holding it for 11 years.

We completed this sale at a multiple of original invested capital of 3.2 times our money and a 16% IRR.

I remember at one point in time after this investment was made, we had this investment marked at only 10% of original cost.

So from that mark until we sold it, this investment was only up 32 times.

So, this is just to counsel you to not get overly focused on any of these marks from quarter to quarter, and recognize that we're in the business of building this massive value, which, over time, we can pick our moment to exit and realize on that.

Looking at our historical exits in general, our average exit price is 20% to 25% higher than the prior quarter's mark-to-market, as we cannot factor things in from our accounting treatment, like acquisition premiums, into our evaluations.

As such, you should expect sharply higher increases in value during periods of greater realizations, generally.

During the second quarter, challenging capital market conditions and ongoing subdued M&A activity limited our opportunity for exits.

One of our peers announced a partial sale of a European drugstore business to a strategic partner, which we believe is a good example of a 2007 buyout done at the absolute top of the cycle, that ended with a very favorable result that, at other times, as you were monitoring that investment, the market may have dismissed.

This is how our industry works.

You should see more of this across the sector as markets heal and M&A volumes improve.

For example, late in the quarter, we did sell a portion of our interest in Team Health, which we had initially bought -- brought public in late 2009.

The Team Health sale generated a multiple of investment capital of 3.1 times our money, and a 19% IRR, and a $33 million distributable earnings contribution for our public investors.

Our patient capital and superior returns over time drive our fundraising success.

We have the largest pool of dry powder in the private equity area available at $16 billion.

And there is a real advantage to this scale and flexibility, allowing us to move in size and with certainty anywhere in the world we see opportunities for value creation.

As a last note on our private equity business, as we announced yesterday, we completed the leadership transition begun a couple of years ago, by naming Joe Baratta head of Private Equity globally.

Several of you met Joe at our European Investor Day last year.

We sent him to London a decade ago to help launch our European business, and he will return to New York next month.

Moving on to our real estate business, where the benefits of scale are particularly clear, we are currently operating in a unique moment in time, given our size and the very favorable investing climate.

As the largest player in opportunistic real estate in the world, and one of the sole survivors from the financial crisis, we have the dominant franchise in this space, which I believe is very well illustrated by the success of our most recent global fundraise.

We've raised over $12 billion in capital, and are extremely confident that we'll hit our $13.3 billion cap when we have our final close in the next few months.

This gives us, by far, the largest pool of dry powder capital in the industry at a time when we are seeing highly attractive investment opportunities, due to the level of distress and the need to deleverage around the globe.

In fact, we've deployed or committed $16 billion across our real estate platforms since the fourth quarter of 2009, when we started to see early signs of market stabilization.

In virtually all recent transactions, Blackstone has faced limited competition, due to the magnitude of capital required and the complexity of the transaction.

Our strategy remains focused on -- buy it, fix it, sell it -- in which we acquire good assets that need improvement at below replacement cost, and provide capital and expertise.

Given our basis in investments we've made during this period, we have high expectations for the ultimate returns we expect to generate.

During the second quarter specifically, we invested or committed $3.5 billion, which is a massive amount of money compared to everyone else in real estate.

This includes our commitment to acquire Motel 6 from a public European lodging company.

We paid roughly $26,000 per key, which is a substantial discount to physical replacement cost, and we see real growth potential around the franchise business, similar to some of the other hospitality investments.

Our ability to move in size and swiftly [access] the transaction, given our vast lodging knowledge, was critical to our success in this case.

We don't need partners to complete a large deal, and we can deliver certainty in the particularly uncertain real estate and financing world.

In addition, we've started deploying capital into US single-family housing, which is an area we have largely avoided for years and quite successfully so.

We are now buying post-foreclosed homes, which generally need some capital improvements, and we are leasing them up.

We expect this activity to drive greater housing affordability and think it will help the nascent economic recovery.

Home price appreciation has already begun, with March showing the first month of year-over-year appreciation since 2007, and that's about when we started entering this business, I think more or less picking another market bottom, like we've done in the hotel business.

The US and Europe are still the most attractive places to deploy capital.

Distress in Europe remains the highest and we're quite constructive there.

European financial institutions are selling more, and there aren't a lot of equity players there to absorb these assets.

In emerging markets, weaker capital markets have meant that developers that were long land and have been feeling more of a crunch, and we are there to provide capital.

And that's going to also increasingly provide opportunities for us.

Our current portfolio rose 2.9% in the second quarter and is up 6.7% year-to-date, driven by ongoing improvement in operating fundamentals and persistent low new supply.

It's tough to find cranes in America.

In office, we continue to see occupancy improvement and rent growth in most of our core markets.

For our key office assets in the US, occupancy is up 300 basis points versus the prior year, which is a big increase.

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

In hospitality, across all US hotel segments, there continues to be improvement in both RevPAR and EBITDA.

So, on an operational basis, virtually everything is doing well.

In terms of dispositions, you may have read that we're starting to sell small pieces of our office portfolio.

We are not anticipating any large-scale bulk sales imminently, but do expect the pace of realizations to continue to pick up this year and into next year, consistent with our stated plans.

During the second quarter, we completed two large sales -- the Pearlridge Mall in Hawaii, and our UK student housing platform, which together generated $420 million in proceeds and a multiple of invested capital of 2 times, which is pretty unusual in the real estate business these days.

Our disposition activities continued in July, with two partial sales signed or completed, including our 50% interest in a Manhattan office building and a small portfolio of four high-quality hotels.

Moving on to BAAM, our Hedge Fund Solutions business, even though the second and fourth quarters are primarily redemption quarters for BAAM, we had, despite what you might think, net inflows of $450 million in the quarter, and another $950 million of inflows on July 1. This brings us to $2.5 billion in net inflows for the first half of the year.

The focus of our growth remains on customizing specific solutions for our institutional clients and providing value-added services.

We are known to our clients as a product innovator and trusted advisor.

Our scale is the largest investor globally in hedge funds.

And our sizable investments in risk management, technology, and due diligence, continue to set us apart from others in industry and drive our market share gains.

BAAM protected our investors' capital in the second quarter through our broad strategy diversification and management selection.

Our composite return was a negative 1% -- never a wonderful thing to be down, but still, only 1% for the quarter, despite the more severe decline in global markets.

Remember I told you before -- global markets were down 6%; we were down 1%.

On a year-to-year basis, the composite is up 3%.

Continued solid performance in inflows drove total assets under management $43.6 billion as of July 1, up 8% year-over-year.

Moving on to our credit business, GSO.

As one of the largest owners of leveraged loans globally, we are well-positioned as a leading provider of credit in a credit-constrained world.

This is particularly true as traditional lenders pull back, and GSO conversely has been aggressively expanding its footprint and diversifying its offerings.

We are expanding up and down the capital stack, investing in the whole range of strategies from performing loans to stressed and distressed.

GSO is viewed as a solutions provider and partner to borrowers, helping them identify a financing solution, allowing them to get back to focusing on their businesses.

Client demand for our investment vehicles remains strong, as investors search for strategies that can deliver a higher degree of competence and income in a low-growth, low-interest rate world.

This very much reflects on what Tony said in our earlier press call -- that it's a world starved for yields, and GSO can provide very high returns with a high level of safety.

GSO is capturing share in this growing market, with total assets under management of $51 billion, up 50% year-on-year.

I'll give that to you again -- we're up 50% year-on-year in credit, driven by organic growth in our acquisition of Harbourmaster.

Our drawdown carry funds generated solid returns in the second quarter.

In fact, I'd say it's more than solid, with mezzanine up 5.8%.

Remember, this is against a world that was down 6 and our mezzanine funds are up 5.8%, and our rescue lending fund was up 2.9%.

On a year-to-date basis, these funds have appreciated 12.6% and 10.6%, respectively, which is pretty remarkable given what's happened in the world.

We invested approximately $450 million in the quarter from these strategies, and our first rescue lending fund is approximately 2/3 invested.

While there are recall provisions that will extend the capital availability somewhat, we have commenced fundraising for our second rescue lending fund, which we believe should be quite successful.

During the second quarter, we launched our third business development company, which provides direct lending to middle-market borrowers as a core part of its investment strategy.

We hit the equity cap on our previous BDC at $2.6 billion, and our new fund is tracking at a good pace.

Last week, we priced our first CLO in 2012, a $500 million pool, which was one of the larger deals of the year.

And we plan to bring other CLO's to market later in the year, as we expect this area to continue to recover as a meaningful source of capital for corporate borrowers.

In our Advisory segment, second-quarter revenues declined 8% from last year, but were basically flat on a year-to-year basis -- which is actually quite good compared to what's happening virtually every other place on Wall Street.

In M&A, industry activity is down sharply from the first half of last year, as CEO confidence, as Tony talked, has seemed a critical limiting factor in an M&A recovery.

Despite this, our business was basically flat year-to-year in M&A.

That's actually pretty remarkable.

In restructuring, while the market remains slow due to the availability of financing and loose monetary policy, our business had a very strong quarter, as several transactions closed, driving a 50% increase in revenues.

Lastly, at Park Hill, our placement business, while revenues were down year-over-year, due to the lumpiness of when yields just happen to close, our pipeline is robust, as fund-raising market conditions are still challenging, driving demand for an experienced placement agent like Park Hill.

In summary, as public market investors analyze our business, we believe you should focus on the long-term trends supporting our lifecycle.

Capital formation, number one, or our availability to raise new funds and products.

Number two, our focus on value creation, or our ability to invest the capital we raise, and great assets with a strategy of transformation and improvement.

And number three, our ability for investment realizations, or the ability to harvest gains once we've created the value, driving performance fees for our public markets, where we wait until we've improved the assets, and we have an excellent time market-wise to exit this to the maximum value for our limited partners as well for our public investors.

We've successfully raised substantial dry powder capital to put to work at $36 billion, which is the biggest in the industry.

We have $38 billion that has been invested and is not yet earning performance fees, because it's early in the investment period or we've not yet crossed the required rate of return to the fund.

And we have nearly $50 billion that is invested and currently earning performance fees.

As we have seen throughout our history, Blackstone will continue to drive outperformance for our investors through this simple lifecycle of capital, resulting in meaningful cash distributions for all of our partners.

With that, I'd like to turn the call over to Laurence Tosi, affectionately known here as LT, who will close with some comments on our financial results.

Thank you, Steve.

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

Since the time of Blackstone's IPO in 2007, a little more than five years ago, we've been focusing on setting a standard for transparency and objective clarity in all of our investor communications, particularly in our filings and on this quarterly call.

As part of that ongoing process, we have sought the input of respected analysts, investors, and the rating agencies, to come up with a view of what is the best way to report the Firm's performance.

We published today, for the first time, the latest iteration of that effort.

At the time Blackstone went public, we worked with analysts and investors, and determined that we would have to adjust our GAAP results to show the actual operating results of the Firm.

That measure, derived directly from GAAP, is Economic Net Income, or ENI.

Unfortunately, things have not been that simple.

Because ENI is, technically, a non-GAAP measure, there is flexibility in how it is and can be defined by each firm that has followed us into the public markets.

And that has bred inconsistency across our industry.

The inconsistency has clearly frustrated investors and obscured direct comparability.

While our details are the same, we are hoping that the new information and layout we present you with today will clear that up, so that you can focus on and evaluate what is important -- how we are running and growing Blackstone, and what the return to you, our investors, is and could be.

As always, we welcome your input and feedback.

This is a process, not a conclusion.

Second-quarter ENI of $212 million brings Blackstone's year-to-date earnings to $704 million or $0.63 a unit.

The second quarter was marked by volatility in our public holdings and investments held in non-US currencies, particularly euros.

Despite these market conditions, however, we generated $188 million in distributable earnings, bringing the year-to-date total to $351 million or $0.31 per unit, which is a solid result in difficult markets, made possible by Blackstone's diversity and scale.

Total fee revenues were up 7% on consistently strong asset growth, which drove base management fees up 20% over last year in an environment of low to negative economic growth.

I should also note that this quarter's results are hurt in part by comparability to the prior year period.

The second quarter of 2011 experienced not only more favorable markets generally, but specifically to Blackstone, it was also a period where we entered the catch-up phase for our largest real estate funds, which generated $450 million of performance fees in the year-ago quarter, a large part of which would have been accrued across several quarters and not just one, but for the impact of that catch-up.

At the end of the second quarter, the firm had $49.1 billion of assets currently earning performance fees, generating $1.75 billion or $1.58 a unit in accrued performance fees net of compensation.

The accrued performance fees are essentially a receivable, such that the entire $1.58 would convert to distributable earnings, payable to unitholders if we sold those investments at the end of the quarter.

We also ended the quarter with $1.35 billion of cash and liquids, and $2 billion of illiquid investments, which, in addition to the performance fee receivable, equates to $5.1 billion or $4.61 per unit of combined value on the balance sheet today.

The illiquid investments of $2 billion are largely in our private equity and real estate funds, and are held at a total of 1.2 times their original capital cost, which demonstrates not only diversity and consistency of returns, but also the growth of our capital base, even over an extended period of disappointing market conditions.

Blackstone continued to be very busy over the quarter, and has committed or deployed $8.2 billion of capital year-to-date.

One-third of that capital was committed outside the United States, which provides insight into where opportunities can be found, and is made possible by the unique global reach of the Firm and the strategic advantage of our patient capital fund structures, particularly in a world of turmoil.

Similarly, capital formation for Blackstone continues to be very strong, and provides perhaps the clearest evidence of the growing concentration of allocations of sophisticated investors attracted to our leading track records, brand, and scale.

The Firm had gross organic inflows of $17 billion or 10% in the last six months alone, and that excludes the additional $10 billion of assets that came with the Harbourmaster acquisition.

In closing, Steve started the call highlighting the strengths of Blackstone's competitive positioning and performance.

We continued by pointing out that we believe greater transparency will enhance investor understanding of both Blackstone's absolute and relative performance.

Alternative managers are the best positioned among all asset managers to attract and manage capital.

Since 2006, Blackstone has grown AUM 174%, which is more than three times as fast as the public traditional asset managers.

In addition to favorable allocation trends, the long-term commitment structure of our funds affords us the ability to navigate difficult markets globally, to adapt to market conditions to find and create value for our investors in many more ways than other asset classes.

The Firm's $121 billion of performance fee-eligible assets presents a unique opportunity for unitholders to participate in our value creation process, which Steve described.

Even without the scale upside of performance fees, the steady cash earnings, generated by our long-term fund structures, produces a consistent cash distribution yield that is two times more than public asset managers.

In other words, while the timing of scale realizations and performance fees are often hard to predict, our model pays you to wait and rewards patience.

Despite superior fundamentals and industry trends in Blackstone's competitive positioning today, Blackstone trades at the largest discount to the traditional managers that it ever has as a public company.

While that gap is inexplicable and certainly frustrating to all of us, our focus is, and always will be, on providing the best returns for our investors and continuing to innovate ways to add value.

What we do know is that with today's step forward, with more transparency, the value Blackstone is creating should now be more evident.

On behalf of all of us at Blackstone, we thank you for your time, and we welcome any questions you may have.

(Operator Instructions) Howard Chen, Credit Suisse.

Thanks for the new disclosure.

(multiple speakers) Just with respect to performance fees, could you provide a sense of what you think is more recurring across that performance fee base?

Maybe things such as dividends and private equity or rents and cash flow from real estate investing coupon, interest from the GSO business.

I think that would be helpful.

Thanks.

Sure.

Howard, if I start with -- if you go back to the disclosure we gave you on page 22 -- and I promise I won't keep pointing back to pages; but as it's new to all of us, it's probably easier.

What we did was a couple of things.

We broke out carried interest from incentive fees.

And generally speaking, incentive fees are realized at an annualized basis.

So if you maintain the level of values in a particular portfolio, and you reach that particular marketing period, you get the realization.

That's the first point.

The second one I would say is, if you look at the breads, which is real estate debt strategies in real estate, and if you look inside the credit businesses for all of their funds, those typically are yielding funds upon which we also get carried interest.

And if that's your point, it's more recurring in the sense that you're getting a 20% performance fee on assets that yield anywhere between 10% and 12% on an annualized basis.

I would also add to that that several of the larger funds in real estate and private equity, frankly, given the decent operating environment, are also generating current income as well.

Great.

Thanks, LT.

And then the next bigger picture question on real estate investing, I mean, given you're such a scale player in the business, we've increasingly seen you invest in larger and more complex transactions than peers, and I guess I see no reason for that trend to end, but I'm just curious -- in terms of the exit, can you speak to how you think about exit strategy in a business where you're separating the pack from the pack, in terms of deal complexity and size?

Well, this is Steve.

You know, in real estate on the buy side, there's obviously a distinct advantage, and there's lots and lots of things to do.

It's doing them all over the world.

And we think in that business, we have a very unique advantage in terms of being able to marshal the largest of our funds in the world to do those transactions.

And not to be underestimated that we have a high level of integrity here.

And when we make deals, we make them.

And so people choose to really like to do business with us in the real estate industry.

And that has been a very strong advantage for us over the years.

In terms of exit, one of the great things about real estate is, you can buy a large highly complex pool of assets, but you can sell them one by one, where there's no complexity at all for the buyer; or you can sell them in a group of assets.

And we can tailor exits to market demand and it provides enormous flexibility on both timing, size.

And we've just done that -- we just sold four hotels out of the whole group.

Somebody wanted those particular hotels.

We got a very good price, we believe, for it.

And our whole approach in that business is to buy properties that are either undervalued or have something that needs to be fixed.

We fix them and then we sell them.

So, the complexity and the scale of the buy does not limit us on the sell.

In fact, Howard, let me just add -- in some cases, it can be an advantage, because we have the scale to set up things like our own REITs and whatnot, that are big enough to go -- to access the public equity markets that smaller investors couldn't do.

And one other thing with that -- not to spend a lot of time on this, but it's actually so much fun -- is that when you buy a big complex thing, you get a discount for doing that, because you don't have the competition either because of that size, somebody else can't marshal that.

When you sell them -- the assets in smaller amounts, you get much, much better cap rates.

So not only do you fix the things up, you arbitrage the value to more normal size, which makes it inherently a very good structure for us.

Very interesting.

Thanks, Steve and Tony.

And just a final one for me.

And maybe sticking with the exit theme -- if the private portfolio performance was flattish and fundamentals held in, then I guess that suggests that you didn't adjust your exit timing.

I know you don't want to liquidate anything prematurely and before its time, but just can you discuss what drives and changes your exit timing assumptions?

Yes, I mean it's actually the real world.

We live in the real world.

And when the real world is slowing down, when markets, last quarter, for example, were down 6% globally, that is not an ideal time to be exiting assets where we have money locked up for 10 to 12 years.

In some cases, the companies aren't quite ready to exit.

But as to timing, that's not exactly when you'd really try and do something, in effect jamming an exit just to get liquidity.

We have no pressures at all for liquidity, other than the fact that it would be great to sell everything as if we were near a market top, which we're not, as the global economy is going through a slowdown and a relative tough time.

So, what we do when we look at exits is see where we are in terms of the improvement of the asset, and are we in an environment which will support a very high exit multiple, either in the marketplace, which looks iffy now because of the difficulty of doing IPOs, or to strategic buyers, who tend to pay higher prices than the public markets.

And I think if you look forward, and if we have a change in the economy for the positive, which will happen, obviously, at some point, that with strategic buyers loaded with cash -- certainly in the US and Canada, Latin America and Asia -- that in that part of the cycle, we will be able to have very, very substantial realizations at surprisingly high prices, which is what tends to happen when the cycle really swings for you.

And that cycle isn't swinging now virtually anyplace in the world.

And so, our job is just simply to wait, keep improving the companies, feeding them capital, getting them to expand as rapidly as they can.

And there is a moment when we will puff these things out.

And normally, over our valuations, it's 20% to 25%, and that's with a mix of a bunch of IPOs (technical difficulty) that are not just strategic sales.

So, I don't mean to be even vaguely defensive about this.

This is really just the way the world works, and we'll be able to produce very strong returns when that happens.

Yes, just a little color on that.

We have our analytics around when we're considering an exit.

And we look at the return to our investors from continuing to hold, versus a return -- versus exiting at that price, regardless of where we are in terms of historic gains.

And you know we have our hurdle rates for that.

And our -- and depending on the risk, we'll assess as, are we getting paid enough to wait, to justify taking the risk on owning the company?

And that's the kind of analytical decision we make.

We make it all the -- we're analyzing it all the time.

And as Tony mentions, one other interesting thing is, is when you're holding a company and you're growing it, it's not like a bad thing is happening.

And in addition, if you're paying down debt, that's really providing a return on your investor's equity, which you will fully realize at a future time.

Understood.

Great.

Thanks for taking the questions.

William Katz, Citigroup.

Appreciate the new disclosure as well.

In the discussion around sort of taking market share, I'm sort of curious if you have any more tangent evidence of gains?

I don't know, expressed maybe as a number of products per LP or maybe another type of metric you look at internally.

And then maybe more broadly related to that, what are you hearing from institutions right now?

Is there a slowing of allocations or any kind of change in the allocations toward alternatives?

So, generally, when we look at market share, we're looking at our flows versus industry flows in that segment.

So, for example, we would look at hedge fund flows, fund to fund flows, then look at what BAMM is doing and get a feel for share.

And that's how we know the share has been going up.

And we can see in each of our business lines, because we manage money from the vast majority of people who are eligible to give it to us.

We've got a feel of who they're giving money to, how much we're getting, whether we're increasing in absolute terms with that account or in relative terms compared to our competition.

We also own Park Hill, which, as you know, raises money for third parties.

And that gives us a good window across real estate, hedge funds, private equity, as to what's happening in the broader industry.

So it's a lot of different data points.

The only thing, Bill, I'd add to that is that even in the market share in the markets we play in, we're not really still statistically significant.

You're looking at our market share, in any one of the markets we play in is less than low single digits.

So that's not a limiter.

What we have seen, though, are the two most recent fundraisings, both in our mezzanine fund and GSO, and the most BREP fundraising is a sharp increase in the diversification of high-quality LPs.

So these recent BREP fund will have almost 40% new LPs over and above the ones that were already there.

And in the GSO fund, it was almost twice as many.

So you can see the allocation differences or trends evidencing themselves in the new fundraisings.

So, for example, in the real estate, assuming we get to our cap of $13 billion, probably the next biggest fund in the world that will be raised in that opportunity class will be several billion.

And our previous fund was $10 billion.

This one would be $13 billion.

Everybody else had shrunken hugely or been eliminated.

So that's an easy class to measure that.

BAAM is easy also because the results are published, and we're significantly larger than anybody else.

And we keep growing.

And most other people in that class are stable to shrinking because those results are public.

(technical difficulty) We can see our growth in credit, also compared to our principal competitor, is the asset class is growing and we're growing very rapidly with that.

So we have a pretty good sense of how to back that up as an assertion.

That's very helpful.

I appreciate the comprehensive answer.

The other question is -- and maybe, LT, just sort of an age-old one, I think, since we've been covering you, is you know (inaudible) the multiple.

Given the dry powder you have, given the diversification of the business, given where the stock is trading, how do you think about sort of cash flows, if you will, obviously your balance sheet is pretty liquid at this point in time.

Any thoughts on reshaping that balance sheet or buyback or other uses?

No, I don't think so.

I think right now we're comfortable with where we've been.

Actually our level of liquidity in the makeup of the balance sheet has been consistent over, frankly, several years.

As you've seen, when given the opportunity, we have been strategic with the balance sheet to make acquisitions to bolt-on things that we think are very strategically important.

You will see in the quarter that we did re-up our revolving credit line, simply taking advantage of the fact that our credit was in demand, our bonds trade very well, we're viewed positively in the credit markets, and the pricing was in the right place.

So we extended that over the last -- we've just finished that about a week ago, for another year.

So it's about $1.1 billion facility at less than our prior pricing, and it actually has some new names in it.

So, we feel good about where the balance sheet is.

We think it's of strategic importance.

At this growth level, I think we're in the right place.

One question you asked that we didn't answer, which Tony, I think, did a very eloquent job of discussing on the press call, was your question about the increase of alternatives by the sources of capital.

And you've seen the results from some of the large pension funds which were running 12 months, I guess, ending July -- June 30th -- 1% to 1.5% returns.

This is utterly unsustainable for the pension fund system.

And as Tony mentioned quite correctly, is that these funds increasingly need to have higher returns, and the only place where you can reliably do it is not in public markets.

It's really in the alternative class.

And we've seen a renewed interest and emphasis.

There are special accounts, separate accounts being formed, institutions talking to us about how do we get higher levels of return with safety, because we really need this stuff.

It's not -- you know, this isn't like college where these are elective.

This started off as an elective course alternatives.

And it's moving into core curriculum, because if we can keep giving these very high returns with very low downside risk, then you're going to have this continued shift to alternatives, just because there's no place else for these funds to actually go on a risk-adjusted basis to beat their hurdles.

And as Tony said, nobody is looking for higher taxes to put money into these (technical difficulty) any way to outearn it.

And so I think in that sense, the alternative class is well-positioned, extremely well-positioned.

And our firm in particular is the only one that has this very substantial representation and outperformance in all four of the major alternative areas -- private equity, real estate, hedge funds, and credit.

So I just wanted to loop back with you because we didn't answer that one.

Thank you very much.

I appreciate taking all my questions.

Michael Kim, Sandler O'Neill.

First, just given kind of the ongoing improvement in fundamentals across your real estate holdings that you talked about earlier, and kind of the maturity of the portfolios, what are some of the broader factors that come into play as it relates to driving either an acceleration, in terms of selling some of these assets, or kind of just waiting for better exit points, understanding that each investment is different?

Yes, I think, you know one of the things that's neat is that because there's very little building, we have a big exposure to the US obviously, that's because there's virtually no building going on in the United States.

I guess we reported that occupancies improved by 300 basis points.

If you take those types of improvements as you get closer to a full -- you know, more normal levels of occupancy, you tend to get -- if you're just talking about office or any of these asset classes -- you get rent spikes, where rents start going up.

And when you sell those types of assets, at that time period, where there is a perception that rents are going to be going up significantly above trend, you can get much more for those buildings.

So, in effect, we monitor all of these asset classes.

We monitor the particular assets we own and where they're located to see where we are close to that kind of acceleration of revenue.

And we get a much higher price, because real estate itself is levered.

So you get like a double bank on that.

But, you know, Michael, the -- as you get towards full occupancy -- and it's never 100% because you've always got some turnover -- as you get close to that, it becomes an obvious thing for you guys to think about.

That would be the time we'd be selling, because that's when some of the other factors Steve is talking about kick in.

Got it.

And then maybe just one for LT.

It looks like base compensation was up a bit on a sequential basis.

Was that really just mostly a function of kind of continuing to build out the franchise?

Or was there anything lumpy in there that might have related to fundraising or anything else like that?

Just trying to get a sense of that line and the trajectory going forward.

No, Michael, you're right.

Your instinct is right.

It's not actually related to buildout; it was related to marketing activities.

In some cases, when you do fundraisings, there's a decrease in the early time of the fund, because you have an offset for basically distribution fees.

And so the comp ratio will come up slightly because it's mistimed against the actual comp.

And of course, then there's comp with respect to marketing.

So that slight BIP and you'll see it in real estate, for example, because they had fundraising in the quarter.

That's just a one-time event that will then flatten out over that.

But that's what it reflects -- it reflects the heightened business development activity.

Got it.

Okay.

Thanks for taking my questions.

Dan Fannon, Jefferies.

So I guess on the private equity side, if you could talk about kind of the outlook your companies are thinking about for the remainder of this year.

I think, Tony, you mentioned on the earlier call maybe stronger EBITDA growth in the second half of this year from those companies.

And just trying to get a sense of what's maybe driving that or how they're viewing kind of like the current environment.

Yes, okay.

Well, the -- I think you're thinking that the sort of revenues from here have sort of bottomed out and that you get a little bit stronger revenue growth to start with.

Nothing dramatic, but a little bit stronger.

Because it's -- as things -- as some of the leadership issues clarify themselves and one thing and another, and Europe deals with issues, one thing or another.

In addition to that, you've had kind of an interesting commodity cost cycle where it takes a while for those to work through the chain.

But we recently had some lower commodity costs, which are starting to come through the chain now, which you're actually reducing some of the cost of the companies.

So between -- and by the way, some of them also, it just might be natural optimism.

We ask the CEOs to be as disciplined and as skeptical as they can be, but they believe, for the most part, that they've got actions they're taking to -- that will work and will grow their companies.

And so there might be some extra optimism in that.

But cumulatively, those three factors mean that they're looking at a stronger second-half and -- they believe.

Okay.

Great.

And then on the credit side, I think the number is roughly $5.4 billion in credit AUM that's not earning fees currently.

I guess how should we think about that kind of flowthrough kind of rolling up into management fees over time?

I think -- Dan, it's LT.

I think the way to think about that -- we try to break this out to make it a little easier.

So, if you look at the base management fees not earning fees -- they're not kicked in yet, it's $5.4 billion.

Another way to look at it is we go back to the credit business page, you'll see the amount of capital deployed in the quarter.

So in this particular quarter, we put about $450 million to work.

And the way to think about that, that will play through.

I would point out, though, that that tends to be somewhat lumpy.

And $450 million is actually somewhat muted relative to their run rate over the last year.

By the time they finish raising their last mezzanine fund, they were 25% invested from the first closings.

So I would take that number and I would roll it forward.

The investment period remaining on the rescue fund, the last rescue fund, is probably the next -- I think they think by the end of the year, that will close, and the mezzanine fund is in its first of three years.

Okay, great, thanks.

Roger Freeman, Barclays Capital.

Just actually following off that last question, in mezzanine, you have a fair amount of unrealized gains.

Is that -- what's that sort of typical -- I guess you kind of discussed this in the last question, but -- what's sort of the typical cycle for realizing built-up gains in mezz?

Well, it's a couple of things.

First of all, we realize them pro rata when we sell investment by investment, which is different than some other structures that are out there.

So, what you're looking at right now, you're looking at the total receivable, about $176 million in that segment, of which $106 million is related to the mezzanine and rescue fund.

I think that's the number you're pointing at.

That will be realized as we exit some of those investments.

And frankly, it's a matter of time in the particular asset.

It's somewhat hard to predict.

And that's why we decided giving you the receivable over time and you can see its fluctuations.

Got it.

Okay, thanks.

And then for this next rescue fund, is -- it sounds like there's a fair amount of demand for these sorts of products.

I mean, do you think this next one would be as big or bigger than that prior one?

That's certainly our hope and expectation.

Okay.

On BCP V, can you -- I know this was in the release somewhere -- update us on where that is relative to the hurdle rate?

I think it was 11% last quarter.

It was 12% last quarter and it's 13% this quarter.

Okay.

And then just the bigger picture conceptual question.

Do you -- are there any businesses, capital-intensive businesses, within Wall Street firms that don't work for them anymore under Basel II.5, III, potentially Bulker, that you could restructure potentially into funds that those could actually generate attractive returns?

I'm thinking about the leading story a few weeks back about Morgan Stanley considering itself a commodities business, and do you think a potential acquirer?

And I'm not looking for a comment on that transaction, but just conceptually thinking about whether there's opportunities there?

(multiple speakers) Or do you just hire the people and build the funds?

Right.

So, it's a complicated answer and it's hard to generalize.

But I would say that, generally, the capital-intensive businesses part of Wall Street that are ongoing businesses are hard to fit in funds and hard to fit in our firm.

We're not an asset-heavy business.

We don't want to be an asset-heavy business.

We manage other people's money.

And similarly, other people don't want to put money in and have it be there forever.

So it's hard to have an operating business around a fund that has a sunset.

However, there are certainly things we can create that supplement a baseload of capital, and we looked at some of those.

There are also things that these companies -- that the Wall Street firms might sell, ironically, that aren't the capital-intensive businesses, but are the non-capital-intensive businesses that have a lot of value.

Because that's where you really get a lot of the pickup in terms of regulatory capital and capital cushion.

And so there will be some of those trades as well.

Okay, thanks.

Matt Kelley, Morgan Stanley.

Thanks for taking my question.

So given your commentary on the conditions in the backdrop, I'd be curious to get your sense for what really gets us over the hurdle for M&A?

And in the meantime, how selective are you in allocating capital to your portfolio companies for growth, given the backdrop that you mentioned?

Well, on M&A, I think we need to, in general, the corporate executives around the world need to feel like confident about where the major economies of the world are going, and about what kind of regulatory environment and new regulations they're facing, and in terms of the leadership in the key countries.

I mean -- and all those things are sort of up for grabs right now.

And so I don't see a robust M&A market until those things clarify -- which they will.

I couldn't tell you exactly when any more than you could -- you'd probably know better than I would.

But it will clarify.

That I'm pretty sure about.

And at that point, the M&A market will swing up.

We don't actually have to feed a lot of new capital into our portfolio companies unless they want to make acquisitions.

But, generally speaking, on the growth initiatives, they can self-fund those.

So we don't tend to have dribs into the portfolio companies for those things.

But if there's a transformational acquisition that requires a lot of outside equity, we love those because we're a synergistic buyer in an environment where there's not much M&A.

We can sometimes get some pretty good deals.

Okay, great.

And then coming back to the real estate exits, not to beat a dead horse here, but it would be helpful to kind of get your thoughts on, by segment, of your real estate portfolio, who the potential buyers are on your potential exits.

The real estate is such a huge and diverse asset class that one of the wonderful things about the business is you can tailor your exits to almost the size of any buyer of scale.

And so, in laying out what you can do in each of the areas is something that we obviously keep in touch with.

But it's an extremely broad group of potential buyers for virtually every one of the asset classes that we're in.

If you look at the number of REITs, the number of private owners of real estate, the number of institutions who like to buy real estate of the type that we own for income purposes as core real estate, it's a huge number of potential buyers.

And in some cases, they're also strategic buyers and international sort of sovereign wealth fund guys.

So, it's, as Steve said, it's -- and then we -- and the I think I -- I don't know, somewhere, maybe the press call, we talked about it -- and in some cases, we can access the public markets directly ourselves with portfolios and REITs.

So it's a full panoply and we'll see what's best at the time.

Okay, that's very helpful.

And then one final one from me is just in terms of the momentum you're seeing in BAAM, obviously, you're continuing to get in close there and the July 1 subscription number is strong.

Do you think you're accelerating your share gain of that industry?

Is that picking up even more now?

And what are the discussions you're having with your clients there?

I would say that we are accelerating our gain there.

It's quite interesting that institutions in the liquid area really are quite downside-focused, and we provide a lot of unique problem-solving.

We don't just issue a fund of funds.

And we also have all kinds of state-of-the-art technology tying ourselves into the LPs, with reporting other types of services that we provide.

And you can check that the industry produces -- I forget whether it's quarterly or semiannual numbers, in terms of where the different groups stand.

And we're continuing to put daylight between ourselves and the other managers in that asset class.

Most of the other big managers are at best flat and many are declining.

So yes, we continue.

And that's in the hedge fund fund of funds, broadly defined.

In the direct hedge funds, though, there's quite a growth of direct hedge funds.

So I'm not sure the fund of funds industry -- well, the fund of funds industry itself is not growing as fast as the hedge fund industry.

So we're taking share in the fund of funds industry.

And also we benefit at the Firm from the growth in the overall hedge fund therein through our Park Hill area.

We're a very significant marketer of hedge funds to institutions where we have a fee structure, where we get ongoing feed from those clients.

Great, thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

On Hilton, you know, obviously, you guys have been talking for a while about RevPAR and improvement in the outlook, and I guess you've created some equity value there.

Can you just remind us where Hilton is in your portfolios, and how you're thinking about sort of the -- an exit from Hilton?

Marc, it's LT.

Hilton is primarily in three funds.

And so it's in BCP V, it's in BREP VI, and BREP V. The biggest concentration's in BREP VI and the concentrations in BREP BCP will be the second-largest, with BREP V being the third.

And on the balance sheet would be a fourth, which is substantially smaller than the other two.

And in terms of the exits, what we've said is we would expect at some point to take that public over the next few years.

The Company is doing very well.

And as the RevPARs keep growing and we keep opening units around the world, it's -- we also have a terrific management there, led by Chris Nassetta, and the whole investment has got a very good feel to it.

Okay.

Then, Steve, you know, it's just a big picture question.

And I guess it's somewhat related to fees.

But if you look -- to go back to your initial comment about the 14 months of outflows from domestic equity funds, clearly, the world of traditional asset managers is looking at your world more frequently, and there's more of a mainstreaming of alternatives going on.

Are you -- do you expect to see fee pressures in certain parts of the business, or maybe more competition from maybe sensing or seeing any competition from more of the traditional players in the space?

Well, we haven't really seen competition from the traditional players.

At one point, there was some competition from the hedge fund industry that, for the most part, either blew off its left hand or its right hand trying to do this type of investing.

You'll see some fee pressure, just because institutions generally are having difficulty reaching their actuarial returns.

And they're looking for all kinds of different areas -- from personnel cuts in their own organizations, to consolidation of managers, which -- so they can handle things easier at lower cost, which really benefits our firm; to some type of fee pressure on virtually everyone they touch in the institutional money management area.

That's a normal type of thing, when the customer is under pressure themselves.

And the way that rolls through for us is that we tend to get a larger market share of the business; as institutions concentrate, it might hit us a little bit with some fee pressure in some areas.

Sometimes incentives change a bit, where we can make that up with higher performance.

But there's an inexorable move, Marc, to more and more assets in this class, which is a big offset, if you will, from an earnings perspective for a superior manager picking up share.

Yes, I would just -- one note on that.

I would say to the extent there should be cutting, it's in terms for a greater volume of assets.

And net-net, it's better for us.

If I can for a second, I just want to interrupt because I just want to correct something that I said before, Marc, in answer to your question about Hilton, because I just want to make sure that we're 100% accurate here.

So Hilton is primarily in BREP VI.

That's where the largest investment for the firm is.

Second-largest concentration is in BCP V. The third then is that we have a substantial amount of co-invest in that investment.

And then the last piece of it, the last two pieces are in BREP International II and on the balance sheet.

So it's a very pervasive investment at Blackstone.

But everything else we said holds.

Okay, great.

Thanks.

Chris Kotowski, Oppenheimer.

I'm looking at page 23 of your press release, with an eye on kind of assessing the probability of BCP V becoming a carry-generating fund.

And I wonder if this -- is this the same disclosure that we had in your 10-Q's of the past?

Because just when I -- if I look at the MOIC on the realized investments and BCP V, it's [$1.7 billion] now.

At March, it was [$1.4 billion].

And if it's comparable, it would imply like a $1.3 billion realization on only $70 million or $80 million of cost increase?

Right.

Chris, a couple of things.

This is the same presentation.

We made one change to it in response to investors, which was, we used to have a category called Unrealized Investments, and then one called Partially Realized or Realized Investments.

And the conclusion was, the Partially Realized or Realized bundled together was a little bit confusing.

So we break the two apart, so it's either Realized or it's Unrealized.

But in the Realized portion, we don't put the Unrealized portion of something that's been Partially Realized.

So by creating that kind of bright line, if you will, you're right -- the updating of the numbers, if you went and looked at them sequentially, wouldn't make sense.

But we'll give you some background on that on the 10-Q, to give you some color to clear that up specifically, Chris.

(multiple speakers) But that's the difference.

But it's a good question.

Okay.

All right.

It's not that there was a big realization in the book.

No.

No, it wasn't.

Okay.

And then, secondly, what's the dollar amount of the catch-up to cross into carry mode?

You know, the number -- I think the better metric on that, because it -- first of all, that fluctuates somewhat with respect to where you are and where leverage is.

And there's a lot of different assumptions as to how you would get to that.

But I think the better measure is to look at because things aren't sold just on the equity piece.

They're sold on the total enterprise value.

And so the total enterprise value change required to get to the hurdle is 13%.

It was 12% at the end of last quarter.

Okay.

And then, finally, I realize it's hard to comment on, but if we look at the real estate segment over the last 2.5 years or so, I think there have been about $1.5 billion of unrealized performance fees and about $100 million of actual realizations.

Well, you're probably not going to be able to say, but I mean, can one scale at all what one should expect in the year ahead in terms of realizations?

Or you know, there have obviously been press reports about the $22 billion that's up for sale --?

Yes, I mean that report I think was inaccurate or at least characterized what's happening inaccurately.

So we're not actively marketing our office portfolio.

In due course, it will be sold over the next several years.

That's consistent with what Steve said -- you know, the buy it, fix it, sell it model.

Okay.

All right.

That's it for me.

Thank you.

(multiple speakers)

I also think, Chris, just look at the change in the balances with respect to the performance fees.

They're going up at a pretty good rate.

So you can see that the value being created for both the investors in those funds and the shareholders is solid right now.

Yes.

And we did sell some small properties.

We distributed about $800 million in cash to investors this quarter.

That included over $400 million of sales.

And I'm going to assume that there is -- if there is a big sale, in the back of our minds, there is the fact that the last time that Blackstone sold a 20-odd-billion-dollars of real estate, there was a worldwide economic collapse immediately thereafter.

(laughter) I assume this time it's just that the borrowers -- the acquirers are paying good prices?

You know, I think you know it's pretty low interest rates, as money has come back into the US banking system.

The system, certainly with the largest bank, the banks are underlent -- it's an underlent system looking for earning assets.

And this will happen -- don't give us too much credit for prescience, you know.

That would be great if it were always true.

Don't expect a major disposition program here either.

I mean, that's not what we are.

We're not sitting around picking a moment.

We're fixing the properties, we're seeing the cycle ripen, and we'll be exiting in due course.

We get people call us all the time for assets and REITs, want to buy things.

And so, it's really a question of our choosing, not whether we can exit these types of assets.

All righty.

Thank you.

That's it for me.

Jeff Hopson, Stifel Nicolaus.

Okay, thanks a lot.

In terms of the hedge fund of funds, wondering if there's any, I guess, capacity limitations there in developing new ideas, et cetera?

And I think I heard you talk about single-family real estate.

And I'm curious -- it sounds like that's fairly labor-intensive.

So do you have the infrastructure in place?

And when you eventually -- how much do you have invested today?

When you eventually sell, would this be bigger portfolios that you've put together?

And then, finally, in terms of operating costs, and I think real estate and credit, we saw a fairly sizable reduction this quarter.

Just curious versus the first quarter, which is a better run rate.

Any input as to what's going on there?

In terms of question number one, limitation on the hedge fund of funds, we keep actually customizing different types of strategies.

And there appears to be a huge demand for different types of strategies, both between the debt equity commodities, other types of assets done either globally or regionally.

And when you look at all of those different types of approaches, with clients with different levels of risk appetite, that you'll be able to see that there is a very large potential appetite for growth of our services to those institutional clients, with some just getting into the asset class for the first time.

(multiple speakers)

A lot of new entrants.

And a lot of new entrants with that.

And new entrants tend to want to work with some -- with an organization that has a top reputation, because the asset class is often viewed by Boards of Trustees as a little risky.

And so doing it on your own has career risk potentially for people working at these institutions.

In terms of the home purchasing business, you're absolutely right, that there's a limitation in terms of how you manage this thing.

Hold on, I've got a phone call here.

Let me handle that.

So, it's a very labor-intensive local business, because obviously, you've got rental units all over the place, and the furnace breaks or something, you've got to go fix it.

So what we've done is, first of all, we've concentrated in a few regions of the country and where we have the infrastructure.

And that infrastructure has come primarily from strategic partners that already run a lot of rental units, most of them apartment units, but not necessarily exclusively apartment units.

And so we teamed up.

And that's how we do that.

And as we build the infrastructure in new regions where we think there's -- it's attractive in terms of the home price appreciation and the availability of merchandise, some of the different demographic factors and the other things we look at, we then enter new regions.

And this could be quite large, but certainly hundreds of millions of equity -- I don't know how large it will be, but it seems like all of a sudden, it's getting a lot of -- a lot more attention.

And added capital is coming.

When that happens, pricing will adjust.

So we'll have to see how it plays out.

But so far, we are quite excited about it, and we think it's really good for the economy and for the people in the homes and for a lot of things.

So we think it's a really exciting thing to do.

Yes, make no mistake, that the critical variable here is the one you recognize.

And we are super careful about what we're doing because you don't want to have unhappy people in those homes.

You don't want to have complaints.

You want to make sure that you've done your diligence, which is on a very micro level; it's really house by house.

Just buying huge pools to put some assets on and hope it works out, is not our strategy.

Because you can have some bad outcomes there.

So we're putting together in a very granular way an operating approach that will work, combined with the buy side.

But it's really having your infrastructure in place.

It's like any really good entrepreneurial activity -- you imagine starting a firm like ours without a back office that really works, you'll blow yourself up.

And that will be the same thing with some people who are playing around with this asset class as well.

The last question I think you had, Jeff, was about the operating expenses in real estate and credit.

And you're correct -- the run rate in the second quarter is down from the first quarter, which reflects a decrease in business development expenses related to the latest BREP fund, and the closing of the mezzanine funding credits.

So the second-quarter run rate is more reflective of the ongoing run rate than is the first.

Okay.

Great.

Thank you.

Michael Carrier, Deutsche Bank.

If I look at the fundraising that you guys have done has been very successful really across the product areas, and deployment and realizations, particularly in real estate but also on, like, credit, has been also successful.

It seems like the hurdle, and it's partly industrywide, is just on the private equity side.

So when we look at the dry powder, that's where you're heaviest.

And when we look at the rate of deployment, it seems like it's been a little slower.

So when I think about next year, two years, you still see attractive opportunities out there.

Are you looking at things differently in terms of the types of transactions?

And do you need some clarity on the macro front in order to get more active?

I think what happens is that your ability to typically set up deals is correlated to M&A volume.

And M&A volume tends to dry up when economies go down.

It's like a cycle that never changes.

There are always interesting things to buy in the private equity industry.

There's always some country that tends to be out of cycle.

There are always some assets that get sold on a distressed basis.

There's always some assets that need to be sold for liquidity reasons.

And so, there's always a steady stream, but you have these peaks and valleys.

The valleys tend to occur when economies are weak or going down, because nobody typically likes to buy an asset and find out that, six months to a year later, because its earnings went down or the markets went down, then you've bought an asset that's worth a lot less than you paid.

So, the experience we've had over sort of 26 years doing this, is that you expect investment rates to be somewhat lower in times when things are going down.

And when you hit the bottom and it starts coming up, that's the time when you want to be deploying maximum amounts of money, if you were a market timer.

And we actually try to be a bit of market timers.

Some things you can buy when things are down that are readily buyable -- more energy assets and things of that type.

You know people need capital and you can fulfill that need, and you can buy it cheap and that's our business.

But if you're looking for just a steady investment rate, it does, of course, fluctuate with overall economic conditions.

You know, Mike, we put $2 billion committed and invested in the first half of this year in private equity.

That's a lot.

That's a pretty good level.

The fund size won't support much more than that on a sustained basis.

But -- so that's one I would say.

Second, I would say it's lumpy.

So that you can -- one deal can be $100 million of equity or something.

And it's waiting until you get close to a deal and then maybe you missed it, you don't invest quite so much that quarter.

That quarter, you might do two or three of them, and all of a sudden, it looks like a huge investment rate.

So just remember that it's quite lumpy.

And real estate, of course, you're putting up money in sort of record pace right now that's unsustainable.

Yes, okay.

That's helpful.

And then just on the exit side, so just focusing on Fund [V] and private equity, can you -- are there certain investments -- because obviously, if the environment gets better, it's going to lift all boats.

Like, that's just better for most investments.

But are there specific investments that the teams are working on that can drive greater efficiencies, drive stronger revenues?

Is there anything that you can highlight that are somewhere like the core holdings in those -- in that fund?

Well, we always -- you know, good times or bad, we try to get as much efficiency and drive as much growth as we can.

So we've been at that, and it's one of the reasons right through the downturn that our Companies grew EBITDA and grew revenues in '08 -- 2008, 2009, 2010; they continue to chug along.

So I can't single out anything in particular that's new and different that we weren't doing.

Okay.

All right.

Thanks, guys.

This brings us to the end of our question-and-answer session.

I will now hand the call back over to Ms. Joan Solotar for closing.

Please proceed.

Great.

Thank you, everyone, and look forward to following up after the call.