Good morning, ladies and gentlemen, and welcome to the 2014 Blackstone Investor Day. Just a couple of house notes before we begin. The wireless network for in the room is Blackstone. The access ID is Blackstone. For those of you who are using the Watchdocs application, if you have any questions during the day, please see the registration desk for presentation material assistance.
For those of you joining on the webcast today, thank you. The presentation materials are downloadable on the lower side of your screen through the PDF widget and you can download those at any time during the webcast. And with that, I turn it over to Joan Solitar, Head of External Relations and Strategy for Blackstone.
Good morning and welcome to Blackstone's 4th Investor Day. So glad to see so many of you here and we have lots of folks dialed in as well on the webcast. So welcome to all of you too. So I hope you come away today with the understanding that while we have many able competitors my clicker is not working. There we go.
That while we have many able competitors in all of our businesses, we really have paved the road in alternatives. We're in the fast lane and we'll continue to stay ahead of the pack because of our skill, our scale, our innovation and our brand. Here's some fun facts about Blackstone that you actually may not know. Over the past year alone, we've created $33,000,000,000 in value in our funds. That's more than the total revenue of companies like Halliburton, Nike and McDonald's and about twice that of Starbucks.
Investors over the last year have entrusted us with $52,000,000,000 of their assets to manage. Why is that? It's because we continue to dramatically outperform both peers and the indices with our drawdown products over time beating the indices by over 1,000 basis points. Innovation remains core to what we do at Blackstone and it resulted in new products representing $122,000,000,000 in AUM. Those are products that didn't exist at the time that we went public and it's today about half of our total AUM.
We're the most profitable, though not the largest of the public asset managers and probably most of the privates, if not all of the privates as well. And while 272,000,000,000 dollars is nothing to sneeze at, it doesn't include the debt within the private equity and real estate portfolios. So really we're managing about $500,000,000,000 in total assets. We have $90,000,000,000 of combined revenues in our private equity companies. We're the largest owner of private real estate, the largest allocator to hedge funds anywhere in the world and one of the biggest providers of debt financing.
Individually impressive, but together and that's really the key, a real powerhouse. And then a plug for my own team, we have the strongest presence in social media of any of our peers. And so we're hoping you'll follow us on Twitter and now Instagram to get the inside track of all the things happening at Blackstone. And a lot's happened over the past several years. So the alternative sectors really evolved.
At the time that we went public, I think this was a space that was easy for institutional investors to pretty much ignore. But today there's real scale and liquidity. 8 companies are public. The average dollar trading volume is now $357,000,000 and many days it's a lot more than that. It's about 4 times what it was in 2,007.
The industry market cap has nearly tripled and free float has grown about 7 times. For Blackstone itself, we're a substantial percentage of the total and we now have more than 65 institutional investors owning more than 1,000,000 shares each and you can see that was only 14. We've evolved. In fact, if we were part of the S and P 500, we'd actually rank in the top quartile in things like market cap per employee where we'd actually rank 4th, but expire to hopefully beat Facebook, which is number 1. Earnings, distribution and yield.
The only area where we rank towards the bottom, which we're happy about is number of employees. So now I'd like to address a couple of The first has to do with the nexus between earnings and the stock market. So I've heard the comment fairly frequently that our earnings are dependent on a rising stock market. And so we really took a hard look at the facts. So it may feel that way, but there's actually very little correlation between our earnings or the change in earnings, which is what's represented here and stock market movements with a relatively low R squared.
The next misperception has to do with volatility. So some say we trade at a discount to others because we're more volatile, whether that's stock volatility or earnings volatility. So here too, we did a very deep dive. And when coupled with growth, the market actually values volatility pretty highly. So we've had a very long term track record of good growth, 22% in revenues per year And even when measured against the last peak in 2,007 to current earnings, which we don't believe is a peak, we've had a 13% CAGR and earnings growth that's significantly greater than that.
You can see over 30%. We looked at a lot of other businesses. We found that whether it's inside or outside of Financial Services, our earnings growth has been greater. Our stock volatility is similar if not lower than some of the most highly valued sectors in the world. So what does this all add up to?
So since we last shared this analysis, we've moved 1 year forward and we've outperformed both in performance, investment performance and in asset growth. So you could see the numbers are a bit higher. But we use the same assumptions, compressed assumptions that Steve would probably call underperformance, so lower than what we actually have achieved in real estate, private equity, hedge funds, credit. And the numbers moved up to $2.70 per average on a normalized basis in cash earnings going up to $4.15 So for perspective and a reminder, those numbers were 2.50 a year ago and 3.95. And what does that mean for value?
So if we use the same yield assumptions of 4% to 6%, you get stock valuations in a range of $69 to $104 In addition to that, you get $27 in cash, bringing the total values much higher to $96 to 131. So we see significant upside from where we are today. So in wrapping up, the alternative sector is growing quickly. We are the leader and the pioneer and we intend to outdistance the rest And that's because of our skill, our scale, our innovation and our brand. And with that, I'm going to turn it over to Tony James, Blackstone's President and COO.
We manage money for all kinds of institutions really, but the assets we manage are critical to someone's future. That's what makes it a sacred trust. For 25 years, we've been investing capital outside of traditional liquid markets. We've been earning returns well above what liquid markets can do. 1st and foremost, of course, it's the country's retirees.
They've worked all their lives with the anticipation there's a certain level of income that's coming from their pension benefits. That's not there, they're destitute. Secondly, there's many small companies out there that can't access public markets. They don't want to borrow a lot of money from the banks because we all know leverage is dangerous. We give young companies the capital they need to grow.
Without that capital, they won't grow, the jobs won't be created and American society GMP will be a slower growth. And then finally, America is an established industrial power and that means we've got a lot of aging industrial Many times those assets are under managed and under invested. We can go into those companies with some of our management expertise and with fresh capital and save those aging businesses and in that process save a lot of good high paying jobs. Investing well is hard and the thing that limits you more than anything else is knowledge. You can never know enough and just as in sports, the way a group plays together brings collective knowledge and enables you to make much better decisions.
And all of our businesses are industry leaders in terms of their performance. So it's like being able to pluck from all these all star teams and basically gives us a knowledge advantage and helps us to be better investors. Good morning, everyone. Always a rude shock to see yourself on the video first thing in the morning. I'm going to I want to thank you for coming.
It's a long day and we really appreciate the attention you're giving us. I'm going to walk through, just set the stage a little bit this morning here. Here you'll see the major speakers you'll be hearing from today. We'll be presenting on each of our major businesses. And in each case, it'll be a group head talking.
And the only business is missing our advisory businesses. And we just in the interest of time could quite squeeze them in. But they're all having good years this year and we expect a strong performance from them as well. I think one of the key strengths of Blackstone is, which I'd like to showcase today and I hope you will agree is the depth and quality of our management and our leaders. And I think any one of the people you hear from today could run an entire firm like Blackstone and run it well.
And beyond just being strong leaders, I think you'll see people that are passionate about their business, love what they do, are intense, are focused, are really have really granular knowledge of what they do. We have no bureaucrats here, no one leading from on high. And I think that's I think they're really extraordinary people. And I just obviously, it's my team and Steve's team, but I have to say honestly, I just couldn't be prouder of the guys you'll hear from today and not only how good they are, but what nice people they are. And I'm just, as I say, couldn't be prouder of them.
Bennett Goodman is going to start off with a credit presentation. We merged our little credit business with Bennett's little business in 2008. I think we had about $14,000,000,000 of assets under management. He's grown almost 5 times in the last 6 years, to $66,000,000,000 And his returns have been consistently spectacular. Ben has delivered across many different credit products across a huge pile of assets returns that equity managers would be happy with that is 10% to 20% across all of his funds.
After Ben and John Gray will present, we are the largest investor in the world. The nearest competitor is only about a quarter of our size. I think rarely in Financial Services is any business as dominant as the business that John's built. We have the best team, the deepest market knowledge, the most cloud unmatched scale and it's really, really truly is a dominant business which is rare in Financial Services. After John, Joe Barata will talk about private equity where we've got the largest fund in the world.
We've had consistently top quartile performance across the history. And Joe will talk about how our strategy is differentiated from other investors and what the sort of drivers of growth that we expect in that business are. But this is a business that's not just about investing. It's really about operating. And Dave Calhoun will talk about our operations.
Dave is one of the most highly regarded CEOs in America. And we're really proud to have him as part of the team. After that, David Blitzer will talk about tactical opportunities. It's one of our newest businesses and there it's opportunistic. They're supposed to hit little market windows when they open and do unusual investments across asset classes.
In the 2 years, we start 2 years ago we started with nothing. It's got $5,600,000,000 as a first capital pool that's almost fully invested now. This fall will go out for a second capital pool and we expect to easily double that business in the next 12 months. Very exciting growth opportunity. Another one will be presented by Vern Perry, the secondary business.
This is our newest business. It's a team that joined us within the last year from Credit Suisse, but a team we knew well for many years. Vern and his partner Steve Cannon and I all worked together. We started the business together. And they've just completed a very successful fundraising, their biggest fund in history and which was just heavily oversubscribed and their AUM is now up to 12,500,000,000 dollars just showing how our AUM can continue to ramp.
Brendan Boyle will talk about one of the most important strategic initiatives of the firm. That's our Private Wealth Management business. This is our retail distribution. I know there are some other people in our industry that have asked a question whether that's going to be a big thing. Well, it's already a big thing for us, so there's not really a lot of future debate.
We've gone from $600,000,000 of annual retail raise 4 years ago to over $9,000,000,000 in the last 12 months. And I see no reason why retail can't be equal in size with institutional capital long term for us. It's about 10% of our capital today. Then Tom Hill will talk about BAM. It's the largest investor in hedge funds in the world.
We have the best managers and we use that to drive better than market returns at only a third of the market volatility, a fantastic mix of skill of things do. And BAM's exciting growth is into higher margin direct investing products so that you can see their margins going up over time. And finally, LT will talk about the financials and some of our technology initiatives, which distinguish us from all of our competitors. After each presentation, you'll have an opportunity question ask questions about that business. And then at the end of the day, Steve and I will feed field whatever general questions remain.
What makes Blackstone unique is that we have leading positions across all of our businesses. We have some very, very good competitors in 1 or 2 businesses, but no one else is close to having a leadership position in multiple businesses. No one else has their size and performance across virtually the entire alternative spectrum. People have been talking about the Blackstone model and imitating it for years, and yet no one else has been able to do so. And that's because it's not easy to do.
Each business is large and complex. Each business has great historical performance that takes years to replicate if you're lucky enough to be able to do so. Beyond that, the success of one business is self reinforcing across other businesses. So that makes gives a significant advantage for the whole firm. In other words, the whole is stronger than the sum of the parts.
We create because of the strength of all of our businesses together, we have a tremendous brand. We have unparalleled depth of customer relationships. We have unmatched access to capital, to people and to information, all of which we use collectively to make each other stronger. Now in anticipation of the
day, I asked some
of my colleagues who'd worked at other firms, what makes Blackstone different? Because I've been had a hard time trying to articulate that and not come up with platitudes. And so this year again I'm going to have a hard time articulating it and I've come up with platitudes, but such is life. But the response when I asked in each case was, well, Blackstone's there was a pause and they said, well, Blackstone's completely different. And so
I said, well, why is
it different? And they said, well, first of all, it's a big firm, but it feels really small. It's personal. Every individual here feels like they count and they can make a difference. Secondly, it's such a flat organization.
Our organization, we do an organization chart, has 3 layers from the entire organization. Everyone in a group reports directly to the group head. There aren't subgroups and regional and hierarchy. Everyone reports to the group head. All the group heads report to Steve and me.
Three layers. No organization of our scale comes close to that simplicity. Thirdly, our people really care. They take tremendous pride in what they do. There is no indifference at Blackstone.
They play their hearts out every day, sometimes to a fault, I will admit, but everyone goes above and beyond the call of duty. Innovation, it's part of our everyday thought process. Every single one of us is trying to reinvent ourselves and reinvent our businesses. It's not top down. It's driven because through individual action at all levels of the firm.
It's systemic. Talent, We've been fortunate to have financial success and we've used that to attract and develop the best talent out there. And then we train them and we inculcate them in our culture and make them the best that they can be. Because by running lean and we always run all of our businesses lean, our people get much more experience much faster than people at other firms and they become better. Raw talent must be seasoned with experience particularly in investing business and then we empower them and they think like owners.
That's a powerful combination and it's viral. Camaraderie. It's like a great basketball team. We have no look passes. We have defenders.
If someone gets beat, there's another one that just slots in there and helps. It's almost it doesn't take any conscious thought. It just happens automatically like a flaws team. And it happens across businesses and across levels of the organization. And then finally, we have hands on engaged leaders.
Those are the people you'll hear from. They are in the trenches themselves every day molding culture, molding people. They're putting their personal thumbprint on the character of the firm daily. Now in a market where it's hard to find value, I think Blackstone jumps out. The quality of the business, the strength of our team, the leading market positions and almost any financial metric you want to look at make Blackstone look like a great buy.
Thank you and I'll turn it over to Bennett.
Thank you, Tony. Good morning. I'm going to talk today about Blackstone's credit and distressed investment arm. We refer to it as GSO. And I'm going to start by providing a little bit of an overview of what our franchise looks like today.
As of March 31, we had approximately $66,000,000,000 of assets under management. When we think about our business, we kind of view it as 2 different clusters. We have our alternative investment funds. That's a little bit of a euphemism for a business in which we get a management fee and carry. That fee structure is somewhere between 1% and 1.5% on management fees and somewhere between 10% 20% on the profit participation that we're able to earn.
Obviously, the highest margin piece of our business today represents slightly in excess of 50% of our total AUM and it's the first time since we've built our business that our alternative cluster is now larger than what we refer to as our long only cluster. That business is effectively a leverage loan opportunity. It's a management fee only business. On average, we earn 50 basis points. However, while it's lower margin, it's incredibly steady.
It's not volatile. And because of the scale of our operation, it really does add a lot to our bottom line and we're a huge factor in that business. Another way of thinking about our activities is that we have several different strategies that participate in private market activities. Deals where they're we're the primary lender where we're originating the deal. And those businesses are our mezzanine activity, our rescue lending business and we have a business development corp that lends money to small mid market companies.
And in those activities, we're doing the deal origination. We're calling on companies. We're trying to provide them financing. A lot of this activity is a result of the fact that the banks in today's regulatory environment don't like to lend to these sorts of companies and that BDC can kind of fill that void. The public market strategies invest in the secondary markets where there's a syndicated loan or a high yield bond that's already out there.
And we're either putting it into our hedge fund or our CLOs are buying a syndicated loan from JPMorgan. The common denominator across all these different clusters is that we have an exclusive focus on non investment grade corporate debt, junk rated companies. That's all that we do at GSO. We have tremendous expertise and knowledge. The 250 people that are part of GSO today is probably the largest group dedicated to this particular segment of the capital markets.
And we like these array of boxes because there are a lot of synergies across these businesses. We find deals for our hedge fund and our rescue lending fund where we might have had a syndicated loan that resided in our CLO. And that company needs some kind of financing, and we have a position in that company. And we're we have a kind of an early warning sign and we're able to get to that situation faster than others because we're an incumbent lender. The other kinds of synergies relate to information.
We collaborate across these boxes on industry analysis. When we see a trend developing in our hedge fund where a cyclical company is starting to see a weakness in this business, very important having that knowledge because we can apply that knowledge across all the other strategies that we deploy at GSO. We do have a very simple goal at GSO and that is to deliver superior investment results to RLPs. And you can see here on this slide, our performance. I think 2013 was arguably our best year ever, both on a nominal basis, but also relative to our competitors.
Our private market strategies and our hedge fund have consistently created equity like returns, while taking credit like risk. And I think that's what our LPs like. We've had very good success across all of our funds because of our ability to originate deals, our due diligence, our structuring capabilities and the average loss of principal across all of the GSO businesses since inception is less than 100 basis points. And we're operating in the risky segment of the corporate bond market and we've been through quite a bit of a volatility in the 6.5 years that we've been part of Blackstone. These returns also relative to the benchmarks with which we're compared look quite compelling.
And quite frankly, if we can keep our LPs happy with this kind of investment performance, they reward us with more AUM. And that's that virtuous cycle that we're fortunate to be in. Let me talk a little bit about the evolution of our group. Tony mentioned that when we merged into Blackstone, if you took the GSO businesses and the Blackstone credit businesses, you put them together, we had about $14,000,000,000 $15,000,000,000 of assets at the time. That merger happened in March of 2,008.
By year end 2,008, we had roughly $22,000,000,000 of AUM. We have tripled that over the next 5 plus years to 66 $1,000,000,000 Importantly, in that high margin sector that alternative cluster, we've raised about $30,000,000,000 and that long only business we've kind of doubled it over that period of time. Importantly, we've grown by creating and developing new products. We've not oversized any one strategy. And today, I would say each one of our 6 different businesses still has plenty of room to roam and to grow without compromising returns.
You can see here on this slide that 71% of our AUM comes from products that didn't exist in 2,008 and many of our LPs are in these products that we didn't have back in 2,008. Where has this growth come from? It's been primarily our rescue lending activity, something that we refer to as our strategic SMAs and our small cap direct lending that we do via the BDC. And the rescue lending is a strategy we developed at GSO. We kind of invented term.
We have the largest dedicated group of investment professionals who exclusively focus on that activity. The strategic SMAs are kind of fascinating. They're done with our largest LPs. It's very flexible capital. We have about 10 of these and on average they're somewhere between $500,000,000 $1,000,000,000 today.
And we're able to put our highest conviction ideas into these SMAs and it gives us quite a bit of flexibility. The BDCs as I mentioned have benefited from the retrenchment of the banking system lending to small single B rated companies. It's a very efficient way for us to provide capital. These are publicly traded entities, BDCs listed on the New York Stock Exchange. And we think we'll continue to have good growth in that activity.
How will we achieve this growth? Well, there are about 4 different ways that we've been able to do this. 1, I think our group is pretty good at developing a theme, usually around an industry trend and then putting a lot of capital across all those strategies in that sector. I'm going to give you some examples of how we do that in our Energy and Power group and as well as in the Residential and Building Products. I think we've been pretty opportunistic when we see a dislocation in the market.
We've also been a big, big beneficiary of the heightened regulatory intrusion on the banking system coming out of Dodd Frank and the Volcker rule. These strategic SMAs and partnerships with large LPs, well, we're really in the sweet spot because we're a big factor in this alternative credit space. Many LPs will complain they have too many GPs that they're invested in. They want to consolidate these relationships. We're a very, very logical and trusted partner.
And it's been able we've been able to raise over $5,000,000,000 of capital through these strategic SMAs. And as we keep our LPs happy when we launch the next fund, very, very high re up rate where people will support us in whatever the activity is. Finally, I think through the help of Brendan Boyle, who's going to speak a little bit later today, we've been able to access the retail market for many of our products. In the long only space, we have closed end funds, we have exchange traded funds and the BDC is a retail type product. We've not only used a retail in our in just the long only area, but we've also been able to develop distribution for those higher margin products into the private wealth channels as well and that's benefited our rescue lending, our mezzanine and our hedge fund activity.
So let me go a little deeper in terms of some of these industry themes. I think our most successful industry cluster is the Energy and Power Group. We've invested about $15,000,000,000 over the last 5 years in this space. We actually have a dedicated team of 16 people. This is all that they do.
Energy is one of these classic industries for GSO. You have a real asset, a tangible asset. You have lots of volatility and you have many, many aggressive CEOs who take on risk. And there's a natural value creation and value destruction, but it enables us to structure transactions where we can help companies fulfill their drilling programs, but we can structure deals in lots of different ways to kind of get to our principal protected type credit investment, but also have lots of exposure to the upside as the commodity cycles recover. Today, we have some dedicated energy funds that I think are rather unique.
Dwight Scott, our partner who oversees this cluster has over $1,000,000,000 of his own separately managed accounts who are doing kind of structured equity like investing in the energy patch. 1 of our BDCs is dedicated exclusively to this space. It's the only BDC of its kind just lending monies to small merging E and P and pipeline type businesses. And we're really quite excited about this space. You can see here on this slide a lot of different names for production.
Midstream is pipelines and processing. The service and equipment space, in large part are providing critical component parts and other related either equipment or services to those operators in the various shales. Power generation are essentially unregulated merchant energy entities that are producing electricity. And all of our activities whether in the public markets or in our private market strategies have really benefited by Dwight and his team's ability to create deal flow. And that's significant.
But it shows you how we can put a lot of capital behind a theme like the development of shales in the United States. One of the other things that we found is as we do these investments, we get a lot of proprietary knowledge about the shales in which we operate. And I'll point out whether we're operating in the Bakken, whether it's an investment in the Utica or whether it's the Eagle Ford, we have a lot of unique information. We have operators who then create more deal flow and we just have more data than the next guy who's about to make an investment decision. And it's this kind of self fulfilling thing that happens when you have kind of the dedication, focus and concentration within a specific endeavor.
And you can't possibly read all these different names, but I think the slide makes the point that we've been very, very effective at putting a lot of capital to work. And I think if you look across our funds in terms of attribution, energy and power is our most successful sector. Had a similar experience in residential housing. Effectively, we hated the marketplace back in 'six, 'seven. We got a little more constructive in 'eight.
We started putting capital to work in 2,009 selectively for homebuilders who were having problems accessing capital. By 2011, we thought the cycle had turned and then we got really aggressive putting money to work. We invested in a lot of different companies and it worked out pretty well. As we get later into the recovery cycle, we were doing rescue lending for firms like Morris Homes, KP1 or both European homebuilding and building products related businesses, hedge funds making lots of different investments. We actually raised a dedicated fund to help with what we call land bank financing.
The banks don't like lending against land and we came up with a clever structure that allows homebuilders to in effect leverage their balance sheet, buy more inventory. So they're positioned to take advantage of the recovery in residential home pricing, but they do it through a very efficient capital model in our land bank. And it's just indicative of our business model. We've done a lot of land financing in the last 3 or 4 years. We didn't want to overweight our funds to this particular strategy.
So we went out and raised a dedicated fund. We did it all in 6 months and boom we had $500,000,000 And it kind of shows you when you develop capability like that what you can accomplish. Much like energy, both our private market strategies and our public vehicles benefited by this theme and you can see here lots of different names across various different sectors of the housing industry. We have been quite a significant beneficiary of the regulatory changes occurring in the banking industry. The Volcker Rule, Dodd Frank, the Office of the Controller and the Currency all have imposed different forms of capital requirements that in large part make the lending to single B companies not very profitable.
The banks have migrated to a distribution model where they like to syndicate risk. In the old days, they would commit to risk and then syndicate it. Well, they don't like that commitment aspect of it. And what has happened is firms like GSO, we want to own that risk. So there's a great symbiotic relationship today between us and the banking community because we allow them to be of value to their clients and we're taking that risk into our funds which is exactly what we want.
What we don't want are the 1,000 and 1,000 and 1,000 of people that are on their payroll. And it's great for us to let them create the transactions. We could do some of that on our own. But again, we want to have as Joan said a people light business model and the current regulatory environment really helps us. We also like dislocations.
And when we see something in the marketplace where capital becomes quite scarce that's really the opportunity set for GSO. And you can see here rescue lending fund which today is almost $9,000,000,000 in AUM. The BDC today at $11,000,000,000 is the largest BDC complex in the world. And we've been quite aggressive in consolidating the CLO industry over the last 5 years. Today, we're the largest manager of these CLOs in the world.
So what's next? Well, all of you are well aware of just how high the markets have gotten. We would describe the public markets for leveraged loans and high yield bonds as rather frothy, no doubt. However, it sets us up well for the next distress cycle. We have a lot of dry powder.
We are definitely rooting for a correction, a recalibration of risk and we will be poised to take advantage of that. I will say we have a lot going on in Europe. Today, our backlogs for deal flow are probably 50% out of Europe. We have a team of over 30 people. My co founder, Tripp Smith, has relocated to London to help drive that activity.
We have a fabulous team and now we're starting to see the benefit of that investment through the capital deployment across all of our funds. There's so much for us to do in Europe. We're going to this year, we just started a marketing process for a direct lending fund. This is for performing credit in Europe. Think of it as in Europe they don't have those business development corps.
And we're trying to replicate that concept in Europe by having a fund that will lend to small mid cap companies to help them get financed. In terms of other opportunities, we're evaluating whether or not to get into emerging market corporate debt. We don't currently do that. That could be a very interesting product extension for us. The emerging markets are experiencing more growth in the United States and Western Europe.
There are not high yield bond markets, leveraged loan markets in any of these locales whether it's Latin America, Eastern Europe, different parts of Asia and we're trying to figure out a strategy that makes sense. And we'll continue to be quite active I think in energy just given the need for capital in that space. We believe that we are very well positioned for the future. This slide kind of highlights some of the reasons why. I'd kind of like to summarize by saying that if you ask the people in our group, this is the most exciting time for GSO.
With Blackstone's support and guidance, we've built a really powerful platform with distinctive capabilities. And it allows us to deliver a very differentiated value proposition to our clients. And we'll continue to refine this model. We have to because it's a changing world and our competitors are good. But we believe we can execute really well in this current environment.
At the close of business today, we hope to be able to announce our largest commitment in our history. It's about $1,000,000,000 capital commitment. It will go across 3 of our funds and almost every one of our strategic SMAs. The company is an existing client where we had lent about $100,000,000 $125,000,000 to 2 years ago. They're a regional player in North America and they're about to launch a transformational acquisition that will create a truly global juggernaut in their industry.
They are the proverbial minnow swallowing the whale and we're playing a very, very prominent role in the acquisition financing. For GSO, it doesn't get any better than this. We are the only alternative credit firm that could put all the pieces together to make this transaction happen. It's a very attractive opportunity for our limited partners. And this transaction is indicative of the powerful platform that we've created over time and it's exactly why we are so excited about the future.
So with that, I'd love to open it up and happy to address any questions that any of you might have.
Thanks so much. Hi, Bill Katz from Citi. Thanks very much. Great presentation. Can you talk a little bit about institutional demand, where we are in terms of appetite for taking on credit?
It seems to be a big theme for the last couple of years. Maybe use a baseball analogy, are we in the 5th inning, 7th inning? How do you see that demand playing out?
I like these sports analogies. Tony came out with that behind the back, no look pass. I wish I had that move. I think there is a lot of demand for alternative credit our space. And if you think about it, on a global basis in the markets at least where we deploy capital, we're somewhere between slow growth and no growth, but it's limited.
And a lot of these LPs whether they're pension plans, insurance companies have very high either actuarial requirements or other obligations that they have to meet. So they're really trying to get incremental return. And what our strategies allow them to do is to find things in private markets where they don't necessarily take on more risk, but because of the patience of their capital they can command higher current income, but also have some upside to the warrants and other equity features that our funds are able to capture. So we're currently in a very enviable position where we know we can raise capital. But to be totally candid, we don't want to have too much capital.
So we have to be pretty thoughtful and tactical about how much capital we want to take in because we don't want to compromise returns. And I would say we don't always have the luxury of that, but today the things that we do are pretty popular. If I had to pick an inning, I'd say we're somewhere between the 6th and 7th inning.
Last question.
Thanks. It's Brian Bedell from Deutsche Bank. Similar question, but on Europe. For the opportunity given the bank deleveraging in Europe, it's we've all heard it's a very long term phenomenon. What inning do you think we're in, in that?
How do you think you're positioned? And what type of pace do you think you can raise capital and deploy capital in your funds for the next 3 to 5 years? Sure.
Well, I think Europe is going to take a lot longer to resolve itself. I think in the U. S. The banking system has done quite frankly a much better job of deleveraging getting the balance sheet right rationalizing the businesses that they want to be in. Now obviously there's a tough regulatory environment that they're coping with, but they're getting towards that double digit return on equity.
I think in Europe it's much, much more complicated. I think there are many more structural problems. The banks in Europe are levered somewhere between 20 to 30 to 1 depending upon the bank. In the U. S, the big banks are levered a little bit more than 10 times.
And I think the economy is weaker in Europe. So I don't view this as a short term cyclical phenomenon. I think it is a secular change. It's going to last for quite a while. And the recovery of a kind of a debt bubble just takes longer to get resolved.
So I do think we'll be able to deploy a lot of capital there. I do think we'll be able to raise assets from our investors who understand this phenomenon. And I think for us, we have been reluctant to deploy capital aggressively in performing credit just because we didn't think we'd get the terms and now that's starting to change where we can get better terms. And I think the distressed opportunity for our various funds is also quite attractive.
More detail about your entree into emerging markets.
We like the corporate credit aspect of emerging markets because it's exactly what we do in the Western economies. And we know that a country like Brazil, which is going through quite a bit of growth, has very positive demographic. There's not much of a bank market. There's no high yield bond market, but these companies are growing and they need capital. We ought to be able to figure out a way to help facilitate that capital deployment.
We see that throughout Latin America, including Mexico. We think in large parts of Eastern Europe also are capital constrained. So we advertise to RLPs today that we only invest in those countries and those regions that have a bankruptcy code, a rule of law. And a lot of these geographies don't meet that standard. So it would require us to go out and raise new funds.
And that's what we're trying to figure out and evaluate what makes sense. We do have the capability through our strategic separately managed accounts and our hedge fund to do some of this activity, but not at the scale that we like to operate in. So we're trying to figure out how do we do this organically? Are there groups that we might be able to lift from a bank who do this today? Perhaps there's a small firm out there that does this and we might be able to figure out a way to acquire them.
And we're going through all that analysis. There's nothing imminent, so I don't want to suggest that we're on the verge of figuring all this stuff out. But it's the first time we've really dedicated an effort. A large part of our strategic plan is to try to sort this out. We think it's a good opportunity.
Thank you very much, Bennett.
Was that my exit? I see one last hand. We can't. All right. Sorry.
I'll come find you later. Okay. Thank you very much.
The strategy is very simple. We call it buy it, fix it, sell it. We try to buy income producing real estate at a discount to physical replacement cost, the cost of building that real estate. We go in and fix whatever is broken. And then once we complete whatever that mission is, we sell the asset to the right long term owner.
If you look at our track record over a long period of time, we've invested in real estate assets, office buildings, shopping centers, hotels and yet we've generated solid returns in good and bad times. In every one of our investments, we focus on the fix it. Without the fix it piece, we can't have success in virtually everything we do. So if you went to 1095 Sixth Avenue in New York and you saw what that building looked like before we acquired it, and then you see the 100 of 1,000,000 of dollars in capital we spent to reskin it, to build new retail, We've created a great feel at a critical part of New York City at the corner of forty second Street and Sixth Avenue. We like
to think we provide the operational expertise. How do you build a building? How do you lease a building? How do you manage a building? They are really the strategic and financial partners.
So we took a Class B office building and today with some degree of modesty, I will tell you that I think that is one of the most valuable buildings in New York City.
Been the growth there that generated the favorable returns. And that's what we try to do again and again and again, not only in the U. S, but in Europe, in Asia and Latin America, everywhere we invest.
We focus on investing for growth. So whether it's investing in franchise growth, like the Hilton story, where the company has been able to grow its total system almost 35% from when we started in 2007 to the La Quinta story where we're up over 200% in its franchise system from when we bought the company.
It's the idea that despite the size of our business, the consistency to me, the integration of the value, one approach to our limited partners, one approach to how
we underwrite investment. That's fundamental to our business and I think it's fundamental to the kind
of
Thank you. Hope you enjoyed the always riveting buy it, fix it, sell it video. My goal this morning is to give you a little bit of an overview of Blackstone Real Estate, answer some of the questions we get frequently from investors Bennett did. Before jumping in, I wanted to highlight 2 key messages from my remarks. The first is that the pace of realizations will continue to accelerate from our business given the maturity profile of our assets.
The second is that we believe the business has tremendous growth potential because of the combination of global reach, investment track record and our relationship with our limited partners. To achieve this growth, we have to maintain investment discipline. You'll hear that theme throughout the day. And we also have to continue to build and train our global team. With that, I will jump into our business.
Today, we're at $81,000,000,000 of investor capital. It's grown to be that size as a result of investment performance 17% net returns in our flagship global funds, Only 1% realized losses, that's a pretty remarkable number given what happened in the 2008, 2009 downturn. And equally important, while most people were waiting for the all clear sign, since the summer of 2,009, we have deployed $34,000,000,000 of capital. We think that capital will pay big dividends for our limited partners and for our unitholders. In terms of the keys to our success, a lot of it's around continuity.
You heard the buy it, fix it, sell it story, a simple strategy we execute over a long period of time in all different places around the globe. That has not and will not change when it comes to our business. We've had the same investment process. So every transaction we do around the globe, I'd like to say Dalian, China Dusseldorf, Germany Dallas, Texas is treated exactly the same way. Monday morning at 10:30 a.
M, the senior leadership of the firm, all the real estate professionals around the globe are on video, on the phone, in the room. We go through every transaction. That's been a great discipline to keep us out of trouble. And we've had a lot of continuity in terms of our people. I'm just about to start my 23rd year.
Our partners on average in the Real Estate business have been together 13 years. In terms of the current environment today, I'd say it's characterized by still compelling investment opportunities. Getting tougher here in outside the U. S. We're finding very attractive investments.
The landscape since the financial crisis is radically altered. Our major competitors going into the crisis were large financial institutions who did opportunistic real estate investing in funds and on balance sheet. They generally didn't do it so well. The regulatory environment changed. And so today we have a lot less competition.
Tony mentioned our scale relative to our competition a very big gap and a lot of it has to do with what happened to the competitive landscape. And also an impact from the crisis limited new supply. Even though we've seen slowing growth around the world, weak growth, real estate performance has still been pretty good the last few years and the reason why is because of limited new construction. That's the reason why we remain constructive on this sector for the next couple of years. There's just not a lot of building.
I'll touch on that in a bit. Here is our performance of the global funds over the 20 plus years we've been doing this Blackstone Real Estate Partners. Ironically, the fund I'm most proud of is our 5th fund which was 100% deployed in 'six and 'seven. It shows here 10% net return. We've almost doubled investor capital.
But given when it was deployed, it's probably the fund that has $13,300,000,000 will ultimately grow to be call it a $16,000,000,000 fund because of recycling capability. That fund is at 28% net since we started in 2011. The biggest piece of that fund is in U. S. Single family housing, which I will touch on.
Now that investment success, Bennett touched on this as well, translates into asset growth. As you can see here since 2,005, our fee earning AUM has grown from $6,000,000,000 to $53,000,000,000 Our total AUM has grown from $7,000,000,000 to $81,000,000,000 as of Q1 2014. I would point out during that period, we sent back more than $20,000,000,000 to investors through realizations. So that growth has happened despite returns of capital to our investors. Now what's happened in this growth is also interesting how the business has grown.
Here's a snapshot of the business. If you look back in 2007 just before the crisis and at the end of the Q1. What you see here is a tripling of our asset base from $26,000,000,000 to $81,000,000,000 but also a change in composition. Our global business which is really U. S.
Opportunistic primarily has actually doubled in size, but has shrunk from 85% of our business to 53% of our business. And the reason that has happened is the way our business has grown by product and geography. Co investment where we get paid typically a point management fee and a 10% carried interest has grown to be 12% of our business. Our Debt Strategies business didn't even exist prior to the crisis, but we thought there was an opportunity in providing debt capital during the crisis and after We built a team under Mike Nash's leadership. Today, it's 11% of our funds, dollars 9 plus 1,000,000,000 We've got mezzanine drawdown funds.
We took over a failed mortgage REIT cap trust, gave it new energy, did a equity raise last year, have done a series since then. We now call it Blackstone Mortgage Trust. The stock's up more than 20% since we re IPO ed it. We have in addition to that liquid funds we invest in CMBS. And finally we do co investment.
And the goal here is really to create a mini GSO solely focused on commercial real estate. In Asia, you've heard we've raised about $4,000,000,000 today of a $5,000,000,000 target Asia fund. It's our 1st dedicated opportunistic fund. We think long term Asia will grow to be a very large piece of our business. We feel good about deploying capital today.
I'll talk about that in a moment. Chris Hetty there has done a phenomenal job in Europe where Ken Kaplan runs our business. We just completed raising our 4th European fund $7,000,000,000 that represents nearly 20% of our business, obviously an interesting time to deploy capital. And finally, this very little sliver, I'll talk about it later, core plus safer, high quality assets, longer term holds, less leverage that's a business that can grow to be a much larger piece of this pie over time. How do we do all this?
To me, the most important thing is running a globally integrated business, 270 professionals worldwide, 20 partners, 1 global investment committee. This is not a franchise operation. Everything is done on an integrated basis. Our people move around the globe. The folks who run our businesses in Europe and Asia have worked in different offices.
We move our junior people around the globe, weekly partner calls, our investment committee, asset reviews on a global basis, asset management reviews on a global basis. We meet quarterly in different places around the world to talk about what's happening. We want to have a highly integrated business. And by doing that, we can maintain the same standards and investment discipline for our investors in whatever product or whatever geography we're investing in. I think that's critically important as you grow a business like ours in scale.
In addition to that, today we have a huge advantage off the operating platforms that we own or control. In the office space globally, we have something like 100,000,000 75,000,000 square feet I think is the number. Hospitality owned, managed, franchise across our different companies more than 800,000 rooms. Retail, more than 100,000,000 square feet. Industrial 175,000,000 square feet 80,000 residential units.
These platforms enable us to find opportunities to create value with the assets and to have all sorts of proprietary market information that allows us to deploy more capital effectively, a real advantage relative to the marketplace. You put that together, the platforms we've got, the people we have around the globe in the various offices, the different products, it's not a surprise that our ability to deploy capital has gone up. So last year in real estate, we deployed $10,250,000,000 In the Q1 of this year at the end of the quarter, we had $3,600,000,000 either invested or committed. So the business has very good momentum. As I mentioned, it's getting a little tougher here in the U.
S. To deploy capital. But given the number of places we're deploying capital, we think this is an area where you'll continue to see growth. Now some key questions that some of you ask us from time to time that I'd like to try to answer. The first one is where are we in the global real estate cycle?
So what we try to show visually is sort of a line here thinking about real estate on a cyclical basis moving here from left to right. And the way we think about real estate is all about what we call capital and cranes. Capital meaning debt capital. Do you have a ton of debt capital fueling
prices? Or do you have
a lot of cranes? And when you see a lot of cranes that's generally bad for real estate because it means lots of new supply. And when you look at the world today and I'll go from left to right, the good news is we don't see any of the markets in that far right phase. That period like 2005, 2007 when banks were lending 99% on real estate or you were on the southern coast of Spain or Dubai or Miami and there were cranes everywhere. Most places in real estate, we still have some running room to go.
So starting in Europe, that's the market that's still the slowest, you heard it from Bennett, to recover at this point. There, we're buying distressed assets. There's an example here of a portfolio of assets in the U. K, Germany and Ireland, €1,800,000,000 of face. We bought the non performing loans for €1,100,000,000 We're quite active in Spain and Italy.
That's a market where there is distress. We think there's opportunity, real challenges on growth and more competitions moving into the market. We think we've got an advantage because of our teams on the ground and we're moving quickly to deploy capital to take advantage of this Asia. Growth has certainly slowed in places like China and India creating a lot of caution that there definitely will be less growth on a go forward basis as they transition from a fixed asset investment environment and an export oriented environment to a domestic consumption oriented economy. But it's creating opportunities because we're seeing stocks on the screen in those markets trade down significantly.
Real estate IPOs are almost non existent and new supply in places like Bangalore and Beijing down call it 50% in the office sector. So for us our capital is now finding opportunities there. We bought control of a high quality mall company at the end of last year and the business is still performing fine despite all the negative headlines, we think there will be more opportunity as people get increasingly negative about that part of the world. Finally, here in the U. S, as I said, we're more in the middle of the cycle here.
There's not much in the way of distress left, which makes buying tougher. The good news is, as I talked about, new supplies running about half of historic levels. That creates a good tailwind the next couple of years with limited with even in the face of demand, if it's not so strong, if the economy picks up more, that limited new supply means real estate assets will perform better than people expect. This is an example. We just did the Cosmopolitan Hotel.
This is actually a legacy asset that was built during the crisis. We were able to buy at a significant discount to construction costs. We also made a bit of a play on a recovery in Las Vegas. So this is how we see the world today and this is the reason why you see us deploying still a fair amount of capital. Now one area worth noting is single family housing.
It touches all of us in the investment world. And you'll hear out there home prices are going up because Blackstone's moving the market or really low interest rates and pretty soon home prices are going to turn back down. We have a, I'd say, a different view on that. We think about it in the context of supply and demand. If you look historically in the U.
S, there are about 1,300,000 single family homes built on average from 1993 to 2,007. It got up to as high as $1,700,000 in 2006. Last year, many years after the crisis, you've got 569,000 homes single family homes being built. That's creating a shortage. And when you look on the right side here, that's why prices are starting to move up and have been the last couple of years.
Now why are more homes not being built? It's because home prices are still too low in most markets to justify new construction. So what's going to happen? Continued price appreciation will lead to more new construction, which will be a positive for the U. S.
Economy. What about the status of realizations? I mentioned at the beginning, this chart shows you that we've had a very big pickup in realizations. They've basically been doubling over the last 3 years up to $7,400,000,000 of distributions to our limited partners. In the Q1, they doubled again.
We think this will continue. I don't know exactly what the pace or timing will be, but we think you'll see a pickup. And the reason why is the next chart here, which I'm trying to get to. There we go. This shows you where our gain sits in our real estate portfolio.
We have $21,000,000,000 of gain in our opportunistic portfolio today, but 77% of that gain sits in 4 public companies and an office portfolio we're in the process of liquidating. You may have read recently we're selling a $2,000,000,000 group of assets in Boston, more of that to come. We've done some filings around some of our public companies. We will be exiting from these companies over time. The good news is we have terrific management teams.
The businesses are performing well and we're in the right point in the cycle. So there's not any pressure, but ultimately we have to return capital. That capital will go back to our limited partners and also generate carried interest for us and our unitholders. So you can see the path to realizations I think pretty clearly on this page. Now also in terms of carried interest, I think it's interesting to see how it's evolved over the last 4 years.
4 years ago, we had almost no net accrued carry. So this is carried interest net of compensation expense. And that number is now up to $2,400,000,000 If you add in the $660,000,000 we distributed out from 0 to almost $3,000,000,000 over the last 4 years. Interestingly, going forward, we think there's also very large potential. If you think about BREP7 as a $16,000,000,000 fund, BREP Asia we hope to be $5,000,000,000 BREP Europe $7,000,000,000 That's $28,000,000,000 of capital.
If we do our job and invest that money well, double the money, that will create $5,600,000,000 of carry, take off a 40% compensation expense and you end up here with $3,400,000,000 of potential net carry. On that sheet, only $358,000,000 from BREP 7. So a potential $3,000,000,000 of future carry just from those 3 funds alone. So we not only feel good about the past, but also the future if we do our jobs well in terms of investing capital. So is Blackstone Real Estate too big to keep growing?
The answer of course we believe is no. How do we think about our business? We think about it in a matrix context. There's the equity side where we have opportunistic higher yielding real estate investing. We have the core plus business which I'll talk about long term safer assets.
We've got debt high yield debt. We've got 1st mortgage debt and then liquid securities. And then we think about it geographically North America, Europe, Asia, Latin America. And we think there are lots of growth opportunities, Specifically in opportunistic, at some point here probably in 2015, we'll raise our next fund, BREATH8. If you look in Asia, as I said, I think over time that business can grow to be much larger.
Latin America, we started deploying capital there. We think over time we could raise a fund there. Core plus I'll talk about it, but that asset class is much larger than the amount of capital limited partners allocate in the opportunistic space. In debt, the high yield area in Asia, we think is an opportunity given our presence on the ground in the various offices and the capital dislocation that exists. I also think Blackstone Mortgage Trust can grow.
It's already made more than $4,000,000,000 of loans in a little over a year. I think that business can grow quite a bit. So we still see plenty of running room across the real estate landscape. Specifically in Core Plus, what you've got here is a business that didn't exist as recently as November of last year. Today we've got $1,600,000,000 of capital.
We've got various discussions for separately managed accounts around the globe in Asia, Europe and the U. S. I think we'll also look to do some co mingled funds and it will look more like our debt complex where we have a range of separately managed accounts as well as dedicated funds. And we think this can grow to be quite large and generate significant earnings for the firm over a long period of time and create a real stable base. And it's also complementary just like the way the debt business is complementary to our opportunistic equity business.
We think this will be as well because of who we're dealing with the incremental information we get from the marketplace. The key takeaways from our business, what I'd say is performance, we talked about it 17% net IRRs, 1% realized losses. That's the reason why investors have a lot of confidence in us. Fundraising, we have raised in this business $56,000,000,000 since 2007. We're in the market today in Asia with BREP Asia, Core Plus.
We have liquid CMBS in our brief product, which we're actually selling through the high net worth channel, Blackstone Mortgage Trust. We've got robust capital deployment, put out $34,000,000,000 as I mentioned since the crisis. We have $18,000,000,000 of dry powder and the ability to recycle capital in many of our funds. And we talked about it accelerating dispositions. Distributions are up 120% in Q1 year on year, Performance fees up 171 percent.
Large pool of public equities, as I said, we're going to be very disciplined and thoughtful how we exit from those companies. It will be done over a number of years, but it will create liquidity and cash distributions to our unitholders. So overall, we feel very good about where we are in the cycle and where our business sits today. And with that, I will open it up to any and all questions.
Hi. Michael Kim from Sandler O'Neill. Just wanted to come back to sort of the outlook for realizations. You talked about maybe getting a bit more active selling down some of the stakes in the bigger investments that went public last year. So just going forward, how are you thinking about balancing sort of being disciplined and continuing to be opportunistic on sort of the market side versus maybe holding on to some of these assets that continue to create value?
Well, in an ideal world, if we didn't have the business model we give, a lot of these companies, we'd love to hold almost forever. Great businesses as I said solid management teams. And so what creates the need to sell of course is the nature of our funds. So I would say that the driver for us is we know we've got to return capital. We've sort of completed the mission, but we want to do it in the right way.
I think the good news for most of these businesses where they are in the cycle, we will see continued growth in these businesses in terms of value. So it's as I said, you'd love to hold these things much longer, you can't. So what you'll do is be methodical on how you sell these down over a number of years. Can't be more specific than that. Obviously, market conditions can change.
If the market goes down sharply as we've done in the past year hold, if prices really rocketed up and you were really concerned you might accelerate, I think the most likely case is a methodical sell down over a number of years.
Are there any markets where you've really ruled out because of interference from governments or government lending or overbuilding or rule of law?
Well, there definitely markets rule of law has been an issue in. Some of the Latin American countries are very challenging, places like Argentina, Venezuela. We have not to date done anything in Russia. So there are places where we have been more concerned. In terms of overbuilding, what I'd say, you're always looking at that.
So New York City, the hotel At the same time, you've had a government pullback. So we're always looking out there in the landscape. The other thing I'd say we're cautious about are things that are bond like. So if you think about net leased real estate long term lease where there's very little upside maybe the rents are it's a Walgreens lease for 20 years and you're paying more than the value of the real estate. It's being driven by fixed income as opposed to growth in cash flow.
We're very cautious around stuff like that.
Blayne Askin with RBC Capital Markets. Chuck, could you talk about your macro view, your perspective on the markets, interest rates, just put everything into
perspective? Sure. I would concede by saying I think I've been wrong about interest rates for as long as I can remember. I think most people would be surprised that the 10 year treasury is 2.5%.
I would expect
with greater growth here in the U. S. Interest rates at some point are going to go up from where they are today. Now the interesting question is what does that mean for our portfolio? If you look at commercial real estate and what happened in the early 90s late 90s mid-2000s all periods where the 10 year treasury went up 150 to 250 basis points.
Private and public market real estate performed actually pretty well, because real estate is not just a utility or a bond. It also can have growth in cash flow. And in an environment like we've been in where you've had limited new supply that growth can be pretty good. So what I think when I think about commercial real estate, I think it will see a slowdown in growth as a result of rising interest rates, but still decent performance because of the underlying cash flows. I would just mention in housing, we've also looked at that data.
Over the last 50 years, the 10 year treasury has gone up 26 times. And counterintuitively, all 26 of those periods, U. S. Home prices went up, again correlating more to economic growth rather than to the rate to interest rates. So I think it's fair to assume and we as a firm assume interest rates will be higher and we try to reflect that in our exit multiples.
Hi. This is Dina Hsing from Credit Suisse. It sounds it looks like you're expanding into all kinds of real estate core plus debt. Just wondering, is there a reason why you're not going into developing assets building, not just fixing it? Because it sounds like there's not enough supply as you said.
So just wondering what's the rationale in terms of not going into that developing asset?
So historically and we do occasionally some development a little bit more in the emerging markets. But generally the risk return trade off for development isn't great. What happens is if a market if you buy an existing asset or build in a market that's going up strongly, you'll do well in either case. But when the market turns down, if you own an existing asset, you're getting income, you'll extend out your maturity, you'll play through it, you'll do okay. But with a development asset, if you're in the midst of a crisis, high risk of capital loss.
So when we look at our returns over a long period of time and say why have we not had more in the way of losses, we think staying away from development has been a positive. Now it doesn't mean we may not do it in a few situations, may do a little more in emerging markets. But generally the risk return plus the cost of development, the number of people, the number of things that can go wrong, anybody who's renovated a home knows what that's like. Building things from scratch costs a lot, takes a lot of time and oftentimes things can go wrong. And it's a bit like saying, hey, I'm going to IPO something 3 or 4 years from today.
Maybe the environment today is good, but you don't know what it looks like 3 or 4 years from now. We'd always prefer sort of a hard asset there and security of income in place if we can.
Thanks very much, John. Appreciate that.
Okay.
Thank you all.
I think we have a few simple guiding principles in our private equity business. The most important of which is to find businesses where actions we take can really change the fate of the company, backing a great management team in a business where actions we're going to take are going to make the company bigger, better, have a better growth rate. Blackstone had a history of investing in theme parks dating back to the early 90s. Nick Varney, the CEO of Merlin, was looking for a partner to help consolidate the visitor attraction sector in Europe and possibly globally. He was looking for somebody with a large capital base with experience in supporting companies in a consolidation strategy.
Nick and his team were really excellent operators. Our real value add was in helping the business scale up from a small company to a leader and not having balls dropped along the way. We invested many 100 Tussauds. We took a business that was predominantly British based to one of global scale. So now Merlin is really the largest visitor attraction company in the world by number of assets, 2nd largest by number of locations and in terms of number of visitors, second only to Disney.
And each time we open a new location or we add a major attraction to an existing asset, we create jobs. We saw a terrific young ambitious management team operating a very good but small business with the capability to operate a much larger business. And so we saw the ability to rapidly scale up principles of finding good companies where we can really effect change is what led us to make this investment even though it was nontraditional.
Please welcome Joe Barata, Global Head of Private Equity.
Thanks. So in events like these, I'm frequently given the gift of having to follow John Gray, which is a tough act to follow indeed. So I'll do my best. We operate in Blackstone Private Equity a broad large scale multi product platform. We're global in scope.
We invest out of the single largest pool of private equity capital in Blackstone Capital Partner VI. And we have a diversified product mix outside of global private equity, which meets well the needs of our largest institutional partners, the global Corporate Private Equity Fund, our energy specific fund which invests alongside our global fund, our tactical opportunities business started and led by my partner David Glitzer which he'll talk about in detail from $0,000,000 to $5,500,000,000 of assets under management, leveraging our private equity platform with deal flow going both ways and shared intellectual capital. We have a secondaries business, which is new led by Verne, who you'll hear from, where we have enormous knowledge both in private equity and in their business of the general partners and the markets in the deal, a rich fountain of knowledge to mine. And we have other initiatives underway, which I won't get into too much detail. So we have a complete product suite just within our private equity business, not to mention all the other areas of the firm.
And we meet the needs of our largest limited partners extremely well. We can deploy $1,000,000,000 plus for the largest pools of capital in the world and that's unique almost unique to our firm. My comments today in this presentation will focus on our corporate and energy private equity activities. So on the screen this is something I presented to our limited partners at our annual meeting about 3 weeks ago. And this is simply put our mission.
We enable pension plans, endowments and governments to meet their future obligations. We invest as Tony said on behalf of half the retirees in the U. S. And nearly 40,000,000 people globally. So me and my partners take this obligation very seriously.
This is not about the greater glory of Blackstone. It's about serving the needs of state workers and police officers and firemen. We invest in companies to grow them and in large projects that wouldn't have gotten off the ground without our sponsorship. The companies we ultimately sell are better invested, have more employees, have higher growth rates than the ones that we originally bought and we're proud of that fact. And Merlin is the ultimate testament to that kind of strategy, a small £15,000,000 EBITDA business that today is a FTSE 100 company with a £4,000,000,000 market cap.
We have the capability and expertise to drive transformational change in our companies. It's core to what we do. We're best in class at it. Dave Calhoun, who will follow me, will explain why. And him joining us is itself a testament to our strategy and our ability and our philosophy to intervene in companies.
We have the flexibility to invest all over the world in different sectors and transaction types out of our global fund. This enables us to maintain discipline and allocate capital to the best opportunities we see globally. We don't have money burning a hole in our pocket with an investment period looming in any one geographic region. We have a single consistent decision making process. On the investment philosophy, we try to find value where others don't.
We identify sectors and companies with capital needs that aren't readily met in the public markets. We cannot compete purely on the basis of our cost of capital. We have to have a differentiated view. We have to want to buy things others don't or we have to be able to improve the company in a way that's not priced into the competitive process. So our commitment in trying to fulfill this mission is that we will have a specific strategy to improve the company or we won't invest.
It's as
simple as that. And as we think about returns, we think about the unlevered return. We're buying engaging to improve the margin structure. To discount all of that back to a return for our investors on an unlevered basis that's worse than they can earn buying Procter and Gamble, an unlevered liquid company 2% dividend yield 5%, 6% earnings growth 7%, 8% expected return. Why would we do that?
We have to beat the public markets on an unlevered basis and we do consistently and we'll continue to do so. And finally, and most importantly, we have to retain the best investors and operators in the industry, period. So how are we different from our largest competitors? Well, we have a single global fund. And as I mentioned, that allows us to maintain discipline and allocate capital to the best opportunities we see globally and by sector vertical.
We have 1 investment committee, 1 culture, one global deal team that meets every week on Monday. I know everything that's going on everywhere in the world from start to finish on our deals. We are not a regional franchise operation. We do not find guys who are foreign to the firm, raise money around them, take half the equity and hope it works out. We build businesses with our own young talent.
I moved as a 30 year old person, 13 years ago to start a business with my partner David in London, 2 young Americans. We were both there over a decade. We built a team more or less in our image of local people. They now speak our language. They understand our investment culture and discipline.
And it's no coincidence that that business has outperformed our American peers in terms of return and consistency of return. So we think this is a core strength of our business, consistent decision making, consistent results, homegrown culture. We have a scale platform with global reach despite the single global pool of capital, offices on 3 continents, 105 investment professionals around the globe. We have nearly 80 companies with $90,000,000,000 of revenue and 617,000 employees that makes us as a conglomerate one of the 15 largest companies in the world. The pool out of which we're currently investing Blackstone's $16,000,000,000 of available capital is a differentiator for us.
Our ability to commit nearly $2,000,000,000 of equity allowed us to buy gates. No one else in the process could have done it. And we were able to use that scale and then sell down some of the equity post closing, which we've already done. And we're able to leverage the intellectual capital in our private equity business from all of the Blackstone businesses. In real estate, we've done many deals together from Hilton to SeaWorld to nursing homes in the U.
K. To pubs in the U. K. And that differentiates us versus our largest competitors. With GSO, we work on the common sector themes that Bennett talked about energy, housing and other things.
We look at large distressed deals together also not currently because of where we are in the distress cycle, but in 2,009 2010 we were often looking at assets with them. Our restructuring business we use quite frequently. We leverage their knowledge of the distress process. And with Tactical Opportunities, our sister business, there's a two way flow of deals. They're able to do a lot of things that we can't do.
It's a terrific thing for our investors. And it's really improved the dialogue that we have as a firm with our investors because that's a very high touch business, tack ops, and Blitz will talk about it. We have the capability to improve the performance of our companies. It's a proven fact. We have strong leadership under Dave Calhoun, who joined us this year.
He's formally ran a large portfolio company of ours and other of our competitors called Nielsen. Prior to that, he was Jeff Immeltz peer at GE, one of the first high profile corporate executives to take on a private equity role. And I bet he's glad he did that. You'll hear from him in a minute. We have functional experts in key areas supporting Dave.
We've got group purchasing, lean process, talent management, IT experts have company specific executive advisors. These are ex CEOs with real domain expertise. We find somebody with the skill set that's fit for purpose for whatever the intervention strategy for our portfolio companies are and we'll put this person on the Board as the non executive Chairman working hand in glove with the CEO to execute on our intervention strategy. This frees up the time of our deal team to be out there in the real world putting the firm in a position to make new investments. And we're constantly adding new executives to this stable of people.
Some of them have multiple portfolio companies, some of them we find on a fit for purpose basis. And finally, we have a very well defined investment strategy and importantly value discipline, which I'll get into in a moment, which is important in these treacherous times. So all this is added up to really consistent performance over 26 years. It doesn't really matter who's in this seat, the person talking to you today. It's about the system, the culture, the discipline.
The investments we've made in our organization, homegrown culture has allowed us to do this remarkably consistent through all cycles. Even the 2006 and 2008 cycle will return the fund will return approaching 2 times cost. That's the Blackstone V fund. Our most recent vintage funds, the investment period began in the middle of 2011 on Blackstone VI and in BEP, our top quartile performing extremely well with between 17% 50% net IRRs. This positions us really well for upcoming fundraisers through BCP 7, which we expect to be at least as large as BCP 6 and for Blackstone Energy Partners 2, which will be meaningfully larger than the first effort.
And we've done this through cycles with a flexible nimble strategy, finding opportunities in different sectors at different points in the cycle where we see value and we see the ability to change the fate in some way of that company. We do not doggedly adhere to one strategy, one small group of industry sectors, control buyouts over a certain size. It's too limiting, it's too hard to make money, doesn't allow you to be nimble and flexible, which has been our core strength. Recently, our performance has been really terrific. We used the last 18 months just to pick a time.
We've sold or IPO'd 17 of our portfolio companies, large scale capital return to our limited partners in cash by all means virtually. IPOs, corporate sales, sales to our competitors, dividend recaps, dollars 15,000,000,000 back to our limited partners, extremely powerful as we go out to raise new funds. And the money that's been returned has on average been 2.5 times what they initially put in deals. So proof of concept on our ability to invest $1 and return on average $2,500,000 That's what we try to adhere to. On top of the $15,000,000,000 of cash back, we've created $11,000,000,000 of market cap for companies in the portfolio.
These are largely BCP5 companies, companies like SeaWorld, Hilton, PBF, Pinnacle Foods. Those are real marks not mark to market things. So in total across all of our active funds 28% net returns in the last 18 months compounded per annum. And importantly nearly 50% on the realized investments which is a large chunk of the portfolio. Why are the realized returns so much higher than the cumulative returns?
Because we don't actually mark the portfolio to market. That's not how it works. It always lags in a rising market. The average premium to the then mark when we sell a company or we take one public is over 35%. That will continue to happen as we continue to sell and IPO other large BCP V investments.
On the new investing side, we remain active but disciplined, 15 new companies in the last 18 months, dollars 4,000,000,000 of capital invested. So we sold 15, we've deployed 4. We feel like that's about right in the current environment. So turning to the current environment. Credit availability is high and its cost is almost comically low.
Equity markets are at an all time high. PE multiples, if you look at the median, are in the top quartile now of history, forgetting the weighted average S and P multiple, which is weighted down by some low multiple large market cap stocks. The median multiple, as you will know, is now in the top quartile. Options for sellers of assets are numerous. The IPO market is wide open.
Corporate buyers are active. Credit markets are funding dividend recaps. And our competitors, including ourselves, are reloaded with capital and confident. Underlying economic fundamentals are good, but they're not great. But despite that LBO prices are rising, discipline is beginning to wane and we see risks abound.
Chart on the left shows high yield and leverage loan issuance. It's eclipsed the previous peak in 2,007, $1,700,000,000,000 last year, dollars 1,400,000,000 on a run rate this year. We'll probably get close to where we were last year, way in excess of what it was in 2,007. So the market is wide open. We all know why.
7 years of 0% interest rates, everybody searching for yield. You can see the effect on the yield. On the right, the high yield bond indexed at 5.3% compared to a 20 year historical average of 10%. If you believe in mean reversion in all asset classes as I do, These conditions cannot persist for that long. And we have to defend ourselves against this mean reversion in our portfolios.
This chart just shows what I talked about S and P at a peak, nearly $100,000,000,000 of annual IPO volume, dividend recap volume at $80,000,000,000 from close to 0 a few years ago and the corporate M and A cycle now in full swing. We are seeing corporates competing with us regularly in the various competitive processes we look at.
Thanks.
This has resulted all of these factors in LBO prices rising over time. They troughed in 2009 and 2010. Fortunately, we were active at that point, sub-eight times. They're back now around where they were in 2,007. Doesn't mean that this crop of deals will be bad.
If the conditions were in persist, low interest rates, high credit availability, relatively benign economic scenario, these deals will work out just fine for nearly everybody. It's the risk that rates mean revert, multiples come down, exit multiples are lower than the entry multiples you paid and that's where you can get into trouble in our business because the exit multiple is the single most important driver of return in our 5 year hold models. If you could hold stuff forever, it would be less of an issue. But we kind of have to sell around year 5, 6, 7, 8. That's about the time we'll probably start seeing some of these actions that central banks have taken to reverse themselves.
So we're inoculating ourselves against that eventuality. We do not want to be exposed to that one major risk and be wiped out if that comes home to roost. So how are we navigating this environment? We're adhering to the core discipline. I've mentioned it a few times.
We have to intervene to change the performance of the company, actions that are under our control to change the fate of the business. We will not be a passive recipient of what the market will bear in an easy to understand, highly transparent Goldman Sachs or JPMorgan auction for a business. And secondly, the unlevered return has to drive the value decision. Focusing on the current comparable trading multiples and assuming they persist forever is dangerous. So we focus on yield and we focus on the unlevered after tax yield in the business.
And we pay a price that we're comfortable owning the asset at for basically indefinitely. And this is going to inoculate us against this mean reversion on global cost of capital, particularly in the sub investment grade corporate credit markets. The deals we're doing in Blackstone 6 and Blackstone Energy Partners fall into 3 categories. There are sectors even still where the mismatch between the requirement of the demand for capital in that sector and its readily available supply in the public debt and equity markets is imbalanced and we put capital to work in those situations. As we're having to pay higher prices, we're looking for companies with more growth and growth that's uncorrelated to the business cycle with low capital intensity.
The weirdest phenomenon in this market as an investor is that people get fixated on EBITDA. You buy 8 you buy an industrial company for 8 times EBITDA, but it's got a third of its EBITDA and depreciation and capital expenditures. You're paying about 12.5 times. I'd rather pay 14 times for a business growing at 10% than 12 times for a business growing at 3 or 4. So as we're looking at how to deploy the capital, we're trying to find great businesses with moats around them where we can somehow improve the business, paying a full multiple, but a low relative multiple of free cash flow compared to the growth.
And finally, there are special situations, special companies where we can really transformational change the nature of the company either its growth rate or its profit potential. We concentrate our deal sourcing efforts in certain core areas and take a very proactive approach. All of the deals on this page that you see are a result of a 6 to 12 month effort preceding the formal deal process. We are not in a flow business. We do not pick off the best of what comes into our office.
We go out in the world with 110 people globally and find things. So drilling into this just for a moment, this is all of the capital basically in BCP6 and BEP allocated 6 and BEP allocated across these three core thematics. Really Energy and Power and Financial Services is what is driving our investments where we see a mismatch for the demand for capital and its readily available supply. A good example is our Cheniere liquefaction facility Sabine Pass, where in 2010 2011 we committed to a very large capital project to build the 1st licensed liquefaction facility in the United States to ship low cost gas from these shores abroad. We committed $1,500,000,000 of capital across our energy and private equity funds and created co investment for our LPs and we're able to price that at a cash on cash hold forever return if we could never sell it in the mid teens with the benefit of leverage that gets driven up into the mid-20s.
The security we invested in is convertible into the public underlying public company. It's marked at 3 times our money. It's in projects like this that you can't go out and get capital from the public markets or from public equity markets or from banks or for project finance where we can step in and price our capital well. We're also doing it in oil and gas development deals offshore in the United States in the Gulf of Mexico also onshore mostly oil and orientation. We're also building financial services lending platforms, finding management teams, finding books of business where we don't have to pay any goodwill.
So we're creating companies much in the way we did Merlin the theme park business paying very little goodwill where we see really good net interest margins on the lending products with margin for error if rates were to go up. That's about 25% roughly of what we're doing. The unlevered returns in this group of investments are between 14% 19%. Of course, we use leverage magnifies the returns. These should be mid-20s type returning investments.
The growth platforms I talked about, these are high growth, high single digit, low capital intensity, good competitive position businesses. And in some cases Blackstone is acting as a strategic buyer like Ipreo which manages all the equity and debt underwritings for the investment banks where we have significant influence with investment banks as one of their largest customers for their core products. We did this deal joint with Goldman Sachs who is one of the last holdouts for the Ipreo Equity platform. So it's a clever part of the thesis. These are businesses growing between 5% 15% per annum compounded.
We're paying EBIT multiples between sort of 12 14.5 times, which we think is reasonable for businesses growing at that clip. The unlevered returns again 10% to 16%, well in excess of what our investors could earn, buying unlevered public company stocks. And finally, transformational operating intervention about a third of our capital. We have a portfolio of good branded consumer companies, many of which employ no leverage, where Blackstone's global footprint is helping them grow outside of their core markets. Our portfolio operations team is working to improve the management's.
These if these businesses work, they'll have nothing to do with the leverage markets at the time of our exit and we like that. And again, 11% to 17% unlevered returns. So that's how we're behaving in this environment, mindful that the leverage markets can back up on us, mindful we need margin for error on the exit multiple assumptions. So in summary, we're really well positioned for the near future, near term fundraising. Dollars 15,000,000,000 of cash back is best in class in our industry, another $11,000,000,000 which will turn into cash over the next couple of years.
Still in the pipeline, large portfolio companies to exit both in terms of strategic sales and IPOs. We've derisked the BCP V fund in the eyes of our investors and in reality 1.2 times cost is already back in cash or publicly traded stock. The current market will approach 1.6 times cost. We expect meaningful carry from this fund. Blackstone VI and BEP, great performance so far, 17% 49% net IRRs, top quartile.
And beyond just the recent performance, we have a 27 year record of consistent returns through all market cycles. No losing funds, no even really truly mediocre funds, all of them in the top quartile. We're committed to the approach that I've articulated and we have a world class team period. I was presenting at a last week at a Morgan Stanley Private Wealth Manager Forum and I was asked, so why is it relevant for anybody to invest in private equity more it's illiquid, it's locked up. I think that's an enormous asset for us and our investors and they also believe it.
We can invest through a cycle. We don't have to rush to get the capital out. We're never called out of our position. At the depths, BCP V look like 0.8, 0.9 times cost, it will now be 2. Why?
We weren't forced to sell anything at the bottom. We had dry powder. We made investments. We improved our portfolio companies. We made follow on acquisitions, and we radically improved the performance of that portfolio.
And we control the timing of our exit. It's really important. If we had to sell everything 2 years ago, we would have our option would have been extinguished. We didn't, we held, we continued to work the assets and now we're going to be in carry. That's powerful.
The value of control or specifically negotiated governance is really high. Everybody talks about activists. Well, we actually control these companies. We don't have to send letters. We don't have to go on CNBC.
We actually control the companies. The value of that is really high. And we have a proven ability to change the fate of our investee companies with this robust portfolio operation group portfolio operations group. And finally, we serve the needs of these large scale institutional investors and endowments really well. They don't need liquidity.
Liquidity is overpriced right now. Yield is overpriced. We invest $1, we let it compound, we return 2.5 or 3, 5, 6, 7 years from now. And that's the type of investment product they need and they want for a large portion of their alternatives allocation. We will continue to get allocated capital because of our ability to do that.
And for high net worth people, it's extremely tax efficient. So we'll also accumulate capital from those people as they understand the power of the model on an after tax basis. So to wrap up, what's next? The new energy fund substantially larger than the first, the new global private equity fund. I have a high degree of confidence in that being successful and larger than the last one.
We have several initiatives underway to leverage the unique relationships we have with our largest LPs to grow the AUM in this business. A lot of the things we're thinking about are innovative and would be competitively copied. So I'm not going to talk about them, but there'll be more to come on that. The tac ops fundraise is coming in the near future. Its investment pace has been excellent.
And we as John showed in his chart, I don't have specific numbers, this business will generate meaningful carried interest over the next 3 or 4 years, both from the Blackstone V Fund and from the Blackstone VI Fund, dollars 16,000,000,000 doubled. It's the exact same math John just walked through. So I don't think any of that is necessarily being valued by the public markets. I think our business is probably the most undervalued within the whole of the Blackstone portfolio. Thank you.
We have time for one question in the back.
Okay. Just a question on regulatory scrutiny of the banks leverage lending and what impact that's had on deal financing for you. And I'm curious just on the growth of non bank lending and how that's maybe impacted your cost of funding?
Yes. Well, I thought it would have an impact on our business and I was looking forward to it constraining the leverage levels that were on offer, but it hasn't in fact. We're just about to price the Gates financing, one of the largest LBO loans of the last 3 or 4 years at historically low pricing, fully underwritten by the banks at the time we signed up for the deal. So we have not seen the effect of this on our any of our investments. But I'm rooting for it because there'd be nothing wrong with constrained lending activity given the strategy that we employ.
We're not looking to twerk out to the last 8th of a turn the leverage levels on all of our companies because we have this growth and intervention strategy. Thank you. On to Dave.
You know I'm new because I have no video. So just by way of stories and maybe just a little bit of testimony with respect to the asset class and to Blackstone. Many of you probably know my background is an operator. So I'm the working grunt in the room. 27 years at GE doing a variety of things, subsequently convinced by a group of sponsors, private equity groups including Blackstone that they had found a company called then VNU that had been mismanaged for years years that held this prized asset and brand Nielsen within it and that wouldn't it be great if we could get together and rebuild this company in every way.
So very smart investment, incredibly highly levered at the peak of the market and turns out very, very smart investment. That's not why I'm here that's not the testimony I'm here to provide. That's what Joe does for a living. He does it as well as anybody in the world. I'm very proud of it.
This is a pure operator's perspective. What do you do to restructure a company? How do you think about it differently? You got to be more productive and you got to grow and you got to take swings like you've never taken before and you have to do them fast. And so for me and the Nielsen experience for 5 years of operating in a purely private environment before we went to the IPO.
I got to do everything I ever want to do as fast and as hard as I ever wanted to do it with the backing of capital that sought for what it was without having to present it to The Street at every turn, without having to turn in a quarter at every turn, all of which throttle your start, all of which throttle the benefits that you ultimately can gain. So I'm just a crazy man about an operator's perspective operating within this alternative class and private equity. It is the best it can possibly be. But you have to be willing to take that swing. You've got to field great teams and you've got to bring in great teams to be able to do it.
So that's why I'm here with Blackstone. Just a comment, I'm going to go back. So our job is to outperform the public markets, outperform the S and P. We have to do it at the operating margin line or at the EBITDA line and we have to do it with just good old fashioned operating techniques. Below here are a series of things that the Blackstone Group brought to me during that time.
So I stood up a Lean and 6 Sigma organization. I went from 0 to 120 people within 6 months. How did I do it? I used the Blackstone experts to come in, help me go recruit and build that team so that we could build a continuous improvement process. I used their IT organization to help us think about a brand new architecture to move from the legacy batch formats to today's modern technology in the big data world.
In sourcing, I immediately took advantage of big group sourcing deals that they had. So healthcare completely redesigned the benefit plan for a big roughly 30,000 person organization so that we could make it contemporary, save some money and in fact build a better relationship with our employee base. And ultimately in the energy which I didn't use, but I've seen it used throughout the rest of our portfolio some instant benefits. The point is, these weren't shoved down my throat. I had 5 firms choose from and in every case I chose these.
And I used them and I got momentum early so that I could bet even bigger on growth, namely building a global footprint around the world and digital. So all things digital, I had to jump into. So my point is that the way we improve these operations, we have real functional experts, but the biggest and most important part of it all is fielding the very, very best teams and surrounding them with the very, very best people. And that's why I came to this role and that's why I'm joining Joe. So that as Joe builds and makes these big investments in these great opportunities and he does and he has a desire to want to invest in each of them, My job is to make sure we're fielding the very best teams in the world.
And I'm absolutely convinced everybody wants to join if they know what it is. If they understand how they can operate and the speed with which they can operate, they will join, they will come and they will build great value inside our portfolio. So that's our job. Now this notion of executive advisors or really senior experienced operators to join up on the boards of our teams is a concept that was sold and built by Joe and Tony and the team before. My job is to try to put it on steroids to make sure I can extend the reach of our existing CEOs with better, bigger players on the board, so that we can again go bigger and faster.
Secondly, rigorous, rigorous leadership assessment. If there's one thing I learned in my GE life, it's important. It changes quarter to quarter. You have to be on top of it. You got to know whether you've got the best team in the world operating and we've got to bring that practice to it.
And then early mobilizations of these big initiatives. You have to start out of the gate. You can't whittle your way into it. And believe it or not, a lot of folks who come in with the companies we buy, believe it or not, have been trained in that throttled approach and our job is to unthrottle it, to make sure they know they have the flexibility to go bigger and faster. I use Gates as an example simply because this is a one of our bigger investments.
It is not yet made. It will be here very shortly. But I see everything in Gates that I saw in Nielsen. And now my job is to try to figure out how to do it even faster and bigger to make sure we have the very best team on the field. In this case, I will play that executive chair role, but think about me as similar to many others that we will have in our portfolio companies, so that I can extend the reach of our CEO, its team, hold it to a very high standard relative to everything I've known in my history and so that we can build on what is already a significant operating margin or EBITDA improvement relative to public alternatives, so that we can build that gap even bigger and justify even more investments and attract more of the very best operators in the world to this asset class and specifically to Blackstone.
So anyway, that's it for me. Short and sweet. I'm sure I saved us a little bit of time. Anyway, I'm happy to take a question if anybody has it.
Thank you, Dave. Good. Thanks. Ladies and gentlemen, we are going to take a quick 10 minute break and then resume back here very shortly for our next session. Thank you very much.
For those joining us on the webcast, we look forward to you joining us at session 2 in approximately 10 minutes. Thank you very much.
It's an honor to join President Obama and First Lady Michelle Obama in supporting Joining Forces. This initiative is a prime example of how the public and private sectors can partner together to support initiatives of critical national importance.
I was in the Army Reserves in 1970 during Vietnam. Trained in infantry. I met all these remarkable characters who would go down these tunnels just headfirst knowing that somebody might be there and that that might be the end of them. A lot of those people kept other people alive. One of the things that happened in the financial crisis was this massive unemployment.
Now we have sort of a disappointing economic recovery. We have people who are demobilizing from the military and we're not creating enough jobs in the overall society to please the military people who for totally sound reasons are just out of the flow. And entering the private sector is tough when you've been out of it. Remember this business round table group, it's all these people, men and women who run big companies in the country. Mrs.
Obama came and had something on her mind, which was hiring veterans.
She did a really good presentation.
Went back to New York, got to my house.
And before
I went upstairs, I dictated a note to Michelle. And I said, that was really a moving presentation today. And we're going to do 50,000 people. I really felt so strongly about this.
Enthusiasm.
Creating jobs and doing the right thing for people is really a core part of what we do at Blackstone.
It is absolutely the right thing for
us to be doing as a firm for society, for the military people. We want to create opportunities for them because if we can help people regain their lives when they come back to civilian
Recruitment at Hilton Worldwide.
I can't think of a better fit. We're really looking for folks who are used to managing diverse teams, who are disciplined. I mean, the training and the things that they've been through and their current work environment in the military has really far prepared them for what they'll face with us. And so we really feel like that just made great employees.
That's what's motivating us. It's just sort of simple. It's a thank you. It's doing something that's right for people who give up major parts of their lives. It's helping people reenter.
And it's I don't see an option of not doing this type of thing.
Please welcome Steve Schwarzman, Chairman, CEO and Co Founder of Black Stone and Mario Giannini, CEO of Hamilton Lane.
Well, thank you, and thank you to Joan for running that video. It's a really important program we're doing at the firm San Diego's running it. And we didn't update that. We've now hired, I guess, around 10,500 people in 11 months. So we'll do better than 50,000 veterans with our companies.
It's good for the companies and it's good for the veterans. And so it's just part of what we do here at Blackstone. I wanted to introduce Mario Giannini. For all of you who are out there, we're used to drinking out of a fire hose at Blackstone, but the blizzard of information that's coming at you at least will slow it down a tiny bit, and we don't have all those slides. And I think it's important that you meet Mario.
I met Mario, it's either 1991 or 92, small consulting firm they were just starting called Hamilton Lane in Philadelphia. I'm from Philadelphia, and we were marketing our 2nd fund. And Mario is a consultant. He'll tell you exactly what that does in the alternative investing area. But because I'm from Philadelphia, I knew what street they were on.
They had some addresses, as I was telling Mario, on Broad Street and I kept looking for the building. And of course, it wasn't fair because they were just starting their business. So whenever you're really in trouble as an entrepreneurial business, it's you go into some building that looks like it's on a real street, but it's actually in the crappy side street. And so I managed to find it and went up. I don't know whether it was 8 stories and there were like 7 different places.
And they were the gatekeeper for CalPERS, which was a really important thing for us as a firm. And there were like 4 guys at a card table. And I walked in and I said, what am I doing here? Fast forward about 22 years, and I believe that Hamilton Lane is the largest advisor to institutional investors for investing in the private equity area as well as other areas. They're currently around 3 times the size of anybody else.
They have somewhere around $160,000,000,000 the term is under advisement in terms of what who they should give money to in our world. So I think it's really important that you understand you've had the investment side, and you'll have more of the investment side. But who's providing the money to us? You'll hear a little bit from Brendan Boyle on the retail side, but the vast majority of the money comes from the institutional side. So what I want to do is have Mario talk to you about that because he knows these people.
He knows what they think. He and some of his competitors are the people in the room. We sort of visit the room. We display our wares and somebody says yes or no, but he's the wizard behind the curtain. So with that as
a And you know that you never want to hear the wizard speak. And so this is very dangerous here. The world I live in, the institutional world is really composed today. You can think of it as a couple of parts. And just for some frame of reference, our clients will put out in the private market space, we'll talk a little bit about that, dollars 15,000,000,000 $20,000,000,000 $25,000,000,000 a year.
So it's a significant amount of capital that flows into that market. And when you think about that, there are 2 big classes of it. 1 is pension funds, and particularly here in the United States, you hear a lot about the issues around pension funds, but also sovereign wealth funds becoming a much bigger player in that sphere. And at the end of the day, you need to think about it as a very simple math problem. Most of these institutions need to get 7% or 8%, 8.5%, pick your number percent a year return.
That's what they're aiming for. If they don't do that, then that's where you read all the problems underfunding. If they don't do that in many of the countries where they have sovereign wealth funds, you have issues that are far bigger than some of the issues pension funds face. So it's a math problem. What they do is they divide the assets into equity, which you all know public equity and debt.
And again, go back, this is not the problem in math you had where someone's going 50 miles an hour this way and 100 miles an hour and where do they meet. It's simple. If equity gives you 10 on average and bonds and debt gives you 2 and you're running a portfolio of 2 thirds, 1 third, which is what most of them do, you're not making 8% today. It's as simple as that. So what do you have to do?
You have to go into alternatives. And you do that now, and you know with Blackstone, both on the debt side and the equity side, including real estate alternatives, because you're going to get more than 8% and you're going to blend that in. And again, doing the math, you can see that there's an increasing desire to put more in alternatives simply because you are going to have a greater likelihood of getting over that 8%. It's really that is the simplest way to look at it. Added to that and why this business is growing so well is private equity has in fact delivered that return.
Private debt has delivered better returns than any other form of debt. The hedge side has actually done it too. And so when you combine that, you have this enormous amount of capital that is looking for the higher return in an asset class, I'm calling it an asset class in terms of all of the things that Blackstone, for example, does, that has proven itself able to deliver that return. That's the very simple math and driver around what's happening in the institutional investing world. And it's why you have seen really private equity in particular, become an established part of the capital markets.
There's money going in. People know there's money in it. And so they use it as a capital market solution. So Mario, if you
look 10 years ago, from the kind of capital pools you represent, what would be the amount of money in private equity, in broader alternatives as a percentage of their portfolios? And what
is it now? What you used to have, and I'll dismiss the outliers, what you used to have is people would be around 3 to 5 in private equity and maybe around 5 in real estate. Hedge funds, it really varied quite a bit, but for many institutions, they weren't even in hedge funds. And private debt, and this is really important in terms of particularly looking at Blackstone, private debt really hardly existed at all, because everyone was fine with the bond market and they just didn't really think about it that way. Now fast forward, you have everyone that sort of looks at 5% as your minimum.
You don't want to be below that because it's noise on the private equity side. And you have institutions, I would say now it is trending towards the 8% to 10% on private equity. It's going back to that level for real estate. And now it is actually moving into the 5% range for private debt. So you can see that the proportion of portfolios has, in many cases, doubled in terms of allocations into the private markets.
So if you look at that being where we are today, what's the reasonable expectation of what you think the growth ought to be as a percentage of portfolio looking out 3 to 5 years? And what are your investors telling you?
Well, I think you have to look at it in 2 ways. What our investors are telling us is, number 1, one of the great things that happened to private equity, and now you're going to hear how bizarre we are as human beings. The downturn of 'eight was one of the best things that happened for private markets. And I know you're all going, this guy's on drugs. Here's the reason why.
What happened in that downturn is private equity in particular, among all the asset classes, did what it was supposed to do. And people got very comfortable with it. Private debt developed as an asset class out of that. And so what you have now is a background of people saying, I'm really comfortable with this asset class in a way I wasn't in 2000, 2000 and 1. And so I am now comfortable moving it up.
And so what you're seeing is, you're seeing people ratchet up their allocation to private equity. I think it will continue to ratchet up closer to the double digit number, including private debt, which I think will increase as a number. Let me mention one thing because I get a lot of press about institutions like CalPERS. You see some institutions that are moving back their allocation to private equity. And so everyone goes, asset class is terrible, people want out.
What's happened is, we LPs, who are normally sort of the lowest common denominator in the investing world have gotten smarter. What we are saying is CalPERS or Washington or some of the ones that have huge allocations, they're saying, I am not going to force the money into the asset class. To meet my allocation target, I'm going to have to go from $5,000,000,000 a year, that's the level we're talking about, to 10. I'd rather go from $5,000,000,000 to $6,000,000,000 So when you read these things, what you're seeing is people are increasing. They're just not chasing a target.
And so I fully expect that the institutions I deal with will continue to increase the allocation. And the other part, you know this really well, The other part people cannot lose sight of is if a U. S. Institution goes from 10 to 12, that's a significant number. You have outside of the United States massive institutions that are going from 0 to something.
And those amounts of capital, I was in a discussion 2 weeks ago with an institution that was sitting there saying, I'm not sure whether my maiden allocation should get me to $100,000,000,000 That seems like too much, doesn't it? Maybe I should think about $50,000,000,000 This is the first time this institution is going to invest in the private markets. That's the sort of capital flow you're dealing with today in those capital markets. And what's going to change that? Okay.
So that institution maybe does 40 instead of 50. Is that really going to move the needle in terms of the potential future for private market sorts of assets?
So we're talking about just percentages here, but the pie itself grows. Yes. So we decided to have a pie discussion, but they're making bigger and bigger pies. So it's like going from one of these little pizza things to like the extra big pizza. And so when you compound a whole portfolio at 8% to 10%, if that's certainly in a lot of the sovereign funds, they're going to jump in money in it.
So that's happening with no appreciation.
Yes. Those sovereign funds, you talk to some of them. And if the markets do nothing, 0, they will grow in numbers that, I mean, frankly, dwarf some of the largest U. S. Institutions that are investing are European.
So do
institutions today, Mario, make their decision of who they're going to give money to? In the olden days, it was almost like everybody who walked in, it was going to like Las Vegas. They just sort of threw some cards on the table and had a variety of odd outcomes. What's going on?
I'd love to say it was more rational than that. And I should be sitting here going, it's totally rational. It's somewhat more rational. I mean, I've always said one of the amazing things about private equity in particular, but this is probably true about all the private market asset classes is everyone that walks into our door is a top quartile manager. It's a statistical anomaly.
All 500 of them are top quartile. And so as investors, again, you got to look at that and say that even I know that can't be true, not being a statistician. But what is odd about the private markets, and I think this is an important thing because it lends to, frankly, why Blackstone has succeeded so well is unlike in the public markets where track record I think is 95% of what you're looking at. In the private markets, track record is important, but it is not the sole critical determinant because track record matters. But remember, we're locking up our assets for a long time.
And so brand matters, reputation matters, relationships matter. And as you look at those kinds of institutions that have to put in huge amounts of capital, if I'm let me go back to the one that's putting in $50,000,000,000 in the private markets, it's not going to make $5,000,000 $100,000,000 investments or whatever the math works out to be. It wants to concentrate those assets with managers that can take a fair amount of capital. And fair amount for these purposes are 1,000,000,000 of dollars. And so again, track record matters, but so does the platform, so does, as I said, the reputation of the firm.
If you're a sovereign wealth fund in Country X, you're not going to give the money to Mario's buyout firm just because I came in and said, I've done 3 really good deals and I bet I can do 3 more. It just doesn't work that way. You're committing your capital for far too long and there's a risk of that not being able to get out. So I think those factors are all involved in how you select someone.
So what we're seeing and you should share with us is that institutions are increasing their concentration with very few managers. They're lowering the number of managers in the absolute that they're giving money to. And they're also giving money to managers that can do things across asset classes to the extent they've had a good increasing to the asset class of alternatives. So in a way, it's pretty much of a perfect storm.
Yes. I think, again, think of yourself as the institution. Think of yourself as me or our client. Try not to. Don't think yourself as me.
Think yourself as our clients. They have a lot of money to put out. And what they have learned is it's not like public equity where you pick 100 managers and that's how you diversify. When I put my money with Blackstone, I have I'll use the private equity fund. I have 20, 30, 40 companies underlying that.
That's my diversification. I don't need 100 managers. I need 10 managers. And again, this is a young asset class on the private equity side. It's 20 years old.
It has taken the asset class that long, I think, to learn that concentration is a different animal in the private markets than it is in public equity. It's not like having one stock. It is like having 25 companies here. If you're in GSO, it's like having, I don't know, hundreds of different debt positions. You have your diversification around that.
And so I think that has really driven this trend towards, frankly, the big global branded funds that are able to do that. There are just not it's monopoly is the
wrong word. I guess I'm
not supposed to say that. It is a small number of funds that can do that and do that well. And it is very hard to break into that group.
So Mary, when you take an asset class, for example, and one of the things that we get asked by investors is the sort of like anybody could do this stuff. I mean, real estate, they're just buildings. So anybody could go into this. And you guys do very well. You're the biggest in the world, but Brand X can just sort of hire sort of a few people and institutions receive them well.
And there's the concept, I believe it's called white space. And they'll just do amazingly well raising money. What's going on, on the other side with that?
In terms of believing that anyone can do it well, there is. I mean, I'm not going to lie. There is an under appreciation of how much work goes into having a good investment track record. I think people like us believe once you buy the company, it's just magical. Something happens and then all of a sudden you have a 2 or 3x.
And I'll tell you why we believe that, because there are some groups that have done it for 20 years. And so how hard can it be? I mean, my God, they call me, they give me a capital call, and then 2 years later, I've got this great return. I bet I could do this and even if I don't get 2x, I'll get 1.5x, I'll be happy. Fortunately, there is some sanity in this asset class And what people have seen is there is some continuity.
There is some persistence. There are some groups that have been able to do it through cycles, that have been able to do it with increasing sizes of funds of platforms. And so you have and again, the virtue of what happened in 'eight, 'nine, and you know this on the real estate side. I mean, I had someone tell me the other day that given that the Blackstone Real Estate Fund was one of the few funds that actually maneuvered through the downturn, Blackstone has sucked the air out of the real estate industry. That was the term that was used.
And so again, we're not the smartest people in the world, but we see things over and over and we go, I see a pattern here. And you have that view of, yes, maybe anyone can do it, but maybe no one or not everyone can do it as well. And you are beginning to have some haves and have nots in terms of who my world gives capital to out there. And that is something we have not seen before. I mean, I think you're right.
10 years ago, I could tell a great story and I could convince a good part of the market to give me a fair amount of capital. That time is gone. And you really have to show something now and that winnows out the winners and losers, which I think for everybody is a good thing.
Just a final question, because we're on some kind of time clock apparently. How is Blackstone positioned in that world that you live in?
Well, as I said, I think there are a few things in terms of Blackstone's positioning. 1, if you look at each of the market segments in which Blackstone operates, you're the market leader, which is a fairly unique position in this world. The second thing is that it's what I said before, the number of large firms, your competitive set is very limited. The bad news is they're good. The good news is it's limited.
And the concept of another firm creating a platform of this size and scale anytime soon is remote. I mean, I know everyone's going to yell at me that's not in this room that isn't Blackstone and say that's insane. We've seen it. We've watched it. It's very hard at this point.
And so if you're a large institution and you're thinking of an allocation around the private markets, you need scale. And there's not a lot of scale out there across these asset classes with quality. And so from that perspective, it is I had someone say to me that, again, because remember, private markets are very young. We're talking about 20 some odd years. Know I'll finish in a minute.
I know they want me off. I can see the red there. But here's the thing. Somebody said to me, think about the private markets asset classes and the Blackstones of the world as the investment banks of some years ago. How many new Goldman Sachs or Morgan Stanley's could you create?
And I'm not suggesting this is where they're going to end up. But when you think about what has been created, when you think about how young and growing the background behind some of these firms and Blackstone is and where you think about Blackstone's positioning in it, that's there's a lot of trends pushing your way. Well,
what I can say just anecdotally and then we got to wrap it up is in the olden days, when Mario was just starting in business and we were doing our 2nd fund, if you got a $5,000,000 or $10,000,000 commitment from an institution, You thought that was like a good day. That was worth flying across the United States for. You didn't go to Europe then for 5 they weren't sort of in the game so much. And now we have individual LPs who can give us a $500,000,000 or $1,000,000,000 In fact, we had one of our businesses or somebody came in with $0.75 billion and we turned them down because the fund was already subscribed. This is like a completely different sense of scale.
And I can guess who that 40 $1,000,000,000 to $50,000,000,000 player is or $100,000,000,000 or whatever there is they were going to be. And in a practical sense, people like us can take really large amounts of money and put it out across what we do and deliver these kind of results. And that's like a real differentiator. And I want to just thank Mario for coming by. It's not easy.
He's got a full life. He's flying to Asia tomorrow for a day. One of the things about people in finance, you don't get successful by not working hard. And the people in this room work hard. Mario and his partners work really hard.
Our people at Blackstone play their hearts out. We work really hard. Success is not easy. But to start with like 4 or 5 people, now you've got a few 100 and with a global presence, which you've developed, is really a testament to great judgment, hard work and being nice. Do not underestimate being nice in finance.
You don't have to be a nasty piece of work to be successful in finance. So Mario, thank thank you.
Steve, if we
could actually open it up to the audience for a couple of questions.
Yes, if you would. That would be great.
Thank you. Mario, what's
I was wondering if
you could provide some perspective on the corporate pension plan market, especially with the rising funding status as of many pension plans last year. How do you think alts fits in there and especially versus LDI? Do you think low rates in the public debt markets really makes LDI a nonstarter now?
Well, I think what you've seen, the proportion the percentage of participation, if you will, by corporate pension plans in the private markets has gone down. And I think that will continue to go down, not because they don't like private assets. They were the first ones in it and it had a great performance. I remember our first corporate client said to us that it's a little bit like Blackstone stock, if you will. He said the way he viewed his private equity portfolio since it had been mature and out there for a long time was almost like a bond substitute in the sense of there was a steady stream of distributions coming out all the time.
Carry sometimes went up or down, but it just kept coming out to him. But the reality is corporate pension plans want to derisk illiquids, which is more what they're worried about than any risk return thing. It's the illiquidity of this particular side of the asset ledger. They'll go down in the number, but you see the participation more than made up by others coming into the market. So I don't expect that trend in that specific sector of the market to change on the private equity, real estate, that side.
Hedge fund, different, I think.
Okay. Thanks so much. Bill Katz from Citi. Appreciate the conversation. Two part question.
You mentioned allocations continue to go up to alternatives. I'm curious where is the money coming from? Is it coming from smaller players within the segment? Or is it coming from outside into other manufacturers, mutual funds, etcetera? And then secondly, what's the pricing dynamic these days since the assets or pools of assets are getting larger?
Are there price concessions being given to get those assets?
Yes. The 2 part. The allocation is coming from it's not coming from, as I said, when the allocation goes up within an institutional framework, generally, it is coming from the private equity, the public equity side, for private debt from the fixed income side. So it's coming it's a reallocation, if you will, from the more liquid sides of the asset class. The second part of the question in terms of which specific sorry,
what price pressure?
There is price pressure, I think, far less, I think, than there was 3 or 4 years ago when the fundraising market was more difficult. But I think what let me do the price pressure on 2 parts. Number 1, there is a little bit of pressure on the fees, but you're talking about really increments. So a difference of an eighth or a quarter. And it is generally, I mean, to Steve's credit, they're not dumb.
They will say, I'll give you a quarter less for 50% more money. And we go, cool, I get a quarter less, we give you the money. So the math works out pretty well. And there's no I have seen no change in the carried infrastructure, none. That has not moved at all.
And I haven't seen it move in 25 years really.
Yes. I wonder everybody kind of lumps alternates and alts into one category. And if you just put it into 2 big buckets, private versus liquid hedge funds? And how do you see the ability to create value? And how much of the benefit from alternates is driven by the private public arbitrage and the ability to own and transform the assets versus just the good investing?
And related to that, how do you look at the ability to of liquid hedge funds to generate value? And if you had to rank the proportion of how much value is created by the private side versus the liquid side, how would you look at that?
Okay. There's a lot in there. Let me try to break some of it down. I will deal more with the private side because while we do some liquid, that is not I would not pretend to be the expert on that, that I'm pretending to be on the private side. So I think that on the liquid side, let me move that aside.
On the private side, what's interesting is the question you asked in terms of how much is arbitrage, how much is operating. We do a fair amount of analysis on where the return, where the value comes from. And there's sort of a, I believe, a misnomer that private equity just gets its return either from arbitrage or from leverage. Most of particularly with the quality groups, like Blackstone, when we run the numbers, most of the return is coming from operational improvements. Some of that does get reflected in an arbitrage, but it's not arbitrage.
If you have a company that is pretty lousy and you pay 6 and then it's really good and you get 8 for it on exit, I'd argue that's not an arbitrage. And so we do some analysis of where it's just the markets have gone up or where and you see the quality groups are running 75%, 80% in terms of operational improvements. Some of it is they're really good financial engineers. I don't think that should be a dirty word either. I think if you look at why some of the companies did so well in the 'eight, 'nine downturn, a lot of it was financial engineering.
I get that it was operating, but the use the way they maneuvered balance sheets, the way they maneuvered debt structures was better than anyone else in the world did it in the 'eight, 'nine downturn. So again, the long winded answer, as you see most of them are long winded when you're up here with me, but it is that we see a lot of I'm not going to use alpha. We see a lot of the performance generated by things that are done at the operating level at the companies and not by buying cheap. That's certainly an element, but a lot of times they buy cheap because the companies just aren't run as well as
they're going to be. This should be the last question because we're going to eat into other time.
Okay, great. Can you there's been a lot of talk about scrutiny of fees from a regulatory perspective and private equity. Can you give us a view on some of the larger firms, what you see from them providing in terms of transparency, reporting?
Do you think there needs
to be more investment made and maybe how Blackstone stacks up?
Yes. The best. I mean, I think one of the things and why scale is important and why brand and reputation, it was that issue I went to is, I think the larger firms, both because they have more resources, because this has been an item of interest for them for a fairly long time relative to the rest of the industry, have been at the forefront of disclosure. I think the SEC has really hammered in on what is the disclosure? Are we as investors being told what is going on?
Where are the fees going? And so I would say that the larger firms, by and large, not all of them, but certainly Blackstone, the amount of disclosure you've received, the amount of deallocation, all of those things you've seen in the press, I it has been fine. I mean, I think investors have been very happy with it. It has been driven by Blackstone. And also, I think, when you look at one of the things that is important to think about the LPs like us, not us maybe, but the institutional investors, they're pretty large and sophisticated too.
They have been driving for more disclosure. They have been driving for more transparency. That has been a huge part of what people have wanted in this asset class. And so you have this sort of perfect marriage of big institution like Blackstone that is trying to be cutting edge and please big institutions that want more transparency and disclosure. And so I think at that point, we're all of the new entrants that they are now looking at going, wait a minute, we need to make sure everybody is state of the art.
And one of the advantages we've had with this is when you go public, you're already subject to all of their scrutiny and compliance stuff and so forth. And part of what's happened recently is that an asset class with thousands of managers has just been dumped into a regulatory format that they had no experience with. And we're very, very far along in that kind of area. Anyhow, we ought to go on to the rest of our presentation. Mario, 10 out of 10.
And it's great to have him here.
Thank you very much. Please welcome David Blitzer, Head of Tactical Opportunities.
Great. Well, thank you very much. It's a pleasure to be here today and talk to you all a little bit about the Blackstone Tactical Opportunities business. I'm going to try to be brief, but I thought I would break this into a couple of short sections, which would be 1, talk to you a little bit about why we actually started this business 2, a little bit about our strategy and how we've sort of been developing various themes across the business and then actually get into couple of specific deals to actually give you a sense what are we actually investing in these days and then open it up for a question or 2. So just to start out, why did we enter this business?
This is one of the more recent new business opportunities that Blackstone has gotten into. And I always start really simply, basic laws of supply and demand. So we were staring at the marketplace towards the back end of 2011. I had recently moved back from about a decade in the European market. And we realized that actually what was happening with both regulatory change, in particular, the Volcker rule, which was basically taking financial institutions and dramatically reducingeliminating their investments off their balance sheets and proprietary investing, etcetera.
And at the same time, we had just been through a financial crisis where many of the hedge funds who had frankly gotten a little bit too far afield in terms of illiquid product we're dramatically pulling back and sticking with their more liquid strategies. So we looked at that and said, wow, the supply of capital for this market really broadly defined as special situations, the demand for that capital was as strong, if not stronger than ever, but actually the supply of that capital was diminishing dramatically. What an interesting place to sort of think about from our perspective. Secondly, we had realized over a long period of time, but it continued to become maybe more acute with the incremental Blackstone businesses and their own growth, etcetera. But we found that we were getting a tremendous amount of deal flow coming into the firm.
And a variety of different areas, coming in through our advisory businesses, it could be coming in through private equity businesses, our real estate businesses, our credit businesses, our hedge fund solutions businesses, but they actually didn't have a home. Amount of deal flow that comes in due to the brand, the relationships, and our depth in all of these different markets and they're actually not finding a particular home. And then lastly and most importantly, as we do with everything at Blackstone, we said, well, can we do this better than everybody else? What is it that we have at Blackstone? And basically, when you think about it, we talked a little bit about brand earlier.
We talked about the incredible focus on risk, on evaluating return. We talk about the depth that we have across all of our platforms. So whether it's again credit, whether it's the hedge fund solution side, whether it's private equity, whether it's real estate debt, real estate equity, we have this unbelievable set of businesses that are incredibly deep. They're deep in their knowledge base by industry, by subcategory, by asset class. They are deep in their data.
We mine the data very, very aggressively across our asset classes and our companies. And we obviously do a tremendous amount of research across all of these different areas. So when we looked at that, we said, wow, we have a deal flow, we have the supply demand imbalance. And most importantly, we have this amazing set of intellectual capital that floats around this institution and we can utilize that to create a new business and deliver something very special to our clients. And then lastly, to have a new business, you actually need some clients that are really excited about that business.
And I think again, we're blessed a bit at Blackstone with incredibly deep and substantive relationships from very large capital pools across the globe. And we went out and actually talked to many of our closest relationships, described what we were seeing in the markets, described the idea behind this business and look for their support as we started in the Blackstone Tactical Opportunities business. So we started the business early on in 2012. We had terrific support for many of our long standing relationships. But interestingly, over the course of raising some capital for the business, we actually brought in some new relationships to the firm as well, which is always a wonderful thing to see.
So I'd end by just impressing upon you again on this slide that the key is having this incredible depth and diversity across the alternative landscape within Blackstone and to be able to utilize that intellectual capital and that depth to deliver a very high quality product and service to our investors. So what is tac ops in a sense? It's investing across asset classes, capital structures, geographies. We have about the broadest mandate one could imagine. We obviously, our intention is to be extremely opportunistic with our capital.
So opportunities that might be very compelling in the 1st two quarters of 2012 might not be so much in the last two quarters of 2013. Our ability to move nimbly across these different areas is a huge competitive advantage for our firm. Just as an example, when you think about some of our limited partners, I always use this example, I think it's a good one. So we're spending time with one of our early clients and we had been talking about how we were very interested in U. S.
Residential non performing loans. And they said, wow, we completely agree with you. We said, so what would be the dynamic if you just try to invest in a non performing U. S. Residential strategy on your own, absent being part of the tactical opportunities business?
And they said cutting through it, it would take somewhere from 9 to 12 months from having an idea of somewhere that they wanted to invest on a private basis and taking that all the way through an RFP process, consultants, their internal investment committees, choosing their partner and ultimately investing would be in that range of 9 to 12 months, that opportunity might be gone. And in many cases, it actually is gone in a period of time of 3 to 4 quarters out in the marketplace. And we're also taking quite a thematic approach. As you can imagine, I have this wonderful position where I can literally go and sit in any group's meetings, right? So I spend time with all of the other business units.
I'm trying to get into their brains as it relates to what they're seeing in the markets. What are some of their themes that are coming specifically out of the work in the different areas of Blackstone? A good example would be, and again, this point of having to be able to move, we started off in 2012 thinking that shipping would be a really interesting place to look for some capital solutions. We actually made 3 shipping investments during the course of 2012 into early 2013. We're not particularly bullish just generically on shipping.
These were very bespoke situations, but it was obviously a industry that had extreme dislocation of capital. That's a perfect place for us to be in tech ops. Today, we're very happy with what we invested in, but frankly, we don't think shipping is particularly dislocated anymore. There's a tremendous amount of capital that over the past 12 months has launched into that particular sector. It doesn't mean we won't find an interesting transaction again on a very bespoke basis, but it's not an area that we're spending a ton of time focusing on.
And as an example, we've shifted over and we're spending a lot of time on mining, which again is an area that has just extreme dislocation from the standpoint of capital. So we're constantly looking for that edge for that difference where that lack of capital is at a given point in time. As you can imagine, specialty finance broadly defined is extremely important area for us. There are always pockets and the pockets change over time. They change by asset class, geography, risk level, place in the capital structure.
But there's constantly new areas where there's just a complete, again, supply demand imbalance of capital. Our goal is to find those areas to put out the capital at very attractive risk adjusted returns and deliver. Over time, we actually expect that those anomalies will go away and then you go from being a buyer to a holder and eventually a seller in those areas. We talked a bit about the flexible nature. Again, we view ourselves and people say this all the time, but you can imagine with the mandate that we have in terms of its breadth, we are really a solutions provider.
A good example in one of our shipping deals would be a few of our competitors were trying to buy a particular company in the LPG space. And we just took a totally different approach, because we knew that it was a family owned company and they actually did not want to actually sell the entire company. We went to them with a completely different solution, which was we're going to provide you capital for growth. It's going to effectively be a fixed income instrument, but it's going to have a convertibility feature and that convertibility though will be into a minority stake in your company. So things work out really well with this particular business.
We will convert to equity and generate 20 plus percent returns. And if we're wrong, which is possible, I certainly hope not, we will be senior to a tremendous amount of equity in the capital structure where we'll generate a very attractive fixed income return for our investors. So that type of a hybrid approach and a solutions provider rather than just purely we want to buy X or Y has served us extremely well. Again, I talked a little bit about the breadth of the mandate on risk adjusted returns. We all talk about risk adjusted returns in our business.
However, we're literally looking at things that range from the low double digits all the way up well into the 20s. And of course, that is going to fundamentally depend on the underlying risk of a particular situation. So we really live and breathe every day this question of would we rather do that deal, which has less risk in it at a 13% return, we'd rather do this particular transaction at a 21% return. And we're constantly mining that. And what I meant to mention earlier on the first page, but I think it's critical for this business is our investment committee.
So we have some we did something unique with PAC ops that we hadn't done before the firm, which was we created an investment committee that goes across our platforms, meaning that it is effectively the people that you just heard speak prior to me today. So John Gray, Joe Barata, Bennett Goodman, Steve and Tony, of course, and we all meet every single Monday to go through our pipeline and particular transactions that we're looking to approve from a capital commitment perspective. That is an amazing asset for myself and my group. It's amazing asset as you can imagine for our clients to have that group of people in there, again, constantly thinking about things from a different perspective. John might come at something from a sort of more real estate oriented perspective.
He looks at shipping as a bunch of metal that's just appreciating in the water. Joe Barata might look at that same investment from a slightly different perspective of what we can do to improve that shipping company and what resource we can bring to bear for Blackstone, etcetera. So I feel that being able to have that sort of diversity and that frankly kind of depth, both in our investment committee and that incredible presence, but also taking that down throughout the firm, we work with other people across the firm on a daily basis. So we're always going to where the most knowledge is based. So if we're looking at something that's real asset oriented, we'll oftentimes be spending time with our real estate folks, with obviously people from GSO, people from private equity, people from our hedge fund area, our restructuring area.
It's really a wonderful dynamic from, again, our perspective and really leveraging the firm and leveraging those assets that are going up and down the elevators every single day. I'm going to move quickly through this, which is basically we tried to just put a sense up of here are some of the traditional alternative investment categories and here are some of the investments that we've made that fall outside of those traditional mandates. Without going into too much detail, but just to give you a sense on some specific deals, non performing loans, we're one of the largest buyers of U. S. Residential non performing loans and reperforming loans actually.
Think about that from an intellectual and data perspective. Our real estate group is the largest owner of single family homes in the country. When we go to bid on mortgages coming out of the financial institutions, we have all of that data by zip code from our real estate group and they share that data with us. And so we'll crack a tape on a set of non performing loans and we'll play it out by zip code and there will never be 100% match, but maybe half the portfolio will have incredibly detailed information on that market on every specific home that's traded. And most importantly, what is our view at Blackstone based on deep research and experience of what's likely to be the housing price assumption in that particular local market?
So again, we're constantly trying to have a total differentiated edge relative to anybody else we're competing within the marketplace. Regulatory capital, I might have mentioned earlier, we think this is still a quite an interesting area where we're effectively taking on risk of a financial institution. And they are able to free up reg capital for a variety of reasons that we're all quite aware of. So we did a transaction about a year ago in that space where we took a 12% first loss position in a portfolio of over $1,000,000,000 worth of loans. We utilized GSO, our advisory business and our private equity business, all who knew some of the companies that we were actually writing the underlying insurance on.
And it was a wonderful way again to bring the firm together and get significantly better knowledge than anybody else in the market across the portfolio of maybe 36, 37 credits. We're a large investor in ground leases under cell towers. Again, we were one of the largest owners of cell towers in the country to our private equity group over the years. So again, that knowledge base to be able to go into the ground lease business was fantastic. We're bullish on spectrum.
So one of the ways that we decided to play the complete against supply demand imbalance in U. S. Spectrum is we're buying TV stations. And we're not buying TV stations for cash flow value, we're buying television stations for spectrum value. And I could go on and on, but I am running out of time.
So I am going to conclude by just saying, we're early in the business. We've been operating for a little over 2 years. We've raised over $5,500,000,000 of capital, again from some of our largest and deepest relationships at the firm in very large scale. We're going to likely launch our second version of TechOps 2 later on in 2014. We've committed over $3,000,000,000 of capital in about 30 transactions to date over that period of time.
And we've been generating to date through last quarter about 18% gross returns. So I'll conclude by saying, we're very happy with the business. It works extremely well around the firm. We have a completely differentiating, let's call it product to our investor group. And most importantly, we don't believe that others could actually replicate this product and certainly can't replicate it in the sense of the substance and the depth of how we're doing it here at Blackstone, again, given all of the platforms that we have.
So thank you very much.
David, let's just open it up to one question, if we could.
Thanks. Rob Lee at KBW. This is a multiple part question, but can you give us a sense of I want to be clear, how much of what proportion of your investments do you originate versus are originated in one of the other businesses that make their way to you? And then secondly, to the extent they're originated somewhere else, how do you actually deal with the allocation of the capital among whether it's a GSO product, an SMA and tech ops? And then I guess the last thing, if it is originated somewhere else and you underwrite it and you turn it down, what is the implication for
the other business? Sure. Let me try to take those briefly. So about 35%, so think about it as 2 thirds, 1 thirds, about a third of our investments have come from other areas of the firm, calling us up in tac ops and saying, we think this is really interesting, doesn't fit our particular mandate and about 2 thirds has come from our team doing what you would expect our team to do out in the marketplace. More than that you could argue comes from maybe some of the intellectual capital and just the themes like we were very bullish on U.
S. Residential. Well, a lot of being very bullish on U. S. Residential obviously came from the real estate group at Blackstone, but in terms of specific deals.
Secondly, we don't compete with the other areas of the firm. So if there is a transaction, whether it is generated by somebody in my group or even your example of somebody else in the group coming over to us, if it fits into one of our other core traditional mandates, it goes to them. So we're not sitting around competing in the marketplace in any way with the other areas of the
firm. Last question.
Can you do deals in tactical ops that would make a deal that doesn't otherwise fit areas of the firm fit them, so you take a piece that once you've taken it, it fits other areas?
Again, sometimes the question of whether something fits in another particular group is in the eye of that particular group. Sometimes it's very clear, right? Every once in a while, of course, it can be debatable for that group head, let's say, as an example. So we have done a few things where we've made investments, and there's been another area at the firm that is co invested in that particular area. But again, that's always done, always discussed and I'll just give you one example.
We bought a bunch of CLO equity in early 2012 when the CLO equity market was sort of completely mispriced. And we went to GSO and said, so what do you think about this? We think it's really mispriced. And GSO said, yes, we agree with you. We ended up making an investment in equity out of the Lehman estate of a CLO that GSO was actually the manager of.
So GSO took a piece of that transaction, we took a piece of transaction and I think we're all very happy with that. So it's a discussion at the point you've described with really the other areas, but we don't see it too often. Thank you, David. I'm going to pack up and thank you very much.
Please welcome Vern Perry, Co Head of Strategic Partners.
Good morning. I'm going to walk you through the overview for strategic partners. As Tony mentioned earlier, our business was acquired by from Credit Suisse in August of 2013. As you know, we are a secondary buyer. What does that mean?
We buy secondary aged limited partnership interest in buyout, mezzanine, venture, growth equity, real estate funds as well as other private equity strategies. Our focus has always been on high quality, and we look to close deals in a fair, timely and confidential basis. Why do we do that? 1st, it's the right thing to do for sellers. 2, it's the right thing to do for business.
We've actually garnered a lot of secondary sellers on a repeat basis by treating them fairly. We have a dedicated team of 31 investment professionals located in New York, London and San Francisco. In addition to our investment team, we have 20 accounting, finance and technology professionals. The team is extremely stable. So if you were to look at the 7 most senior professionals on our team, which make up our investment committee, we've been together on average 13 years.
In terms of our focus, very consistent. We do deals as small as $100,000 as large as $1,000,000,000 But our focus is always on high quality funds that have the opportunity to appreciate and return near term distributions. We look to minimize risk when we buy into portfolios. In terms of our track record, we've closed more secondary deals than anyone. It's 800 and counting.
Just to put that into perspective, since our inception in 2000, we closed one new transaction on average, one every 6 calendar days. Now the transaction closed in August of 2013 and as busy as we thought we were, we now close one every 5 business days. It's a lot of deal flow. So to put that in context, 800 transactions, what does that mean? It's somewhere around 2 to 3 times most of our competitors.
So we're very in tune with the markets, the sellers and pricing. In terms of our returns across our funds 1 through 5 from inception through December 31, 2013, we've generated 20 gross, 17 net. This slide gives you a sense of the evolution of our business. Since inception, we've raised $14,000,000,000 in commitments. If you look at the left of the slide, you can see our LBO centric business starting with our Fund 1, which is a 2,001 vintage fund.
We raised $832,000,000 Also in that blue box, you can see our net returns. So for Fund 1, we're currently at an 18% net IRR through December 31, 2013. You can see the progression in growth of our LBO centric business for Fund 2,2003 Vintage Fund as well as Fund 3, 4 and 5. We're currently raising our latest secondary fund. Now in addition to our flagship LBO centric business, we also manage venture capital only secondaries funds.
We also manage an overage fund. And that allows some of our larger LPs to co invest alongside of us in secondary transactions. In addition to that, we manage real estate only secondary funds where we buy opportunistic and value added real estate funds. Just to give you a sense of some of the advantages of secondary investing, what we typically like to do is compare ourselves to primary fund to funds. And there are several metrics here that I'll discuss.
1st, assets acquired. We typically buy funds that are on average 75% to 85% funded. We don't like blind pool risk. Certainly, we like to be able to perform fundamental bottoms up analysis on those companies. So by mitigating that blind pool risk, we know exactly what we're getting exposure to.
2nd, year of acquisition, typically years 3, 3, 7. The advantage of that is it mitigates the J curve, you're closer to ultimate exit, so it provides near term liquidity. But there's another advantage to that. We like to see who the winners and losers are in a portfolio before we buy in. Interestingly enough, by years 34, many times losers have revealed themselves.
As painful as it is, we don't like that. We don't want to lose money. And so whether a company has already been written off completely or it's trending negatively, we can attribute 0 or very low values to those assets that we don't think are going to make it. Finally, cost of investment. We're typically at a discount.
In fact, across the life of our business, our discount is 15%. But just keep in mind that discount doesn't drive the attractiveness of the deal. It's a data point. It's an output. It's not an input.
But just to give you the data point, it's typically a 15% across the life of our business. And then return of capital, years 0 through 7. It's not unusual for us to close a transaction and then get a distribution the next month, literally. So unlike most private equity strategies, our funds begin making distributions almost immediately. In fact, many investors view secondaries as a yield like product.
And then finally, diversification. We can diversify by sector, vintage year, manager, geography. If we don't like a particular sector, we won't buy it. So we can see how the portfolio is performing. If we like it, we buy it at a fair price.
If we don't like that particular sector or geography or manager, by the way, we're just not going to buy it. We don't compromise on quality. We don't compromise on price. It's pretty simple in our view. Like any market, the secondary market is driven in large part by supply and demand.
So we have here 2 slides. The slide on the left speaks to supply. The slide on the right speaks to demand. So let's just talk about supply here. These bars on the slide to the left represent primary dollars raised to pursue private equity strategies from 1991 to 2013.
If you look below the bars, there's a sort of a shaded box that represents in 1,000,000,000 of U. S. Dollars the amount of secondary deals executed globally. So the year we were founded at DLJ in 2000, there were $3,000,000,000 of secondary deals executed globally. Last year, that number had grown to $28,000,000,000 so a ninefold increase in 13 years.
What's more telling is, in 2000, roughly 1 half of 1 percent of all unrealized private equity assets sold in the secondary market. That number now as of last year is about 1.5% to 2%. So yes, it's grown, but I would argue that, that penetration rate is extremely low, 1.5% to 2%, there's significant room to grow from there. Where it ultimately goes, it's unclear, but I would argue it's going up. If you look at the chart to the right, that speaks to demand.
So how much demand is out there chasing the supply or pursuing the supply? So these charts show the beginning of 2010 through the beginning of 2014. That's the dry powder unfunded commitments pursuing this strategy. So at the beginning of 2014, there's about $45,000,000,000 of unfunded commitments and that's all of our competitors, that's strategic partners and all of our traditional competitors in the space. Now if I were you, what I would do is I'd add $10,000,000,000 to that to account for nontraditional secondary buyers.
Who would that be? That could be a sovereign wealth fund. It could be a public pension plan. It could be a primary fund of funds who will do secondaries on occasion opportunistically. If you look at that in total, it's about $55,000,000,000 of dry powder.
Now keep in mind that number is typically invested over 4 years. So what that means is you only need about $14,000,000,000 of supply per year to be imbalanced. This year, 2014, we expect another record year, roughly $30,000,000,000 of supply. So said another way, there's enough demand to meet only 2 years of supply. So you may say to yourself, well, there's certainly going to be new secondary funds raised this year.
That's true, but that unfunded commitment will be reduced by the $30,000,000,000 of deals that we're going to do this year. So in our view, this market is more than in balance for buyers and we're going to take advantage of these opportunities. What's driving the growth in our market? Why do people sell? There are 3 broad categories for why someone would sell in the secondary market.
The first is active portfolio management. And that could simply be a pension plan reducing relationships or locking in gains. As you all know, this is an illiquid long term asset class. Should an investor want to get out or need to get out, they realize they can get out and many investors are now starting to actively manage their portfolios. What's beautiful about that is they're programmatic sellers.
They're not one time sellers and they're out. They'll never sell again. What they're doing is they're actively involved in investing in new funds. And on occasion they will sell in the secondary market. So for us, our strategy is if we work with you once, we want to work with you again.
And so programmatic sellers are our best sellers. They come back to us over and over again. 2nd, financial regulatory reform. We can all see that in the form of the Volcker Rule here in the U. S, Basel III and Solvency II in Europe affecting banks and insurance companies.
It's driven a significant amount of deal flow for the last 24 months. We believe it will do so for the next 24 months to 48 months, depending on the extension of the rules for the broker role. Finally, frictional displacement. That's just another way of saying change. It could be a change of CIO.
It's not uncommon for a new CIO to come in, sell off names he or she doesn't like to free up capital to invest in names they do like. It happens all the time. It also could be a liquidity need. But I think I bring that up just to talk about one of the most common misperceptions about the secondary market. And that is that most sellers in the secondary market are driven by distress or liquidity need.
It's absolutely false. Less than 10% of all sellers to our market are driven by liquidity or distress. So what that means is, this is not a point in time strategy. We deal with sellers that are selling year after year after year for various reasons that have nothing to do with macroeconomic shocks to the macroeconomic environment. What's next for us?
Well, we believe there are significant growth opportunities for strategic partners. If you look at what we're doing currently, our key businesses are LBO secondaries, real estate secondaries. We also have early secondaries vehicles. What is an early secondary? That's a secondary that has more blind pool risk.
So they're typically less than 50% funded. So it's not the right fit for our typical core traditional LBO secondaries fund, but there is a need out there and an appetite for early secondaries. They could be as low as 20% funded. And there are a lot of LPs that actually like that to get exposure various managers for various reasons. Going forward, we have several opportunities, including but not limited to infrastructure and real asset secondary.
We're seeing a lot of appetite for that program as well as co investments. We're in 1700 different funds across 700 managers. We have co investment deal flow that others simply can't see. And so we may pursue the co investment vehicles. Also primaries and fund administration on behalf of some of our existing relationships.
At the end of the day, no matter what we do, we're going to leverage our expertise in the Blackstone platform like other businesses that Blackstone have done to launch additional products that are related to our business. So to wrap up, I want to just spend a little bit of time to talk about our keys to success, how we've been able to build a very successful secondaries business. And I think as I talk through this, what I want you to take away from this slide at the end when I'm done is simple, is that the impact Blackstone has had on our business has been both immediate and significant. And I think you'll see that as I talk through this. So on to that, on sourcing, we pride ourselves on our ability to source transactions that others just can't touch either because they don't have the relationships, they don't have the resources or they just don't understand complex structures and they can't execute.
And so we do deals again on a fair tell me and confidential basis with the hope of working with sellers again. I think our best potential seller is a seller we've already worked with. Oftentimes, those deals are done off market on a proprietary basis. They come back to us over and over again. They're not coming back because we overpay.
They're coming back because they like us and they trust us and we treat them fairly. So for example, in 2013, 72% of our deal flow by value was with repeat sellers. That's a huge percentage and we like that. But more importantly, since we've gotten here to Blackstone, Blackstone has sourced $1,200,000,000 of opportunities for us. We weren't expecting that.
We didn't think we needed that. It's absolutely enormous. It's a huge help. We're just a better buyer. If you think about our touch points with sellers and LPs and banks, it's just increased exponentially now being at the Blackstone Group.
In terms of pricing, we believe we are a market leader. Again, we own 1700 funds. Those are in our database. We track those. In addition to the 1700 funds, there are an additional 1,000 funds that we don't own.
So we have a pretty robust database. When you take all of those funds and all of that knowledge in combination with the intellectual capital across Blackstone, it's absolutely remarkable. Now you can certainly use the same models that we have. It's not rocket science. It's effectively a DCF.
What you can't replicate is experience. You can't replicate insight and knowledge in all of these different asset classes, geographies and companies across the capital structure. In terms of closing, we've closed more deals than anyone. We have more touch points and a tremendous amount of knowledge. So in our view, if you can source, close and price effectively, you should have strong performance.
I'll just give you the performance for our Fund 5 funds. Our LBO fund is currently at a 46% net IRR. Our real estate fund is at a 33% net IRR. Our VC fund is at a 65% net IRR. And our overage or co invest fund is at a 51% net IRR.
If you have strong performance, you should be rewarded with AUM, Fundraising. So if you look at fundraising, given the strength of the strategic partners team and our track record, our performance in combination with the breadth and depth of the Blackstone relationships, we will complete fundraising for Fund 6 and roughly half the time as our previous fund for Fund 5. And then finally, people. All great businesses start with people. And I couldn't be more proud of our team.
Very strong investment professionals. We work very hard. But again, good people, that's a theme you'll see run through. There are good people here at Blackstone. We're hungry for growth and we love to win.
So in closing, I can share with you we're in that virtuous cycle that Bennett mentioned earlier and we're growing quickly. We're providing opportunities for our best and brightest to grow and take on new roles and responsibilities. And frankly, I see a very long and positive trajectory from here. So with that, I'll conclude and open up for any questions you may have. This one right here.
Can you talk about the willingness of the GPs to let you transact? Is that increasing? How have you seen that evolve over time? Sure.
With respect to being at Blackstone now, sure. So one of the things that we thought about a great deal when we're going through the acquisition is, will other GPs be bothered or concerned with the fact that we're owned by Blackstone. So we built a very strict information barrier policy. Information can flow in. We don't share any information with other groups, any company level or fund level information.
That's 1. 2, if you think about it, when we were at our previous firm, there were competitors to some of these other groups out there. We've been in the market going on 14 years. People know us. They trust us.
I think finally what's most important is we've physically our ability to transfer funds. So if you think about Blackstone and you think about their core competitors, the vast majority of those we've purchased since August 2. So to put that into context, we've closed 46 transactions. We bought 291 funds across 227 managers. And those managers are in real estate private equity, LBO, energy, mezzanine.
So we're very comfortable with our ability to transfer.
Last question.
Currently, you should be buying funds that are in the 2,005, 2,006, 2,007 vintage. Those have not performed, I'm sure, for the LPs very well. Are you taking or demanding a greater discount? Or are you also expecting a higher rate of return on those? It's a fair question.
For our deals, we target 20 gross, 17 net. So for those 'five, 'six, 'seven, if you look at our Fund V, our weighted average expenditure is 2,005. It's already 8 to 9 years old. We actually like that. The beauty in our strategy is that we didn't take the same ride that the primary investors took.
So when those companies were written off or became impaired, we hadn't bought it yet. We only started buying it 5, 6, 7 years later. And so those companies had already been written down. We're buying some really strong assets at a discount with near term liquidity. We couldn't ask for better.
By the way, those same funds we target 20 gross 17 net. Thank you for your time.
We decided 4 to 5 years ago that we wanted to be the largest factor in the private wealth market in the alternative investment area. Blackstone is quite a good place for people to put money. We operate globally. We operate in all the major asset classes. And our performance is very high over historic periods.
No one else in the alternative business has the range of business types that we're in and we're organized centrally so that we can mine that knowledge. That gives an investor a lot of exposure to different parts of the world, different asset classes and do it in a safe way with a lot of upside.
Please welcome Brendan Boyle.
Hi. 3.5 years ago, we were looking for areas of growth for Blackstone. We were looking to identify those pools of investors who were under allocated to a lot of the good products and services that Blackstone has to offer in the marketplace. And all our research kept on coming back to the same thing. The greatest opportunity for us was in the private wealth space.
So I'm going to cover 3 things today. I'm going to talk about the opportunity. I'm going to talk about how we're executing on the opportunity. And we're going to talk about our results. So let's talk about the opportunity first.
You see a chart there in front of you. In the United States, the average pension plan has about 19.5% of their money allocated into the world of alternatives. Those are hedge funds, private equity, real estate, etcetera. Endowments have even more money. They have about 26% of their money allocated to alternatives.
Private wealth individuals have somewhere between 2% 3% on average. Now to put a finer point on this, if I look at North America and I look at all of the money that's in the asset management world in U. S. And Canada, and I take a look at the institutional side, so pensions, endowments, foundations, outsourced insurance money, that market is about somewhere between $9,000,000,000,000 and ten $1,000,000,000,000 If I take a look at the private wealth side of the ledger, and I look at all the money that's sitting there in banks, private banks, brokerage firms, RIAs, etcetera, that money aggregates to somewhere around $10,000,000,000,000 to $11,000,000,000,000 So not only are individuals under allocated relative to institutions, but the pool of money that we were looking at was actually a bigger pool of money. If I put a finer point on that, if I use as a proxy here the 5 big banks and brokerage firms, the 5 largest ones in the United States, total client assets are somewhere north of $5,000,000,000,000 When we look at their analysts and what their analysts and strategists are recommending in terms of where individuals with $5,000,000 or $10,000,000 or more of money, where they allocate their assets to, what we see across the board is that it ranges somewhere between 5% 20% of their assets, their strategists are saying should be in alternatives.
And yet remarkably, almost no matter where we go, it doesn't matter whether it's a private bank or brokerage firm or whatever, the highest to the lowest, almost invariably, the amount of money that they have invested is somewhere between 2% 3%. So you can do the math as easily as I can. Essentially, when we looked at the opportunity, we saw that for every 1% increase of AUM into the world of alternatives, just from these 5 large players, dollars 50,000,000,000 was in play. And if I extend it further to all the players, it's a bigger number, obviously. So that's great.
That's the opportunity. How do we go about tapping that opportunity? Well, our first and our primary area of channel of distribution has been to partner with those large banks and brokerage firms and we've gotten a really good relationship with these large players. Now, the reason that we went in to do it is quite simply. We looked at them and we figured out that their main area of focus was going to be on growing the ultra high net worth space.
That's where they were zoning in on. And when you go into the ultra high net worth marketplace, you need certain things. Among other things that those investors want are alternatives. I'll give you a good example as to why they want to deal with us. We just finished a fundraise with a huge bank here in North America.
We were doing a drawdown product from our BAM unit. All of our research seemed to indicate that the raise would be somewhere around $150,000,000 to $175,000,000 which is a great success. Actually, what ended up happening is that we ended up getting somewhere around $450,000,000 The punch line to us though, which was more interesting is that when we did the analysis after the fundraise, what we found out is that more than 50% of the money that this bank raised was net new to that bank. Of all the matrices and metrics that these banks use, net new assets is the most valuable thing. So as they are looking to get more into the world of alternatives, what they're looking to do is attract net new assets.
And this is what we have the ability to help them do. Now when we go and raise money into these banks, what we have done as a way of doing this is we've set up a sales service marketing company, classic in the world of asset management. We have salespeople throughout the United States who are experienced in both the world of alternatives and the world of private wealth management. We have a desk in New York, toll free number of very bright young people who also have lots of experience in both alternatives and private wealth. We have people who do product development, training, we do people who do lots of things, right?
I point this out for a very simple reason. These are table stakes of what you need to do to do this right in this business. And I'm not sure any firm but Blackstone could pull this off. And the reason is threefold. You're going to go in and partner with a JPMorgan or a Merrill or a UBS or a Morgan Stanley, you need a big brand name.
People are not going to give you lots of money and have it locked away for a long period of time if they're not comfortable with you. Secondly, if you're going to go out and hire the help that you need to help and salespeople and all these different product people, you need product. As you've heard today and you continue to hear, we have 6 different businesses that are in the asset management business here. We have real estate, private equity, BAM in the hedge fund space. We have real estate, probably GSO.
We have now tactical opportunities and the secondaries business. If all you have out there is an occasional drawdown fund, say, in the GSO credit space or in the PE space, you can't keep your people busy. You can't pull this off. So it's a distinct advantage having Blackstone and the breadth of our products, which we'll show you in a second out there. The third thing you need to be successful at this is you need the will of our branch of our senior management to get this done.
So if you take our brand name, our breadth of products and the focus that our senior management has put on it, it puts us in a very unique place. The final thing that we have done so successfully in penetrating this market though is we've set ourselves up as a training and education focus. So when we went into these firms and we're talking about really a Merrell or Morgan Stanley, not dealing with the 18,000 registered people that they have, but the top 5% to 10% of their very high end, what these people wanted from us more than anything else is training and alternatives. So we came up with this very simple idea called Blackstone U, wherein what we do is we take people who are high end financial advisors, we bring them to our home offices here in New York and we spend 2 days with them. We don't spend 2 days selling to them.
We spend 2 days going with them through all of our businesses, how they work, how we get the returns, how to position alternatives in the marketplace. And I'll tell you, we have a difficult time keeping up with the demand. At the end of the day, people do business with whom they know, like and trust, correct? We've had 1200 financial advisors from the best firms in America come through here and I think we have a pretty good know, like and trust relationship with those people and it's made a huge, huge difference with us. All right.
So we have 3 channels of distribution when it comes to private wealthier. Number 1, the main focus has been with our partner firms. We identified really early on that inherently what we sell to the end investor is a complicated investment and that our end consumer, our clients would be better serviced if there was a trained financial advisor between us and them, guiding them, holding their hand, working with them. So that has been our main focus. Secondly, for those family offices and ultra high net worth individuals who would rather deal directly with us, we have the wherewithal for them to do that.
We've had accounts from anywhere from $250,000,000 to $20,000,000,000 come in to visit with us and spend time with us. And then thirdly, as you've probably heard through the course of the day, in our various businesses, be it GSO or you're about to hear from BAM, there have been advisory and sub advisory relationships that have been out there as well. So what is it we sell? Well, we sell from all of the different product areas here at Blackstone. Most of what we do are the episodic drawdown funds that you're so familiar with, private equity or real estate or whatever.
I can tell you in the 3rd Q4 of this year, there will be 4 of our businesses out raising capital. These are that we know about now. It could grow. We already have homes for all of those products. We are in negotiations or have finished negotiations with our partners who want access to that.
So that's one way that we raise money and that's one of our product sets. Secondly, when you're out there chatting as we are constantly with these distribution partners, opportunities come up. We have had a great opportunity from 1 of the largest asset managers in the country, a real brand name that will go nameless in this room, who has a great friends and family pool of money of over $20,000,000,000 None of it was exposed to alts. We built an alt product specifically for them. That's just one example.
And of course, the other thing that we do is we try to get evergreen product, things that are in the market constantly. So with our BAM and our GSO units, we have created RICs that we can take money in on a regular monthly basis and we are working with GSO, real estate and our hedge fund businesses to create other products that would be out there on a more regular basis. That's all the theory. How has it been in results? Well, in 2010, total sales from the private wealth side of the marketplace for Blackstone were about $2,500,000,000 In 2013, if we aggregate through our partners, through our sub advisory relationships, all the different things that we do, it grew to 7.8 and then in the last 12 months in the quarter ending in March 31, it was 9,300,000,000.
So things have gone well. In terms of market share, when we had these original thoughts back at the end of 2010, Private Wealth represented 8% of the $128,000,000,000 worth of money that Blackstone had on the books. We now represent more than 12% of the $272,000,000,000 that Blackstone has on its books. I spoke about certain things that were working well. We continue to expand the number of relationships with banks, brokerage firms, RIAs that we have.
And in addition to that, we have started to have penetration into Europe and Asia and we're in preliminary discussions with certain banks in South America. So there's great opportunity. There's good areas for growth, and it's been a fun place to be. Anyway, if you don't ask me difficult questions, I'll take 1 or 2.
Kindly raise your hand.
Go right there. Thanks so much. One of the feedback we get from some
of your peers about trying to get into the retail channels that there are some disparate economics of the business versus more of the institutional money. Can you talk about how you're bridging that differential in pricing or economics overall?
Sure. We have not found that it has been particularly onerous on the economics that they're looking for. As a matter of fact, I think in more cases than not, essentially what they're looking for is to tap into our brand in order to get new assets. And so I would say the cost of acquisition for assets for us is probably less than, say, 6 months worth of management fees or something in that neighborhood.
Other questions? Yes.
You hit on the high net worth part of the market. When you look at the retail part of the market, and particularly the retirement, so the 401 channel, and when you think about the shift of defined benefit to defined contribution, Do rules need to change there for the overall industry where there can be allocation still illiquid investments? And is there any progress being made on that front?
So you bring up a good point. Most of the money that Blackstone manages from an institutional point of view is in the defined benefit marketplace. As a matter of fact, it's almost half of the money that we manage. It would be wonderful if a lot of people in the 401 and other areas could take advantage of what we do. People in the private wealth space who have IRA rollovers and those are big pools of money, in fact, can get access to us and we do a lot of that business through the Merrells and the Morgan Stanley's and the UBS.
In terms of 401 and defined contribution, it's difficult to do unless you can strike an NAV. The next speaker who's up is going to talk about something that his group has done that is tremendously creative to address that marketplace and that's one answer to it. But unless there are dramatic rule changes, it is going to be very difficult for most of these people to get into the private equity and the real estate and all. It's just it's too hard.
Last question. Yes.
So if you think about the market and there were some comments made about the AUM being about half of that being in retail space or retail. What gives you confidence that you can achieve that? Because we heard some comments this morning, there were some news out there that basically said retail, there could be some challenges in growing that business. Some of your peers don't believe in that channel. So what gives you confidence that you can grow and become dominant?
So I think probably what gives us the most confidence is that we've been having pretty good success. I think as we've gone to partner with all these major banks and the private banks, what we find is that there's as much pull, if not more pull, as push that is happening. These banks need to grow their ultra high net worth side of the market. That's what they're looking to grow more than anything else. When you can have access to a really great brand name and what we've been able to do, which is give support around it, sales support, marketing support, customized product and education, the world is sort of knock on wood beating a path to our door.
We have difficulty keeping up with a lot of the demand. We have I'll be in Europe and Asia in the next few weeks. We have huge demand from there. Think we're just if I can use a baseball analogy, we are really in the bottom of the first inning here on what this is for Blackstone. So, all right.
Thank you all. I appreciate the attention.
Please welcome Tom Hill, President and CEO of BAM.
Good morning. In our discussion today, we're going to focus on 3 questions. What, how and why? What is the BAM business model, how is it that we've achieved better returns and better asset growth than our competition? And why will we continue to grow and prosper.
Let's start with a report card on BAM from January 2009 to year end 2013. Our assets under management have grown 130%. The largest hedge funds from that same period have grown 36%. The largest hedge fund to funds and I think you know, we don't like to use the f word when it applies to our business, have been negative 29%. What did we do right?
1st and foremost, we anticipated changes in the industry and then we adapted our business model. What else did we do? We honored our commitments to our investors and we provided $9,000,000,000 of liquidity when our investors needed it after the crisis of 2,008. Now the good news is virtually all of that $9,000,000,000 came back to us once our institutional investors had rebalanced their portfolios. We also provided value to our institutional investors through our technology spend and broader portfolio advice that we give them.
As a sign of the trust that we have engendered in our investor base, in addition to the roughly $60,000,000,000 of assets that we manage, we also advise on another $25,000,000,000 of assets. Now, most of our competitors did not meet investor expectations in 1 or more of the categories I just described. The question for you to figure out is whether our competition has the resources and the investor goodwill to close the very large gap between themselves and BAM. The next largest competitor has $27,000,000,000 less assets under management than we do. And rest assured, we're not standing still.
Now let's give ourselves a report card for our investment returns. Since 2000, we've achieved over 300 basis points of outperformance relative to hedge fund industry benchmarks and also other benchmarks like the S and P total return. And we've done this with less volatility, translating into higher sharp ratios. So to recap what we have done, we've grown assets under management faster and we've put up better risk adjusted returns than our competitors. So let's get to the question of how, how have we done it?
By using our scale and our deep industry relationship to negotiate deals, we're in the deal business, to negotiate deals for the benefit of our investors. In the last 2 years, we have negotiated 138 deals with hedge fund managers. Now what kind of deals? Deals that reduce management fees, so for our flagship fund, we've been able to get fee reductions of 40 basis points to 50 basis points. We've created customized capacity and that capacity where we go into a manager and we say, you know what, we like your overall hedge fund, but we want the following 1, 2 or 3 specific aspects that they create for us and we customize.
And often what we pick does better than the overall hedge fund. We've secured capacity in direct investment opportunities. I think you know about BSOF, which is our Blackstone Special achieve our outperformance. We have the scale, the talent and most importantly, the infrastructure to manufacture differentiated capacity on an industrial scale. In just the last 2 years, we've created $18,000,000,000 of new capacity that is just for us.
And this is very important because with many of the best hedge fund managers closed, you cannot have meaningful AUM growth without large scale capacity manufacturing capability. No one else has it and it takes time and skill to build it. The success of our Blackstone Principal Solutions platform, BPS, which is our co mingled and customized funds. It's what everyone thinks of as the traditional fund to funds business, has allowed us to lay the foundation for the next generation of our hedge fund strategies, where we will create specialty solutions and new business lines, we'll be able to hire talented hedge fund and prop desk talent. You might have seen we recently hired Parag Panda, who was a senior portfolio manager, a trigger puller within the SIF Brothers structure.
And we also will be able to invest in our overall business infrastructure. So let's take on the 3rd question. Why? Why will we continue to grow and prosper? We have created not 1, not 2, but 3 new legs to our existing business model.
And I'm going to go through each of them in some detail. Direct Investing, hedge fund ownership and liquid alternatives. In 2,009, these new businesses, the platforms that we created accounted for only 10% of AUM and 11% of revenues. In 2013, 16% of AUM and 17% of revenues. We are projecting by year end 2016, 33% of our revenues 33% of our AUM and 44% of our revenues will be from these new initiatives.
Now why do we like these next generation businesses? They provide diversified revenue streams, they have higher fee structures and they give us access to a whole new set of
investors.
Let's answer the question, why does direct investing drive increased profitability? You saw a large AUM growth, but you saw even more rapid revenue growth. Very simple. Rather than allocating capital to others, we are managing it ourselves. Today, we manage $5,500,000,000 in a multi strategy center book that sources ideas and invests directly across our entire platform.
So if we're running a $5,500,000,000 multi strat, how have we performed against the competition? How we performed against a composite of other multi strats? We've achieved the same returns, but with lower volatility, hence higher sharp ratio. Now what are the benefits to BAAM? Longer duration capital, hedge fund fee structures producing more revenues per dollar of assets managed.
And this platform as we think about it over the next 2 years is going to include a whole new initiative where talented risk takers like Parag Panda will be recruited into a condominium like structure managed by BAM to create interesting exposures for our overall business. We expect by the end of 2016 to have multiple 1,000,000,000 in this new platform. So let's spend a minute on our hedge fund ownership platform, where we're currently managing 5,800,000,000 dollars This business line provides both seed capital where we can attract hedge fund talent, but also permits us to purchase hedge fund GP interest in more established hedge funds. Now you might ask the question, why does hedge fund talent want to partner with BAAM on our hedge fund ownership platform? First, let's take seeding.
We provide stable, long term locked up capital. We help our managers with their infrastructure development, as well as helping them to implement an institutional framework. If you're just starting out as a hedge fund, having the BAM stamp of approval is not only useful in terms of attracting institutional appetite, but also in the fundraising. In our GP stakes, we help more established hedge fund managers diversify their businesses, where we provide manufacturing expertise. What is the biggest fear that a hedge fund manager has?
The absence of going concern value that the top person when they don't do it anymore, the business stops. So having an ability to help these hedge funds create going concern value is a big plus in their minds. Also, our purchase of a minority interest is a mechanism to demonstrate the equity value of the business to their next generation of employees. It's a marker on value. And lastly, we provide capital, so that they can invest more broadly in new product offerings that they want to pursue.
For instance, creating in addition to your traditional hedge fund, an ability to manage money in a 40 Act structure requires a massive investment, not just in compliance, but also in dealing with the regulatory bodies. Our capital will permit them to do that. Why are our hedge fund investing businesses so attractive to our investors because we raise money for them, to us, to BAM and to you? If the hedge fund industry grows and you've seen numbers that were slightly less than $3,000,000,000,000 now and by the end of 2018, numbers say it could be as much as $6,000,000,000,000 and we stop to think. That number is not so out of line because the total value of financial assets around the world is about 280 $1,000,000,000,000 That includes stocks, bonds around the world, not including bank deposits, commodities and foreign exchange.
So hedge funds now are just about 1%. And if you view hedge funds as simply a way of managing money in a more flexible format, the denominator ought to permit the numerator to grow. If the hedge fund industry grows significantly in the next 5 years, we want our investors to benefit as an equity owner in these businesses that are going to participate in the growth. But even if the hedge fund industry doesn't grow, at BAM, we have the expertise to identify and to make deals with hedge fund managers who will outperform the industry. Our hedge fund ownership businesses have the following attributes.
They are private equity like drawdown structures. They have hedge fund and private equity fees, I. E. Higher, and we have the ability to monetize ownership either through a sale of our interest or in the case of our GP stakes interest potentially to take it public. We expect our GP stake business to end 2014 with $3,000,000,000 of committed capital.
I think you know in our first close, we were $1,400,000,000 We're going to have a second close, which should be another $600,000,000 to $800,000,000 but we're fully expecting that to be at $3,000,000,000 by the end of 2014. Let's spend a second on liquid alternatives. First of all, what are liquid alternatives? These are strategies designed to meet a need in the individual marketplace. We also refer to this as individual investor solutions.
So Brendan mentioned the RICs that we are managing now, mentioned the 40 Act, where we have a very large relationship, where we have over $1,200,000,000 in 40 Act and also UCITS. 2 years ago in this category, we had 0 assets. Today, we have 2,000,000,000 dollars It took us 3 years to build this platform. You don't start down the path of creating a 40 Act strategy without having the compliance, the regulatory issues and the ability to have your managers perform. In the 40 Act, you get it wrong, you go to jail, okay.
It is really, really scary and you've got to have the infrastructure in place so that you don't have any missed opportunities. Individual investors want what we have created for our institutional investors and these strategies are a way for us to give them in a different format what we have created for our institutional investors. We're now providing solutions for any number of large traditional asset management businesses, mutual fund complexes want what we have created. Defined contribution pension funds want what we've created. Institutions in need of liquid alternatives due to regulatory and capital restrictions, insurance companies, German institutions want what we can create in the form of usage.
Also individual investors, the mass affluent, they've seen what institutions have been able to do in terms of risk adjusted returns with their investments in hedge funds, they want that too. This platform has the highest potential for scale in terms of AUM of any of our businesses. I mean, just think about it. Right now within U. S.
Mutual funds, there's $11,300,000,000,000 Only 1% of that is in liquid alternatives. So we see this as a major opportunity to grow. Why will BAAM's leadership position persist? Scale begets further benefits. We've got the 1st mover advantage in many of these businesses and we have created significant barriers to entry.
We have 234 employees in BAAM around the world. A 100 of those are devoted just to the investment side. We've hired 13 direct risk takers from hedge funds or from prop desks and we have access to the broader investment expertise within Blackstone, over 800 investment professionals and other teams. Often, we work together on deals, whether it's GSO, tac ops, private equity and real estate. Meeting investor expectations has been critical to our growth.
The one number that I'm most proud of as CEO of this business is over the last 5 years, 60% of the money that we've raised has come from existing Existing investors have provided between 50% 100% for new strategies that we've launched. Key takeaway is that our investors trust us based upon our past performance. Now another factor contributing to our success has been our willingness to continuously reinvest in the business. A very good example relates to what we spend on technology. We have had a large historical and ongoing commitment to spending in the investment, investment technology.
So what is that? That's risk management. It's aggregating positions. We spend over $20,000,000 a year just on this. That's more than many of our competitors make in terms of profits, just on technology in the investment area over $20,000,000 This permits us to build, monitor and risk manage our investment portfolios in the most efficient and effective manner.
Now, we also provide this technology to our largest institutional investors. So 18 of our biggest relationships have gotten the benefit of all this money that we've spent on our technology build. VAM is a high growth business. Over the last 5 years, we've significantly grown our business across all financial metrics. We have consistently provided significant portion of BX's overall earnings.
And we're going to continue to grow our business to capture market share and provide significant earnings to BX shareholders by doing the following: focusing on our investors and our hedge fund relationships retaining and expanding our team of hedge fund talent, continuing to invest in our infrastructure and technology, and continuing our track record of creating new solutions and platforms that deliver strong risk adjusted returns to our investors. In conclusion, in answer to the what question, BAM's business model is to use our scale. We are the largest investor in hedge funds and we are the largest factor in the space to make deals with both our investors and with our hedge fund managers to create superior risk adjusted returns. How? We do it through customized capacity that we create from our hedge funds, but we also do it through our 3 next generation platforms, direct investing, hedge fund ownership, which includes ceding and GP stakes and the liquid alternatives, individual investor solutions.
Why? Why will we continue to grow and prosper? It boils down to our investment in human capital, our investment in the systems, including technology, those investments have created significant barriers to entry in our business. Our rapidly growing hedge fund investing and hedge fund ownership platforms generate more attractive economics and longer duration assets than our traditional businesses. And our liquid alternatives platform is well positioned in the fastest growing part of the industry.
So even if hedge funds don't grow from $3,000,000,000,000 to $6,000,000,000,000 dollars BAM will continue to capture market share and prosper. So thank you and I want to turn it over to questions.
Kindly raise your hand.
Oh my goodness, no questions.
No questions.
That's a great question.
I'm disappointed. Yes, Joan.
Related to Can you address the earlier question related to 401 market?
I didn't hear the previous question. Okay.
So the question was basically, how can you address it? Can you address it? What are the hurdles, etcetera?
There are a lot of hurdles.
Your product?
There are a
lot of hurdles. I mean, I think you know that we have a relationship with one of the largest providers of 401 options in the world. And we have been working with this very large institution to see similar to what we did with the 'forty Act, if we can wrestle to the ground the complex issues. But I have to say, we haven't cracked the code yet. If we are able to crack the code, there are significant assets, but similar to the 40 Act, you got to do it very carefully.
There are land mines everywhere. There are land mines everywhere.
Thank you, Tom.
Thank you.
Please welcome Laurence Tuptzey, Chief Financial Officer of Blackstone.
Earlier, Joe lamented having to go after John Gray. Well, I get to go at the end of the day after Tom and before Steve and Tony. I know exactly how Ringo felt. I'm just hoping this is a little bit more lucid than Octopus' Garden, but I'll do my best. I'm going to focus on 5 things to tie together what we've heard from my partners today.
The first is what makes Blackstone unique as a company and asset manager as an alternative asset manager. I think some of the drivers are underappreciated and you've heard today the inputs for that. Well, I'll show you some of the outputs of what it means for you as investors in the company. The second piece is competitive positioning. We are, at our core, platform pioneers.
We don't run funds, franchises or disparate businesses. We build platforms. Each one of the businesses, if they hammered home one point, was that we are in the 10th, 11th, 12th generation of building exposures to asset classes by doing one simple thing, leveraging what we're good at to find above average returns across the cycles. And those are the growth drivers behind the firm. I'll also talk about earnings drivers, not just the outlook, but also what measures you can look at for what we call the value creation.
There's a unique thing about Blackstone Businesses that make them all the same. Everything we do, we look towards informational advantages, skill advantages and our ability to impact the outcome of an investment after we make it, whether that be through credit management, risk management in the hedge funds or operating assets in private equity and real estate. And I'll finish with a few comments on our core strategy and why we think that's enduring across the cycles. I'll start with a little bit of an outlook for the last year. It's been a record 12 months, but we've also seen some strengthening forward indicators.
In the last year, we've seen a 73% increase in economic debt income. That's important for investors because that indicates to you the value that's being created and captured within the businesses that we will realize over time. At the core of the business, we still operate in a very disciplined fashion. We have the single largest base of fee earning assets in alternative asset management. And even with a strengthening pace of realizations, the myth that that house somehow compromises the growth in fee related earnings should be debunked.
We're at a 13% increase year over year and investors can count on that as a steady source of cash income. In distributable earnings, adding to those fee earnings, the realizations that we're paying on our performance fees have also been up very sharply to 1,900,000,000 dollars We've returned $42,000,000,000 of capital over the last year, and that comes back. You heard Mario today, our investors by and large are in this for the long haul. They're solving for long term returns for the pensions, the corporations that they invest. When they get back $42,000,000,000 they're looking to put that back to work.
We have gross inflows in the firm of $62,000,000,000 And at the same time, we put $22,000,000,000 to work. This isn't just about a year, it's been a longer trend than that. If you look at any measure over the last several years, you can see our fee earning AUM despite even that $30,000,000,000 that we pushed back, you see going from $91,000,000,000 to now $204,000,000 Our total AUM almost 300% rise from $95,000,000 to 2.72 percent, distributable earnings going from $461,000,000 to just under $2,000,000,000 and the realizations going from $1,000,000,000 to 33 More than ever before, all of this creates momentum, not negative momentum in the business. But now a little bit about potential and competitive positioning. When we look across the Asset Management business, this is what we see.
Alternative managers are gaining share as LPs continue in accelerating trend of allocating to higher return during private markets. There was probably no one better to articulate that today than to hear from Mario about how his clients is the largest representative of allocated capital in our market. The public asset space is large and it's crowded. There's over 150 public asset managers. They manage 13,100,000,000,000 dollars But down at the bottom of that stack, a mere 8% is the fastest growing segment of it.
Why? Alternative manager allocation drivers are many and they're enduring. We have superior long term returns. You've seen that in every one of the businesses today. That's driving increasing allocations and increasing allocations from investors who are in the market to solve for long term liabilities.
We're not public market dependent, and I'll give you some more facts related to that. But we're not just betting on the public markets. When the S and P 500 reads a 16.5% forward earnings multiple, there's an 80% chance that the growth in the equity markets over the next 3 years will be less than 5%. We don't have to play that game when we're operating assets. We have fewer scale competitors and the barriers to entry are very, very real.
If you take something away from the businesses you heard today, it can't be built. If you look at the attempts from the traditional asset managers to enter alternatives, none of them have reached scale, dominance or top quartile performance in any one of the businesses we can compete in. You can't buy it, you have to build it and that takes a long time. There's also higher manager return dispersion. You can invest in the outcome of your return in alternatives.
We're not confined to public markets or public market information. We go into deals with hard work, skill, experience, a informational advantage and then an operational advantage. On the right are some of the fastest growing and no coincidence all alternative managers. There are 8 of us. The public alternatives, We represent $1,000,000,000,000 in assets under management, but we're distinct.
We're very different businesses. Unlike I heard before the analysis to the investment banks, the investment banks are different by culture and name and maybe they execute with different levels of efficacy, but they're in the same business. So are the commercial banks. We are not. Not only is Blackstone different in its whole, but every business, the way we prosecute private equity, real estate, all the new businesses we've created are entirely different.
It's a creative process driven by one thing at Blackstone, where can we find outsized returns across the cycles that we can defend with our skill and ability to invest. All these factors relating to alternatives is driving the positioning, and we think we're positioned as the leader in the fastest growing asset management segment. Since 2011, the alternatives are growing not just faster, but much faster than the traditionals. If you look at the traditional asset managers, 6%. The top 4 alternative competitors to Blackstone, 19% break out their acquisitions, 10%, still a large multiple, 150% faster than the traditionals.
Blackstone itself, 22%. Back out the acquisitions we've done, 19%. We're growing at twice the rate of the other fastest growing asset managers. Look on the right. You can see the total AUM and capital raised since 2011.
Our top 4 competitors who have $547,000,000,000 in management, almost twice the size of Blackstone, have raised $153,000,000,000 or roughly 28% of their total size. Blackstone, this is the one chart where we will look small, at $272,000,000,000 has raised nearly 61% of our size or 167,000,000,000 dollars And that is because we're in all four asset classes. Most of our competitors are 1, maybe 2, none 3 and nobody 4. We're relevant to our clients on many levels and the returns have been there to drive these allocations. Here's another way to look at it.
You hear us speak a lot about innovation. We don't have asset targets at Blackstone. That may surprise you. We're going through our strategic plans now. No one is putting up numbers saying we want to aggregate assets, we want to buy companies.
That's not how we think. The game begins with, are there ways we can leverage the experience we have over 20 plus years in the businesses we're in to find another place that's relevant to our LPs where we can have a return over time that will make sense through cycles. That's what drives Blackstone. It's an innovation chasing returns that we think about. If you look at the growth in the firm since 2,008, and again, I use the word platform and Mario used that when he described Blackstone, he described us as a platform.
We're not funds and not businesses, we're platforms. If you look at 2,008 through to today, we've raised $272,000,000,000 $122,000,000 of that came in businesses that didn't even exist at the time we went public and strategies. That's all about finding new ways. So when you think about cycles, we are a different company today than we were even at the time we went public. And even the existing strategies simply through performance have been able to drive $150,000,000,000 of inflow.
But here's another interesting stat. Let's translate that to what we've been doing over the last 24 months. And what's interesting to us is people say, well, you heard some of this from some of the best businesses today. John said it's getting tougher in North American real estate. Joe said the deals are tougher.
You have to look more places. 2,006, 2007 and 2008 for Blackstone were searing experience. It's part of our culture to look at and examine critically what we got right and what we got wrong. And we realize now and we realize then at the time we went public that being in more regions, in more products with more people to find returns away from the crowd was critical to us. The last 12 months, we put $18,000,000,000 to work, but it's a very different $18,000,000,000 that we might have seen in 2,005 and 'six.
Almost $8,000,000,000 of that $18,000,000,000 came from those very same strategies that didn't exist in 2,008. So not only we're innovating, but we're actually in a scale way able to put money to work. And I'll give you an example. Look at the top right. 43% of the last 12 months invested capital was outside North America.
We, even Blackstone was not capable of doing that in 2,008. When we went public, we had over 800 people and 5 offices. We have 2,100 people and 25 offices. The business scales. The key is we now know we can see returns globally.
There's another big distinction between us and the alternative competitors. We run global funds. The core funds in BREP, in BCP, in Credit and in BAAM are global funds. We can move to where the opportunities are. We learn from our experiences.
Dollars 129,000,000,000 has come into gross inflows into new strategies and $97,000,000,000 into the existing strategies. Now a little bit worried about differentiation. There seems to be right now a trend towards trying to diversify by buying, by rolling up, etcetera. For us, it's all about extensions. Everything we do finds an adjacency to something we're already good at.
If we're not already good at something, it's not likely that we're going to go in and try to venture that way. We have the ability to build on our platforms. If you look at the other alternative firms, they're essentially bottom weighted into a highly correlated single segment. To the right in Blackstone, and this is as much by LP demand and frankly uniform performance, less than design. At any given time, the fastest growing business in Blackstone could be any one of our 4 major segments.
In the last 6 months, we went from 3 months where real estate was the fastest in terms of realizations to a period when private equity was. They had even E and I in the Q1. Tom's business in BAM has been one of the fastest growing over the last several years and one of the highest margin business. They have different characteristics, but the fact of that balance is the same. Let's talk a little bit more about the total AUM.
And what struck me when I put this slide together was, while we're continuing to grow at a rapid pace, we're maintaining that diversity by growing and growing our competitive advantage over our peers. Look at each one of the businesses. They range in CAGRs between 19% to 26% at any given time when you go back from 2,008. To give you an idea of how that is reflected in our LPs, in 2,008, which will be the left hand side of the slide, we had 7 19 LPs, today 2,312. In 2013 alone, we raised $7,000,000,000 from 200 LPs who didn't even do business with us in the end of 2012.
But here's what's interesting. Only 1% of our LPs are in all four of our segments. Only 18% of our LPs are in more than 1. So to think that we've only begun to mine the LPs that we're bringing into the firm, each reaching out in their own way to a different part. And what that's where quality control matters.
At Blackstone, the first and most important hurdle you have to reach before you raise any fund or new business, is it something that we would invest in and is it something that's going to be enduring in terms of its outperformance over time? If you can't meet that hurdle, it doesn't happen. And with that quality, our investors see that. That's what confuses us when we see this rush to diversify and create. It's hard when your primary synergy is to sell products to the same clients.
If you buy something and you put your franchise brand on it and it doesn't work out, that positive synergy is a distinct negative. And that over time is something that we've come to get in our LPs' minds that when they touch it and it's Blackstone, it's going to have Blackstone quality, whatever that asset is, and we'll execute it the same way. You could probably see today in all the presentations a certain consistency in the way we think about playing away from the crowd. All right, a little bit on the financials. Value realization.
Right now, it's driving a shift in the earnings mix, while value creation remains robust, which is an indicator of future earnings. Said differently, as distributable earnings have increased on the back of more realizations, you can see the numbers going from 272 in the green box to $1,200,000,000 over the last 12 months. And in the bottom, fee related earnings are consistent growth driver. What's really important is, and this is true from a year ago, 2 years ago and 3 years ago, Blackstone is always very balanced because we're diverse, we cannot we can actually balance the ability to realize performance fees and sell out of businesses at the same time we're creating value for you future shareholders to realize when we exit those investments. And that's what's key.
Our economic income CAGR since 2010 is 31%. What you'll see in other businesses that are less diversified is a burst of realization activity, even sometimes concentrated to a few investments and you'll see a decline. When you're broad enough, if the markets maintain even stability and you're creating value in all those asset classes, you will be both creating value and realizing it at the same time. Here's another way to look at it. One of the myths, I think, is that in a realization cycle, it will draw down the rest of the firm's financials.
Not true. That's not how our business model is diverse as we are works. Number 1, there's a compounding effect. So every quarter that we generate value appreciation in our businesses, there are then more assets created that we are receiving performance fees on or management fees on as the case may be. So that value creation is important not only for what it creates in terms of earnings, but also in the fact that it's growing our asset base.
And that grows net performance fee growth. What this shows you here is net accrued and realized performance fees. Going back to 2011, we had $1.33 a unit. That has grown to $3.11 a unit. At the same time, we've put out almost $4,000,000,000 in realizations that have been paid out.
And that's important. So essentially, the creation in the firm is outpacing even the rapid pace of distributions. And to break that down a little bit more, the way to look at this, the gray box in the middle, which is $2.21 a unit, those are assets sorry, those are net performance fees related to assets that are public or liquidating today. Those are businesses that are actually already public. If I add to that on another $0.11 which represents the incentive fees that are paid out annually, you have $2.32 per unit today poised to be realized.
And at the same time, we're seeing those realizations, you can see in the private markets, we continue to create value. So that 71% net accrued performance fees public or liquidating is a key part of our business model. It outpaces the realizations. Our realized performance fee CAGR since 2011 is 130%. When people look at the S and P and they think 4%, 5%, we're not growing at that level because we're compounding off of the assets we already have in the ground.
Uncorrelated. We often see and Joan made this point earlier, I thought very effectively that people misconstrue a few things about how to forecast our model. They say, well, it's too it's volatile. Well, first of all, performance fees can never be negative. So if that's volatility, it's certainly a good volatility, because it's performance fee upside.
And we have that core base of earnings. But we also see that there are certain times that people look at the fluctuations in the S and P and say, well, that will this temporary fluctuation will damage their ability to generate distributable earnings. Not so. If you look at this chart, what it shows you is our distributable earnings have been consistently growing over time and accelerating as we get to the current markets. And these short fluctuations, some as big as a 14% or 12% change in the S and P largely doesn't impact it.
Why? We're in a long cycle valuation creation business. You've heard in all of our businesses today, we match the liquidity profile of our funds with the underlying assets we manage. We're never forced sellers. We don't sell assets at spot prices.
So the world imbuing on us a certain level of beta or volatility isn't actually what runs our model. What runs our model is the growth in the portfolio companies. You saw Dave Calhoun give you a statistic today on what's happening in the private equity portfolio, far outpacing the growth in the S and P. John's businesses, the real estate fundamentals relative to the supply demand in difference have never been better. Tom's businesses, the diversity related to the holdings that they have in hedge funds or in all the credits that we manage are all very strong.
That drives it. What we do see is a bit of seasonality. You will see the Q4 and this is in Blackstone tends to be a period where there's higher realizations. That's just a market phenomena. Now what happens is, I'm going to add in the yellow line shows you that I just put up, shows you what the analysts forecasts are for us.
And you can see that they use a more linear model over time where they're assuming that each quarter builds on each quarter. If you back that out and look at the trend lines, we're actually more consistent. They tend to underestimate the 4th quarter, which is usually seasonally higher and overestimate the 1st few quarters. But what's undeniable when you look at this chart is the forward earnings momentum is a steadier earnings stream than you'd even see in the public markets. A couple of thoughts on our core strategy.
What's important about Blackstone is, we've thought very carefully about how we'll position ourselves in each one of the businesses. And that didn't end in 1987 when Steve and Pete started the firm. It starts and ends every it doesn't end every any day, starts every day. We think about how to be consistent and how to be different. We think about building global platforms and we think about the outcome for our investors.
So there are 5 key things to it. The first is organic growth. We think we can get superior growth come from our fund performance, the breadth of offerings and our culture of innovation. We're not going to aggregate assets. We're not going to roll up under scale managers.
We're not going to buy businesses to say that we're in them. We're going to use the platform, which is a distinct advantage. We've been in these businesses for 20 plus years. When you're in it for that long, you can find new ways using those asset classes to drive returns. The second one, and I think there's some confusion as people try to differentiate the alternatives, we are and always will be a pure asset manager.
We manage 3rd party assets and that provides scale. Our own assets in the businesses are there for alignment. There's $7,500,000,000 of insider investments in the funds. Believe me, our LPs know that we're playing the same game and we're on the same side. To think differently and to think in terms of balance sheet and aggregating assets and holding them would create LP conflicts where we don't want to have.
And most importantly, the single highest return on equity business in asset management is managing 3rd party money. Our returns on equity are in excess of 40%. That's what you as shareholders want us to do and that's what we'll continue to do. The 3rd part, and I think this came through in all the presentations today, Blackstone is about value creation and innovation. Our core expertise of actively creating value at the portfolio level is a sustainable advantage.
It's not picking public markets, it's picking asset classes, deals and managing them over time. We don't always get it right, but we do have the ability in all our investments to intervene and to move.