Welcome to the Blackstone second quarter 2013 investor call. At this time, I would like to turn the conference over to Joan Solotar, Senior Managing Director, External Relations and Strategy. Please proceed.
Great. Thanks, Chantelle. Good morning and happy summer, and welcome to our second quarter 2013 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO, who's calling in from Europe, Tony James, President and Chief Operating Officer, Laurence Tosi, CFO, and Weston Tucker, Head of Investor Relations. Earlier this morning, I issued a press release and a slide presentation illustrating our results. Hopefully, you have that, and it's also available on our website, and we're going to file the 10-Q in a few weeks. I'd like to remind you that today's call may include forward-looking statements which are uncertain and outside of the firm's control. Actual results may differ materially. For a discussion of some of the risks that could affect the firm's results, please see the Risk Factors section of our 10-K. We don't undertake any duty to update forward-looking statements.
We will refer to non-GAAP measures on the call, and for reconciliations for those, refer to the press release. I'd also like to remind you that nothing on the call constitutes an offer to sell or solicit as an offer to purchase any interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated, reproduced, or rebroadcast without consent. A quick recap of our results. We reported economic net income, or ENI, of $0.62 for the second quarter. That's up sharply from $0.19 in the second quarter of last year, mostly driven by higher management fees and higher performance fees in every one of our businesses. Distributable earnings were also up $0.28 for the second quarter. That's a 73% increase from last year's second quarter.
For the year-to-date period, distributable earnings were $0.62 per unit, which was nearly double the prior year period. As always, if you have any questions on anything in the earnings materials, please call me or Weston after the call. Because we do have a lot of folks dialed in, if you could limit your initial questions to one or two and then just get back in the queue. Thanks. Now, I'll turn it over to Steve Schwarzman.
Thanks, Joan, and thanks for joining our call. Investors across almost all asset classes recently have been concerned about the prospect of rising interest rates, as you can tell from the earlier call that Tony was handling. It appears that markets predictably overreacted initially to the Fed's indication on when and how it might start tapering its bond purchase program. Stock markets in the U.S., which initially declined up to 8%, have now recovered in only three weeks to regain record levels. Interest rates have started to decline slowly from market peaks as investors recognize that the Fed will act with prudence not to stifle the economic recovery. Higher rates, as Tony mentioned, are not per se negative for Blackstone, as investors may have initially believed. Historically, we've performed well in periods of rising rates, and we are well positioned today given our mix of businesses and investments.
When rates rise in tandem with better economic activity, the result is higher cash flows for most of our private equity and real estate assets and higher returns for our hedge fund solutions businesses. Our credit operations benefit because they tend to invest in floating rate, not fixed rate assets, and they obtain higher yields on their mezzanine and rescue lending assets. To share an example with you with some numbers, in real estate, we look back at periods of rising rates during the past 20 years to see the impact on values. In each of these periods, plus the following year, commercial real estate values rose between 4% and 15% on an annualized basis in both the private and public markets.
That question you asked Tony, in the past 20 years, in each of these periods where interest rates went up on commercial real estate, plus the following year, commercial real estate values rose between 4% and 15% on an annualized basis in both the private and public markets. Going back further, but this time on the residential side, interest rates rose in 26 of the past 50 years. In every single one of those years, when interest rates rose, home prices actually increased. The permanence of investors and the concerns on the real estate side are basically belied by the facts. Our business and returns benefit from strengthening economic activity, and today we see pockets of significant strength in the U.S. economy, including housing, auto, energy, and technology.
This is offset to some degree by pressure on consumers, as well as the continuing federal government dysfunction, which reduces confidence generally. In our own private equity portfolio, trends are improving, as Tony mentioned. With year-on-year revenue growth of 5% and EBITDA up 8%, both in the second quarter. 8% increase in EBITDA in a quarter is a good thing. This helped drive continued appreciation of our portfolio of 5.4% for the quarter, and 29% over the last 12 months, or nearly $8 billion in total equity value appreciation. Make sure you understand that. 29% increase in our private equity portfolio in a year. Our real estate business has achieved similarly strong performance so far this year, with our opportunistic funds appreciating 5.7% for the quarter, in line with what private equity was doing basically, and 19% over the past 12 months.
This was helped by sustained strong cash flow in Hilton, our largest investment, which grew 17% in EBITDA in the first half of 2013 and now has over 4,000 hotels globally. 17% growth in the first half is really fantastic. Our hedge fund solutions business, or BAAM, had a composite return of 2% in the quarter and is up over 13% for the past 12 months. This performance is double the HFR index with only one-third of the market's volatility. As the largest allocator to hedge funds globally, our scale gives us many advantages, including capacity with the best managers, broad insights to market trends, and access to the best ideas.
Finally, our various credit strategies at GSO rose 5%-7% for the second quarter, despite a sell-off in the last month, and remarkably, 22%-42% for the past 12 months, sharply outperforming virtually every benchmark for that period. As a result of our compelling investment performance across market and economic cycles, we've been able to raise dramatically more capital than any of our peers. For example, we raised $14 billion in the second quarter alone, most of which was in our real estate and credit businesses. In real estate, we had our first Asia fund closing at $1.5 billion, marking strong investor reception to our first dedicated fund in the region. We're targeting a total raise of $4 billion for this strategy, which will be one of the largest first fundraises in our history.
In our real estate debt strategies area, we raised $2 billion for our new drawdown fund during the second quarter alone, followed by an additional close in July that brought us to $3.5 billion of available capital. In late May, we raised an additional $660 million for our permanent capital commercial mortgage vehicle, Blackstone Mortgage Trust, which we call Blackstone MT, in an oversubscribed offering where we could have sold three or four times that amount. In total, our real estate debt strategies business, started in 2008, is now over $10 billion in size. In credit, GSO, we continue to see strong inflows into our various products. This is a sharp contrast to the record outflows you've been seeing from bond mutual funds, which is not our business. Our new rescue lending vehicle has raised $5 billion, reaching its cap.
This is more than 50% larger than our prior rescue fund, which also hit its cap. In fact, all of the flagship drawdown funds we've raised since GSO joined Blackstone in 2008 have reached their respective caps. The GSO team really is doing a terrific job. Also in credit, our new ETF, which trades under the ticker SRLN, has raised $375 million since its commencement in April, making it the most successful of any new ETF launched in 2013. We expect continued growth as many investors trade out of long-duration assets and fixed-rate assets into floating rate products like SRLN and the other things we do throughout GSO. Our hedge fund solutions business reported $1.6 billion in net inflows in the second quarter, despite the fact that the second and fourth quarters are the primary redemption quarters. Year-to-date net inflows were $2.5 billion.
In private equity, we're continuing to see strong LP interest for our Blackstone Tactical Opportunities business, which raised an additional $325 million during the quarter. In terms of capital deployment, investors frequently ask us if we can invest all the capital that we're raising with the same types of returns we've delivered historically. By the way, they've been asking that question for over 20 years. The answer is that we continue to find very attractive opportunities to put capital to work around the world, leveraging our brands, deep sector expertise, and our.
Hello, Brendan. Brendan, I pulled you out of the conference. I need your company name, please. Can you double-check your line to see if it's on mute?
No. Please put me back into the conference. This is a streaming line. Thank you. Please put me back in.
Compelling investment opportunities remain globally, with lots of distressed or over-leveraged assets, enabling us to buy the discount to physical replacement costs. The competitive landscape remains attractive, with very little competition for large-scale deals. During the quarter, we invested two-thirds of our capital in the U.S., one quarter in Europe. We also committed to our first large-scale joint deal with our partner in Brazil, Pátria, to acquire a controlling interest in their nation's best-in-class branded national developer of residential lots. In credit, the low rate environment we saw for most of the first half of the year, while great for realizations, made it more difficult to deploy capital. As rates move up, this is good for opportunistic credit investing. For example, in 2011, we invested approximately one-third of our first rescue lending fund in the months following S&P's downgrade of the U.S. rating.
In private equity, competition remains high for new investments. We've been able to leverage our global network and brand to source exclusive and proprietary deals. Financing for new buyouts remains available on attractive terms, although there is more demand for floating rate leverage loans than for fixed rate bonds over the near term, given expectations for rate increases. The last topic I'd like to discuss is our realization activity, which is the biggest driver of cash earnings for our public investors. Realizations rose to $6.6 billion in the second quarter, up from $1.4 billion last year. I'll just give you that number again because there's so many numbers in these presentations. Our realizations rose in the second quarter to $6.6 billion, up from $1.4 billion last year. Over the past 12 months, we've had $21 billion in total realizations. Activity increased sharply in every business.
In credit, we had $2.7 billion in realizations for the quarter, primarily reflecting CLO activity, as well as realization out of our first mezzanine fund, as a lot of people prepaid. In private equity, we had $1.6 billion of realizations in the quarter, mostly in BCP V, which did not drive carried interest yet. This includes the very successful IPO for SeaWorld, which was priced at $27 a share, the top end of the filing range, and has since traded up another 42%. Since the beginning of last year, private equity realizations totaled nearly $8 billion, which is a really big number, as healthy equity capital markets have allowed several public market exits, including five IPOs and 17 secondaries. We have three more private equity IPOs on file, we could see several more in the coming quarters.
Lastly, in real estate, we had over $2 billion of realizations in the quarter, more than double last year's second quarter, generating $175 million in realized performance fees versus $21 million last year. This was largely driven by the sale of our remaining General Growth Properties stock with a 2.3 times multiple of our investment after a two-and-a-half year hold. If we could do that with everything, that would be a very happy world, and we do do it with a vast number of our investments. We also announced the sale of our EDT Retail Trust portfolio to DDR at a multiple of $350 million investment of approximately two times. That was double the money we've earned for our fund investors after only a one-year hold. We expect this sale to close in October, and the capital is fully recyclable as it's in our BREP VII fund.
Looking forward, we remain confident we'll see further acceleration in activity later this year, next year. In fact, this morning, we filed an IPO of Brixmor, one of the largest grocery anchored shopping center companies, which is our third largest real estate investment. In summary, we feel great about our business, which we believe is uniquely positioned in the alternative investment area as the only firm of its type with world-scale operations in real estate, private equity, hedge funds, and credit. We've raised over the last two years more capital than our four closest competitors together. Our team is extremely experienced with an unalterable commitment to excellence in all we do. I continue to believe that our stock is significantly undervalued. With that, I'd like to ask Laurence Tosi, LT, to take over with a review of our financial results.
Thank you, Steve. Good morning, everyone. By almost any measure, it has been a record start to 2013. Blackstone continues on a steady trend of industry-leading growth as total AUM reached a record $230 billion, up 21% year-over-year, marked by $42 billion of inflows and $25 billion of value created, together which far outpaced the $28 billion of capital returned to investors over the same period. Each of our investment businesses again saw double-digit increases in AUM, as every segment ended the quarter at record levels of assets. Our sustained growth is the result of both our ability to achieve returns for our fund investors and continually innovate new products and ideas. We leverage the leading scale and performance of our core global funds, which serve as anchors to launch adjacent complementary strategies. This competitive advantage is evident in our strategic efforts in the high-net-worth channels.
While you may have read about recent forays into this vast and growing segment by industry competitors, Blackstone has invested heavily in this market for several years. As a result of those efforts, today we have an efficient scale distribution effort and have created one of the fastest-growing capital sources for every single one of our businesses. In true Blackstone fashion, virtually every senior manager in the firm has personally dedicated time and effort to developing this channel, and the platform we have built has raised more than $14 billion of assets, including $5.4 billion raised in the past 12 months alone. The Blackstone brand and historical performance are compelling to this market, as evidenced by our last several fundraisers literally selling out on some of the world's biggest retail channels.
As Tony highlighted this morning, we think we are in the very early stages of the impact that this channel can have on the firm. Turning to earnings. Blackstone's diversity and fund outperformance overcame the market headwinds in the second quarter. Revenue for the first half of the year reached a record $2.7 billion, up 66% over the same period last year, and earnings nearly doubled to $1.3 billion at a 50% margin. The main driver of revenue was fund performance, which produced a 150% increase in performance fees to $1.3 billion for the first half of the year, also a record. The fastest-growing component of Blackstone's earnings continued to be realizations, which helped double distributable earnings to $730 million for the first half of the year. Some further observations and facts about Blackstone's second quarter and first-half results.
At quarter end, the net performance fee receivable, a key forward indicator of earnings, reached a record $2.5 billion. In real estate, the net performance fee receivable is now $1.6 billion, as $30 billion of assets are generating performance fees in an increasingly favorable environment for realizations. Private equity now has $633 million of net accrued performance fees, with $500 million of that in BCP IV, which is 47% publicly traded. Additionally, BCP VI and BEP, our energy fund, are both accruing in full carry and are 28% and 48% public, respectively. Our 2007 vintage fund, BCP V, continued to make good progress towards the preferred return threshold. In the last year, BCP V created $5 billion of value, almost halving to $3.7 billion, the amount needed to reach the carry threshold.
In credit, performance fees grew 80% year-over-year, proving that that business is not only largely insulated from rate rises, but actually grows and benefits in the current and expected rate environment. In hedge fund solutions, 96% of eligible assets are now generating performance fees in the first half of $100 million, up fivefold, which also drove an 80% growth in first-half earnings. You should remember that incentive fees in hedge fund solutions and our credit hedge funds accrue through the year but are largely earned in the fourth quarter from a cash realization perspective. Currently, we have $0.14 per unit accrued in the first half alone, based on the strong performance of those funds. Additionally, advisory posted a strong quarter, particularly in restructuring, which had one of the best starts to a year in its history.
Our strategic M&A and fundraising businesses both posted double-digit gains in revenue versus the first quarter. The strength in fundamental earnings has also impacted the firm's balance sheet, which includes a total of $7 billion in net assets or $6.31 a unit in the second quarter, up nearly 40% over the same period last year. As part of our continuing effort to lead in terms of transparency and unitholder alignment, we announced today that we would no longer reduce distributable earnings by the non-cash expense associated with equity-related awards. These awards, consistent with GAAP, have always been part of our historical compensation expense and ratios, and that will not change. Cash distributions, however, will no longer be reduced by this expense, which added $0.01 per unit to our distributable earnings and cash payout this quarter.
This new policy would have added $0.08 a unit to distributions for the full year 2012 With six of those $0.08 coming in the fourth quarter, when most of these awards are made and expensed against earnings. Historically, these awards are 8%-9% of fee-based compensation, and we expect that to remain the case with respect to timing and amounts. The historical impact of this increase to distributable earnings can be seen on page 30 of this morning's release in detail. I should also point out that over six years since we went public, our share count has only slightly increased by 38 million shares or 3.4%, roughly 60 basis points a year. In closing, a few key data points to consider. Over the past five years, Blackstone has nearly doubled assets.
We've increased earnings ninefold at a 56% compound annual growth rate and distributed $3.5 billion of cash to investors, including $1.3 billion in the last 12 months alone. Looking forward, the key drivers of future performance demonstrate the momentum behind our positioning against a dynamic market backdrop. We now have $95 billion in performance fee earning assets, up 63% year-over-year across 100 different funds and vehicles, providing a broad base of earnings power for future value creation. We also have record dry powder of $39 billion, up $3 billion year-over-year, despite $16 billion in capital deployed over the last 12 months. Finally, we have $17 billion in committed capital, not yet earning management fees and several scaled fundraising initiatives underway. On behalf of everyone at Blackstone, we thank you for your time in joining this call, and we welcome any questions you may have.
Ladies and gentlemen, if you would like to ask an audio question at this time, please press star followed by one on your touch tone phone. If your question has been answered or you wish to withdraw your question, please press star two. Press star one to begin.
Just a reminder, if you can limit it to one question first go around and then to queue up just because we have a long list.
Your first question comes from the line of Matthew Kelly of Morgan Stanley. Please proceed.
Thanks, guys. Just curious, the commentary on the real estate investments was really interesting. It seems as though, especially given Brixmor , the life cycle for a lot of these real estate investments has shortened. I'm just curious, Steve, to get your view on how close we are to I know that's a broad statement, but if you think about your real estate portfolio, how close we are to getting back to more regular, normal, as you think about it, life cycles for these investments, or if we're still at kind of a very short life cycle when you think about spending them.
This is Steve. I don't think our life cycle has changed materially. What's happening is when we buy things, I guess our approach is buy it, fix it, sell it. That happens over periods that vary slightly with changes in economic activity. You're seeing that accelerate in the U.S. because we started buying very large amounts of real estate really about three years ago in real scale. We've been the largest purchaser in the world with vastly exceeding, vastly multiples of anyone else. The cycle is changing now in Europe, where that will be an investment cycle that will take longer to come out of by the nature of the underlying European economy, which is evidencing virtually no growth.
Asia will have another cycle still because it's continuing to grow, but it's experiencing real estate credit shortages as some of those economies grow slower and the economies generate other problems besides just real estate developers who can't sell out projects. I don't think we're experiencing something slower. We're just dealing with the maturation cycles in different geographic areas.
Okay. My follow-up.
As it relates to the hold time itself, I think it's fairly typical when you're buying at distressed assets, the rise can happen faster, so the hold times can be shorter. As we've talked about for assets that were bought in '06, '07, perhaps the hold time there has been longer than typical.
Yeah. It's Tony. I think you'll see in general across all of our businesses in rising markets, what happens is when we make an investment, we have a target value that we think is sort of intrinsic value. We try to buy below intrinsic value in down markets. In rising markets, sometimes the values get up to that level quicker, whether it's private equity, real estate, credit, all of them. You'll see holding periods come in a little bit in rising markets and extend in declining markets. It kind of depends on how quickly we can get assets and realize what we think is going to be fair intrinsic value.
Your next question comes from the line of Michael Kim of Sandler O'Neill. Please proceed.
Hey, guys. Good afternoon. Just to follow up on the real estate front, can you just talk about the thinking behind the Brixmor IPO filing, particularly as it relates to your outlook for real estate more broadly? Is this kind of the first step of the exit strategy where you're selling down sort of the ownership stake over time, similar to the process you typically follow on the private equity side? Does that suggest you still see more upside here to come, broadly speaking?
Well, let me tackle that, Michael. First of all, I can't comment on Brixmor. As you know, it's publicly filed, we're very limited in what we can say on that. I think one of the things about real estate is we have the option to both take some of these platforms that we've created public. Brixmor, the bulk of it was bought in one thing, then we've added on other pieces, and we have a management team there. It can be an operating company. Also, depending on the asset, you could also sell off assets piecemeal. We have a lot of flexibility as to how we do that. I think there's still more value to come in real estate, there's some assets that are getting near their intrinsic value.
When it's a public stock, you kind of got to go public. We actually try to price our public offerings at a bargain to the initial IPO buyers so that the stocks trade up, and people are happy. We don't generally sell much or any of our ownership when it actually IPOs. Usually we take it public a little in advance of the time we actually expect to be harvesting most of our capital, and at lower prices than we want.
In Brixmor, we bought this company during the financial crisis, particularly in Australia. The company didn't have as much ability to invest in tenant improvements. Its vacancies were down. We've made those investments, and vacancies have improved, and that's a more normalized type of business at this point. It's appropriate to take that in the market where it should trade in a satisfactory way.
Okay. If I could just follow up one quick one for LT. Anything notable on the expense side this quarter, particularly looking at base comp? Was there any lumpiness related to maybe a pickup in fundraising activity that we should be thinking about in terms of trends going forward?
No, I think it was a relatively ordinary quarter. Any of the anomalies were really quite small, and it wasn't related to fundraising. It's the same comp ratio year-over-year. I would say the business mix a little different because advisory had a stronger quarter.
We have done a lot of, though, new hiring and a lot of investment spending in some of these, both to support the growth you've seen, but also to support future growth initiatives that we have that we're just starting to roll out.
Okay. Thanks for taking my questions.
Your next question comes from the line of Daniel Fannon of Jefferies. Please proceed.
Thanks for taking my questions. I guess to start, maybe if you could comment on M&A broadly why it's kind of been lackluster from an industry perspective. Thinking about it maybe from the perspective of your portfolio companies and their appetite to do deals in this environment. It just seems like we've been waiting for M&A to pick up, and it's just taken a long time.
Okay. Well, I agree. Why? You probably have as informed opinion as I do. My own view is companies are uncertain about their futures, and I think a lot of that uncertainty emanates from regulatory and Washington, frankly, and if we're talking about the U.S. The rules are changing. They're not sure what that does to the economy. Are we going to have another crisis over the debt ceiling in the fall? What's that going to do? One thing or another. I think companies in the U.S. are sitting on the sidelines. They're happy to be in cash. They're happy to be secure. I think that's one factor. I think some of the exciting markets that people are all hot about, generally speaking, the BRIC markets, are all showing issues right now. All four of the BRICs are.
A lot of the acquisition activity corporations have done has been to drive growth, and a lot of it has been to make investments in those markets. Those markets are looking like they have some issues. I think M&A is going to stay restrained. Now, our portfolio companies in general don't do a lot of M&A except around the ones that are consolidation plays. Those continue to roll out. We continue to make consolidating acquisitions, but they're small. You're not going to see those in terms of moving the needle or getting a lot of, or any press.
Okay, great.
Your next question comes from the line of William Katz of Citigroup. Please proceed.
Okay, thanks so much. Can you give us an update on the retail initiative? I think at your analyst day, you mentioned you sort of "cracked the code" of an opportunity to bring the hedge fund into the mutual fund wrapper. I'm sort of curious. That was expected to roll out in June. Maybe an update there. I'll do a follow-up.
Okay.
We actually announced this week that we will be rolling out a product. We can't really talk about distribution partner and all that yet. You'll hear from us in the future. It's a product that we're really excited about. It took a very long time to figure out. We think we're unique in the ability to execute this the way we are, given our positioning in the hedge fund solutions space. It's an exciting product. It's probably a bit early to say much more, given that the rollout hasn't happened.
What we can say is it essentially, for retail investors, it will give them access to some of the leading hedge fund managers, but still preserve their ability to have daily liquidity and daily marks. That was a bit of the trick, is accomplishing both those things, and we think we've done that. We have a strong distribution partner. We hope it works. We hope it will be well-received.
Okay. The follow-up question is just in the Hedge Fund Solutions business. Sort of curious, if you look year-on-year, I think volumes are a bit down this July versus a year ago. What's the general appetite for that product set at this point in time in the institutional channel? Are you seeing any kind of maturation in that business?
No, I think it's exactly the same picture we've seen. In fact, in general, that business, it's a lower risk way to participate in markets. That business shines when markets get lumpy, volatile or in terms of relative performance or go down. When you have very hot bull markets, it lags a little bit. I mentioned in my press call that just in the second quarter, when the global equity markets were down about 2%, our hedge fund solutions composite was up about 1%. In one quarter, 300 basis point outperformance. We do that with, generally speaking, somewhere between a quarter and a third of the volatility of the public markets.
If you look at how that product has performed in the 10 worst down months of the last five years, I think our investors have about broken even in those months, whereas the public markets are down high single digits on average in those months. It's sort of a lower risk way to play the markets. While it might lag the performance a little in the up markets, when you look at the relative performance of that product versus the public markets through the full cycle, because you don't have the down legs, even if you give a little on the upside, we've tended to outperform public equity markets with lower risk. That's the beauty of that product. If investors were really positive and really ebullient, at some point, flows might slow down a little bit.
We're still getting a great reception across the board.
Yeah. If you look at just comparing because there's seasonality, I think it's good to look year-over-year. This year's second quarter, we had net flows of about $1.6 billion. Last year's second quarter, we had net flows of a little over $400 million. We're not seeing momentum slow.
I mean, it's up. Full fee-related earnings are up. Fee-related assets are up 18% year-over-year, Bill. I also think what's important with this business is, as Tom went through on Investor Day, a key trend that continues is a lot of the inflows and strength are towards their customized products and some of their newer strategies that they're rolling out. That very positive trend for that business and really for the stickiness of their assets, to use that expression, continues.
Okay. Thanks for taking my questions, guys.
Your next question comes from the line of Howard Chen of Credit Suisse. Please proceed.
Hi, good morning, everyone.
Morning.
Morning.
I wanted to go back to where Steve began on higher rates and Tony, where you spent much of the morning, as I agree it's been an area of focus for the investment community. Specifically on realization and fundraising activity.
Fundraising activity.
Do you think higher rates alter your view of timing of the harvesting cycle if rising rates come with higher growth expectations, a change in cap rates, et cetera? Second, do you believe LP allocation behavior changes in a rising rate environment, putting aside all the mega trends that we talk about?
Okay. Let's see. If higher rates are connected to a stronger economic activity, I think it's a net positive across our businesses, both for the portfolio and for new investing. If higher rates come in a weak economic environment, I don't see that happening, but I might give a different answer to that. Part of it is what happens to the equity market. Are higher rates associated with a much lower stock market? That would negatively impact realizations. If higher rates go up gradually and associated with stronger economies and a strong stock market, that wouldn't. It's not just rates, I guess, is what I'm saying. Kind of depends on what's going on with the other factors.
On balance, I think we're really well-positioned in our portfolio of existing assets to benefit from the conditions that are likely to prevail when rates go up, and higher rates will definitely help us on the new investment activity. We have a lot of products which actually benefit from higher rates because they're floating rates, like our BXMT, our Blackstone Mortgage Trust, for example. It's all floating rate. Higher rates. Higher dividends for shareholders. The value should go up. It shouldn't go down. It's kind of a mixed picture. In terms of the impact on LPs, again, I don't see it changing their allocations. They're expecting not to earn very much on fixed income. I suppose if rates went up high enough, fixed income would look attractive. On the other hand, they'll take a lot of mark-to-markets that'll be very painful.
If a sharp and significant increase in rates is probably not good because they'll have markdowns, that'll get into asset allocation issues. They'll look at fixed income as having a more attractive go-forward return. Based on the surveys we've done of LPs, they've been thinking that treasuries and investment grades future returns will be somewhere between 0% and 2% on their fixed income portfolio. They've been thinking that equity markets go-forward returns will be something in the 6% range. No matter how you mix those 50-40 or two-thirds, one-third, no matter what mix you put on public securities, you're getting a low single-digit return if you're a big institution. That just doesn't get them there. If you're a pension fund, that doesn't pay for your liability. That's why they're shifting to alternatives, and I don't see rates going up enough to change that.
Okay. Thanks, Tony. My follow-up is, we saw some further payoff on the securities underwriting business with participation in Pinnacle and SeaWorld being notable ones that stick out to us. Was just hoping for any postmortem thoughts you all had on how that process went for you, and ultimately, where you see this evolving to. Thanks.
Well, hang on. Steve wants to make a comment first, and then one of us will get to that. Steve?
Yeah. On this interest rate comment. People get very worried about this, and the type of worry that's appropriate is a Volcker type of reaction to inflation. Where in the early 1980s, Volcker just broke the back of inflation by just driving rates to a point where the economy faltered, and he got inflation under control. When we talk about rising rates in this environment, we have extremely low levels of inflation. Rising rates ought to be a very moderate type of phenomenon, and it's clearly being micromanaged by the Fed to not really hurt an economic recovery. In that type of world, what Tony is saying is absolutely true.
If you look at the firm's performance over years, you'll see that because we're such large owners of operating assets at the firm through our funds, that we do much better when those assets earn more money and the economies are growing than we do with any minor movements in cap rates in real estate or multiples. To get multiples to really come in in the stock market, you've really got to jam on interest rates. I don't think the preconditions for that actually exist today. I could foresee with a gradual increase in rates exceeded by a growth in the economy. That's a good thing for us, and it isn't a supposition. It has always been a good thing for us at the firm.
Okay. Howard Chen, your question about how we feel about the IPOs we've done. Look, we never feel the public markets quite appreciate the beauty of our children. I would say generally speaking, that the experience has been good. Maybe it's just because we went through a period of time where the experience was terrible, it's just much better now. Terrible only it was very hard to get them public. The prices were low. It just kind of felt like a battle. Then a little while later, the stocks are way higher, and you just feel like you didn't have very good execution on the IPO process itself. Here, I think we feel good about. We did PBF, the refinery company. We did Pinnacle Foods. We did SeaWorld. Our TAC ops did a residential mortgage REIT. We did our own mortgage REIT.
We've got some other things coming out of real estate and private equity. I think all in all, if these markets hold up in this environment, we feel very good about it.
Tony, just how about your view of your role as a securities underwriter as you're expanding that business a bit? How do you feel about traction there on some of those transactions?
We're really pleased with that, actually. We're really pleased with that. Sure, as the capital markets advisory, it's added revenues and it's kind of another little line of business for us, which is quite profitable and so on. What makes me really pleased about it is I feel like we're getting much more insight in the IPO process, much better ability to execute for our limited partners, much more informed, and we have more expertise internally to make the right judgments when the chips are down. I think it's a win-win. It's a win for our shareholders. It's a win for our limited partners. That's worked out really well.
Great. Thanks.
Your next question comes from the line of Marc Irizarry of Goldman Sachs. Please proceed.
Oh, great. Thanks. Steve, maybe you can give, or Tony, a little more color on the operating performance of the real estate portfolio between hotels and maybe office properties. Then I'm curious, as rates move higher, what impact, if any, did that have on the valuations? When you think about the operating characteristics, whether it's RevPAR or rents, just how much flexibility in the real estate portfolio is there to see sort of an incremental uptick as growth improves in the operating characteristics of the real estate portfolio?
Okay. Well, there's a lot of specifics there. In general, in our real estate portfolio, let's just start with that. The appreciation, 5.9% last quarter, was driven by the operating results, the NOI. Not by changes in cap rates and things like that. Now we do have some public holdings in that, which move around with the public markets as well. On the cap rates, cap rates have been low, really because base rates are low, treasury rates are low. The spreads over the base rates have not been low. As the economy goes up and as the real estate market intrinsically gets stronger, and with construction so limited, of new construction, I would expect spreads, as base rates go up, spreads to come in a little bit and cushion the blow of higher treasury rates if that happens.
Then at the same time, you're getting the higher occupancies and the higher rents and the stronger outlook. I actually think that scenario of an improving economy, just as Steve was saying, that scenario of improving economy associated with somewhat higher interest rates, net-net will play through the portfolio to add value. Okay? I think that's important. As for specifics, the hotel RevPARs are averaging up about 6% the last quarter. The office, I'd say every single office market is improving. Some are improving faster than others. Some are sort of flat-ish. Every single one of them is improving to a greater or lesser degree. When I look at the retail, well, you can see the grocery anchor centers with Brixmor. You can see how that's doing.
All of the retail businesses, again, retail sales look like they're coming up across the board as reflected in our centers. Warehouses, it's another industrial, as we call it. It's another big area. Again, all across the board coming up. Then housing, obviously, is a big one, too, for us, and I commented on that earlier. Again, prices going up over 1% a month. I think it's pretty much across the board. We can dig into whatever metrics you want and whatever asset class you want, but the picture is the same. It's not only across asset class, it's the same in Southern California or Northwest or Boston or Washington, or just sort of all the markets we're in. It's the same picture.
It's really driven by the fact there's just very limited new supply. It doesn't take much economic growth to drive this. We've got enough economic growth, and we've got enough with no new supply to have this look like a very favorable supply-demand balance for several years. The new supply can't come on overnight, particularly you're talking about office thing, it takes years. We've got pretty good visibility on the runway, and it looks pretty good for the next few years for us.
I think to add to that, what's also positive is that the increases are good increases on top of what were large increases last year. It's not like you have easy comparisons. We've just continued to see good growth.
Okay, great. That's helpful.
As Steve talked about Hilton, I think we're EBITDAs up 17% for the first quarter. It gives you a flavor for what can happen.
Right. We keep probing when Tony and I meet every Monday with our real estate group about economic softness because it's a potential indicator for us to help think through issues with other of our business lines. As consistently as we ask the question, "Are you seeing softness here? Aren't you seeing softness there?" The answer that comes back is, "No, we're not. Things are good for us." It's a very straightforward, snappy reply, and Tony gave you the pieces of it. There is a sense of what we're seeing empirically, that things are strong in that area.
Hi. Thanks a lot. Your next question comes from the line of Michael Carrier of Bank of America Merrill Lynch. Please proceed.
Hi. Thanks a lot. Maybe just on the new opportunity front, you guys mentioned on the retail side, the hedge fund product. Just given what you've done so far in the retail channel, when you think about that opportunity, you mentioned you're at the beginning stages. Is it more of a distribution opportunity, meaning, continuing to gain traction with the current products, or are there other product opportunities on the innovative side that now that you've done a decent amount of due diligence you can plan ahead? Where are those areas? Just on the recent Strategic Partners deal, just any other opportunities like that for Blackstone to take advantage of and then use that to grow your own business?
Sure. Okay. It's both existing products in its existing forms being offered to retail investors as well as new products in new forms. None of us would look at the retail market as being homogenous. You can segment the market. Some of them are family offices where we talk to the CIOs of family offices, and it feels an awful lot like an institution, and they'd be very similar to existing products. All the way down to sort of closed-end funds or mortgage REITs where an unsophisticated investor can buy 100 shares for $1,000. It's everything in between. On top of that, we're thinking about new structures and things like that to embed our products in other things. It's really across the board, and as I mentioned, we're at the early stages of that.
I'm not sure that totally answers the question, but let me just get to your second part, then you can come back if I didn't. Yeah. Strategic Partners fits really well into that, I think. Strategic Partners, it's a great retail product. It's a great institutional product too, but I think it really appeals to retail investors. Why? Because when they start drawing down money, they instantly start paying cash returns every quarter after that because they're buying mature funds that are in their harvesting period. An investor gives money and starts getting a "yield" right away. The investment cycle is quicker. They get their money put to work quicker, and they get it back quicker. That appeals to retail investors that care about liquidity, care about current yield. Their fund returns have been spectacular.
I think that's a really good retail product. One of the real appeals we saw in that acquisition, they were part of Credit Suisse, and they had access and great support from the Credit Suisse retail system. Of course, they weren't getting distribution from any other retail system for obvious reasons. As part of Blackstone, we expect to be able to continue to distribute to Credit Suisse investors, also to other firms investors. That's I think one of the synergies so to speak, that we identified. It's a great product that doesn't overlap with anything, and it's had wonderful, consistent top quartile returns in the sort of like consistent with private equity. Good product. Other acquisitions, yeah, we've got some other things that we're looking at. Nothing that we're close to doing. I think conceptually, there's some interesting things out there.
Okay. Thanks a lot.
Your next question comes from the line of Patrick Davitt of Autonomous. Please proceed.
Hi. Thanks for taking my question. We've seen BCP V IRR go from two to five% in just six months, largely I think on the back of the two very successful IPOs. I estimate they're both roughly 10% of the fund. My question is, can you give us an idea of how many high concentration slugs there are left in that fund to really help boost the IRR over that eight% bogey?
Well, I don't know how many high concentration funds. The biggest investment in that fund is Hilton. That's obviously one. I'm not exactly sure how to otherwise answer your question in terms of the number of them. I would say, though, everything in that portfolio has got upside in my view. We try to mark very conservatively. When we get near an exit, it almost always is a big increase over our mark. Looking at LT, what do you think the average increase from when we hit a realization event versus the prior quarter mark?
Our average, we looked at it for 10 years, and it's close to between 25 and 30%. In a better market like this, Tony, it's even higher. If you look at SeaWorld and performance, they were both up. One was up 50% and one was up 70% versus our mark in the prior quarter before the IPO.
Yeah. Recently, you probably saw there was an announcement of an acquisition of one of our publicly traded TeamHealth.
Vanguard.
Vanguard. Sorry. Where a year ago, it was trading at $8, we have an all-cash bid for $21. That doesn't get factored in, obviously, into a mark.
Right.
Partly it's that, but partly it's just all these companies
They're lean, and when revenues start to grow again, a lot falls to the bottom line. You've got leveraged capital structures, and that value accretes to the equity really, really fast. BCP III, I think at one point it was marked down to less than half of, I think, cost, and it ended up being over two times cost. There's a lot of upside in these portfolios when the world turns.
Okay. Quickly on the mechanics around the cash distributions, when and if that gets over the 8%, say you sell a few secondary or sell a few slugs of shares in Pinnacle and SeaWorld over the next few months, and then you get over that 8% hump. Will there be a huge slug of cash that comes through the distribution when that happens, or is that not how it works?
There's two separate questions there. One is for the fund investors and then one's for the public. When the fund itself starts accruing performance fees and then the realizations after that, you'll begin to see the cash realizations push through to the public investors. Today, given the activity in the portfolio, when we were talking about the increase of $5 billion over time, just to give you an idea, over the last 12 months, there's been about $3.4 billion of cash in different ways returned to the investors in that fund, and that's either from realizations, capitalizations, or current income. That level is already occurring in an increasingly rapid pace. Once that does, it's eating through the hurdle. Once you get over the hurdle, then you'll see the accruing of carry at the parent company, and then you'll see it also go through to cash.
Don't forget, there's a little bit of an odd thing that happens when you get over that hurdle for a while. You may have a catch-up period where a disproportionate percentage of the net gains go to the shareholders. Real estate had that a couple of quarters ago, you got some not totally linear things happening around the hurdle.
Right. That's an 80/20 catch-up, right?
That's right.
Yep. Okay.
Yeah.
Thank you, guys.
Your next question comes from the line of Roger Freeman of Barclays. Please proceed.
Hi. Good morning. Just back on real estate. It sounds like maybe with the improving economic environment and obviously the supply dynamics, you've got a pretty positive outlook on valuations continuing to grow. Is the timeframe over realizations of real estate portfolio, has that maybe gone out a little bit from where it was six or nine months ago? Because it seemed like it was more focused on sort of nearer term realizations.
Well, really? If so, I'm not sure that was a fair impression. It's hard to forecast very specifically realization events, and we really don't do that. We have a general idea of how a property is maturing and when we expect it to go to market. I would've said in a couple of instances, things have popped a little sooner in real estate. In some instances, there are assets where it might take a little longer. I don't think it's fundamentally changed. It's lumpy. We're in a period of time where you can expect to see real estate realizations growing and a fair amount of them over the next 12 to 18 months. Predicting which quarter and what order and what kind of ramp is sort of not doable. It's too market-dependent.
If it's helpful, Roger, just on that, to Tony's point, obviously it's a longer cycle over time. What we tend to look at from a trend basis is kind of the gross realizations, whatever that may be. It may be capitalizations, may be current income, may be sales. We look at it over a relatively long tail. On that basis, the number of transactions and actually the realized amount has increased quite steadily. Let me just give you a couple of numbers. I'm going to give you for the whole firm because I think this question's been asked in different ways over the course of the call. Just to give you an idea. In the first half of 2012, we saw 64 deals produce cash generation of about $4.5 billion. In the second half of 2012, that number went to 86 transactions and $8.6 billion.
In the first half of this year, it's been 105 deals and $12.6 billion. While it's very lumpy, as the fundamentals increase, you can start to see a longer-term trend, and you have to look at it that way. By the way, real estate followed that. They basically doubled the amount of transactions in capital over the last 12 months that's actually generating. When it'll happen, as Tony said, hard to tell. That steady trend is increasing, and you can see it in our numbers.
We're still in the virtuous part of the realization cycle in a general way.
Okay. That answers the question very well. Thanks. I guess the second one on, just back on this retail product, I know you can't say a lot, but I thought I heard you mention distribution partner. Is it one partner? Is that going to be an exclusive arrangement? Secondly, on the earlier call, Tony, you were talking about this dynamic of providing daily liquidity but investors also having to, I guess, understand take some limits on that to sort of get access to the higher returns that hedge funds can offer. How does that play out? Will there be daily limits?
Roger, I don't think I said that actually. I can't get into the terms of it now. Frankly, I don't even know all the details of it. I really can't go further other than to say it combines. For this purpose, until it's fully unveiled, I'd just like to keep it. It allows investors to have the daily liquidity feature that they want but gives them access to some top hedge fund managers, which they also should want. We hope they will.
Okay. Got it. I guess I misunderstood. Okay, thanks.
Your next question comes from the line of Jeff Harte of Stifel Nicolaus. Please proceed.
Okay, thanks a lot. Just on real estate, you mentioned that in terms of your investing opportunities, that there's still a fair amount of distressed properties out there. Could you expand on that a little bit? Even on the leverage issue or over-leverage issue, I would have expected perhaps the ability of the current owners to, I guess, refinance. Any additional comments on that issue?
Well, I think, Jeff, in the U.S., that's happening. It's not like all the distress is gone by any means. Markets are healthier, properties are doing better, and credit markets are very accommodating. In the U.S., that's starting to happen, and there's definitely less distress than there was a year ago. In Europe, though, I don't think that's happening. To the contrary, there's been a lot of distress in Europe. The spigots are starting to loosen up in the sense that people are starting to face that and want to sell assets and want to move assets. Also, in some cases, there were a number of sort of temporary patches put on where creditors cut a borrower some slack or extended some things, and those are coming up again, and borrowers are having a hard time renewing that.
We're seeing the banks start to sell more in Europe, and that activity level is high. I would say in Asia, it's a bit different. There's the well-publicized credit squeeze that's going on in China, but it's also happening in India, and it's happening in Brazil, and it's happening in some other places. Real estate financing is kind of drying up in those markets, and that's opening up some opportunities. It's kind of the locus has shifted a little. In the U.S., I think your perception is right. The distress is waning.
Okay. In private equity, post Q2, despite some volatility in the equity markets, it almost seems like the environment for realizations, at least through the IPO process, seem to have improved, given that 1, equity markets have rebounded, outperforming some other asset classes, and some of the IPOs having done well. Would you say post Q2 that the IPO process of realizations has actually improved a little bit?
Well, it depends on what you're comparing it to. It was pretty good in the beginning of Q2. Then, of course, June was a little bit choppier, and now it's back to where it was. I guess by comparison to June, it's definitely improved. I don't know that it's much different from the sort of the April-May timeframe when it was pretty good.
Okay. Very good. Thank you.
Just generally speaking, if you look at markets in the third quarter to date, they're all up solidly. That's true across every sector.
Right. Thank you.
Our final question comes from the line of Chris Kotowski of Oppenheimer. Please proceed.
Just reflecting on Steve's comments at the open, I'm not sure that what hit the stock so much a couple of weeks ago was the fear of rates, as much as it was one of your peers commenting that, quote, "There is an almost biblical opportunity to sell assets here." That, I think, just created the fear that there's a fragile window that's about to shut. I guess the question is, can we infer from the fact that you're holding on to assets like Hilton, even though hotel stocks are hot and EBITDA is up 17%? Can we infer from that that you disagree with that point of view, that this is a big biblical opportunity to sell? I guess, just to follow up to Tony, you said we're still in the virtuous part of the cycle.
What gives you comfort that it's not getting to the frothy part of the cycle?
Okay. Obviously, we filed Brixmor today out of real estate. We've got some other things for sale out of real estate. We've got three IPOs on file for private equity. We obviously think that for the right asset, this is a good environment to start seeking some exits. We're doing that. There are other assets. Just take Hilton, for example. When you can have that kind of growth in EBITDA with the kind of leverage capital structure that is on that company, the equity accretion is tremendous. You kind of want to let your winners run a little bit because you're creating a lot of value for your shareholders every quarter. We think Hilton's a great company, and we think that we'll have plenty of exit options. We'll have recap options. We'll have M&A options. We'll have IPO options. We'll have all kinds of things.
We're not in any rush. We feel like there's always a balance there. You're looking at the current market conditions, and you're also looking at the fundamental growth of equity value of your company, and you're trying to balance those. I guess I was saying that I think we don't see the window shutting right away. Indeed, as the economy improves and corporations get more confident about the future, you might see the corporate change of control market, the M&A market, get hotter, and that might accrue to our benefit. I think what I meant by the virtuous part of the cycle was not so much trying to predict markets, but in terms of what was going on with our. Markets are pretty good, A, so the avenues are open.
B, in terms of what was going on with our assets, they're coming to the stable, and particularly in real estate, I think that was a comment about real estate. We have this buy it, fix it, sell it. Our operations are, a lot of the assets are getting to the fixed stage when they'd normally look to exit, and the windows are open, and I think we're going to have another 12 to 18 months of good activity on that.
Chris, I would say just based on the incoming questions, everyone was asking about interest rates, concerned about interest rates. I might disagree somewhat. I think there wasn't a clear, and maybe there still isn't a fully clear understanding of how GSO is positioned, its private market transactions, that it's floating rate, that they actually benefit in a rising rate environment. We even saw it with the Blackstone Mortgage Trust, which is commercial mortgages. Initially, that got hit with the residential rates where you're trying to play a curve. Here we're not. Again, it's the floating rates they have in their queue for every 100 basis point increase in rates is a commensurate increase in income. Hopefully, there's a better understanding today than there was two weeks ago, but I still think we have a way to go.
Okay. Thank you. That's it for me.
Great. Thanks, everyone. We look forward to catching up after the call as well.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.