Blackstone Inc (BX) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone third-quarter 2015 investor call.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Ms. Joan Solotar, Senior Managing Director, Head of Multi-Asset Investing and External Relations.

Please proceed.

Terrific.

Good morning everyone.

Thanks for joining us today for Blackstone's third-quarter 2015 conference call.

I am joined by Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; Michael Chae, our newly appointed Chief Financial Officer; and Weston Tucker, Head of IR.

So earlier this morning we issued the press release and the slide presentation illustrating our results and that is available on our website and we expect to file the 10-Q in the next few weeks.

So I would like to remind you that today's call may include forward-looking statements which are uncertain and outside of the firm's control and may differ from actual results materially.

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

And for a discussion of some of the risks that could affect the firm's results, please see the risk factors section that is in our 10-K.

We will refer to non-GAAP measures and you will find the reconciliations for those on the press release and I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone funds.

This audio cast is copyrighted material of Blackstone and may not be duplicated, reproduced or rebroadcast without our consent.

So just a very quick recap.

We reported economic net income or ENI per unit of negative $0.35 for the third quarter due to the unrealized marks on our public holdings in private equity real estate and credit.

And for the year-to-date period, we reported positive ENI of $1.45 per unit.

Distributable earnings were $692 million in the quarter or $0.58 per common unit.

That is up 7% from the prior year as realization activity was strong and we will be paying a distribution of $0.49 per common unit back to unitholders of record as of October 25, 2015.

That brings us to $2.90 paid over the past 12 months which if you want to calculate it, equates to a pretty compelling yield of 9% on the current stock price which makes it actually one of the highest yields of any large companies in the world.

With that, I'm going to turn it over to Steve and we will take questions after Steve and Michael speak.

I just want to remind you to please keep it to one question on the first round because we have a lot of folks on the call.

Steve?

Good morning and thanks for joining the call and thanks, Joan.

The third quarter as you know was a turbulent period for Global Markets with sharp declines and heightened volatility in basically every publicly traded asset class.

Volatility in the US stock market for example reached its highest level in four years.

Markets have moved as though the world is heading into a recession or at the very least that the world is facing an enhanced risk of slowing growth.

From our perspective, we do not see a recession but we are seeing slowing in certain regions and sectors with some excess coming out of markets.

Here in the United States with the dollar up 10% to 25% versus many other currencies around the world, we have effectively experienced a Fed rate hike without actually having one.

With that said, we are seeing lots of positive signs as well.

Restrictive building in real estate around the world leaves supply often below demand.

Housing in the US is strong and we expect it to get stronger.

Office leasing is good.

The auto and tech sectors are healthy and low oil prices should be good for the consumer.

In the lodging space, which has been one of the hardest hit sectors this year in terms of public market valuations, revenue trends actually remained quite strong with industry RevPAR estimated at around 6% year-over-year which certainly is not reflective of a recession.

I find this very surprising in terms of the public market's evaluation.

Overall, we see good growth in the US, perhaps slowing a bit from 2014 levels while Europe appears to have bottomed and is growing slightly faster than we anticipated.

In emerging markets, India is in very good shape growing at over 7% while China is definitely slowing but still growing faster than much of the world and certainly faster than the doomsday scenarios I sometimes see on television.

Brazil is facing significant challenges and a serious recession but is becoming more interesting as an investment opportunity ironically as it weakens.

In Japan, stimulus appears to be working with slow growth expected for next year.

These are generalizations however and our holdings are not reflective of a market.

We carefully select sectors and companies and then implement a specific plan to improve those companies and create value and that is what gives us the super performance we have had historically.

Against this backdrop of significant public market weaknesses, Blackstone's ENI was negatively impacted and the value of our public holdings declined and I think Tony gave you this.

Importantly, these declines historically have been temporary.

We have locked in capital in our drawdowns funds.

We are never forced sellers and can write out any period of volatility.

Already in the fourth quarter, our publics have rebounded sharply, up 7.3% and based on where they are today, our ENI of course would have been significantly higher.

Most importantly, the growth of our underlying portfolio companies and the long-term value of our holdings continue to build just as the stock market says just the opposite.

In private equity, our companies reported aggregate EBITDA growth of 9% year-over-year.

That is 9% year-over-year -- doesn't quite match what the stock market thinks.

In real estate, our companies continue to see strong fundamentals across the board including high single growth in office rents in the US and the UK and healthy hotel RevPAR growth.

In India, which is one of the hottest office leasing markets in the world, we are seeing 17% rent growth on new leases.

Our Chinese shopping malls which will shock you are reporting same-store sales growth in the area of 15% to 16%.

Global recession, go figure.

So overall, not seeing recessionary signs in the portfolio.

We feel very good about our current investments.

All of this positive performance underlying companies simply does not square with the large declines we have seen in several of the stocks that were in the decline of Blackstone stocks.

Volatility is however ultimately good for our business, a little bit painful from time to time.

We are uniquely positioned to take advantage of dislocations.

We have seen the public markets correct many times before and as always, it presents the potential for greater deal flow with favorable risk-adjusted returns.

We have the confidence of our limited partner investors and we have raised nearly $100 billion in new capital in the past 12 months.

Just think about that.

That is a stunning number, giving us the industry's largest dry powder balance at a time of significant market dislocation.

We have great flexibility in how and where we can invest depending on the environment.

It is a good thing.

For example, in real estate as public REITs declined 15% and lodging REITs went down unbelievably 30% peak to trough as well as some individual companies, we pivoted to public to private transactions.

We have already announced three this year representing over $5 billion of invested or committed equity capital.

That is for getting the debt side of the deal which is infinitely bigger of course with the largest pool of opportunistic capital globally by far.

We don't need partners and we can move with speed and certainty to close the largest transactions in the world.

In private equity where it has been more difficult to invest recently because of high prices, the pullback in markets broadly is helpful.

To the extent that financing becomes less available, we can continue to pursue proprietary transactions with well defined value creation strategies and less leverage at the outset.

Easy credit, the opposite of what you think, tends to simply drive pricing higher which benefits the seller but not us when we are buying.

For GSO, the recent increase in spreads combined with the lack of liquidity and high-yield generally means greater opportunity to deploy our $17 billion in dry powder which includes new dedicated energy and direct lending funds.

In terms of our existing portfolio, we have taken a cautious approach towards rates and concentrated on floating-rate exposures, not fixed-rate positioning us well in the current investment environment.

For BAAM, our hedge fund complex, we can selectively invest in difficult markets to produce strong risk-adjusted returns.

BAAM's lower volatility approach to investing has produced positive returns year on year outperforming the S&P and many other market indexes.

BAAM continues to be an engine of innovation at the firm, and the firm itself is like an innovation machine creating successful scale products such as our new multi-manager hedge fund.

This fund is off to a terrific start raising $1.4 billion and substantially outperforming its peers and any relevant index through September 30.

In terms of realizations, given the long-term and locked up nature of our drawdown funds with no redemptions, we don't have to sell at the wrong time and while a sustained weakness in public markets might delay certain dispositions in the near term, the public markets alone do not dictate realizations the way many people think they do.

We rely also on strategic and private sale opportunities and we have several that will close in the coming quarters which Michael Chae will describe in more detail driving healthy expected realizations, in other words the perception that our coverage will run dry is misplaced.

It is misplaced, some of you still believe it.

You are wrong.

Even with the recent market volatility, we returned as Tony mentioned $9 billion to our investors through realizations in the third quarter alone and $45 billion in the past 12 months and that is clearly not a melting ice cube.

We have been both raising and deploying record amounts of capital into what we believe are very attractive opportunities across all of our businesses.

This is not the result of raising and investing bigger and bigger funds but rather having broader, more global platforms and capabilities.

In real estate for example, our core plus business had already invested nearly $3 billion this year helping to put real estate on track for another record year of deployment and core plus is a business that didn't even exist here two years ago.

Our average investment pace over the past four years exceeds $20 billion per year from our drawdown funds alone which is multiples of the investment pace that planted the original seeds for what you see as today's quite good level of distributions at areas that are at our strongest levels ever.

The logic holds then if you believe in our ability to invest well and we have proven that over 30 years and our LPs believe it obviously, then you should believe today's investments are planting the seeds for potential distributions of a larger order of magnitude than what we are harvesting today.

It is all logical.

From a BX stock perspective, the firm has demonstrated an incredible ability to generate high levels of current cash flow for our unitholders with sustained growth over time and I am confident this will continue through any reasonable market and economic backdrop.

To maintain an above average distribution yield on today's depressed stock price, the median yield at the S&P is around 2%.

We don't need any realizations for us to have a 2% yield which is average for the S&P.

That is no realizations whatsoever.

We generate more with just our fee earnings, most of which is locked in.

To generate a top decile 4% yield, we would need to realize just $0.60 per unit in net performance fees from our nearly $250 billion of performance fee eligible AUM.

This is far below our long-term expectations.

By comparison in the past year, we have generated $2.30 per year in net realized performance fees.

So generating 25% of last year's performance fees gets us to the top decile of yields for the S&P companies.

Doesn't sound so hard.

Anything can always happen my General Counsel would say but it seems pretty reasonable to me.

As evidenced by the recent declines in stocks including Blackstone's, it is clear that the public markets really don't take the long view.

At Blackstone, that is all we do and I believe that is why our funds have outperformed the public markets since inception, typically at about double the S&P return in our high-performance products.

This month as Tony mentioned is Blackstone's 30th anniversary.

The firm has come a long way in the past 30 years from our $400,000 in start-up capital, half of which was mine, to a market cap of $52 billion earlier this year.

That is not a bad rate of return.

We built the strongest brand name in the alternative space by delivering consistently strong returns through the use of our unique intellectual capital and ability to analyze market cycles and select successful strategies to benefit our customers.

Our brand allows us to raise large-scale capital for basically any investment opportunity that we see around the world now.

While the past 30 years have brought much success to Blackstone, I am most excited for what I think is in store.

The firm is getting better and better.

We have remarkable people here and great processes.

I am confident in the long-term trajectory of our business and our ability to outperform over time driving significant benefits to our unitholders and to the people who work at the firm.

I would like to thank everyone for joining our call today.

I'm going to turn things over to our new Chief Financial Officer, Michael Chae.

For many of you, this is your first opportunity to interact with Michael.

For those of us who have been here a long time, we've worked with Michael closely for 18 years.

He is a tremendously talented individual and is already off to a great start.

As you get to know Michael, I think you will come to understand that our Company is in great hands in the financial area and part of the fun of Blackstone is that people grow and they get new responsibilities and when we know them and trust in them, we think they are super smart that is the way to grow a great firm.

So now with that big buildup, which your mother will be very happy with, Michael, go for it.

Thank you, Steve.

Thank you Steve and good morning everyone.

With respect to our financial results, performance and outlook, I would like to cover three key areas.

First, digging into our E&I results a bit more and putting it in context; second, highlighting key performance trends in the business; and finally, discussing the outlook for distributable earnings and the cash generating power of the business.

First on E&I, the driver of the negative E&I result for the quarter was the decline in our public holdings and the associated unrealized performance fee reversals.

As you know, unrealized performance fees and unrealized investment income are two of the key components of E&I.

These unrealized metrics are driven by the change in marks between two days, the first day and the last day of the quarter and are a snapshot based upon that beginning and end point.

As Steve mentioned, in the brief period since quarter end, our publics in both corporate private equity and real estate have depreciated over 7% as of yesterday's close and the effect of that is to largely reverse the E&I decline in the third quarter and the first two weeks of the fourth quarter.

Now this is not to minimize E&I as a metric especially over longer measurement periods but to step back and put it into context over the shorter-term particularly during volatile periods.

We also want to highlight the effect of the BCP V catch-up which amplifies the E&I impact of the markdowns in our public positions.

A substantial portion of the overall decline in the firm's economic income came from the impact of the catch-up in BCP V which declined 7% in the quarter due entirely to its publics which now comprise about 59% of that fund's value.

The fund overall has performed very well particularly given its vintage and ended the third quarter marked at 1.8 times original cost.

BCP V's publics are up meaningfully so far in the fourth quarter and we feel good about the fund's position.

With that as context in terms of reviewing specific E&I drivers within the overall publics movement, two contributors for our Hilton position and the energy area.

Hilton traded down in the quarter along with much of the lodging sector.

We continue to feel great about the Company and indeed its stock has bounced back since quarter end.

In energy again it was largely about public positions and similarly since quarter end, we have seen meaningful rebounds in the public prices of certain positions.

Looking past the headline E&I number, trends in the business remain very healthy, as Steve described.

AUM; total AUM rose 17% over the last 12 months to a record $334 billion as $97 billion of inflows and capital raised plus market appreciation of $12 billion well outpaced capital returned in that period to investors of $60 billion.

This strong growth was broad-based across all businesses.

Investment performance.

The competitiveness and growth of our firm begins and ends with investment performance.

Our overall investment performance so far this year has been strong on an absolute basis and relative to broader market indices, we have delivered quite extraordinary outperformance.

Our private equity segment funds are up 8% for the first nine months of the year and our real estate opportunistic funds are up 9% versus declines in the S&P and other global indices as well as real estate indices.

This represents outperformance of 1400 to 1800 basis points and is up 3% year to date versus a 3% decline in the global hedge fund index outperforms at 600 basis points and our credit strategies are also outperforming their benchmarks across the broad array of strategies.

Our balance sheet is strong with $4.2 billion of cash, corporate treasury and liquid investments.

We have $5.25 per unit of total cash, liquid and illiquid investments.

Our outstanding debt has attractive cost with a very long dated maturity structure, a weighted average maturity of 15 years.

Both S&P and Fitch recently affirmed our A+ credit rating.

Let me now turn to the distributable earnings picture and shed some light on the engines firing our cash generation.

In addition to reviewing the recent strong DE performance, I will talk about a few different drivers of the outlook for cash generation, the near-term distribution picture, the FRE dynamics around the business and the performance fee outlook.

First, in terms of the quarter and year to date, our realization activities remain very strong helping drive year-over-year growth in distributable earnings in the quarter notwithstanding the markets for total DE of $692 million in the quarter and $0.58 of DE per common unit which represents an increase of 7% versus the third quarter of last year.

The quarter contributed to a record $2.97 billion of DE year to date, 54% higher than the same period last year and a DE of $4.1 billion over the last 12 months.

Looking forward, our realization pipeline is fairly robust and I expect a favorable fourth quarter for distributable earnings based solely on what is already been signed and announced.

This includes the sale of Avintiv which closed on October 1, the pending closings of announced sales of Allied Barton, SunGard, Vivint Solar and some of our office properties in Boston.

There are other potential asset sales in process and of course market conditions permitting, we would evaluate secondary offerings of certain publics.

So that is the near-term tactical outlook for DE in realizations.

Now let me step back and talk a bit about the fundamental drivers because the fundamental driver for some structural position of the firm to produce cash for our shareholders over time are very, very strong.

First, with respect to fee related earnings, our FRE for the quarter was $266 million, up 12% over last year and just over $1 billion over the last 12 months.

As we find ourselves in a period of public market volatility that can cause swings in our marks and in E&I, it is worth focusing on the mass and stability of this substantially locked in recurring fee generating base of the firm.

To put this in perspective, the last time we saw a quarter with similar downward pressure in public markets that weighed heavily on E&I was the third quarter of 2011 and our current fee related earnings are nearly doubled now what they were back then and that is because the fee earning AUM of the firm is $241 billion now versus $133 billion then, over $100 billion higher.

This large stable base of fees is an extraordinary asset and ballast for the firm in all markets.

Furthermore we have significant embedded near and medium-term growth in fee revenues from funds that have been raised but are not yet contributing full management fees.

As you know, our eighth global real estate fund was activated this year and will experience its first quarter of full fees in the current quarter and first year of full fees in 2016.

Our seventh flagship private equity fund is expected to activate in 2016 and will experience its first year of full fees we expect in 2017.

Projecting forward the combined management fee revenue stream from these two new funds and their immediate predecessor funds, we anticipate incremental management fee revenues in 2017 of $200 million to $250 million over the current year base of approximately $415 million for just those funds.

This is but one example but a significant one of the structural embedded growth in our fee base.

Turning to performance fee drivers going forward, we know a key question on investors' minds is what will future harvest be like?

The sources of current and future harvest we believe are rich and deep.

I would think about these drivers in three parts.

First, our mature liquidating vintages.

Just over half of our net accrued performance fee receivable is from vintages 2010 and prior and 90% of these are public and/or liquidating.

Consider these as producing proven reserves so to speak in terms of having been a well-established and a continuing source of realizations.

The firm has over $24 billion of public market cap across its private equity and real estate portfolios with a large portion from these older vintages.

Second is our more recent, last five year's vintages.

These portfolios are financially strong and performing well as exemplified by the returns of the major funds of the time period.

BREP VII's inception to date net IRR of 24%, BREP Europe IV's 21%, BEP is 20% and BCP VI is 12% with that fund continuing to appreciate through a J-curve with a realized IRR of 47%.

We believe our teams chose well and selectively in a price year vintage period.

The value of these investments is seasoning steadily but the ultimate realizable carry potential we believe is not reflected in the current marks nor in the performance fee receivable on the balance sheet.

And we are seeing proof of that and in the ability to generate monetization events even in a younger portfolio, in very recent IPOs in the last two weeks of companies like Scout 24 and Intertrust, is public market values imply approximately 2.4 times our invested capital in aggregate on 1.5 and 2.5-year-old investments and represent premium over the prior private marks.

We anticipate that these more recent vintages will be steadily coming into their own in terms of monetization realization events for a while to come.

Finally, the third driver of future performance fees is from the deployment of the $85 billion of the dry powder we have amassed.

The average lockup period on this capital is nine years which is at the heart of the fundamental advantage of our business model to be able to patiently attack opportunities and sell only at the right times.

We are extraordinarily positioned in massive scale with our strategies need to be deployed opportunistically in times of dislocation and volatility.

Our (technical difficulty) pace is at record levels with $25 billion deployed over the past 12 months, $6.5 billion deployed in the third quarter and $11 billion currently committed but not yet funded which with much of this recently committed and our ability to do so directly benefited by the volatility in the market.

So like Steve, I feel very good about the underlying momentum of the business, the deployment environment and our ability to generate robust distributable earnings for our unitholders over the long-term.

We have significant base performance fee generating assets with great diversity across vintage year and asset class.

In addition, our management fee base continues to grow in size and diversity ultimately driving an upward trajectory in fee earnings.

Looking ahead to the fourth quarter, our advisory segment will no longer be included in our financials following completion of the spin on October 1 so we will no longer have that segment's contribution to earnings which was approximately $0.06 E&I per unit in our last fiscal year.

It comprises in the area of 3% affirmed DE over time and so from a financial contribution point of view we feel our growth will absorb this affect fairly readily.

So in closing, I feel great about Blackstone's position and our ability to thrive through any environment.

I look forward to working with all of you going forward.

Thank you for joining our call and we would like to open it up now for any questions.

(Operator Instructions).

And just a reminder, if you could keep it to one question on the first round, we are happy to answer all your questions.

Craig Siegenthaler, Credit Suisse.

Thanks.

Good morning, everyone.

I know this question may sound a little premature but how do you think about the capacity constraints on the individual investor hedge fund products especially given their fast ramp (inaudible) the year?

Craig, it is Tony.

There is obviously some capacity limitations to our individual hedge fund products but we are a long way from testing those right now.

We set up as you know, we set up that product with Fidelity because of exclusivity arrangements, we sort of mimicked it actually.

So we have shown we can replicate it already so if anyone of those products runs out in capacity, we can re-create a look alike and I think we can scale that business quite substantially over time.

Thank you.

Bill Katz, Citigroup.

Think so much.

Appreciate all the color, Michael as well.

Thank you.

So there has been I think some uncertainty about what is going on with some of the sovereign wealth funds.

I think this industry has been quite a big beneficiary of a lot of growth coming out of the sovereign wealth funds.

Can you frame your exposure to some of the sovereign wealth funds, what you might be seeing in terms of any kind of liquidation or redemption pressure and more broadly what you are seeing in the institutional channel for incremental demand?

This is Steve, I think the sovereign wealth fund group is divided into two categories.

We are one of the ones that are most effected typically by the oil business and the others are all else.

The all else group is continuing to enter -- some the first time investors in our asset class and some of those funds will be very, very substantial new investors in the asset classes.

So it is sort of business as usual with that group.

And the other group of the energy oriented economies had mixed approaches.

We have not really dealt with redemptions and things of that type because what is also going on in that group as well as the non-oil people is they are increasing their allocations to alternatives and then within alternatives, they are increasing their allocations to their best-performing managers and we are sort of it.

We don't experience a lot of problems.

The biggest issue with the oil oriented sovereigns is that some of them are not increasing their aggregate money in their funds which means that for us to grow with them we either have to take share which is happening but even some of them interestingly are significantly increasing their share of alternatives because of the performance characteristics.

So we are not really affecting, feeling the effect of anything particularly major.

In fact, we are growing in that asset group.

One other point.

As you know, two thirds of the capital we have is locked up for life of asset or life of funds and we just raised the flagship products so on that two-thirds the average life remaining is like nine years.

The other thing I would mention is that in terms of taking more share in both of these categories, oil and non-oil sovereigns, that we are engaged in a number of discussions which is quite interesting where they want to very significantly increase their exposure and are talking about a multibillion-dollar commitment to us as opposed to just commitments on single funds.

So it is quite an interesting area and an important area and a growing area for us.

Just the opposite of what the underlying assumption was I think of your question.

I will put one more fact in there.

The most sophisticated investors in the US which are really the endowments have about 50% of their assets in alternatives.

Most pensions have 20 to 25.

Sovereigns are still way behind that and have a long way to go.

Okay.

Thanks very much.

Alex Blostein, Goldman Sachs.

Good morning, everybody.

Thanks for taking the question.

As a follow-up to the distribution discussion and the outlook there, understanding that it is obviously pretty difficult to predict with a lot of precision on what realizations will look like.

But if we take a step back and think through just a more stressed capital markets scenario whether or not it is more difficult to exit the equity markets or via M&A transactions, which businesses do you expect to contribute the most in that scenario to your realized investment income and incentive income businesses just to help us again gauge what potential downside could be?

Because the offside case is clearly could be quite significant but I think the market is just more concerned on the downside problem.

Yes, this is Steve and we will have an open discussion with Michael and Tony on this one because it is an interesting question.

I think the real estate sector will power on in that environment.

The only difficulty that sector would have would be access to capital that would slow it down.

At the moment, that does not appear to be happening.

The leverage sector has had price and availability and some kind of mix affected certainly on the junk side, less so on bank debt.

Real estate will continue in all probability quite strong because their exits are not typically through public offerings, they are through sales of individual properties or groups of properties.

The supply-demand characteristic in real estate in many, many places around the world is very good.

So what you would need to really negatively impact that is just literally recession huge number of sort of nonperforming loans generally so the banks wouldn't be financing capital markets sort of locked up and turned off and then it is hard for anybody to do business.

The number of times that scenario happens is quite low, it is usually around -- if I was to not study it but just sort of do it by feel, it is like once every 10 years something like that happens, a relatively brief period of time.

So I think we've got a very good situation there if you were asking us what would be the part of the business that would be least successful.

And real estate, even then, if you don't get overbuilding in real estate, then you are going to have a lot of value and so to get overbuilding you have to have an extended good part of the cycle before you come to that.

Otherwise inexorably people need more and more space and rents go up and you get the leverage on the operating income.

So even in higher interest rate environments in that scenario without overbuilding, real estate hold its value.

And I would just chime in that in real estate and agreeing with Steve and Tony, that there has been a bifurcation recently between the public market performance where there has been a pull back and the private cap rate environment for real estate assets which has remained very strong.

And we are in the market with some assets.

We continue to see strong interest apparently unaffected by the public market turmoil and as Steve alluded to particularly in the real estate business, we can sort of buys, hold, sell and sell retail.

We can buy big enterprises but then sell individual assets in smaller chunks to those private buyers.

The other thing is if we get economic softness we should have low rates and at some point even if you can't exit a private equity company in the IPO market or in the M&A market, then you have the advantage of recaps where we can as long as our companies continue to perform which they are with EBITDA at 9% this year, that is great performance.

That is -- none of us lose sight of that.

Those companies delever quickly and with growing EBITDA you can pay yourself some nice dividends.

So the credit markets are sort of an offset of the equity markets in this whole sustaining our distribution question.

And meanwhile on private equity in the face of obviously quite choppy markets in the last few weeks, we did successfully execute three IPOs in the last three weeks.

So it is an environment where the markets are not closed, they are open from time to time for good companies and so --.

That is because the performance of those companies was really terrific and people like to buy terrific things and if that is what you have on order, what the heck -- it works out.

Got it.

Thanks so much for taking the time to answer that question.

Michael Cyprys, Morgan Stanley.

Thanks, good morning.

So you have a greater skew to public holdings than you did just a couple of years ago and it seems to make your E&I a little bit more correlated to public markets than in the past.

So I guess just more strategically, how are you thinking about balancing your portfolio exits from here?

Do you want to be more skewed toward strategic sales as opposed to IPOs, perhaps reduce some of the volatility in your E&I?

Separately, how do you balance some of the strategic exits, potential challenges whether it could be a larger portfolio sale which could be maybe more challenging to do or even some of the antitrust concerns that have come up with some strategic sales recently?

Michael, let me just hit the first couple, it is Michael Chae, nice to talk to you, hit the first couple parts of your question.

First of all, in terms of the public component of our portfolios, I did allude to BCP V which obviously is a quite mature fund at 59% publics.

But for real estate overall, their portfolio, the public component of that is in the low 20s percentage.

And for private equity overall, it is about one-third and that is obviously concentrated in BCP V. So when you step back, that is still the balance around it.

I would say certainly to something you alluded to, we don't manage our exits to E&I.

We are patient and we manage our exits as we have for 30 years against what the right moment is and how to optimize the outcome for our limited partners.

Let me chime in on a couple of things too.

A number of times, when we go public, we actually don't exit very much so it is important to keep that in mind and a lot of times once a company is public, we can actually exit either with subsequent equity sales or as a strategic sale of the whole company.

Sometimes we go public and then sell the company.

So as Michael says, all we are trying to do is exit in the best way at the best time for our limited partners and drive underlying investments, underlying investment returns that are actually realized.

The mark to market returns quarter to quarter we don't worry about.

Actually this isn't so hard.

You do what the market will give you.

If you have a hot equity market, and you take companies public and you make money that way.

If those markets aren't so good, you don't worry about it because our businesses typically don't need the capital.

We've got almost an infinite ability to fund these companies and then you just sell them if the sale market is good and if not, you recap them and you make money that way.

So we just sort of go with the flow if you will.

Great, thank you very much.

Brian Bedell, Deutsche Bank.

Good morning, thanks for taking my question.

Maybe just to flip it around to deployment, obviously with the markets pulling back late in the third quarter, how are you feeling about that going into the fourth quarter?

I know we have had some rebound here of course but maybe if you want to comment on some of the specific sectors particularly energy, also overseas and in real estate in terms of putting some of the $85 billion of dry powder to work in the near to intermediate term?

Energy is a major area of focus both in our credit markets and in our credit business and in our equity business so that jumps to mind.

When you sit back in the world and say where is there distress, where is there value?

That is clearly while there are certainly risks and certainly issues I think we feel pretty comfortable that the energy is not going to be down here forever and so that there is a value opportunity to create value and capture value with the companies that can get through this.

Energy is a subset of broader commodities, there are other commodity areas I would say the same thing about.

Real estate, we are putting a lot of money to work in Europe still.

There is still a lot of ability to buy it below replacement costs there.

Those markets, the capital markets for real estate have not really recovered.

Here obviously we're trying to arbitrage the difference between fairly robust values asset by asset but public REIT stocks that have been hit with the market drops overall so that has created some values.

We are focused on that obviously with two big transactions we have announced recently.

I think we are also doing a lot of looking around sort of building new stuff particularly power assets around the world.

A lot of the world needs electric power whether that be traditional power plants or whether that be renewables and the infrastructure that goes with that to move gas, to move oil, to move electricity.

And all of that stuff we can build -- our money goes in at cost, goes in at book value and as long as the underlying economics of the projects are good, we know we are going to get our return on that and it is decoupled from market movements.

So we've got $85 billion it sounds like a lot but we are also putting to work a lot.

I think we have put to work I think we mentioned about 16.5 we have put to work in the last year -- or sorry year to date and we've got another 10 that is committed and not even drawn down yet.

So just this year with just what we've got on the plate, that is already like $25 billion.

So I think we will be able to make some really good investments in here.

As Tony mentioned, that $10.7 billion or close to $11 billion of currently committed but undrawn, much of it recent, I think is a good metric for the opportunity set improving.

I would say for real estate and or credit business, the last couple of months there has been a tangible I would say shift in the deployment environment and a good one in terms of the ability to be opportunistic and buy more opportunities for sure.

I think in private equity, these things tend to take a little while to season, a little bit longer but I can tell you my partner Joe Baratta is happy when he sees market pullbacks from the perspective of being an investor.

Market pullbacks we think and volatility are ultimately good for creating good private equity deals.

It takes some time but I would say even private equity or as well in private equity, there are a number of situations where some months ago we felt like we were priced out of the situation but that now they are coming back in line as actionable opportunities.

Great, that is great color.

Thanks so much.

Glenn Schorr, Evercore ISI.

Thanks.

This is Kaimon Chung for Glenn Schorr.

Just want to get an update on the progress of core plus real estate.

Also just wondering how long before core private equity rolls out?

Can you run that just with your existing infrastructure and any color on that would help.

Thanks.

Core plus real estate, we are at about $8.5 billion.

There is a lot of investor interest and there is a lot of transactions.

We try to kind of balance those two things.

We try to take in money when we've got our sights on money to put to work so I think that will continue to grow steadily and well.

Core private equity, we are really doing that -- we don't need much new infrastructure at all and we are kind of in the process of assembling capital for that.

We have a couple of transactions we are looking at but nothing we are about to announce.

Dan Fannon, Jefferies.

Thanks.

Could you guys update us with regards to BCP V as to where we fit in the catch-up period?

I think there is a gap between E&I and DE and I assume they went opposite directions this quarter but can you give us where you are at that as of the end of the quarter?

Yes, Dan, it is Michael.

I think in previous calls we have used the parlance of what percent went through the catch-up and I think the last call we talked about 84% on an unrealized/realized basis.

That same metric would be about 73% today.

But I think maybe the right, the simplest way to think about it frankly is about half of our BCP V LPs by value are at full carry including all of the BCP ACLPs and about half are in catch up mode.

And over time with hopefully more appreciation, more will go from the catch-up volume to full carry volume.

So I tend to think about it that way as opposed to a percent through the catch-up.

Great, thank you.

Mike Carrier, Bank of America Merrill Lynch.

Thanks, everyone.

Just had a question on both credit and energy and I hear your comments on the portfolio company and in terms of the outlook versus people worried about a recession.

But I guess in both areas just given that they were under pressure during the quarter, if you can give an update in energy what your current -- I don't if you look at it from a private equity standpoint things that you have invested maybe prior to 2013 versus the capital that is raised to be deployed or the opportunity to take advantage of the pressures.

And then anything on the credit side and when I think about the private equity business like the average leverage or the maturity of the debt that is in these companies like how stable are they versus maybe past cycles?

And then same thing on the credit side how much dry powder do you have available to take advantage of certain industries that might come under pressure?

I know it is a long question but just a couple of areas that I feel like we keep getting questions on.

I think with respect to energy, certainly from an opportunity standpoint both our second energy fund which as you know was activated at the beginning of the year and our new opportunities which we call [ESOC] in GSO, both I think showed great disciplined by not deploying capital in that first half of the year where it turned out there was a bit of a false dawn in the sector.

So between the two of those, they stand with combined something like $7.5 billion to $8 billion of dry powder to phase into that opportunity set.

I think from an exposure standpoint, we feel good about it.

Our private equity fund as we talked about on past calls we think did a nice job divesting assets particularly ones directly impacted by oil prices and today the exposure to companies directly affected by oil prices we think is manageable.

It is about 1/5 of the portfolio.

They have done an excellent job putting in hedging.

I think importantly most of the vast majority of our investments in BP are not highly levered.

They were investments with little or no leverage going in and so compared to some of the more infamous large deals in the sector if you will in the past few years, it is a distinct difference.

And I think on the --.

And they are still marked above cost.

That's right.

And on the credit side, we obviously have different kinds of investments and exposures in energy GSO.

Private energy investments in our private drawdowns funds and then liquid investments in our hedge funds and in our BDC and certainly energy credit in terms of the indices overall has took a beating in the third quarter.

And so from a mark to market perspective that is going to impact to some degree some of our portfolios.

But overall I noted the discipline we showed in our investment strategy earlier in the year, we feel good about that and we feel good about our overall portfolio.

One thing just to mention I guess is that our first energy fund is -- despite the collapse of the oil business is still up approximately 25%, 26% for us.

This is not what you would call a national tragedy and there are many people who have gotten severely damaged in this sector.

We have done quite well.

Just to clarify, Steve, the 26% is the IRR, it is actually 2.5 times multiple of money for investors.

So as Steve says, they are happy.

It is pretty amazing, right?

I was at a conference yesterday with a lot of LTs and the people who put money out in the first six months of this year is hard not to do that.

But our people put out really this great discipline -- wow -- I mean people got crushed.

They really got destroyed and part of what you do in our business is you don't do things where you think there is real risk and I think we will be well rewarded deploying our money at the right time.

Obviously we have had on the credit side some investments in companies that had a lot of leverage that are suffering.

I don't want to say we have been flawless on this, we haven't.

We have also taken some -- in private equity we had bigger write-ups than we have today so we have written some of the write-ups down a little bit.

We are still ahead of the game but we have definitely given back some value on a temporary basis.

But I think the strength of the Company and our conviction that as I say, that today's spot prices are not long-term energy prices and I think if we are right about that, we will earn some very nice returns for our investors.

We've been very careful also in investing companies that are unlevered as Michael said or have plenty of liquidity to ride through the next couple of years to prove ourselves right.

We are not making speculative bets that require quick bounces in energy prices.

Luke Montgomery, Bernstein Research.

Thank you.

So I think there is a tendency to view the accrued carry balances as a key indicator of where distributions are headed.

It has declined about 25% in the last two quarters I think clearly a key driver of that has been BCP V and the catch-up.

My question is whether you think the focus on that metric is appropriate and how concerned you think we ought to be about the trajectory of the balance and accrued carry as we are thinking through what our distributions could step down over the intermediate term?

I think finally maybe an answer to the question would be approximately how much better might the balance look today versus at the end of the third quarter?

So Luke, it is Michael.

In terms of the receivable, as you know and we have it in the 8-K, the vast majority of the decline quarter over quarter was from BCB V and BREP VI.

To break that down for you a little bit, about one-third of that decline was just from realizations and of the remainder to your latter question about half of that decline has now been on a mark to market basis been made up by rally in the public in the last two weeks.

So without maybe directly answering your question about what I think of the meaning of this metric because I think it is an interesting metric, maybe what I just described gives you a sense of how you have to put it into context.

Okay, thank you.

Michael Kim, Sandler O'Neill

Good morning.

Maybe more of a conceptual question just given the more recent underperformance of the stock and the alternative asset managers more broadly.

Just curious if you are thinking on the PTP structure has evolved at all?

And that related to that, any sense that the chatter around potential tax changes for publicly traded partnerships has maybe started to pick up a bit more these days?

I think it is political season and there used to be 19 candidates on the Republican side and I guess I watched four or five of them on the Democratic side.

Everybody has a point of view and you have to distinguish yourself in a crowd and there is a lot of different ways to do it.

And one of the ways is obviously to look at different kinds of businesses, asset classes, tax approaches and so forth.

We see the same stuff you see and we also see sort of a very complex congressional array and some people don't want to do anything under any circumstances and some people will do almost anything to anybody at any time.

So I think we are just sort of like cautious, interested observers and I don't know that there is any way you could sort of handicap what is going on.

Very difficult.

So we will see what happens.

It runs the gamut from overall tax reform which could take a whole variety of different things to targeted things against our industry which some people are in favor of.

And this has only been going on now for eight years and so I think we just take an active watching posture on it.

America has become an unbelievably complicated place with the variety of different positions, some of which had not existed in my lifetime certainly and society will figure out what it wants to do and hopefully it will really do a good tax reform thing that's very simple and treats people without enormous preferences and has very low rates.

And this is my personal view, not Blackstone's view and that would be great for society.

I don't even know if anything like that is even vaguely possible.

I think it is the right thing to do, but with different people in Congress opposed to this, that and so forth, sort of tough.

Okay, fair enough.

Thanks for taking my question.

Ken Hill, Barclays.

So you have recently raised a significant amount of capital through some of the flagship funds like BCP VII, and BREP VIII.

Do you anticipate any sort of step down after such a robust period that -- and how do you think about fund-raising going forward in general?

Are there any key funds you think in particular that are going to drive some inflows over to 2016?

Our fundraising is episodic.

So yes, I mean it is lumpy.

Those are big funds and they all came at the beginning of the year and it is going to be hard to keep that pace.

However, core plus real estate we talked about has huge potential and we are just beginning on that.

In addition, we've got tremendous potential with two different kinds of retail products that we are just beginning on.

So I think those are two big areas where you can see a lot of assets.

In real estate, we are coming to the end of a couple of funds that are chunky funds so BREP Europe at some point will be in the market.

We have got other real estate funds.

So it is not going to fall off a cliff by any means but it is going to be hard to equal the pace of the first half of this year.

There is also the third real estate mezzanine loan that is going in the market later this year and the secondary (technical difficulty) this year.

Then there is other perpetual hedge fund products like the long only etc.

that are on the platforms.

And I would add in -- we are all chiming in here -- that GSO, some of their major drawdowns funds will have fundraisers over the next year or two -- so.

And then stepping back I would say if one could sort of time one's life and business perfectly, obviously we feel great about the timing of our flagship fund raises for real estate and private equity and are excited to have that capital in this environment.

Just to go back to Michael's earlier comments, if you recall a lot of that money hasn't even been turned on so to speak from a fee perspective so we have raised the large private equity fund but it is not even in its investment period yet.

So it is not in our fee earning AUM.

Thank you for taking my question.

I appreciate all the color there.

Devin Ryan, JMP Securities.

Thanks.

Good morning.

Just want to come back to the question on potential tax changes on carry interest.

I think we are clear on where you guys stand, I know that you also prepare for a number of scenarios.

So just in that scenario where distributions experience higher taxes, does that change your view on capital allocation and maybe make buying back stock become more attractive as an alternative?

And then along the same theme, the stock has bounced around a bit here.

It has recovered from the low but is there a price or point where you say there is just really no better opportunity than buying back your own stock?

It is Michael.

Look, we are not contingency planning in that regard and I'm not sure in that scenarios those are the contingencies that we would consider strategically.

What you are hearing in this room is it is just not something we are focused on at this point in terms of those kind of plans.

Let me jump in on this.

We are a business because we pay out all of our earnings, we don't generate a lot of capital.

We see as far as we can see, we have got double-digit growth ahead of us in AUM and that is going to require given the structure of funds and the way LPs want to have skin in the game, it is going to require us to keep putting money up.

And those underlying properties, those underlying investments have very high returns.

So the combination of the returns on the underlying capital and then the carries and the fees and all that that's generated for the firm means that the return on our money if it is key to raising more capital is extremely high.

And our view is we are going to keep growing and we are going to need to husband our capital to keep supporting that growth.

So I don't see near-term buy ins, I really don't.

If anything as you have seen over the last few years, we have raised additional external capital through the debt markets.

I think that tells you kind of where we are.

We are not running out of growth.

If we go (technical difficulty), it might be a different discussion.

Just to put it simply really on the first part of your question, what we said before and we say it every time and it is true which is we manage and run our business the way we always have which is to generate the highest returns over the longer term for our LPs period.

So whatever regulatory changes may come or other exogenous factors that won't change it.

Got it, thank you.

Eric Berg, RBC.

Thank you and good afternoon.

(technical difficulty) quarter portfolio stock market went (technical difficulty) what does that imply regarding your market?

Are they (technical difficulty)

Eric, can you either dial back in?

The question was basically if the publics were down, what does it imply for the private markets?

Do you want to take that or -- and what does it imply about the performance of the underlying portfolios?

And I would say generally the underlying portfolios are outperforming what you would see in the markets and as you know, we are very careful about choosing sectors and companies so we saw positive performance in both private equity and real estate and so the privates actually were up.

Bill Katz, Citigroup.

Thank you very much.

I just want to come back to this notion of capital allocation because I think it is a sticking point on the sector.

I think one of the issues for this group overall is relevancy relative to traditional managers.

Steve, you have often compared yourself to Blackrock and they have a higher multiple than you and half the growth rate you did this quarter on quarter.

So if I look at your stock price when you went public, it was 31 and you add back the dividends, you have compounded growth of the stock by about 3.5% and yet fundamentals it is hard to argue that you have out executed everybody.

So how do you help the shareholders get comfort that this is a good stock at this point in time?

Because the age-old question is do you invest in Blackstone funds or Blackstone the stock and what I hear you saying now is there is no interest in buyback.

But why not?

I just don't understand why you can't possibly lower the payout ratio.

You're not getting credit for the carry anyway and then buy back some stock and maybe a little bit more forceful statement of confidence relative to some of your peers who do buy back a lot of stock in the traditional space.

Convoluted question but I am curious.

One of the advantages that the long only managers have is they don't have to invest one dime in what they do and so they can do anything they want with their cash flow and if they want to buy in some stock at a high price and look not so smart or at a low price and look smarter, they can do that.

What happens with our business, sometimes we have unbelievable opportunities when markets go down and for us to raise money we must invest large amounts of money alongside our limited partners and as the world gets worse, they want you to put up more and more money because they think perhaps it is not such a wonderful idea.

That is the most wonderful time to be investing and we can do nothing that inhibits that.

By the way, when the times are terrible, we can't sell stock to replenish, we can't even sometimes go to banks because banks freak out and regulators freak out.

And so just when we need money to grow and make great investments, you would have us be out of money and frankly that doesn't work.

If we are trying to service our customers, have great products, we have to not just look at the world as it is today, we have to plan on all the different types of contingencies and one of those contingencies is always be liquid, don't run out of money, have amazing products and grow your business and we are a great example of that.

The fact that people don't still sort of buy into what we are doing -- didn't somebody say on this call we had a 9% yield.

I guess that is a bad idea.

Why would we want to do that?

Right?

That is like a bad idea and we will have very strong cash generation and growth over a very long period of time.

I think Joan has explained repeatedly what we see as the bans for growth with the 10-year model, with a stock price somewhere around in terms of the assumptions that we have used $85 stock price with another $25 to $30 of cash income.

Now if that is not good enough for you, then I can't help you.

I just can't help you.

I think we can easily do that, that is my personal opinion and go out and buy something else and the people who believe what we are doing only because we have been doing it for 30 years.

We have had the same basic rates of return on what we do and we are getting better and better at what we are doing.

And I get a little sort of frustrated but I know in the end those kinds of returns will be terrific for investors.

They're terrific in our funds and they will be terrific for public investors.

I realize I sound a little adversarial, I'm not really adversarial I am frustrated.

Because we can demonstrate all these things but it is hard to deal with fear.

And so maybe we have to go through another cycle or something and you come out and we earn in this huge amount of money and that will be perceived as an accident.

These aren't accidents.

This is just to correct something being a little picky here but the return is actually a little higher than you alluded to.

So we returned over $10 in cash.

You also have to include the PJT spin out which shareholders got and when you do the compound growth rate from the IPO until now, it is actually closer to 5%.

Now that is well below how the firm has grown assets, how the firm has grown earnings and we are triple the size that we were at the time of the IPO.

And as Steve said, the earnings power is meaningfully greater than what the market is giving us credit for.

So we agree with your frustration but the structure of the firm is that we get taxed on the full amount of earnings regardless of what we distribute and so retaining capital is just not as efficient for those receiving the distributions.

Okay, I appreciate the --.

Also one other thing I would say.

My own people around the table are telling me to say nothing.

But we went public at a time of sort of very high valuations.

It was really the top of the cycle.

Somewhere between two and three weeks after we went public there was the start of like the most massive credit crisis that we have had since the depression.

It drove our stock down to $3.55.

If you had bought at $3.55, you wouldn't have the same mediocre return you were talking about.

And so we can't control what the market was like the day we went public but we sure as heck can control the growth of our business and what we have paid out and all of those types of things.

So I think the analysis has a bit of a false premise which is that we went public at an absolute market peak and you are measuring us off the that.

I wish the multiples were all the same because then there would be the performance that would drive it that much higher but multiples changed and they changed for almost all financials.

And our performance against all financials is actually I think quite good.

But something happened to the overall market place and we are sort of out there right at the top.

So I think if you want to measure against the top, then you could generate numbers that are somewhat like what you were saying.

If we went public in a more normalized environment, it would have been much different.

I would like though if Bill can get into our funds, I would love to have him.

I don't we are that low in the minimums, but thank you.

Thanks everyone and we are here of course this afternoon to answer any other questions that you have.

Thanks for joining.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.