Blackstone's Second Quarter 2014 Investor Call. I would now like to turn the call over to Joan Solitar, Senior Managing Director, Head of External Relations and Strategy.
Great. Thanks, Patrick. Good morning, everyone. Welcome to our Q2 20 18 conference call. So I'm joined today by Steve Horstmann, who's actually calling in from out of the country Chairman and CEO Tony James, President and Chief Operating Officer Lawrence Tosi, CFO and Weston Tucker, Head of IR.
So earlier this morning, we issued our press release and slide presentation illustrating our results. They're available on the website, and then we're going to follow-up with the filing of our 10 Q. So I'd like to remind you that call may include forward looking statements that are uncertain outside of the firm's control. Actual results may differ materially from the company. For a discussion of some of the risks and uncertainties and risks and uncertainties section of the details.
We don't undertake any forward looking statements. We'll also refer to non GAAP measures on the call and for reconciliations back to GAAP press release to those. And I'd like to remind you that nothing on the call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Blackstone funds. The audio cast is copyrighted material and may not be net income or ENI for the Q2 of $1.15 that's up very sharply from $0.62 in last year's Q2. Performance, as you may have seen already, was strong across the board with greater appreciation in the underlying portfolio assets as well as higher management fees.
Distributable earnings were $771,000,000 for the 2nd quarter or $0.65 per common unit, that's more than double last year's 2nd quarter's distribution. We'll be paying a distribution Investor Day in person or via webcast. But if you missed it, we have it posted on our website, so you can scroll through by segment. And with that, I'm going to turn the call over to Steve Schwarzman.
Thank you, Joan, and good morning and thank you for joining our call. Our results announced this morning dollars was our 2nd best quarter ever, up 89% from last year. It indicates the significant value we're creating across our platform. For the past 12 months, earnings were $4,300,000,000 Going to repeat that. Our earnings in the last 12 months were $4,300,000,000 or $3.76 per unit, which is a record for any 12 month period for any publicly listed asset manager in the world.
If we look at the growth in earnings from year end 2007 before the financial crisis, we've compounded at a rate of 12% per year and grown our assets three times despite the impact of a once in a generation global financial collapse. Despite this challenge, Blackstone has shown impressive growth in earnings and AUM, in fact, one of the strongest performances in the financial sector in the world. Our current cash earnings also increased sharply, as Joan mentioned, up 128% in the quarter. Realizations continue to pick up as we've indicated they would on previous calls, exceeding $13,000,000,000 in the quarter. While disposition activity has been accelerating to record levels, we've also been investing record levels of capital, creating new value and we're getting additional balance from having more assets with a current yield or annual performance fee payout due to the significant growth in our credit and hedge fund solution businesses.
In effect, all is going well. The strength or some would say very well. The strength of our results today is entirely because of our singular focus on delivering good investment performance to our limited partner investors. And our returns frankly have been some of our best yet. In private equity, our portfolio rose 8.4% in the quarter and 28% as Tony reported over the past year, driven by strong portfolio operating performance.
Revenue and EBITDA trends in our companies are some of the best we've seen in years, up 8% and 11%, respectively. Our 2,005 Vintage BCP V main fund crossed its preferred return threshold in the Q2 and is now in catch up as Tony and LT explained and you'll hear more on that later. Our real estate funds also continue to generate stellar returns with the portfolio up 6% for the quarter and 28% surprisingly the same number as private equity for the last year. Strength has been broad based in real estate with all of our major sub segments gaining significantly. Our credit funds had gross returns between 2% 5% for the quarter and 16% to 31% for the last year, which is actually quite astounding for credit investing as Tony said in a 2% world.
Our hedge fund solutions business or BAM produced a 2% composite gross return for the quarter and 11% over the past year also quite favorable. One of the current debates given strong markets, particularly in the U. S. Is around managers' ability to find new attractive investments to deploy large scale capital. At Blackstone, we've invested significantly over the years developing global capabilities where our local offices are fully integrated into the broader platform.
In this way, we can identify opportunities anywhere in the world and move capital to where they are most attractive. Our fund structures also give us great flexibility around when and where to invest and our scale lets us do deals that most others simply can't do. As such, we continue to invest record amounts of capital deploying $6,000,000,000 in the quarter $20,000,000,000 over the past year with an additional $8,000,000,000 committed to deals, but not yet deployed at quarter end. That's a total of $28,000,000,000 Roughly half of our investments were outside the United States. So I want to repeat that because it's really an important thing.
Roughly half of our investments were committed outside of North America. In fact, we'd already invested or committed 34% of our new European real estate fund as of quarter end and twenty 7% of our new Asia real estate fund and we're not even finished raising it. In credit, 50% of our backlog is in Europe, where we see a lot of interesting opportunities very much as we have in real estate. So despite the challenges that exist today for investing in some regions and asset classes, I'm excited about the opportunities we are seeing. Our capabilities are greater today than at any time in our history and our sustained high pace of capital deployment is building the foundation for future value.
Due to our active pace of deployment, we continue to raise new money from investors. Despite the sharp increase in realizations, we again grew our total AUM by greater than 20%, ending the quarter with $279,000,000,000 of AUM. In the second quarter, we raised $14,500,000,000 of capital, bringing us to over $62,000,000,000 in gross inflows for the past year, which was predominantly organic. Just so you don't miss it, $62,000,000,000 in gross inflows for the past year. The monies we've raised over the last 12 months equal as much as 50% to 100% of the entire AUM of many of the publicly traded alternative asset managers.
And we have several significant fundraising initiatives currently underway in virtually all of our businesses. In real estate, our core plus initiative is in early days with good momentum. We started with a number of separately managed accounts and we now have launched our 1st U. S. Focused commingled fund.
We also are having active discussions for additional SMAs in Europe and Asia And we think this combined platform could exceed $5,000,000,000 from a standing start within the next year. And by the way, I think we believe it's going to grow a lot bigger from there if the trends remain consistent. Our current global flagship fund, which started at $13,000,000,000 in size is now nearly $15,000,000,000 on its own, $16,000,000,000 with co investors due to favorable recycling provisions and will likely grow further. At our current investment pace, we're likely to be back in the market with our next global fund early next year, which gives out a fund deployment life of about 2.5 years. Our Asia focused real estate fund continues to march along and has raised $4,400,000,000 and we expected to hit our cap of $5,000,000,000 Our debt strategies business is expanding with additional capital raise for our liquid CMBS investment vehicle as well as our commercial mortgage REIT Blackstone Mortgage Trust.
In private equity, we've got a big very busy year. We commenced the fundraising of our 2nd energy fund, which we're targeting $4,000,000,000 plus with an expected first close in the fall. And Strategic Partners, our secondaries business is making great progress on their new fund benefiting from the synergies of being part of Blackstone with $3,200,000,000 raised on our way to the cap of 4,400,000,000 dollars That's nearly twice the size of the previous fund before they joined Blackstone. In credit, investor demand remains strong and we had inflows into our hedge fund vehicles as well as several separate account mandates from large investors. We've also just started the marketing process for direct lending fund in Europe given the opportunity set there.
And lastly, BAM continues to take share in the quarter with $2,300,000,000 dollars of fee earning net inflows including July 1 subscriptions. This included an additional close for the new GP which is now $2,300,000,000 in size, as well as the launch of our second 40 Act fund, which raised $300,000,000 just in the quarter. There's a lot going on from a fundraising perspective. And as Tony said, this isn't episodic anymore. This comes from all over the firm on a reasonably consistent basis.
And I'm confident of the firm's continued growth trajectory even with our heightened levels of realizations. Our 2nd quarter realizations of $15,000,000,000 included several strategic sales as well as 5 public market dispositions, one of which was our first sale of Hilton shares. We also successfully executed a loan against part of our Hilton position, which returned over $2,000,000,000 of capital to our limited partners, but preserve future upside on the shares, which continue to perform very well. Hilton's current share price equates to a multiple of 2.8 times our original investment and implies a total gain of almost $12,000,000,000 which we believe is the largest private equity gain in history. We also brought Michaels public in the quarter, although we didn't sell down any of our shares and we have 3 other companies on file for IPOs with more to come markets permitting.
We now have $32,000,000,000 in public equities and our private equity and real estate funds, which will sell down in an orderly basis over time. We also have a substantial portfolio of office assets. We're in the process of liquidating. You've probably seen some news reports in the pending sale of more than $2,000,000,000 of our Boston office assets. And in credit, we continue to see realizations out of our 1st mezzanine and rescue lending funds.
In many cases, as our borrowers call us out at a premium in favor of lower cost financing. Looking forward, our realization momentum is significant. And given our investment performance, the positive cycle of the business continues with our LPs returning those dollars to us in newly raised funds. In summary, Blackstone's results continue to demonstrate the unique and compelling strength of our business model. I believe we are the best positioned firm in the fastest growing part, the asset management business, with the most recognized and most trusted brand name.
Our investment performance is outstanding and is driving record levels of demand for our products, resulting in sustained double digit AUM growth, at least double to triple the rate of almost all traditional asset managers. And I believe there is much more to come for Blackstone as each of our business lines introduce exciting new investment products, which will appeal to potential investors. I foresee continued controlled expansion of the firm on an organic basis consistent with us maintaining our unique culture of meritocracy, hard work, unflinching integrity and service to the public and all of our constituencies. Alternatives are evolving as a publicly listed class and have become a required course in financial services investing, not an elective. And Blackstone is the core curriculum with global leading platform, each of the major asset classes.
Thank you for your support. And with that, I'll ask Laurence Tosi to take over with a review of our financial results.
Okay. Thanks, Steve, and thank you everyone on the call for your continued interest in Blackstone. I would like to begin my comments today by addressing what appears to be a couple of common misconceptions about alternative managers in general. First, the firms cannot create value and realize it at the same time. That asset growth is inherently constrained by returns of capital or that firms cannot be both a smart buyer and a smart seller at the same time and finally that our results are more volatile than the assets we manage.
Our performance we think over time shows why these assumptions are unwarranted. For the quarter, Blackstone had distributable earnings of $0.65 per unit, more than double the prior year period, bringing the last 12 months to $2 per unit. As we continue to realize season investments, while continuing to invest and raise new capital. Strong returns across all of our investment platforms drove 61% growth in E and I to $2,100,000,000 year to date. Importantly, realized performance fees of $1,100,000,000 for the 1st 6 months were up 85% year over year.
Following 11 sequential quarters of increases, we now have $4,200,000,000 in net accrued performance fees, of which roughly 3 quarters is either in public equities or assets that are pending exits. Another way to look at what we call the compounding effect in our financials is the fact that with approximately the same level of fund appreciation as the first half of last year, the first half of this year produced record E and I and distributable earnings, up 61% 72% respectively. All indications are that we are actually at the early stages of exiting a number of scale assets, which means $2.51 per unit of the net performance fees is associated with public holdings or pending exits, which should become realizations in the foreseeable future. What we are seeing is not just market driven nor is it temporary. You can see the long term fundamental trends at play in private equity as Steve mentioned and in our BCP V fund in particular.
Private equity funds achieved 8.4 percent appreciation in the 2nd quarter and 28% over the last 12 months on the 11% growth in EBITDA that Steve pointed out, well ahead of the S and P average. BCP V, the industry's largest fund generated 10.5 percent appreciation in the 2nd quarter alone and 34% over the prior year and it reached its eightytwenty catch up phase of performance fees for the first time. To give you some specific numbers, the fund BCP V generated $579,000,000 in revenues and $487,000,000 in economic income in the quarter. Of those amounts, dollars 274,000,000 of those revenues and $25,000,000 of the economic income are related solely to the catch up. Additionally and importantly, the fund generated $174,000,000 in net realizations.
BCP V is currently 34% of the way through the catch up and needs 13% appreciation for a $2,500,000,000 increase in value to reach full carry. While we generally guide you to a 40% to 45% compensation ratio on many of our drawdown funds, some of the larger pre IPO funds have lower compensation ratios as partners sold carry in exchange for Blackstone units. This is the case in BCP V, where we currently estimate 80% of the carried interest generated will go to unitholders. This lower compensation ratio obviously has a favorable on operating margin, which was 59% for the quarter. Consistently strong AUM growth also continues to positively impact our performance.
There are 2 ways Blackstone's assets grow, value creation and inflows. Over the last year, the firm grew $37,000,000,000 by value creation and $62,000,000,000 by gross inflows for a combined $100,000,000,000 from these two drivers. That is precisely how we were able to grow AUM 21% and fee earnings 23% in the past year despite returning $50,000,000,000 in capital to investors. We also view the $50,000,000,000 returned as an asset as most of our LPs have to put return capital back to work to meet investment targets. In fact, almost 90% of our LPs invest in successive Blackstone funds and history shows that returns of capital are highly correlated to fund demand, explaining why all of our major fundraisers have sold out over the last few years and why Blackstone itself has grown every single year since inception.
You can return capital and grow. Despite $20,000,000,000 invested over the last year, our dry powder managed to grow to $45,000,000,000 giving us plenty of capital to leverage the unique investment capabilities that we have built. Of the $11,000,000,000 we have put to work in the 1st 6 months, 43% of that were in funds that did not even exist in 2,007 and almost half was outside the U. S, something we were not capable of achieving just a few years ago. We can be both a profitable seller and a discriminating buyer at record levels at the same time, capitalizing on our unmatched breadth of strategies, regional presence, vintages and assets sometimes within the same fund.
It will never be the case of Blackstone that one fund needs to lose when another fund wins. That is why Blackstone's fund returns are more balanced with higher growth than the markets over time and are less susceptible to short term market fluctuations than investors think. When we look to invest, we look at long term fundamental trends, not short term market prices, because all of our funds are designed to have flexible mandates and patient capital that allows them to be consistently buying, creating value and selling for above market returns. That is what makes Blackstone different. It can all work at the same time.
That is the way the firm was designed a core mission to build by constant innovation and develop a balanced set of world class investment platforms that can use patient capital and operating expertise to outperform across all cycles. And with that, we'd be happy to take any
questions. But if I could remind everyone to just stick to one question the first go around and then you're happy to we're happy to take your second and third and whatever on the second round.
And your first question comes from the line of Luke Montgomery with Sanford Bernstein. Please proceed.
Hey, good morning guys. Thanks. So it looks like the aggregate industry data suggests that PE deal multiples have spiked in 2014. I think by one vendor, it was 11.5 times during the first half of this year. That's up from 8 times in 2,009.
So that's been accompanied obviously by easy debt financing and the median debt percentage is now around 7%. Given the amount of dry powder you've been sitting on, it's encouraging to see you put $2,200,000,000 to work in the quarter. That's a good pace, but your firm hasn't been shy about calling out the pitfalls of the investment environment. So just really wondering how you're staying disciplined in this environment? How we can get some confidence that we might not have another BCP V coming down the pike?
Well, I was okay with you until you added that last clause. GCP5 is going to double our investors' money on $20,000,000,000 I think it will be a spectacular success and our LPs are very happy with it. So let me just start with that. In general, values are high. I think the last cycle was challenging not so much because the values were high, which they got high in 2,007.
But had we not had a historic meltdown of all meltdowns, you would have had very different investment results too. And it's too simplistic to just look at values. You really got to look at what you're buying. And I would say and I can't comment on the industry because I think there's a lot of stuff which is going for too high a price driven by too much leverage. And of course, our job is to not chase those.
What we are investing in and we're finding a lot of good opportunities is companies that need capital to grow. So they have very strong organic growth. And like any company, it's a little simplistic to say, well, that's a bad company X is a bad deal because it's got a 20 PE and company Y is a good deal because it's got a 15 PE when company X might be growing twice as fast or 3 times as fast. So markets pay and values reflect growth rates. So we're investing in much more than before higher growth companies.
And that's and I don't think those multiples are particularly pricey often for the growth. So that's one area. The second area is we're putting work in we're putting a lot of minor work in sort of new build stuff. So we might be building a pipeline or a wind farm or a power plant or somewhere. And in a sense, if you look at trailing multiples, that's an infinite multiple, because we're putting money to work in a company that doesn't exist.
But the other sense is we're buying assets at book value and assets that we believe will earn a very nice return on equity much higher than the cap rate if you will that we'll sell that asset for once it's developed. So we'll capture not only the profit of the higher return on equity while we hold it, but then we'll get a higher multiple on sale because we'll be selling a cash flow at the higher multiple we went in. So I think we're finding some interesting things to do. They're not traditional public to privates of mature companies without a lot of value creation. And in general, everything we do, everything is dependent on value creation.
So the one big sort of LBL we did, Gates is a company where we think with our we have with our superstar fantastic manager Dave Calhoun, we can working with the management team that's in place in Gates, which is very solid. We can create a lot of value to that company that hasn't been created yet. And it's just a great company, great business with great market positions. So and by the way at the right part of the cycle. So we like that business a lot and we had a lot of co invest in that business and a lot of our very sophisticated institutional investors looked at that and joined us and put money into that company.
So we had if you're worried about what we paid on that, there's a lot of market value validation from sophisticated third parties. So all in all, we feel very good about what we're doing.
Okay. Thank you very much.
Your next question comes from the line of Bill Katz with Citigroup. Please proceed.
Yeah. Thanks very much. Maybe a bit of a narrow question for today's call, but LT mentioned that on the BCP V, you have sort of a favorable margin opportunity as that moves further along just given the dynamics between carrier versus ownership. When you look at the 2nd quarter earnings within few late earnings, it looks like a little bit elevated comp and other expenses. I'm wondering if
you could maybe walk through some
of the dynamics there and how you see the dynamic between sort of the seasoning of the realization opportunity versus maybe new investments you need over the next 12 to 18 months?
So a couple of comments. I'll take it in reverse Phil. I think the comps generally in line. The fee comp related ratio tends to be around 49% to 50% and I think that's in line with where we've been for some time. I think the difference in the non compensation operating or non or other operating expenses or non compensation was really related built to business development expenses.
And so we had some fund closing and some fund initiation expenses that were one time in the quarter. Of course, those expenses will come up from time to time as other funds close. But if you back out bond interest and business development expenses, the growth rate on our non comp or other operating expenses is 4%, which is less than half of the growth in our fee related revenues, which is about where we've been over the last couple of years just on a disciplined basis. And I expect that to be the case going forward. We don't have any foreseeable large increases in basic operating expenses going forward.
Okay. That's helpful. Thank you.
Your next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed.
Thanks for taking the question. LT, just on BCD-five, you gave some detail, but you went through it relatively fast. So I just want to understand in terms of the eightytwenty, what portion of the catch up we saw this quarter? And then I think I got like the 13% in terms of getting that further catch up. But I just wanted to make sure we got the details of that because obviously it will be important over the next couple
of quarters? Sure.
First of all, Mike, my partners are chuckling at me because that was for me relatively slow. But I'll try it again. So the way I would look at the quarter is about 50% of the revenues and the economic income in Private Equity for the quarter were related to BCP V. About a third of the revenues and economic income in the segment were related to just the catch up piece. And that's how I look at it.
So to give you roughly speaking, BCP5's revenues for the quarter were $580,000,000 just the catch up piece was 274,000,000 dollars The economic income was $486,000,000 and the catch up portion of that was $224,000,000
Okay. Does that make sense? I think I was referring more to the forward looking meaning I think you mentioned that if you had another 13% increase in the fund then that would reach full carry. So I was just trying to understand where the fund is and then how we would get to there or like why you have that gap in order to get to the full carry?
Sure. First, Tony had a question, which was he asked what the realizations were. So the net realizations in the quarter, which is investment income and net realized performance fees were $175,000,000 So there's cash carry coming out of the funds.
And that's net of compensation and expenses.
Okay.
So Michael, going forward, the numbers I gave you was in order for the fund to reach full carry, you need 13 percentage points of appreciation above the hurdle. That's about $2,500,000,000 of appreciation. If we were to get to the full 13%, there'd be about $1,700,000,000 of carry generated to get during that period, during the catch up. And of which I said of 35% of the catch up we've already been through, so 65% remaining. Is that helpful?
Yes. Got it. All right. Thanks a lot.
Your next question comes from the line of Mark Irizarry with Goldman Sachs. Please proceed.
Yes. So just one question on private equity and I guess 2 parts. The first is on Hilton and the loan on the position. Is that unusual for your private equity business to take out a loan on the equity? And maybe you can help explain how that maybe can enhance returns to LPs and if that's unusual.
And then as it relates to other exit opportunities in the PE funds, how do you think strategic M and A just given what we've seen in some big headline deals in certain industries? What's sort of the outlook for strategic M and A exits for you guys?
Okay. Mark, it's Tony. I'd say that recapitalizations as a general category are not at all unusual. And with private companies sometimes it'll be you leave the same leverage at the operating company, but you'll do a holding company, debenture of some sort and pay out a dividend. In a sense that's with public companies, you have the option because they are publicly traded securities are doing more of a marginal loan.
And so as our portfolio shifted from predominantly private to a lot of public interest public positions, some of them quite large, I think you'll see some more of that here and there. And the way it and what it does of course is it arbitrages a little bit of cost of funds. So we can borrow a margin loan at very low interest rates. LT could probably give me a specific one, but I don't remember it off the top of my head. And replace with that and give that back to our LPs that are looking to get 20% a year return.
So by arbitraging that, they're very happy. And even the pref on our funds, which was in the old days, the preferred return was set at about government bond rates. Today, it's like 8% government bond rates are 2 or less. It's gotten so the preferred return has become a really significant hurdle. And so we can borrow at much less than the prep, it allows us to accrue carry faster on the remaining gains.
So there's some interesting things about that. And so that's why we do it. So it is a general category of things to do. It's not unusual. But we haven't done a lot of it this particular form because we haven't until recently haven't had big public positions.
And by the way, we could sell stock too, but we love the company and the company is doing spectacularly well. So we're accruing what we think is a lot of value still on that equity. So this allows us to sort of have our cake and eat it too, get some money off the table at very low cost and continue to have percent of the upside in the stock. So we sort of like that. On the strategic market, well, we're clearly seeing the strategists come back.
And I think you should expect that that will accrue benefits to our exits over time. And I would expect more of our sales are the evolution of the form of exits started off when the credit markets were the first thing to rally. And so it started off with recapitalizations. And then the equity markets rallied and so we did a lot of IPOs and secondaries. And now the strategic M and A is coming back is just later in the cycle and more of our excess will shift to that, including some companies that are already public, of course.
So you'll some of these things or have all have been recapped. So these things can go together. But that should be a beneficial trend to us and we it feels like it's still at the early stages of
that.
Your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Hey, guys. Good morning. So your cash continues to build. You just raised some debt and the value of your GP investments continue to rise as well as season. So as your funds increasingly exit some of those investments, Just wondering, does the thinking change at some point in terms of still retaining capital for investment spending versus maybe looking at potentially changing the payout ratio?
Well, this is Tony. We pay out about 85% of our distributed earnings and I think that's kind of we feel comfortable with that ratio at this point in the cycle. We like to retain some earnings because we have in my time at Blackstone, I don't think I've ever had seen as many really exciting new products and new initiatives that we have today. So as we grow bigger, the irony is we have more and more exciting new things to do. And each of those things takes alignment of interest from our LPs and therefore skin in the game therefore capital.
So when I look forward, some of the biggest some of the new things we have can be the biggest businesses we have in AUM. Core plus real estate, for example, can be gargantuan and we have some other really, really interesting things in other businesses. So we're optimistic, if you will, that we've got tremendous growth needs ahead of us and that will require capital even though as you point out our traditional portfolio has been maturing. So we're going to continue to retain capital at this rate. That's something significant changes in the outlook.
I would add to that though Michael that exactly what Tony said. I think we feel really good about where we are. We had a blow up bond deal earlier in the quarter. Obviously, dollars 2,700,000,000 in cash and corporate liquid investments is a good place to be. The A plus rating we're solidly in the middle of that range.
In this quarter to get to the 85% payout ratio, we did pay out about half of the gains that we had on our investments. So when we have a good realization quarter, we obviously get our return to capital. Then we had about $220,000,000 of actual gains realized cash in the quarter and about half of that we paid out to get to the 85%, which I think frankly reflects both our confidence in the forward operating outlook and in the balance sheet and having enough capital to do what Tony just referred to.
Okay. That's helpful. Thanks for taking my question.
Your next question comes from the line of Dan Fannon with Jefferies. Please proceed.
Thanks. One more question on the some of the BCP5 metrics, LT. On the comp ratio in the favorable to you guys, is that just during the catch
up period? Or is that throughout the life of the fund?
No, Dan, that's for the whole fund. And it won't always be consistent. But if the fund plays out over time, it should be and it's all deal by deal, Dan, so it's not a deal by deal. Over time, it should be 80% whether we're in catch up or whether we're not.
Okay. Thank you. Thanks, Dan.
Dan. Your next question comes from the line of Glenn Schorr with ISI. Please proceed.
Thanks. Maybe just a quickie. Fee revenues up 7% year on year despite 19% fee earning asset growth. Is that just a function of geography of what's being what's where you're exiting and where the new money flows are coming?
I think it's partly mix and where the new inflows are coming. And some of the inflows also are not yet fee paying. So that's really the impact.
So something could be a fee earning asset, but not fee paying?
Yes. So just looking at the roll forward of the fee earning assets, you had year over year a higher mix of areas like in credit, well overall. Yes, I think it was, I think it's mix.
It's mix. Mostly mix, but that ebbs and flows. We also have a number of products where you have one they're fee paying assets, but there's only one fee for committed and uninvested and then that fee jumps up once the assets get invested. And so when you have a lot of new funds with that kind of money, obviously, it starts off at lower fee ROAD. In general, in business, there will be some mix changes.
But in general, in our business, if you look at business line by business line, we are not seeing significant price cutting or fee reductions.
Yes. I didn't think so.
I was just curious on the mix. I appreciate it. Thank you.
Your next question comes from the line of Robert Lee with KBW. Please proceed.
Thanks and good morning everyone. I guess maybe it's a little bit of a technical question for LT, but if the memory serves me, I think FASB recently passed a rule that on a GAAP basis at least everyone's going to have to go to method 1. So should we be thinking there's going to be any change though in your financial reporting at least to the public, back in the change in E and I or whatnot?
So the ruling is not definitive. They're still working through the application of the rules. Obviously, we've been as the leader in the market, we've been intimately involved in the discussions. I've met with the FASB twice directly on this specific issue to work through both when the rule is being promulgated as well as its application. So the application phase is yet to come out Rob and so we'll see how it applies.
There are some interpretation of the rule as written that might not require us to go to what you would refer to as method 1, which is accrual of performance fees only after all the capital is returned. Even still if that happens, we'll have all the same metrics. It's just that our reconciliations to GAAP will change if that happens. So I don't any impact. By the way, if it were to go through and it were to have the impact to that our GAAP numbers then would have that type of accrual, it wouldn't be till 2017.
And I'd like to point out that the 2 public managers Fortress and Oaktree that are on that basis today also show E and I on the same basis we do. So I actually think while it will be a lot more work, it will be the exact same results and it won't have any impact on how they're reflected.
Great. Thanks for taking my question.
Sure. Your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hey, guys. Thanks. I want to talk a
little bit
about your discussion of the growth capital opportunities you're seeing. Can you compare and contrast how you approach something like that relative to how a VC firm would? And should we take that to mean that you're now more comfortable than taking non controlling stakes than maybe you had in the past?
Well, we've always taken non controlling stakes. And really our positioning in the market has always been the big fund that can certainly do big deals, but basically does a full spectrum of stuff. And in fact large buyouts and I think that's let's just say total enterprise value over $3,000,000,000 has never been more than about 25% of any fund that we've done. So we've all we've got a long history of doing sort of smaller stuff and growth and more growthy stuff. And of course outside the United States, if you're talking about Asia, for example, it's almost all growth stuff and a lot of it's non control.
And some of the growth equity we're doing is controls. They're just companies that have a lot of growth and tremendous opportunity. So I'm not sure the control is the dimension to think about. And we're certainly not becoming a venture firm, however. These are all companies with well defined business models, well defined and profits and market position and customers and development management team and all.
Our skill set is not finding the next Google or understanding that how someone's going to invent the next semiconductor and betting on science or anything like that. That's not what we're
Okay. Great. Thanks.
Your next question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Thank you. Good morning. I just have a question on the longer term outlook for fundraising. At the recent Analyst Day, Steve hosted a really interesting interview with Mario Giannini, the CEO of Hamilton Lane. And I think one comment that stood out to me at least was just that many institutions are moving from a 0 allocation to alternatives to something.
And in some cases, the example I think that was given was moving to a $50,000,000,000 maiden investment. So it would be great to maybe put some perspective around how large you think this untapped opportunity is where institutions are still exploring the merits in your
opinion? Well, I'll take a little of that. I mean, I was last week in a foreign country with a capital pool that was in the $50,000,000,000 to $100,000,000,000 range that has no exposure to the alternative class and wants to do it. And they've made the decision to do that. And I think we're well positioned to be in their first group of companies that they give money to.
And these things are happening periodically. We're not being in the alternative asset class is really mathematically sort of been unsound
for
decades. And so people can see that that's a smart thing to do mathematically. And what that's leading to is new pools of capital that have been created or have been managed with a very heavy emphasis on debt are switching And they start small and then they go up to typically 10% to 20% allocation. And existing investors are increasing sort of their allocations and the retail class, which has only 2% exposure, which is mostly just hedge funds, is still a huge area of growth. And so if you're in an asset class where you can perform for firms like ours, 1,000 basis points or more in terms of your products, you should suspect that those institutions that observe that phenomena would like part of that and will increase their allocations because the asset class has been very resistant to loss in the down part of the cycle.
That's something that's very important to understand. Actual loss is almost negligible. There is some mark to market type of loss near at bottoms of cycles. But I think we've now shown as a public company and also as a private company, that's just a very transitory issue, these marks. And we historically have boomed back with very large profits.
So I think we're seeing increases from virtually every asset class. Occasionally, there's an endowment that has been super huge and alternatives that is trimming back a tiny bit, but that's only because they've got exposures that are double or triple the normal investor. So I think there's a lot of white space to come here with big numbers.
Thank you.
Your next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks. Good morning. If we look at the entire business Or do you think this represents the longer term scale advantages in
the hedge fund and credit platforms here?
Well, I'll take that. I think it's some of both. I mean, we're clearly in a favorable market cycle. Returns are high, flows to alternatives are increasing and so on. And they're increasing because the reverse denominator effect partly.
And because the a big chunk of traditional portfolios are in fixed income where people are earning very little and they just need more returns. So there's clearly a favorable environment for funds flows in our industry. Same time, we're opening a lot of new asset classes in new regions, new products and with great people and great returns and that's secular. That's going to continue. There'll be a cycle overlaid on that.
But over the long term, it stuns me to say this, but I think looking forward, our long term secular growth rate take the cycle out of it at 270,000,000,000 dollars is just as high as it was at 70,000,000,000
Thank you.
Your next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Great. Thanks for taking my questions. Just to go back on BCP V, if we look at this longer term in terms of its lifetime realization potential, just to make sure I have the math right here. If you've got about a total fund value of roughly $33,000,000,000 and even if we use the conservative $1,600,000,000 multiple on invested capital, about $12,000,000,000 of profit essentially. Is the if we just take 20% of that, we're looking at a lifetime realization of about $2,500,000,000 assuming that you get through the 13% and can accrue carry in full.
Is that correct? And how much have you realized in cash carry on B5 so far?
Okay. So your math is directionally correct that you just went through on the $2,500,000,000 $2,600,000,000 given the assumptions that you gave. And I think the end of your question was how much have we realized in BCP V life
to date? In cash carry,
yes. In net growth.
In gross cash carry.
It's about $320,000,000 gross life to date.
Right. That's great. And just one last one on the fundraising. Looks like you had a solid pace of $15,000,000,000 plus fundraising, not just this quarter, but over the last year. And from everything that you've said in terms of new markets, including core plus being gargantuan of potential size.
Should we be thinking of that $15,000,000,000 on a sort of an annualized pace moving up?
So you're talking about whether we would be at a $15,000,000,000 pace in net, we'll call
it, gross inflows per quarter.
Is that
what you're asking Brian?
Yes. Correct, correct.
Well, if you look at the
look, the $62,400,000,000 over the last year has about $10,000,000,000 of inorganic, which is the acquisition of SP. So normalized around $52,000,000 That's higher than it's been in the last couple of years. We've been somewhere around 40 5%, 48% and then 52%. So directionally, I guess, your 15% is right. It won't be consistent like that.
But if you're I'm sorry, I'd it's a little bit high. I think somewhere between 45% and 50% is a more normalized run rate.
Okay. Great.
However, it's not a static business that's grown over time. And incidentally, your one I just want to note that your 1.6 assumption where BC5 also comes out, we're already at 1.6 just
to clarify.
Yes. Yes. That was conservative. Yes. I know there's potential for a lot
more. Your next question comes from the line of Ulan Azkhan with Royal Bank of Canada. Please proceed.
Hi. Good afternoon. I had a quick question on capital deployment. I heard your first comments, but I'd like to dig a little deeper into it, just given the record levels of dry powder. For instance, Catalonia Bank came out today selling that it's selling its own portfolio to Blackstone.
So 8,600,000,000
dollars worth
of portfolio. It seems like it was a very competitive bidding process with a lot of your peers participating in this process. My question is, what is it for Blackstone that makes this deal work? What is it that allows you to get to the IRs that you're targeting? Essentially, what's your secret sauce?
Because I would think that it's a plain vanilla kind of asset that you're buying. And maybe I might be wrong on that, but I just want to understand that we will get we'll get to the targeted IRRs at the end of the day when we deploy to building ourselves capital?
Yes. Okay. Well, first of all, it obviously got attention from some other bidders, but there weren't a lot of them. There were very few of them, not only because it was complex. It's a portfolio with a lot of a lot you to work it.
It's not just a passive asset. These are non performing loans. Secondly, the rep our real estate people owned a servicer in Spain already. So we're positioned to do the servicing, a lot of the servicing loans ourselves and have unique insight into how these loans can get worked out and how we can deal with the homeowner and so on and so forth. And when we're buying this at a huge discount to face and with leverage and with our view and a discount to the underlying replacement value of the physical assets if we were to own them.
So we have the downside covered. We have leverage with our view of what we can do with
them through our
servicer and a view frankly that Spain at least has bottomed out and the wind will probably be in our backs in terms of values, we think we'll get to our returns.
I see. Maybe a similar transaction because you guys bought office in London from Carlyle. They're basically saying that it's a great time to sell right now. And it seems like China buy, fix it, sell this kind of product or office property anymore. What drove the decision to buy the property from Carlyle?
What is your view like what's the difference in your view versus Carlyle's view?
Well, I couldn't tell you what Carlyle's view is, except that's being bought by our core plus business. So it's lower risk stabilized assets with somewhat lower return hurdles, but we think we'll get a double digit return for our investors. We're very confident about that.
Okay. Perfect.
And by the way, I didn't even know they were in the real estate business actually, but our real estate people are the best operators in the world. We can buy an asset for anyone and run it better and get more cash flow out
of it. I appreciate it and congratulations on a great quarter. Thank you.
Your next question comes from the line of Warren Gardiner with Evercore. Please proceed.
Thanks. So you guys may have kind of already answered this, but you just kind of remind us what's your policy around for the distribution of cash carriers and how that BCP V is crossed? I mean, will you or did you kind of hold some of it back just to build kind of a buffer? Or is it more sort of formulaic in the meeting?
Okay. It's LT Warren. All of our funds and all of our deals are we calculate carry on a deal by deal basis. When a fund is generating carry, I. E.
It's above the hurdle, we pay out realizations as they're earned. So there is no concept of holding things back. Now in order to do that, you have to look at where you think the entire fund will end up. And if you're conservative in forecasting the future values of the whole fund, you should be conservative then in calculating what you're paying out and that should cover you with respect to future changes. And so that's how we do it.
So BTP V actually has been paying cash carry for a couple of quarters because it consists of 2 separate funds and there are LPs in one of the segments that we're already paying carry going back to the Q1. And now a larger percentage of them in both sides of the fund all in the smaller fund and part of the larger fund are paying carry as well. But there's no concept of just indiscriminately kind of holding things back. It all goes to the conservative outlook that you have and that will make your calculation of payouts
conservative. Okay. Okay. Understood. Thank you.
Your next question comes from the line of Chris Kotowski with Oppenheimer and Company. Please proceed.
Mine was just asked. Thank you.
Very nice. We have 2 follow-up questions.
Your first follow-up question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Hi. Thanks for taking my follow-up. I just wanted to circle back on the core plus. You've raised $2,000,000,000 so far in that. I don't know if there's a way you can sort of size that opportunity on raising given your expertise over the next 2 to 3 years in terms of going back to the fundraising size question?
And then also can you remind us of the types of IRRs that you're underwriting the Core Plus portfolio overall?
Let me just clarify one thing and then I'm going to turn the ultimate size over to Steve because he's our dreamer and he sets our standards and goals here. And whenever he sets it, we accomplish it. So I said near $2,000,000,000 between what we've closed and another transaction we have in process, it's actually about 1.8 now. I have someone look at someone tell me if I'm about
right. Okay.
So that's where we are now. And then I'll turn it over to Steve for how big this business can be. And let me just comment on the returns. Returns are in the low double digit net area. Steve?
Yes. This is an interesting one, because the core plus asset class is about 3 times the size of what we're doing in the opportunity class. In the opportunity segment now, I guess, we're up to around 80 some odd 1,000,000,000 dollars not all of which is equity. We have probably LT somewhere around $10,000,000,000 of debt products in there and a little bit, something like about $10,000,000,000 So as I think about this and this is my own personal view and not everybody always agrees with me even within the firm, that's for sure when we get into these new areas. But I look at a business like that.
We're going to be if what we think is going to happen year 1 is about $5,000,000,000 And if we can continue to do the kinds of things we think we can do in terms of producing the returns Tony was just talking about, that you could look at a business like this over a 10 year period and have $100,000,000,000 under management. Now that's something that would make my general counsel really squirm, which apparently I can see him, he's squirming. But and there's no guarantee. That's what I would call an aspirational goal. Most people would say, if you could do half of that, that would be pretty terrific.
So I think the reality is somewhere in between. I am a believer in the high end of that. I think if you can deliver 10, 11, 12 returns to institutions who are really focused on making 8s And if you can do it with real safety, you'll have good flows there. And the advantage we have is that we have the most active deal flow in the world in real estate. And for us, all we're doing is chopping off the lower return end of properties that don't meet our opportunistic criteria for our funds.
So we should see an awful lot of this type of thing and we're set up perfectly with a major asset management capability to improve properties. And so we also have a terrific set of relationships with people who give out real estate money around the world. In the opportunity area, I guess, we're like some were in the last year or 2, I forget whether we've raised 6 times more money than anybody else in the world or 8 times. It's some number that LT can or junk can get you after the meeting, but it dwarfs what everybody else is doing. And so I think with a really good product like this with an asset class that is already 3 times the size, we should be able to do the kind of numbers over time that I'm talking about.
And it sounds like your LPs have been asking for this or is it more of a creation on your side? It sounds like demand would be very strong given the increasing desire to immunize portfolios
by Yes. Finance is like a very funny business. What passes for innovation isn't so innovative. And that this is the kind of thing where we have product and of really quality buildings that would fit this kind of model that really just simply do not meet the criteria for the opportunity part of our business. And we took these products, you start with one opportunity and then you go on to others.
And there was a huge amount of receptivity on the part of the institutional community. And what happens is once you discover that, you do a second, you do a third, you do a fourth and you see that there's really big demand. And so what we realized is that we can take our same set of skills and basically just segment them and the market would respond to it and that's why we did it.
Okay, great. That sounds pretty compelling actually. Great. Thanks very much the thoughtful answer.
And the last question comes from the line of Robert Lee with KBW. Please
Thank you and thanks for taking my follow-up and I appreciate the patience with the call today. Last follow-up is, I mean, clearly, you guys have had a lot of success in a lot of places entering new launching new strategies, raising assets in those strategies, starting some 40 Act products. But I guess, I'm just kind of curious, I mean, I'm sure I think most businesses as successful as they may be always have 1 or 2 things that they've tried that didn't pan out as expected or as hoped. And I'm just curious over the last couple of years, if there's some new strategies that you've launched or took a stab at or new markets or geographies that you were thinking of entering that didn't seem to pan out? Just trying to get a feel for maybe what some of those were, but more importantly, maybe why you think those didn't succeed as you had hoped and how that's maybe altered how you approach new product development or going forward?
Okay. Well, I guess I'll take that one. And of course, we've had initiatives that didn't pan out as we hoped. Sometimes the performance wasn't sometimes it was our own making, performance wasn't what we'd hoped. Sometimes it was a great idea, but the market just didn't want to fund it or the timing was wrong.
And sometimes whatever premise was whatever the business premise was the world changed and therefore the opportunity sort of disappeared. Examples just we were we had at one point in this business a mutual fund business, ran closed end funds. They were the largest mutual fund in India and they had a one invested in non India and Asia. And it was closed end fund as I mentioned. It was obviously the meltdown in global markets and those currencies and their stock markets in particular made that performance not very good and it kind of got subscale and we just decided having owned the business for a while we decided weren't a lot of synergies and sort of went our way.
And one of the earlier calls, someone asked me about getting long only business. And I think one of the learnings there was there's not a lot synergies between the long only business and what we do generally. And so that's an example. We've tried other things whether that be an office or not or a product, but nothing big. I think we do a pretty good job focusing on really good opportunities and getting really good talent to do it.
And I think the most important thing that we have to attract the best talent in the world. We have to train it. We have to get it adapt our culture and the way we think about things. And if we do that and we put really great talent against the opportunities we see, we don't miss that much. And so that we're not perfect, but we feel very confident about the opportunities on the page.
Great. Well, thank you for taking my question and hope everyone has a great summer.
Great. Thanks and thanks everyone for dialing in and look forward to any follow-up questions off the call.