Good day, ladies and gentlemen, and welcome to the Blackstone First Quarter 2014 Investor Call. Now I'd like to turn the call over to your host for today, Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. Please proceed, Ms. Oltar.
Terrific. Thank you, Glenn. Good morning, everyone. Welcome to Blackstone's Q1 2014 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer Lawrence Tosi, CFO and Weston Tucker, Head of IR.
Earlier this morning, we issued our press release and the slide presentation illustrating our results. Those are available on the website and we'll be filing our 10 Q in a couple of weeks. So I'd like to remind you that today's call may include forward looking statements, which are uncertain and outside the firm's control and actual results may differ materially. For a discussion of some of the risks, please see the Risk Factors section in our 10 ks. We don't undertake any duty to update forward looking statements.
We will refer to non GAAP measures, and you can find those reconciliations in the press release. I'd also like to remind you that nothing on the call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Blackstone fund. The audio cast is copyrighted, can't be duplicated, reproduced or rebroadcast without consent. So quick recap, we reported economic net income or E and I for the Q1 of 70% $0.07 excuse me, that's a record Q1, it's up 27% from $0.65 last year's Q1. Increase was driven by higher performance fees.
We had greater appreciation in the underlying portfolio assets as well as higher management fees. Distributable earnings were $485,000,000 in the quarter, that's $0.41 per common unit, up 21% from last year's Q1, We'll be paying a distribution of $0.35 per unit to shareholders of record as of April 28. So one more note from me, we're going to be hosting our 4th Annual Blackstone Investor Day on June 12 in New York. We've just sent out the save the date emails. If you haven't received one, but you'd like to, please let us know.
Also, please mark it on your calendar. Please feel free to follow-up with me or Weston after the call with any questions. And with that, I'm going to turn it over to Steve Schwarzman.
Thanks, Joan. Good morning and thank you for joining our call.
It's been a terrific start to
the year, as Joan told you and Tony earlier, with a record Q1 for both E and I and cash earnings, an all time record AUM of $272,000,000,000 which is up 25% year over year.
Each of
our investment platforms posted great returns and double digit AUM growth, and we generated total realizations in the quarter of over $9,000,000,000 Though equity markets have experienced a recent downdraft, though they're rebounding a bit, we're at a favorable point in this cycle as our asset values of our underlying assets continue to rise and we're finding interesting investment opportunities around the world. Our limited partner investors are looking to put capital to work in areas of asset management that have shown the greatest returns over time with less correlation to market indices. Blackstone is perfectly positioned to take share of this growing pie. We pioneered several businesses over an extended period of time to become a best in class brand and the only manager with scale global platforms across the major asset classes. One of the challenges many money managers will face with greater capital flows, more competition and higher asset prices is how to generate good returns.
Blackstone's singular focus on achieving top tier investment performance is a key differentiator in this environment. Our returns were quite good across the board in the Q1. As Tony mentioned, our private equity portfolio rose 27% in the past year, including 7% in the Q1. These returns are being driven by strong portfolio company operating performance with some of the best revenue and EBITDA trends we've seen in some time and significantly better than trends in the broader market. This is really important for you to understand that our underlying assets are in our view significantly outperforming what's happening in liquid securities markets.
In real estate, our opportunistic investments were up 28% over the past year, including 4% in the Q1. Our credit funds had gross returns between 19% 31% over the past year and 4% to 5% in the Q1, which is pretty terrific for any asset class, but particularly outstanding
for
credit investing as you've seen from results from other firms that we reported in the last few days. And our hedge fund solutions business or BAM produced a 10% composite gross return over the past year and 1.8% for the Q1. In order to generate sustained performance like this across our business and across cycles, you need to invest well and you need global diversified investment capabilities. We've invested over many years to develop this. For example, our real estate business started with a central global fund and then we raised a European fund then a Debt Strategies business, now Asia and most recently Core Plus.
In private equity, we've added a dedicated energy fund to invest alongside our global fund, created our innovative tactical opportunities business and then added a secondary business and so on. Our business is the business of innovation for the adjacent products. Because of this approach, the backdrop for making new investment remains favorable for us today. In the Q1, we invested or committed $7,400,000,000 across the firm, which reflects a very active pace. Over the past year, we've invested $22,000,000,000 so you can see our pace has increased from that annualized pace with an increased mix of deals outside In private equity, our investment pace has picked up sharply to $3,100,000,000 in the Q1.
New commitments include Cronos, a workforce management software provider that's really got a really terrific market position and Versace, one of the best known fashion brands. We also continue to see significant deal flow in the energy sector. Post the quarter, our pace remained strong with several new commitments including Gates Global, a leading manufacturer of automotive and industrial components and significantly that's a big aftermarket type of business, which is protected from some of the vicissitudes that you'd assume with auto. In real estate, we expanded our logistics platform in Europe, added to our industrial and multifamily footprint in the U. S.
And invested further in select service hotels. The outlook for new investments remains compelling, particularly in Europe, where significant distress exists in the system and Asia, where we see strong growth, less supply and limited competition as well as a shortage credits, it's good opportunities for us there. In our credit business, our mezzanine and rescue lending funds were quite active deploying or committing nearly $900,000,000 in the quarter with a continued focus on energy as well as European direct financing. To support our investment pace, we have significant dry powder of $48,000,000,000 which is up from 36,000,000,000 a year ago. That's a really nice increase as our investors entrust us with more of their money to manage.
Importantly, despite our ability to raise substantially more for all of our recent funds, we've capped them to match the investment opportunities. In fact, we've never seen flows in the firm's history of this scale and we've had the discipline to not take every dollar that we've been offered, which is important to preserve our performance record for our limited partners. Our outstanding track record, which spans nearly 3 decades, is built on this discipline and our ability to manage capital across cycles. In the Q1, we raised over $10,000,000,000 in capital, bringing us to $52,000,000,000 for the past year, excluding acquisitions. No one in history in our asset classes has even vaguely approached this kind of number.
In real estate, we had a final close for our 4th European fund, which hit its cap of nearly $7,000,000,000 making it the largest of its type ever raised, we could have raised very significantly more than the $7,000,000,000 While it is an accomplishment in its own right, the fact that the team achieved this fundraise, the biggest in history in only 6 months from 1st to final close is a true testament to the power of our real estate franchise and the excellent work we do for our limited partners in that area, and it's the strongest possible endorsement by the investors in the real estate opportunity class. We had an additional close for our dedicated Asia Fund, which is now $3,500,000,000 This is still in real estate and we expect to hit our cap of $5,000,000,000 And we've had 2 oversubscribed common equity raises already this year for BXMT, our commercial mortgage REIT, which has reached $1,400,000,000 in market cap in less than a year and this is a company that we bought for $30,000,000,000 that had other assets in it. So this is a pretty remarkable increase in value. Lastly, in real estate, we're advancing with our core plus strategy, which I mentioned, which now includes 4 separate account investments, the most recent of which was in Europe.
While it's too early to detail our approach to this market, it's a very large asset class and we're extremely well positioned to address it. Strategic Partners, our new secondaries business is making great progress on their new fund, reaching $1,500,000,000 at the end of the quarter on their way to a targeted $3,000,000,000 plus size. And this is one of the reasons why we occasionally purchase a business. This is a group where it was started by Tony at DLJ and the scale of the increase in the size of the business will be quite substantial, utilizing the Blackstone name with the same excellent investment skills that the group has. And tactical opportunities closed on a few more large commitments, which were pending at year end, bringing the business to $5,600,000,000 one of our most successful first time fundraisers to date and a great testament to the team there led by David Blitzer.
Investor demand for our credit products remains strong with good inflows into our hedge fund vehicles and several separate account mandates from large investors with very substantial returns for those investors. And BAM further advanced its leadership position in the Q1 with a very strong $1,600,000,000 of fee earning net inflows and an additional $800,000,000 of subscriptions on April 1. As I mentioned before, we're at a very favorable point in the cycle where capital markets have been conducive for us to exit our more mature investments. Our realizations in the Q1 of over $9,000,000,000 equated to one of our best quarters ever for realizations and if you remember from what I said earlier that's about what we raised in the quarter. We were particularly active in private equity mostly from BCP 5, that's Blackstone Capital Partners 5, including 3 public market dispositions and 3 strategic sales.
In real estate, we had significant partial realizations in our U. S. And European office portfolios, including our sale of Broadgate in London, which occurred at a multiple of over 4 times our original invested capital and a net IRR of over 40%. This is not what happens typically in real estate with mature properties in the center of London. If you recall, we made this investment in December of 2009 when the owner needed to delever its position like many people in real estate at that time after we patiently refrained from investing for 2 years when markets were in free fall.
I want to just say that again because part of being a really excellent investment firm is knowing when to go and when not to. And we stopped investing for 2 years while the markets were really just melting away and that was before the financial crash. This is another great illustration of how having locked up capital and investment period of several years enabled us to choose our moments with great outcomes for our investors. Since we made that investment, our real estate platform has invested a truly remarkable $34,000,000,000 of equity and no one, no one in the world has done anything of that type. Our full sales in the quarter for private equity and real estate generated a combined multiple of 3.4 times our original invested capital.
The reason people give us money isn't because we have good analyst calls. They give us money so that they can make money. And an example of 3.4 times across 2 of our biggest asset classes for investments sold in this period gives you a sense of why the alternative investing area is a great one and it's going to continue to grow. In credit, we saw further realizations out of our first mezzanine and lending funds. In many cases, as our borrowers called us out at a premium in favor of lower cost financing.
Looking forward, our realization momentum is continuing to ramp up and I believe our shareholders can expect much more to come. We have a large portfolio of seasoned assets and $36,000,000,000 in publicly traded AUM, which will look to exit over time as markets permit. People ask questions on occasion about having these large public investments, which we have now and what tends to happen over time is as we sell stocks go up because overhang is reduced. So rather than be concerned about us having this scale of investment, we're prudent sellers and it typically works best for the people who own these other stocks and they figured that out which is overall
a good
thing. Blackstone remains the best positioned company and the fastest growing part of the asset management business. I believe we have the strongest platform, the best brand, the most experienced and talented team in the industry. As we continue to grow assets at substantial rates, invest wisely and achieve great returns, our earnings and cash distribution should continue to grow as well, which will benefit our public shareholders. So our shares have sold off a little bit in recent high, although they're climbing back with our results and Tony's explanation of them, And we're above our initial IPO price, which is sort of a good thing, still down from 35 to around 32 now, but not so bad.
I'm confident that ultimately our shares are going to rise to reflect the real value of the company. 1 or 2 quick things, I was on my treadmill this morning watching this endless array of earnings results, which I'm sure you've seen. And somewhere around, I think it was 7 o'clock BlackRock came out with its results and they're really good. And their revenues were up 9%, their earnings were up 20% to $762,000,000 and that was a really, really good quarter. And they're paying a dividend yield of 2.5%.
And I just bring to your attention that we announced a little bit later and our revenue was up 20%. And our earnings were up 30% as opposed to their 20%. And actually our earnings in this quarter were larger, 814 to their 762. The only difference is our market cap was only $35,000,000,000 and theirs it was $53,000,000,000 which is like 32% less. And we're trading at a multiple of 10.2 and they're trading at 17.
And our dividends only double at 5.6 according to analyst estimates. So this is all public information. It always like coming over. And I was sort of watching it. So I think BlackRock is a great company.
We were involved when they started. They've had terrific growth and they're a gold standard in the businesses that they're in. And I just wanted to point out that perhaps we're not so bad either. Finally, Blackstone has been the pioneer in the multi asset class business in alternative assets And we're the knowledge leader in this approach. And one thing I think is important for you to be thinking about that there are other people who want to sort of take the approach that we've had.
And from reading some of the analyst reports, evidently, there's a real focus on white space where there's a sense that people can just sort of do this stuff. And having been involved for almost 30 years now of doing it, this is difficult to do. Just because you say you want to do something, it doesn't mean that you can do it. And the reason for that is multifaceted. First, institutions don't like trying new firms with any scale in industries that they've never been in.
It's
just not something they like to do. Retail investors don't like it much either. Secondly, the issue of how you assemble a team, who's had success and whether people have worked together is an issue as well. And so I mentioned this because just to give you a sense of how this works, I was reading a chart that PERA gave out on money raising over the last year in real estate. And in that chart, for example, Blackstone was somewhere around $30,500,000,000 And the next biggest was another group that's been in the business for 20 years and they were at 7.
So we're 4.5 times. And people who haven't been in real estate had virtually no position in that business. So this is something that takes a very, very long time to do well. We've been doing it on that basis and people here are dedicated to producing great returns and growing rapidly, but consistent with not taking more money than we want since we've turned away money in virtually every fundraising we've done in the last few years. So with that as just sort of a little background, I'll turn it over to Lawrence Tosi and then we'll be glad to take questions afterwards.
Okay.
Thank you, Steve, and thank you, everyone, for joining our call. This quarter was a record first quarter by all major financial measures and asset measures with ENI, the measure of total value created, reaching $814,000,000 up 30% year over year. Distributable earnings, the measure of value realized as cash is up 24% to $485,000,000 which translates to $0.41 per unit or 5.6 percent yield over the last 12 months. Those levels of growth easily outpaced traditional asset managers, as Steve just pointed out, financial services firms and the S and P at large by an increasingly wide margin. All of Blackstone's investing businesses contributed double digit growth to the firm's overall 18% increase in fee revenues, a steady earnings driver, which is 70% tied to a growing base of long term commitments to our funds.
Net performance fees and investment income rose 28% to 325,000,000 dollars on a 50% increase in realization activity, with 50 different deals driving $9,300,000,000 of realizations in the 1st quarter and 174 different deals generating $33,000,000,000 over the last year. We now have $3,500,000,000 of net accrued performance fees equal to $3.11 per unit that would be realized at exit based on first quarter values and which indicates considerable forward earnings momentum. Blackstone has experienced consistent and balanced growth, and I'll focus today on how that growth has a uniquely stabilizing and enduring effect on the firm's earnings, including across market disruptions. Blackstone's balanced growth reflects the fact that we are in a long term value creating business where risk management, allocation flexibility, product diversity and operational expertise are the drivers of fund and firm value, quite separate from short term public market movements. The Q1 was no exception, although the depth and consistency of the drivers behind Blackstone's performance are perhaps not entirely appreciated.
The value creation across our business is driven by fundamental growth. For example, in the Q1, we saw 14% EBITDA growth in our private equity portfolio companies on 7% revenue growth compared to 4% earnings growth for the S and P. More than 80% of our portfolio companies reported healthy revenue and EBITDA growth, the most on record, and 96% of our CEOs surveyed after the Q1 said their calendar year 2014 EBITDA would be higher than 2013. Similarly, real estate fundamentals are strong across all subsectors, largely due to limited supply, coupled with moderate improving economic growth. We are seeing pre crisis levels of occupancy and hospitality, which are driving up rates and showing high single digit revenue across those portfolios.
Equally, logistics assets and retail shopping centers are showing occupancy and rate driven valuation increases in the high single digits. Finally, we are continuing to see strong trends in U. S. Housing with double digit annualized home price appreciation in our markets. This isn't just the case with our private holdings.
Our public holdings representing $36,000,000,000 of equity value were positioned at IPO to achieve long term growth and exceed the hurdle in the funds in which they are held. Blackstone's public holdings were up more than the S and P in the Q1 4%. We price, build and exit assets based on the long term value created whether by private sale or IPO. And for that reason, we think our forward earnings momentum is less susceptible to market swings than public assets in general or traditional managers, which revenues are based on public AUM. Our credit business is largely based on private investments and floating rate debt, where the biggest risk to valuation is defaults.
While there are certainly risks of a rate rise, which creates value for our funds, the current economic conditions do not indicate an uptick in defaults and all of our credit vehicles are performing exceptionally well. Even in the downturn, Blackstone's ability to structure and manage its credit exposure led to realized losses of less than 1% in our customized credit solutions, while our mezzanine business has never had a negative quarter. Our hedge fund business invested across 21 strategies has long and short elements to it and is largely based on our ability to find good managers, structure our investments and optimize our allocations, all activities designed to outperform the market. And the hedge fund business' delivery of 11% returns at 37% of the volatility of S and P over the last 20 years proves that to be true. In fact, that business outperforms greatest in the periods when the S and P is volatile.
And since inception, BAM or Hedge Fund Solutions has outperformed the broader market in 92 of the 98 months in which the S and P index declined. Here's perhaps another way to look at it. If you take the 4 quarters the S and P has declined since 2010 and compare that to Blackstone's performance, what you will see is that E and I can experience temporary impacts that recover in the subsequent quarter, but the pace of cash realization continues on its trend without impact. Why? Because realizations are more tied to fundamental operating growth than short term markets.
The last 12 months experienced a 95 percent increase in realization activity and a 75% increase in realization revenues and earnings. In fact, over the last 4 years, despite 2 full market corrections and a strong increase in our realizations, our net accrued performance fees have grown 13 out of 14 quarters to the current record of $3,500,000,000 That is 5 times what it was 4 years ago, reflecting the compounding effect inherent in performance fees where Blackstone typically gets 20% of the value created regardless of the invested or committed capital. We now have $116,000,000,000 of performance fee earning up 31% year over year. Or maybe think about it this way, of the $3,500,000,000 in net accrued performance fees, dollars 1,800,000,000 or $1.59 per unit relates to companies that are actually publicly traded today. The compounding growth of net accrued performance fees combined with our strong earnings mix and ENI driven by value creation are both the best indicators of our forward earnings.
So to bundle Blackstone in a higher beta version of public markets simply belies the fact that our entire business model is built on creating value away from those public markets on a consistent and long term basis. A few comments on our balance sheet and value per unit. The firm now has $7.20 per unit in cash and investments on the balance sheet, up 21% over the last 12 months. In the Q2, we executed a very successful $500,000,000 30 year debt offering at a 5% coupon. The offering reflects our commitment to be consistent be a consistent participant in the bond markets and to support our current offerings by issuing different tenors.
The offering was 3 times oversubscribed and led by some of the world's largest bond buyers. Both S and P and Fitch reaffirmed their A plus ratings, making Blackstone one of the highest rated and in demand credit issuers, not just in asset management, but in all financial services. In closing, global markets may see some volatility as they often do, but the ultimate driver of value is performance of the assets. And we have a very good performing assets in fund structures that give us significant long term value creation advantages. Thank you.
Great. Thanks. So if you have questions, please feel free to go in the queue. We have quite a few analysts and investors on the call. So if you can limit your first round to just one question, please.
And operator, we're ready for the first
And your first question comes from the line of Dan Fanning with Jefferies. Please proceed.
Good morning. Just looking at BCP V, outside of the public holdings, which are now obviously a big component, can you talk about some of the biggest movers in that and things we or for the quarter and also potentially going forward in terms of some of the holdings?
So Elsie, do you want to hit the numbers of that
and then I'll talk about the portfolio a little bit?
Sure. So, Dan, BCP V had a very good quarter in the Q1 and was really driven by the fundamental growth in the portfolio. Its public assets performed well and that's been pretty consistent. And a lot of the data that I just gave you about the forward outlook does reflect assets that are in there. We pull obviously, we have all the real time financials through the end of the Q1.
We pull the CEOs in there. And the feeling is that the EBITDA growth is steady and on pace. And you can see that just by watching the deficit, if you will call it that, to earning full carry going down from $1,400,000,000 to 916,000,000 dollars just in the last few months and I think that reflects the operating performance.
Okay. So Dan, the EBITDA is actually accelerating EBITDA growth in B65 is accelerating each quarter and while for a while it tracked the S and P pretty closely, actually there was one quarter where it fell a little bit behind for whatever reason, which was the Q3 last year. But lately it's been not only ahead of the S and P, but it's accelerating while the S and P earnings growth is flattening. We've got some companies that really have a lot of momentum. Hilton, for example, which is the biggest investment, is doing extremely well.
And we're getting the compounding, of course, of earnings growth with leverage and which magnifies it and then the delevering effect of the cash flow. So we're pretty we feel good about the portfolio. Basically, we kind of whenever we analyze the sale process, we look and see what's the return to keep holding even if the market backs off a little.
And if we can get something in
the teens by continuing to hold, even though the company is public, we continue to hold because we're earning well above the return is well above what the investors could otherwise earn by redeploying the capital either in debt or general equities. So, so far it looks good. The portfolio looks good. We're 3% away from where we are fully in carry on the enterprise value overall portfolio. We're already in carry on a part of BCP V and have pulled out have made some carry distributions this quarter.
So I think we feel good that it will get there. How far into the carry it gets will be the issue.
And your next question comes from the line of Bill Katz with Citigroup.
Thanks so much.
Can you tell us where you think we are in terms of the opportunity set to pick up either distressed or other type of assets that were formerly being managed by banks, if you will, in terms of the maybe the deleveraging around the world and where
you stand in terms of the opportunity set? I think it depends where in the world you're talking about and what asset class. Right now in Europe, really for the first time over the last 6 months, the European banks are in good enough shape that they're able to liquidate assets and still maintain a decent capital ratio in the bank. And so that's got a lot of stuff going on. And you're also seeing some type of distress in Asia, in real estate as a number of the banks retreat in terms of credit extension, which is putting a lot of pressure on people who develop and hold real estate.
Not so much here in the U. S. A lot of that's been increasingly cleared out, although there still is some real estate in the commercial area of that type and residential different markets are healing in different ways, but have a way to go from the artificial depression from the withdrawal of credit in the housing sector. Corporate wise, in the U. S, there's obviously not a lot of distress left.
There's a little bit in Europe and in Asia, really some of that's going to be coming in the future if the emerging markets develop problems. So I don't know, Tony, whether you see things differently than Yes, no,
I see it the same. I mean, just put to pull meat on the bones. Europe, there's very little distressed in any asset class and what is out there is the prices have really moved up. So we started buying non performing residential loans at $0.40 on the dollar, it's more they've more than doubled, for example, lately. And at some point, that's not that interesting.
So the U. S, there's not much to stress and I would say it's just declining further and prices are high. And in Europe, there's we've been very active lately, but there's starting to be much more capital flowing into Europe for Distressed. And so I'm not sure necessarily how long there'll be interesting opportunities, but they're interesting today. And interestingly, Asia, particularly with the pullback in credit in China is really starting to pick up a lot of So there's a lot so it's kind of it's flowed from the U.
S. Into Europe and it looks like it's flowing over to Asia just regionally. I would say the 2 businesses that benefit the most from the bank sales are real estate and tactical opportunities and to a lesser degree our strategic partners business. So those have been the prime beneficiaries, but we'll have to see. It's a very pricey world and it's a healing world.
Europe, I think the economy has bottomed out, so I don't think we're going to be creating a lot more distress. U. S, of course, economy is picking up momentum and it's really emerging markets where you could get something going off the rails, but there some of those assets are if they're credit assets, you get creditor rights issues and some other things that make it harder.
Yes, one final thing because we give answers that are much too long, but it sort of tells you how we think that there is dislocation coming out of all the financial regulation that's continuing, whether it's U. S, whether it's Europe, much less in Asia at this point, though that will change. And the tightening of regulation, the prohibition to be in certain things, the mandatory requirements for equity make it very difficult for the banking system to continue extending credit in areas that they are used to. And as a result of that, that creates opportunity, which can be done through a completely different funding mechanism, which is very important to understand that when we go into businesses, we typically raise long term capital without any demands for repayment on liability side. And so we're finding a steady stream of those type of opportunities, which is what you would expect with a dramatic rejiggering of
the financial system globally. Yes. One last piece of color on that. The U. S.
Banking system is pretty well capitalized actually. So there's less forced selling come out of them. It's Europe where you've got relatively more of the forced sellers, which is less well capitalized. And in Asia, it's not so much coming out of the banks as it's companies that can't get access to capital. Right.
Okay. Thank you.
And your next question comes from the line of Robert Lee with KBW. Please proceed.
Thanks. Good morning. Just curious, the Financial Stability Board came out with their
Can you speak up a little for some reason? You're a little Yes.
Is that better?
Yes.
Okay. The FSP, they had their white paper, I guess, several months or quarters ago. They included about looking at taking a look at asset managers more from a product perspective as opposed to a manager's perspective. But some of your peers out there have written their comment letters about how they think they should approach that and with a particular focus on leveraging products, for example. I'm just curious on what your take is on that process and what you think about kind of the what the FSB has said and where you think things may be headed?
All right.
So Robert, are you sort of referring to the whole shadow banking debate?
Well, I guess the Financial Stability Board said that when looking at prospective non bank, non insurance SIFIs, that they would focus that not on the manager level, but on the product level potentially, whether looking at leveraging products, the size of products? So I think I'm just kind of curious where we go. Okay.
So our view is that there's no conceivable way that if people were rational and are worried about systemic risk that Blackstone would be a SIFI. Our assets are not interconnected. Our funds are not levered. Capital is tied up. One asset go down and because there's not crosses, they're not cross collateralized, it doesn't destabilize any vehicle.
It's no different really than a mutual fund owning a bunch of equities. There's no more systemic risk to what we do than that. So it's really and whereas the mutual fund could have a lot of redemptions to be a poor seller, we really can't be. So I don't really see how now that doesn't mean that the political process might not come to a bad result. But so we just look at it and think that at the end of the day rationality will prevail.
If I get one thing, the other measure that they're looking at is $50,000,000,000 of assets in total for some of these institutions worth $16,000,000 So we're a long way from being even close to that. And obviously, even for the 16, all those assets a lot of that applies to what Tony just said was highly diversified in a bunch of different private funds.
And your next question comes from the line of Glenn Schorr with ISI.
Thank you. Curious to get a little update on what's working in the retail channel, obviously a lot, but curious to get in the perspective of the overall company. And then the Part B of that is whether or not the increased penetration in retail and credit lending focus overall brings any more regulatory scrutiny than you already have?
Okay. Well, first of all, everything is working in retail right now. And just to put numbers on that, I think we talked about 5 years ago, we raised about $500,000,000 a year in retail products. In the first quarter, we raised $2,500,000,000 this year, just to show you how it's ramping. Now part of that is the market has come back, but a lot of that is the retail system that we've built and have been building for 4 or 5 years.
We've tried to keep that low visibility for competitive reasons, but it's out there now and it's really humming. So originally retail investors wanted yield product and anything with a yield. And now they've shifted, the risk appetite has gone up a lot and they're very much more focused on total return and there's really appetite for our high return non yield products, private equity, real estate, distressed rescue financing, so on. So and the way we approach is in a lot of forms targeted towards different audiences. So we have a mortgage REIT where you can a little old lady can buy 100 shares safely for a few $1,000 and then we have direct participation into private equity real estate, cash flow opportunities, some of those more esoteric products where it takes ultra high net worth investors.
Then we have products in
the middle targeted for the mass affluent BDCs and things like that. So we and as you know, we've created a daily liquidity hedge fund product for in conjunction with Fidelity, which we're now going to be expanding some of that distribution. So we have a lot of it's all of our products and it's all segments of retail and it's getting at those retail investors through a lot of different distribution mechanisms.
The one thing I might add to that, Glenn, is in that you asked us about regulatory oversight and impact. Just to be clear, when Tony used the word direct, meaning they're going into our main funds, but they're going through a vehicle that's set up and managed by the actual brokerage network as it may be. So we're one step removed from actually taking, so they are qualifying the clients and dealing with the clients directly, not us. I think that's an important distinction from regulatory and risk perspective.
Understood. I guess the only follow-up I'd ask is in conjunction or related to the same product that you have out with Fidelity, I think you're seeing a bunch of the traditional asset managers put out some liquid alternatives. And I'm curious to see how you think that interplays with all your efforts in the retail channel? And if it's that just is that just speaking towards a certain sub segment and your brand would do well in that channel anyway?
Well, I think our brand will do very well in that channel anyway. But those liquid alternatives products that are being put out there are not really alternatives products. So despite the label, they'll get a they are getting huge amounts of money, more power to them, but notwithstanding and they've been out there for a while, notwithstanding that we're still ramping significantly. But none of them offer the kind of returns, the lack of correlation and so on that we do. As I said, they're not truly alternative products the way we define it, which is focused on private markets.
Excellent. Alright, appreciate it. Thank you.
And your next question comes from the line of Luke Montgomery with Sanford Bernstein. Please proceed.
Thanks. On the Gates transaction, I know that Joe has said buying something that someone else has already optimized is not a recipe for success And Onex doubled their money on that holding. So I'm curious what precisely you see that you can do with that business that Onex couldn't? And then just more generally, what is your response to the idea that a 15% IRR is the new 20%. I imagine you'll appeal to the operational improvements you can make, but how do you methodically address the lower term critics?
Yes, this is Steve. Just on Gates and buying things from other people. We get this question from time to time. And it is interesting that when people buy stocks, they don't ask the question of who owns it the last time and the fact that a stock was always out there and its company is always being improved and people buy them. And sometimes if they're smart, they go up a lot and if they're not so smart, they go down.
And for some reason, we get asked different types of questions even though we're buying used companies that were out there. Now we've done this a bunch and it's really a function of what you're buying and what your analysis is. For example, we bought a company called Gersteiner from another firm years ago and we made 6.5 times profit on it and you could have asked the same question. With Gates, the analysis is and it's not a zero sum game. Somebody can make money and someone else can make money too.
That this is a very interesting company. It's a terrific company actually. And it's global. It could do more expansion in certain parts of the world. But basically, Gates was part of a deal, which was a combination with a company called Tompkins in the UK.
And the direction when that company was bought was to basically liquidate the Tompkins business. Tompkins was comprised of a lot of bunches a lot of smaller companies within Tompkins. So the management's primary focus and incentives was for doing that liquidation rather than spending an equivalent amount of time on the Gates portion of the business. Like many private equity deals, there comes a time when you sell it, when you've accomplished a bunch of what you tried to do. I think the sellers in this case did, they had a successful deal.
We look at Gates from an operating perspective and in this regard, we've had a very good thing happen here at the firm with a fellow named Dave Calhoun joining us who for, I guess, it was like 7 years around Nielsen very, very successfully and previously was Vice Chairman of General Electric. And Dave was part of our due diligence team on this along with our team of really terrific private equity professionals and other outsiders that we use. And the view of Dave as well as the other people is that there were significant improvements that could be made to Gates in terms of best practices and other approaches with applications of capital with high returns. And so as a result of really just sort of blocking and tackling a case with a company with very low downside in terms of its basic business because it's primarily aftermarket rather than with the volatility of an OEM that we took a positive approach on the deal. One of the wonderful things about our business is you find out in 3 to 5 years if we were right or not.
And we think the analysis here is correct or we wouldn't have gone ahead. But one of the things you also find is that when you buy really good companies like Gates, good things tend to happen to you. And a little bit of attention goes a long way. So that's maybe more than you wanted to know about Gates.
And on the second part of your question, Luke, is 'fifteen the new 'twenty? I think it's not quite the way we think about it. We promise we expect to deliver our investors 500 to 700 basis points return above what they could earn in the public markets. And that may be somewhat lower today than it's been. But when I look at the deals deal by deal, they're all being priced to what we think is the same 20% hurdle.
Now we correct for the fact that the market is pricier and more difficult by reducing, as Steve mentioned with real estate, reducing the rate of investment to try to keep that bar high. And but I think we'll I think that the funds that we're investing now will be right up in there with any fund we've ever invested in terms of total return.
And what we've also learned is when you stray from that discipline, which other people in our business, not all, but other people from time to time do, they say, well, all the market's giving me is 15, is that's usually a sign of some kind of a bubble. And that if you just follow the crowd, good things don't happen to you because that 15 ends up not being 15 either. So it's important to keep discipline. And it's part of the things part of the lessons you learn doing this kind of investing over decades.
Helpful. Thank you very much.
And your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Hey, guys. Good morning. Just to follow-up on the outlook for realizations, I understand kind of the sizable embedded gains that you've built up across your funds and sort of the more liquid profile of the underlying investments. But just to play devil's advocate, just curious as to the potential extent, maybe the choppier market backdrop more recently could possibly impact the timeline for IPO secondary offerings and just realization activity more broadly?
Well, look, if the market goes down a lot, it will push out the timeline, for sure. On the other hand, these assets are not of static value. If we sell a company 2 years from now, it's going to be a heck of a lot more valuable. So it doesn't so what happens then? Investors have to wait a little longer for distribution, but the distributions are bigger.
And what we when we eat the carry and what investors present from is not IRR, it's the multiple of invested capital. So the IRR could be flat or it could even degrade a little as the holding period stretches out, but the multiple of money really goes up. So the carry goes up and faster than the overall value, obviously, because it's a derivative of the gain. So it's not such a bad thing. And that's why we can be patient, and we are patient.
And we're always looking at what can I get to hold it? And frankly, even at these equity prices, it's not such an easy decision to sell many of these companies. They're doing great, and they have a lot of appreciation ahead of them. And that's one of the reasons that our IPOs almost universally perform extremely well and well outperform the market because investors know, A, we don't sell much when we IPO it and B, there's a lot of appreciation potential ahead with these companies. So waiting is not a bad thing.
One of the things that LT said in his remarks, I think, was that our companies are growing, was it 100% more than the S and P in terms of EBITDA, I'll see. Right. So let me pretend you construct a portfolio that's growing at 100% of the S and P and that you have some stock market choppiness for 2 to 3 weeks and sort of markets go down. As Tony indicated, if we can keep compounding these the earnings of these companies at double that rate, there is no bet that happens to you as an investor. If you could put together a portfolio of companies growing at double the S and P and do it at our ridiculously low multiple, you'd be a happy person, I would think.
I mean, we're happy. So we look at the realization questions slightly differently than some other people might look at it because we're trying to create a lot of value and the market gives it to us, we'll take it. But as long as we can do a terrific job growing these assets well in excess of what other people might be buying at what is in effect for you a very low buy in price. And that's good model, I think.
Okay, makes sense. Thanks for taking my question.
And your next question is coming from the line of Mike Carrier with Bank of America. Please proceed.
Thanks guys. LT, maybe two things just on the on some numbers. First on like the fee earnings, I think the seasonality in terms of 1Q versus 4Q on advisory, you kind of get that. It seems like on the expense side, both on comp and on comp, maybe it was a little bit higher. So any seasonality there that will normalize?
And I know you guys gave some color on that one page in terms of unusual items. And then just on the performance, so I think you guys have stated the growth in the portfolio companies, whether it's on the revenue and the EBITDA side. So I get that. I guess I'm just trying to figure out because in general, we typically see like the private portfolio or the performance be relatively subdued over time. So I am just curious, like in this quarter, was there like an inflection point in some of these sectors and some of these companies?
Or was there something else in the like comps that did well in the quarter even though the broader market wasn't as strong?
Okay. So the first part of your thing about advisory fees, the way the GAAP works, you try to accrue for what you think the compensation amount will be for the entire year, even though in that business, we tend to be cyclically concentrated in the Q4, Mike. So the fact actually that the compensation accrual in the Q1 looks high relative to the revenues is actually a reflection of the fact that our outlook for the year is that we will have more than 4 times the Q1's revenue over the course of the year, if you follow me. So typically, we have about 30% of the revenues in the 4th quarter, but I'm required to account for 25% of the full year compensation expense in the Q1. So actually it's more of a bullish sign of where they are.
And I think if you look at revenues up year over year about 7%, and then economic net income about 3%, that's in that range is what we're forecasting for the year.
Now as far as the
private performance over time, actually what did not drive the valuations in the Q1 was market comparables or changes to exit multiples. It was purely driven by EBITDA growth. So we very rarely do we make changes in exit multiples. Obviously, the multiples will change. We take the company public because the market will give its own multiple to a business.
And that typically those multiples will be higher than our carrying value because we point towards a conservative long term multiple value. But the driver that you saw in the private portfolio and the public portfolio reflects where they are on a growth basis, not a change in multiples.
Okay. That's helpful. Thanks.
And it
really was it was across the board. It wasn't sector by sector.
Okay. Thanks a lot.
It was balanced.
And your next question comes from the line of Matthew Kelly with Morgan Stanley. Please proceed.
Thank you for taking my question. I wanted to ask about the real estate platform with BREP VII, the majority of that being invested, I know you have the Asia Fund out there now. I'm just curious what are your thoughts are when you could be out there with Fund 8 and how big you think you can get or what are the opportunities outside of what you're doing now, how big debt can be, etcetera? So what are the opportunities for growth in other words?
Yes, I think Steve, Fund 8 is a ways away. We've sold a whole bunch of stuff already out of 7 and we have recyclable capital. And so that I can't give you a date on that, but that's not imminent in terms of happening, although the fund is sort of like gangbusters. I think we're allowed to say what the returns are?
Yes, we actually have in there.
Okay. So the returns on that fund, even though it's got a pretty short life, there's somewhere in the upper 20s. It's 28% net IRR today. From memory, which is pretty amazing actually. So we're ways away from doing that.
Even our people might need a breather every once in a while. You were saying where is there opportunity? That part of the question?
Yes. So that was part of the question. Anything else you want to mention too?
Yes. I think we did mention the core plus area, which is a potentially large market opportunity for us. And I think you'll be hearing more from that in the future as we develop our plans in that sector.
Great. Thanks, guys.
And your next question comes from the line of Mark Irizarry with Goldman Sachs. Please proceed. Great.
Just a quick couple of quick questions on private equity. First, just in terms of the uptick in investment activity, the 3 $100,000,000 that you invested or committed, how much of that was in the U. S. Versus the rest of the world? And I have a quick follow-up.
Okay. LT is going to handle that.
It's about sixty-forty, sixty U. S. Forty outside.
Martin, private equity.
Okay, great. And then just in terms of fundraising, it looks like tech ops and strategic partners and private equity have some activity going on there. And I guess you're in the main strategic partners fund, you're 70% drawn. Can you give us a sense of how we should think about fundraising over the next maybe 12 months to 18 months for private equity? Do you foresee also maybe a big another BCP fund coming to market as well?
Yes. Well, yes, we're coming to market with our energy fund, which will in all probability end up being capped. It should be a lot of demand for that with returns. The previous fund in the 50s, you don't find many funds in history that do things like that. And then we'll be again, these are sort of probability type things coming to market with our next significant BCP, basic fund BCP 7 would
fundraising for these funds. So it goes on for a while after that and we can while we finish all the old funds. I should note that Strategic Partners also, their fund has hit its hard cap. It's up from and up from $2,500,000,000 to $4,000,000,000 or something like that, so a 60% increase. And we also have a very exciting business in tactical opportunities.
This is all in the private equity segment, which is getting pretty fully invested. So I wouldn't be surprised to see them back in
the next year or so as well. And Tak, on the SP thing, one of the things that is a sign of health, if you will, is that they in effect will hit their cap probably and sitting with a group of people so they can correct me on this, but it's basically in around 6 months from going into the market. Usually these funds for most firms take 1.5 years to raise and it's a sign of how well regarded the SP people are. We've been experiencing this in other parts of the firm as well that whether it's the market, whether it's us, that the marketing periods for these funds are getting shorter and shorter and the demand is significantly higher. For example, if you were to measure this 2 to 3 years ago, it would have been appreciably different.
Okay, great. Thanks.
And your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hey, guys. Thank you. I want to expand a bit on Steve's intro comments around the dominant position you have in real estate and how much further behind a lot of your competitors are. It does look like a lot of players that probably would have historically been considered core real estate have been ramping up pretty significantly. And I saw the same list you've seen and you see guys moving from 23rd place to the top 10 in 1 year.
I'm curious as these larger pools of money get raised, how does that discussion work with your LPs? Do you feel like they want to diversify away from Blackstone to some of these guys that do have a history in real estate, making that incremental dollar that much harder to get? And secondarily, are you seeing more competition on some of the larger deals that maybe 2 or 3 years ago you would have been the only bidder?
That's a very good question. I think we're still dealing with the overhang of basically miserable performance by most of the managers in real estate, whether they were core managers or opportunity manager. And so there's a real desire for safety. Real estate is in a liquid asset class. Typically, it's got leverage.
Typically, there are always some group of people hitting the wall in any economic downturn. And the fact that we've had virtually no losses in opportunity real estate, which tends to have the highest leverage, and that's virtually no losses. I think it's less than 1% of capital over 22 years. I mean,
it's sort of an astonishing
record for capital preservation, let alone performance that's the highest in its sector with no one close, puts us in a very unusual position, which should last for some period of time because if you've been burned, you've given people money, you tend not to forget that very quickly. And so one of the reasons we keep creating more and more gap between ourselves and the rest of the people in that asset class and it's actually pretty unique thing in my experience because it shouldn't be happening. But the distress was so severe with these other managers and our performance was so differentiated, including the safety component of it, which is very important for large institutions that it's allowing us to expand in different parts of the real estate complex. And so we'll be continuing to innovate in that area. And I think that this is a trend that's going to exist for some time.
It is different buying a piece of core real estate sort of a nice sort of more or less go where office building and generating a 7% return than it is doing a lot of operational changes with a piece of real estate or going through major restructurings or
building
additions or improvements to real estate or basically modernizing or upgrading or improving software systems and a variety of other things that really operation. And so I'm not trying to take the downside of your question. There are always people marketing to every large pool of capital. And just because you're out there wanting to do something doesn't mean people will necessarily assume you can go from something you were doing to something that they view as much different. You may tell them in effect it's the same, but if they understand the differences, they may challenge you on that.
So I think this is much more kludgy than you might suspect. It's not this stuff doesn't happen as fast as it would with liquid managers. We hire somebody who was at a new place and they bring the record and it just sort of happens and the money flows to them. It's different and the approval processes are different and biases that gets built up, not just by the people in the institutions who are green lighting, but also their Board of Trustees, which are very cautious generally about the real estate asset class. So that may have been more of a wandering answer than you were looking for, but it reflects my perception of what's going on.
So Patrick, let me add a couple of things. As Steve mentioned, there's just no one close that has in terms of the investment track record. And so what that's meaning is we go out, we're not only not not only investors are not coming into our funds in preference to others, our fund our real estate funds are all hitting cash. We're turning away investors. So I think that's to the benefit of other funds, because we can't take all the capital.
But we're certainly not finding any if anything, it's insufficient supply, not insufficient demand, number 1. Number 2, in terms of putting money out, real estate is huge. The value of buildings in the world is dwarfs that of
all stocks and bonds combined.
And so there's an awful lot to do by comparison to sort of corporate investing. And ironically, the cumulative amount of real estate opportunity funds raised is way smaller than the cumulative amount raised for private equity. So again, in terms of supply and demand of opportunities, it's extremely favorable. So it has been, as you can see from the rate of investment and the life cycle of these funds, which are shorter than private equity, it's not at all hard to put this money out. The investment pace is extremely high.
Number 3, there's a lot of scale advantages in real estate. I mean, there are certain deals where we're the only ones big enough to do it alone. Consortiums do form, but they're cumbersome and you tend to get a lowest common denominator kind of attitude and you tend to not execute very crisply. So that's one kind of scale advantage. Another one was Steve was getting into is very operational.
We have dedicated teams in Scandinavia that do only suburban office, and we have dedicated teams in Germany that do only hotels, And we have dedicated teams that do only warehouses in Continental Europe or in England or in the United States or in Japan or in China, dedicated teams each play. It's you have to have a lot of skill to have that. And if you don't have it, you become frankly a less good and less effective investor. So I think our LPs understand that this is kind of a unique kind of business that's very hard to replicate.
You should call them and ask them.
You don't have to believe us,
actually. All right. You should
just call a bunch of them. And you can call us back and tell them what we said. We think we're in touch with what they believe, but you should hesitate to call.
Thank you for the input.
And your next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Hi, good morning folks Good afternoon, I guess. Just a little clarification on the pace of capital deployment. It looks like you're running now at a pace of around $20,000,000,000 this year versus $15,000,000,000 in each of the last couple of years. And it looks like the pipeline into the second quarter is good. Just want to see if that seems about right given what you're seeing in opportunities and to what degree core real estate is a part of that deployment picture of that sort of $20,000,000,000 annual paces aside from core real estate and there is potential to put more to work over and above that?
And then just if you could just talk a little bit more about the BAM permanent capital vehicle, it looks like it's getting off to a very good start, your outlook for that mark, that type of market going forward?
Well, it's LTL. I'll take the first part and maybe Tony or Steve will take the BAM part, so find their answers more interesting. But with respect I would be careful to look at the Q1 of this year and normalize it towards some level, in part because the Q1 of last year was actually a relatively slow period with respect to deploying capital. Last year all in, we did just over $15,000,000,000 It feels like the pace of capital will be more than that, but nowhere near the 21, 22 that the pace would indicate at the moment, in my view.
Okay. Well, and let me just comment a couple of things. First of all, when you say the pace was $15,000,000,000 last couple of years and now it's 20, recognize that last couple of years ago, we didn't have as many products and funds. So we have strategic partners now we didn't have before. We have core real estate now we didn't have before.
We have Blackstone Mortgage Trust we didn't have before. So the pace is going up, not because necessarily a given business like, say, private equity is getting more active, although in that case it is slightly, but not back to the glory days, but really because of the because there are more businesses and they're all active putting money out. So let me put a little qualitative. I would say real estate opportunity real estate away from the new products is was at some kind of peak and is probably if anything going to be a little slower to deploy, although it's still running at a pretty good level. Private Equity, which has been putting money out slowly, is picking up.
Credit, which has had some very big years of capital fundings, will be notably slower. So those are kind of the trends within the sub segments.
What was the second part of the question?
The BAM permanent capital vehicle.
Okay. Yes. Well, so I think the vehicle has got off to a great start. It's performed very well. And we're looking we think it can grow a lot, and we're now moving to other distribution partners beyond Fidelity.
Okay. And the market for that, essentially, I guess, just maybe like longer term, it seems like an interesting structure. So do you think that that market just essentially very early innings and there's a lot of opportunity over the longer term to really grow that vehicle substantially?
Extremely early innings. I mean, one product in the first order is what you've got. It could be very substantially larger.
And our last question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Thank you and good afternoon. I just wanted to get an update on your thoughts around M and A. We have been hearing some positive commentary around the outlook from a number of the big investment banks who have been reporting. Clearly, volumes have been pretty depressed and range bound for the past 5 years. North America is starting to show some healthy levels.
Europe is starting to stabilize. So an updated view around the M and A market today from your seat would be great. And maybe how that market's developed relative to last year and then the competing dynamics between the opportunities for better asset monetization versus maybe more strategic participation and how that might be impacting target valuations or crowding out the number of bidders bidding for a particular asset? Okay.
Well, the M and A market feels better.
I would I say
it that way because if I look at the backlogs and all, they're definitely up. And what you'll hear a lot about is M and A practitioners talking about how buyers have been rewarded. So in other words, unusually, the stocks of buyers on the deals announced have been going up, and that's encouraging boards to be more venturesome and to put money out. Also, some other factors are, I think the economies Europe seems to have bottomed out, the U. S.
Economy is healing, And so boards companies are more comfortable, they're more adventuresome. They're sitting on a lot of cash and very strong balance sheets, so they have that in terms of ammo. And their stocks are up, so they got that in the way of currency as well. And then finally, their organic growth,
as you
can see from what's happening at the S and P, is weak. In fact, I think last year, if you took out stock buybacks, S and P earnings wouldn't have even been up. So companies are eager for growth. So the combination of desire for growth, lots of firepower, lots of currency, more comfortable with the world and the stock market rewarding and companies for deals has created, I think, an upswing in the M and A, which should continue for a while. I don't see which that any of those things reverse, and we're seeing that in our pipeline.
Now, what could change that would be some kind of geopolitical thing, I think. So, I mean, God only knows what happens if there's a problem between, say, Japan and China or something like that. That, of course, could change that perception in a hurry. But I will say the M and A business is it is a psychological business. And if markets plummet a lot, you'll have sellers wanting to back off and you might even have buyers wanting to sort of wait and see what's happening.
In the last year or 2, there
have been an awful lot
of transactions in M and A that were worked on, got to sort of the 10 yard line and didn't get done. And that's really happened last year as it looked pretty good
at the
beginning of the year and then it sort of petered out. Just a lot of things that buyers and sellers and agents and everyone spent a lot of time on just didn't happen. In terms of the impact on our I guess what you're asking again is our Private Equity business. I think the stock market now is offering values consistent with what a lot of times a strategic would pay historically. So we don't actually we're not looking to the strategic sale market for most of our exits at this point.
Most of it's equity. And if it comes back, it will be good for our existing portfolio because inevitably there will some more activity. And we certainly had some very interesting approaches lately with several of our companies. So to be clear, that's only a good thing with the existing portfolio. And but our exits are not dependent on that.
Now on the bidding side, a lot of times we're buying assets, which are kind of impaired and take a lot of work and under managed and they're just we don't see a lot of strategics often for those assets. Although, of course, if there's a lot more strategic activity, we'll see more competition inevitably. But our cost of capital today with interest rates where they are and the amount of leverage we can get, I think maybe below that of most strategics.
Great. Well, thanks, everyone, for joining us. And if you have follow-up questions, please feel free to call us directly. Thank you.