Good morning, ladies and gentlemen, welcome to the 2014 Blackstone Investor Day. Just a couple 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 WatchDox 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. You can download those at any time during the webcast. With that, I turn it over to Joan Solotar, Head of External Relations and Strategy for Blackstone.
Good morning, welcome to Blackstone's fourth Investor Day. 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. I hope you come away today with the understanding that while we have many able competitors. My clicker's 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 will continue to stay ahead of the pack because of our skill, our scale, our innovation, and our brand. Here are some fun facts about Blackstone that you actually may not know. Over the past year alone, we've created $33 billion 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 billion 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 billion 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.
While $272 billion is nothing to sneeze at, it doesn't include the debt within the private equity and real estate portfolios. Really we're managing about $500 billion in total assets. We have $90 billion 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. 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. A lot's happened over the past several years. The alternative sector's 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. Today there's real scale and liquidity. Eight companies are public. The average dollar trading volume is now $357 million, and many days it's a lot more than that. It's about four times what it was in 2007. The industry market cap has nearly tripled and free float's grown about seven 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 million shares each. You can see that was only 14. We've evolved. In fact, if we were part of the S&P 500, we'd actually rank in the top quartile in things like market cap per employee, where we'd actually rank fourth, but aspire to hopefully beat Facebook, which is number one.
Earnings, distribution, and yield. The only area where we rank towards the bottom, which we're happy about, is number of employees. Now I'd like to address a couple of misperceptions. The first has to do with the nexus between earnings and the stock market. I've heard the comment fairly frequently that our earnings are dependent on a rising stock market, we really took a hard look at the facts. 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. Some say we trade at a discount to others because we're more volatile, whether that's stock volatility or earnings volatility.
Here too, we did a very deep dive, when coupled with growth, the market actually values volatility pretty highly. We've had a very long-term track record of good growth, 22% in revenues per year. Even when measured against the last peak in 2007 to current earnings, which we don't believe is a peak, we've had a 13% CAGR. 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's been greater, our stock volatility is similar, if not lower, than some of the most highly valued sectors in the world. What does this all add up to? Since we last shared this analysis, we've moved one year forward, we've outperformed both in investment performance and in asset growth.
You could see the numbers are a bit higher. We use the same assumptions, compressed assumptions, that Steve would probably call underperformance, lower than what we actually have achieved in real estate, private equity, hedge funds, credit. The numbers moved up to $2.70 per average on a normalized basis in cash earnings, going up to $4.15. For perspective and a reminder, those numbers were $2.50 a year ago and $3.95. What does that mean for value? If we use the same yield assumptions of 4%-6%, you get stock valuations in a range of $69-$104. In addition to that, you get $27 in cash, bringing the total values much higher to $96-$131. We see significant upside from where we are today. In wrapping up, the alternative sector is growing quickly.
We are the leader and the pioneer, we intend to outdistance the rest. That's because of our skill, our scale, our innovation, and our brand. 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. First 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, and 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, American society, GNP, will be a slower growth.
Finally, America is an established industrial power, that means we've got a lot of aging industrial assets. 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, in that process, save a lot of good, high-paying jobs. Investing well is hard, the thing that limits you more than anything else is knowledge. You can never know enough. Just as in sports, the way a group plays together brings collective knowledge and enables you to make much better decisions. All of our businesses are industry leaders in terms of their performance. 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 want to thank you for coming. It's a long day, 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, in each case, it'll be a group head talking. The only businesses missing are our advisory businesses. We just, in the interest of time, couldn't quite squeeze them in, 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, I hope you will agree, is the depth and quality of our management and our leaders. Any one of the people you hear from today could run an entire firm like Blackstone and run it well. 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, have really granular knowledge of what they do. We have no bureaucrats here, no one leading from on high. I think they're really extraordinary people. 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. Not only how good they are, but what nice people they are.
I'm just, as I say, couldn't be prouder of them. Bennett Goodman's 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 billion of assets under management. He's grown almost five times in the last six years to $66 billion, and his returns have been consistently spectacular. Bennett's delivered across many different credit products, across a huge pile of assets, returns that equity managers would be happy with. That is 10%-20% across all of his funds. After Bennett, Jon Gray will present. We're 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 Jon's built.
We have the best team, the deepest market knowledge, the most clout, unmatched scale, and it really, truly is a dominant business, which is rare in financial services. After Jon, Joe Baratta will talk about private equity, where we've got the largest fund in the world. We've had consistently top quartile performance across history. 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. This is a business that's not just about investing. It's really about operating. 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 Blackstone Tactical Opportunities. It's one of our newest businesses. There, it's opportunistic.
They're supposed to hit little market windows when they open and do unusual investments across asset classes. Two years ago, we started with nothing. It's got $5.6 billion as a first capital pool. That's almost fully invested now. This fall, we'll 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 Verdun Perry, the secondaries 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.
They've just completed a very successful fundraising, their biggest fund in history, which was heavily oversubscribed, their AUM is now up to $12.5 billion, 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 questioned 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 million of annual retail raise four years ago to over $9 billion in the last 12 months, I see no reason why retail can't be equal in size to institutional capital long term for us. It's about 10% of our capital today.
Tom Hill will talk about BAAM. It's the largest investor in hedge funds in the world. We have the best managers, we use that to drive better than market returns at only a third of the market volatility, a fantastic mix of things to do. BAAM's exciting growth is into higher margin direct investing products so that you can see their margins going up over time. 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 to ask questions about that business, then at the end of the day, Steve and I will field whatever general questions remain. What makes Blackstone unique is that we have leading positions across all of our businesses. We have some very good competitors in one or two businesses.
No one else is close to having a leadership position in multiple businesses. No one else has our size and performance across virtually the entire alternative spectrum. People have been talking about the Blackstone model and imitating it for years. Yet no one else has been able to do so, 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. That gives a significant advantage for the whole firm. In other words, the whole is stronger than the sum of the parts. 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 today, I asked some of my colleagues who'd worked at other firms, what makes Blackstone different? Because I've had a hard time trying to articulate that and not come up with platitudes. So this year, again, I'm going to have a hard time articulating it, I've come up with platitudes. Such is life. The response when I asked in each case was, well, Blackstone's completely different. So I said, "Well, why is it different?" 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, they can make a difference.
Secondly, it's such a flat organization. Our organization, we do an organization chart, has three 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. 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. 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. 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 doesn't take any conscious thought.
It just happens automatically like a flawless team, and it happens across businesses and across levels of the organization. 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 the 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 31st, we had approximately $66 billion of assets under management. When we think about our business, we view it as two 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%-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, it represents slightly in excess of 50% of our total AUM, 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. 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 we're the primary lender, where we're originating the deal.
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. 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 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. We're either putting it into our hedge fund or our CLOs or buying a syndicated loan from J.P. Morgan. 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 a part of GSO today is probably the largest group dedicated to this particular segment of the capital markets. 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 have an early warning sign. 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 its 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 our LPs. 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. 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. The average loss of principal across all of the GSO businesses since inception is less than 100 basis points. We're operating in the risky segment of the corporate bond market, and we've been through quite a bit of volatility in the six and a half years that we've been part of Blackstone. These returns also, relative to the benchmarks with which we're compared look quite compelling. Quite frankly, if we can keep our LPs happy with this kind of investment performance, they reward us with more AUM. 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 billion, $15 billion of assets at the time. That merger happened in March of 2008. By year-end 2008, we had roughly $22 billion of AUM. We have tripled that over the next five-plus years to $66 billion. Importantly, in that high margin sector, that alternative cluster, we've raised about $30 billion. In 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. Today, I would say each one of our six 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 2008, and many of our LPs are in these products that we didn't have back in 2008. 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. The rescue lending is a strategy we developed at GSO. We kind of invented the term. We have the largest dedicated group of investment professionals who exclusively focus on that activity. These 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 million-$1 billion today.
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. The BDC is listed on the New York Stock Exchange. We think we'll continue to have good growth in that activity. How will we achieve this growth? There are about four different ways that we've been able to do this. One, I think our group is pretty good at developing a theme, usually around an industry trend, 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 as well as in 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 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 logical and trusted partner. We've been able to raise over $5 billion of capital through these strategic SMAs.
As we keep our LPs happy when we launch the next fund, 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 retail 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. 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 billion over the last five 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. There's a natural value creation and value destruction. 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 billion of his own separately managed accounts who are doing kind of structured equity-like investing in the energy patch. One of our BDCs is dedicated exclusively to this space. It's the only BDC of its kind, just lending monies to small, emerging E&P and pipeline-type businesses. We're really quite excited about this space. You can see here on this slide a lot of different names for companies that we've lent money to, but we're in all aspects of the energy arena. The upstream space is really exploration and 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.
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. That's significant. 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. 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, we just have more data than the next guy who's about to make an investment decision.
It's this kind of self-fulfilling thing that happens when you have kind of the dedication, focus, and concentration within a specific endeavor. You can't possibly read all these different names, I think the slide makes the point that we've been very, very effective at putting a lot of capital to work. 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 2006, 2007. We got a little more constructive in 2008. We started putting capital to work in 2009 selectively for home builders who were having problems accessing capital. By 2011, we thought the cycle had turned, then we got really aggressive putting money to work. We invested in a lot of different companies, it worked out pretty well.
As we get later into the recovery cycle, we were doing rescue lending for firms like Morris Homes and KP1 are both European home building 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, we came up with a clever structure that allows home builders to, in effect, leverage their balance sheet, buy more inventory, they're positioned to take advantage of the recovery in residential home pricing. They do it through a very efficient capital model in our land bank. Just indicative of our business model, we've done a lot of land financing in the last three or four years. We didn't want to overweight our funds to this particular strategy, we went out and raised a dedicated fund.
We did it all in six months, boom, we had half a billion dollars. 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, 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 Comptroller of 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 then syndicate it. Well, they don't like that commitment aspect of it.
What has happened is firms like GSO, we want to own that risk. 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 thousands and thousands and thousands of people that are on their payroll. 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, when we see something in the marketplace where capital becomes quite scarce, that's really the opportunity set for GSO.
You can see here examples of our rescue lending fund, which today is almost $9 billion in AUM. The BDC today at $11 billion is the largest BDC complex in the world. We've been quite aggressive in consolidating the CLO industry over the last five years. Today, we're the largest manager of these CLOs in the world. 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 leverage 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. 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, 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. 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 companies, 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 than the United States and Western Europe. There are not high-yield bond markets, leverage loan markets in any of these locales, whether it's Latin America, Eastern Europe, different parts of Asia, we're trying to figure out a strategy that makes sense. We'll continue to be quite active, I think, in energy, just given the needs 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 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.
It allows us to deliver a very differentiated value proposition to our clients. We'll continue to refine this model. We have to because it's a changing world, and our competitors are good. 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 a $1 billion capital commitment. It will go across three of our funds and almost every one of our strategic SMAs. The company is an existing client where we had lent about $100 million-$125 million to two 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 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. 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. 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. Could you talk a little bit about institutional demand, where we are in terms of appetite for taking on credit? Seems to be a big theme for the last couple of years. Maybe use a baseball analogy. Are we in the fifth inning, seventh inning? How do you see that demand playing out?
I like these sports analogies. Tony came up 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. 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. It's limited. 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. They're really trying to get incremental return.
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 through the warrants and other equity features that our funds are able to capture. We're currently in a very enviable position where we know we can raise capital. To be totally candid, we don't want to have too much capital. 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. I would say we don't always have the luxury of that. Today, the things that we do are pretty popular. If I had to pick an inning, I'd say we're somewhere between the sixth and seventh 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, we've all heard it's a very long-term phenomenon. What inning do you think we're in on 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 in Europe over the next 3-5 years?
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. 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 one, depending upon the bank. In the U.S., the big banks are levered a little bit more than 10 times. I think the economy is weaker in Europe. I don't view this as a short-term, cyclical phenomenon. I think it is a secular change that's going to last for quite a while.
The recovery of a debt bubble just takes longer to get resolved. 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. 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. Now that's starting to change, where we can get better terms. I think the distressed opportunity for our various funds is also quite attractive.
Would you please go into more detail about your possible entry into emerging markets.
We like the corporate credit aspect of emerging markets because it's exactly what we do in the Western economies. We know that a country like Brazil, which is going through quite a bit of growth, has very positive demographics. There's not much of a bank market. There's no high-yield bond market. 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. We advertise to our LPs today that we only invest in those countries and those regions that have a bankruptcy code, a rule of law. A lot of these geographies don't meet that standard. It would require us to go out and raise new funds.
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. 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. 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. 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.
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's broken.
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, 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. If you went to 1095 6th Avenue, New York, and you saw what that building looked like before we acquired it, then you see the hundreds of millions of dollars of capital we spent to reskin it, to build new retail. We've created a great feel in a critical part of New York City at the corner of 42nd Street and 6th 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. 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.
It's been the growth there that's 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, in Latin America, everywhere we invest.
We focus on investing for growth. Whether it's investing in franchise growth, like the Hilton story, where the company's 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 business around the globe is critical. We want to run our business in real estate as one firm, one strategy, one common set of values, one approach to our limited partners, one approach to how we underwrite investment. That's fundamental to our business. I think it's fundamental to the kind of success we generate for our investors.
Please welcome Jon Gray, Global Head of Real Estate.
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, and then open it up to a little bit of your questions as Bennett did. Before jumping in, I wanted to highlight two 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.
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 billion 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. Equally important, while most people were waiting for the all clear sign, since the summer of 2009, we have deployed $34 billion of capital. We think that capital will pay big dividends for our limited partners and for our unit holders. In terms to 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. Every transaction we do around the globe, I 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. 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 the U.S., we'll talk about that.
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, today we have a lot less competition. Tony mentioned our scale relative to our competition, a very big gap, a lot of it has to do with what happened to the competitive landscape. 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, the reason why is because of limited new construction. That's the reason why we remain constructive on this sector for the next couple 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 fifth fund, which was 100% deployed in 2006 and 2007. It shows here a 10% net return. We've almost doubled investor capital, given when it was deployed, it's probably the fund that has outperformed on a vintage basis, any other competitor by the greatest margin. Our seventh fund, our most recent fund, $13.3 billion, will ultimately grow to be, call it a $16 billion 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.
That investment success, Bennett touched on this as well, translates into asset growth. As you can see here, since 2005, our fee-earning AUM has grown from $6 billion to $53 billion. Our total AUM has grown from $7 billion to $81 billion as of Q1 2014. I would point out during that period, we sent back more than $20 billion to investors through realizations. That growth has happened despite returns of capital to our investors. 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 first quarter. What you see here is a tripling of our asset base from $26 billion to $81 billion, 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. 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. 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, $9+ billion. We've got mezzanine drawdown funds. We took over a failed mortgage recap trust, gave it new energy, did an equity raise last year. We've done a series since then. We now call it Blackstone Mortgage Trust.
The stock's up more than 20% since we re-IPO'd it. We have, in addition to that, liquid funds. We invest in CMBS. Finally, we do co-investment. 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 billion today of a $5 billion target Asia fund. It's our first 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 Heady there has done a phenomenal job in Europe, where Ken Kaplan runs our business. We just completed raising our fourth European fund, $7 billion. That represents nearly 20% of our business. Obviously, an interesting time to deploy capital. Finally, this very little sliver, I'll talk about it later, Core+.
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, one 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 million, 75 million sq ft I think is the number. Hospitality, own, manage, franchise across our different companies, more than 800,000 rooms. Retail, more than 100 million sq ft. Industrial, 175 million sq ft. 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. When 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. Last year in real estate, we deployed $10.25 billion. In the first quarter of this year, at the end of the quarter, we had $3.6 billion either invested or committed. The business has very good momentum. As I mentioned, it's getting a little tougher here in the U.S. to deploy capital, given the number of places we're deploying capital, we think this is an area we'll continue to see growth.
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? 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. 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? When you see a lot of cranes, that's generally bad for real estate because it means lots of new supply.
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. 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. EUR 1.8 billion of face. We bought the non-performing loans for EUR 1.1 billion. 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, more competition's moving into the market. We think we've got an advantage because of our teams on the ground, we're moving quickly to deploy capital to take advantage of this distressed window. In Asia, what's happening there is that investors have gotten very negative around 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. 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, new supply in places like Bangalore and Beijing down, call it 50% in the office sector. 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 supply is running about half of historic levels. That creates a good tailwind the next couple of years 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 of Las Vegas.
This is actually a legacy asset that was built during the crisis. We were able to buy it at a significant discount to construction cost, and we also made a bit of a play on a recovery in Las Vegas. 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. 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 1.3 million single-family homes built on average from 1993 to 2007. It got up to as high as 1.7 million in 2006. Last year, many years after the crisis, you've got 569,000 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. 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 three years, up to $7.4 billion of distributions to our limited partners. In the first quarter, 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 billion of gain in our opportunistic portfolio today, but 77% of that gain sits in four public companies and an office portfolio we're in the process of liquidating. You may have read recently we're selling a $2 billion 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. There's not any pressure, ultimately, we have to return capital. That capital will go back to our limited partners and also generate carried interest for us and our unit holders. You can see the path to realizations, I think, pretty clearly on this page. Also in terms of carried interest, I think it's interesting to see how it's evolved over the last four years. Four years ago, we had almost no net accrued carry. This is carried interest net of compensation expense, and that number's now up to $2.4 billion. If you add in the $660 million we distributed out, from zero to almost $3 billion over the last four years. Interestingly, going forward, we think there's also very large potential.
If you think about BREP VII as a $16 billion fund, BREP Asia, we hope to be $5 billion, BREP Europe, $7 billion. That's $28 billion of capital. If we do our job and invest that money well, double the money, that will create $5.6 billion of carry, take off a 40% compensation expense, and you end up here with $3.4 billion of potential net carry. On that sheet, only $358 million from BREP VII. A potential $3 billion of future carry just from those three funds alone. We not only feel good about the past, but also the future if we do our jobs well in terms of investing capital. 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+ business, which I'll talk about, long-term, safer assets. We've got debt, high yield debt. We've got first mortgage debt, and then liquid securities. We think about it geographically, North America, Europe, Asia, Latin America. We think there are lots of growth opportunities, specifically in opportunistic. At some point here, probably in 2015, we'll raise our next fund, BREP VIII. 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+, 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 billion of loans in a little over a year. I think that business can grow quite a bit. We still see plenty of running room across the real estate landscape. Specifically in Core+, what you've got here is a business that didn't exist as recently as November of last year. Today, we've got $1.6 billion 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 commingled funds, it'll look more like our debt complex, where we have a range of separately managed accounts as well as dedicated funds. 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. 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 billion since 2007.
We're in the market today with BREP Asia, Core+. We have liquid CMBS in our BREIF product, which we're actually selling through the high net worth channel, Blackstone Mortgage Trust. We've got robust capital deployment, put out $34 billion, as I mentioned, since the crisis. We have $18 billion of dry powder and the ability to recycle capital in many of our funds. We talked about it, accelerating dispositions. Distributions are up 120% in Q1 year-over-year. Performance fee is up 171%. Large pool of public equities, as I said, we're going to be very disciplined and thoughtful how we exit from those companies. It'll be done over a number of years, but it will create liquidity and cash distributions to our unit holders. Overall, we feel very good about where we are in the cycle and where our business sits today.
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. Just going forward, how are you thinking about balancing being disciplined and continuing to be opportunistic on 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 did, a lot of these companies we'd love to hold almost forever. Great businesses, as I said, solid management teams. What creates the need to sell, of course, is the nature of our funds. 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. As I said, you'd love to hold these things much longer. You can't. What you'll do is be methodical in 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, you 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 are definitely markets. Rule of law has been an issue. Some of the Latin American countries are very challenging. Places like Argentina, Venezuela. We have not to date done anything in Russia. There are places where we have been more concerned. In terms of overbuilding, what I'd say, you're always looking at that. New York City, the hotel market, has seen a ton of building. Washington, D.C., you've seen a bit of a double whammy where you've had overbuilding of new supply of apartments. At the same time, you've had a government pullback. 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.
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.
Thank you.
Bulent Ozkan with RBC Capital Markets. Jon, 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, and 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.
In an environment like we've been in, where you've had limited new supply, that growth can be pretty good. 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's 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 interest rates. 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 Shin from Credit Suisse. It looks like you're expanding into all kinds of real estate, Core+ 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. Just wondering, what's the rationale in terms of not going into that developing assets?
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. 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 the development asset, if you're in the midst of a crisis, high risk of capital loss. When we look at our returns over long periods 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.
It doesn't mean we may not do it in a few situations, may do a little more in emerging markets. 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. It's a bit like saying, "Hey, I'm going to IPO something three or four years from today." Maybe the environment today is good, but you don't know what it looks like three or four 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, Jon. 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 1990s.
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, not having balls dropped along the way. We invested many hundreds of millions of dollars every year in building new theme parks, putting new roller coasters and attractions into existing theme parks, opening new Madame Tussauds. We took a business that was predominantly British-based to one of global scale. Now Merlin is really the largest visitor attraction company in the world by number of assets, second largest by number of locations. In terms of number of visitors, second only to Disney. 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.
We saw the ability to rapidly scale up the company into a market leader. Staying true to the principles of finding good companies where we can really affect change is what led us to make this investment, even though it was non-traditional.
Please welcome Joe Baratta, Global Head of Private Equity.
Thanks. In events like these, I'm frequently given the gift of having to follow Jon 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 Partners VI. 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 Blitzer, which he'll talk about in detail, from zero to $5.5 billion 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 Vern, 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. We have other initiatives underway, which I won't get into too much detail. We have a complete product suite just within our private equity business, not to mention all the other areas of the firm. We meet the needs of our largest limited partners extremely well. We can deploy a $1 billion-plus for the largest pools of capital in the world, and that's almost unique to our firm. My comments today in this presentation will focus on our corporate and energy private equity activities.
On the screen, this is something I presented to our limited partners at our annual meeting about three weeks ago. 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 million people globally. 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 enlarge 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, we're proud of that fact.
Merlin is the ultimate testament to that kind of strategy. A small GBP 15 million EBITDA business that today is a FTSE 100 company with a GBP 4 billion 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. 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 to 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. 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. As we think about returns, we think about the unlevered return. We're buying a company. We're making acquisitions. We're changing the management. We're 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 & 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, we do consistently, and we'll continue to do so. Finally, and most importantly, we have to retain the best investors and operators in the industry, period. How are we different from our largest competitors? We have a single global fund, 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 one investment committee, one 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. Two 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. 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 three continents, 105 investment professionals around the globe. We have nearly 80 companies with $90 billion 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 VI, $16 billion of available capital, is a differentiator for us. Our ability to commit nearly $2 billion of equity allowed us to buy Gates. No one else in the process could have done it. We were able to use that scale and then sell down some of the equity post-closing, which we've already done. 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. 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 2009 and 2010, we were often looking at assets with them. Our restructuring business, we use quite frequently. We leverage their knowledge of the distress process. 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. It's really improved the dialogue that we have as a firm with our investors because that's a very high touch business.
Tac 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 formerly ran a large portfolio company of ours and other of our competitors called Nielsen. Prior to that, he was Jeff Immelt's 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 that cut across the portfolio, adding their functional expertise to each of the companies. Almost most importantly, we 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. 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. 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. All this has 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, our portfolio intervention capability, our homegrown culture has allowed us to do this. Remarkably consistent through all cycles. Even the 2006 and 2008 cycle, the fund will return approaching two 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 for BCP VII, which we expect to be at least as large as BCP VI, and for Blackstone Energy Partners II, which will be meaningfully larger than the first effort.
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 to our competitors, dividend recaps, $15 billion back to our limited partners, extremely powerful as we go out to raise new funds.
The money that's been returned has, on average, been two and a half times what they initially put in those deals. Proof of concept on our ability to invest a dollar and return, on average, two and a half. That's what we try to adhere to. On top of the $15 billion of cash back, we've created $11 billion 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. In total, across all of our active funds, 28% net returns in the last 18 months, compounded per annum. 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 BCP5 investments. On the new investing side, we remain active but disciplined. 15 new companies in the last 18 months, $4 billion of capital invested. We've sold 15, we've deployed four. We feel like that's about right in the current environment. 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&P multiple, which is weighted down by some low multiple large market cap stocks.
The median multiple, as you all know, is now in the top quartile. Options for sellers of assets are numerous. The IPO market's wide open. Corporate buyers are active. Credit markets are funding dividend recaps. Our competitors, including ourselves, are reloaded with capital and confident. Underlying economic fundamentals are good, but they're not great. 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 2007. $1.7 trillion last year, $1.4 trillion 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 2007. The market is wide open. We all know why. Seven years of 0% interest rates. Everybody's 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. Excuse me. We have to defend ourselves against this mean reversion in our portfolios. This chart just shows what I talked about. S&P at a peak. Nearly $100 billion of annual IPO volume. Dividend recap volume at $80 billion from close to zero a few years ago. The corporate M&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 2007. Doesn't mean that this crop of deals will be bad. If the conditions we're 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 five-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 five, six, seven, eight. That's about the time we'll probably start seeing some of these actions that central banks have taken reverse themselves. 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. 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 J.P. Morgan auction for a business. Secondly, the unlevered return has to drive the value decision. Focusing on the current comparable trading multiples and assuming they persist forever is dangerous. We focus on yield, and we focus on the unlevered after-tax yield in the business. We pay a price that we're comfortable owning the asset at for basically indefinitely.
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 VI 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 an industrial company for 8x EBITDA, but it's got a third of its EBITDA in depreciation and capital expenditures.
You're paying about 12 and a half times. I'd rather pay 14 times for a business growing at 10% than 12 times for a business growing at three or four. 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. Finally, there are special situations, special companies, where we can really transformationally 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. Drilling into this just for a moment, this is all of the capital basically in BCP VI and BEP allocated across these 3 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 and 2011, we committed to a very large capital project to build the first licensed liquefaction facility in the United States to ship low-cost gas from these shores abroad.
We committed $1.5 billion of capital across our energy and private equity funds and created co-investment for our LPs, we were 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 underlying public company. It's marked at three 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 U.S., in the Gulf of Mexico, also onshore, mostly oil in 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. 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.
In some cases, Blackstone's 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's one of the last holdouts for the Ipreo equity platform. 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 and 14.5 times, which we think is reasonable for businesses growing at that clip. The unlevered returns, again, 10%-16%, well in excess of what our investors could earn buying unlevered public company stocks. 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 managements. If these businesses work, they'll have nothing to do with the leverage markets at the time of our exit, and we like that. Again, 11%-17% unlevered returns. 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. In summary, we're really well positioned for the near future, near term fundraising. $15 billion of cash back is best in class in our industry. Another $11 billion, 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 de-risked 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% and 49% net IRRs, top quartile. 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 last week at a Morgan Stanley Private Wealth Manager forum, I was asked, "Why is it relevant for anybody to invest in private equity anymore? It's illiquid, it's locked up." I think that's an enormous asset for us and our investors, 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 looked like 0.8 times, 0.9 times cost. It'll now be two. 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, we radically improved the performance of that portfolio. We control the timing of our exit. It's really important.
If we had to sell everything two years ago, our option would have been extinguished. We didn't. We held, we continued to work the assets, 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, we have a proven ability to change the fate of our investee companies with this robust portfolio operations group. 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 two and a half or three, five, six, seven years from now, 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. For high net worth people, it's extremely tax efficient. We'll also accumulate capital from those people as they understand the power of the model on an after-tax basis. 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. Tac Ops fundraise is coming in the near future. Its investment pace has been excellent. We, as Jon showed in his chart, I don't have specific numbers, this business will generate meaningful carried interest over the next three or four years, both from the Blackstone V fund and from the Blackstone VI fund, $16 billion, doubled. It's the exact same math Jon just walked through. 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-
Yeah
What impact that's had on deal financing for you. I'm curious just on the growth of non-bank lending and how that's maybe impacted your cost of funding.
Well, I thought it would have an impact on our business, I was looking forward to it constraining the leverage levels that were on offer, it hasn't, in fact. We're just about to price the Gates financing, one of the largest LBO loans of the last three or four years, at historically low pricing, fully underwritten by the banks at the time we signed up for the deal. We have not seen the effect of this on any of our investments. 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 tweak out to the last eighth 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. Just by way of stories, 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, 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 and years, that held this prized asset and brand Nielsen within it, that wouldn't it be great if we could get together and rebuild this company in every way. Very smart investment. Incredibly highly levered at the peak of the market, turns out very, very smart investment. 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.
For me and the Nielsen experience, for five years of operating in a purely private environment before we went the IPO, I got to do everything I ever wanted to do as fast and as hard as I ever wanted to do it, with the backing of capital that saw it 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. I'm just a crazy man about an operator's perspective operating within this alternative class and private equity. It is the best it could possibly be. 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. That's why I'm here with Blackstone. Just a comment. I'm going to go back. Our job is to outperform the public markets, outperform the S&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. I stood up a lean and Six Sigma organization. I went from zero to 120 people within six 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. 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. 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 five firms to choose from, and in every case, I chose these.
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. All things digital I had to jump into. 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 best teams and surrounding them with the very best people. 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. 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 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, we've got to bring that practice to it. Early mobilizations of these big initiatives. You have to start out of the gate. You can't whittle your way into it. 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, 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 one of our bigger investments. It is not yet made. It will be here very shortly. I see everything in Gates that I saw in Nielsen.
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, 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 done in my history, that we can build on what is already a significant operating margin or EBITDA improvement relative to public alternatives, 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. That's it for me. Short and sweet.
I'm sure I saved us a little bit of time. 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. Ladies and gentlemen, if you could kindly take your seats, we're ready to begin. Thank you.
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. I 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. 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.
Entering the private sector is tough when you've been out of it. I remember this business roundtable 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. We set out on this journey with enormous 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 life, then we should be proud of ourselves.
We're joined by Rodney Moses, the VP of Global 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 in their current work environment in the military has really far prepared them for what they'll face with us. We really feel like they've 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. I don't see an option of not doing this type of thing.
Please welcome Steve Schwarzman, Chairman, CEO, and Co-founder of Blackstone, and Mario Giannini, CEO of Hamilton Lane.
Well, thank you. Thank you to Joan for running that video. It's a really important program we're doing at the firm. Sandy Ogg is running it. We didn't update that. We've now hired, I guess, around 10,500 people in 11 months. We'll do better than 50,000 veterans with our companies. It's good for the companies, it's good for the veterans. 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 we'll slow it down a tiny bit. We don't have all those slides. I think it's important that you meet Mario. I met Mario, it was either 1991 or '92.
They had a small consulting firm they were just starting called Hamilton Lane in Philadelphia. I'm from Philadelphia. We were marketing our second fund. 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 address, as I was telling Mario, on Broad Street. I kept looking for the building. Of course, it wasn't there because they were just starting their business. Whenever you're really in trouble as an entrepreneurial business, you go into some building that looks like it's on a real street, but it's actually in the crappy side street.
I managed to find it and went up, I don't know whether it was eight stories. There were like seven different places. They were the gatekeeper for CalPERS, which was a really important thing for us as a firm. There were four guys at a card table. I walked in, I said, "What am I doing here?" Fast-forward about 22 years, 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 three times the size of anybody else. They have somewhere around $160 billion, the term is under advisement, in terms of who they should give money to in our world. I think it's really important that you understand, you've had the investment side, you'll have more of the investment side. Who's providing the money to us? You'll hear a little bit from Brendan Boyle on the retail side, the vast majority of the money comes from the institutional side. 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, somebody says yes or no. He's the wizard behind the curtain.
You never want to hear the wizard speak, 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. Just for some frame of reference, our clients will put out in the private market space, we'll talk a little bit about that, $15 billion, $20 billion, $25 billion a year. It's a significant amount of capital that flows into that market. When you think about that, there are 2 big classes of it. One is pension funds, particularly here in the U.S., you hear a lot about the issues around pension funds. Also sovereign wealth funds becoming a much bigger player in that sphere. 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 seven or eight and a half, pick your number, % a year return. That's what they're aiming for. If they don't do 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. It's a math problem. What they do is they divide the assets into equity, which you all know, public equity, and debt. Again, go back. This is not the problem in math you had where someone's going 50 mile an hour this way and 100, and where do they meet? It's simple.
If equity gives you 10 on average and bonds and debt gives you two, you're running a portfolio of two-thirds, one-third, which is what most of them do, you're not making 8% today. It's as simple as that. What do you have to do? You have to go into alternatives. You do that now, 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. 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%. 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. 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.
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, I'll dismiss the outliers. What you used to have is people would be around 3-5 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. Private debt, 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. 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. You have institutions, I would say now it is trending towards the 8%-10% on private equity.
It's going back to that level for real estate, now it is actually moving into the 5% range for private debt. You can see that the proportion of portfolios has, in many cases, doubled in terms of allocations into the private markets.
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 3-5 years, and what are your investors telling you?
Well, I think you have to look at it in two ways. What our investors are telling us is, number one of the great things that happened to private equity, now you're going to hear how bizarre we are as human beings. The downturn of 2008 was one of the best things that happened for private markets. 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. 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, 2001.
I am now comfortable moving it up." 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. Everyone goes, "Aha, 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 billion a year," that's the level we're talking about, "to 10. I'd rather go from five to six." When you read these things, what you're seeing is people are increasing. They're just not chasing a target. I fully expect that the institutions I deal with will continue to increase the allocation, and the other part, and 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 zero to something, and those amounts of capital I was in a discussion two weeks ago with an institution that was sitting there saying, "You know, I'm not sure whether my maiden allocation should get me to $100 billion. That seems like too much, doesn't it? Maybe I should think about $50 billion." This is the first time this institution's going to invest in the private markets. That's the capital flow you're dealing with today in those capital markets. What's going to change that? That institution maybe does $40 billion instead of $50 billion. Is that really going to move the needle in terms of the potential future for private market sorts of assets?
We're talking about just percentages here, but the pie itself grows. We've decided to have a pie discussion, but they're making bigger and bigger pies. It's like going from one of these little pizza things to like the extra big pizza. When you compound a whole portfolio at 8 to 10, if that's certainly in a lot of the sovereign funds, they're dumping money in it. That's happening with no appreciation.
Oh, yeah. Those sovereign funds, you talk to some of them, and if the markets do nothing, zero, they will grow in numbers that, I mean, frankly, dwarf some of the largest U.S. institutions that are investing, or European.
How 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, 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. As investors, again, you got to look at that and say that even I know that can't be true, not being a statistician. 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, it is not the sole critical determinant, because track record matters. Remember, we're locking up our assets for a long time. Brand matters, reputation matters, relationships matter. As you look at those kinds of institutions that have to put in huge amounts of capital, let me go back to the one that's putting in $50 billion in the private markets. It's not going to make 5,000 $100 million 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 billions of dollars. 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 three really good deals and I bet I can do three 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. I think those factors are all involved in how you select someone.
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, they're also giving money to managers that can do things across asset classes to the extent they've had a good experience, their assets are growing and the allocations are increasing to the asset class of alternatives. In a way, it's pretty much of a perfect storm.
Yeah. I think, again, think of yourself as the institution. Think of yourself as me or our client. Try not to. Don't think of yourself as me. Think of yourself as our clients. They have a lot of money to put out, 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'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 that are giving me all of those underlying companies. 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. 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 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, it is very hard to break into that group.
Mario, when you take an asset class, for example, one of the things that we get asked by investors is they sort of like anybody could do this stuff. I mean, real estate, they're just buildings. Anybody could go into this. You guys do very well. You're the biggest in the world, brand X can just sort of hire a few people and institutions receive them well, there's the concept, I believe it's called white space, 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'm not going to lie. There is an underappreciation 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. I'll tell you why we believe that, because there are some groups that have done it for 20 years. 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 one and a half x, 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. You have, and again, the virtue of what happened in 2008, 2009, and you know this on the real estate side. 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.
Again, we're not the smartest people in the world, but we see things over and over and we go, "Huh, I see a pattern here." You have that view of, yes, maybe anyone can do it, but maybe no one or not everyone can do it as well. You are beginning to have some haves and have-nots in terms of who my world gives capital to out there. That is something we have not seen before. 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. One, 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. The concept of another firm creating a platform of this size and scale anytime soon is remote. 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. If you're a large institution and you're thinking of an allocation around the private markets, you need scale.
There's not a lot of scale out there across these asset classes with quality. From that perspective, it is an issue. I had someone say to me that, again, because remember, private markets are very young. We're talking about 20 some odd years. I know. I'll finish in a minute. I know they want me off. I can see the red there. 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 Stanleys could you create?" I'm not suggesting this is where they're going to end up.
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, there's a lot of trends pushing your way.
Well, what I can say just anecdotally, we got to wrap it up, is that in the olden days, when Mario was just starting in business and we were doing our second fund, if you got a $5 million or $10 million commitment from an institution, you thought that was like a good day. That was worth flying across the U.S. for. You didn't go to Europe then for five. They weren't sort of in the game so much. Now we have individual LPs who can give us a half a billion dollars, a billion dollars. In fact, we had one of our businesses or somebody came in with three-quarters of a billion dollars, and we turned them down, because the fund was already subscribed. This is like a completely different.
Yep
Sense of scale. I can guess who that $40 billion-$50 billion player is, or $100 billion or whatever they were going to be. 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, that's like a real differentiator. 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. 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, to start with four or five people, now you've got a few hundred, 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.
Thank you.
Mario, thank you.
Thank you.
Steve, if we could actually open it up to the audience for a couple questions.
Yep, if you want.
That'd be great.
Thank you. Mario, I was wondering if you could provide some perspective on the corporate pension plan market, especially with the rising funding statuses 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 non-starter now?
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. I think that will continue to go down. Not because they don't like private assets. They were the first ones in it. 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. It just kept coming out to him.
The reality is corporate pension plans want to de-risk 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. You see the participation more than made up by others coming into the market. 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.
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, whether it be mutual funds, et cetera? Secondly, what's the pricing dynamic these days since the pools of assets are getting larger? Are there price concessions being given to get those assets?
Yeah. The two-part, it's not coming from, as I said, when the allocation goes up within an institutional framework, generally it is coming from, for private equity, the public equity side, for private debt, from the fixed income side. 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 than there was three or four years ago when the fundraising market was more difficult. Let me do the price pressure on two parts. Number one, 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, to Steve's credit, they're not dumb. They will say, "I'll give you a quarter less for 50% more money." We go, "Cool, I get a quarter less. We give you the money." The math works out pretty well. I have seen no change in the carried interest structure. None. That has not moved at all, and I haven't seen it move in 25 years, really.
Yeah, I wonder, everybody kind of lumps alternatives and alts into one category. If you just put it into two big buckets, privates versus liquid hedge funds, and how do you see the ability to create value? How much of the benefit from alternatives is driven by the private-public arbitrage and ability to own and transform the assets versus just the good investing? Related to that, how do you look at the ability of liquid hedge funds to generate value? 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, I would not pretend to be the expert on that I'm pretending to be on the private side. I think that on the liquid side, let me leave 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, 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, it's not arbitrage. If you have a company that is pretty lousy and you pay six, and then it's really good and you get eight for it on exit, I'd argue that's not an arbitrage. We do some analysis of where it's just the markets have gone up or where. 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 2008, 2009 downturn, a lot of it was financial engineering.
I get that it was operating, 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 2008, 2009 downturn. Again, the long-winded answer, as you see, most of them are long-winded when you're up here with me, 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, 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. There's been a lot of talk about scrutiny of fees, from a regulatory perspective in 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?
Sure.
Do you think there needs to be more investment made and maybe how Blackstone stacks up?
Yeah. The best. 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? 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 fee allocation, all of those things you've seen in the press, has been fine.
I think investors have been very happy with it, and it has been driven by Blackstone. 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. 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. So I think at that point That is fine. I think what the SEC is saying is they're firing the warning shot at 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.
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. 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. We're very far along in that kind of area. Anyhow, we ought to go on.
Thank you
Let's go to the rest of our presentation, Mario.
Thank you.
10 out of 10.
Thanks.
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, one, talk to you a little bit about why we actually started this business. Two, a little bit about our strategy and how we've sort of been developing various themes across the business, then actually get into a couple of specific deals to actually give you a sense, what are we actually investing in these days? Then open it up for a question or two. 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. I always start really simply.
Basic laws of supply and demand. We were staring at the marketplace towards the back end of 2011. I'd recently moved back from about a decade in the European market. We realized that actually what was happening with both regulatory change, in particular, the Volcker Rule, which was basically taking financial institutions and dramatically reducing/eliminating their investments off their balance sheets and proprietary investing, et cetera. 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, were dramatically pulling back and sticking with their more liquid strategies. 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.
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, et cetera. We found that we were getting a tremendous amount of deal flow coming into the firm. A variety of different areas. It could be coming in through our advisory businesses. It could be coming in through our private equity businesses, our real estate businesses, our credit businesses, our Hedge Fund Solutions businesses, but they actually didn't have a home. Somebody might have thought it was an interesting type of transaction, but it actually didn't fit a particular mandate.
We realized, wow, there's this amazing 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. Then lastly, 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?" 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. Whether it's, again, credit, whether it's the Hedge Fund Solutions 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 aggressively across our asset classes and our companies. We obviously do a tremendous amount of research across all of these different areas. When we looked at that, we said, "Wow, we have the deal flow. We have the supply, demand, and balance. 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." Lastly, to have a new business, you actually need some clients that are really excited about that business. I think, again, we're blessed a bit at Blackstone with incredibly deep and substantive relationships from very large capital pools across the globe.
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 looked for their support as we started in the Blackstone Tactical Opportunities business. We started the business early on in 2012. We had terrific support from many of our longstanding relationships. 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. I'd end by just impressing upon you again on this slide 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. 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. Obviously, our intention is to be extremely opportunistic with our capital. Opportunities that might be very compelling in the first 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. We were 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.
They said, "Wow, we completely agree with you." We said, "What would be the dynamic if you just tried to invest in a non-performing U.S. residential strategy on your own, absent being part of the Tactical Opportunities business?" They said, cutting through 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. 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. 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, 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 three shipping investments during the course of 2012 into early 2013. We're not particularly bullish just generically on shipping. These were very bespoke, specific situations, but it was obviously an industry that had extreme dislocation of capital.
That's a perfect place for us to be in Tac 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. 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. 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 we go from being a buyer to a holder and eventually a seller in those areas. We've 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. 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. That convertibility, though, will be into a minority stake in your company. If things work out really well with this particular business, we will convert to equity and generate 20-plus% returns.
If we're wrong, which is possible, I certainly hope not, we will be senior to a tremendous amount of equity in a capital structure where we'll generate a very attractive fixed income return for our investors. 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. Of course, that is going to fundamentally depend on the underlying risk of a particular situation.
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, or we'd rather do this particular transaction at a 21% return. We're constantly mining that. What I meant to mention earlier on the first page, but I think is critical for this business, is our investment committee. We did something unique with Tac Ops that we hadn't done before at 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. Jon Gray, Joe Baratta, Bennett Goodman, Steve and Tony, of course.
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 an 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. Jon might come at something from a more real estate-oriented perspective. He looks at shipping as a bunch of metal that's just depreciating in the water. Joe Baratta 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, et cetera.
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. We're always going to where the most knowledge is based. 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 re-performing 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.
We'll crack a tape on a set of non-performing loans and we'll play it out by ZIP code. There will never be 100% match, but maybe half the portfolio. We'll have incredibly detailed information on that market, on every specific home that's traded. 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. Again, we're constantly trying to have a total differentiated edge relative to anybody else we're competing with in the marketplace. Regulatory capital, I might have mentioned earlier, we think this is still 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.
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 billion 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. It was a wonderful way, again, to bring the firm together and get significantly better knowledge than anybody else in the market across a 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 through our private equity group over the years. Again, that knowledge base to be able to go into the ground lease business was fantastic. We're bullish on spectrum.
One of the ways that we decided to play the complete, again, supply-demand imbalance in U.S. spectrum is we're buying TV stations. We're not buying TV stations for cash flow value. We're buying television stations for spectrum value. I could go on and on, but I am running out of time. I am going to conclude by just saying we're early in the business. We've been operating for a little over two years. We've raised over $5.5 billion 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 Tac Ops II later on in 2014. We've committed over $3 billion of capital in about 30 transactions to date over that period of time. We've been generating, to date, through last quarter, about 18% gross returns.
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. Most importantly, we don't believe that others can 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. 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, can you give us a sense of, I want to be clear, what proportion of your investments do you originate versus are originated in one of the other businesses that make their way to you? 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 Tac Ops? 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. About 35%, think about it as two-thirds, one-third. 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." About two-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. In terms of specific deals. Secondly, we don't compete with the other areas of the firm.
If there is a transaction, whether it is generated by somebody in my group or even your example of somebody else in a group coming over to us, if it fits into one of our other core traditional mandates, it goes to them. 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 and fit them, so you take a piece that once you've taken 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. Every once in a while, of course, it can be debatable for that group head, let's say, as an example. We have done a few things where we've made investments, and there's been another area at the firm that has co-invested in that particular area. Again, that's always done, always discussed. 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. We went to GSO and said, "So what do you think about this?
We think it's really mispriced." 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. GSO took a piece of that transaction, we took a piece of that transaction, and I think we're all very happy with that. 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 Verdun 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 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 interests in buyout, mezzanine, venture, growth equity, real estate funds, as well as other private equity strategies. Our focus has always been on high quality. We look to close deals on a fair, timely, and confidential basis. Why do we do that? First, it's the right thing to do for sellers. Two, 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. If you were to look at the seven 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 billion. 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 close one new transaction on average, one every six calendar days.
The transaction closed in August of 2013, and as busy as we thought we were, we now close one every five business days. It's a lot of deal flow. To put that in context, 800 transactions, what does that mean? It's somewhere around two to three times most of our competitors. We're very in tune with the markets, the sellers, and pricing. In terms of our returns across our funds one through five from inception through December 31st, 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 billion in commitments. If you look at the left of the slide, you can see our flagship LBO-centric business starting with our Fund 1, which is a 2001 vintage fund. We raised $832 million. Also in that blue box, you can see our net returns.
For Fund 1, we're currently at an 18% net IRR through December 31st, 2013. You can see the progression and growth of our LBO-centric business for Fund 2, a 2003 vintage fund, as well as Fund 3, Fund 4, and Fund 5. We're currently raising our latest secondary fund. In addition to our flagship LBO-centric business, we also manage venture capital-only secondaries funds. We also manage an overage fund, 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 of funds. There are several metrics here that I'll discuss. First, assets acquired.
We typically buy funds that are on average 75%-85% funded. We don't like blind pool risk. Certainly, we like to be able to perform fundamental bottoms-up analysis on those companies. By mitigating that blind pool risk, we know exactly what we're getting exposure to. Second, year of acquisition. Typically, years three through seven. The advantage of that is it mitigates the J-curve. You're closer to ultimate exit, so it provides near-term liquidity. 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 three and four, many times losers have revealed themselves. As painful as it is, we don't like that. We don't want to lose money.
Whether a company's already been written off completely or it's trending negatively, we can attribute zero 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%. Just keep in mind, the discount doesn't drive the attractiveness of the deal. It's a data point. It's an output. It's not an input. Just to give you the data point, it's typically a 15% across the life of our business. Return of capital, years zero through seven. It's not unusual for us to close a transaction and then get a distribution the next month, literally. Unlike most private equity strategies, our funds begin making distributions almost immediately. In fact, many investors view secondaries as a yield-like product.
Finally, diversification. We can diversify by sector, vintage year, manager, geography. If we don't like a particular sector, we won't buy it. 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. We have here two slides. The slide on the left speaks to supply, the slide on the right speaks to demand. 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 billions of U.S. dollars, the amount of secondary deals executed globally. The year we were founded at DLJ in 2000, there were $3 billion of secondary deals executed globally. Last year, that number had grown to $28 billion, so a ninefold increase in 13 years. What's more telling is in 2000, roughly one half of 1% of all unrealized private equity assets sold on the secondary market. That number now, as of last year, is about 1.5%-2%. Yes, it's grown, but I would argue that penetration rate is extremely low. 1.5%-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.
How much demand is out there chasing this supply or pursuing this supply? These charts show the beginning of 2010 through the beginning of 2014. That's the dry powder, unfunded commitments pursuing this strategy. At the beginning of 2014, there's about $45 billion of unfunded commitments, and that's all of our competitors. That's Strategic Partners and all of our traditional competitors in the space.
If I were you, what I would do is I'd add $10 billion to that to account for non-traditional 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 billion of dry powder. Keep in mind, that number is typically invested over 4 years.
What that means is you only need about $14 billion of supply per year to be in balance. This year, 2014, we expect another record year, roughly $30 billion of supply. Said another way, there's enough demand to meet only 2 years of supply. 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 billion of deals that we're going to do this year. In our view, this market is more of an imbalance 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, that could simply be a pension plan reducing relationships or locking in gains. 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. For us, our strategy is if we've worked with you once, we want to work with you again. Programmatic sellers are our best sellers. They come back to us over and over again. Second, 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 Volcker Rule. 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.
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 on the secondary market are driven by distress or a liquidity need. It's absolutely false. Less than 10% of all sellers to our market are driven by liquidity or distress. 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? 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.
They're typically less than 50% funded. 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 to various managers for various reasons. Going forward, we have several opportunities, including but not limited to infrastructure and real asset secondaries. We're seeing a lot of appetite for that program, as well as co-investments. We're in 1,700 different funds across 700 managers. We have co-investment deal flow that others simply can't see. 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 and the Blackstone platform, like other businesses at Blackstone have done, to launch additional products that are related to our business. 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. 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. I think you'll see that as I talk through this. Onto 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. We do deals, again, on a fair timely 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. For example, in 2013, 72% of our deal flow by value was with repeat sellers. That's a huge percentage, and we like that.
More importantly, since we've gotten here to Blackstone has sourced $1.2 billion 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 touchpoints 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 1,700 funds. Those are in our database. We track those. In addition to the 1,700 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. 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 touchpoints 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 V funds. Our LBO fund is currently at a 46% net IRR. Our real estate fund's at a 33% net IRR. Our VC fund's 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.
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 VI in roughly half the time as our previous fund for Fund V. Then finally, people. All great businesses start with people. I couldn't be more proud of our team. Very strong investment professionals. We work very hard. 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. 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.
Frankly, I see a very long and positive trajectory from here. With that, I'll conclude and open up for any questions you may have. There's 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. One of the things that we thought about a great deal when we were going through the acquisition is, will other GPs be bothered or concerned with the fact that we're owned by Blackstone? 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 one. Two, 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 tested our ability to transfer funds.
If you think about Blackstone and you think about their core competitors, the vast majority of those we've purchased since August 2nd. 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. We're very comfortable with our ability to transfer. There's a question here.
Last question.
Currently, you should be buying funds that are in the 2005, 2006, 2007 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. For those 2005, 2006, 2007, if you look at our Fund V, our weighted average vintage is 2005. 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. When those companies were written off or became impaired, we hadn't bought it yet. We only started buying it five, six, seven years later. Those companies had already been written down. We're buying into 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. 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. 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. Three and a half 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. All our research kept on coming back to the same thing. The greatest opportunity for us was in the private wealth space. I'm going to cover three things today. I'm going to talk about the opportunity.
I'm going to talk about how we're executing on the opportunity. We're going to talk about our results. Let's talk about the opportunity first. You see a chart there in front of you. In the U.S., 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, et cetera.
Endowments have even more money. They have about 26% of their money allocated to alternatives. Private wealth individuals have somewhere between 2% and 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, pensions, endowments, foundations, outsourced insurance money, that market's about somewhere between $9 trillion-$10 trillion.
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, et c., that money aggregates to somewhere around $10 trillion-$11 trillion.
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 five big banks and brokerage firms, the five largest ones in the U.S., total client assets are somewhere north of $5 trillion. When we look at their analysts and what their analysts and strategists are recommending in terms of where individuals with $5 million or $10 million or more of money, where they allocate their assets to, what we see across the board is it ranges somewhere between 5%-20% of their assets their strategists are saying should be in alternatives.
yet remarkably, almost no matter where we go, it doesn't matter whether it's a private bank, a brokerage firm, or whatever, the highest to the lowest, almost invariably, the amount of money that they have invested is somewhere between 2% and 3%. 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 five large players, $50 billion was in play. If I extend it further to all the players, it's a bigger number, obviously. 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. 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 BAAM unit. All of our research seemed to indicate that the raise would be somewhere around $150 to $175 million, which is a great success. Actually, what ended up happening is that we ended up getting somewhere around $450 million.
The punchline 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 metrics and metrics that these banks use, net new assets is the most valuable thing.
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. 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. The reason is threefold. If you're going to go in and partner with a J.P. Morgan 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 six different businesses that are in the asset management business here. We have real estate, private equity, BAAM 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. 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 senior management to get this done. If you take our brand name, our breadth of products, and the focus that our senior management has put on 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.
When we went into these firms, and we're talking about really a Merrill or a 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 in alternatives. 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 two days with them. We don't spend two days selling to them. We spend two days going with them through all of our businesses, how they work, how we get the returns, how to position alternatives in the marketplace. 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 1,200 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 difference with us. All right. We have three channels of distribution when it comes to private wealth here. Number one, 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. 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 million to $20 billion come in to visit with us and spend time with us. 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 BAAM, there have been advisory and sub-advisory relationships that have been out there as well. 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, be it private equity or real estate or whatever.
I can tell you in the third and fourth quarter of this year, there will be four 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. 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 one 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 billion. None of it was exposed to alts. We built an alt product specifically for them. That's just one example.
Of course, the other thing that we do is we try to get evergreen product, things that are in the market constantly. With our BAAM 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 $2.5 billion. 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 billion. In the last 12 months, in the quarter ending in March 31st, it was $9.3 billion. 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 billion worth of money that Blackstone had on the books. We now represent more than 12% of the $272 billion 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. 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. 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 one or two.
Kindly raise your hand.
Go right there.
Hi, 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. I would say the cost of acquisition for assets for us is probably less than, say, six months worth of management fees or something in that neighborhood.
Here you go.
Other questions. Yeah.
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 allocations to illiquid investments? is there any progress being made on that front?
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 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 Merrills and the Morgan Stanleys 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.
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 too hard.
Last question.
Yeah.
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've heard some comments this morning, there was 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?
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. I'll be in Europe and Asia in the next few weeks. We have huge demand from there.
I 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. All right. Thank you all. I appreciate the attention.
Please welcome Tom Hill, President and CEO of BAAM.
Good morning. In our discussion today, we're going to focus on three questions. What, h ow, and why? What is the BAAM business model? How is it that we've achieved better returns and better asset growth than our competition? Why will we continue to grow and prosper? Let's start with a report card on BAAM 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 of 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? First 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 billion of liquidity when our investors needed it after the crisis of 2008.
Now, the good news is virtually all of that $9 billion 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 billion of assets that we manage, we also advise on another $25 billion of assets.
Now, most of our competitors did not meet investor expectations in one 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 BAAM. The next largest competitor has 27 billion less assets under management than we do. 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&P total return. We've done this with less volatility, translating into higher Sharpe ratios. 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.
Let's get to the question of how, h ow 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 two years, we have negotiated 138 deals with hedge fund managers. Now, what kind of deals? Deals that reduce management fees.
For our flagship fund, we've been able to get fee reductions of 40 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 one, two, or three 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 Opportunities Fund. We've achieved 11% compound net returns, and that has helped us 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 two years, we've created $18 billion of new capacity that is just for us.
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 commingled 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 Pande, who was a senior portfolio manager, a trigger puller within the Ziff Brothers structure. We also will be able to invest in our overall business infrastructure.
Let's take on the third question. Why? Why will we continue to grow and prosper? We have created not one, not two, but three 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 2009, 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 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 $5.5 billion in a multi-strategy center book that sources ideas and invests directly across our entire platform. If we're running a $5.5 billion multi-strat, how have we performed against the competition? How have we performed against a composite of other multi-strats? We've achieved the same returns but with lower volatility, hence higher Sharpe ratio.
Now, what are the benefits to BAAM? Longer duration capital, hedge fund fee structures producing more revenues per dollar of assets managed. This platform, as we think about it over the next two years, is going to include a whole new initiative where talented risk-takers like Parag Pande will be recruited into a condominium-like structure managed by BAAM to create interesting exposures for our overall business.
We expect by the end of 2016 to have multiple billions in this new platform. Let's spend a minute on our hedge fund ownership platform, where we're currently managing $5.8 billion. This business line provides both seed capital, where we can attract hedge fund talent, but also permits us to purchase hedge fund GP interests 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 BAAM 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. 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. 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 BAAM, and to you? If the hedge fund industry grows, and you've seen numbers that were slightly less than $3 trillion now, and by the end of 2018, numbers say it could be as much as $6 trillion. When you stop to think, that number is not so out of line because the total value of financial assets around the world is about $280 trillion. That includes stocks, bonds around the world, not including bank deposits, commodities, and foreign exchange.
Hedge funds now are just about 1%. 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 five years, we want our investors to benefit as an equity owner in these businesses that are going to participate in the growth. Even if the hedge fund industry doesn't grow, at BAAM, 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.
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 billion of committed capital. I think you know in our first close, we were $1.4 billion. We're going to have a second close, which should be another $600 million-$ 800 million. We're fully expecting that to be at $3 billion 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.
Brendan mentioned the RICs that we are managing now, mentioned the '40 Act, where we have a very large relationship where we have over $1.2 billion in '40 Act and also UCITS. Two years ago in this category, we had zero assets. Today, we have 2 billion. It took us three 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. It' s 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.
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 platforms that we don't control. So for instance, 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 UCITS.
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 US mutual funds, there's $11.3 trillion.
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 first-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 hundred 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, Tactical Opportunities, 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 five years, 60% of the money that we've raised has come from existing investors giving us more money. What does that mean? It means that you have a highly satisfied customer who wants to give you more. Existing investors have provided between 50% and 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 technology. So what is that? That's risk management. It's aggregating positions. We spend over $20 million 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 million. 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. BAAM is a high-growth business. Over the last five years, we've significantly grown our business across all financial metrics. We have consistently provided significant portion of BX's overall earnings.
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, BAAM'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 three next-generation platforms.
Direct investing, hedge fund ownership, which includes seeding 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. Our liquid alternatives platform is well-positioned in the fastest-growing part of the industry. Even if hedge funds don't grow from three trillion to six trillion, BAAM will continue to capture market share and prosper. 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 presentation.
I'm disappointed. Yes, Joan.
Can you address the earlier question related to 401 market?
I didn't hear the previous question, so
Okay. The question was basically, how can you address it? Can you address it? What are the hurdles, et cetera?
There are a lot of hurdles.
Your product.
There are a lot of hurdles. I think you know that we have a relationship with one of the largest providers of 401 options in the world. We have been working with this very large institution to see, similar to what we did with the '40 Act, if we can wrestle to the ground the complex issues. I have to say, we haven't cracked the code yet. If we are able to crack the code, there are significant assets. Similar to the '40 Act, you got to do it very carefully. There are landmines everywhere.
Thank you, Tom.
Thank you.
Please welcome Laurence Tosi, Chief Financial Officer of Blackstone.
You know, earlier, Joe lamented having to go after Jon 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's Garden," but I'll do my best. I'm going to focus on five 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. 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 tenth, eleventh, twelfth 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. 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.
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 net 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. Even with a strengthening pace of realizations, the myth that that 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 out on our performance fees have also been up very sharply to $1.9 billion. We've returned $42 billion 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 billion, they're looking to put that back to work. We have gross inflows in the firm of $62 billion, and at the same time, we've put $22 billion 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 billion that we pushed back, you see going from 91 to now 204. Our total AUM almost 300% rise from 95 to 272. Distributable earnings going from 461 to just under $2 billion, and the realization's going from 1 to 33. More than ever before, all of this creates momentum, not negative momentum in the business. 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 an 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 13.1 trillion. 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. We're not just betting on the public markets.
When the S&P 500 reaches 16.5% forward earnings multiple, there's an 80% chance that the growth in the equity markets over the next three 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 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 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, an informational advantage, and then an operational advantage. On the right are some of the fastest growing, and no coincidence, all alternative managers. There are eight of us. The public alternatives. We represent 1.0 trillion in assets under management, but we're distinct. We're very different businesses. 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. 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 four 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 raise since 2011.
Our top four competitors, who have 547 billion in management, almost twice the size of Blackstone, have raised 153 billion, or roughly 28% of their total size. Blackstone, and this is the one chart where we will look small, at 272 billion, has raised nearly 61% of our size, or 167 billion. That is because we're in all four asset classes. Most of our competitors are one, maybe two, none three, and nobody four. 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'll 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 2008, 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 2008 through to today, we've raised $272 billion. 122 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.
When you think about cycles, we are a different company today than we were even at the time we went public. Even the existing strategies, simply through performance, have been able to drive $150 billion of inflow. But here's another interesting stat. Let's translate that to what we've been doing over the last 24 months.
What's interesting to us is people say, well, and you heard some of this from some of the best businesses today. Joan said it's getting tougher in North American real estate. Joe said the deals are tougher. You have to look more places. 2006 and 2007 and 2008 for Blackstone were a searing experience. It's part of our culture to look at and examine critically what we got right and what we got wrong.
We realize now, and we realized 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. In the last 12 months, we put $18 billion to work, but it's a very different $18 billion than we might have seen in 2005 and 2006. $8 billion of that $18 billion came from those very same strategies that didn't exist in 2008. Not only are we innovating, but we're actually in a scale way able to put money to work. 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 2008. When we went public, we had over 800 people and five 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 firms-- 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. $129 billion has come into gross inflows into new strategies and $97 billion into the existing strategies. Now, a little word about differentiation. There seems to be right now a trend towards trying to diversify by buying, by rolling up, et cetera. 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 four major segments.
In the last six months, we went from three months where real estate was the fastest in terms of realizations, to a period when private equity was. They had even ENI in the first quarter. Tom's business in BAAM 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.
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 2008. To give you an idea of how that is reflected in our LPs, in 2008, which will be the left-hand side of the slide, we had 719 LPs. Today, 2,312. In 2013 alone, we raised $7 billion from 200 LPs who didn't even do business with us in the end of 2012. 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 one.
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. 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's 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. 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 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, and you can see the numbers going from 272 in the green box to $1.2 billion over the last 12 months. In the bottom, fee-related earnings, a consistent growth driver.
What's really important is, and this is true from a year ago, two years ago, and three years ago, Blackstone's always very balanced. Because we're diverse, 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. 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, we'll draw down the rest of the firm's financials. Not true. That's not how our business model, as diverse as we are, works. Number one, 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. 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. 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 through $4 billion in realizations that have been paid out. That's important. Essentially, the creation in the firm is outpacing even the rapid pace of distributions. 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 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 cents, which represents the incentive fees that are paid out annually, you have $2.32 per unit today poised to be realized. A t the same time we're seeing those realizations, you can see in the private markets we continue to create value.
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&P and they think 4% or 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 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. We have that core base of earnings.
We also see that there's certain times that people look at the fluctuations of the S&P and say, "Well, 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. These short fluctuations, some as big as a 14% or a 12% change in the S&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&P. Jon's businesses, the real estate fundamentals relative to the supply-demand imbalance 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 fourth quarter, and this isn't Blackstone, tends to be a period where there's higher realizations. That's just a market phenomenon. Now what happens is, I'm going to add in, the yellow line that I just put up shows you what the analysts' forecasts are for us.
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 fourth quarter, which is usually seasonally higher, and overestimate the first three 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 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 doesn't end any day. It 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. There are five 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 third-party assets, and that provides scale.
Our own assets in the businesses are there for alignment. There's $7.5 billion 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 we don't want to have. Most importantly, the single highest return on equity business in asset management is managing third-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 third part, and I think this came through in all the presentations today. Blackstone's 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-