Good morning, everyone. Thank you all for joining Bank of America's 34th Annual Financial Services Conference. This is Craig Siegenthaler, North American Head of Diversified Financials at BofA, and it's my pleasure to introduce Michael Chae.
Nice to be here, Craig. Thanks for having me.
So Michael is Vice Chair and Chief Financial Officer of Blackstone. He joined Blackstone back in 1997. He served in several senior roles, including Head of International Private Equity, Head of Private Equity for Asia-Pacific, and he was also a partner in the US private equity business. Michael, so thank you for joining us. Just quick intro: Blackstone manages now $1.3 trillion in AUM. It ranks it as the number one alt manager in the world. It also has the largest individual investor business, which it started much earlier and has dedicated significantly more resources to than peers. And I think the firm has grown AUM by more than 15x, might be a higher number now since the 2007 IPO. So very highly diverse business with scale businesses across real estate, private equity, credit, and even hedge funds, which have come a little bit back into favor this year.
With that, let's get started on the macro front. You have a very expansive portfolio. You've also frequently cited your differentiated insights. I was hoping that you could share some perspective as you look around the world and look at the portfolio. What is the state of the macro environment today, and also where is this heading?
Sure, Craig. And again, great to see everyone and to be here. I'd start by saying, despite all of the noise out there and all the curveballs that have come our way over the last year, that the operating environment for our firm and the fundamentals in our portfolio are quite strong. In terms of the macro drivers, I'd say the most important factor, of course, is that we're undergoing a historic investment boom with what we expect to be a productivity boom coming behind that. In our Blackstone portfolio, we're seeing continued strength. We saw 9% revenue growth in our corporate private equity companies in the fourth quarter with resilient margins. And we're seeing particularly robust gains in those parts of our portfolio in the AI and related infrastructure ecosystem. Our data center platform in the U.S., QTS, grew leasing 50% in 2025. We expect similar trends in 2026.
In terms of the consumer, and I heard our host Brian Moynihan talk about this this morning on TV, clearly we see elements of that sort of two-speed or K-shaped consumer economy. We see that in our economy hotel assets, some of our water parks, some other consumer-facing businesses. But the higher-end consumer, which drives so much of consumption in this country, remains strong. And we see that in our luxury hotels, in premium travel, in credit card data broadly. And then in terms of inflation, we've been pretty consistent on this. We see it is basically under control. Labor costs in our portfolio, and I think broadly, are stable. We see a labor market that's in balance, although possibly cooling gradually. And shelter inflation in real time is running well below the lagging measures embedded in CPI.
So all of this, in terms of our portfolio, is leading to corporate confidence. We survey our CEOs every quarter. Their optimism is at the highest level in over a year. And virtually none expect a recession in the next 12 months. So all this translates into a capital markets environment that is really quite robust, which is a very good thing for the operating environment for our businesses, the combo of healthy economic growth, moderating inflation. We think that's supportive of short rates coming down along with the cost of capital overall, although the steepness, I would say, of the yield curve over time remains to be seen. High-yield spreads today are at nearly, I think, all-time heights. Tights, sorry. Heights would be bad. Investment-grade spreads, I think, the tightest since like 1998.
We subscribe to the view that AI-related productivity is going to have a meaningful deflationary pull over time. And then I would add, in terms of sort of Fed and monetary policy, I think Kevin Warsh has really strong credibility with the market and with financial decision makers, and it'll be a stabilizing and positive force. So when you combine all that, overall, we think the economy and the operating environment for us remains on quite solid footing: healthy economic growth, moderating inflation, short rates coming down. And that makes for a constructive backdrop for our business.
How does that translate into the investing backdrop? Do you expect 2026 to be a stronger deployment year over year? Where is Blackstone leaning into in terms of deployments?
Yeah. Yes, we do expect it to be a very active year. We are coming off a very strong 2025. We deployed throughout the year about $138 billion of investments. That was our highest annual level in four years, including $42 billion in the fourth quarter. We definitely leaned into the public market volatility. We signed or closed eight different public to private in 2025 across real estate and private equity. We saw record deployment in credit and in our secondaries business. So robust deployment momentum moving forward into 2026. Where are we focused? Stepping back, it's a rapidly changing world, obviously, that's replete with critical markets of massive scale that actually are short of the long-term capital they require to grow. And private markets are a critical part of the answer.
And for us, our extraordinary breadth and reach of our business, in our view, really allows us to be a strategic capital provider at huge scale. So it's a really kind of unprecedented and incredibly exciting time for us. So what does that mean? There's this intersection of multiple megatrends that are, I think, driving our deployment, and I think will continue to do so for years. Obviously, AI and digital infrastructure. We talked about that a lot. Data center CapEx increasing by some forecast, projected to increase 3.5 times over the next five years versus the last five years. That's probably low. Something like $7 trillion required. We have the largest platform in the world. And we're really just aiming to be simply put the best position, most trusted partner to hyperscalers to deliver that critical infrastructure for them. Alongside that, power and electrification.
CapEx there for the sector is expected to grow 50%+ over the next five years versus the last five. We're one of the most active investors in that ecosystem in our private equity segment, mainly in infrastructure and in our energy private equity area. We've completed actually 31 investments representing over $10 billion of equity just over the last two years in this space. That's really driving significant gains in our portfolio. We announced a few days ago the sale of a majority stake in a business called Saber, which is one of our early kind of electrification thematic investments. Life Sciences, where we have a big business, the extraordinary innovation that's happening, that sort of in drug development that's sort of colliding with the reality of funding constraints by big pharma. It creates an annual R&D funding gap of over $200 billion.
So that positions our private capital business well. Private credit, as we all know, it's expanding really into being a critical financing source for the real economy, mostly on an investment-grade basis, whether it's infrastructure, commercial asset-based finance, consumer and resi finance, fund finance, and other areas. And that's going to create a $30 trillion market opportunity that's just been barely penetrated by private credit today. And then the private markets themselves, they've doubled from like $6 or $7 trillion to $13 trillion over the last seven years. And with it, the need for liquidity solutions for both GPs and LPs. And yet, less than 2% of those private markets turn over every year on the secondary market. So that's a huge opportunity, obviously, for secondaries and for those capital solutions.
Then I just say from a global regional perspective, Asia is 40% of the world's economy, and it's about 8% of all AUM globally. So that's a big opportunity. We've obviously leaned into India and Japan, among other markets. So I'd just step back and say it's never been a more exciting time, certainly in my career and I think for our firm, where we're just never been a more vital capital provider in so many massive critical markets around the world.
So let's flip it from deployments to growth and fundraising. So how do you see fundraising trending in 2026 across asset class? Where do you expect to see the most strength? And while we're at it, there's been a lot of discussion around industry consolidation. How do you guys think about GP consolidation theme heading into the future?
So on fundraising, in 2025, we generated $239 billion of inflows. That was up 40% year-over-year. And really, with strength across each of our key client channels, we call them the three I's. Inflows in institutional were up over 50% year-over-year. Fundraising, sales in the individual investor channel also grew over 50% year-over-year. And inflows from our insurance clients were up about 20%. So lots of momentum and good things happening across all three channels as we enter 2026. Starting in institutional, where I would say contrary to what you sometimes read in the press, this channel is alive and well, certainly at Blackstone. Our AUM in institutional is over $700 billion. That's up 60% or so in the last five years. We're raising a new cycle of drawdown vehicles, including multiple flagships.
I think at the conference last year, I said that I thought we'd see even greater inflows in 2025. I would say it's still early, but we're currently expecting our drawdown fundraising in 2026 to be well above 2025 levels. And then away from drawdowns in infrastructure, we expect continued strength. AUM there is up 40% year-over-year, entering the year, $77 billion, amazing performance. BXMA, you noted this at the beginning. We're seeing a resurgence in client interest, driven by performance, 23 quarters of consecutive quarters for our business of positive performance. That led to our best year of organic net inflows in nearly 15 years last year. And then in credit, BXCI exited 2025 with record inflows from institutions, reflecting, I think, this kind of broad emerging secular shift among institutions in terms of their awareness and interest in private credit strategy.
So that's a lot of momentum. In the insurance area, we continue to see clients respond really favorably to our multi-client model. Our AUM in that area is over $270 billion. That's up four times in the last five years. We're the largest non-captive business in the insurance area, asset management for insurance in the world. We're seeing a growing global opportunity with amazing partners like Nippon Life, the largest life insurance company in Japan, L&G Legal & General in the UK, the largest insurance and asset manager in the UK. And I would just say when you look at the industry dynamics, we really like where we sit in our distinctive model. As you all know, in annuities market, that's intensely competitive. But where spreads in the liquid markets are near historic tights, as I mentioned, the need for excess spread from private assets is more imperative than ever.
And we're really ideally suited to serve that with our scale, to serve that demand without taking on the liabilities and risk associated with them ourselves. So we really like where we sit. And then finally, private wealth, and I know we'll talk about that more. We crossed the $300 billion milestone in the fourth quarter, up three times in the last five years. All of our flagship perpetuals really delivered in a big way in 2025. And we think are well positioned going forward. And our private equity strategy for individuals, it's grown to over $18 billion in two years of existence. We think we led the market in terms of sales in that area in 2025. Our infrastructure strategy, it's already one of the largest in that space, only a year after launch. BCRED is coming off a record year of sales.
Despite some of the noise, impacting net flows remains anchored in outstanding performance and a really great positioning. Then BREIT, we're seeing very positive momentum. We're as optimistic as we've been in years in terms of the demand for that going forward. Looking forward, we'll continue to expand the product offering. We have that strength from that sort of core group of products. Overall, we anticipate another strong year in 2026. On consolidation, which you asked about, I know peers have commented on this. I don't think it's about smaller firms, GPs, disappearing in the near term. I think it's about concentration of capital and flows. I see growth accruing, continuing to accrue to, and flows being directed disproportionately to the larger scale players with track records and brands. LPs are consolidating capital, consolidating relationships.
Scale, I think, broadly speaking, is just critical in terms of the ability to deliver capital solutions and the most interesting investments at scale in terms of the advantages of data, intellectual capital, brand reach. And so while we've been, I think, successful in selectively making acquisitions over our history, the beauty of our model, I think, is that we can continue to expand and innovate in an unconstrained way organically and in a capital-light way.
So the macro outlook sounds pretty good. The investing outlook sounds pretty good. The fundraising outlook sounds pretty good. Now, how does all that translate into financial performance of Blackstone over time?
Yeah. Well, we think it's a multi-year picture of strength. First, in terms of 2026, as I said on our earnings call, we saw mid-teens growth in base management fees in three of our four business segments in the fourth quarter. We expect a continued strong trajectory in these businesses in 2026. The drivers are broad and deep in the private equity segment. I mentioned our latest drawdown fundraising cycle. We expect five of those funds in the private equity area, totaling over $50 billion, to be launched at various points this year and to be fully fee-earning by the end of the year. Just overall, that's a reflection, I think, of the vibrancy and breadth and expansion of the platform, whether it's across Asia private equity, our dedicated energy strategy, our longer-dated core strategy, life sciences growth, and of course, secondaries.
So we think these businesses should scale really considerably from here. And I can't overstate the power of our private equity strategy for individuals in private wealth. It's early days, but we see this as a significant engine for management fee and FRE growth going forward. In credit, continued strong momentum in 2026 with significant dry powder that will earn fees as it's invested. And then BXMA, its open-ended strategies benefit from positive net inflows and NAV-based appreciation. And we enter 2026 with the fee-earning AUM in that area up 14%. Switching to transaction fees, we expect a strong year ahead again for our capital markets business in the context of both improving transaction backdrop and also this widening aperture of the firm's investment activity, which our BXCM business participates in. And then this overall expansion of our perpetual capital platform, it's now almost half of our firm-wide fee-earning AUM.
It drives the expansion of our firm's earnings power in a substantial way, both in terms of management fee growth, management fees that compound with NAV, and also incentive fees. So that's a really strong foundation for FRE growth in 2026 and beyond. And then net realizations: the transaction environment has improved significantly. And so we expect disposition activity to ramp as we move through the year. And then I'd say looking forward to 2027, even though it's early 2026, a lot of, I think, powerful drivers in the private equity segment will see the full-year benefit of those drawdown funds that I mentioned being activated in 2026. We expect continued sort of powerful momentum in our private equity retail product, continued momentum in credit and BXMA. We'd look to a resumption of positive growth in real estate.
In terms of net realizations, we would anticipate very significant benefits from the cyclical recovery, which is now underway. Then really importantly, there is another large-scale scheduled crystallization of incentive fees, of fee-related performance revenues in our institutional infrastructure business with respect to what will then be three years of gains. In 2024, that generated $1.1 billion of fee revenues. We anticipate it'll be quite substantial again in 2027. We see a very positive picture for Blackstone's financial outlook for the years ahead.
So Michael, you have the number one private wealth business in the world, kind of first at that, bigger at that. You have multiple category leaders, BCRED in credit, BREIT in real estate. And then you have some very large funds that are scaling quite quickly like BXPE and BXINFRA. What is next for Blackstone and private wealth? Are there still opportunities to expand distribution? Are you already covering a lot already? And then also, where does the retirement channel fit in? Because we might be getting something from the Department of Labor in the next month or two.
Right. So you've heard us say this before. We think we're still in the very early stages of investor adoption in what is a $140 trillion global market with low single-digit penetration of private markets today. We've got, we believe, the market-leading business. And the pace of innovation is accelerating. So our momentum is underpinned by these four core strategies with great performance, represents over $160 billion of AUM. These strategies are really foundational for our next phase of growth, particularly around multi-asset products and the retirement channel, which represents really a whole new dimension of our wealth business where we think we are uniquely positioned. In terms of new products, just to reference a few, the alliance with Wellington and Vanguard, the WVB Alliance, we filed registration statements for two products. We expect launches later this year.
We announced a partnership with L&G, including public-private credit products for the UK wealth and retirement markets. And then alongside that, we expect other major multi-asset products that we plan to introduce. We've also filed for a new perpetual product that leverages our capabilities across BXMA, which we think we can deliver something very special. And then other new strategies, as always, are in the lab and in process. You asked about distribution. We certainly think we can go much deeper within the existing footprint and expanding distribution around the globe. So the U.S. remains the largest market. It's still very early in its adoption, including moving deeper into key subchannels like the RIA channel, which is a $10 trillion U.S. market, deeper into the credit investor area. And then major markets focus outside the U.S. So in Japan, that's the second largest market outside of the U.S.
As we know, an enormous pool of financial assets, about half are allocated to low-yielding cash or deposits among households, very low-penetration wealths. In Canada, it's a $4 trillion market. We now are offering all four of our core perpetuals there. And we're growing distribution across major hubs. Australia, it's a $2.5 trillion market. It's actually almost comparable in size to the UK. We recently established teams on the ground there. So we're in the process of rolling out products across multiple distributors there. And then Korea actually is a newer market. But we'll have boots on the ground there, we expect, for the first time later this year. So that's, I think, an exciting picture. From the wealth contribution, massive opportunity over time.
And here again, we think we're the only firm with these large-scale building blocks across private market asset classes, which will position us exceptionally well to deliver private market solutions. We think, as you mentioned, after we hear maybe soon from the DOL and after the comment period, that the rulemaking could be finalized by the end of the year. And in the meantime, we're expanding relationships with leading players in the retirement market and preparing our existing products for inclusion in target date funds. We've created ERISA-compatible CITs for BREIT and our private equity strategy to start with, with a near-term goal to add private credit infrastructure to that. We recently announced a partnership with Empower, the country's second-largest retirement plan provider, $2 trillion of AUA. And then with our partners, Vanguard and Wellington, we're focused on launching our wealth-focused products in the near term.
And we're excited about the opportunity to potentially expand this relationship, including potentially to the U.S. retirement market. So overall, we're very optimistic about the picture here.
Great. Let's switch gears and go deeper into private credit. I look at the fourth quarter, 2025 results for Blackstone, very good across the board, including returns. Now, despite that, there's been some more focus on the area. And that includes, in the last week, on the software front. So how do you think Blackstone is positioned in private credit? And when you read some of the newspaper articles or watch how the stocks are reacting and talk to investors, do you think what's happening has been overblown?
Well, first, just stepping back before we get to software, Blackstone, we think, continues to and has delivered really outstanding results in our credit business. Just to remind people, we have a $520 billion platform diversified across liquid credit, direct lending, infrastructure and asset-based finance, private investment grade, real estate debt. Our BXCI segment grew FRE 16% in 2025 and DE by 37%. Deployment was a record in 2025. Fundraising was nearly a record, underpinned by record inflows from institutions. Our IG business within that grew 50% year-over-year. In terms of investment performance, which you mentioned, 11% gross in our non-investment-grade private credit, 17% in our real estate high-yield area. Over two decades in private credit, we've delivered annualized realized losses of 0.1%. Today, credit quality remains strong. Defaults remain historically low.
It's reasonable to assume we'll see some increase in defaults from this extremely low level. But believe the structural advantages will continue to produce superior results. So overall, outstanding momentum to our credit business as we move into 2026. So with that said, the market has been focused, as you mentioned, on the AI disruption risk, in particular in software. You ask, is it overblown? I'd just say when you see such indiscriminate and very technical trading against a whole sector, as you have with software stocks, which include some of the best companies in America, that almost definitionally means it's being overdone with a too broad brush. And there'll be a range of outcomes over time.
But we expect larger, well-entrenched businesses to be better protected and, in many cases, beneficiaries of AI, given the attractive moats and resources to invest in their own businesses and apply AI as a competitive advantage, characteristics which we think are evident across our portfolio. For Blackstone overall, software represents 7% of our total AUM. More on that in a moment. In credit, software represents 10% of our platform across the firm. And we believe we're quite protected in terms of, first, where we are in the capital structure and, second, the nature of our portfolio. So our average loan-to-value was less than 40% at setup, which implies the original purchase price would need to be impaired by over 60% before our position is impaired at all. Our focus is on larger companies. The average TEV of our software holdings is over $4 billion.
This portfolio produced, on average, high single-digit year-over-year revenue growth and low double-digit EBITDA growth for the most recent reported period. Bigger companies, low loan-to-values, and healthy growth overall. Some quick illustrative math, which we're all getting good at these days. If you take the year-to-date decline, for example, in the software index of, say, 20% and apply that to our $4 billion+ average TEV, our loan-to-value would still be sub-50%. Maybe even more simply, if the public software comparables have traded down from 17x-14x EBITDA, our net leverage multiple in our large vehicle is still less than half of that. Blackstone, in our credit business and across the firm, we have significant resources to support our investments and help drive value, our operating teams, our deep sector expertise across the firm. Also, this volatility will definitely create buying opportunities.
And then I just end on, overall, across the firm, as I said, 7% of total AUM. We focused extensively on deeply embedded, high-retention businesses where switching costs are high. And it's worth probably also repeating here, in terms of playing offense, that we've been one of the largest investors in the whole AI ecosystem, the largest in the infrastructure around it in data centers globally, one of the largest in power and electrification, as I said, really playing the picks and shovels that are making AI a reality in a way that's sort of neutral to picking winners and losers. And at the same time, we've also invested directly in AI leaders such as Anthropic and OpenAI and some of the application companies that sit on top. So we think we're positioned to make our business and our investors major beneficiaries of the AI revolution.
That's great. Let's turn to a different asset class, real estate. Real estate has been out of favor for a couple of years here, really since interest rates turned in 2022. But this has led to some positives, including potentially less competition going forward. But where are we now in terms of a net flow, fundraising outlook? I know John Gray called a bottom a couple of years ago. And he was right. And he was also writing that it's been uneven. It wasn't a V-shaped bottom. But what does the fundraising return outlook look like now?
Yeah. So first, I think we would acknowledge that the sector's recovery has taken longer than we would have hoped. But we do believe we're moving towards a better environment. Private real estate values have slowly improved from the trough about two years ago. It's still down about 16% since the start of that interest rate cycle in 2022 versus the S&P being up 75% over the same period. Across our portfolio, and I think this is really important to highlight, we're seeing multiple areas of real strength. So data center fundamentals are obviously exceptional. Industrials have significant momentum. So our US logistics platform saw record leasing in the fourth quarter. We're seeing corporate confidence return to the market. You hear that from some of the large public peers in industrials as well. This is a very important development for the real estate market and for real estate business.
In multifamily, which represents the vast majority of our residential exposure, it's turning the corner, we think, or will be turning the corner given absorption of excess supply and new deliveries being past peak and coming down. In grocery-anchored retail, often overlooked, we see rents in those markets having grown high single digits last year. Even in the traditional office market, although it represents a small part of our portfolio, we are seeing the recovery take hold in certain markets. Manhattan office leasing activities at like a six-year high. In San Francisco, rents on trophy properties are growing double digits. Just more broadly, there are a number, I think, of really important tailwinds for the industry that we've talked about. First, new construction starts for virtually all kinds of real estate are down sharply. U.S. multifamily new starts, the lowest in over 14 years.
Logistics, the lowest in 12 years. This will increasingly translate into depressed deliveries and new supplies. It's just a time lag from starts. It's become much more expensive to build. We estimate construction costs are up about 50% over the last five years across real estate sectors in the U.S. The cost of debt is down sharply. Debt issuance activity is up sharply. 2025 was the highest year of CMBS activity in the U.S. since the GFC. So that's a real harbinger, I think, of transaction activity, which you're starting to see pick up. U.S. market activity was up over 20% in 2025. In terms of flows, which you asked about, we do believe the sentiment is improving. We see strong interest in real estate credit and significant improvement in BREIT flows driven by performance.
So BREIT was up 8.1% net in 2025, the best annual performance since 2022. And as I said before, we're as optimistic as we've been in years around prospective demand. We're in between major drawdown fundraisers in real estate. But we saw strong success in our most recent vintages despite the backdrop over the last couple of years. Last year, we closed the world's largest ever European real estate fund. And our real estate credit fund, we raised a fund nearly the same size as the prior fund, which was a record size. And then in terms of our flagship global opportunistic strategy, it's over 50% committed in the current vintage. So we could be back in the market raising the successor fund before year-end, subject to deployment. So I would just say, overall, Blackstone is exceptionally well-positioned as the cycle turns in real estate, we think.
It's really all about portfolio construction. As we've said before, 75% of our global portfolio in these three sectors, data centers, logistics, residential. BREIT is nearly 90% across those three. And in those three, enormous strength in data centers, significant momentum in logistics, and strong underlying fundamentals in multifamily. And you asked about competition. I'd just say that our sector selection has been key through cycles to driving, we think, highly differentiated results versus our peers. And it's been our experience that with each real estate cycle, our business emerges stronger than before.
Great. I don't think I'll do a meeting this week without bringing up AI. So I'm curious in terms of how is Blackstone applying it today? What might you be doing with it in sort of five years? And is the output that we're going to see FRE margin progression and maybe better investment outcomes?
Great question. It's early days. But at Blackstone, let's just talk about sort of operations. We're employing AI-enabled tools and processes across multiple areas in varying sort of breadth of use cases. In many cases, this is sort of off the radar usually. But we're strategic partners with emerging application providers, and all with very promising early results. So just some examples. In software development, like a lot of folks, AI coding assistants have made our engineers, we think, about two times more efficient in the past couple of years in those coding activities. In cybersecurity, we recently adopted an application from a company called Seven AI, which is an AI-powered platform, which boosts cyber investigation speeds and accuracy, we think, by about 30%. In legal and compliance, we talked about this quickly on the earnings call.
We're using something called Norm Ai, Blackstone portfolio company, to help review marketing materials.
We have a lot of them, which is already showing the opportunity, we think, to make our teams in this area with this use case 50% or so more efficient. Then in valuations and portfolio management, we're using a product called 73 Strings to automate data extraction and ingestion and model building. It's been transformational, I think, in terms of the efficiency of these very extensive processes at the firm. In nearly all of these cases I just mentioned, we're an investor in the platform, in the businesses, as well as an anchor customer and a design partner. We think we're sort of a first mover. We're very well-positioned around adoption. We're at the leading edge of the ecosystem. You asked about operating margins. I do think, over time, these and other tools and platforms will enhance our productivity and impact our margins positively.
Ultimately, though, really, for us, the foundational opportunity for our business lies in our data. In a world where public market investors are, we think, confined to public market data, which will be increasingly commoditized, instantly available to all, I think that being able to possess and integrate the deepest, richest troves of proprietary private market data will infer a true strategic advantage to a firm like ours. In that, we're distinctively positioned, given our scale, the breadth of our businesses, our global footprint, four decades of longitudinal data. Overall, we expect to be a leader in enabling our business with AI. We do expect the impact to be very consequential.
Great. Well, with that, we are out of time. So on behalf of all of us at Bank of America, Michael, I just wanted to thank you very much for joining us.
Thanks, Craig.