Good day, ladies and gentlemen, welcome to the Blackstone Q1 2014 investor call. 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. Solotar.
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, Laurence 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, we'll be filing our 10-Q in a couple of weeks. I'd like to remind you that today's call may include forward-looking statements which are uncertain and outside the firm's control, actual results may differ materially. For a discussion of some of the risks, please see the Risk Factors section in our 10-K. We don't undertake any duty to update forward-looking statements. We will refer to non-GAAP measures, 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 a solicitation of an offer to purchase any interest in any Blackstone funds. The audiocast is copyrighted, it can't be duplicated, reproduced, or rebroadcast without consent. Quick recap. We reported economic net income, or ENI, for the first quarter of $0.70. That's a record first quarter. It's up 27% from $0.65 last year's first quarter. 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 million in the quarter. That's $0.41 per common unit, up 21% from last year's first quarter. We'll be paying a distribution of $0.35 per unit to shareholders of record as of April 28th. One more note from me.
We're going to be hosting our fourth annual Blackstone Investor Day on June 12th 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. Please mark it on your calendar. Please feel free to follow up with me or Weston after the call with any questions. With that, I'm going to turn it over to Steve Schwarzman.
Thanks, Joan. Good morning. 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 first quarter for both ENI and cash earnings, an all-time record AUM of $272 billion, which is up 25% year-over-year. Each of our investment platforms posted great returns and double-digit AUM growth. We generated total realizations in the quarter of over $9 billion. 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 first quarter. As Tony mentioned, our private equity portfolio rose 27% in the past year, including 7% in the first quarter.
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. Significantly better than trends in the broader market, which 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 first quarter. Our credit funds had gross returns between 19% and 31% over the past year, and 4% to 5% in the first quarter, which is pretty terrific for any asset class, but particularly outstanding for credit investing, as you've seen from results from other firms that have reported in the last few days.
Our Hedge Fund Solutions business, or BAAM, produced a 10% composite gross return over the past year and 1.8% for the first quarter. In order to generate sustained performance like this across our business and across cycles, you need to invest well. 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. Then we raised a European fund and a debt strategies business. Now Asia, most recently Core+. In private equity, we've added a dedicated energy fund to invest alongside our global fund, created our innovative Tactical Opportunities business. 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 investments remains favorable for us today.
In the first quarter, we invested or committed $7.4 billion across the firm, which reflects a very active pace. Over the past year, we've invested $22 billion. You can see our pace has increased from that annualized pace, with an increased mix of deals outside the United States. Within the U.S., we're staying away from crowded trades and expensive sectors. In all cases, we're keeping the emphasis on generating our own deals. In private equity, our investment pace has picked up sharply to $3.1 billion in the first quarter. New commitments include Kronos, 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 remains 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 of credits. It creates good opportunities for us there. In our credit business, our mezzanine and rescue lending funds were quite active, deploying or committing nearly $900 million 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 billion, which is up from $36 billion 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 three decades, is built on this discipline and our ability to manage capital across cycles. In the first quarter, we raised over $10 billion in capital, bringing us to $52 billion 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 fourth European fund, which hit its cap of nearly $7 billion, making it the largest of its type ever raised. We could have raised very significantly more than the $7 billion. While it is an accomplishment in its own right, the fact that the team achieved this fundraise, the biggest in history in only six months, from first 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 $3.5 billion.
This is still in real estate, we expect to hit our cap of $5 billion. We've had two oversubscribed common equity raises already this year for BXMT, our commercial mortgage REIT, which has reached $1.4 billion in market cap in less than a year, and this is a company that we bought for $30 billion that had other assets in it. This is a pretty remarkable increase in value. Lastly, in real estate, we're advancing with our Core+ strategy which I mentioned, which now includes four 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 $1.5 billion at the end of the quarter on their way to a targeted $3 billion-plus size. This is one of the reasons why we occasionally purchase a business. This is a group 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 had. Tactical Opportunities closed on a few more large commitments, which were pending at year-end, bringing the business to $5.6 billion, 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. BAAM further advanced its leadership position in the first quarter with a very strong $1.6 billion of fee earning net inflows and an additional $800 million of subscriptions on April 1. As I mentioned before, we're at a very favorable point in this cycle, where capital markets have been conducive for us to exit our more mature investments. Our realizations in the first quarter of over $9 billion 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 V.
That's Blackstone Capital Partners V, including three public market dispositions and three 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 four 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 two 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.
We stopped investing for two 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, an investment period of several years enable 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 billion of equity, and 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 3.4x 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.
An example of 3.4x across two 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 is going to continue to grow. In credit, we saw further realizations out of our first mezzanine and rescue 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 billion in publicly traded AUM, which we'll look to exit over time as markets permit. People ask questions on occasion about having these large public investments, which we have now.
What tends to happen over time is as we sell, stocks go up because overhang is reduced. 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've figured that out, which is overall a good thing. Blackstone remains the best positioned company in the fastest-growing part of the assets 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. Though 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.
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. One or two quick things. I was on my treadmill this morning watching this endless array of earnings results, which I'm sure you've seen. Somewhere around, I think it was 7:00, BlackRock came out with its results, and they were really good. Their revenues were up 9%, their earnings were up 20% to $762 million. That was a really good quarter. They're paying a dividend yield of 2.5%. I just bring to your attention that we announced a little bit later, our revenue was up 20%. Our earnings were up 30%, as opposed to their 20%.
Actually, our earnings in this quarter were larger, $814 to their $762. The only difference is our market cap was only $35 billion, and theirs was $53 billion, which is like 32% less. We're trading at a multiple of 10.2, and they're trading at 17. Our dividend's only double at 5.6 according to analyst estimates. This is all public information. It all was coming over. I was sort of watching it. 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. 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. We're the acknowledged leader in this approach.
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. 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. 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. 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. I mention this because just to give you a sense of how this works, I was reading a chart that PERE gave out on money raising over the last year in real estate. In that chart, for example, Blackstone was somewhere around $30.5 billion. The next biggest was another group that's been in the business for 20 years, and they were at $7 billion, so we're four and a half times. People who haven't been in real estate had virtually no position in that business. This is something that takes a very long time to do well.
We've been doing it on that basis, the 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. With that as just sort of a little background, I'll turn it over to Laurence Tosi, then we'll be glad to take questions afterwards.
Okay. Thank you, Steve. 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 million, up 30% year-over-year. Distributable earnings, the measure of value realized as cash, is up 24% to $485 million, which translates to $0.41 per unit or a 5.6% 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&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 million on a 50% increase in realization activity, with 50 different deals driving $9.3 billion of realizations in the first quarter and 174 different deals generating $33 billion over the last year. We now have $3.5 billion of net accrued performance fees, equal to $3.11 per unit that would be realized at exit based on first quarter values, which indicates considerable forward earnings momentum. Blackstone has experienced consistent and balanced growth. 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 first quarter 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 first quarter, we saw 14% EBITDA growth in our private equity portfolio companies on 7% revenue growth compared to 4% earnings growth for the S&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 first quarter said their calendar year 2014 EBITDA would be higher than 2013. Similarly, real estate fundamentals are strong across all sub-sectors, 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 billion 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&P in the first quarter, 4%. We price, build, and exit assets based on the long-term value created, whether by private sale or IPO. 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 in 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 a 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.
The hedge fund business' delivery of 11% returns at 37% of the volatility of S&P over the last 20 years proves that to be true. In fact, that business outperforms greatest in the periods when the S&P is volatile. Since inception, BAAM, or Hedge Fund Solutions, has outperformed the broader market in 92 of the 98 months in which the S&P index declined. Here's perhaps another way to look at it. If you take the four quarters the S&P has declined since 2010 and compare that to Blackstone's performance, what you will see is that ENI can experience temporary impacts that recover in the subsequent quarter. 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% increase in realization activity and a 75% increase in realization revenues and earnings. In fact, over the last four years, despite two 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 $3.5 billion. That is five times what it was four 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 billion of performance fee earning assets, up 31% year over year. Maybe think about it this way. Of the $3.5 billion in net accrued performance fees, $1.8 billion 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. 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 second quarter, we executed a very successful $500 million, 30-year debt offering at a 5% coupon. The offering reflects our commitment to be a consistent participant in the bond markets and to support our current offerings by issuing different tenors.
The offering was three times oversubscribed and led by some of the world's largest bond buyers. Both S&P and Fitch reaffirmed their A+ 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. The ultimate driver of value is performance of the assets. We have a very good performing assets in fund structures that give us significant long-term value creation advantages. Thank you.
Great. Thanks. 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. Operator, we're ready for the first question.
Ladies and gentlemen, if you would like to ask a question, please press star one on your phone. If your question has been answered or you would like to withdraw your question, please press star two. Your first question comes from the line of Daniel Fannon 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 for the quarter and also potentially going forward in terms of some of the holdings?
LT, do you want to hit the numbers of that, then I'll talk about the portfolio a little bit.
Sure. Dan, BCP V had a very good quarter in the first quarter, it was really driven by the fundamental growth in the portfolio. Its public assets performed well, that's been pretty consistent. A lot of the data that I just gave you about the forward outlook does reflect assets that are in there. Obviously, we have all the real-time financials through the end of the first quarter. We poll the CEOs in there.
The feeling is that the EBITDA growth is steady and on pace. You can see that just by watching the deficit, if you will call it that, to earning full carry going down from $1.4 billion to $916 million, just in the last few months. I think that reflects the operating performance. Okay. Dan, the EBITDA is actually accelerating. EBITDA growth in BCP V is accelerating each quarter. For a while, it tracked the S&P pretty closely. Actually, there was one quarter where it fell a little bit behind for whatever reason, which was the third quarter last year. Lately, it's been not only ahead of the S&P, it's accelerating while the S&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.
We're getting the compounding, of course, of earnings growth with leverage, which magnifies it, then the de-levering effect of the cash flow. We feel good about the portfolio. Basically, whenever we analyze a sale process, we look and see what's the return to keep holding, even if the market backs off a little. If we can get something in the teens by continuing to hold, even though the company's public, we continue to hold because we're earning well above, the return's well above what the investors could otherwise earn by redeploying the capital, either in debt or general equities. Far it looks good. The portfolio looks good. We're 3% away from where we are fully in carry on the enterprise value of the overall portfolio. We're already in carry on a part of BCP V, have made some carry distributions this quarter.
I think we feel good that it will get there. How far into the carry it gets will be the issue. Great. Thank you.
Your next question comes from the line of Bill Katz with Citigroup. Please proceed.
Okay. 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 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 six 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. That's got a lot of stuff going on. 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 U.S., there's obviously not a lot of distress left. There's a little bit in Europe. In Asia, really some of that's going to be coming in the future, if the emerging markets develop problems. I don't know, Tony, whether you see things differently than that. Yeah, no. I see it the same. To put a little meat on the bones. Europe, there's very little distress in any asset class, and what is out there is, the prices have really moved up. We started buying non-performing residential loans at $0.40 on the dollar. They've more than doubled, for example, lately. At some point, that's just not that interesting.
The U.S., there's not much distress, I would say it's just declining further and prices are high. In Europe, we've been very active lately, but there's starting to be much more capital flowing into Europe for distressed. I'm not sure necessarily how long there'll be interesting opportunities. They're interesting today. Interestingly, Asia, particularly with the pullback of credit in China, is really starting to pick up a lot of momentum. 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 two businesses that benefit the most from the bank sales are real estate, and Tactical Opportunities. To a lesser degree, our Strategic Partners business. GSO. Those have been the prime beneficiaries. 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, I don't think we're going to be creating a lot more distress. U.S., of course, economy's picking up momentum, and it's really emerging markets where you could get something going off the rails. Some of those assets are, if they're credit assets, you get creditor rights issues and some other things that make it harder.
One final thing, because we give answers that are much too long, 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. 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're used to. As a result of 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 the liability side.
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.
Yeah. One last piece of color on that. The U.S. banking system is pretty well capitalized, actually.
Yeah.
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. In Asia, it's not so much coming out of the banks as it's companies that can't get access to capital.
Right.
Thank you.
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-
Is that better?
Yeah.
Okay. The FSB, they had their white paper, I guess, several months or quarters ago. They included about taking a look at the asset managers more from a product perspective as opposed to a manager perspective. 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 what the FSB has said and where you think things may be headed.
Robert, are you sort of referring to the whole shadow banking debate?
I guess the Financial Stability Board said that when looking at prospective non-bank, non-insurance SIFIs, that they would focus not on the manager level but on the product level, potentially, whether looking at leveraging products and size of products. I think I'm just kind of curious where we go.
Okay. 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. Our capital is tied up. One asset can go down, and because 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. Whereas the mutual fund could have a lot of redemptions and be a forced seller, we really can't be. Now, that doesn't mean that the political process might not come to a bad result. We just look at it and think that at the end of the day, rationality will prevail.
If I could add one thing. The other measure that they're looking at is $50 billion of assets in total for some of these institutions. We're at $16, we're a long way from being even close to that. 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.
Great. That was it. Thanks for taking my question.
Your next question comes from the line of Glenn Schorr with ISI Group. Please proceed.
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. 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's working in retail right now. Just to put numbers on that, I think we talked about five years ago, we raised about half a billion dollars a year in retail products. In the first quarter, we raised two and a half billion this year, just to show you how it's ramping. 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 four or five years. We've tried to keep that low visibility for competitive reasons, but it's out there now, and it's really humming. Originally, retail investors wanted yield product and anything with a yield. Now they've shifted. Risk appetite has gone up a lot, and they're much more focused on total return.
There's really appetite for our high-return, non-yield products, private equity real estate, distressed rescue financing, so on. The way we approach it is in a lot of forms targeted towards different audiences. We have a mortgage REIT where a little old lady can buy 100 shares safely for a few thousand dollars. Then we have direct participation into private equity, real estate, Tactical 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. As you know, we've created a daily liquidity hedge fund product in conjunction with Fidelity, which we're now going to be expanding some of that distribution. 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, because 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. We're one step removed from actually taking. They're qualifying the clients and dealing with clients directly, not us. I think that's an important distinction from a 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. I'm curious to see how you think that interplays with all your efforts in the retail channel. Is that just speaking towards a certain subsegment and your brand would do well in that channel anyway?
Well, I think our brand will do very well in that channel anyway. Those liquid alternatives products that are being put out there are not really alternatives products. Despite the label. They are getting huge amounts of money. More power to them. They've been out there for a while. Notwithstanding that, we're still ramping significantly. 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. All right. Appreciate it. Thank you.
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. I'm curious what precisely you see that you can do with that business that Onex couldn't. 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. How do you methodically address the lower return critics?
Yeah, this is Steve. Just on Gates and buying things from other people. We get this question from time to time. It is interesting that when people buy stocks, they don't ask the question of who owned it the last time. The fact that a stock was always out there, and the company's always being improved, and people buy them. Sometimes if they're smart, they go up a lot, and if they're not so smart, they go down. For some reason, we get asked different types of questions, even though we're buying used companies that were out there. 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 Gerresheimer from another firm years ago, and we made six and a half times profit on it.
You could have asked the same question. With Gates, the analysis is, it's not a zero-sum game. Somebody can make money, and someone else can make money, too. This is a very interesting company. It's a terrific company, actually. It's global. It could do more expansion in certain parts of the world. Basically, Gates was part of a deal which was a combination with a company called Tomkins in the U.K. The direction when that company was bought was to basically liquidate the Tomkins business. Tomkins was comprised of a lot of smaller companies within Tomkins. 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. In this regard, we've had a very good thing happen here at the firm with a fellow named David Calhoun joining us who for I guess it was seven years ran Nielsen very successfully, and previously was vice chairman of General Electric. 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.
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. As a result of really just sort of a 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 three to five years if we were right or not. We think the analysis here is correct or we wouldn't have gone ahead.
One of the things you also find is that when you buy really good companies like a Gates, good things tend to happen to you. A little bit of attention goes a long way. That's maybe more than you wanted to know about Gates.
On the second part of your question, Luke, is 15 the new 20? I think that's not quite the way we think about it. We expect to deliver our investors 500 to 700 basis points return above what they could earn in the public markets. That may be somewhat lower today than it's been. 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's pricier and more difficult by reducing, as Steve mentioned with real estate, reducing the rate of investment to try to keep that bar high. 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.
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. That if you just follow the crowd, good things don't happen to you, because that 15 ends up not being 15 either. It's important to keep discipline. It's part of the lessons you learn doing this kind of investing over decades.
Helpful. Thank you very much.
Your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Yes, 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. 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'll push out the timeline for sure. On the other hand, these assets are not of static value. If we sell a company two years from now, it's going to be a heck of a lot more valuable. What happens then? Investors have to wait a little longer for the distribution, but the distributions are bigger. What we eat when we eat the carry, and what investors benefit from, is not IRRs, it's the multiple of invested capital. 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. The carry goes up and faster than the overall value, obviously, because it's a derivative of the gain. It's not such a bad thing.
That's why we can be patient, and we are patient. We're always looking at what can I get to hold it? 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. 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. 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&P in terms of EBITDA, LT?
Yeah.
Let me pretend you construct a portfolio that's growing at 100% of the S&P, and that you have some stock market choppiness for two to three weeks, and sort of markets go down. Tony indicated, if we can keep compounding the earnings of these companies at double that rate, there is no bad that happens to you as an investor. If you could put together a portfolio of companies growing at double the S&P and do it at our ridiculously low multiple, you'd be a happy person, I would think. We're happy. We look at the realization question 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.
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, then that's a good model, I think.
Okay. Makes sense. Thanks for taking my question.
Your next question is coming from the line of Mike Carrier with Bank of America. Please proceed.
Thanks, guys. Hey, LT, maybe two things just on some numbers. First on the fee earnings. I think the seasonality in terms of one Q versus four Q on advisory, kind of get that. It seems like on the expense side, both on comp and non-comp, maybe it was a little bit higher. Any seasonality there that will normalize, and I know you guys gave some color on that one page in terms of unusual items. Then just on the performance. I think you guys have stated the growth in the portfolio companies, whether it's on the revenue and the EBITDA side. I get that. I guess I'm just trying to figure out, because in general, we typically see the private portfolio or the performance be relatively subdued over time.
I'm just curious, in this quarter, was there an inflection point in some of these sectors, in some of these companies? Was there something else in the comps that did well in the quarter, even though the broader market wasn't as strong?
Okay. 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 fourth quarter, Mike. The fact actually that the compensation accrual in the first quarter 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 four times the first quarter's revenue over the course of the year, if you follow me. Typically, we have about 30% of the revenues in the fourth quarter, but I'm required to account for 25% of the full year compensation expense in the first quarter.
Actually, it's more of a bullish sign of where they are, and I think you look at revenues up year-over-year about 7%, and then economic net income about 3%. 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 first quarter was market comparables or changes to exit multiples. It was purely driven by EBITDA growth. Very rarely do we make changes in exit multiples. Obviously, the multiples will change if you take a company public because the market will give its own multiple to a business, and typically those multiples will be higher than our carrying value because we point towards a conservative long-term multiple value.
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.
It really was across the board. It wasn't sector by sector.
Okay. Thanks a lot.
It was balanced. That's right.
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, and I know you have the Asia fund out there now. Just curious what your thoughts are when you could be out there with Fund VIII, 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, et cetera. What are the opportunities for growth, in other words?
Yeah. This is Steve. Fund VIII is a ways away. We've sold a whole bunch of stuff already out of VII, and we have recyclable capital. 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. Are we allowed to say what the returns are?
Yeah, we actually have them in there.
Okay. The returns on that fund, even though it's got a pretty short life, they're somewhere in the upper twenties.
It's 28% net IRR to date.
From memory, which is pretty amazing, actually. We're a ways away from doing that, and even our people might need a breather every once in a while. You were saying, where is there opportunity? Was that part of the question?
Yes.
Yes.
Debt was part of the question, and anything else you want to mention, too?
Yeah, I think we did mention the Core+ 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.
Your next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.
Oh, great. Just a couple of quick questions on private equity. First, just in terms of the uptick in investment activity, the $3.1 billion that you invested or committed, how much of that was in the U.S. versus the rest of the world? I have a quick follow-up.
Okay. LT is going to handle that.
It's about 60-40. 60 U.S., 40 outside.
Mark, private equity.
Okay, great. Just in terms of fundraising, it looks like Tac Ops and Strategic Partners and private equity have some activity going on there. I guess 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 to 18 months for private equity? Do you foresee also maybe another BCP fund coming to market as well?
Yeah. Well, 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. Will be, again, these are sort of probability-type things coming to market with our next significant BCP, basic fund BCP VII, would be probably in the next year.
Marc, that's when we commence the fundraising for these funds. It goes on for a while after that, and while we finish all the old funds. I should note that Strategic Partners also.
Right
Strategic Partners' fund has hit its hard cap. It's up from two and a half to $4 billion or something like that. A 60% increase. We also have a very exciting business in Tactical Opportunities. This is all in the private equity segment, which is getting pretty fully invested. I wouldn't be surprised to see them back in the next year or so as well.
On the S&P thing, one of the things that, sign of health, if you will, is that they, in effect, will hit their cap probably in Sitting with a group of people, so they can correct me on this, but it's basically in around six months from going into the market. Usually, these funds for most firms take a year and a half to raise. It's a sign of how well-regarded the S&P 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 than, for example, if you were to have measured this two to three years ago, would've been appreciably different.
Okay, great. Thanks.
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. I saw the same list you've seen, and you see guys moving from 23rd place to the top 10 in one 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?
secondarily, are you seeing more competition on some of the larger deals that maybe two or three years ago you would've been the only bidder?
Patrick, 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 managers. So there's a real desire for safety. Real estate is an illiquid asset class. Typically, it's got leverage. Typically, there are always some group of people hitting the wall in any economic downturn. The fact that we've had virtually no losses in opportunity real estate, which tends to have the highest leverage. 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. 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 a pretty unique thing in my experience, because it shouldn't be happening. 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. So we'll be continuing to innovate in that area. 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, more or less go, where an 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 are really operational. So, I'm not trying to take the downsides of your question. There are always people marketing to every large pool of capital. 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. If they understand the differences, they may challenge you on that.
I think this is much more kludgy than you might suspect. This stuff doesn't happen as fast as it would with liquid managers, where you hire somebody who was at a new place, and they bring their record, and it just sort of happens, and the money flows to them. It's different, and the approval processes are different, and the biases that get 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. That may have been more of a wandering answer than you were looking for, but it reflects my perception of what's going on.
Patrick, let me add a couple of things. As Steve mentioned, there's just no one close in terms of the investment track record. What that's meaning is we go out, not only investors are not coming into our funds in preference to others. Our real estate funds are all hitting their caps. We're turning away investors. I think that's to the benefit of other funds because we can't take all the capital.
Yep.
We're certainly not finding any. If anything, it's insufficient supply, not insufficient demand. Number one. Number two, in terms of putting money out, real estate is huge. The value of buildings in the world dwarfs that of all stocks and bonds combined. There's an awful lot to do by comparison to corporate investing. Ironically, the cumulative amount of real estate opportunity funds raised is way smaller than the cumulative amount raised for private equity. Again, in terms of supply and demand of opportunities, it's extremely favorable. 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 three, there's a lot of scale advantages in real estate.
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. That's one kind of scale advantage. Another one, which Steve was getting into, is it's 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 U.S. or in Japan or in China. Dedicated teams each place. You have to have a lot of skill to have that. If you don't have it, you become, frankly, a less good and less effective investor.
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. I'll do that.
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 shouldn't hesitate to call.
Thank you for the answer.
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 billion this year versus $15 billion in each of the last couple of years. 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. To what degree core real estate is a part of that deployment picture, that sort of $20 billion annual pace is aside from core real estate, and there's potential to put more to work over and above that. If you could just talk a little bit more about the BAAM permanent capital vehicle. It looks like it's getting off to a very good start. Your outlook for that type of market going forward.
It's LT. I'll take the first part, and maybe Tony or Steve will take the BAAM part since you'll find their answers more interesting. I would be careful to look at the first quarter of this year and normalize it towards some level. In part because the first quarter of last year was actually a relatively slow period with respect to deploying capital. Last year, all in, we did just over $15 billion. It feels like the pace of capital will be more than that, but nowhere near the $21 billion, $22 billion that the pace would indicate at the moment, to my view.
Okay. Well, let me just comment a couple of things. First of all, when you say the pace was $15 billion the last couple of years, and now it's $20 billion, recognize that a couple of years ago, we didn't have as many products and funds.
Right.
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. 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. Really because there are more businesses and they're all active putting money out. Let me put a little qualitative. I would say opportunity real estate, away from the new products, 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.
Those are kind of the trends within the sub-segments.
What was the second part of the question? Sorry, Brian.
The BAAM permanent capital vehicle.
Okay. Yeah. Well, I think the vehicle has got off to a great start. It's performed very well. We think it can grow a lot, and we're now moving to other distribution partners beyond Fidelity.
Okay. Yeah, the market for that essentially, I guess just maybe longer-term, it seems like an interesting structure. Do you think that that market's just essentially in very early innings, and there's a lot of opportunity over the longer term to really grow that type of vehicle substantially?
Extremely early innings. One product in the first order is all you've got. It could be very substantially larger.
Okay, great. Thanks very much.
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&A. We've been hearing some positive commentary around the outlook from a number of the big investment banks who've been reporting. Clearly volumes have been pretty depressed and range-bound for the past five years. North America is starting to show some pretty healthy levels. Europe's starting to stabilize. An updated view around the M&A market today from your seat would be great. 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&A market feels better. I say it that way because if I look at the backlogs and all, they're definitely up. What you'll hear a lot about M&A practitioners talking about how buyers have been rewarded. 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. Companies are more comfortable. They're more venturesome. They're sitting on a lot of cash and very strong balance sheets. They have that in terms of ammo. Their stocks are up, so they got that in the way of currency as well.
Finally, their organic growth, as you can see from what's happening at the S&P, is weak. In fact, I think last year, if you took out stock buybacks, the S&P earnings wouldn't have even been up. Companies are eager for growth. The combination of desire for growth, lots of firepower, lots of currency, more comfortable with the world, and the stock market rewarding managements and companies for deals has created, I think, an upswing in the M&A, which should continue for a while. I don't see that any of those things reverse. We're seeing that in our pipeline. Now, what could change that would be some kind of geopolitical thing, I think. 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.
I will say the M&A business 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 two, there have been an awful lot of transactions in M&A that were worked on, got to sort of the 10-yard line, and didn't get done. That's what really happened last year, is 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, 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. We're not looking to the strategic sale market for most of our exits at this point. Most of it's equity. If it comes back, it'll be good for our existing portfolio because inevitably there'll be some more activity, and we've certainly had some very interesting approaches lately with several of our companies. To be clear, that's only a good thing with the existing portfolio. 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 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.
Our cost of capital today, with interest rates where they are and the amount of leverage we can get, I think may be 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.