Blackstone Inc (BX) 2020 Q4 法說會逐字稿

Good day, everyone, and welcome to the Blackstone Fourth Quarter and Full Year 2020 Investor call hosted by Weston Tucker, Head of Investor Relations.

My name is Leslie, and I'm the event manager.

(Operator Instructions)

And I'd like to advise all parties that the conference is being recorded for replay purposes.

And now I'd like to hand you over to your host for today, Weston.

Please, go ahead.

Thanks Leslie, and good morning, and welcome to Blackstone's Fourth Quarter Conference Call.

Joining today are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; and Michael Chae, Chief Financial Officer.

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

We expect to file our 10-K report later next month.

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 and 10-Q filings.

We'll also refer to certain non-GAAP measures, 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 for the quarter of $1.8 billion, distributable earnings were $1.5 billion or $1.13 per common share, and we declared a dividend of $0.96 per share to be paid to holders of record as of February 8.

With that, I'll turn the call over to Steve.

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

Blackstone reported exceptional results for the fourth quarter, including our best quarter for both distributable earnings and fee-related earnings in 35 years.

Realizations rose to a record $21 billion as global markets recovered from the trough of the crisis.

At the same time, we deployed $25 billion into new investments, also a new record, adding to the foundation of future value.

The power of the Blackstone brand has never been stronger.

We achieved nearly $100 billion of the inflows in 2020, ending the year with industry record AUM of $619 billion.

While these results would be remarkable in any environment, they are particularly so in a year where the world faced unprecedented challenges, including the steepest economic downturn in modern history.

Our business is built to navigate the difficult periods and to deliver for our investors in good times and bad.

Limited partners around the world know that by investing with the best alternative managers, they can generate better returns than by investing in traditional asset classes alone.

That's why capital flows have increasingly migrated towards the alternatives asset class and to Blackstone, in particular.

We believe this trend will continue, particularly in an environment where interest rates are expected to remain historically low.

Blackstone is the reference institution in our rapidly growing sector as is radically acknowledged by third parties.

For example, Morgan Stanley published a report entitled, [30 for '21] naming Blackstone as one of the best companies in any industry, based on its review of business quality and competitive positioning.

We continue to take market share, raising well over $200 billion over the past 2 years, comparable to the fundraising of our next 3 largest peers combined.

We have the most recognized brand for both institutions and retail investors.

And our unique culture continues to set us apart, characterized by the highest standards of excellence and an unwavering dedication to serving our clients.

We have extraordinarily capable people at every level of the firm as well as the ability to recruit exceptional talent in the occasional circumstance when we look externally for someone to help us build a business.

Our investment process is highly differentiated including a rigorous focus on choosing the best sectors and assets, always with a priority of protecting capital.

This is evident in the way we concentrated nearly half of our real estate portfolio in global logistics and life science offices in the years ahead of the recent downturn.

Our positioning helped drive 1,100 basis points of outperformance for our opportunistic real estate funds last year as compared to the public REIT index, that's 1,100 basis points outperformance.

And unlike investing in public stocks, we create value in our investments through our expansive portfolio operations and asset management capabilities.

The result is the exceptional long-term investment performance that defines us as a firm, including 15% net returns annually in both corporate private equity and opportunistic real estate for 3 decades.

The power of our brand has been continuously reinforced by our performance to market cycles of the past 35 years.

This was particularly true during the global financial crisis, when we extended our leadership position in every area and launched multiple new businesses, setting the stage for the next decade of remarkable growth.

Since our IPO, which immediately preceded the financial crisis, we've grown our AUM 7x, launched 34 new strategies and significantly expanded our business internationally.

We are similarly emerging from this most recent downturn with powerful momentum.

Jon will describe the broad range of growth initiatives we have underway across the firm, many of which are in the earliest stages of their vast potential.

As we continue to grow, our capital base is shifting towards perpetual strategies, such as real estate core+, infrastructure, insurance solutions and private credit.

These areas are characterized by large-scale investor allocations as well as a much larger universe of potential deployment opportunities than where we focused historically.

As the nature of the capital evolves, so does our earnings mix to a steadier and more recurring fee-related earnings, which is highly valued by the market.

For the full year, FRE reached $1.97 per share, effectively achieving our Investor Day target of $2 per share, but 1 year earlier, and notwithstanding the pandemic.

FRE comprised approximately 2/3 of total earnings in 2020, up from only 1/3 in 2017.

Looking forward, we have great confidence in our continued FRE momentum, which should further supports the revaluation of our earnings multiple that has been underway since our corporate conversion.

As we move into 2021, all signs point to it being another strong year for the firm.

The pandemic will further impact the economy over the next several months with the widespread and effective deployment of vaccines, which we anticipate will occur, we expect a robust recovery in global growth later this year.

And as the economy accelerates, Blackstone is well positioned for continued strong growth ahead.

I couldn't be more proud of our firm's people, our culture as the prospects for the future for both our limited partners and our fellow shareholders.

And with that, I'm very glad to turn it over to Jon.

Thank you, Steve, and good morning, everyone.

We just completed a record quarter.

I'll take you through some of the highlights as well as the extraordinary range of growth engines that are firing across every area of the firm with a major emphasis on perpetual capital.

The foundation of our business, of course, remains performance when we deliver great returns, it builds investor trust and leads to further inflows.

It's a virtuous circle that also involves attracting top talent, moving into new areas and growing meaningfully.

In the fourth quarter, our funds again posted exceptional returns across the board.

For the past several years, we've been orienting the firm towards faster-growing areas, such as life sciences and those connected to the digital economy.

These continue to be amongst the best-performing sectors of the market and were the largest drivers of appreciation in our funds, including our holdings in global logistics, digital payments and enterprise software.

Our investment performance is creating very favorable dynamics with our customers, and they continue to allocate more capital to us.

Inflows were $32 billion in the fourth quarter and reached $95 billion for the full year, the fourth consecutive year approaching or exceeding a $100 billion.

Last January, before the crisis, we told you we thought we'd reach this level again in 2020.

We're pleased we were still able to achieve our original goal, a testament to the confidence our investors place in us.

Looking forward, demand for our products remains as strong as ever, including for new areas that represent tremendous potential.

In growth equity, we expect our inaugural vehicle to soon reach its $4.5 billion hard cap.

Our life sciences business is deploying capital at a rapid pace and is well positioned for growth.

In private equity, we're raising our second Asia Fund, which we expect to be meaningfully larger than the first.

And in tactical opportunities we begun raising our fourth vintage in the context of continued strong performance and deployment.

In real estate, our core+ platform has grown to $69 billion, up 50% year-over-year across 5 perpetual capital vehicles.

We Launched the fifth BPP Life Sciences in the fourth quarter with the recapitalization of BioMed, raising $8.4 billion so far.

We've been actively investing this new capital.

And in addition to BioMed committed in Q4 to acquire a large portfolio of lab offices adjacent to MIT and Cambridge, the world's leading biotech hub.

BREIT, our largest core+ vehicle now has $22 billion of AUM, up sevenfold since our 2018 Investor Day.

On the back of strong performance, fundraising has reaccelerated meaningfully from the bottom of the crisis, with approximately $900 million of inflows on January 1. Investor demand for resilient income producing assets, coupled with the Blackstone brand is a powerful combination.

As we've stated before, we believe BREIT could become the single largest earnings driver at Blackstone.

Perpetual AUM across the firm has more than doubled since Investor Day to $135 billion, helping drive a 73% increase in fee-related earnings over the same period.

In addition to real estate, our perpetual capital vehicles and infrastructure and direct lending are seeing strong momentum and have grown to leading scale only a few years after launch.

In infrastructure, we raised $14 billion initially and are now seeing deal activity accelerate in both the U.S. and Europe, bringing the fund to approximately 40% committed.

In credit, our global direct lending platform has grown to $22 billion, one of the largest in the world.

Our scale allows us to provide bigger and more comprehensive capital solutions to borrowers.

And the opportunity is enormous, with sub investment-grade financing markets in the U.S. alone, totaling nearly $3 trillion.

Post-quarter end, we launched our non-traded BDC, BCRED, with over $800 million of commitments at the first closing.

As with BREIT, we anticipate strong monthly demand from individual investors for Blackstone managed income solutions.

Also in credit, we acquired DCI in the fourth quarter, a pioneer in systematic investment strategies, which we see as central for the future of liquid fixed income investing.

DCI will meaningfully expand our capabilities in the vast, high-yield and investment-grade markets and will further differentiate our business as we integrate their technology across the credit platform.

In total, the credit and insurance segment reported inflows of $13 billion in the quarter and $28 billion for the full year.

Turning to BAAM.

We continue to see strong demand for our various direct investing strategies, including our second GP stakes perpetual capital vehicle, which has raised $4 billion to date.

We were excited to announce recently that Joe Dowling, former CEO of Brown University's Investment Office is joining Blackstone as Co-Head of BAAM alongside John McCormick.

Joe is a world-class talent with proven experience investing and managing risk.

In his 7 years of Brown, the university ranked #1 amongst peers on 1, 3, 5 and 7-year returns and achieved the highest Sharpe ratio of any major U.S. endowment, driven in large part by their successful hedge fund investment program.

Joe's leadership will be a major asset to BAAM as we continue to expand into new areas.

Our secondaries business remains one of the best positioned globally in a sector with huge tailwinds.

SP's 2019 Flagship Fund is over 75% committed, and we expect to start raising the successor later this year.

We also continue to grow adjacencies like infrastructure and real estate secondaries.

And we recently launched a new strategy, investing alongside GPs in high-quality assets that they want to continue to own beyond their initial fund term.

Finally, in insurance, we just announced the acquisition of a life insurance and annuity company from Allstate with $28 billion of long duration assets.

The acquisition will be completed through a new Blackstone managed vehicle of approximately $2 billion, and our insurance solutions team will act as the asset manager, bringing the firm's pro forma insurance AUM to nearly $100 billion.

Given insurers need for better returns and our direct credit origination capabilities, we expect to do more in this sector in support of their policyholders moving forward.

In summary, every business at the firm has terrific growth prospects that we're executing against.

We remain extremely confident in the path forward.

And with that, I turn things over to Michael.

Thanks, Jon, and good morning, everyone.

The fourth quarter represented a remarkable finish to the year as we achieved record results in nearly every metric.

Distributable earnings, fee-related earnings, AUM, realizations, deployment and total fund appreciation.

We also reported our fifth best quarter for inflows.

This broad-based success in the same year as one of the most severe market declines on record is a powerful illustration of the all-weather durability of our business model.

Starting with results.

fee-earning AUM increased 15% year-over-year to $469 billion, while total AUM rose 8% to $619 billion, driven by robust gross inflows of $95 billion for the year and despite $43 billion of realizations.

The strength of inflows in 2020 despite not raising any of our largest flagship funds during the year, highlights the firm's expansive breadth of product offerings and the ongoing shift toward perpetual capital.

Indeed, over 1/4 of the firm's fee-earning AUM is now perpetual.

Fee-related earnings rose 33% in 2020 to $2.4 billion or $1.97 per share, as Steve highlighted, driven by continued strong growth in fee revenues, coupled with significant margin expansion.

Management fees increased 18% to $4.1 billion for the year and are up 35% over the past 2 years, powered by our flagship fundraising and a doubling of the real estate core+ platform in the last 2 years.

BREIT alone increased its AUM by 71% in 2020 and generated strong gross appreciation of 9% for the firm despite the environment.

In terms of margins, the firm's overall FRE margin expanded over 400 basis points in 2020 to 52.8%, the highest level ever for an annual period.

Distributable earnings for the full year rose 16% to $3.3 billion.

For the fourth quarter, DE increased 60% to $1.5 billion or $1.13 per share, underpinned by sharp growth in FRE and a doubling of net realizations to $897 million.

In addition to strong fund realizations, most advanced liquid strategies crystallize incentive fees annually in the fourth quarter.

BAAM strong finish to the year in terms of investment performance with a 5.6% gross composite return in the quarter as well as the growing contribution of its direct investment strategies generated a 57% increase in the segment's realized performance revenues to $171 million.

Turning to investment performance.

It was another excellent quarter for the firm across the board.

With record total fund appreciation of $31 billion in the quarter.

As Jon highlighted, we continue to see the benefit of favorable sector and asset selection in our funds against a backdrop of rising global equity and credit markets.

In real estate, the BREIT opportunistic funds appreciated 4.3% in the quarter, while the core+ funds appreciated 5.5%.

As has been the case since the start of the pandemic, the vast majority of the real estate portfolio is demonstrating fundamental strength, particularly our holdings and logistics, suburban multifamily and life sciences office.

Despite headwinds in certain more affected sectors, the BREIT funds appreciated 3.4% for the full year, and the core+ funds appreciated 7.9% as compared to a 7.6% decline for the public REIT index.

In private equity, the corporate PE and Tac Opps funds appreciated 10.6% and 11.3%, respectively, in the fourth quarter, marking the third consecutive quarter of double-digit appreciation for both platforms.

Strength was broad-based across both the private and public portfolio, led by our technology and consumer finance holdings.

For the full year, the corporate PE funds appreciated 11.9%, while Tac Opps appreciated 14.1%.

Life-to-date returns for the most recent vintages of the corporate private equity and Tac Opps funds remains outstanding.

The secondaries funds, which report on a 2-quarter lag, started to recognize the benefit of last year's market recovery in their fourth quarter returns, appreciating 9.4%.

We expect strong performance to continue over the coming quarters given the direction of markets in the second half of 2020.

And in credit and hedge fund solutions, we saw healthy appreciation again in the fourth quarter, including a 4.6% gross return for the credit composite.

Strong investment performance across the firm generated $1.2 billion of net accrued performance revenues in the quarter and lifted the balance sheet receivable of $3.8 billion, up 8% sequentially, notwithstanding nearly $1 billion of net realized distributions.

At the same time, the firm's invested performance revenue eligible AUM increased to a record $294 billion, up 18% year-over-year.

These are both important indicators of future value.

One last topic of note, 10 years ago, Blackstone made a strategic minority investment in the Brazil based alternatives manager, Patria, a team we had known for many years.

Last week, Partia completed a highly oversubscribed initial public offering, marking their transition to a valuable public company and a successful investment for Blackstone.

While we partly monetized our stake in the offering, we remain a continuing shareholder.

In closing, the firm's 2020 performance exemplified the power of Blackstone's extraordinary business model, resiliency and staying power during the market dislocation and the ability to deliver record results in the fourth quarter across almost every metric in the context of the market recovery.

Looking forward, we continue to scale existing businesses while also expanding into new areas with deep addressable market opportunities for the firm.

The outlook for robust, high-quality growth over the long term is strong.

And we believe the future for Blackstone is very bright.

With that, we thank you for joining the call.

I would like to open it up now for questions.

(Operator Instructions) Back to you, Leslie.

(Operator Instructions) And your first question comes from Alexander Blostein from Goldman Sachs.

Great.

Why don't we start with insurance, I guess, in light of the Allstate acquisition announced last night, maybe you guys could comment on your bigger picture aspirations for the insurance segment.

Obviously, you've made several hires there recently.

Should we expect more deals like this one, I guess, over the coming quarters and years?

Or is Allstate meant to be sort of the platform to build off of?

And then secondly, maybe you could comment on the economics as well, sort of the fee rate on the assets and how you expect that to evolve as well as the funding structure.

It sounded like the majority of the purchase obviously comes off the balance sheet, right?

So $2 billion, I think you said is third-party capital relative to a $2.8 billion purchase price.

So a few questions there, but maybe we can try to hit it, all of them.

Okay.

Thanks, Alex.

I'll start with the big picture.

And what's driving what you're seeing us do and a number of firms in our industry is the extremely low level of interest rates out there, which is creating the need for greater returns for insurance company assets and particularly the ability to have direct origination capabilities.

So our ability to originate corporate debt, structured debt, real estate debt is quite important.

And we think gives us a real strength in this area, to line up our insurance solutions business with insurance balance sheet.

So this is an area we've had success with Fidelity guarantee.

We've said on these calls.

This is something we intend to do more of.

It's an area of focus.

We're obviously hiring a number of people to help build out this business and capability.

Exactly the form it will take.

I think each of these transactions may look and feel a little different.

The underlying sort of path here is the same.

The idea of us managing these assets, driving the returns higher, which ultimately helps the policyholders.

I think all of that is key.

On this particular transaction, and Michael can fill in the blanks.

But the $2.8 billion, there are flows related to the transaction plus a bit of debt.

So the ultimate check size here is less than -- a little less than $2 billion of equity.

It's more of a typical GP LP setup, I would say, but we are putting in some capital, single-digit percentage of the total capital needed.

So this is really a third-party situation where we're managing capital and our compensation will come from managing the assets along the lines of what we've done with Fidelity & Guaranty.

Our next question comes from Sumeet Mody from Piper Sandler.

Just sort of a high-level question here on creating these new dedicated funds across growing sectors like life sciences and growth equity, some of these flagship funds, the raises are now behind you.

The global growth seemingly is concentrated here to areas like technology and health care.

When you're creating these dedicated funds in some of these areas, like you're doing now and down the road, does it kind of crowd out some of these deployment opportunities to the flagship funds?

Or is there just kind of generally a lot of opportunities out there for global private equity funds to take advantage of or kind of along with some of the newer dedicated funds?

It's a good question.

I would say it does not crowd out our dedicated funds.

Our traditional large-scale private equity funds.

And the reason is the mandates here are very different.

So if you look at the 2 funds to focus on, let's talk about Blackstone Life Sciences.

Its mission is to invest primarily in Phase III trial drugs, something that we would not do in our private equity business, have never done before.

And so it's a completely new area.

It may invest in companies.

But again, it's based on drugs that we're waiting for FDA approval.

This is not something we would do in our private equity business.

In the growth equity business, we're taking minority stakes with founders, which is, of course, is very different than our private equity model, which is based on control and being able to intervene in these businesses.

In our growth equity area we're looking to partner and help these young companies generally working with founders, again, a very different model.

And then some of our other more geographic strategies are similar to what we've done in the past where we've raised Energy or Asia or other funds.

And we keep a portion of that in the main funds but we -- by expanding with the new fund, we don't have over concentration in the main fund in a particular geography or sector.

So we're super sensitive to our flagship funds, delivering in real estate private equity and corporate private equity is what we built the business on.

We want to continue to deliver for those investors.

There just happens to be a lot of white space, new areas to go into that we as a firm, had not historically been in.

Your next question comes from Michael Cyprys.

Just looking at the dry powder levels here, about $147 billion.

Look fairly high here and certainly, similar levels a year ago, too.

So I was hoping you could talk a little bit about how you're expanding your capacity to generate new investment ideas and expanding the capacity to put capital to work, particularly in size and with the new insurance business or expansion of the insurance business that you'll be getting more assets?

I guess what new sourcing and origination capabilities are you thinking about adding or might be able to add?

Well, the good news here is we just have a much broader base of capital today, achieving the highest return strategies involves a smaller universe potentially of investable assets.

As you raise particularly some of this perpetual capital, longer duration, lower yielding, you can look at a much broader view.

So yes, we're investing in origination capabilities and particularly in our credit area in corporate and real estate and structured credit, but also in our equity investing, as we move into core private equity or the real estate core+ business.

We're just hiring more people in these areas.

It gives us more dialogue.

But oftentimes, you're not using real estate as an example, looking for an empty building or distress situation.

You're just buying a leased apartment project that's high-quality; you want to own it a reasonable return.

So this newer cost of capital enables us to sort of widen the funnel.

Then you take our existing team, you add more people, and it actually makes our original businesses even better because we're in more dialogue with more sellers, more brokers, more investment bankers, we're just part of the flow, and there's really been a real benefit from expanding our platforms.

And if you think about it on the credit side as well, if you go -- went in there and you only had the ability to do higher returning mezzanine, you would only have one discussion.

But if you can go in there today and you have a wide variety of capital, with different durations, lower loan-to-values, longer duration insurance capital and what we're getting from our direct lending platform, we have a much more robust discussion.

And so we're finding the ability to deploy more capital, given the range of places, given the opportunities.

And yes, to your question, we have to build the organization to meet these needs.

Your next question comes from the line of Adam Beatty from UBS.

I wanted to ask about the wealth management channel, given the success of BREIT and promising start to BCRED.

In terms of distribution, which sub-segments in the wealth channel, do you find attractive?

And what kind of resources on the distribution side are you applying towards that?

Also, maybe what product adjacencies might be attractive at this point?

So what I'd say about retail is we had a big event here.

We had a modest celebration crossing $100 billion of AUM.

Joan Solotar and her team have done a terrific job and it's a mix of the episodic funds that we still distribute that's generally targeted to the highest net worth investors.

As we move into these perpetual capital vehicles, BCRED and BREIT, which do have elements of liquidity to them that are favorable to customers, they come down in terms of the availability, and it expands the universe of potential customers who can invest.

I would say, in distribution, we're trying to really cover the waterfront.

It's -- we're talking in the United States, in Europe, in Asia, we're raising money broadly.

It's RIAs.

It's obviously the largest distribution firms.

It's private banks around the world.

It's the IBD channel.

It's really broad-based.

And what investors are seeking is obviously higher return.

They want more yield.

They're looking for things done at Blackstone quality, and we're focused on the fees we charge being quite reasonable that we're looking for the customers to have a great experience.

And I think historically in private assets distributed to retail, there was a bias, I guess, to try to make short-term money and not necessarily deliver a great customer experience.

What we're trying to do here is give individual investors the same experience that our institutional investors have.

The products may look and feel a little different, but the goal is exactly the same.

Obviously, the markets are reacting positively, investors are, the strength of the brand here is very differentiated.

And that's why we have so much confidence here in the potential of this.

We said BREIT could grow to be the largest product, BCRED has very good momentum out of the box, given people's desire for yield.

I think some of these products will be able to move geographically where you raise money in different parts of the world.

There is more we can do.

We're not ready to announce anything.

But what I'd say is our bias is not necessarily to create a massive number of products, but a smaller number of very large products that can scale.

And BREIT getting over $20 billion was another big achievement for us.

So as you can tell, we're spending a lot of time in this area.

It continues to grow the perpetual capital, and we expect good things from retail in 2021.

Our next question comes from the line of Craig Siegenthaler from Crédit Suisse.

For my question, I wanted to hit on Blackstone's ability to expand into newer geographies, including in Asia and South America, and specifically, what are the major economies and markets and white spaces around the globe today, where Blackstone is either not present or is significantly subscale and what is Blackstone's appetite to expand into these geographies, either through M&A or organically over the next few years?

Well, as you know, we definitely have a global business.

I would put Asia at the top of the list, given the scale of the economies there.

China and India both have more than a 1 billion people and what you see there in China, in particular, is an economy that's growing very rapidly, will grow to be the largest economy in the world at some point in the future.

I think there's an opportunity over time for us to offer products that are R&D based, that would be something that could happen over time.

That could be very large scale.

I think we can do more in countries like Japan, which may not be fast-growing, but there is a strong desire for returns from individual investors and institutions.

And India, frankly, has been our greatest strength in Asia, where we've deployed a lot of capital in both private equity and real estate, and that economy is still early days.

I would say as a caveat that smaller economies for us are a little more challenging given the scale of capital we operate at.

So -- and more -- less developed economies.

We -- I would say our results in places like South America and in Africa, which have been small -- very small as a percentage of what we do, have been a little more mixed.

There could be opportunities in those markets over time.

But I think in terms of geographic growth, I would say, Asia and the big economies in Asia are the most interesting.

And then I would say that Europe, despite its slow growth, aggregately is the largest economy in the world, if you put all those countries together.

There are fewer competitors there.

And there are more of our products that we can distribute there, both raising money, but also deploying capital in Europe for Europe.

So when I look at our -- one of our great strengths of the firm, it's that we're a global business.

And so if one market around the world gets too hot, we can deploy capital elsewhere.

Customers around the world are facing the same challenges, which is they need higher returns, and they want a trusted pair of hands who takes a long-term approach, and that's what Blackstone represents.

So when we look, yes, there's opportunity in retail, there's opportunity in insurance, and there's certainly opportunities outside the United States.

Your next question comes from Glenn Schorr from Evercore ISI.

So curious to hear your expanded thoughts on the SPAC market, not from the humongous growth necessary that we've seen, but they have, at minimum, several hundred billion of buying power.

And so I think of them as half friends where they could beyond the lookout to purchase some of your assets and have so where they're competing against some of the same properties you go after.

So just curious to get your thoughts on that environment?

Well, I think this SPAC market, and I commented earlier this morning on TV about this.

I think it's a good development long term to open up access to capital to public companies.

We've seen a reduction in the number of public companies by 50% over the last 25 years, and the SPACs have led to the highest number of IPOs in more than 20 years now.

So I think that's positive.

Now that being said, I think there are some challenges around alignment of interest, when sponsors earn their economics, what the size of those economics are.

And I think some of that will change over time.

As it relates to our business, we've announced, I think, 3 SPAC sales in the last few months.

I think these will all be very good public companies.

These are good executions.

And so it's helpful for us on the liquidity front.

But I do think it's fair to say for smaller-sized businesses, in most cases, it gets a little more competitive with this SPAC money.

The good news is we tend to operate, particularly in private equity at large scale.

So there's not many SPACs that can do the type of deals we do.

And I would also say not every company wants to go public.

Certainly, faster-growing companies may want capital to grow.

They're not ready to go public.

Other businesses may not be.

So it requires a certain type of company, a certain type of exit and tends to be a bit on the smaller side.

So overall, for capital markets, as I said, I think it's a positive.

I think there will be some changes in reforms over time to make it even better.

Your next question comes from Kenneth Worthington from JPMorgan.

With the new administration and one with an aligned White House and Congress, what is top of mind in terms of implications and opportunities here for Blackstone and private markets investing?

So in terms of implications, there could be a variety.

It's obviously early.

It's possible we could see higher corporate taxes, which would impact the entire corporate landscape.

We could see more regulatory activity.

On the flip side, I think some sectors where we are active investors could really benefit.

I think you could see environmental and sustainability areas get a boost.

We're doing a lot in that space across energy and energy credit.

We could see more dollars into infrastructure, an area we haven't underwritten a lot of corporate activity or government activity, that could change with a big push by the government.

And then I think one of the benefits people may not focus on is an aligned government here could push more dollars to places like New York and San Francisco, hard hit urban areas during the COVID period and that would be beneficial for some of the real estate properties we own because those areas are under pressure.

So I think there's a variety of things.

As a firm, we've operated in all red, all blue environments, purple environments, and we take a long-term approach, and we've been able to navigate those issues and as changes come up, we expect the same here as well.

Your next question comes from Patrick Davitt from Autonomous REITs (sic) [Research].

So my sense from investors, they tend to want to discount these big performance-related fees you put through fee earnings.

So could you maybe frame or help us separate out how much of the fee-related performance fees in the fourth quarter was really kind of what you view as repeatable each year versus those that are maybe more episodic or based on kind of one year type performance fees?

Sure, Patrick.

Look, first of all, in terms of fee-related performance revenues, as we talked about before, we think this is a super high-quality revenue stream.

As you know, it's derived from perpetual capital.

It's paid on a recurring basis on contractual timetables, well known, and without having to dispose underlying assets.

So we think it's very much in line with the overall quality picture of FRE.

And you've seen it scaling, right, as we've sort of predicted in the last few years, and you saw that step-up again.

In terms of the composition of it, right now, the majority, the strong majority of the total annual amount is from the core+ platform.

And of that, BREIT is really the dominant portion of that.

And that, as you know, is -- it's recurring, it's annual.

It's in the fourth quarter.

And as that platform grows, and it grew 70%, as we said, year-over-year, the fees will continue to scale, both management fees and fee-related performance revenues.

A smaller portion of that was from the BPP platform.

Those are specific to investments that occur on a several year basis, 3, 4, 5 years.

And so that occurred during the year, both in the third quarter and the fourth quarter.

And then you're also seeing a smaller amount, but that over the long term, it will scale from our direct lending platform, both our BDC and also going forward, BCRED or non-traded BDC.

So it's a -- it's sort of a portfolio of different products.

Core+ is the biggest part, but not the only part.

And BREIT is the biggest part within core+, and that is to your question, an annual occurrence.

And the key distinction, Michael, is that we don't have to sell assets to generate these fees.

That's the key distinction of what ends up in the fee -- in the FRE.

That's right.

And as we talked about, this is not a new thing.

In terms I mentioned BDCs, the incentive fee portion of that income and yields in products like that have been, I think, for a long time, considered very much part of the sort of metric.

Your next question comes from Devin Ryan from JMP Securities.

I have a question just on the FRE margin.

Obviously, saw some really nice expansion in 2020, over 400 basis points, you had very strong fee growth.

But also the OpEx was decently below the prior couple of year average growth, which we appreciate, especially given the lower T&E from the pandemic.

So I'm just trying to just think about some of the moving parts as we look forward, the expectation for the FRE margin from here as maybe some of those pandemic savings reverse and just more broadly, how we should think about the FRE margin and T&E and some of the costs that may come back into the system in 2021.

Devin, thank you for the question.

Look, the short answer is stepping back on margins and it was a terrific year on that front.

As our margins are up significantly because of strong operating leverage.

Revenue is currently well in excess of expenses.

I know that's sort of a truism.

And you can particularly see that in our real estate segment and which was really the biggest driver, where fee revenues were up over 30%, with operating expenses, total operating expenses, up 15%.

And that's why you can do the math, overall, the real estate segment accounted for around 3 -- 3/4 of the overall margin expansion from a business unit breakdown perspective.

As you mentioned, as we've talked about previously as with almost every other business, 2020 did benefit from a substantial reduction in T&E spending.

And that, to help you out here, accounted for around, call it, 100 basis points of that 440 basis point margin expansion.

So look, as we look ahead to 2021, all of us, of course, are looking for normalization sooner rather than later.

And such that the T&E dynamic would reverse.

And -- but notwithstanding that, even adjusting for that, we still expect strength in margins.

So that hopefully will help you on just to put in context the COVID component of that expansion.

Our next question comes from Mike Carrier from Bank of America.

You guys have had great success in the perpetual vehicles, which obviously provide good visibility and growth in FRE, but it also threw up a lot of performance fees.

And I'm assuming that was just BREIT in the fourth quarter, having a strong rebound.

But just longer term, can you put some context on the type of the year, maybe 2020 was versus the potential you see for that type of earnings stream since it's still fairly new.

And then how can products like BCRED contribute to it longer term?

Sure, Mike.

And I think this picks up a bit on, I think, Patrick's question as well.

I think the simple answer, and it's a good one.

Is that over time, those -- the growth in those fee-related performance revenues will basically be aligned with the growth in our perpetual capital strategies with, again, real estate core+ being a huge portion of that right now.

But also, as you mentioned, in that direct lending area, a scaling of that source of performance revenues as well over time.

So that sort of, both in the short and long run, is kind of the r-squared on this.

Growth in perpetual, growth in core+, growth in direct lending equals over time growth in those fee-related performance revenues, and that is a meaningful tailwind.

And I would just add that the fact that you don't have to sell assets, as we mentioned, is important.

The preferred returns in these vehicles tends to be materially lower because they're lower targeted returns.

And just as we grow more assets in the space, have more vehicles, this should be a steady source of income for a long time to come.

Your next question comes from Rob Lee from KBW.

Great.

Happy belated New Year.

Hope everyone is doing well and thanks for taking my questions.

On hedge fund solutions on BAAM, in understanding the performance has been good.

You have a new co-leader of the unit, but growth there has been kind of a challenge, kind of, I guess, more stable.

How do you see growth in that business progressing?

Do you see any signs that there's maybe increased demand from more liquid strategies, given how the markets have run-up of late?

Or what can you do to kind of reinvigorate growth in that business?

We think that business has tremendous potential.

The low rate environment obviously has investors looking for other liquid alternatives where they can get returns.

And then the run-up in the stock market has investors looking for places to put capital where there's some downside protection.

And both of those factors lead you, I think, to our hedge fund solutions business.

With the addition of Joe Dowling, teaming up with John McCormick, I think that puts us in a really good place.

Joe's track record has been excellent.

We are going to be looking to try to drive the returns higher in that space.

Joe was outstanding at Brown, finding, leading cutting-edge managers, looking at where the economy is transforming either geographically in some of the fastest-growing sectors as well, and we expect he'll do the same here.

And as the returns continue to improve or improve, we think we'll see more flow.

So our hedge fund solutions business, which has flattened off in terms of AUM, but it's actually improved our profitability.

Michael can comment on that.

I think you can grow in AUM and become a growth engine again for our firm.

And I'd just add to that, I mean, putting some financials around that.

First, as Jon said, while AUM was somewhat down this year, revenues were up 7%.

On the AUM side, outflows were actually in line with 2019 and maybe not surprisingly, inflows slowed somewhat in the wake of the March-April volatility.

But revenues were up, which reflects the business mix shift towards higher fee strategies, both within BPS and also in the direct investing area.

And as a result, you can actually see the fourth quarter management fee rate was actually up 8 basis points year-over-year.

So the sort of unit economics are, I think, are improving.

And it's funny for a business that's been in our hands for 20 years.

We've never been more excited about the potential.

As Jon said, in the context of the rate environment, fixed income market, the search for sort of absolute return replacements with some more upside is deep.

And our platform, with its scale and its reach and its access to the best managers, doing things with them, allocating capital as well as the flow within our firm and the IP.

Those things combined along now with additional leadership alongside Jon with Joe Dowling, we're super excited.

Your next question comes from the line of Chris Harris from Wells Fargo.

As you guys know, Apollo is looking to move to one share class.

What are your thoughts about potentially going down this path?

And I appreciate their pros and cons to consider with that type of a change.

So what I'd say is if you look at our firm over 35 years, our governance structure has served our LPs really well, our employees, and for the last 13 years, 14 years, our shareholders.

So we're really comfortable with it.

We're always looking at ways to maximize value for shareholders.

We did that in the context of the C Corp conversion, but we're very deliberate in how we do things.

But I would say, generally, the idea of taking a long-term approach and the management of the firm, how we're structured today, we feel good about that.

It's delivered for us in the past.

We think it will deliver for us in the future.

Our next question comes from the line of Chris Kotowski from Oppenheimer & Company.

I guess I thought the BioMed transaction was really interesting.

And I -- a couple of narrow questions about that.

One is, I'm wondering, did it all end up in BPP Life Sciences?

Or was it distributed among a number of different vehicles?

And then secondly, what is, I guess, the long-term vision and ambition for BPP Life Sciences?

And then I guess the more broad question I have is over time as you've developed more and more of these permanent or very long-dated capital structures, should we see your strategy in the opportunistic funds kind of more from the buy it, fix it, sell it to the buy it, fix it, move it into a permanent capital vehicle.

Should we see a lot more of that?

So there are a number of questions here.

Let me go through each one.

The first one, I want to back up, I guess, for a second and just say that the genesis for this transaction was a number of our investors in the BREP VIII fund wanted to continue to own this.

And that really was the catalyst.

And more than 70% of the capital in the BPP Life Sciences vehicle came from the existing investors.

So I think because they were so enthused about this, it made a lot of sense for us.

Where it ended up, the vast majority of the capital did come from this new vehicle.

We put some of it into our general BPP fund, based on some available capital, but the vast majority ended up in BPP Life Sciences.

No surprise, our investors are excited about this new vehicle.

I think we'll raise additional capital beyond the $8.4 billion we talked about.

There's a potential for this to grow to be, again, quite large.

We announced the deal shortly after the initial recapitalization, which I mentioned, where we did a $3.4 billion deal of additional properties in Cambridge, the heart of life sciences, making us the largest owner in Cambridge, which we think is important strategically.

So this is a business that has the potential to grow not only in Cambridge, but in South San Francisco and San Diego, Cambridge U.K., where the business is focused.

In terms of ambition, I guess, we've hit that I think this is an area that has real growth given the tailwinds we see in life sciences.

And one of the things we don't often talk about on these calls is the power of the overall platform.

So the fact that we have Blackstone Life Sciences gives us more confidence here in BioMed, it allows us to do the Cryoport investment in Tac Opps and frozen logistics.

It allows us to do Precision Medicine, which is a company that commercializes and does run a trial for life science companies.

It was one of our largest investments in private equity in the fourth quarter.

So we are really building a powerful life science ecosystem here at Blackstone and BPP Life Sciences will be a big part of it, Nick Galakatos, who runs our life sciences business is actually going to be on the Board of the BioMed life sciences fund.

In terms of our opportunistic business, no.

I don't believe this will be the way the vast majority or whatever of deals will be sold.

There was a pretty unique set of circumstances.

There may be other situations, but I think it will be the exception.

In this case, the scale argued for it.

We also ran a process, a competitive dynamic, brought an outside firms, had a go shop period.

We want to make sure, the most important thing to us is fiduciaries, is maximizing the return in our private equity and real estate private equity funds.

So I think this is a little bit of a unique situation.

We had a great process to bet the values.

And long term, now we have a bunch of investors excited about this area and a new vehicle that I think will grow in scale.

Our next question comes from Arnaud Giblat from BNP.

I had a question on capital deployment.

It's been very strong in Q4, even if you exclude the capital going to the new perpetual capital vehicles.

How much of this is a function of a good market condition?

Or should it -- and how much is a function of just being able to catch up on deals that were identified earlier in the year and were you able to execute on them?

And if you could also elaborate on -- in terms of the outlook for capital deployment in the quarters to come?

So I think the biggest factor, obviously, deal activity and deployment was slow coming off of March for the next couple of quarters.

And so we saw a resumption.

I think so again, given the expansion of the firm, if you look at our secondaries business now where we have large-scale private equity secondaries, real estate secondaries, infrastructure, we're deploying more capital.

If you look in private equity, regular weight corporate private equity, a larger scale fund, our Asia business is growing, our core private equity vehicle grew from $5 billion to $8 billion in the latest generation and you can look across the firm and then the expansion in these perpetual vehicles, we keep talking about, of course, leads to the need for greater capital deployment.

So I think a big portion of this is just a function of the engines are -- there are many more of them and they're larger, and that's leading to more deployment.

I also think we have some sectors, we have high conviction around.

We're spending a lot of time on some of the COVID-impacted businesses, travel-related, location-based entertainment, hotels.

I think we'll see more activity in some of those areas.

And then these big secular themes around digitalization, life sciences, what's happening in green energy.

Those areas, I think, will attract a lot of capital.

And we'll continue to invest in Europe and Asia and around the globe.

So this quarter was particularly active because of the large life sciences transaction.

But when you look overall for the year 2020, I think it's $62 billion was basically the same as it was in 2019.

So I think that indicates it's likely that deployment probably grows over time or will grow over time, just given the scale of our overall business.

Our next question comes from Gerry O'Hara from Jefferies.

Great.

Maybe one more on the insurance initiative.

Clearly, a well-documented total addressable market of material size, but also increasingly more buyers in the market.

So perhaps you can speak to the competitive dynamics you saw during the Allstate process or just even more generally.

We'll not -- obviously, we'll not talk about particular transactions, but I would concede that the space has gotten more competitive over the last few years.

I think our advantage is, one, the scale, we can do things at; and two, our origination capabilities, I think, are pretty unique.

And I think gives us an advantage in this space for counterparties to want to work with us.

So we like where we sit today.

But I do think it's important to keep in mind beyond actually just our capabilities, our brand resonates.

So if you're an insurance company and you're thinking about putting your liabilities in somebody else's hands, you really want to know who that is.

And so the scale of Blackstone, our reputation as a fiduciary helps us.

And so yes, like in all things, there's more competition, but we like our positioning.

We think there's an opportunity to really grow here.

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

In the strategic partners business, I know you're going to be raising a new fund there.

I think last time I checked secondaries transaction volume across the market was something like 2% or 2.5% of total private equity NAV.

Where do you think that percentage can go over the next handful of years?

And why?

Well, I think 2 things are going to help the secondaries business.

One, really importantly, is that the denominator is going to grow, even if the penetration doesn't grow, I'll come back to that in a moment.

But alternatives are growing at high single digits, double -- low double digits across the globe.

And by definition, that means there's a bigger addressable market.

People change their investment strategies.

They're unhappy with managers.

They want to get out of certain spaces.

And so if you believe in the alternatives sort of mega trend, which we certainly do, secondaries is a powerful way to play it.

And then as a percentage, I just think 2% of the market trading is not a sign of a market that has sufficient liquidity.

And so I think that will lead to higher percentages.

This is a business that's growing for us, I don't know, eightfold or something since we took it on 5 or 6 years ago.

I think it's a business that can continue to grow at a very rapid rate.

Vern Perry and his team have done an outstanding job.

The returns have been excellent.

We said in here that we'll raise our ninth private equity secondaries fund.

We talked about moving into the continuation area.

We're having success in real estate and infrastructure.

I think as alternatives grow this fund continues to grow.

This area of the firm continues to grow.

And I don't think we're anywhere sort of near the end for secondaries in terms of growth.

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

Great.

Most of my questions have been answered.

Very, very comprehensive answers.

Maybe just one on the retail side.

As you said, Jon, you've seen great momentum in that.

Just maybe sort of the outlook over the next 1 to 2 or maybe even 3 years, whether you think that growth can accelerate given your distribution initiatives in the wealth management space and especially the demand for your products on the retail side?

And if you can sprinkle in comments on sustainable investing in your ESG initiatives, whether you're seeing a stronger demand for ESG solutions within your products?

I would just echo my earlier comments that retail remains a very favorable channel for us given the brand and the range of products now.

The movement from beyond just the episodic products, which are obviously continue to be offered to the highest net worth people.

But the BREITs and BCREDs, their distribution capabilities, the ability to sell those broadly is powerful.

And I would just point out, BREIT, it took a number of years to sort of get to lift off momentum.

It feels like BCRED in the early days is having more success because we've opened up those channels and we're broadening the number of channels.

And so I think as we introduce new products in this area, they can continue to grow and have this success.

And as this is all part of this sort of growth in perpetual capital growth, ultimately, of course, in fee-related earnings and bringing this sort of world-class service and investment discipline to individual investors.

We think that trend will certainly continue and we're at the vanguard of that trend.

As it relates to ESG, I think there's opportunity there.

I think there is more opportunity.

We talk about it internally.

I think there's opportunity both institutionally and individual investors.

Going back to one of the earlier questions, we just have to make sure we set it up in a lane that is very defined.

And in a separate area where we can deliver for the individual investors and do something separate and different than we do in some of our other funds.

But I think over time, we'll develop some products in that area.

And your final question comes from Sumeet Mody from Piper Sandler.

I just had a follow-up on the Allstate Life acquisition.

It looks like the funds are purchasing about 80% of the life and annuity business, just leaving about $5 billion of GAAP reserves in the New York ALNY on the table.

Just it seems like they intend to sell that as well.

Just curious if you could talk about what went into the decision to not acquire that portion of assets as well?

Well, we make decisions about which jurisdictions and so forth make the most sense for us and we're obviously engaged in discussions with the seller on what maximizes value for them.

And in this particular transaction, that's how we landed on this.

We ended up buying the vast majority of the assets, and that worked for Allstate.

I would say, I think, Tom Wilson, the CEO, has done a terrific job here pivoting his company.

And getting them focused on higher growth businesses, and this was something that made a lot of sense for us and our investors.

So we looked at it as a real win-win.

I now would like to turn the call back to Weston Tucker for closing remarks.

Thanks, everybody, for joining us this morning and look forward to following up after the call.

Goodbye.

Thank you, everyone.

That concludes your conference call for today.

You may now disconnect.

Thank you for joining, and enjoy the rest of your day.