Welcome to the Blackstone First Quarter 2013 Investor Call. And now, I'd like to turn the call over to Joan Solator, Senior Managing Director, Head of External Relations and Strategy. Please proceed.
Great. Thanks, Chantalie. Good morning, everyone. Welcome to Blackstone's Q1 2013 conference call. So today, I'm here with Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer and Laurence Tosi, Chief Financial Officer.
Earlier this morning, we issued a press release and the slide presentation illustrating our results, which are also available on our website. We expect to file our 10 Q in a few weeks. So 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 ks report.
We do not undertake any duty to update any forward looking statements, and we will refer to non GAAP measures on the call. For reconciliations, please refer to our press release. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicit of an offer to purchase of any interest in any Blackstone fund and the audio cast is copyrighted material of Blackstone and may not be duplicated, reproduced or rebroadcast without consent. So quick recap of our results. We reported economic net income or ENI of $0.55 per unit for the Q1.
That's up from $0.44 in the Q1 of last year. And the improvement was largely driven by sharply higher performance fees from greater appreciation in the underlying portfolio assets really in every one of the businesses. Distributable earnings were $379,000,000 or $0.33 per common unit for the Q1 of 2013, more than double last year's Q1 and we'll be paying a $0.30 distribution to common of record as of April 29, which reflects the $0.33 in distributable earnings less $0.03 in retained capital per unit. And then lastly, we're hosting our 3rd Black Stone Investor Day on Friday, May 3 at the Waldorf in New York. We sent out registration emails many of you have registered.
But if you didn't receive 1 and you'd like to attend, please follow-up with either me or Weston Tucker after the call. And as always, let us know if you have any questions following the call as well. And with that, I'll turn it over to Steve Schwarzman.
And good morning to all of you and thank you for joining our call. It's been a terrific start to the year. 1st quarter revenues were up 29% year over year and earnings rose 28% as all of our investing businesses posted another quarter of great returns and strong inflows. Assets under management grew by 15% to a record 218,000,000,000 despite a sharp increase in cash realizations to $6,000,000,000 in the Q1. While many of our businesses are already the largest of their kind in the world, everyone reported another quarter of double digit AUM growth as our limited partner investors entrusted us with greater amounts of capital.
1 of the defining characteristics of our ability to achieve this continued growth is innovation. We stay attuned to market dislocations and long term trends that provide scale and best opportunities. We meet investor needs with unique and better solutions and then we have the best people to execute and this is what we do here at Blackstone. Almost $76,000,000,000 of our current AUM of 218 comes from new products, new strategies and new regions that didn't exist for us at the time of our IPO 6 years ago. These assets contribute meaningfully to our average AUM growth of 28% over the past 20 years.
And I don't think there are many businesses in finance that have any kind of record of this type. We have several innovative products either recently launched or in progress. 2 weeks ago, we launched the first actively managed ETF in partnership with State Street Global Advisors, a leading distributor of ETF products as you know and a well established retail distribution channel. The new fund trades under the sticker SRLN and is finally called Sirloin. I obviously didn't have anything to do with this name because I don't eat red meat, but hopefully other people will.
This is an exciting new product and with our investment track record and brand, we believe it has the potential over time to become as large as some of the largest open end mutual funds focused on bank loans and the potential on this is really very big. It's hard to know how it will develop, but these types of products often get into the tens of 1,000,000,000 of dollars. So we have an aspirational goal that we have no idea how this will develop. Also in credit, our new rescue lending fundraise is progressing very well and the fund has already surpassed the size of our first fund at $3,300,000,000 We fully expect to hit our $5,000,000,000 cap by the time of our final close in June. And this is a fund that is not yet investing, so it's not included in our fee earning AUM, but will roll in as we invest over the next few years.
Recall, we also hit the cap on our second mezzanine fund last year. So the GSO team here at Blackstone is really doing a terrific job. We raised over $3,000,000,000 in our CLO and other customized credit strategy platform, which included pricing 2 new CLOs in the Q1. If you'll remember, this market was completely dead 2 to 3 years ago and some people questioned whether it would revive. In fact, it's not only alive and well, it's particularly alive and tick well right now.
This also includes great successes we're having with our retail business development company platform, which is raising well over $500,000,000 in equity per quarter. That's per quarter. Gross fee earning assets in this strategy have now reached $7,000,000,000 including leverage. Our Hedge Fund Solutions segment is also broadening distribution channels and diversifying product offerings, driving strong capital inflows and market share gains. BAAM, as we have factually call, our hedge fund solutions area, is the clear leader globally basis excluding another $950,000,000 or almost $1,000,000,000 of April inflows.
Some of BAM's new initiatives include expanding our platforms to invest in special situation opportunities and hedge fund stakes, as well as developing hedge fund solutions for individual marketplace. Our real estate platform remains very active around the world and in both our opportunistic and debt strategy businesses. In April, we had a first close on our new debt strategies drawdown fund of $2,000,000,000 and are targeting a final close of 3,000,000,000 which is way below the demand for this product. We capped the fund at this amount in order to match its size with the current market opportunity. Including the April close, our real estate debt strategies platform is now $9,000,000,000 in total, up from 0 in 2,008.
And as I mentioned, we could have made it significantly larger. Also in real estate, we launched our 1st dedicated pool in Asia earlier this year and expect to first close in the Q2 in excess of $1,000,000,000 Lastly in real estate, we continue to generate strong inflows from co investment in our large deals, which earned fees and we've raised nearly $2,000,000,000 in co investment in the last two quarters alone. So if you annualize that, which you actually shouldn't, that $2,000,000,000 in a quarter times 4 would be $8,000,000,000 which is almost which would be raising more than the largest fund in
the world other than our own,
just through co investment. One final note on fundraising. Our tactical opportunities business, which is a special situations platform with a broad investment mandate across asset classes, raised an additional $1,000,000,000 in the first quarter bringing its total size to $2,700,000,000 currently. This product has received strong interest from some of our largest limited partner investors and has the potential to be quite significant over time, which I believe it will be. In aggregate, we raised $8,500,000,000 in capital in the Q1.
Central to our ability to continue raising this much is our track record of generating attractive returns and ultimately better performance than what can be achieved by our investors in other asset classes. Our Q1 performance was consistent with this trend. In real estate, our opportunistic investments rose over 6% or $2,400,000,000 in total appreciation. In terms of fundamentals, it's more of the same with ongoing improvement across all subsectors, largely on the back of limited new supply of product and moderate economic growth. Our BREP 7 Global Fund, which started investing in the Q3 of 2011, the largest such fund in the world, has already achieved a net IRR of 32%.
Let me just go over that one again. The largest fund in the world, so we're not supposed to have good performance according to a lot of theoretical models, which has not turned out to be the case for us. And it's up 32% net of fees. It's really an amazing performance and all of our global funds as well as our current European fund are fully incurred. Real Estate's accrued performance fees net of compensation increased to $1,400,000,000 despite higher realizations, which equates to $1.28 a share.
Our private equity portfolio behind rose 8% in the Q1 with over $2,000,000,000 in equity value appreciation net of the negative impact of foreign exchange. Most of this gain was in our fully invested BCP V fund. The fund as you know is below the preferred return hurdle. Now it's by 9% on the total enterprise value basis, which is a good improvement from the 12% GAAP that we reported. So we're not that far away from getting into carry, although it's hard to predict exactly how that will develop.
The fund is now held at 1.3 times cost, including realized proceeds. Our portfolio companies are performing well in a tough economic environment and we're leveraging the strength of the platform and our portfolio operations to create real sustainable value for our companies and our limited partner investors. We also tapped into the strength of the credit markets, which Tony talked about on the earlier call, during the quarter to execute over $20,000,000,000 in portfolio company debt financings, driving substantial interest savings across our portfolio overall. And these savings translate into a multiple of value appreciation. As our funds have continued to create value and post strong returns, recent market conditions have increasingly enabled us to convert this value into cash earnings for our investors.
I've stated in our last call that it was becoming increasingly evident we've reached an inflection point in terms of realizations as long as markets remain constructive. While on a quarterly basis realizations are always lumpy, our first quarter distributable earnings of $379,000,000 were our 2nd best quarter ever as a public company in about the last 6 years, trailing only the last quarter. This brings our 6 month total to $870,000,000 Our $6,000,000,000 in total realizations in the Q1 is up from just over $2,000,000,000 last year, that's 3 times. Our credit business was half of this amount, driven by CLO activity as well as out of our first mezzanine fund, which generated an inception to date return of 19%. If you can make 19 percent after fees and mezzanine, that's about as good as most people have done in equity returns, it's not better.
It's pretty remarkable performance by the GSO Group. In real estate, we had nearly $1,000,000,000 of real estate this quarter, double last year's Q1, generating $72,000,000 in realized performance fees versus $9,000,000 the year before. So that's 72, percent up from 9 percent. And we remain confident we will see a material pickup in this level later in this year and next year. In private equity, we've also been active generating $140,000,000 in realized carry in the Q1, up from only $4,000,000 the year before.
So if you keep track of this blizzard of numbers, you'll see that private equity had much larger realizations in that sense than real estate. We completed 10 Equity Capital Market transactions, including nearly $2,000,000,000 of secondary share sales. The average multiple of invested capital in these transactions was 2.7 times your money. Any way you look at it, when you're selling things at 2.7 times investors' money, it compares so massively better than the stock market that this is why people continue to give us increasingly large amounts of money over time to do what we do. As the M and A environment for corporates has been somewhat restrained over the past few years, we've seen more of a concentration towards public market exits for some of our more mature investments.
So I think this will change over time given the enormous liquidity that companies have. In addition to several secondary offerings, at the very end of the Q1, we completed the successful IPO of Pinnacle Foods. This priced at $20 a share at the top end of the filing range and has since traded up further. We did not sell down any of our interest in this offerings. We have a few more other IPOs on file and we expect several others in the coming quarters.
So this part of our business is doing quite well. In summary, we're very excited about the prospects we see in each of our businesses. We've launched or launching a number of new and innovative products in every business line and are broadening our distribution channels. As we continue to attract more capital, our diversity and global presence enable us to identify attractive opportunities to deploy this capital, sowing the seeds for future returns. We've seen sharp increases, very sharp increases in cash realizations recently and in good markets, we will continue to harvest the value we've created, driving good returns for our public shareholders.
Our firm is in terrific shape, both in terms of growth of assets, our capital position, our performance for our investors, number of new products, our personnel, which is really absolutely terrific. The people here are really excellent what we do and a culture where we have a sense of mission to be the best performing firm that we can be for our investors. So it's a
state of the end of
the first quarter is a very positive one certainly from my perspective.
Okay, Steve. Thanks. Blackstone's Q1 was a record start to the year with $1,300,000,000 of revenue, 29% year over year on record performance fees and investment income of $739,000,000 which was up 57% year over year. The firm's results reflect not just the impact of a single strong quarter, but also the earnings momentum created by sustained fund performance and growth, which Steve outlined, and the earnings leverage that combination generates. To give you better insight into how we think about the firm's performance and earnings potential, I'll focus my comments on 3 core earnings drivers: capital formation, value creation and gain realization.
Capital formation. Over the last 12 months, Blackstone's global marketing platform, network of LPs and continued innovation generated $34,000,000,000 of inflows. In fact, as Steve outlined, as several of our newest and largest fundraisers have resulted in the firm reaching caps or capacity, evidencing the demand for alternatives in general and the power of Blackstone's track record and brand in particular. Consistent robust inflows and value creation more than offset the $23,000,000,000 of capital return to investors over the last year, allowing the firm to grow 15% to a record 218,000,000,000 dollars Further, despite the $17,000,000,000 of capital invested or committed across the firm, the global capital formation capabilities of Blackstone were able to maintain the level of available capital or dry powder at $36,000,000,000 at the end of the first quarter. Value Creation.
The sustained fund performance across all of Blackstone's businesses created $18,000,000,000 in value for fund investors over the last 12 months and $7,000,000,000 in the 1st 3 months of this year alone. The value creation reflected in fund performance can also be seen in a couple of key measures of earnings potential. Total performance fee earning assets reached a record $88,500,000,000 across 90 distinct funds currently generating cash performance fees. That total is up from 54% in just the last year up 54% in total over the last year. Sustained fund performance also has the direct effect of accelerating accrued performance fee revenue, which reached a total of $604,000,000 for the quarter as the base value of assets upon which we earn performance fees continues to expand.
This earnings dynamic also impacts the net performance fee receivable, which reached a record $2,300,000,000 or $2 per unit at the end of the quarter. Another key indicator of value creation is the sharp growth in total net value of cash and investments on the balance sheet, which grew over $1.50 in the last year to $5.93 per unit, up 34% year over year, which further creates value for shareholders. Now on to gain realization. Our gain realization activity over the last year has strengthened materially, which resulted in $929,000,000 in realized cash performance fees paid and $0.92 per unit in total distributions to unitholders over the last 12 months. In the Q1, the firm executed 40 different transactions that generated another $6,000,000,000 in realizations across the 90 funds earning performance fees.
These realizations are of course the key driver behind the more than doubling of distributable earnings year over year to 379,000,000 and represents the strongest Q1 in the firm's history. Over the last 12 months, the cash generating components of earnings or ENI, which are realized performance fees and fee related earnings have grown to 64% of our total earnings, up from 49% in 2011. What is perhaps most interesting about the performance is that as gain realizations and cash payouts to unitholders have strengthened considerably, the value creation elements of our balanced earnings continue to expand Blackstone's forward earnings potential. As I mentioned last quarter, as Blackstone's earnings have steadily and consistently grown and diversified over time, it afforded us the opportunity to enhance unitholder value by increasing our quarterly base distribution by 20% to $0.12 per unit. We also moved to a current quarter payout policy and accelerated the timing of that distribution.
For the Q1, our distributable earnings grew to 33% per unit and we will distribute $0.30 per unit or 3 times our last year's payout to our unitholders of record on April 29, a date that comes before some managers even report earnings. In a period where public equity and debt markets are impacted by a sharp increase in risk capital and historically low rates, finding and creating value in the largest markets becomes more difficult. We have consistently invested in Blackstone's capabilities to find opportunities to create value where others cannot. Blackstone's culture of innovation, global reach, unmatched diversity of strategies and trusted brand uniquely position us as the solution provider to the world's largest pools of capital. Our public units give all investors liquid exposure to the fast growing asset classes we manage, which can find those opportunities often complex or illiquid to create sustainable value across its markets and convert that value into a consistently high yield.
The Q1 again demonstrated how sustained strong performance across Blackstone's funds can and will drive long term value and cash earnings for our unitholders. Joan?
Great. So on behalf of everyone at Blackstone, thanks for joining the call and we're going to take your questions now. If I can ask if you can just keep your first round to 1 or 2 questions and then go back in the queue just so we can get to everyone.
Thank you. Your next question comes from the line of Bill Katz with Citigroup. Please proceed.
Okay. Thank you. Good morning, everybody. Steve, I'm curious of you if you could flesh out the retail growth opportunity. It seems like you and some of your peers are particularly focused on trying to crack into that particular area.
And so I think under your discussion of broadening out distribution. So could you talk about A, what your strategy is from a distribution perspective? And B, what type of products are you looking at here? And sort of in that construct, how you think about redemption risk as you build out the business? Thank you.
Bill, it's Tony. I'll take that one. And I hit this briefly in the press call, because we basically think retail opportunity is big for our industry and for ourselves. It's big for the industry because there's the total amount of high net worth assets is bigger than the total amount of institutional assets. Whereas institutions tend to have 10% to 20% of their assets in alternatives, retail tends to 1% to 2%.
So that shows you the scale that could be potential. So we're excited about that. We're actually hitting that every single one of our businesses has at least 1 and maybe multiple ways that they're accessing retail investors. And that might be defined by channel or it might be defined by form of product. Form of product could be partnerships, sort of special purpose entities that a distribution arm was set up to distribute LP interest in one of our main funds or it could be publicly traded vehicles like the ETF that Steve mentioned or like BDCs or like closed end funds, all like mortgage REITs, all of which we have.
So I would say it's across the board, it's across the retail channels and it's in multiple forms.
Okay. You. And just my follow-up question. When you look at the dynamic between cash return and growth in fee paying AUM, obviously, a little bit of a depressant on fee paying AUM to the extent you're very successful in generating realizations and so forth. How do you think about the ability to grow fee paying AUM?
I think it was about 2% sequentially, a little bit lower than your long term average. And the realization cycle picks up, what are the key drivers to that growth going forward?
What happens with AUM, when you raise a fund, you get a bump. And then when you sell things, you take away from the value of those assets. And that kind of sort of wave phenomenon is endemic in our business. We have a lot of assets in different parts of our business. So the way you keep the business growing, which is great for the people who work here because everybody gets a chance to be have platforms to grow in where they can be important and grow professionally and it has a good result financially is to expand new products and to move into new geographic areas to the extent that all these things always have to be measured against producing great returns for investors.
We just don't do this stuff to manage to some earnings expectation. We do it if we see great opportunities to produce superior returns for our limited partners. And you also grow your business by taking advantage of different channels. And so we've had for several years here and actually much longer use of retail distribution that Tony talked about earlier and that bringing our products to high net worth investors is a logical evolution. The technology has gotten better and better to do that on the cedar fund side.
And these types of investors were typically scared to death in the financial crisis and basically went to cash, which was the exact wrong thing to do, just by the buy. It's a pattern that gets repeated from time immemorial. But putting money in our types of products yields much higher returns and I'm asked reasonably often during a year to talk to groups of high net worth financial advisors. And I basically say to them, why would you invest in the products you normally do it from? You can make 2 to 3 times and make your money and have happier customers if you put them into our products.
And I think that's not a sophisticated sales pitch, but it actually happens to be one that's pretty compelling and the people managing these large high net worth groups increasingly want to get their customers into these types of products because the customers are better served and because we've got not only a great array of products more than anybody else in the world, no one close, But we also have a brand name that people can trust because we're very risk averse and tend to be highly diversified in what we do. And so it's a safe we're a pair of safe hands, but with high performance historically. And so by rolling that distribution channel out over time is another source of growth for us. So part of what we do is follow the opportunities to create products and move around the world in terms of gathering money and outside of the United States, the Blackstone name is really, really powerful. It's powerful in the United States too, but I'm saying is a differentiating item, it's a great name to bring to a market.
Bill, let me answer your question on AUM growth. So we've got this kind of seesaw cycle a bit which you pointed out which is on the one hand when you go through big realization you start shedding AUM. And then at the same time, when you're in your big fundraising, it's lumpy because you get particularly if you're doing the mega funds that are the core funds in real estate private equity places like that, you get big step ups. So it's not totally smooth And those things don't always correlate. So you'll have flatter periods as you're not raising a big fund, but you are divesting and then you'll have spurts when the big fund comes in and you're not divesting much.
I think when you smooth that out, you can expect us to have high single digits, low double digits long term AUM growth, at least that's what we expect. I think actually the structure of our business as it grows is getting smoother in that, because we're having more and more funds that are always in the market. And because some of our funds increasingly number of them, particularly some of the GSO and credit related stuff only come into fee paying AUM once they have been drawn down. So that's a much steadier kind of thing. It's disconnected from the big raise cycle.
So, but we think as I say, high single digits probably is what it averages out over time. But you'll have some softer periods and somewhat spurty year periods, but it should tend towards the smoother.
Okay. Thanks for taking my questions. I appreciate it.
Your next question comes from the line of Michael Carrier with Bank of America. Please proceed.
Thanks for taking the question. You guys gave a decent amount of color just on the realization environment and you've been pretty active and it's driving healthy distributable earnings. On the deployment front, just wanted to get maybe an update, activity across the industry has slowed a bit, valuations have picked up. I think you guys have mentioned when you look at valuations, whether it's being driven by central bank policy versus fundamentals. So just where you see the opportunities going forward just given the fairly strong move in the markets which obviously has been positive on the exit front?
Yes. It depends on the business line, in this note that we're in. They used to have different characteristics. Real estate is just still basically by historic standards smoking and it has not impacted that as much as you can start seeing a little tightening there. It's affected private equity the most.
We had a slow investment rate for the current quarter, but I don't look at life in terms of quarters. I know you do. It's a bit of an artifice And we look at what happens in a year or 2 and we missed 1 or 2 large situations where we would have ended up just putting $1,000,000,000 or more in just one transaction and then these numbers would have looked different. So that's a bit of a luck of the draw type of thing. You also need to pick your shots as to where you work and developing product that's more direct where we have a number of deals going on like that as opposed to some of this auction product like Life Technologies, which we lost to a strategic is the way you go about doing that.
And to the extent that the deal business picks up that our GSO people have a lot of opportunities there with their drawdown funds. And so a bit of this is a wax and wane kind of phenomena.
So, yes, and Michael, let me weigh in on that. It seems it sounds like the post of your question is primarily private equity. I mean, obviously, real estate is at some kind of huge level. So there's no shortage of opportunities there. And so let me focus on private equity.
We're still seeing prices are high as a general industrial LBO market, but we try to avoid that unless we have some kind of special sauce anyway. But we've put a lot of money into energy very successfully, continue to see a lot of interesting investments there. We've put a lot of money into private companies or companies that can't access public markets whether debt or equity has been a really good place for us both our credit business and our private equity business. So private capital private credit has gotten historically high returns in relation to public credit. And similarly on the equity side, small companies that can access public markets need growth capital, want to consolidate their industry, still a lot of interesting things there, but they're smaller companies for the most part.
And then there's still some industries which are capital constrained from the financial crisis and those have not healed yet that some of the markets are not opened up for them yet. There's various regulatory driven capital needs that are kind of throwing distorting supply and demand and creating anomalies, which we've been focusing on. On. And of course, Europe is not a hot market and there's some interesting things there depending on where you look. So when we look around the world, we're still seeing plenty of interesting things to look at.
We're being disciplined. We've put out last year we put out last 12 months I think we put out $4,400,000,000 in private equity. That's probably not a higher than sustainable investment pace for us. So we don't feel constrained by lack of opportunities at all.
Okay. That's helpful color. Just as a follow-up, On BCP V, so you guys have made some good improvement particularly this quarter. I'm just enclosing that gap. But when I look at 2014 estimates and stuff, there's a pretty wide range out there.
So I just want to make sure that we look at this correctly. So if I just take like the last take it 3 quarters since the market has rebounded, it looks like the markets have been up in that timeframe from 15% to 20%. And then if I look at the kind of the equity or the fair value improvement in your performance or in that gap, it's gone from like 36% to 22%. And then that enterprise value has gone from like 13% to 9%. And so when you guys report performance, I'm just we always look at that fair value metric, which is at like that 22%.
But I know you guys look at that enterprise value metric, which is at 9. I'm just trying to like tie the 2 or what we should be focused on when when we look at the performance of the funds?
Michael, it's LT. They're actually as you just did the math, they're actually the same numbers. We prefer to show the total enterprise value number because that's more akin to more of what's happening in general markets when you look at the S and P or other indicators. But you can as just as you did calculate it on a levered basis where you're taking advantage of the leverage and then it's a bigger number to reach, but you have the advantage of the leverage so that the total enterprise value has to go up by less. So it's just a matter of presentation.
We thought it was simpler for more investors to show it on a total enterprise basis, but we give you enough numbers so you can also calculate what it is on an equity basis.
Okay. Got it. Thanks a lot.
Your next question comes from the line of Robert Lee with KBW. Please proceed.
First one is, I guess since it seems like every financial that's reasonably successful or very successful as a target on it. Is there any I'm just curious, is there anything besides the ever present carried interest in the recent budget proposals or regulatory proposals out there that weren't that you're taking extra closer to look at or could be problematic if enacted?
That's a good question.
We spend a lot of time worrying about risks here. And if you look at our initial perspectives or you look at whatever we produce by way of documents that we file on a regular basis, there's always a list of these kinds risks. And I don't know that any of us think there's anything on the horizon other than Washington type issues that really should impact the business in any in any significant way given the momentum that it's had. Longer term, there's a trend to define contribution as opposed to defined benefit plans, which on a very long term basis may have some impact, but to the extent we pivot to going to individual investors and more sovereign wealth funds, we can ameliorate that. We always have the risk of our own performance, which firm wide has been really terrific.
And that's something that we're always laser like focused on. But in terms of external types of things,
We have a little bit of
investors sometimes wanting to go direct on certain types of deals. That's a relatively small impact to our business and we've grown right through that. We find new ways to partner with these types of investors on certain types of things. And so I think it really is more government oriented things and passing things in Washington, we're all finding out now is pretty difficult to do. And without making too much of a political statement, it's hard to imagine when 90% of Americans are in favor of some types of background checks that we can't even sort of get a vote on it.
So even though Washington things could have some interest in terms of potential negative things that people mentioned almost in passing, like getting rid of that interest deductibility, which is just on the list of something that came up a few weeks ago, that a lot of these things that make some headlines, I think are quite unlikely in the context of the world we're living in today to really be effective. But that's the area that I think from an overall point of view that we worry about the most, just doing our business and making excellent returns our customers. That's something we're pretty focused on and it's part of the firm's culture and we don't knowingly do anything that is straying from achieving that objective. So I'd say on balance from a risk perspective, it certainly appears from being thoughtful about it that we're in a relatively low threat level to the firm in any way except for these types of Washington oriented issues. And most of those we can find a way to
grow through frankly. Actually, Robert, I'd say to the contrary, we actually think that these the markets where I think Goldman Sachs published report with a projected returns for the next 5 or 10 years recently. And they projected the stock market returns at like 5.5% and credit intensive say high yield in the 3s and investment grade and government bonds, government bonds 0, actually investment grade close to 0. So if you think about a traditional investor that's got to earn 7.5% to 8% to make his payments to stay solvent with more beneficiaries. And the equity returns are 5.5 and the credit returns are best depending on the credit spectrum are 2% and they've got traditionally people have 60% of 1 or 40 percent towards equity, 40% towards debt.
You're talking about a portfolio around 3.5% if that's all you're doing. It's a killer and it's going to be a huge societal burden and because the taxpayers got to pay it or you're going to push or you're just having insolvent pension plans. And I don't know how society deals with that in any painless way. And the only painless way truthfully is to earn more on the portfolio. And the only way to do that is to move your money to alternatives because there you can have pretty consistent uncorrelated returns that are way above on a good alternatives portfolio as you have tons of confidence of being way above your liquid market alternatives.
And so we see it the other way. We see that the trends are inexorable. It doesn't matter about whether private equity is popular or this or that. They have no choice. There's no better answer for society than these institutions moving substantially more capital into alternatives.
If you just look at, for example, we've got 1600 basis points long term performance in real estate over the stock market. I mean, how could you not allocate more as Tony is talking about to that asset class? We're in the 900 to 1000 over in private equity. Why would you not do that in increasing size? Our credit business has earned major multiples over those areas and all of them are way above the actuarial rates.
And so this isn't like a theory. This is reality. And so there is nowhere to go to solve the problems other than the kinds of things that are horrible types of alternatives for society. So we think our business is really extremely well positioned
for the future. Maybe just following up to that.
I mean, one of your peers has talked about them believing, I guess, a couple of years down the road, 2, 3, 4 that it's inevitable that they'll find a way to put more alternative products into defined contribution plans and whatnot. I mean, do you guys
assume, I don't know if
you do share that confidence? I mean, do you see that as being a realistic potential in the foreseeable future?
Absolutely. And if you look at like in Australia, you'll see a lot of alternatives already in the equivalent of defined contribution plans. And we've developed specific products right now that are going into defined contribution plans, daily marks, daily liquidity that sort of stuff. So absolutely we'll see that and we're already there.
Great. Thanks for taking my questions.
Your next question comes from the line of Roger Freeman with Barclays. Please proceed.
Hi, good morning. Just to pick up on this last point and kind of carry this out. If you moved I guess how much capacity do you think there is to generate these consistently high returns. If you look at how you generate the returns, right, improving the businesses that you buy, some of it's financial capital structure related. If you move the kind of money that would have to move into sort of private equity and similar investments to solve the pension issue.
Does that change the dynamic?
No, I don't think so. I don't we haven't seen any diminution of the returns as our businesses scale. And remember as we grow, we're not just growing the same three funds over and over and over again.
We have a lot of
new products. We have a and let's take private equity for example. When private equity industry started 20 years ago, you focused on small, because you couldn't finance big, mundane industrial companies that were slow growing in the United States. You'd never do a tech company. You'd never do a growth equity.
You'd never do a large deal. You'd never do a deal in Europe, Asia or Latin America. The scope has widened dramatically and continues to widen. And so we haven't seen any limits of scale. And as I say, it's not just doing the same old thing bigger, it's really expanding the horizons and the number of things you can do well.
Okay.
And I guess my other question would just be on proprietary data points, I'm always interested in kind of what you're getting out of your many portfolio companies. There's a lot of talk about more slowdown again. Are you seeing that?
We're seeing, I would say, let's just talk it depends on where in the world.
Yes.
But let's start with the U. S. Because I think that's what you're primarily thinking about. We're seeing anemic growth. It is growth, but it's anemic.
Okay. Europe is flat to down and Asia is growing, but there are different areas
of strength. Of course, the whole housing area, for example, you've seen housing starts are now a little over a 1,000,000 up from sort of at the bottom, I guess it was 500,000, 600,000. You've got autos that are still doing quite well, it's about 15,500,000 units, which were up from about 8,500,000, 9,000,000 units at the bottom. So these areas have strength as does the money at least going into the energy complex and that area yields more of course in terms of return with the commodity price for oil was $10 higher than the way it was sort of a month or 2 ago. But that area has really very significant strength as people are working with sort of the shales all over the country.
I mean, it's a revolution in terms of what's going on there. That's the strength of the economy. I think what Tony was alluding to correctly so, is that there obviously is some impact that's being felt through the economy from issue of the reversal of the cuts on withholding and at year end, those reversals and no one can be sure exactly what's triggering what you've had huge tax increases on upper income people, you've had the sequester. And so economists generally said that with those three factors, economy in the 1.5% to 2% growth rate and you have some of these other offsetting factors. And so that leads you to a sort of a compromise growth rate.
So you don't see the strength all through the economy the way you wish you did. And then confidence levels over the last few months have been down in large part because as you watch what's going on in Washington, you really have to shake your head. And how do you maintain confidence in an optimum way when outcomes appear to be pretty suboptimum. And so you put that together and I think you've got a scenario in line with what Tony is talking about, but you get there different ways and our different businesses are impacted
in different ways because of that. And if you peel back and look at it by consumer, the sequester, the payroll tax, the Affordable Care Act, those things hit the low end consumer a lot harder. We're seeing the low end of the consumer even stepping back a bit, but the high end stays pretty strong. And of course, that's also got its regional overlay. Like for example, in England, which is doing very poorly, overall London is rocking and the rest of the country suffering.
So you see some funny patterns as Steve said, it's not homogeneous in that way and that's reflected of and you weren't asking about our portfolio. I know you're asking about the overall environment, but it's kind of you see these pockets of strength, pockets of weakness, but overall pretty anemic.
Okay. Appreciate thinking. Fair answer. Thanks.
Your next question comes from the line of Howard Chan with Credit Suisse. Please proceed.
Hi, good morning.
Good morning, Howard. I heard you're in the baby business. Is that true?
Yes, it is. Yes, thanks so much, Steve.
Hey, Rob.
Steve, on realizations, you know the meaningful pickup in activity, particularly in private equity. Just given all the value you have in the ground in real estate, I was hoping you could talk a bit more about your process of selectively culling, lining up the higher quality properties and preparing the market for just more active harvesting within real estate specifically?
Well, we've got a very interesting situation in real estate. We own wonderful things that appear to be going up in value a lot. So our timing of putting investments in the ground has been really good. We've been the largest investor in the world by far over the last several years globally in real estate. And we do sort of a regular analysis of what we think has sort of breached its improvement potential.
I mean, John Gray is I got a very snappy sort of description of our real estate business, which is buy it, fix it, sell it. And so when we're past the fix it part of the equation. Then we look to sell it depends where the markets are in terms availability of capital at that point. If we think capital is going to be rushing into an area, then you'd rather wait a little bit because the price will go up. But we've got a lot of things that we're actively contemplating.
And I really can't say more than that. It's we're on the good side of the cycle for sure in terms of realizations in real estate.
Okay, great. And then just my follow-up more broadly on harvesting. As you said, you're beginning to more actively harvest and yet the pipeline, if you look at your portfolio value, net accrued performance fees, they're refilling faster than you're harvesting. So my thinking is maybe we're all underestimating the magnitude of this harvesting cycle versus prior ones. You've seen a lot of these cycles, Steve and Tony.
And I'm just curious, how do you think about that?
I'll answer that one very quickly and Tony can add that. I think the issue is really the strength
of the
economy. If we had an economy that was really moving along, you'd see a lot of stuff being sold very quickly. And so part of it is just responding to that. And when the time is right, there'll be an enormous volume of stuff like in every cycle. When you get to the closer to the midpoint to the top of the cycle, there's enormous M and A activity and it's not because we need realizations, it's the way the system works.
And we've had a system that's been beaten up part by the financial crisis, but part by the governmental response to it and confidence being lower than it would normally be. And at a certain point that'll burn off and then there'll be a lot more. So I don't know that it changes things in a material way. It's just looking at what's going on in society. And when we have great assets, we want to make get a great price when we go to sell them.
So Howard, let me just I mean, let me paint a picture for you. Imagine that the housing comes alive and from the energy and this U. S. Economy starts growing not at sort of 2%, but at 4%, which could easily happen out of ways. We get a little inflation, so the nominal growth is 6%.
Earnings of companies are very strong. The stock market, which now has the S and PPE of say 14 goes back to where it was about 2020. The dividend yield of the S and P which is the universe of that would go from 2.5 back down sorry from 2 ish back down to about half where it was before. So you got a very strong stock market. You got corporations with a very low cost of capital sitting on a ton of cash and they want to go buy a bunch of stuff.
And we've got all these equities or real estate or whatever on leverage. So that I mean the math is simple, but if you have if there's a company where a quarter of the capital structure is equity and 3 quarters debt and that value goes up 50%, your equity triples, all right. So imagine what can happen in the right environment, both in terms of the dollar size, but also the returns. And we've seen this in the past. I mean, we I'm trying to think back, but back in 2000 early 2000s, I think it was our BCP III fund was I think it was $0.30 on a dollar and ended up being 2.2 times one point.
So the swing back can be very, very powerful and both in scale and in returns. So we're keeping our fingers crossed.
And on top of all of that, you have new products and new funds that are first being invested. So if you are only look at one fund in isolation, what's been said is absolutely true. But now you have areas like energy, tech ops, next year you'll have hopefully BREP Asia etcetera. And this is all new money going in the ground that also contributes to the IPO is in new products.
I'll add one
In 2005, 'six and 'seven we had $1,000,000,000 And all the comments you just heard where we feel like we're more towards the beginning than the end. And the firm back then was $75,000,000,000 in AUM. Now we're at 218,000,000 and our performance fee earning asset base is bigger than the entire size of the firm during those 3 years.
Great. Thanks everyone. My only follow-up Tony is who's Treasury Secretary in that scenario?
Well, are you volunteering?
Apparently not.
Your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hi. Good afternoon, guys. Is there a large incremental operating expense investment associated with raising or bringing in the large Asia Real Estate Fund? Or is it largely using teams already in place from the legacy real estate business? In other words, what could we expect to see a big margin bump when that starts earning fees?
It's entirely with existing team. We've been investing in Asia for 5 years. We have a fully built out team. We don't need any more bodies.
Great. And then sticking in real estate, to the extent there's an opportunity to sell individual properties, I imagine it's fair to assume that real estate realizations could continue to pick up regardless of what equity market environment is, particularly when you think about the size of pools of capital and the reason for the pools of capital that are forming from sovereigns in particular to buy that kind of stuff?
You're absolutely right. And in fact, most of our real estate exits will not have anything to do with public markets.
Right. Okay. I figured that. All right. Thank you.
Your next question comes from the line of Dan Fannon with Jefferies. Please proceed.
Thanks. Tony, I think you mentioned on the media call beginning of an M and A pickup. And I'm just wondering if that's something you're seeing just from the broader market or that's actually coming from conversations at your portfolio company and this is within the real estate portfolio?
Well, I was referring to the corporate market less the real estate. Although there's a robust demand for high quality properties on real estate side as well that's picked up. But on the corporate side, it's not so much from our conversations as what we see in terms of competition for properties. We see that through our advisory guys. The activity level of their clients has really picked up again the number of things they're looking at.
So it's more observational than trying to imply that we were going to be selling a bunch of companies near term.
Okay. And then within GSO, it does seem like they're out marketing a lot of funds right now. Can you highlight some of the strategies and maybe the potential in terms of AUM goals within certain of those buckets?
Wow. Well, as I think Steve mentioned, they've got CLOs in the market. They're just they're working on their distressed lending fund called Capital Solutions that will hit its cap shortly. They've got strategies for retail products like a retail energy credit product for us. They have a product they have a fund that does loan private loans, senior floating rate loans to companies that are small, so small business originated stuff.
They have help me out guys. The ETFs. The ETF we mentioned, they have various SMAs that they're talking about.
And the hedge fund.
The hedge fund is always open and has had great results. So
They have about 7 different 6, is it 6? 6. 6 different products that are currently available. BDC is Franklin Square. Note to investors.
So, I don't think we should be projecting for you exactly what each one is going to get. I've got my own assessment and my own fantasy life associated with each one of those terms of what they could be. But I think that it's fair to say that GSO will continue to be in a major growth mode.
Great. Thank you.
Your next question comes from the line of Matt Kelley with Morgan Stanley. Please proceed.
Good morning. Thanks for taking my question. I wanted to switch course a little bit to the BAM business. And just hoping you guys can give a little bit of color on the latest trends in your LP states, who the incremental subscribers are? And particularly, is that an area where you think you can get meaningfully bigger and high net worth in retail?
Yes. BAM gets about half of its flows from its existing investors. So we have very happy investors and as you can tell from tracking it, the inflows are way more than the outflows. And in fact, this is a custom designed business. The days when this was a fund to funds business selling a standardized product is like way over.
And the people who have stayed in that model have shrunk in this whole industry of the fund of funds is about half of what it was before the crash. And we've increased our size significantly. And so what we do is we're designing different types of products. We're putting overlays on the portfolio as to enhance performance. We're coming up with new drawdown products.
We're hiring more people who are capital committers themselves. And we're evolving this model in a way that works for the largest institutional clients in the world.
And I would say the client base is still largely institutional, but we have some retail products out there. We have a registered investment company that was started up last year and in one retail system and it's expanding to other retail systems. We have working on some fine contribution products in that area, which can be also embedded in insurance and other things like that. But for the most part, it's still institutional money. On the in the terms of the composition of the institutional money, they've gotten more the U.
S. Investors account for smaller percentage today. They're still growing, but the faster growth I guess a better way to put is coming on from the international side.
And we do all kinds of really sophisticated types of modeling for these large clients and way beyond just efficient frontier type of stuff. And they increasingly are working closely with us and relying on us to help them with allocations within this type of area and some other types of areas.
Okay, great. And then one follow-up for me and sorry to beat a dead horse, but on BCP V again, good move this quarter, still only 28% of the unrealized investments, it looks like are public. So how should we think about that going forward with some of the public with the S-1s you have on file? And maybe if you can help us understand maybe where Pinnacle or other investments have been marked prior to taking them public, so we can understand kind of the magnitude of the lift going forward?
Just I'll let LT handle that. But just in concept, we're like 9% away from an enterprise value from getting into carry. On the other hand, we're measuring that against an 8% hurdle that keeps moving against us. And so we need to create value in the companies above that moving 8% target, which actually is a little higher when you add some fees. So one of the ways to think about it is that typically and historically, when you take the numbers LT was discussing that when we tend to realize investments historically, they've been like 25% to 30% over the mark that we have.
So as you analyze the situation And that's a hard thing to do just based on faith. But historically, that's when it's been. So that's on the equity side, not on the whole enterprise side. So the way I tried to think about this is if we continue to improve the company and if markets are hospitable, we should have a built in pop if the future is like the past, which gets us in a better position to eat up that differential.
The only thing I'd add to that
is and you're referring to the 28% that's currently public. Of the 3 IPOs or S-1s that are on file that Steve mentioned in his comments, 2 of them are relatively large investments and that would be SeaWorld and Michaels. So you could see a considerable increase in the amount that was public as those convert from our private holdings to public. It could be 10 percentage points or more depending on the final valuation if you have the starting point of 28% is public today.
And your next question comes from the line of Mark Irizarry with Goldman Sachs. Please proceed.
Great. I just have a question on TAC tactical opportunities. Can you talk a little bit about the strategies that you foresee within tac ops as a franchise, I guess, how big that could be? And then also the how should we think about the velocity of money in that fund relative to the rest of the private equity franchise?
The tac ops is really like a terrific initiative. And I don't say that in a self congratulatory way. I'd say it from an opportunity set perspective for us. And it's I think among people who do what we do, the only opportunity for investors to buy something that basically tries to get the most interesting things that you'll find in both private equity, real estate, private hedge fund area and credit. There's nobody else who does all these things, let alone does each one of them at a world scale level like we do and has like great results in every one of those areas.
And so by combining that opportunity set and being able to look across the firm, We
do a
number of things. As Tony mentioned in the earlier call, the performance has turned out to be quite good. Sort of at the moment is sort of in the mid-20s even though we were only shooting for 15. But what's important about it is that when we work with the largest pools of capital in the world on this fund. There's enormous amount of interactivity between us and the senior people in those institutions.
And what they're doing is they're going to school off of us and learning how we see what's going on within these asset classes. And we have interaction with them every week or 2. And this is like an opportunity for them if they follow what we're doing and if we're correct, which we more or less have been over many years for them to impact their portfolios beyond what TechOps does for them and make major impact on the rest of their portfolio. So TACOPS is way more important than just TACOPS for those institutions. And what we're finding is that no matter who we sign up for this, they love this, because they're keeping up to date and learning from us and improving the rest of their business.
So the potential for this, I think we'll continue to size and I've got my own number, but my general counsel is probably telling me not to tell you, as he's just like using his hands to tell me to not go there. But it's a product that I think is going to grow. And the consumer's happiness with it is like really high. Word-of-mouth as well as the strategy is, I think like a really, really compelling winner.
And let me just flesh out you had Mark some of the it includes things like real assets, ships, shopping centers in Brazil, some different things. It includes non performing mortgages. It would include intangible assets, royalties, spectrum, mortgage servicing rights, could include small equity investments. So it's got a lot of different interesting components. And it's global.
It's across all asset classes. It's focused on illiquid assets and it's trying to take advantage of things that no one else can really play today.
And the velocity of the money in that strategy versus private equity, I mean, by the name tactical, you think it's maybe a little shorter term if you will?
Well, so in a typical private equity fund the investment period is 6 years, this investment period is 3. So you'd expect the capital raise to be put to work quicker in general.
Okay, great. And then just one follow-up on the comment of having, I guess, many more funds in more places as a business and maybe fewer bigger funds as you've had in the past. How when you look at your lineup of strategies today, how much investing do you have to do in the overall franchise to sort of build out the places that you want to be and the strategies you want to invest in and sort of what's the outlook for margins then?
Well, okay. So I don't want to say there's any fewer bigger funds. It's the same number of bigger funds. But there are in addition a bunch of more focused funds that are hung around that central core. And we basically have in place the vast bulk of the architecture we need for that.
That's not to say like for example in the last 12 months, private equity put a senior guy in Australia, real estate put a couple of guys in Australia. But in terms of your modeling and whatnot, it's just a continuation of the past. We've always invested ahead of where we need into the future and we need there's no spurt of cost. If anything, I would say we're growing some of the products into the capability we have and that should be catch up. Our products should catch up to our infrastructure not the other way around.
Okay. Great. Thanks.
And our last question comes from the line of Chris Kotowski with Oppenheimer. Please proceed.
Yes. I was just a follow-up on an earlier question about the exits. And I'm curious, if you compare the mix of exits today strategic versus the IPO and then I mean it seems to me most of the exits these days are the laborious IPO followed by years of selling down in secondaries and obviously it's much quicker and easier if there are strategic exits. And I'm curious is the mix different than it was in other cycles? So if you go back to the early 90s and you 3 or 4 years after that recession, Is it typical that the strategics don't get involved until late or are they unusually gunshot here in this?
Well, sorry. So let me just level set here. We have 4 basic ways that we exit investments just for your purposes. We exit investments through IPOs. We exit investments through strategic sales.
We exit investments through secondary buyouts and our sales to another private equity firm. And we exit investments through dividend recapitalization. So four basic ways of doing that. At any point in time, there's usually one market or another, which is more robust and there always has been. So there's no typical cycle.
So in this cycle, the strategics have been relatively quiet. And so and then lately, a minute. And then before the cycle, what I let's say before the last 9 months, most of the exits of the industry were in secondary sales to buyout firms. Credit markets got hot before equity did. So you could do dividend recapitalizations and you could do secondary buyouts.
That's now more towards dividend recapitalizations, just the company has a pretty good growth ahead of it and IPOs. And that will probably morph more towards strategic at some point. And the pattern of that ebbs and flows as different market segments get relatively more robust or less robust. And I don't think this cycle feels any different fundamentally than before in that way. Now the one thing I want to talk about IPO is very often you say it's a laborious process and this and that once you get to the IPO ed and I understand what you mean by that.
But quite often you get public and even before you've done your sometime in not so long after that, a strategic comes and buys it. So the IPO can lead to a strategic exit just as much as it can lead to laborious sell downs if you will. So and then we don't actually mind that laborious sell down process quite so much, because usually with the IPO, we price the deal to make it a good experience for the starting investors. We very rarely think we're actually getting full value in an IPO. To the contrary, we usually think we're selling the first piece at a bargain.
Even though that's typically above our mark, it's much less than we aspire to sell at. And so holding that money longer, letting a good company grow and a good management team do its thing, you might IPO it at 2 times your money and you might aspire to ultimately realize 2.5 times to 3 times your money. If you have to wait a couple of years for that added 25% to 50% gain, it ain't bad. So we don't mind that. We don't find that laborious.
We just think of that as part of the process.
Okay. That's it for me. Thank you.
Great. Thanks everyone. Thanks for joining the call. And again feel free to follow-up with me or Wengshin after for questions.
Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.