Blackstone Inc (BX) 2014 Q2 法說會逐字稿

Good day and welcome to Blackstone's second-quarter 2014 investor call.

I would now like to turn the call over to Joan Solotar, Senior Managing Director, Head of External Relations and Strategy.

Great.

Thanks, Patrick.

Good morning, everyone.

Welcome to our second quarter 2014 conference call.

I'm joined today by Steve Schwarzman, who is actually calling in from out of the country, Chairman and CEO; Tony James, President Chief Operating Officer; Laurence Tosi, CFO; and Weston Tucker, Head of IR.

So earlier this morning, we issued our press release and slide presentation illustrating our results.

Those are available on the website and then we're going to follow-up with the filing of our 10-Q in a few weeks.

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

Actual results may differ materially.

For discussion of some of the risks please see the Risk Factor section of the 10-K.

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

We'll also referred to non-GAAP measures on the call and for reconciliations back to GAAP refer to the press release for those.

And I would like to remind you that nothing on the call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone fund.

The audio cast is copyrighted material and may not be duplicated, reproduced or rebroadcast without consent.

So quick recap of the results -- we reported record economic net income, or ENI, for the second quarter of $1.15.

That's up very sharply from $0.62 in last year's second quarter.

Performance, as you may have seen already, was strong across the board with greater appreciation in the underlying portfolio assets as well as higher management fees.

Distributable earnings were $771 million for the second quarter, or $0.65 per common unit.

That's more than double last year's second quarters distribution.

We will be paying a distribution of $0.55 per common unit, and that's to shareholders of record as of July 28.

So thanks all who are on the call and also those who attended our recent Investor Day, either in person or via webcast.

But if you missed it, we have it posted on our website so you can scroll through by segment.

And with that, I'm going to turn the call over to Steve Schwarzman.

Thank you, Joan, and good morning and thank you for joining our call.

Our results announced this morning reflect one of the two strongest quarters in the firm's history, in all respects.

Our ENI of $1.3 billion was our second best quarter ever, up 89% from last year.

It indicates the significant value we are creating across our platform.

For the past 12 months, earnings were $4.3 billion.

I'm going to repeat that.

Our earnings in the last 12 months were $4.3 billion, or $3.76 per unit, which is a record for any 12 month period for any publicly listed asset manager in the world.

If we look at the growth in earnings from year-end 2007 before the financial crisis, we've compounded at a rate of 12% per year and grown our assets three times despite the impact of a once-in-a-generation global financial collapse.

Despite this challenge, Blackstone has shown impressive growth in earnings and AUM.

In fact, one of the strongest performances in the financial sector in the world.

Our current cash earnings also increased sharply, as Joan mentioned, up 128% in the quarter.

Realizations continue to pick up as we've indicated they would on previous calls, exceeding $13 billion in the quarter.

While disposition activity has been accelerating to record levels, we've also been investing record levels of capital creating new value and we're getting additional balance from having more assets with a current yield, or annual performance fee payout, due to significant growth in our credit and hedge fund solution businesses.

In effect, all is going well [distrangler] or some would say very well.

The strength of our results today is entirely the results of our singular focus on delivering good investment performance to our limited partner investors.

And our returns, frankly, have been some of our best yet.

In private equity, our portfolio rose 8.4% in the quarter and 28%, as Tony reported, over the past year, driven by strong portfolio operating performance.

Revenue and EBITDA trends in our Company is some of the best we've seen in years, up 8% and 11% respectively.

Our 2005 vintage BCP V main fund crossed its preferred return threshold in the second quarter and is now in catch-up, as Tony and LT explained, and you'll hear more on that later.

Our real estate funds also continue to generate stellar returns with the portfolio up 6% for the quarter and 28% -- surprisingly, the same number as private equity for the last year.

Strength has been broad-based in real estate with all of our major subsegments gaining significantly.

Our credit funds had gross returns between 2% and 5% for the quarter and 16% to 31% for the last year, which is actually quite astounding for credit investing, as Tony said, in a 2% world.

And our hedge fund solutions business, or BAAM, produced a 2% composite gross return for the quarter and 11% over the past year, also quite favorable.

One of the current debates, given strong markets particularly in the US, is around managers ability to find new, attractive investments to deploy large-scale capital.

At Blackstone we've invested significantly over the years developing global capabilities where our local offices are fully integrated into the broader platform.

In this way, we can identify opportunities anywhere in the world and move capital to where they are most attractive.

Our fund structures also give us great flexibility around when and where to invest and our scale lets us do deals that most others simply can't do.

As such, we continue to invest record amounts of capital deploying $6 billion in the quarter and $20 billion over the past year with an additional $8 billion committed to deals but not yet deployed at quarter-end.

That's a total of $28 billion.

Roughly half of our investments were outside the United States, so I want to repeat that because it is really an important thing.

Roughly half of our investments were committed outside of North America.

In fact, we've already invested or committed 34% of our new European real estate fund as of quarter-end and 27% of our new Asia real estate fund, and we're not even finished raising it.

In credit, 50% of our backlog is in Europe where we see a lot of interesting opportunities very much as we have in real estate.

So despite the challenges that exist today, we're investing in some regions and asset classes, I'm excited about the opportunities we are seeing.

Our capabilities are greater today than at any time in our history and our sustained high-pace of capital deployment is building the foundation for future value.

Due to our active pace of deployment, we continue to raise new money investors.

Despite the sharp increase in realizations, we again, grew our total AUM by greater than 20%, ending the quarter with $279 billion of AUM.

In the second quarter we raised $14.5 billion in capital bringing us to over $62 billion in gross inflows for the past year, which was predominantly organic.

Just so you don't miss it, $62 billion in gross inflows for the past year.

The monies we've raised over the last 12 months equal as much as 50% to 100% of the entire AUM of many of the publicly traded alternative asset managers.

And we have several significant fundraising initiative currently underway in virtually all of our businesses.

In real estate, our core-plus initiative is in early days with good momentum.

We started with a number of separately managed accounts and we now have launched our first US-focused co-mingled fund.

We also are having active discussions for additional SMA's in Europe and Asia and we think this combined platform could exceed $5 billion from a standing start within the next year.

Our -- and by the way, I think we believe it's going to grow a lot bigger from there if the trends remain consistent.

Our current global flagship fund, which started at $13 billion in size is now nearly $15 billion on its own, $16 billion with co-investors, due to favorable recycling provisions, and it will likely grow further.

At our current investment pace, we're likely to be back in the market with our next global fund early next year, which gives out a fund deployment life of about 2.5 years.

Our Asia focused real estate fund continues to march along and has raised $4.4 billion and we expect it to hit our cap of $5 billion.

Our debt strategies business is expanding with additional capital raised for our liquid CMBS investment vehicle as well as our commercial mortgage REIT, Blackstone Mortgage Trust.

In private equity, we've got a very busy year.

We commenced the fundraising of our second energy fund for which we're targeting $4 billion-plus with an expected first close in the fall.

And Strategic Partners, our secondaries business, is making great progress on their new fund, benefiting from the synergies of being part of Blackstone with $3.2 billion raised on our way to the cap of $4.4 billion.

That's nearly twice the size of the previous fund before they joined Blackstone.

In credit, investor demand remains strong and we have inflows into our hedge fund vehicles as well as several separate account mandates from large investors.

We've also just started the marketing process for directed lending fund in Europe, given the opportunity set there.

And lastly, BAAM continues to take share in the quarter with $2.3 billion of fee-earning net inflows, including July 1 subscriptions.

This included an additional close with the new GP fund interest, which is now $2.3 billion in size, as well as the launch of our second 40 Act fund, which raised $300 million just in the quarter.

So there's a lot going on for the fundraising perspective.

And as Tony said, this isn't episodic anymore.

This comes from all over the firm on a reasonably consistent basis.

And I'm confident on the firm's continued growth trajectory, even with our heightened levels of realizations.

Our second-quarter realizations with [$13] billion included several strategic sales as well as five public market dispositions, one of which was our first sale of Hilton shares.

We also successfully executed a loan against part of our Hilton position, which returned over $2 billion of capital to our limited partners, helped preserve future upside on the shares, which continue to perform very well.

Hilton's current share price equates to a multiple of 2.8 times our original investment and implies a total gain of almost $12 billion, which we believe is the largest private equity gain in history.

We also brought Michael's public in the quarter, although we didn't sell down any of our shares, and we have three other companies on file for IPO's with more to come, markets permitting.

We now have $32 billion in public equities and our private equity and real estate funds, which will sell down in an orderly basis over time.

We also have a substantial portfolio of office assets we're in the process of liquidating.

You've probably seen some news reports on the pending sale of more than $2 billion of our Boston office assets.

And in credit, we continue to see realizations out of our first mezzanine and rescue lending funds, in many cases as our borrowers call us out at a premium in favor of lower cost financing.

Looking forward, our realization momentum is significant.

And given our investment performance, the positive cycle of the business continues with our LPs returning those dollars to us in newly raised funds.

In summary, Blackstone 's results continue to demonstrate the unique and compelling strengths of our business model.

I believe we are the best positioned firm in the fastest-growing part of the asset management business with the most recognized and most trusted brand name.

Our investment performance is outstanding and is driving record levels of demand for our products, resulting in sustained, double-digit AUM growth, at least double to triple the rate of almost all traditional asset managers.

And I believe there's much more to come for Blackstone as each of our business lines introduce exciting new investment products, which will appeal to potential investors.

I foresee continued, controlled expansion of the firm on an organic basis consistent with us maintaining our unique culture of meritocracy, hard work, unflinching integrity and service to the public and all of our constituencies.

The alternatives are evolving as a publicly listed class and have become a required course in financial services investing, not an elective, and Blackstone is the core curriculum with the global leading platform each of the major asset classes.

Thank you for your support.

And with that, I'll ask Laurence Tosi to take over with a review of our financial results.

Okay.

Thanks, Steve, and thank you, everyone, on the call for your continued interest in Blackstone.

I would like to begin my comments today by addressing what appears to be a couple common misconceptions about alternative managers in general.

First, the firm's cannot create value and realize it at the same time, that asset growth is inherently constrained by returns of capital, or that firms cannot be both a smart buyer and a smart seller at the same time.

And finally, that our results are more volatile than the assets we manage.

Our performance, we think, over time shows why these assumptions are unwarranted.

For the quarter, Blackstone had distributable earnings of $0.65 per unit, more than double the prior-year period, bringing the last 12 months to $2 per unit as we continue to realize seasoned investments while continuing to invest and raise new capital.

Strong returns across all of our investment platforms drove 61% growth in ENI to $2.1 billion year-to-date.

Importantly, realized performance fees of $1.1 billion for the first six months, were up 85% year-over-year.

Following 11 sequential quarters of increases, we now have $4.2 billion in net accrued performance fees, of which roughly three-quarters is either in public equities or assets that are pending exits.

Another way to look at what we call the compounding effect in our financials is the fact that with approximately the same level of fund appreciation as the first half of last year, the first half of this year produced record ENI and Distributable Earnings, up 61% and 72% respectively.

All indications are that we are actually at the early stages of exiting a number of scale assets, which means $2.51 per unit of the net performance fees is associated with public holdings or pending exits, which should become realizations in the foreseeable future.

What we are seeing is not just market-driven, nor is a temporary.

You can see the long-term fundamental trends at play in private equity, as Steve mentioned, and in our BCP V fund, in particular.

Private equity funds achieved 8.4% appreciation in the second quarter and 28% over the last 12 months on the 11% growth in EBITDA that Steve pointed out, well ahead of the S&P average.

BCP V, the industry's largest fund, generated 10.5% appreciation in the second quarter alone and 34% over the prior year.

And it reached its 80/20 catch-up phase of performance fees for the first time.

To give you some specific numbers, the fund BCP V generated $579 million in revenues and $487 million in economic income in the quarter.

Of those amounts, $274 million of those revenues and $225 million of the economic income are related solely to the catch-up.

Additionally, and importantly, the fund generated $174 million in net realizations.

BCP V is currently 34% of the way through the catch-up and needs 13% appreciation for a $2.5 billion increase in value to reach full carry.

While we generally guide you to a 40% to 45% composition ratio on many of our draw-down funds, some of the larger pre-IPO funds have lower compensation ratios as partners sold carry and exchange for Blackstone units.

This is the case in BCP V where we currently estimate 80% of the carried interest generated will go to unit holders.

This lower compensation ratio obviously has a favorable impact on operating margins, which was 59% of the quarter.

Consistently strong AUM growth also continues to positively impact our performance.

There are two ways Blackstone's assets grow, value creation and inflows.

Over the last year, the firm grew $37 billion by value creation and $62 billion by gross inflows for a combined $100 billion from these two drivers.

That is precisely how we were able to grow AUM 21% and fee earnings 23% in the past year, despite returning $50 billion in capital to investors.

We also view the $50 billion return as an asset as most of our LP's have to put return capital back to work to meet investment targets.

In fact, almost 90% of our LP's invest in successive Blackstone funds and history shows the returns of capital are highly correlated to fund demand, explaining why all of our major fund raises have sold out over the last few years and why Blackstone itself has grown every single year since inception.

You can return capital and grow.

Despite $20 billion invested over the last year, our dry powder managed to grow to $45 billion giving us plenty of capital to leverage the unique investment capabilities that we have built.

Of the $11 billion we have put to work in the first six months, 43% of that were in funds that did not even exist 2007 and almost half was outside the US, something we were not capable of achieving just a few years ago.

We can be both a profitable seller and a discriminating buyer at record levels at the same time, capitalizing on our unmatched breadth of strategies, regional presence, vintages and assets, sometimes within the same fund.

It will never be the case at Blackstone that one fund needs to lose when another fund wins.

That is why Blackstone's fund returns are more balanced with higher growth than the markets over time and are less susceptible to short-term market fluctuations than investors think.

When we look to invest, we look at long-term fundamental trends, not short-term market prices, because all of our funds are designed to have flexible mandate and patient capital that allows them to be consistently buying, creating value and selling for above market returns.

That is what makes Blackstone different.

It can all work at the same time.

That is the way the firm was designed with the core mission to build by constant innovation and develop the balance set of world-class investment platforms that can use patient capital and operating expertise to outperform across all cycles.

And with that, we'd be happy to take any questions.

And, operator, we are ready for questions.

But if I could remind everyone to just stick to one question the first go round and then you are happy to -- we're happy take your second and third and whatever on the second round.

(Operator Instructions)

Luke Montgomery, Sanford Bernstein.

It looks like the -- in the aggregate industry data suggest that PE deal multiples have spiked in 2014.

I think by one vendor it was 11.5 times during the first half of this year.

And that's up from 8 times in 2009.

So that's been accompanied, obviously, by easy debt financing and the median debt percentages now around 70%.

Given the amount of dry powder you've been sitting on, it's encouraging to see you put $2.2 billion to work in the quarter.

That's a good pace but your firm hasn't been shy about calling out the pitfalls in the investor environment.

So just really wondering how you're staying disciplined in this environment, how we can get some confidence that we might not have another BCP V coming down the pike?

Well I was okay with you until you added that last clause.

BCP V is going to double our investors money on $20 billion.

I think it will be a spectacular success and our LPs are very happy with it.

So let me just start with that.

In general, values are high.

I think the last cycle was challenging, not so much because the values were high, which they got high in 2007, but had we not had a historic meltdown of all meltdowns, you would've had very different investment results too.

It's too simplistic to just look at values.

You've really got to look at what you're buying.

And I would say, and I can't comment on the industry because I think there's a lot of stuff which is going for too high a price driven by too much leverage, and of course our job is to not chase those.

What we are investing in, and we're finding a lot of good opportunities, is companies that need capital to grow.

So they have very strong organic growth.

And like any company, it's a little simplistic to say well that's a bad -- company X is a bad deal because it has got a 20 PE and company Y is a good deal because it's got a 15 PE when company X might be growing twice as fast or three times as fast.

So markets pay and values will reflect growth rates.

So we're investing in much more than before, higher growth companies, and I don't think those multiples are particularly pricey often for the growth.

So that's one area.

The second area is we are putting work in -- we're putting a lot of money to work in new-build stuff.

So we might be building a pipeline or a wind farm or a power plant or somewhere.

And in a sense, if you look at trailing multiples, that's an infinite multiple because we're putting money to work in a company that doesn't exist.

But the other sense is we're buying assets at book value and assets that we believe can earn -- will earn a very nice return on equity, much higher than the cap rate, if you will, that we'll sell that asset for once it's developed.

So we'll capture, not only the profit of the higher return while we hold it, but then we'll get a higher multiple on sale because we'll be selling a cash flow at the higher multiple than we went in.

So I think we're finding some interesting things to do.

They're not traditional public-to-privates of mature companies without a lot of value creation.

In general, everything we do, everything, is dependent on value creation.

So the one big sort of [LBL] we did, Gates, is a company where we think with our -- we have it with our super star, fantastic manager, Dave Calhoun, we can -- working with the management team that's in place Gates, which is very solid, we can create a lot of value to that company that hasn't been created yet.

And it's just a great company -- great business with great market positions.

So -- and by the way, at the right part of the cycle.

So we like that business a lot and we have a lot of co-invest in that business and a lot of our very sophisticated institutional investors looked at that and joined us in putting money into that Company.

So we had -- if you're worried about what we paid on that, there's a lot of market value, validation from sophisticated third parties.

So all in all, we feel very good about what we're doing.

Okay, thank you very much.

Bill Katz, Citigroup.

Maybe a bit of a narrow question for today's call but LT mentioned that on the BCP V you have a favorable margin opportunity as that moves further along, just given the dynamics between carry versus ownership.

When you look at the second quarter earnings within a [few] late earnings, looks like you had a little bit of elevated comp and other expenses.

I'm wondering if you could maybe walk through some of the dynamics there and how you see the dynamic between just the seasoning of the realization opportunity versus maybe new investments you need over the next 12 to 18 months?

So a couple of comments.

I'll take it in reverse, Bill.

I think the comps generally in line the fee comp related ratio tends to be around 49% to 50%.

And I think that's in line with where we've been for some time.

I think the difference in the non-compensation operating -- or non -- or other operating expenses or non compensation was really related, Bill, to business development expenses.

So we had some fund closing and some fund initiation expenses that were one-time in the quarter.

Of course, those fences will come up from time to time as other funds close.

But if you back out bond interest and business development expenses, the growth rate on our non-comp or other operating expenses is 4%, which is less than half of the growth in our fee-related revenues, which is about where we've been over the last couple of years just on a discipline basis.

And I expect that to be the case going forward.

We don't have any foreseeable large increases in basic operating expenses going forward.

Okay.

That's helpful, thank you.

Sure.

Michael Carrier, Bank of America Merrill Lynch.

LT, just on BCP V, you gave some detail but you went through it relatively fast.

So I just want to understand, in terms of the 80/20, what portion of the catch-up we saw this quarter.

And then I think I got like the 13% in terms of getting that further catch-up.

But I just wanted to make sure we got the details of that because, obviously, it will be important over the next couple of quarters.

Sure first of all, Mike, my partners are chuckling at me because that was for me relatively slow.

But I'll try again.

So the way I would look at the quarter is about 50% of the revenues and the economic income in private equity for the quarter were related to BCP V. About a third of the revenues and economic income in the segment were related to just the catch-up piece.

And that's how I look at it.

So, to give you roughly speaking, BCP V's revenues for the quarter were $580 million, just the catch-up piece was $274 million, the economic income was $486 million and the catch-up portion of that was $224 million.

Okay.

That makes sense.

I think -- I was referring more to the forward-looking, meaning.

I think you mentioned that if you had another 13% increase in the fund then that would reach full carry.

So I'm just trying to understand where the fund is and then how we would get to there.

Why you had that gap in order to get to the full carry?

Sure.

First, Tony had a question which was he asked what the realizations were so that the net realizations in the quarter, which is investment income and net realized performance fees, were $175 million.

So there's cash carry coming out of the other fund.

And that's net of compensation and expenses.

Okay.

So, Michael, going forward, the numbers I gave you was in order for the fund to reach full carry, you need 13 percentage points of appreciation above the hurdle.

That's about $2.5 billion of appreciation.

If we were to get to the full 13%, there'd be about $1.7 billion of carry generated to get -- during that period, during the catch-up, and of which I said 35% of the catch-up we have already been through so 65% remaining.

Is that helpful?

Yes, got it.

All right.

Thanks a lot.

Marc Irizarry, Goldman Sachs.

So just one question on private equity and I guess two parts.

First is on Hilton and the loan on the position.

Is that unusual for your private equity business to take out a loan on the equity?

And maybe you can help explain how that maybe can enhance returns to LPs and if that's unusual?

And then as it relates to other exit opportunities in the PE funds, how do you think strategic M&A, just given what we've seen in some big headline deals in certain industries, what's sort of the outlook for strategic M&A exits for you guys?

Okay, Mark.

It's Tony.

I'd say that recapitalization as a general category are not at all unusual.

And with private companies sometimes it will be leave the same leverage at the operating company but you'll do a holding company debenture of some sort and payout of dividends.

In a sense that's a -- with public companies, you have the option because they are publicly traded securities and doing more of a margin loan.

And so as our portfolio shifted from predominately private to a lot of public positions, some of them quite large, I think you'll see some more of that here and there.

And the way it -- and what it does, of course, is it arbitrages a little bit of cost of funds.

So we can borrow a margin loan at very low interest rates -- LT could probably give me a specific one but I don't remember it off the top of my head -- and replace with that, and give that back to our LPs that are looking to get 20% a year return.

So by arbitraging that, they are very happy.

And even the pref on our funds, which was in the old day the preferred return was set at about government bond rate.

Today it is like 8% government bond rates are 2% or less, it's gotten -- so the pref, the preferred return, has become a really significant hurdle.

And so if we can borrow at much less than the pref, it allows us to accrue carry faster on the remaining gains.

So there's some interesting things about that and so that's why we do it.

So as a general category of things to do, it's not unusual.

But we haven't done a lot of it in this particular forum because we haven't, until recently, haven't had big public positions.

By the way, we could sell stock too but we love the company and the company is doing spectacularly well.

So we're acquiring what we think is a lot of value still in that equity.

So this allows us to sort of have our cake and eat it too, get some money off the table at very low cost and continue to have 100% of the upside of the stock.

So we sort of like that.

On the strategic market, we're clearly seeing the strategics come back and I think you should expect that, that will accrue benefits to our exits over time.

And I would expect more of our sales -- the evolution of the form of exits start off when the credit markets were the first thing to rally.

And so it started up with recapitalizations and then the equity markets rallied and so we did a lot of IPOs and secondaries.

And now the strategic M&A is coming back just later in the cycle and more of our exits will shift to that, including some companies that are already public, of course.

So some of these things -- or have been recaps.

So these things can go together.

But that should be a beneficial trend to us and it feels like it's still at the early stages of that.

Next question?

Michael Kim, Sandler O'Neill.

So your cash continues to build.

You just raised some debt and the value of your GP investments continue to rise as well as season.

As your funds increasingly exit some of those investments, just wondering does the thinking change at some point in terms of still retaining capital for investment spending versus maybe looking at potentially changing the payout ratio?

This is Tony.

We payout about 85% of our Distributable Earnings and I think that's kind of -- we feel comfortable with that ratio at this point in the cycle.

We like to retain some earnings because we have -- in my time at Blackstone, I don't think I've ever had seen as many really exciting new products and new initiatives that we have today.

So as we grow bigger, the irony is we have more and more exciting new things to do.

And each of those things takes alignment of interest from our LPs, and therefore skin in the game and therefore capital.

So when I look forward, some of the biggest -- some of the new things we have can be the biggest businesses we have in AUM.

At core-plus real estate, for example, can be gargantuan and we have some other really, really interesting things in other businesses.

So we're optimistic, if you will, that we've got tremendous growth needs opportunities ahead of us and that will require capital even though, as you point out, our traditional portfolio has been maturing.

So we're going to continue to retain capital at this rate unless something significant changes in the outlook.

I would add to that though, Michael, that exactly what Tony said.

I think we feel really good about where we are.

We had a blowup bond deal earlier in the quarter, obviously $2.7 billion in cash and corporate investments, liquid investments, is a good place to be.

The A-plus rating -- we are solidly middle of that range.

In this quarter, to get to the 85% payout ratio, we did payout about half of the gains that we had on our investments.

So when we have a good realization quarter, we obviously get our return to capital.

Then we had about $220 million of actual gains realized cash in the quarter and about half of that we paid out to get to the 85%, which I think, frankly, reflects both our confidence in the forward operating outlook and in the balance sheet and having enough capital to do what Tony just referred to.

Okay.

That's helpful.

Thanks for taking my question.

Dan Fannon, Jefferies.

One more question on some of the BCP V metrics, LT.

On the comp ratio, in the favorable to you guys, is that just during the catch-up period or is that throughout the life of the fund?

No, Dan, that's for the whole fund and it won't always be consistent.

But if the fund plays out over time, it should be -- and it's all deal by deal, Dan.

So it's not (technical difficulty) exactly over time, it should be 80% whether we're in catch-up or whether we're not.

Okay, thank you.

Thanks, Dan.

Glenn Schorr, ISI.

Maybe just a quickie.

Fee revenues up 7% year-on-year despite 19% fee earning asset growth.

Is that just a function of geography of what's being -- what's -- where you're exiting and where the new money flows are coming?

I think it's partly mix and where the new inflows are coming.

And some of the inflows also are not yet fee paying.

So that's really the impact.

But something could be a fee earning asset but not fee paying?

Yes.

So just looking at the roll-forward of the fee earning assets, you had year-over-year a higher mix of areas like in credit -- well, overall I think it was mix.

Mix.

It's mix.

Mostly mix but that ebbs and flows.

We also have a number of products where you have one -- they are fee paying assets but there's only one fee for committed and uninvested and then that fee jumps up once the assets get invested.

So when you have a lot of new funds with that kind of money, obviously it starts off at lower fee [erodi].

In general in business, there will be some mix changes, but in general in our business, if you look at business line by business line, we are not seen significant price-cutting or fee reductions.

I didn't think so.

I was just curious on the mix.

I appreciate it.

Thank you.

Robert Lee, KBW.

I guess maybe it's a little bit of a technical question for LT but if the memory serves me, I think FASB recently past a rule that on a GAAP basis, at least, everyone's going to have to go to method one.

So should we be thinking there's going to be any change though in your financial reporting, at least to the public?

It's not going to change ENI or what not?

So the ruling is not definitive.

They're still working through the application of the rule.

Obviously we've been as the leader in the market, we've been intimately involved in the discussions.

I've met with the FASB twice directly on this specifically issue to work through both when the rule was being promulgated as well as its application.

So the application phase is yet to come out, Rob.

And so we'll see how it applies.

There are some interpretation of the rule as written that might not require us to go to what you would refer to as method one, which is accrual of performance fees only after all the capital is returned.

Even still, if that happens, we'll have all the same metrics.

It's just that our reconciliations to GAAP will change if that happens.

So I don't see any impact.

By the way, if it were to go through and it were to have impact the impact that our GAAP numbers then would have that type of accrual, it wouldn't be until 2017.

And I would like to point out that the two public managers, Fortress and Oak Tree, that are on that basis today also show ENI on the same basis we do.

So I actually think while it will be a lot more work, it will be the exact same results and it won't have any impact on how they're reflected.

Great.

Thanks for taking my question.

Sure.

Patrick Davitt, Autonomous.

I want to talk a little bit about your discussion of the growth capital opportunities you're seeing.

Can you compare and contrast how you approach something like that relative to how a VC firm would?

And should we take that to mean that you're now more comfortable in taking noncontrolling stakes then maybe you had in the past?

Well we've always taken noncontrolling stakes.

And really our positioning in the market has always been the big fund that can certainly do big deals but basically does the full spectrum of stuff.

And in fact, large buyouts, and I think that's -- let's just say total enterprise value over $3 billion -- has never been more than about 25% of any fund that we have done.

So we've got a long history of doing sort of smaller stuff growth -- and more growthy stuff.

And of course, outside the United States, if you are talking about Asia for example, it's almost all growth stuff and a lot of it is noncontrolled.

And some of the growth equity we are doing is controlled.

They're just companies that have a lot of growth and tremendous opportunities.

So I'm not sure that controlled is the dimension to think about and we're certainly not becoming a venture firm, however.

These are all companies with well-defined business models, well-defined -- and profits and market position and customers and development management team and all.

Our skills set is not finding the next Google or understanding how someone is going to invent the next semiconductor and betting on science or anything like that.

That's not what we're doing.

Okay, great.

Thanks.

Devin Ryan, JMP Securities.

I just have a question on the longer-term outlook for fund raising.

At the recent analyst day Steve hosted, a really interesting interview with Mario Giannini, the CEO of Hamilton Lane.

I think one comment that stood out to me, at least, was just that many institutions are moving from a zero allocation to alternatives to something.

And in some cases the example I think that was given was moving to a $50 billion made in investment.

So it would be great to maybe put some perspective around how large you think this untapped opportunity is where institutions are still exploring the merits of alternatives but just aren't there yet.

Maybe it's more outside the US or is this example that was given maybe more the exception than the rule in your opinion?

Well I'll take a little of that.

I mean I was last week in a foreign country with a capital pool that was in the $50 billion to $100 billion range that has no exposure to the alternative class and wants to do it.

They've made a decision to do that.

I think we're well-positioned to be in their first group of companies that they give money to.

These things are happening periodically where not being in the alternative asset classes is really mathematically sort of been unsound for decades.

And so people can see that, that's a smart thing to do mathematically.

What that's leading to is new pools of capital that have been created or have been managed with a very heavy emphasis on debt are switching.

And they start small and then they go up to 10% to 20% allocation.

And existing investors are increasing their allocations and the retail class, which has only 2% exposure, which is mostly just hedge funds, it is still a huge area of growth.

And so if you are in an asset class where you can perform for firms like ours, 1,000 basis points or more in terms of your products.

You should expect that those institutions that observe that phenomena and would like part of that and will increase their allocations because the asset class has been very resistant to loss in the down part of the cycle.

That is something that is very important to understand.

Actual loss is almost negligible.

There is some mark-to-market type of loss near bottoms of cycles but I think we've now shown, as a public Company and also as a private Company, that's just a very transitory issue these marks and we historically have boomed back with very large profits.

So I think we're seeing increases from virtually every asset class.

Occasionally there's an endowment that has been super huge and alternatives that is trimming back a tiny bit but that's only because they've got exposures that are double or triple the normal investor.

So I think there's a lot of white space to come here with big numbers.

Thank you.

Craig Siegenthaler, Credit Suisse.

If we look at the entire business here, increasingly you're seeing higher organic growth outside of the privately equity and real estate boxes.

I'm just wondering do you think this is partly a function of where we are in the macro cycle?

Or do you think this represents the longer-term scale advantages in the hedge fund and credit platforms here?

I'll take that.

I think it's some of both.

I mean we're clearly in a favorable market cycle.

Returns are high, flows to alternatives are increasing and so on.

And they're increasing because the reverse denominator effect partly and because a big chunk of traditional portfolios are in fixed-income where people are earning very little and they just need more returns.

So there's clearly a favorable environment for funds flows in our industry.

At the same time, we're opening a lot of new asset classes in new regions, new products and with great people and great returns and that's secular.

That's going to continue.

There will be a cycle overlaid on that but over the long-term I -- it stuns me to say this but I think looking forward, our long-term secular growth rate, take the cycle out of it, at $270 billion is just as high as it was at $70 billion.

Thank you.

Brian Bedell, Deutsche Bank.

Just circle back on BCP V. If we look at this longer-term, in terms of its lifetime realization potential -- just make sure I have the math right here.

If you've got about a total fund value of roughly $33 billion and even if we used a conservative 1.6 multiple on invested capital, about $12 billion of profit essentially.

Is the -- if we just take 20% about, we're looking at a lifetime realization of about $2.5 billion assuming that you get to the 13% and can accrue carry, in full.

Is that correct?

And then how much have you realized in cash carry on BCP V so far?

Okay.

So your math is directionally correct that you just went through on the $2.5 billion, $2.6 billion given the assumptions that you gave.

And I think the end of your question was how much have we realized in BCP V life-to-date?

In cash carry, yes.

In growth cash carry.

It's about $320 million gross, life-to-date.

Great.

That's great.

And then just one last one on the fundraising.

It looks like you had a solid pace of $15 billion-plus fundraising, not just this quarter but over the last year.

And from everything that you've said in terms of new markets, including Core Plus being gargantuan of potential size, should we be thinking of that $15 billion on a sort of an annualized pace moving up?

So you're talking about whether we would be at a $15 billion pace in net -- we'll call it gross inflows per quarter.

Is that what you're asking, Brian?

Yes.

Correct.

Correct.

Well if you look at the -- look, the $62.4 billion over last year has about $10 billion of inorganic, which is the acquisition of SP.

So it'll normalized around $52 billion.

That's higher than it's been the last couple of years.

We've been somewhere around $45 billion, $48 billion and then $52 billion.

So directionally, I guess your $15 billion is right.

It won't be consistent like that, but if you're -- sorry, I'd say it's a little bit high.

I think somewhere between $45 billion and $50 billion is a more normalized run rate.

Okay great.

However, it is not a static business that's grown over time.

And incidentally, I just want to note that your 1.6 assumption on where BCP V ultimately comes out, we are already and 1.6.

Yes.

That was conservative.

I know there's potential for a lot more than that.

Bulent Ozcan, Royal Bank of Canada.

I had a quick question on capital deployment.

I heard your first comments but I'd like to dig a little deeper just given the record levels of dry powder.

For instance, at the [Lumiere] Bank came out today telling that its selling its loan portfolio to Blackstone -- it's $8.6 billion worth of portfolio.

And it seem like it was a very competitive bidding process.

A lot of your peers participating in this process and my question is what is it for Blackstone that makes this deal work?

What is it that allows you to get to [IRRs] that you are targeting?

Essentially, what is the secret sauce?

Because I would think that it's a plain vanilla kind of asset that you are buying -- maybe I might be wrong on that.

But I just want to understand that we will get -- that they will get to the targeted IRRs [to date] when we deploy $2 billion or so of capital.

Okay.

Well first of all, it obviously got attention from some other bidders but there weren't a lot of them.

There were very few of them, not only because it was complex, it's a portfolio with a lot of -- a lot you have to work it.

It's not just a passive asset.

These are nonperforming loans.

Secondly, the [rep] -- our real estate people owned a servicer in Spain already so we are positioned to do the servicing -- a lot of the servicing of loans ourself and have unique insight into how these loans can get worked out and how we can deal with the homeowner and so on and so forth.

And when we're buying this at a huge discount to face and with leverage and with our view and a discount to the underlying replacement value of the physical assets if we were to own them.

So we have the downside covered.

We have leverage in it with our view of what we can do with them through our servicer and a view, frankly, that Spain at least has bottomed out and the wind will probably be at our backs in terms of values, we think we'll get to our returns.

I see.

Maybe on a similar transaction, you guys bought a office in London from Carlyle.

They're basically saying that it's a great time to sell.

Right now it seems like an odd time to buy it, fix it, sell it kind of product -- office property anymore.

What drove the decision to buy the property from Carlyle?

What is your view -- what's the difference in your view versus Carlyle's view?

Well I couldn't tell you what Carlyle's view is except that's being bought by our Core Plus business.

So it's lower risk stabilized assets with somewhat lower return hurdles but we'll think will get a double-digit return for our investors.

We're very confident about that.

And by the way, I didn't even know they were in the real estate business, actually, but our real estate people are the best operators in the world.

We combine asset for anyone and run it better and get more cash flow out of it.

Appreciate it and congratulations on a great quarter.

Thank you.

Warren Gardiner, Evercore.

So you guys may have already answered this but can you remind us what your policy is around for the distribution of cash carry and how the BCP V is crossed?

I mean will you or did you kind of hold some of it back just to build kind of a buffer?

Or is it more sort of formulaic going to be --?

It's LT, Warren.

All of our funds and all of our deals are -- we calculate carry on a deal-by-deal basis.

When a fund is generating carry, i.e.

it's above the hurdle, we payout realizations as they're earned.

So there is no concept of holding things back.

Now in order to do that, you have to look at where you think the entire fund will end up.

And if you're conservative in forecasting the future values of the whole fund, you should be conservative then in calculating what you're paying now and that should cover you with respect to future changes.

And so that's how we do it.

So BCP V actually has been paying cash carry for couple of quarters because the consist of two separate funds.

And there are LPs in one of the segments that we're already paying carry going back to the first quarter.

Now a larger percentage of them in both sides of the fund, all of the smaller fund and part of the larger fund are paying carry as well.

But there's no concept of just indiscriminately kind of holding things back.

It all goes to the conservative outlook that you have and that will make your calculation of payouts conservative.

Okay.

Okay.

Understood.

Thank you.

Chris Kotowski, Oppenheimer and Company.

Mine was just ask.

Thank you.

I see we have two follow-up questions.

Brian Bedell, Deutsche Bank.

Thanks for taking the follow-up.

I just wanted to circle back on the Core Plus.

You've raised $2 billion so far in that.

I don't know if there is a way you can size that opportunity for fundraising given your expertise in real estate over the next say two to three years in terms of going back to the fundraising size question?

And also can you remind us of the types of IRR's that you are underwriting in the Core Plus portfolio overall?

Let me just clarify one thing and then I'm going turn the ultimate size over to Steve because he is our dreamer and he sets our standards and goals here.

And whenever he sets it, we accomplish it.

So I said near $2 billion.

Between what we've closed and another transaction we have in process, it is actually about [$1.8 billion] now.

Someone look and tell me if I'm about right.

So that's where we are now and then I'll turn it over to Steve for a big this business can be.

Oh, and let me just comment on the returns.

The returns are in the low double-digit net area.

Steve?

This is an interesting one because the Core Plus asset class is about three times the size of what we're doing in the opportunity class.

In the opportunity segment now, I guess we're up to around $80 billion-some odd, not all of which is equity.

We have probably, LT, somewhere around $10 billion of debt products in there in a little bit -- something like about $10 billion.

So as I think about this, and this is my own personal view and not everybody always agrees with me even within the firm, that's for sure, when we get into these new areas.

But I look at a business like that, we're going to be -- if what we think is going to happen year one, is about $5 billion.

And if we can continue to do the kinds of things we think we can do in terms of producing the returns Tony was just talking about, that you can look at a business like this over a 10 year period and have $100 billion under management.

Now that's something that would make my General Counsel really squirm, which apparently I can see him.

He's squirming.

(laughter) But -- and there's no guarantee.

That's what I would call an aspirational goal.

Most people would say if you could do half of that, that would be pretty terrific.

So I think the reality is somewhere in between.

I am a believer in the high-end of that.

I think if you can deliver 10, 11, 12 returns to institutions who are really focus on making 8s, and if you can do it with real safety, you'll have good flows there.

The advantage we have is that we have the most active deal flow in the world in real estate.

And for us, all we're doing is chopping off the lower return end of properties that don't meet our opportunistic criteria for our funds.

So we should see an awful lot of this type of thing and we're set up perfectly with a major asset management capability to improve properties.

And so we also have a terrific set of relationships with people who give out real estate money around the world.

The opportunity area, I guess, we're like somewhere in the last year or two -- I forget whether we've raised six times more money than anybody else in the world or eight times, it's some number that LT can -- or Joan can get you after the meeting -- but it dwarfs what everybody else is doing.

And so I think with a really good product like this, with an asset class that is already three times the size, we should be able to do the kind of numbers over time that I'm talking about.

Sounds like you're LPs have been asking for this or is it more of a creation on your side?

It sounds like the demand would be very strong given the increasing desire to immunize portfolios -- (technical difficulty).

Finance is like a very funny business.

What passes for innovation isn't so innovative and that this is the kind of thing where we have product and of really quality buildings, that would fit this kind of model that really just simply do not meet the criteria for the opportunity part of our business.

And we took these products -- you start with one opportunity, then you go on to others and there was a huge amount of receptivity on the part of institutional community.

And what happens is once you discover that, you do as second, you do a third, you do a fourth and you see that there's really big demand.

And so what we realized is that we could take our same set of skills and basically just segment them and the market would respond to it and that's why we did it.

Okay, great.

That sounds pretty compelling, actually.

Great.

Thanks very much for the thoughtful answer.

Robert Lee, KBW.

Thank you and thanks for taking my follow-up and I appreciate the patience with the call today.

The last follow-up is clearly you guys have had a lot of success in a lot of places, entering new -- launching new strategies, raising assets in those strategies, starting some 40 Act product.

But I guess just kind of curious -- I'm sure I think most businesses, as successful as they may be, always have one or two things that they've tried that didn't pan out as expected or as hoped.

I'm just curious over the last couple of years if there is some new strategies that you've launched or took a stab at or new markets or geographies that you are thinking of entering that didn't seem to pan out?

Just try to get a feel for maybe what some of those were, but more importantly, maybe why you think those didn't succeed as you had hoped and how that maybe altered how you approach new product development going forward?

Okay well I guess I'll take that one.

And of course we've had initiatives that didn't pan out as we hoped.

Sometimes the performance wasn't -- sometimes it is our own making.

The performance wasn't what we hoped.

Sometimes it was a great idea but the market just didn't want to fund it or the timing was wrong.

And sometimes whatever premise, whatever the business premise was, the world changed and therefore the opportunities sort of disappeared.

Examples, we were -- we had at one point in this business [sale] a mutual fund business that ran closed-end funds.

They were the largest mutual fund in India and they had one in invested in non-India Asia.

And it was a closed end fund, as I mentioned.

It was obviously the meltdown in global markets and those currencies and their stock markets in particular made that performance not very good.

And it kind of got sub-scale and we just decided having owned the business for while, we decided there weren't a lot of synergies.

So we sort of went our way.

And one of the earlier calls, somebody asked me about getting a loan-only business and I think one of the learnings there was there's not a lot of synergies between a loan-only business and what we do generally.

And so that's an example.

We've tried other things whether that be an office or not or a product but nothing big.

I think a pretty good job focusing on really good opportunities and getting really good talent to do it.

I think the most important thing that we have, we have to attract the best talent in the world.

We have to train it.

We have to get it -- adapt our culture and the way we think about things and if we do that and we put really great talent against the opportunities we see, we don't miss that much.

And so that -- we're not perfect but we feel very confident about the opportunities on the page.

Great.

Well thank you for taking my question and I hope everyone has a great summer.

Great, thanks.

And thanks, everyone, for dialing in and look forward to any follow-up questions off the call.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.