Good day, ladies and gentlemen, and welcome to Black Stone Third Quarter 2014 Investor Call. My name is Lisa, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Ms. Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. Please proceed, ma'am.
Great. Thanks, Lisa. Good morning, everyone. Welcome Blackstone's Q3 2014 conference call. So I'm joined today by Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer Lawrence Tosi, CFO and Weston Tucker, Head of IR.
Earlier this morning, we issued our press release and slide presentation illustrating our results, which are available on the website. We expect to file the 10 Q in the next few weeks. So I'd like to remind you that the call may include forward looking statements, which are uncertain and outside of the firm's control and actual results may differ materially. For a discussion of some of the risks, please see the Risk Factors section of our 10 ks. We don't undertake any duty to update forward looking statements.
We will refer to non GAAP measures on the call and you could find the reconciliations in our press release. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any of our funds. The audio cast is copyrighted and can't be duplicated, reproduced or rebroadcast without consent. So quick recap of our results. We reported record 3rd quarter economic net income or E and I of $0.66 that's up from $0.56 in last year's Q3 and it was driven by both higher performance and management fees.
Distributable earnings of $672,000,000 or $0.53 per common unit were also a 3rd quarter record and more than double last year's Q3. And of that amount, we'll be paying a distribution of $0.44 per unit to shareholders of record as of October 27. And with that, I'll turn it over to Steve Schwarzman.
Good morning and thank you for joining our call or maybe not such a good morning, depending upon what you own in the markets today. Blackstone, however, has had a terrific quarter, which was a record Q3 for ENI, cash earnings and assets under management. In fact, in every major area, investment performance, capital raising, investment activity levels and realizations, the firm is producing record or near record results. Our investment performance continues to significantly outperform the public markets. Over the past 12 months, we've created $35,000,000,000 in total appreciation across our funds, a staggering number.
Even in the 3rd quarter, most of our funds delivered returns that were multiples of their comparable market indices. Our real estate funds were up 6% for the quarter and 28% for the past year and our private equity funds were up 4% overall for the quarter and 28% for the prior year. Our credit drawdown funds, as Tony indicated earlier, were up between 8% 15% growth for the quarter. The stock market barely went up and 30% to 34% for the year. Altogether, this is really stunning performance.
This performance along with strong demands for alternative products continues to drive significant capital inflows to the firm. Against the positive secular backdrop of limited partner investors allocating more to alternatives, which I think we've told you in prior calls was going to happen, and also reducing the number the number of managers they do business with, which we also indicated we thought would happen. Blackstone is, I believe, the best positioned firm to capture and grow market share and that's occurring. We're doing this in all of our businesses. As our global investing platforms have become more diversified, we continually have new funds in the market and our capital inflows are no longer the step function they were years ago when we were a lot smaller firm.
Blackstone has raised $13,000,000,000 just in the current quarter $55,000,000,000 over the past year, which is by far a record. And in the past 2 years, we've raised $100,000,000,000 That's greater than the total size of many of our closest competitors. It's a real testament to the performance of our products and depth of relationship with our limited partners. We have $42,000,000,000 in dry powder capital to invest and with leading global platforms in each of our investment businesses, we're able to find many interesting opportunities to deploy this capital. We invested or committed a record amount in the Q3 of $10,000,000,000 bringing us to nearly 30,000,000,000 over the past year as a result of our unique position.
Over 30% of the $30,000,000,000 was in Europe, primarily in real estate as we're taking advantage of the current distress there. DSO completed the largest investment in its history, for example, a $1,000,000,000 acquisition financing package that they were uniquely positioned to execute. And private equity invested in several very carefully selected and conservatively structured deals. Our new European Real Estate Fund, as Tony mentioned, is now 2 thirds invested or committed after only 1 year. We were waiting for the European real estate sales to break open and it did and we were ready and we've executed.
Because of our rapid deployment, we've agreed with our investors to expand the size of what was already the largest fund of its kind ever raised in Europe by additional 1.5 €1,000,000,000 That will bring the total fund to €6,600,000,000 or approximately $8,800,000,000 bringing us well to continue to take advantage of the distressed opportunities in Europe. This is really quite remarkable and exemplifies how quickly Blackstone can raise and deploy large scale capital to take advantage of a vintage or a market opportunity minimizing any J curve. In private equity, we very selectively pursue transactions, usually with low double digit unleveraged target returns and enhance those returns further with prudent levels of leverage. We've been doing this for about 28 years and it really works out extremely well for our investors. In fact, despite having an active weekly calendar deal sheet, the vast majority of our corporate private equity capital deployed was actually only in 10 to 15 transactions a year.
It's a very small number of actual transactions when you look at it on a global basis, which is why we can be so careful in terms of setting up things we think are very sensible for our investors with minimum downside and a lot of upside. Our behavior remains contrary to what you may hear about capital chasing deals public markets have clearly deteriorated significantly with a sharp increase in volatility that you can see on your screens and see on television. The S and P and global indices are both down 6%. Credit Indices have also declined with widening spreads and frankly a lot less liquidity than people expected. Hedge funds are being forced to unwind in positions and sometimes they're doing them voluntarily and capital markets generally have seen a decrease in liquidity as I mentioned.
I'd like to make 2 important points on this development. First, we are uniquely positioned to take advantage of the market volatility across all of our businesses. We've seen the public markets correct many times before. And as always, we'll present the potential for abnormal deal flow with favorable risk adjusted returns. With one of the largest pools of dry powder capital, we can and will move quickly to respond to market dislocations.
These types investment environments end up becoming some of our best vintages. Our job is to look at the markets and the world objectively, not emotionally. 2nd, as it relates to Blackstone's current investments and our performance going forward, public markets alone do not dictate realizations for us. We also rely on strategic sales sales to strategic buyers and other private sale opportunities, which would include the liquidation, for example, of our office portfolio in real estate. We closed the sale $2,000,000,000 of our Boston office portfolio in the 3rd quarter and have approximately $12,000,000,000 of office assets remaining in liquidation.
In addition, our growing base and expanding diversity of monies under management drives greater ongoing fee related earnings, which are part of our distributions to shareholders. In other words, we're not hostages of stock market. We have a lot of mechanisms for realizing investments and we are never for sellers unlike almost all other market operators. Given the long term and locked up nature of our funds with no redemptions, we do not sell at inopportune times as I have seen people do repeatedly in times of market uncertainty. In fact, our portfolio companies are in great shape, best shape they've been in many, many years and continue to see strong operating results.
So if we have to wait from time to time for realization, it's not a bad option. A market readjustment might delay certain public market dispositions in the near term, but things have a habit of changing. But if the timing is impacted, we'd expect our companies to continue to grow very nicely while we wait compounding our returns for our investors where they end up being very pleased when we sell these investments. The public markets tend to overshoot and undershoot What we see however is that the U. S.
Is growing nicely, particularly in our real estate area and where we're seeing sustained positive fundamentals across every sector of our portfolio. In our private equity companies, trends remain quite strong, up 7% and 10% respectively year over year, well ahead of the average company. The U. S. Market is currently trading somewhere around 15 times earnings, although that seems to move around a lot every day, which doesn't seem unreasonable.
Very low interest rates and declining oil prices should be good for growth in most countries of the world. We feel very good about our current portfolio and particularly good about our ability
to
momentum. Our M and A backlog is more than double what it was this time last year, that's double. Our restructuring group was just recognized by Thomson Reuters as the number 1 Distressed Advisory Business in the World. And Park Hill is the clear number 1 in the placement business in the world and is projecting a record year this year. As we announced last week, we'll be spinning these businesses into an independent publicly traded firm at some point next year.
And we're very excited about the opportunity for them. There couldn't be a better time other than the market uncertainty to launch this new company given the significant market opportunity that exists for a top notch independent and diversified advisory practice. With such a talented team untethered from our larger asset management business, which creates conflict and under Paul Taubman's leadership, one of the top bankers and advisors in the world, I believe we're creating something that will be truly special. Feedback from our clients and potential clients has been extraordinarily favorable. Our shareholders should benefit as standalone advisory businesses generally trade at significantly higher multiples in the public markets than Blackstone does.
A better earnings trajectory coupled with a better multiple should equal a compelling value for our shareholders. In summary, I couldn't be more pleased with our Q3 performance. I'm excited about the firm. We're wonderfully positioned. I expect a lot of good things to be happening over forthcoming years.
With that, I'll ask Lawrence Tosi to take over with a review of our financial results and then we'll be taking questions and there are a lot of them for us because I think the current market environment gets people curious as to what's going on generally and what we're seeing.
Okay. Thank you, Steve, and thank you everyone for joining the call. The one takeaway we want to leave investors with today is that while market movements are by their very nature temporary, the momentum of Blackstone's performance is not. In the Q3, the S and P saw volatility and a peak to trough value differential of 5.3% similar to the volatility seen in the Q4 to date, It still ended up largely flat on low growth and earnings for the index companies. Against this rather lackluster backdrop, Blackstone has produced record 3rd quarter and year to date earnings, while posting above market fund performance in almost all of our investing businesses.
The key to Blackstone lies not in short term public market fluctuations, but in longer term trends like the availability of credit, the mispricing of liquidity, bank downsizing, regional capital constraints, supply and demand imbalances, strategic opportunities, lack of new construction, asset price devaluation and operating underperformance. These are operating and risk drivers that make up Blackstone's expertise not public market metrics. The 30% returns across private equity real estate and credit funds over the last 12 months reflects strong underlying portfolio company and asset performance as Steve outlined. These are some of the best fundamentals and operating performances we have seen across these asset classes. Similarly, BAAM outperforms most in difficult markets, while also maintaining 1 third of the volatility of the S and P, which is why that business is seeing both record inflows of 12,000,000,000 dollars over the last 12 months, while outpacing the broader market in returns year to date.
More than anyone, our fund investors understand and appreciate the long cycle benefits of investing with Blackstone. Over the last year, we had record organic inflows of 55,000,000,000 but perhaps most interesting is that 65% of that amount or almost $36,000,000,000 of the inflows came from new funds, new businesses and new strategies we didn't launch until a few years ago as we continue to innovate best in class product ideas and extensions across Blackstone. We also had $18,000,000,000 of inflows over the last year in evergreen funds that are always in the market, giving us continuing access to new capital. Some of those funds are specifically created for high net worth individuals, where we have raised a record $10,000,000,000 over the last 12 months, representing a new and growing market for us, where there is a broad demand for Blackstone's unmatched product quality, depth, brand and performance. Over the last several years, almost all of Blackstone's drawdown funds have hit their caps.
This strength is continuing for alternatives in general and Blackstone in particular. We are currently fundraising our second energy fund, which is well on its way towards our $4,500,000,000 cap. We're also raising our 2nd tactical opportunity strategy, which we think could exceed the $5,000,000,000 we raised for the first fund. Our new core plus real estate platform is nearing $2,000,000,000 in commitments. We are launching new strategies in our secondaries business, which just closed on $4,400,000,000 for its newest fund, nearly doubling the last pre Blackstone fund, in part by accessing channels uniquely developed by Blackstone.
We are also adding 1.5 €1,000,000,000 to our 4th European Real Estate Fund, which is double the size of its predecessor fund. These fundraisers will drive growth for Blackstone and that is before we even begin to launch our flagship 7th global private equity fund this year and our 8th global real estate fund early next year.
All of this comes at
a time when we are returning record levels of capital to our investors at attractive returns. Record AUM and consistent fund performance on a growing base of assets accelerates earnings and distributions even in volatile or flat public markets. This is exactly what we've already been seeing so far this year. Our record year to date E and I easily outpaced record fund performance posting a 47% increase to 2,900,000,000 dollars Realization activity was also robust and continued unabated in a flat but sometimes volatile market driving distributable earnings up 85 percent to 1,900,000,000 was broad based and that for investors is a unique balance only Blackstone can deliver. Further note that while marks can impact E and I temporarily, distributable earnings is a longer cycle reflection of both sustained inflows and the value created in our funds where we focus on decade long returns and never on just quarters or even single years.
First, we are at record levels of locked in fee revenues and profits, up 22% on record inflows, a consistent source of cash earnings regardless of market conditions. Secondly, our realizations are also of greater scale and more diverse across a wider set of growing businesses than ever before. Some details. The momentum of realizations has been building over the last several quarters with the 2nd and third quarters of this year marking realized performance fees ever. Distributable earnings year to date reflect over 150 different transactions.
Only 50% of those transactions involve public markets. The remainder was generated by private sales, operating earnings and refinancings. None of that activity is dependent on public market or occurs at a spot price. Our forward outlook for realizations has a similar public and private split. Blackstone's financial profile has also been strengthening at a rate greater than the broader markets.
At the end of the quarter, Blackstone had a record $8.72 a unit on our balance sheet, up 34% in just 1 year. Our liquidity profile has also improved as we ended the quarter with record cash and treasury investments of $2.56 We currently have $4,300,000,000 or 3 point 78 per unit in net accrued performance fees and another $931,000,000 or $0.81 per unit of investment gains on the balance sheet. Together, this represents $4.59 a unit of future cash earnings and 64% of that amount is in assets that are public, liquidating or paid annually. Our record results for the quarter, the year and the last 12 months reflect sustained fund returns, strengthening of our market position and earnings momentum that will certainly outlast current market volatility. For whatever reason, what drives Blackstone and what drives Blackstone's stock price appears today to be 2 entirely different and somewhat unrelated dynamics.
We do know that Blackstone's performance is driven by long term valuation value creation in our funds, which in turn drives the growth of our asset base and our earnings performance. Today, those dynamics are unchanged and have never been stronger. And with that, we'll open up to questions.
Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Hey, thanks. Good morning. First on VCP 7, I'm just wondering did any of the recent market weakness have any driver in terms of the timing of starting to raise that fund here in the 4th quarter just given improving asset class valuations broadly here?
No, it is Steve. I'd say absolutely not for that. We have a strong investment rate and it's time to raise funds typically as you know, when you get around 75% invested, in, you go out to market, we're approaching that. And so there's nothing other than normal course in that. One of the interesting things, the trend that's going on as opposed to several years ago is that larger size funds are becoming much more popular, if you will, than they had been.
So that's a good sign for that fundraising. That's an across the board type of phenomenon, not just involving Blackstone.
Larger funds and alternatives also. Alternatives in general are growing as part of LP's portfolios.
Thank you.
Your next question comes from the line of Bill Katz, Citi. Please
Okay. Thanks very much for taking the questions. Just two unrelated questions. The first question I have is Steve you mentioned in your opening remarks that your the flexibility to exit and selection flexibility on private equity deals and still applying some good underlying rate of return both levered and unlevered. I guess the question that I has affected the group and your stock
to some degree is how
are you thinking about funding availability given the fact that credit spreads have backed up a little bit and some banks have been highlighting the riskiness in the levered loan markets. How do you think about just sort of financing growth from here?
My own sense is and Tony can give his view is things cycle a bit in terms of the availability of credit. We haven't been seeing that this is a problem. And we may have a somewhat idiosyncratic portfolio or the types of transactions we're doing. In our model, private equity availability of capital is the most important criteria. The cost of money goes up and down a little bit, doesn't affect return too much, surprisingly.
So at the moment, we haven't really experienced what you're describing.
Yes. Bill, I will add 2 things. First of all, as I've said many times before, but I just want to remind the audience here, hot credit markets tend to be difficult markets for us to earn high returns on new investments. So we don't if the credit markets cooled off private equity, we would welcome this. Secondly, we have been shying away from maximizing real driver of our investing is unlevered returns, use credit markets to enhance that and magnify it.
But we use credit markets to enhance that and magnify it, but they've gone overboard. So
a lot
of what we've been doing is specific in investing in private equity have been growth investments. And I mentioned on the press call, energy investments where we're actually going out and finding hydrocarbons or building generation facilities and so on and so forth, which are not particularly credit market dependent and not also equity market or anything else dependent. So we don't we're not worried, I guess.
I think one other thing is Black Stone taken this group is in most years the largest generator of fees to the financial community in the world. And so if there's credit to allocate, we tend to be well positioned to get that credit. And also memory, I don't know that throughout our whole complex, of real estate, private equity and other types of vesting that we've ever lost money for any bank in the firm's history. And this type of positioning in terms of protecting the banking system when we borrow money, as well as being historically one of the top fee payers in the world really positions us very well. And when Tony said he's not concerned about in effect the difficulty of borrowing money that when times are tough borrowing generally prices go down.
And then there's a cycle where credit improves. And if you can buy things when those prices go down, you always get wonderful vintage returns. It's just logical. So we don't look at any of this as a problem. In a way, it's a competitive advantage for the firm.
Okay. Thank you for that perspective. And my second question, unrelated, you mentioned in your press release you're having some good success in sort of European retail funds. Could you talk a little bit about how you see that opportunity over the next several years? I'm thinking maybe if you can answer it in the prism of either product opportunity or incremental distribution relationships?
Okay. LTT. Yes. I think though you're referring to the comment in the VAM portion where we're talking about the UCIT funds that we released in Europe?
Correct.
Yes. So it's 2 things at play. First is, BAAM has been hard at work for several years at different ways that they can create customized or tailored versions of their products and risk exposures for the retail audience. The launch of our first ever usage fund in Europe is an extension of that. So on a macro basis, we're talking about addressing retail with retail tailored products within VAM and more recently, putting out the usage structure.
There are other funds at Blackstone in other businesses that are more liquid that will benefit from a usage type structure that we can then offer to that European retail base. And that's some of the beauty of having the technology or the learning, if you will, fund by fund, we can pass that on to the other funds as we offer them. So it's another way of accessing that market. The usage structures are very popular and dominate the high net worth channels in Europe and the ability of BAM frankly over a couple of years to tailor to that audience is really a great growth opportunity.
Okay. Thank
you. Your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Hey, guys. Good morning. So my question has to do with sort of the outsized growth that you talked about coming from newer strategies that you brought to market over the last few years. Just wondering how you're thinking about sort of product development broadly speaking these days going forward? And then related to that as these newer strategies continue to season, what's the dynamic between sort of letting incremental revenues fall to the bottom line versus continuing to reinvest in the business as that cycle sort of plays through?
Well, just in terms of developing new products, we actually have a very good procedure here. We have once a year strategic planning sessions for each of our 4 major business groups. And at that meeting, each group brings in 2 to 3 new ideas, ways that we can serve investors better, generate high returns, which tends to be in effect packages as a new product. And then we debate among the management committee members and the group as to which one has best upside for our investors and how executable that is. And depending upon the ease of introduction, we either do one of them in a year assuming there's something really good to do or if there's really something terrific at 2 of them, we'll do 2 of them as long as we have the human capital to execute.
And it's a wonderful way to run a business because it gives younger people in developing talents, the opportunity with supervision to run these new businesses. So we have a steady stream of these now. 10 years ago, some of us had to like invent these things, very fewer number. It's a system. And in terms of the second part of your question, we don't want for financial resources to prosecute growth strategy at the firm.
In other words, there's something terrific to do, we will do it. Because as you know, markets are somewhat fragile. There is a moment for different strategies and our job is to hit that moment where we can generate really outsized returns for our clients and our investors. So we don't hesitate to spend whatever it takes to stand up any new product if it's really terrific. So it's a simple way we do things.
And Michael, let me just say in general, we've never had more new products than we have now. And the new products we have, have never had bigger have more opportunity to be huge. So more runway ahead of them. We're not talking about starting something that's niche and that is what it is. We're talking about things which could be huge in the even in the scheme of Blackstone.
So I think we've got the richest, biggest, longest term, strongest new products that we've ever had. And yes, there is a lag and we lose money for the 1st few years in a new product typically and that investment has flowed through the P and L. So the future is
to come. Great. That's helpful. Thanks for taking my question.
Your next question comes from the line of Glenn Schorr with IFI. Please proceed.
Hi. Thanks very much. 2 quickies. One is 4th quarter has always or historically has been a very good performance, key quarter for you all and performance over the last 12 months has been excellent as you pointed out. How much does the volatility that we've seen in October dent what should have been really good expectations for performance fees?
Any color around how we should think about that for the Q4 would be great?
Glenn, it's LT. A couple of things. You're correct. I mean, typically the Q4 for us, let's just talk about locked in fee growth and deal activity tends to be busy as there is some seasonality to our business. We tend to be about 28% to 30% of a full year's fee related activities Q4 and that's been true for several years.
But I don't think these short term market fluctuations will dent that. With respect to performance fees and the performance quarter to date, we saw some volatility in the Q3, turned out to be a great quarter. We'll just have to wait and see.
No problem. Another unanswerable one is curious on how you think about the potential of a buyback in the context of great growth, great performance, you've been vocal enough that you think the stock is cheap, so do I, yet you've got to manage the fact that the float is small. The reason why I ask is the share count each quarter has been up a little bit year on year, nothing material, but just pops to mind.
Pops to our mind too. And we actually think the liquidity in the stock is pretty good by comparison to the rest of the industry, but we haven't made any decisions.
Yes. I think our liquidity equals pretty close to the liquidity of the whole rest of the industry. So in that sense, it's pretty close to that. So we think we have good liquidity and I think our valuations wouldn't surprise you, but I often turn out to be right on these is sort of really
like what are we thinking, frankly.
I think Glenn, you raised a good point. I mean, it's the free float now is about $15,000,000,000 or so. And that's up and over time we would expect the whole sectors free float will move up into more mature territory. So I think it's just following the path of other financial services subsectors when they were born and became more mature like you saw with the whole brokerage industry. But as Steve mentioned, relative to the rest of the group, I think our if you look at our average daily trading volume, I think it's equals more than pretty much everyone else combined.
So there seems to be good liquidity.
All right. Thanks very much.
Your next question comes from the line of Davitt with Autonomous. Please proceed.
Hi, good morning. Thanks for taking my question. I wanted to focus a little bit on energy exposure and oil in particular and how you think or how we should think about $80 oil or even lower flowing through private marks or if you even think that's much of an issue? And secondarily, does the collapse in the oil price change your view on that niche as kind of a major growth engine for your business?
Okay. So I don't think we think the lower oil price will have a very big impact on our marks. There's some companies we still own that are dependent on oil, most particularly Cosmos that trades publicly on the stock market. So you'll know what that's doing in the market. You can see what happens to stock price.
With respect to a lot of our private oil oriented assets, most of them have been sold frankly and lately we've been mostly buying gas, figuring the gas was near or low ebb and oil was pretty high. That view has been pretty is helpful for margins. And so how all that plays through on balance, I'm not even sure it's negative at all, but I must say I'm not sure. And dislocation in the energy business, we think this
is a temporary dislocation of oil price. We think
that the long our long term view of oil prices really hasn't changed. Our long term view of energy prices was below most of the price levels in the last 2 years. And it's probably a bit above today's spot price. But we review that periodically. Our investments that we've been made in energy will be quite successful if oil prices even stay at this level.
Great. That's helpful. Thanks.
Your next question comes from the line of Robert Lee with KBW. Please proceed.
Thank you and good morning. Can you maybe update us on so fundraisers, sometimes it's tracked, but where things stand maybe with BREP, I guess, be BREP 8, kind of how you're thinking about that? And also curious on BCP's 7 and maybe also the next prep fund, are you seeing any change in or change in kind of the typical LP demands, particularly maybe around the demands for co invest? Is it backing off at all? Is it kind of getting more pressured for co invest opportunities as part of the commitment?
Just kind of some color on that be helpful. Okay. So BREP-eight will be Steve is going to chime in
a minute. BREP-eight looks like it will be sort of early next year sometime most likely. BCP probably late this year most likely. And yes, there's a lot more interest on part of LPs for co invest.
What I'd say is that almost every fund, not aware of any, but just trying to be criticized by my General Counsel. But every fund that we've offered over the last several years has like been significantly oversubscribed. So when you ask a question of what do we think is going to happen
a prep 8
where we typically in real estate have been the signature sort of investor where people like to put money. And that's been the empirical reality giving us huge multiple what other people have raised. We don't know anything in the environment that's going to change that. We can't guarantee that, but that's what we'd expect to have happened. In private equity as we're going to market, We had a very successful Fund 6 so far and we have a lot of activity and we'll see how that goes.
There is more of a demand for co investment, But it is interesting that we're being regularly approached for very large capital outlook by some of the largest investors in the world, way beyond what we've ever experienced. And sort of as a sort of part of a package they'd like to see sort of in some cases more co investment. What we find, which is I don't quite understand that, but
they're trying to balance
their own core I don't quite understand that, but they're trying to balance their own portfolios and they've got their own reasons for not wanting to do something at a given point in time, given the demands on their overall payments to beneficiaries or whatever. And so in a way, we think this is something that makes sense from their perspective. It certainly makes sense from ours and these are like discussions. And net net, the evolving world appears to be a very, very good one for a firm like ourselves. So it's not an issue that's unexpected.
And in many cases, in the olden days, like 4 years ago, when we needed more money for an individual transaction because of size, we would call another firm, a competitor of ours and team up and make investment. It works really nicely to have our own limited partners put up that money, makes them happy, gives us more control a deal, less share control, because typically we're in charge of that investment. So it's an interesting phenomenon, but it works very well
for us.
Great. And maybe one other just quick question for LT, just kind of really almost a modeling question, but it looked like the taxes have jumped up a bit in the quarter. Anything specific driving that?
Sure, Rob. So there's really two factors at play. The more material factor, so what you're referring to is our tax rate typically runs around 2.5% to 3%. It jumped up to about 9% this quarter. So that's 6 percentage point difference.
A large part of that's related to the fact that a very good in fact record realization quarter in GSO, Those realizations are on the mezz funds and the rescue funds, which are typically ordinary income funds. And so there's a higher tax rate associated with them. That's number 1. And number 2, the pre IPO funds in real estate, which would be a BREP IV and BREP V also had strong realizations and those 2 actually run through an ordinary income vehicle. So I would say it's a short term spike in large regard related to those 2 phenomena related to the realizations in those The second to a lesser extent impact on it is that much of the equity that we grant best in the first half of the year, which lowers the tax rate as that gets deducted for tax reasons.
So Rob, with respect to modeling, I think that I'd continue to keep it to what it's been historically and I would view this as a one time event.
Great. Thanks for taking my questions.
Your next question comes from the line of Devin Ryan with JPM Securities. Please proceed.
Hey, good morning. So just want to follow-up, I guess, on the strong realizations in real estate, just to make sure I understand. So BREP 4 and BREP 5, I know you guys mentioned earlier in the year that we'd be seeing a pickup in realization activity. So just trying to get some additional perspective there around how strong now we've had 2 really good quarters in realizations and just get a sense of some perspective of is this kind of a sustainable type of trend? I know it will be lumpy, but are we now kind of at a more elevated potential level moving forward here for at least foreseeable future?
Yes. Well, regards to breadth, we think what you've seen is sustainable and can even grow from here.
Okay. All right, great. Good to hear. And then just secondly, with respect to the $13,000,000,000 of gross flows, is there any way to break down how much came in from existing LP relationships and maybe how much of those flows are being generated from new relationships you guys have? So it's LP existing
LPs. Existing LPs. I did highlight in my speech that there's some new pockets of LPs as well that are contributing materially. And one of the exciting aspects of this is that we're also putting now a wider range of funds in front of the same LPs. So the cross selling continues to gain momentum in all those.
The new pockets, the cross selling we all view as sustainable trends.
Great. Appreciate the color guys.
Your next question comes from the line of Mike Carrier with Bank of America. Please proceed.
All right. Thanks a lot. Steve, you mentioned upfront some of the color around the portfolio companies and how they're performing. Just curious if you can give some perspective on maybe the European part of the business. It could be in either real estate or private equity, But what are the trends there maybe in some of the sectors?
And then if the growth outlook does take a step down, how is that relative to what your expectations were in making some of these investments? And then for the portfolio companies, like what are their options to try to hit those returns, meaning driving stronger revenues, looking at expenses again, just what are the variables that they'll reconsider if the growth is slowing?
I'd say in the European area, our biggest exposures have been in real estate. We have a very conservative view towards Europe. I guess you would another word choice you could have for that, which is unoptimistic. So when we buy something there and we're buying very large amounts of different types of assets simply because there's an imbalance with way more sellers than buyers puts pressure on price. So we can create investments at very good yield and then leverage them and get very returns with no growth in individual markets simply because of the illiquidity.
We also, when we buy something, we try not to be passive buyers of anything. And we usually have some improvement plan of what can be done, even if a market is flat, if an asset has not been maximized. Our job as John Gray would say it very nicely, it's buy it, fix it, sell it. And our overall economic model is that we're not optimistic about economic growth in Europe. And so we're consequently not disappointed when that growth is not there.
It's all part of that plan. In terms of purchases of U. S. Assets and what we were talking about and Tony mentioned remarks earlier, our investments in Fund 6 have performed very well, very well. And we're not supposed to be selling securities on these calls.
So I guess I won't tell you how well it's doing, but it's good. And so we've been well surprised on the upside. That was not the case in effect 4 years ago after the financial crisis, slow coming out of the shoots, both real estate in the U. S. And private equity in the U.
S. Is doing better than our expectation there. That's all good. So that's sort of how we see the 2 geographic areas that think you asked about.
Yes, that's helpful. And then LT, just real quick, just given the volatility in the markets right now, with BCP V, just how much of a buffer do we have if it got back close to that to the hurdle? And then on the transaction fees in the quarter, it was pretty high. Just wanted to get any color on the outlook there?
Sure. So for BCP V at the end of the quarter, it was about halfway through the catch up and you'd need if you were to reverse the carry that we've accrued year to date, you need about a 10% decline in equity value to reverse it. So I'll just give you an idea of magnitude. So it's been accumulating over some time. With respect to transaction fees, the uptick in the quarter had to do with an interesting transaction really in real estate where you'll see on there line by line related to what is effectively a caused
the uptick. Other than that, it was
relatively flat quarter over quarter for transaction fees.
So it caused the uptick.
Other than that, it was relatively flat quarter over quarter for transaction fees for the firm as a whole.
Okay. Thanks a lot.
Next question comes from the line of Mark Arazari with Goldman Sachs. Please proceed.
Great. Thanks. Steve, I'm just trying to figure out the impact that denominator effects have maybe had on the allocations to the firm across asset classes? If markets are more volatile and outlooks change around rates and global growth and public markets trade lower. Do you think going forward that that could play a role in the percentage that investors might
allocate to alternatives? Thanks. That's a good question. That obviously if these funds shrink down 75% and they have no money of any type and the world is completely desperate, yes, that will have an impact on everybody who's in the business, even Goldman Sachs, a great firm. In a normal operating environment, since we're actually selling out everything that we've offered, we have a built in buffer in terms of that shrinkage.
There's also something very material going on. And that's the fact that not only are about half of large institutional investors increasing their exposure to alternatives. They're really shrinking the number of people,
the number of
firms they give money to. So what's happening with that phenomenon is quite widespread, it's hurting capital to the high performing firms sort of like ourselves who can also handle significant amounts of money. So if you have roughly half of the in our class, let's just say that markets are down 5% or 10%. Given the fact that there'll be a significant shrinkage, money management that will be allocated to and the fact that we constantly, at least over the last X number of years, have been limited by investors as to how much money we can take, not what they'll give us. And we can every fund has limited us and we've blown over the caps.
So we have a lot of safety, if you will, built into that. If markets give way to the point that there's catastrophe, then what happens is people just freeze. But I don't think that's part of this cycle. The U. S.
Economy quite nicely and I think we've got an overreaction going on with health concerns, foreign policy can all this stuff come together that's just scaring people and in a way you can't blame them because there's a sense that we're sort of out of control and that's being reflected into markets. But that's not, I don't think sustainable. Let me make a couple of comments. First of all, from 5 or 6 years ago, public markets are up
70 percent or something. It's huge. It's they're up way more than these people have been able to allocate to alternatives. Secondly, their net becoming disinvested in alternatives. For several years, they've been getting back way more capital than they're actually been able to put out, which has caused them to run faster and faster to try to get up invested.
Thirdly, some of the markets like treasuries are actually appreciating in here. Let's not forget that. And a few days in the public market when year to date, maybe it's off the peak 5% or 6% in the last few weeks, but boy, it's still pretty at a pretty high level and by any by most standards. And then finally, where the big new flows coming are not so much some of these traditional pension funds with asset allocation and denominator issues. A lot of that money is coming from sovereign wealth funds, from foreign investors and whatnot that are wildly under invested in alternatives where they're just beginning to move money into that.
And so there are a lot of trends here that overwhelm a few work week weeks in the stock market.
Right. And we're perceived by U. S. Investors as a U. S.
Based firm. Even though we operate globally, we are U. S. Based. And right now, the U.
S. Is number 1 developed market on it that non U. S. People as a rule want to be invested. They're very open about that.
So our positioning is quite good.
Okay, great. Thanks.
Your next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Great. Thanks for taking my questions. Maybe just to follow on the line of fundraising and maybe in a different way. I think Steve and Tony you mentioned the pace of deployment or the opportunity for deployment could potentially improve with the dislocation in the markets. Two questions on that.
Maybe first, how quickly do you think that could improve given what we're seeing in the And if you can comment on the U. S. Versus non U. S? And then does that give you capacity?
As you mentioned, Steve, you're oversubscribed in a lot of funds typically. Does that do you feel that gives you capacity to basically raise or to basically narrow that gap between oversubscription and what you actual?
Let me comment on the deployment. I don't first of all, I think we're all getting a bit really focused on overly focused on a few days in the stock public stock market candidly. Our business isn't really a public markets business and the things don't move that quickly. It's a long term business. As Steve said, we buy assets.
The value doesn't come so much from the purchase price or the exit multiple. It's the value we create in the assets, which decouples the investment performance from economies and markets. And that the fundamental picture, frankly, notwithstanding a few bad days in the market hasn't changed very much. In terms of the deployment level, recognize too that the deployment levels are already extremely high. So do I think that they'll go a lot higher from what they've been?
No, I don't. Do I think that it will be able to have maybe some juicier opportunities and some things that are a little easier to find. We've been working hard to find what we've been finding and be able to sustain our deployment. I do think that. So I don't I'm not sure I can quite I don't and I'd say that both that's the same for the U.
S. As well as the non U. S. I don't like pictures that different. Things were already pretty troubled in Europe and there were some credit issues in Asia.
So I don't think that hasn't really changed here obviously. And then in the U. S, in terms of the particularly in real estate, rents are still going up, occupancies are still going up with a stronger economy. There's still an ability when you have a stabilized building of high quality real estate, there's still plenty of ability to finance it. So I think we're going to continue to be able to sell assets.
And I the amount of distress in the U. S. Is still going to be low as we're still lagging the amount of building we should have had for the last 6 or 7 years. So I don't know that that changes much on the real estate side. And on the private equity side, as I said, we've been focused more on we haven't been doing a lot of private to privates anyway.
I think we've got a ways to go, frankly before those get to be very attractive. So not a big change from my perspective.
This is supplementing one of the areas that Tony didn't touch on. We will see a pickup in the GSO area. They've been waiting patiently for something bad to happen because they've got tons of money and credit spreads were so tight that there wasn't enough juice in it to really play. But what's happening now as a result of lack of liquidity in certain types of markets and fear is that and outflows from junk and things of that type is that you're going to have some marvelous opportunities and that is actionable in the short term. And there'll be certain types of extensions of credit to longer term borrowers if public markets are reduced or closed certain types of lower rated long term debt, boy, that's like a feast for the GSO group.
I mean, you just sort of that's like a perfect storm for their type of business. And we were talking yesterday to one of the senior people there and Tony and I were meeting with the group and they said, geez, there's some individual situation. Bonds went down 6 points yesterday. This is like a screaming buy. And those are opportunities because we're very liquid where we can take advantage of things like that And fear, what did they say, 1 man's Shakespeare, 1 man's tragedy is another one's comedy.
And so I think we'll be able to deploy significant resources there in response. In terms of what Tony was talking about is you don't have those instant stages in M and A markets to buy companies or buy real estate, sometimes it really helps you get a deal done. When you're in the midst of something and you have a blowout and somebody is a little reluctant and you're willing to close it close to where you were and they say, oh my goodness, I've had enough, you get an occasional accident like that done, but it doesn't like change the full flow of things. But to the extent that as a buyer, we've closed virtually ever announced in 30, 29 years. It makes us a much better buyer in an uncertain world because the seller knows we will find a way to get that deal done and somebody else might not.
And so that's good for us from a competitive perspective.
Great. That's really helpful. And maybe just one follow-up. I know you guys talked about the realization mix between strategic sales and strategic buyers and private sales versus the IPO market. So just maybe if the IPO market does shut down for any reason, if the market gets worse, do you see that shift changing much more towards the M and A side from an exit perspective?
Or do you think you might end up just being more patient and we keep waiting for that to rebound?
Well, first of all, the M and A side closes down periodically. It's not an odd outcome. When it's going on and it's rolling, people tend to think it happened all the time and it will always happen. And so we've lived through a lot of cycles and we switch our realizations, whether they're sort of recaps, whether they're individual sales. We do what it's sort of like a restaurant, what's the special of the day here.
And you can order what they're serving, but you can't order what's not on the menu. So if for some reasons they stock out of IPOs for sales, then we just move what we're doing or we keep compounding these companies, which as we said in the prepared remarks is going really well. And so then we pop out periodically and we make it work then and you see much larger realizations at that time. But this isn't a world that shuts down.
So let me make a couple of comments. First of all, when your EBITDA of a company has grown at 10 percent as they are on a weighted average basis and you're leveraged. So in other words, a lot of the capital structure is debt not equity. Accretion to equity just by waiting very substantial. And so we are paid the way.
Our LPs are paid the way. We make more money by waiting because the carriers grow in value. So understand that waiting is not at all a bad thing for us. I realize the public likes 1st $0.01 today to $0.02 tomorrow. But we get richer by waiting and our investors will get richer by waiting.
Secondly, IPOs are not exit events. IPOs are the most volatile part of the equity market, but we have something like 40 percent of our private equity portfolio is already public. We can sell those shares into and at values that are consistent with our marks and our carries and all that. We can sell those shares anytime we want. We're not we can do block trades, we can do secondary.
It's not that's not the end of the whip. The IPO is in the whip, but the irony about that is we don't sell in the IPOs generally speaking. We have an awful lot of real estate public securities in our real estate business as well, just tens of 1,000,000,000 of dollars across the firm. So that is still eminently executable into the public markets if we want to. But then I come back to my first point is the value accretion is so high that we kind of like making more money and that's what we get paid to do for LPs and for our public investors as well.
But fundamentally to your question, of course, if equity markets shut down completely and if equity markets get hammered, then the percentage of our liquidations from equity markets will go down. And as Steve said, we've had years when it's been all strategic or recaps or other things or tertiary buyouts and whatnot and no equity, and that's fine. We're not a one trick pony here.
Great. That's super helpful. Thanks so much.
And our final question comes from the line of Birenth Ozkan with Royal Bank of Canada. Please proceed.
Hi. I've got a question regarding the credit business. Can your credit business participate or provide financing to your basically LBOs and your private equity portfolio companies? Or are there certain restrictions that would prohibit you from basically providing financing?
So our credit business, it varies by credit business is not one business, it's multiple businesses and it varies somewhat by business. But in general, our credit business can provide financing to our private equity as long as at least half of the credit is provided by third parties on the same terms.
Okay. So liquidation, it shouldn't be an issue if there's no liquidity in the market because you'll be able to finance your own deals, so to speak, if you can find? Well,
our credit guys would only do that if that's the best available return for the risk at a moment in time. I don't want you to over date that actually.
Okay. Understood. And my second question would be on performance in the credit business. It seems like the hedge fund strategies had an not too strong quarter, but you've seen very strong quarter out of the mezzanine front and the rescue lending front. Could you just give some perspective on what was driving the performance and I'm comparing 3Q to 2Q?
Well, okay. So I actually think that the hedge funds have performed very well, frankly. Remember, this is and I think with the backups and the volatility of the market lately, their performance is going to particularly shine. The hedge funds tend to underperform when there's very low volatility in big bull markets. It's very hard for a fund that's managing risk down and hedging to keep up with the indices.
So, our investors couldn't be happier with the hedge fund performance and they're even happier now with that investment than they were before the recent market volatility and backup. And as regards to the performance of the credit funds, they've had a confluence of a few factors. First of all, defaults have been near 0. They've made great selections of the credits. Secondly, they tend to when they make those things, they tend to get equity kickers and things like that, which have appreciated a lot.
Thirdly, as credit markets rally, 2 things happen. Number 1, obviously, the interest rate that you put on in a higher and straight environment, there's capital appreciation because it's a debt instrument. But then 2, a lot of issuers will sometimes refinance you and pay you out and pay you a call premium and some things like that, which accrues to the benefit of our investors obviously. And then finally, just operating performance of the underlying companies has been really good. And again, as I was mentioning before with response to last question, when you have a leverage capital structure and your operating performance underlying company is good, equity appreciates a lot, the equity kickers appreciates a lot and the lowest tranche of the capital stack in terms of credit
and just a final question since I'm the last one on the call. So I was just wondering about your credit business and we see now you're contemplating about spinning off your advisory business given that the valuation could increase significantly as a standalone company. Could we see this with other business segments such as credit? It seems like the market describes a higher multiple on the credit businesses versus private equity and the transparency?
I know the question and the answer is no, absolutely not. I hope that's clear, absolutely not. There's a lot of synergies with this business. We do a lot there's a lot of magic that makes this firm go. It's a core part of the business and you won't certainly won't
see that spun off.
Okay. Thank you very much.
Great. Thanks everybody and we look forward to following up with Q and A after the call.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation.