Blackstone Inc (BX) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blackstone Third Quarter 2017 Investor Call.

My name is Tony, and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Weston Tucker, Head of Investor Relations.

Please proceed.

Great.

Thanks, Tony.

Good morning, and welcome to Blackstone's third quarter conference call.

Joining today's call are Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; Michael Chae, our Chief Financial Officer; and Joan Solotar, Head of Private Wealth Solutions and External Relations.

Earlier this morning, we issued a press release and slide presentation which are available on our website.

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

I'd 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 do not undertake any duty to update these statements.

For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-K.

We will also refer to certain non-GAAP measures on this call, and you'll find reconciliations in the press release on the shareholders page of our website.

Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund.

This audiocast is copyrighted material of Blackstone and may not be duplicated without consent.

So a quick recap of our results.

We reported GAAP net income of $847 million for the quarter, up sharply from the prior year.

Economic net income or ENI per share was $0.69, up 21% from the prior year due to greater performance fees as well as strong growth in fee-related earnings.

Distributable earnings per common share were $0.52 for the quarter, up 8% from the prior year.

We declared a distribution of $0.44 per common share to be paid to holders of record as of October 30.

And with that, I'll now turn the call over to Steve.

Thanks a lot, Weston, and good morning, and thank you for joining our call.

Before I start, I just wanted to wish our General Counsel, John Finley, a happy birthday.

He's in the room and does an amazing job for the firm.

Blackstone itself has reported an excellent set of results for the third quarter, as you just heard from Wes, continuing our momentum of strong growth in economic net income, cash earnings and assets under management.

On a year-to-date basis, ENI rose 60% to $2.5 billion, while DE increased 78% to $2.6 billion.

And we remain on track to deliver one of our best years ever for DE based on sales already signed up, which Michael Chae will discuss in more detail.

Blackstone has long been the clear leader in the alternative sector in terms of AUM, fundraising and earnings as you all know.

But our financial performance illustrates a broader leadership beyond alternatives, comparable to some of the most recognized names in global money management.

In fact, for the past 5 years, Blackstone is ranked one of the top 2 or 3 asset managers in the world in terms of earnings.

We're in an elite group that includes our friends and former colleagues at BlackRock, which manages nearly $6 trillion and does a terrific job, and also Fidelity, which manages over $2 trillion.

And Fidelity, of course, is private.

So investors can only benefit from the earnings power of this group by owning either BlackRock and Blackstone.

And they're both really terrific choices for you.

Blackstone's significant earnings power continues to grow.

Total AUM rose 7% year-over-year to $387 billion, another record for the firm.

With leading global platforms across the alternatives universe, we've become the reference institution for limited partner investors who wish to deploy billions of dollars across asset classes.

That's a long way from the firm's early days of raising commitments of $5 million to $10 million apiece.

The third quarter was our strongest quarter of capital inflows over a year, reaching nearly $20 billion in 1 quarter across an ever-growing array of products.

And with several fundraisings and other initiatives underway, we expect our fourth quarter AUM to significantly surpass today's reported numbers.

One example earlier this week, as Tony mentioned on the press call, we closed our acquisition of Harvest, a leading manager in the MLP space, which will complement our existing credit and private equity-focused energy teams.

In addition to enhancing our capabilities in this area, we plan to make their products more widely accessible to a broader range of LPs, including retail, where they really don't have a presence.

This strategy is similar to how we're successfully bringing Blackstone Real Estate to retail investors with our nontraded REIT product called inspirationally BREIT.

Harvest alone will add $11 billion to our AUM in the fourth quarter.

Even as the firm continues to grow, returns have remained strong across a larger and more diverse capital base.

In the third quarter, for example, our real estate opportunities -- opportunity funds appreciated 5.5% as compared to the REIT Index, which is flat.

Now imagine that, we're up 5.5%, public REIT Index is flat.

And we were up 19% for the last 12 months.

In private equity, despite the drag from our public holdings in the quarter, the corporate PE funds appreciated 16% for the last 12 months.

Since inception, 25 to 30 years ago, these 2 strategies have returned 15% to 16% per year, net of all fees, dramatically ahead of any relevant index.

We have a long record of successfully replicating our strong investment performance in new business lines.

Our new businesses benefit from the intellectual capital and reach of our existing ones and in turn, further enhance the overall platform's strength here at Blackstone.

This becomes a virtuous circle and attracts further capital.

For example, our real estate core+ platform, which we launched less than 4 years ago, is up to $18 billion in AUM, an increase of nearly 40% in 1 year.

Our Tac Opps business is now up to $22 billion in AUM in about 5 years.

Both of these platforms grew from investment opportunities we identified at the time that didn't fit into the mandates of our existing funds.

Today, they've reached global scale and remain 2 of our fastest-growing areas.

Another major area for us, of course, is infrastructure, as you've heard.

While we're limited in what we could say given we're fundraising now, restricted by the SEC from commenting, we're targeting a first close for our new fund by the end of the first quarter next year.

As you know, we've already received up to a $20 billion commitment from a sovereign investor, which will flow into AUM as matching capital is raised.

We also continue to expand and diversify our fundraising channels, including into retail.

The power of the Blackstone brand is perhaps best illustrated by the high level of demand we're seeing for our funds across different subchannels, including the wirehouses and private banks, independent broker-dealers, the RIAs and family offices.

These channels investors, by and large, have been under-allocated to alternatives within their portfolios, some dramatically.

We're helping them access institutional quality products, in many cases for the first time, having established one of the leading retail alternative platforms in the world, now already representing 18% of our total AUM.

And we have other major initiatives in process that I can't yet talk about here today because sometimes people copy what we do.

All of this taken together, our firm is clearly positioned for tremendous growth.

Importantly, we're not growing just for the sake of growth, and we never have.

As we further broaden the suite of solutions we can offer our investors, we have more avenues through which to find and create value basically anywhere in the world.

This is particularly important in today's environment of higher prices, where deal activity has slowed in areas like U.S. opportunistic and distressed investing.

Instead of slowing down, we've been able to remain very active in terms of new investments.

In the third quarter, we deployed nearly $11 billion, bringing us to almost $40 billion deployed over the last year.

By far, our most active 12-month period on record and more active than anyone in this type of investment area.

Despite higher prices, we're finding plenty to do around the world.

Virtually all major geographies are in positive growth mode and the outlook's improving.

In the U.S. specifically, the employment picture is strong and tax reform has the potential to further accelerate growth.

There's some potential threats in the periphery, including geopolitical risks, the potential for unfavorable policy outcomes and for central banks to tighten policy more aggressively than markets expect.

But we remain broadly constructive on the prospects for global growth.

Against this dynamic background, I think we're doing an excellent job choosing our spots and building conviction around certain themes.

For example, we moved aggressively into Europe early in the recovery, focusing on fundamental value or situations where dislocation created compelling opportunities.

This enabled us to ride out the shorter-term volatility brought on by some of the issues they've had like the Greek debt crisis, Brexit and the ongoing impact of populism on several elections.

These types of dislocations provide opportunity for a firm like Blackstone.

Two great illustrations of this trend are Logicor, our highly successful logistics investment, which we discussed last quarter and Alliance Automotive, which we agreed to sell a few weeks ago.

In the case of Alliance, we acquired an auto parts distributor operating in the U.K. and France in late 2014 when we were investing in Europe and Europe was really out of fashion.

In fact, people were wondering whether Europe would stay together.

I remember at the time the prevailing fear about monetary union and other issues regarding Europe and slow growth, which is in point, in fact, what was happening in Europe at that time.

In the first year, we expanded Alliance into Germany.

And over the subsequent 2 years, increased EBITDA by about 2.5x by accelerating organic growth, completing 50 bolt-on acquisitions and 2 strategic ones.

That's a lot of stuff to be doing, but that's how you make money in private equity, not just buying and holding.

We're now selling the company for over 5x our original cost.

This is a company that makes auto parts.

This is not a software company or a tech company.

So you can make enormous money doing the right things in our business.

It's never easy, but that's why our LPs choose us.

We've been able to create great investment outcomes, and we're doing it across a wider array of funds and areas.

Given the amount of capital deployed over the past several years and the seasoning of earlier investments, we're now seeing a very active pace of realizations at attractive returns, driving substantial cash distributions for our shareholders.

Over the past 3 years, we've distributed an average annual of about $2.50 per share of value, driven by over $130 billion of realizations.

Over the same period, despite those realizations and distributions, assets under management still increased 36% to $387 billion while most money managers were actually shrinking.

We've demonstrated we can deliver consistently high payouts to our shareholders over time while simultaneously growing at a high rate, and I have every expectation that this will continue.

Looking forward, I have great optimism for the firm's prospects.

We will continue to leverage our differentiated business model, our unique market position, our highly recognized brand, and most importantly perhaps, our culture of excellence and integrity to drive great results for our LPs and our shareholders alike.

Thank you for joining the call.

I'll turn it over to our Chief Financial Officer, Michael.

Thanks, Steve, and good morning, everyone.

The third quarter marked a continuation of the firm's robust momentum with consistent growth in all of our key revenue and earnings metrics.

Total revenue for the quarter rose 21% year-over-year to $1.7 billion, while economic net income also increased 21% to $834 million or $0.69 per share, driven by strong double-digit percentage increases in both management and performance fees.

Performance fee revenue increased 33% in the quarter to $895 million, with healthy fund returns across a steadily growing base of invested capital.

Our investment record, combined with business line expansion, continues to attract significant capital inflows, reaching $19.7 billion in the quarter and $62 billion over the past 12 months, propelling AUM up 7% to new record levels, both in total and for every business segment.

Management fee revenue rose 15% year-over-year to $692 million as fee-earning AUM also rose 7% to a record $286 billion.

Fee-related earnings rose 25% to $307 million, with FRE margins expanding 340 basis points year-over-year to 44.3%.

Stepping back from the quarter and looking at year-to-date results, which are more informative than any single quarter.

Total revenues rose 45% to $5.1 billion, ENI was up 60% to $2.5 billion and DE increased 78% to $2.6 billion.

Fee-related earnings rose 25% to $909 million, by far a firm record for the period.

On last quarter's call, we outlined a baseline path of FRE growth in full year 2017 of mid-teens or better.

Given the performance and visibility, we're able to refine and update that view to growth in the high teens or better.

Indeed, 2017 is progressing to be one of the best years in our history.

This is further evidenced by the sustained momentum in the key capital metrics driving our financial results, realizations, investment performance, deployment and fundraising.

And I'll now discuss each in more detail.

First, with respect to realizations and DE.

We generated $8.8 billion of realizations in the third quarter and have a significant pipeline of sales not yet closed.

The single-largest realization in the quarter was Hilton, where we sold about half of our remaining shares and also fully exited our stake in Hilton Grand Vacations, one of the 3 public company spin-offs from the original investment.

Our $6.5 billion investment in Hilton has now produced about $14 billion of profit, equating to a multiple of 3.1x, including $1.2 billion of unrealized equity we still hold.

Other realization activity in the quarter included the sale of several office assets in the U.S. and U.K., certain other sales in Tac Opps, distributions from multiple portfolio company refinancings and notably, our first realized cash performance fee from our core+ real estate strategy.

Our third quarter activity brings us to $37 billion of realizations so far in 2017, with another $9 billion under contract, including the sales of Logicor in real estate and Alliance Automotive in corporate private equity, among others.

These expected sales, together with expected FRE and giving effect for interest and taxes, should result in approximately $0.60 per share of DE in the fourth quarter prior to any further realizations.

Added to our DE in the first 9 months of $2.17 per share, we therefore enter the fourth quarter with line of sight on over $2.75 of DE per share for 2017, which even prior to further realizations in the quarter would equate to one of our 2 best years for DE in our history.

Second, investment performance and ENI.

We continue to see broad-based strength across most of our global portfolio.

Real estate, the opportunity funds appreciated 5.5% in the quarter and 19.2% over the last 12 months, while the core+ funds appreciated 3.2% and 12.4%, respectively.

Our real estate business, in particular, continues to disprove the notion that size is the enemy of returns.

Even as AUM for the opportunistic funds has doubled in the past 5 years, the performance has been exceptional.

Indeed, in the 4 vintage years between 2012 to 2015, in each year, we invested $7.5 billion to $8.5 billion across the BREP funds.

And in each vintage, we have delivered annualized gross returns of between 22% to 25% to date.

This performance has been powered by many of our largest investments which include BioMed, our U.S. life sciences office portfolio; our India office platform; the Cosmopolitan Hotel in Las Vegas; Invitation Homes and of course, Logicor, among others.

These are some of the most important contributors to the firm's existing store value and bode well for future realizations.

Moving to private equity.

The corporate PE funds appreciated 3.3% in the quarter and 16% for the prior 12 months.

Portfolio companies continue to report healthy revenue and EBITDA growth in the mid and high single digits, respectively, driving appreciation in our private holdings of over 5%.

That performance was partly offset by a decline in our public, in particular, our largest public position, an energy infrastructure company which has been an extremely successful investment for us and where we feel very good about the fundamental long-term value.

GSO delivered composite gross returns in the quarter of 4.1% and 2.7% in its performing credit and distressed segments, and 14% and 11%, respectively, for the LTM period.

For BAAM, with a 2.3% composite gross return in the quarter and 9% for the LTM period, 89% of incentive fee-eligible AUM is above its high-water mark versus 67% a year ago.

This positioned BAAM to generate $44 million in performance fees in the quarter, higher than all of last year.

And 9-month total revenues of $573 million nearly equal to full year of 2016.

In aggregate, this performance across the firm has helped drive our net accrued performance fee balance $3.6 billion, up 8% over the last 12 months and to its highest level in 9 quarters, despite that being a period in which we delivered some $105 billion in realizations, a powerful reflection of both performance and the growth in our invested capital base.

Third, capital deployment.

Our deployment remains very active even in the face of a tricky broader market environment, as Steve discussed.

We invested $10.9 billion in the quarter across the firm and committed another $6.9 billion.

How are we doing it?

The answer is carefully and by leveraging our global reach, our scale and our multiplicity of platforms to seek value across the whole risk/return spectrum and aggressively pursue themes we believe in.

Regarding our global reach and scale.

Nearly half of the capital we deployed or committed in the quarter was outside of the U.S. with about 40% in Europe, the rest in Asia.

Four of our 5 largest transactions across the firm were in Europe.

In real estate, our commitment to acquire a 51% interest in a EUR 30 billion face value portfolio from a Spanish bank and our take private of a Scandinavian-listed property company.

In private equity, we agreed to acquire Paysafe, the U.K.-listed leading global payments provider.

And in credit, our mezzanine fund provided a nearly $0.5 billion financing for the acquisition of a leading European industrial distribution company.

Meanwhile, our deal flow in Asia is quite healthy, including, for example, 3 committed transactions by BREP and BCP in the last 2 quarters involving public companies in the region, reflecting our theme of finding idiosyncratic value in orphaned, listed companies in these markets.

Regarding our multiplicity of platforms.

With a widening array of funds with diverse mandates, we can pursue value flexibly and selectively identify the best risk/reward in a given environment.

It's about having more weapons to deploy to express the firm's intellectual capital and convictions and take advantage of deal flow that cuts across the firm.

$2 billion of the $10.9 billion in third quarter deployments originated from our core and core+ strategies in private equity and real estate that allow us to invest in high-quality assets with longer-term holds.

Each of Tac Opps and Strategic Partners deployed over $1 billion in the quarter, with Tac Opps' flexible mandate to pursue idiosyncratic opportunities with compelling risk-adjusted returns, arguably making it the busiest part of the firm in this current environment.

Of course, none of the aforementioned platforms existed at the firm just 5 to 6 years ago.

Lastly, on fundraising.

As expected, our pace of inflows reaccelerated in the third quarter to $19.7 billion, including the first close of $5 billion for our second dedicated Asia real estate fund, $4.7 billion for our third GSO distressed fund, bringing it to $6 billion raised, and $2 billion for our third Tac Opps vintage.

We expect each of the 3 fundraises to reach or exceed $7 billion in size in the near term, driving significant AUM growth at a time when neither of the flagship global BREP or BCP funds are in the market.

Looking forward, we expect the pace of AUM growth to further accelerate in the fourth quarter and into 2018, driven by a variety of products and significant initiatives, as Steve discussed.

A final comment on 2 notable corporate developments.

First, with respect to the Harvest acquisition, to add to Steve's comments, a little more color on its impact.

We think this is a really attractive deal.

This is a firm with a terrific, high-quality, high-integrity team that has set the standard for investing in its asset class, with its flagship strategy outperforming its benchmark by 500 basis points over the last 5 years.

Our institutional LP bases are very complementary with limited overlap and the retail opportunity is in its nascency.

Finally, with respect to financial impact, on a run rate basis, prior to future growth, Harvest adds approximately $40 million of FRE and pretax DE.

While we are not disclosing the specific valuation, we have structured the acquisition such that the upfront purchase price reflects a multiple of FRE and pretax DE in the area of the mid-single digits.

Second and in conclusion, our balance sheet.

At the end of September, we issued $600 million of U.S. dollar bonds, split evenly between 30- and 10-year maturities to refinance our notes maturing in 2019.

We also took advantage of favorable conditions to execute cross-currency swaps back to 10-year pound sterling and 30-year euro yields, further hedging the firm's P&L exposure to assets in those currencies.

The result was lower funding cost than could have been achieved by issuing directly in those currencies.

And in the case of the euro market, the longest tenor available in the market is only 12 years.

In effect, we executed a $600 million 20-year financing for the firm at an effective yield of 2.4%, which reduces the firm's weighted average cost of debt from 4.4% to 3.7% and extends the average maturity from 12 to 15 years.

Indeed, 40% of our debt has maturities falling beyond 2041, all while substantially neutralizing the FX volatility in our P&L.

The early repurchase of our 2019 notes will result in a onetime expense to DE and ENI in the fourth quarter of approximately $30 million, which we'll recoup in interest savings in just over a year.

The rating agencies reaffirmed our A+ rating, which are the highest of any alternative firm.

Investor response was exceptionally positive with the offering 6x oversubscribed.

And with the 10-year issue currently trading within 25 basis points of the lowest yield of any public asset manager, reflecting investor confidence in our firm and business model.

Our fortress balance sheet and our access to capital is truly a source of strength for the firm, we believe.

With very low cost, very long life financing and ample cash and liquidity, we have tremendous flexibility to pursue a set of strategic opportunities that, as you've heard on this call, we see as compelling and deep.

With that, we thank you for joining the call and would like to open it up now for questions.

Operator, if we could please queue for questions.

(Operator Instructions) Your first question comes from the line of Mr. Craig Siegenthaler of Crédit Suisse.

I just wanted to get an update on the retail expansion and really sort of 2 main points.

One is, how many retail wholesalers do you employ now?

What does it sort of look like versus a few years ago?

And then also given that 18% of your product now sits with retail, what does the product offering start to look like as you work your way down from the high net worth segment into the mass affluent?

Sure.

It's Joan.

So on the first question in terms of wholesalers, I just want to step back for a minute.

So this is really operating as a full business.

And I don't want you to think it's just that we're popping out some salespeople and it's just a sales organization.

So to support and really partner with major firms, independent broker-dealers, we have wholesalers, we have a sales desk, we have full operating support, fund accounting, marketing, compliance, et cetera.

And that really has taken the last several years of building to get into place so that we can now expand the distribution.

But to address your question specifically as it relates to the wirehouses, we have about 10 wholesalers and a similar amount, 12, in the independent broker-dealer channel.

As it relates to product, so initially, because we were focused on the wirehouses and qualified purchasers, we were largely distributing our drawdown product, the same institutional product.

But in working with the firms, we identified a real need for mass affluent and also those in the $1 million to $5 million range to also have access.

So in addition to that, we've really worked very closely to leverage our team capability in the investing groups and develop more product that have structures that are either semiliquid or more liquid.

So I would say today, if we look at over the last 12 months about -- it's roughly split evenly, liquid, illiquid product sales.

And you'll continue to see more product development happening.

So I'm excited.

And it's early stage.

And just to highlight where we are, even though we are much further along than most, and I think we have the broadest product array anyone could offer given our global platforms across the board, one of the big wirehouses we've been working with for several years, we looked at penetration there.

And even for those FAs who sell all product, we're about 20% penetrated.

When we look across the entire system, we're 5%.

So I think the upside is quite significant.

Joan, you might also mention we've got the beginnings of a sales force that's going direct to large family offices as well in addition to the 22 people you mentioned.

Correct.

Yes.

So we have a team, both here as well as abroad.

And actually, even on the more institutional side focused on private banks internationally as well.

And there, of course, we're trying to find solutions for family offices, multifamily offices.

Your next question comes from the line of Mr. Glenn Schorr of Evercore ISI.

A question on infrastructure overall.

I think on the earlier call, the media call, you had mentioned having to pass on certain opportunities just waiting for the funding for this fund.

So now that we're getting a lot closer to the first close, if we could talk about what kind of opportunities are out there in public versus private, existing versus new build?

I'm just curious on what's happening now underneath the covers as you build the back book, if you will.

Okay.

Glenn, I'll take that one.

Let me start by saying that as we mentioned in the media call, we're really just beginning the institutional part of the fundraise.

So we're not in a position to be executing transactions at this point and won't until we get close to having capital in hand.

And that -- so that will be -- you shouldn't expect to see anything until the middle part of next year as a practical matter in terms of deals being kind of -- being inked.

The opportunities, again, as mentioned in the media call, we think there are interesting opportunities in a number of areas.

Number one, public to privates were asked this morning and that we think there's opportunities to take existing public companies private, enhance the operations and create some enduring value for our investors.

There are also a number of assets that were owned by large companies that are infrastructure-type assets which would have much more value pulled out of that company than embedded in that company given where the multiple of those companies trade.

So we think that they'll be major corporations, integrated oil companies, others, repositioning those assets into the infrastructure market.

Thirdly, there's a number of infrastructure players that are looking for expansion capital to further build out their networks.

That's been a fruitful area for us.

We think that will continue in more private equity funds and more of the kind of newer stuff, but it also extends right on into core, core+ infrastructure.

We think that will be interesting.

Over time, we will move more towards new build, really high-quality assets, but those -- that will take time.

The gestation period of those transactions is long, but there'll be definite opportunities there for us as well.

So that's the kind of palette we see.

Your next question comes from the line of Mr. Bill Katz of Citigroup.

Also sort of coming off the media call, you had highlighted both the -- sort of a building up of permanent capital as well as an opportunity to deepen the opportunity in the insurance side.

Just sort of wondering if you could talk maybe a little, flesh out both those initiatives and sort of how you think the opportunity might roll out in '18 and '19.

Okay.

Well, on the permanent capital side, we have a growing number of permanent capital vehicles in each of our businesses.

And I would think that -- you should anticipate that we're going to continue to try to evolve our business more and more towards that kind of vehicle because the traditional drawdown fund is a bit of a treadmill.

As you grow, you put money out, then you've got to sell assets.

And a lot of times what you have to do in order to return capital to your investors and harvest your gains is sell your best assets.

And that seems kind of like -- kind of silly to us in a way.

If you've got a great asset that has a lot of future potential, why sell it?

And why not let it work for investors longer.

And one of the underlying thesis we've got in this firm is that where interest rates come down, real rates to near zero, it's very hard to have high compounding returns.

And you can substitute that in terms of serving your investors' need by extending the duration of your holdings and of your assets.

So for example, you can make -- you can be a lot richer if you hold an asset for 12 -- for 12 -- 10 years earning 12% than if you hold an asset for 4 years earning 25%.

And so extending the duration, letting that money work for people longer at attractive compounding rates, is one of the ways we serve our investors better.

That drives us more towards permanent capital vehicle.

And then from our public investors standpoint, those vehicles have the advantages of holding the assets longer so it allows us to compound AUM growth, of allowing the -- of allowing the assets to work for you longer so you get growth and you get the growth in AUM from compounding and of course, allowing us to harvest carries by not actually having to liquidate the assets.

And that makes carries both steadier and it allows the AUM to keep growing.

So we think it's a good model for a lot of our businesses.

And as Joan was saying, for certain target investors, we have to change the form of our funds to fit those markets better.

So that's another reason that we're doing this.

So for all those reasons, we're moving more towards the permanent capital.

In terms of the insurance, we've had our products in insurance companies for some time.

A lot of the new products we're developing, the private credit, the permanent capital vehicles, the yield-oriented products, they -- many of them have some very attractive capital treatment on insurance companies.

We've got a full product suite.

As you know, we own something called Harrington, which is a reinsurance company.

We're in the process of buying Fidelity & Guaranty Life.

We've got other things going on.

So it's a continuation of a trend.

And I think you should expect to see that accelerating.

Your next question comes from the line of Mr. Chris Shutler of William Blair.

FRE is going to be up nicely this year.

It looks like on pace to exceed $1 per share.

So maybe talk about the trajectory of that number looking out to 2018, the key drivers.

And I guess, specifically, do you expect continued double-digit growth in FRE next year?

Chris, I think at this point, we wouldn't want to get too granular on projecting or the drivers of 2018, but we certainly expect them to be healthy.

We expect fee-earning AUM growth to be quite healthy.

And so I think broad strokes, we'd certainly expect it to be -- continue to be in the double-digit percentage growth area.

But at this point, probably wouldn't want to refine it further.

Okay.

Can I ask just one more on the private equity and real estate, the appreciation of the opportunistic funds carry values was very strong over the last 12 months.

I think double, about double what it was over the previous 12 months.

Obviously, public markets have been positive, better economic backdrop, in general, I'm sure has helped.

But anything else that you'd point to on why the appreciation has really accelerated?

Look, I think as Steve mentioned, Tony mentioned on prior call, it is a combination of, let's call it, alpha and beta.

The markets -- the market backdrop has been supportive, but the companies have been performing through the -- we'd like to think the value-creation efforts that underpin the investments we always -- we make.

So I think both forces have been very positive.

Your next question comes from the line of Brian Bedell of Deutsche Bank.

Just one clarification on the FRE, following to the prior question on FRE for 2018.

Are you expecting the infrastructure fundraise to begin impacting that?

I think you mentioned potential beginning deployment sometime later or sometime in the middle of '18.

Any impact from that in 2018 or is that really more of a 2019 impact to FRE?

We would expect some impact, but not -- but I'd say modest in 2018.

Okay.

Okay.

And then just back on the retail strategy.

So obviously, sort of an increasing momentum, it sounds like, in terms of the opportunity.

How do you think, Joan, about growing that business and adding a lot more capacity on the sales side?

And do you feel like you have enough product capacity currently to satisfy that demand or is more product development from the structure perspective necessary?

That's a great question.

So as you know, with the drawdown funds, we are largely oversubscribed even for institutions.

And so the goal isn't just to raise as much capital as possible.

And I think the growth will come from expanding the penetration or deepening the penetration into the current channels and expanding those channels as we are in independent broker-dealer and also developing product, which we're doing.

And it's really bespoke product for these channels based on their needs.

And one example in real estate, if you think about it, on the institutional channel, it's longer drawdown, which is only accessible to qualified purchasers, whereas a lot of individuals want yield.

And we were able to leverage the real estate investing group, same investing platform, but identify assets that were more yield-oriented rather than gain and put it in a structure that was accessible to them.

I think one other important point, and this is kind of a time line of history.

Back in the day when defined benefit plans really were the majority of how folks were planning for their retirement, everyone had access to alternatives in that sense.

And today, even teachers, policemen, et cetera, probably 20%, 25% of their pension funds are invested in alternatives.

These products today are not allowed to be embedded, by and large, in 401(k)s because of the liquidity.

And so most individuals just have not had access.

And when you talk to advisers, their targets are anywhere from 10% to 20% for individuals.

But today, the penetration is really more like 2%, 3%.

So how are they going to fill that gap?

And we're really working with them on appropriate products to be able to do that.

And that's anything from developing daily liquidity product to semiliquid product.

And I think you'll see more of that over time.

And it sounds like the -- you can really greatly expand that capacity even on the sales force side, I would think, to better leverage that opportunity?

I mean, would you say that 18%, not trying to put a number on the denominator, but at least the numerator of that 18% could double over the next couple of years?

I think it's really not just throwing bodies at it.

We need to be smart about the technology, analytics that we're using in order to reach more people.

And some of it's just time.

We had this past year, 2,500 advisers come through Blackstone Universities around the world.

We're continuing to educate advisers and really develop a relationship.

So I want to caution a little bit.

It's not just that you go to a distributor and say, hey, here is our product, put it on the platform and it sells itself.

It's really forming a partnership with the adviser to help them improve their business, taking the time to educate them, providing great service, reporting, et cetera.

And so it will be a continuous build.

Just, Brian, also I want to mention.

If you think about the return pyramid out there in terms of global opportunities.

At the top of the pyramid, the narrow point, you get the very, very high returns, the private equity and the BREP.

And the sheer dollar availability of that is small.

As you move down the risk and return spectrum, that pyramid gets wider and wider.

So some of the areas that we're getting into are vast in terms of the opportunity set and the amount of capital we can raise by comparison to the really kind of elite, high-risk, high-return drawdown funds where we started.

So we're opening up big, big frontiers.

Your next question comes from the line of Alex Blostein of Goldman Sachs.

A question for you guys around acquisitions, specifically Harvest, and I guess kind of broader acquisition landscape.

So could you spend a little bit of time on giving us more color around the product that they are managing today, how they're structured?

And I guess more importantly, what the revenue opportunities could look like for that business when you plug it into your distribution force, I guess?

And as a follow-up, just broadly around the appetite for more deals and kind of any particular area of interest?

Okay.

Well, we're -- I'm not going to get in projecting what we're going to do with Harvest at this stage.

But suffice it to say, that as Michael said, it's a very high quality niche manager in a segment of the markets which are largely protected from the big commodity flows.

There's not -- there's only a handful of good MLP managers.

The Harvest guys have outperformed a lot, the most -- the rest of the market.

So we think it's a niche manager that has focused its distribution on institutional accounts.

But then again, they don't have anything like our distribution or relationship set into that market.

So we can help them a lot in their core market.

And they have essentially no retail product.

So they have -- what they have is they have some commingled funds, some SMAs doing MLPs.

We can take that, we think, not only broader institutionally, but through the retail channels that Joan's been talking about.

And we think we can significantly increase their AUM.

At risk of -- and I'm not going to give a time on revenues and so on and so forth, but we can -- but we think we can more than double their AUM.

Your next question comes from the line of Robert Lee of KBW.

Clearly, capital raising has been going very well for you guys and what -- and expectations are high.

I'm just kind of curious though, how do you think LP expect -- return expectations are evolving just given what asset values have done the last 9 years, all the capital out there?

And I guess as part of that, what do you feel is like the return premium?

I'm sure it varies by product, but if we think of maybe PE and your real estate opportunistic business, what's kind of the return premium that you think LPs are expecting in order -- in exchange for agreeing to kind of a long-term lock-up?

Just trying to get a sense of where you think their head's at.

Okay.

I'll start and I think Steve might want to chime in.

And we might have different opinions on this.

So we'll see where it goes.

My own view is that LPs' return expectations have come down slightly.

I frankly think more than they tell us because they want to keep the bar high for us.

And of course, that's fine with us because we want to exceed a high bar ourselves.

Depending on the LP for the high -- the traditional drawdown opportunistic funds, real estate or private equity, most LPs will say, I want to do 500 basis points more than the public markets, although I think there's a number that would admit they're happy with 300 above -- net of fees and carry above the public markets.

Then that gets you into, well, what are the public markets going to do going forward?

My own personal view is, and I think most of them are now S&P kind of would be 5% to 6%, that sort of range.

So that gets -- that sets a bar of -- if you look at that, 8% to 12%, 8% to 11%, which is much, much lower than what we set for ourselves.

As Steve mentioned, in these areas, we've done 15%, 16% forever, every holding period, every fund.

We've never had a losing fund and so on and so forth.

And we continue to expect to deliver returns in that ballpark.

And so I think we'll be wildly above their true expectations, and that will continue to drive fundraising and increasingly they'll allocate more assets to this asset class, as they should.

Steve?

I guess if we were having an open conversation, which apparently we are, is that the returns they're expecting are higher.

We -- we're in the business of delivering the same high returns that we were.

It may be a little harder in today's environment, but you're -- I think we (inaudible) 100, 200 basis.

What we're doing as a firm, as you can tell from the overall sort of approaches that both Michael and Tony are taking, is we're designing products at different return points because what we found is that there's not a unified view on this question.

And so more than ever in my career is some people are satisfied with products that with current income yield 7%, in a world where Treasuries are not (inaudible) . And other people are looking for returns in the lower teens, but some are looking -- I think some still want the 20s.

And so what we are trying to do as a business, and I think we've been quite successful, is segmenting products to appeal to people who want returns of different type.

And this is relatively new in terms of how the world's going.

And then we also have people who are in the conservative business.

With markets generally high around the world, they're just really focused on -- I really don't want to lose money when things come down.

What can we do to take care of that issue.

And so we're now much more segmented.

And we're doing that as a strategy.

And we're also simultaneously rolling that out globally.

So that this is like an unbelievably exciting sort of a business expansion, if you will, where we can perform really well in business.

(inaudible) Tony said or Michael said, I forget which, that counter to the, the more money you have, the worse your results are supposed to be.

We manage to keep segmenting to hit results of a certain type for a certain target, a group of investors.

And we're able to do that.

And that's a big power for the firms doing now strategically.

And I believe that we're uniquely positioned to do that in the alternative class because we're the only people who are in all of these (inaudible) in every one of these.

And the ability to keep innovating, taking very large amounts of money and putting them out because it's not large amounts of money for that strategy.

And everything is geared to have terrific performance with the target expectation of whoever we are managing money for.

So it's a lot of fun and everybody at the firm is charged up because we're hitting new niches.

And part of the key of running a really good financial services firm is getting there early and right with the timing and not being like a follow-on person after the opportunity has sort of played out.

And that's something that we've been doing for 30 years.

And there's lots of opportunities to do that in the future.

That's a longer answer than you may have wanted, but I've been relatively quiet.

Your next question comes from the line of Mr. Michael Cyprys of Morgan Stanley.

Just wanted to ask about the distressed strategies.

It looked like you raised about nearly $5 billion of capital for distressed strategies in the quarter, yet I think on the media call earlier, Tony, you mentioned that you're seeing more opportunities today in performing credit, not as much out there in distressed.

So can you just talk about your expectations for where you might be able to put some of this capital to work and how you're thinking about the time frame there and the opportunities manifesting for distressed and what the sort of catalyst might be?

Sure, Mike.

As you know that or as you may not know, but that distressed fund is a traditional drawdown fund.

And once it's invested and it comes to the end of its life, we go and fundraise.

They have drawn -- they have investment periods typically of about 6 years.

So you're not raising a fund like that to take advantage of an opportunity at a moment in time in markets.

The fundraising itself takes a year.

It takes you, let's say, 4 or 5 years to get the money, most of the money put to work.

And then you hold the thing for 4 or 5 years.

So it's an asset class that you have to commit to through the cycle and through the cycle it will treat you well.

At this point, economies are good, markets are good, even sort of stressed companies can finance.

So it's -- meaning there's not as many opportunities as we might like.

There are always things, of course.

There are always companies that stumbled either because of things beyond their control, oil prices, the Internet impacting retail, regulatory changes and one thing and another.

And there are always companies who stumble because of self-inflicted wounds, overpaying for acquisitions, management change and one thing and another.

So there will -- there are always opportunities and it's just a question of right now the volume.

And this -- the economy won't grow forever, interest rates won't be near zero forever, and I think that we will see plenty of opportunities in the investment period for this fund.

Great.

And if I could just ask a quick follow-up question.

Just curious how you're integrating data and technology into your investment process today?

And how you think that might evolve over the next, say, 5 years?

That's a really interesting question because it's something that we've ratcheted up dramatically here in the last -- in this year, I would say.

It's something Steve's been pushing us all on.

And so we have a number of initiatives really to look at the use of data, frankly, and the development and sale of data that we have embedded in our portfolio companies.

And that's an ongoing exploration, I think, at this point.

But we've now set up a specific, dedicated team, a data team, if you will, to inform our investment processes, number one, internal.

Number two, figure out what might be harvestable, mineable and monetizable.

And number three, to work with deal teams looking at portfolio companies, both to use data to make better investment decisions, but also to use the new technology that is evolving out there to help our companies operate better.

And so that will be a common, like portfolio ops, a common resource to all of our different investment businesses.

And so I'm excited about the possibility there, but it's early days.

Great.

Is that something that could be meaningful in terms of revenue at some point to the firm when you mentioned sale of data?

I think that's way too early to say.

And I'm not sure that the way to monetize it will be to sell it.

Another way to monetize it might be to build investment products around it.

We'll just have to explore that.

But in terms of like the time horizon that you deal with in terms of stocks, not significant.

Your next question comes from the line of Mr. Mike Carrier of Bank of America Merrill Lynch.

Michael, just maybe on the realization activity in the -- thanks for the color for the fourth quarter and this year is setting up to be a big year.

Just wanted to get a sense, if we look over the next couple of years, we can see the returns, meaning the returns are favorable, the net accrued carry's building, so things look good.

Any color on like seasoning the portfolios just to gauge if this is -- and again, I'm not saying 2017 is sustainable, but just what maybe the outlook is in a constructive market backdrop just given where the portfolios sit today?

That's a good question, Mike.

I think we -- I discussed the, I think, the robustness of sort of the magnitude of the receivables, right?

That really has returned to the levels from a couple of years ago.

I think when you think about the composition of it, something like just under 40% of the current receivable is public, is liquid.

And that obviously is a kind of reflection of maturity and of being closer to monetization.

The vintage year mix, I think, is pretty similar in the past.

But I did want to underscore in my remarks that we're really gratified by the fact that some of the vintages, and I highlighted real estate, that are a bit younger, right, the 2012, '13, '14, '15.

We made some big investments at that time.

And at the time maybe some people thought markets were elevated, would they be good deals.

And they've really seasoned quickly and are being converted into DE.

So that -- I think that's part of what has driven the value creation at this point and what will drive the DE runway from here.

So just a mix of a couple metrics and then sort of a qualitative sense.

But we certainly feel like when you step back, we've sort of transitioned from a carry receivable that only a couple of years ago was largely driven by some of the big pre-IPO funds and was full of public positions to one that has remained stable to even growing as we've transitioned to sort of the -- to the more recent vintages.

Your next question comes from the line of Mr. Patrick Davitt.

It's looking like the European NPL opportunity, it feels like we've been talking about for years, might actually happen sooner rather than later.

Could you speak to your view on that finally unlocking?

And within that, how much of your dry powder has a mandate to invest in those kind of assets?

And which fund specifically that would be?

Okay.

Well, I'm not going to inventory all the funds, but suffice it to say that we generally have pockets that can do NPLs in GSO, in real estate, in Tac Opps and in BAAM.

And I think that depending on the NPL, all of those funds have participated in NPL acquisitions around Europe in the past year.

The biggest area has been Spain.

And we just closed a very large transaction there, about $10 billion of NPLs.

But Italy is another big area, and we have initiatives in other countries as well.

So yes, it's coming -- it's coming alive.

There's pressures from the central banks on banks to clean that up.

By the way, it's not just Europe, you're starting to see those same pressures, those same trends in India as well.

So I think it's going to be -- continue -- it's been good for us.

By the way, the NPL portfolios we've got -- bought have performed very, very well.

And I think it will be -- it will continue to be an attractive area.

Your final question comes from the line of Mr. Devin Ryan of JMP Securities.

Well, my questions have been asked so we can leave it there.

We will now turn the call back over to the speaker for closing remarks, and thank you.

Great.

Thanks, everyone, for joining us and please reach out with any questions.

Ladies and gentlemen, that concludes today's presentation.

You may now disconnect.

And everyone, have a great day.