Good day, ladies and gentlemen, and welcome to the Blackstone Second Quarter 2017 Investor Call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen only mode. We shall facilitate a question and answer session towards the end of the conference. At this time, I would like to turn the conference over to Mr.
Weston Tucker, Head of Investor Relations. Please proceed.
Great. Thanks, Derek, and good morning, and welcome to Blackstone's 2nd quarter conference call. Joining today's call are Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer Michael Chae, our Chief Financial Officer and Joan Solitar, Head of Private Wealth Solutions and External Relations. Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10 Q in a few weeks.
I'd like to remind you that today's call may include forward looking statements, which are uncertain and outside of the firm's control and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk section of our 10 ks. We will also refer to certain non GAAP measures on this call and you'll find reconciliations in the press release and the Shareholders page of our website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund.
This audio cast is copyrighted material of Blackstone and may not be duplicated without consent. So a quick recap of our results. We reported GAAP net income of $745,000,000 from the quarter, up sharply from the prior year comparable period. Economic net income or ENI per share was $0.59 up 34% from the prior year due to greater appreciation across the funds as well as strong growth in fee related earnings. Distributable earnings per common share were $0.63 for the quarter, up 54% from the prior year.
We declared a distribution of $0.54 per common share to be paid to holders of record as of July 31. And with that, I'll now turn the call over to Steve.
Thanks a lot, Weston, and good morning and thank you for joining our call. Blackstone posted a strong set of results for the Q2, as Weston indicated. With revenue, ENI and distributable earnings all up sharply from the prior year. This follows a Q1 that you may recall was one of the best ever. Taken together, for the 1st 6 months of the year, ENI nearly doubled to $1,700,000,000 while distributable earnings more than doubled to $2,000,000,000 Our pace of realizations remains strong with nearly $28,000,000,000 sold in the first half, our most active 6 month period on record.
We're continuing to see the benefits of our sustained large scale capital deployment around the world, a patient focus on value creation in those investments and then being able to choose the right moment to exit. We expect this momentum to continue. With pending realizations, including the historic sale of our European logistics portfolio, which Michael will discuss, we're on track for one of the best years for cash distributions to shareholders in our history. As I've said before, our distribution should not be viewed as one off special dividends. We've demonstrated an ability to deliver consistently high payouts over time.
Over the past 3 years, for example, as Tony mentioned earlier, we've distributed an average of nearly $2.50 per year of value, driven by over 130,000,000,000 dollars of realizations. And yet, despite this high level of sales, assets under management continues to increase, up 33% over the past 3 years to a record $371,000,000,000 Our LPs keep entrusting us with their money because we're able to deliver differentiated investment solutions and long term outperformance versus what they can achieve in the traditional areas of money management. We've been doing this for over 30 years and today offer a broader scope of solutions to different types of LPs than ever before in our history, from state pensions to sovereign wealth funds, to individual investors looking for at alternatives for the first time. Last month, as Tony also mentioned, marked the 10th anniversary of Blackstone's initial public offering. And we've come a long way in the past decade against the backdrop of dramatic change in the broader money management industry.
Capital flows have increasingly migrated towards 2 distinct ends of a barbell. 1st, the LOFI index and other passively managed long only funds and second, a highly customized differentiated alternative funds. Each of these opposite ends of the spectrum is taking significant share from traditional active management, which is in the middle. Close to $2,000,000,000,000 for example, has flowed into passive managers in the past 10 years. Similarly, the alternatives industry has doubled in size in the past decade as these funds have become more and more critical for limited partners to be able to meet their actuarial targets.
Allocations continue to increase as a result, and we expect that trend to continue. Blackstone is leading this transformation with a brand that investors trust, built by a culture of innovation and a long track record of protecting and growing their capital. We used the proceeds from our IPO to fund our expansion into new business areas, some of which today are larger than the entire firm was in 2,007. By inventing new fun categories or redefining existing ones, we've created an ever widening product set to help our LPs solve their issues. The result is a more than 4 fold increase in AUM since the IPO, which is close to unprecedented in finance, which has overall been a shrinking category.
We've also shown that we can grow AUM without sacrificing returns. We are carefully sizing new funds, so we don't dilute performance. That discipline is illustrated in both our recent and historical returns. For example, the corporate private equity and real estate opportunity funds appreciated 15% to 17% in the past year and have beaten the other relevant indices by 7 to 9 percentage points per year since inception, net of all fees. In other words, if you've invested with Blackstone and our high return products, you've made 700 to 900 basis points over what you may have returned in the stock market.
Our GSO credit strategies also delivered gross returns of 15% to 17% over the past year, and our liquid funds, as measured by BAAM's composite, achieved a gross return of nearly 10% with only 1 third the volatility of the broader market. In our newer products areas, we're delivering compelling performance as well, consistent with enhancing our Blackstone brand. Our tactical opportunities platform, for example, appreciated 15% in the last 12 months, while our longer dated core plus real estate strategy was up 10% consistent with its mandate. These returns are the reason that when we go to market to sell a fund, usually somebody wants to buy it. We've sold out all our major flagship funds over the past several years and are enthusiastic about the opportunities we see ahead.
In fact, when I look at the new products we're developing today, alongside the recently launched ones that are reaching real scale. To me, this is one of the most exciting time in the firm's history. Our new infrastructure business, it's got a lot of public visibility, is one of several reasons for this excitement. We had carefully considered this business for a number of years. It started as an idea, like many at Blackstone, where we attempt to identify the next paradigm shift in the market.
We're a discount annuity, where we can leverage the firm's unique capabilities to generate outsized returns. We discuss whether an idea can become an enduring business and whether we have the right people to staff it. We've been making infrastructure investments quite successfully for over a decade in our private equity funds. And now when we see a historic investment opportunity emerging in America, we believe the time is right to launch a dedicated business. We started a dialogue over a year ago with a long term oriented sovereign fund to become a lead investor.
They ultimately chose us because they are highly supportive of the way we do business, our process for sourcing and analyzing investments and our value add approach. We're staffing this business as we typically do, by moving talented professionals with relevant experience into leadership roles and filling in around them with key hires. It's a time tested strategy that works because of our deep bench of talent. And while this business will take several years to fully build out, we've received a commitment of $20,000,000,000 from our lead investor, which will flow into AUM over time as other capital is raised to match it. In addition to infrastructure, we have several new other initiatives that are progressing well.
Our longer dated core plus real estate business is now up to $17,000,000,000 in AUM after only 3 years, achieving inception to date net returns of 12% a year, which is pretty terrific for Core Plus Real Estate. Our $5,000,000,000 core private equity business closed its 2nd investment last week. We have several other interesting deals in the pipeline. We're excited about the universe of opportunities this new mandate opens up for us. In our Private Wealth area, we're defining and redefining the channel, bringing solutions to retail investors that have never been available to them before, and this is a huge asset class.
We've invested heavily in distribution, technology and product development, and we have become the clear global leader in retail alternatives. Approximately 15% of the firm's total inflows now comes from retail and we've barely begun to scratch the surface on the addressable market. Our private REIT offering, which we only launched earlier this year, just broke the $1,000,000,000 market. We're bringing the quality and expertise of the real Boxstone Real Estate platform to an asset class that has been largely mismanaged and underserved and which is vast in size and potential. And there are other initiatives of equal or even greater potential that unfortunately for you, we're not ready to announce here today, as people tend to follow us.
At Blackstone, we're an asset management firm, but we're really in the innovation business. And our LPs understand the exceptionally high standard of care that guides the launch of any new Blackstone fund. They know they are getting Blackstone quality anywhere in the world they invest with us. We have built a deep and long term trust with them. That is why our new ideas typically get funded and reach scale very quickly, becoming a lasting and additive part of the firm.
Our new businesses make the rest of the firm stronger and better and vice versa. It's a virtuous circle. Reflecting on the past 10 years since becoming a public company, I take particular and great pride in what the firm has accomplished on behalf of our investors. But I'm most excited about what's in store for the next 10 years and beyond. I look forward to sharing with our shareholders in the future our many hopeful successes.
Thank you for joining our call today. Now I'll turn things over to our Chief Financial Officer, Michael Chase.
Thanks, Steve, and good morning, everyone. Our results in the second quarter and first half highlight the firm's continuing momentum with robust growth in all of our key revenue and earnings metrics. Total revenue for the quarter rose 30% year over year to $1,500,000,000 while economic net income increased 36 percent to $705,000,000 driven by strong growth in both management and performance fees. Performance fees and investment income together increased 62% over the prior year. Management fees rose 14% year over year as fee earning AUM reached a record $282,000,000,000 and also reflected the benefit of the onset of full fees in certain of our recently raised flagship funds.
Together with very modest fee expense growth, including year over year reductions in non comp fee expense, This growth helped drive fee related earnings up 33% in the quarter to $311,000,000 Distributable earnings rose 58% in the quarter to $781,000,000 or $0.63 per unit. Today's results come on the heels of the 1st quarter that set firm records or near records for most metrics. For the combined 6 month period, total revenue was up 61 percent to $3,400,000,000 E and I up 90 percent to $1,700,000,000 and distributable earnings up 126 percent to $2,000,000,000 nearly at the same level of DE as for all of 2016. Fee related earnings for the first half rose 25% year over year $602,000,000 On prior calls, we outlined a baseline path of low double digit organic growth in FRE in 2017. Given the strong trajectory achieved to date, we now expect that growth to be in the mid teens or better.
The bottom line is that we're on pace to deliver one of our very best years for DE in 2017, with robust realization supported by strong and growing baseline of FRE. The breadth and strength of the firm's business lines was reflected in our key capital and operating metrics for the period in realizations, deployments, investment performance and fundraising. I'll now briefly recap those areas of activity for the quarter. First, with respect to realizations. Following a record Q1, the pace of realizations remained strong.
We generated $11,000,000,000 of realizations in the 2nd quarter with significant sales of both public and private holdings in the BREP and BCP funds, including 17 different secondary public sales. The average multiple of original invested capital for BREP and BCP sales was a healthy 2.4 times. Total realizations for the past 12 months rose to $51,000,000,000 our highest for any 12 month period. The biggest news in the quarter with respect to realizations was the announcement in early June of the agreement to sell our European logistics business, Logicor, to a sovereign wealth fund for €12,250,000,000 This transaction is an excellent illustration of our model working at its best. Our team identified a theme, a big idea to play the secular explosion in e commerce in the real estate context.
Leveraging the largest capital base in the industry, which is our competitive advantage, we built a scale platform of high quality assets by methodically executing over 50 acquisitions across 17 countries over a period of 5 years. The sale represents not only the largest private exit in BREP's history, but also the largest private real estate transaction in Europe. We expect a contribution to DE of $0.35 to $0.40 per share when it closes later this year. 2nd, investment activity. Alongside our aggressive pace of sales, we've been actively reloading with new investments, deploying $8,400,000,000 in the quarter $33,000,000,000 over the past 12 months, not including $4,600,000,000 committed to pending deals not yet closed as of quarter end.
We deployed $20,000,000,000 in the first half of the year, our highest first half of deployments to date. While the environment for opportunistic investing, especially in the U. S. Has remained challenging, we're finding pockets of value around the world, emphasizing the themes in which we have high conviction. Having a far reaching global platform in each business has allowed us to go where the value is.
Indeed, about half of our capital deployed or committed in the Q2 across the firm was outside of the U. S. With Europe notably being our busiest region of activity for real estate and credit in particular. The diversity of investment mandates provided by our newer business lines has also supported a positive trajectory for deployment despite the environment. For example, taken together, our core plus real estate, core private equity, tac ops and strategic partner strategies comprised 27% of the firm's capital deployed so far this year and about a third over the past 3 years.
In the last week, in our core PE strategy, we closed the $2,000,000,000 acquisition of Ascend Learning. And in our tactical opportunities area, we are seeing arguably the deepest pipeline of interesting opportunities within the firm as reflected in some of the recent transactions announced by TacOps. Clearly, the Blackstone innovation machine is creating a level of activity and store of value for our shareholders that would otherwise be unavailable in the current environment. With the industry's largest dry powder capital pool of $90,000,000,000 and with over 70% of our asset base locked up for over 9 years on average, we enjoy the distinctive position of having enormous firepower across a diverse array of strategies around the world that we can deploy patiently against selected areas of opportunity. 3rd, investment performance.
Starting with real estate, the opportunity funds appreciated 5.4% in the quarter and 17.1% over the last 12 months, while Core Plus was up 3% and 10.2% respectively. This appreciation reflects both broad based strength in our portfolio as well as sales activity. Within the portfolio, we are seeing strong performance in some of the largest investments made in the last several years by real estate, which bodes well for future value creation. And in terms of operating trends, we continue to see solid to strong fundamentals in most sectors and geographies to which we are exposed. The corporate private equity funds appreciated 2.8% in the quarter and 14.6% for the prior 12 months.
Underlying fundamentals in our portfolio remain solid across most sectors with healthy growth in revenue and EBITDA, although commodity price volatility in the energy markets did impact appreciation and the carrying value of certain private energy investments in the quarter. In credit, our distressed funds were also impacted by unrealized marks in certain energy investments, resulting in the modestly negative return of negative 1.2% in the quarter, although these funds were still up 15.3% gross for the prior 12 months. Our performing credit funds were up 1.5% in the quarter and 16.6% for the prior 12 months. In Hedge Fund Solutions, the BAM composite generated gross return of 1.3% in the quarter and nearly 10% for the prior 12 months, outperforming the hedge fund index. With 84% of BAM's eligible AUM above the high watermark, the segment contributed $30,000,000 of performance fees in the quarter $88,000,000 year to date, driving a 44% increase in first half revenues for the BAM segment.
Finally, on fundraising. Gross inflows were $12,100,000,000 in the quarter $57,000,000,000 over the last 12 months with strong consistency across businesses. In the quarter, we saw among other closes, a final close in the quarter on our 5th European Real Estate Fund, which reached a record €7,800,000,000 a first closing on our 3rd GSO distressed drawdown fund and an additional closing on core private equity. The overall pace of fundraising in the first half of the year was somewhat slower than 2015 2016 as expected, given the timing of the raising of several of our largest flagship drawdown funds in those prior years. That said, we expect that the second half of the year produce meaningfully higher inflows.
We expect the balance of the year to include significant closes on the 3rd GSO distressed fund, the 2nd Dedicated Asian Real Estate Fund, the 3rd commingled TACOP funds, and the first close on a new Asian corporate private equity vehicle, which we'll invest as a sleeve for BCP in a similar fashion as our energy fund sleeve. Steve spoke about our new infrastructure fund, for which we expect to first close by early 2018, followed by subsequent closes thereafter. These closes will consist of third party capital matched by our anchor investor and will flow into both total and fee earning AUM as they occur. 1 of the most compelling trends in our fundraising is that more and more of our new strategies utilize quasi permanent or long duration fund structures with fees often based on NAV versus original cost, such as with our Real Estate Core Plus platform, which will start generating cash incentive fees in the Q3. Infrastructure is the latest and a quite significant example of a new strategy utilizing that structure and we look forward to building out this platform over time.
So overall, another strong quarter, a great first half and a lot to look forward to. Like Steve, I'm excited to see what the next 10 years have in store for the firm and our shareholders. With that, we thank you for joining the call and would like to open it up now for
And it looks like our first question will come from the line of Craig Siegenthaler, Credit Suisse.
Thanks. Good morning, everyone.
Good morning, Craig.
So maybe just starting where you left off, with that new Asia Private Equity Vehicle, this is really a new concept Blackstone as you've stayed away from the geographic segmented model. What are your thoughts on raising a European constrained fund, especially given the commentary I heard earlier that there's a lot of better investment opportunities there than versus the U. S?
Okay, Craig, it's Tony. We don't have any plans for European PE fund right now. And I'm not sure Michael was saying there's better opportunities in Europe and PE now. I think he was referring more towards real estate and credit than PE.
Your next question will be from the line of Patrick Davitt, Autonomous.
Hey, good morning guys. Thanks. On the infrastructure opportunity, do you think you need movement on the legislative front in DC to make the opportunity work at the size you're planning on raising? And within that vein, how are you equipping and or are equipped to deal with the local red tape and bureaucratic issues of building highways, airports and bridges, etcetera?
Steve, this is a really good question. What I'd say is that we think we're going to be able to invest the fund without major new sorry, I'm fighting a cold, if you can believe it in the summer. Tony, why don't you answer that? Yes.
Sure. So, Patrick, we don't need any changes in Washington to invest this fund simply put. We think there's some things that the administration could do and would like to do that would really help America address its sorely under invested infrastructure. And I think that's in everyone's interest. As you know, the American infrastructure cost the average family, I think we said something like $3.60 a year in income just from lost productivity.
So it's good for all of America. We're hopeful they can do something. But our investment is not premised on any changes in Washington and that's not necessary. And you should also know that, yes, new build infrastructure will be a part of the fund, but it will be a minority of the fund. Most of their fund will be more in core plus than in greenfield stuff.
We'll also do some core. The beauty of this fund is that it can do the full spectrum of things. It can hold assets a long time and let them appreciate a long time. So you get high multiples of money. And it can do things in scale that others can't.
But it's not just a new build fund.
Thank you.
Your next question will be from the line of Bill Katz, Citigroup.
Okay. Thanks. Good morning. Appreciate taking the question. Just sticking with the infrastructure fund for a moment, I think you identified that one anchor investor is about half of the $40,000,000,000 target.
Can you give us a sense of how you're doing in terms of LP raise on the other $20,000,000,000 And then Mike, I think you mentioned that this could start to feather into fee paying AUM in the Q1 of 2018. Sort of wondering how you think about that pace throughout the year?
Okay.
Well, we really aren't officially launched yet in the 3rd party fund rate and expect that to start in the fall. And we expect a closing, as Michael said, by the 1st part of 2018. We'll see how it goes, but we're not launched yet. I don't know. But I don't think you think that our target is $20,000,000,000 out of the box.
We're going to start with a target that's smaller than that. And then as we raise additional money, we'll match the balance of the $20,000,000,000 over time.
Okay. Can I just ask a quick follow-up question? On the you had mentioned, Steve, on your opening remarks that retail is an area focus. I think I heard about 15% of your sales are now coming from that channel. Could you expand a little bit on where you're seeing success whether it be product or a particular distribution sub segment?
Maybe John will ask you.
Yes. I'll take it. So it's really, I would say, a 3 pronged approach. One is building out within the channels we're already in, in the wirehouse and private banks are going deeper and broader, adding new product would be the 2nd prong and then new distribution, independent broker dealer, families, etcetera. So it's really across the board.
And I would say, although we're seeing a nice pace of growth, it's still very early stage. So an independent broker dealer channel, for example, we've just started writing the sales agreements. We have a lot more to go and the product is first hitting. And I think without disclosing specifics on new product, we'll have new product that we'll be introducing towards the end of this year as well. So very excited about it.
Great.
I'll follow-up offline. Thanks so much.
Thanks, Phil.
Your next question will be from the line of Devin Ryan, JMP Securities.
Hey, thanks. Good morning. A A question here just on CF Corp's acquisition of Fidelity Guaranty and Life in the quarter and obviously Blackstone's investment management agreement there. I'm just curious how big of an opportunity you see this for the firm over time? Obviously, one of your peers has been benefiting quite a bit from their management agreement as assets have expanded.
And so it seems like there's a strategy to grow. Just curious kind of how you're looking at the opportunity for the firm?
Sure. Okay, Devin. Well, as you know, we already have a similar kind of arrangement with a company called Harrington. And so this is not a new thing for us. We think that in general the insurance industry is under invested in alternatives and it's a very big pool of assets and that over time we'll be able to provide services to that industry.
And I hope it's one of the sort of frankly many growth avenues we have.
Got it. Okay. Thanks. And just quick follow-up here, just on the CLO business, there's been 10 CLOs you've launched over the past year, I think 3 this quarter. So clearly you've been active there.
I'm just curious what you're seeing making that backdrop particularly favorable right now. Is it just the spreads and how have kind of risk retention rules change industry behavior at all or maybe creating some advantages there for you?
Well, yes, I mean obviously there's a hunger for yield instruments. And so we can get we can get liabilities at an attractive rate and we can make the spread and what squeezes down to the CLO equity is pretty attractive by comparison to investors alternatives in this world. And so, it's good for the markets to provide the liquidity they provide. We make up put a long term home for these loans. And so and we're in the business.
So we're going to keep doing that as long as these conditions pertain. In terms of risk retention, yes, we've got risk retention now, but we're very comfortable with the retention of these instruments that we have. We like the investment, frankly, it's a good return on investment. So it hasn't slowed us down at all. And, I think the industry is working around that.
Okay. Thanks very much.
Your next question will be from the line of Michael Cyprys, Morgan Stanley.
Hi, good morning. Thanks for taking the question. Just wanted to ask about the net accrued performance fee balance that seems be stable here at about $3,300,000,000 or so despite some of the strong monetizations that you had over the past 12 months. So as you look forward from here, how are you thinking about the potential for the net accrued performance fee balance to grow. It appears to be supportive backdrop for monetization.
So does this balance remain stable from here? And what sort of environment do we need to see for this to grow even if monetizations are similar to current quarter levels?
Hey, Michael, it's Michael Chae. I guess just to put a frame around that, beneath the surface of over the last couple of years, a stable performance receivable balance, obviously, there have been a couple of really good things happening, appreciation and sales. And so, for example, take the last 6 quarters. At the end of 2015, the balance was $3,250,000,000 Today, it's $3,290,000,000 which is stable to slightly growing. Well, how that happened was $2,400,000,000 of performance fee income of growth and $2,400,000,000 of distributions.
So, we're happy about both those things. That's our model. So, our model is to produce stable to growing performance receivables. There will be ups and downs over time through creating value and returning value. And so we expect to continue to execute against that model.
Got it. Thanks for that. And then just a follow-up question on some of the broader investment themes and megatrends that you've been sort of spot on with over the past couple of years, investing against urbanization and e commerce and last mile delivery. So I guess just as you look out over the next 5 to 10 years, what sort of trends are you watching or thinking about that kind of merge?
Well, that's I must say that that's getting a lot of tension here. We're increasing what we're increasingly seeing is the ability of new technology to disrupt all kinds of traditional industries where you wouldn't think it would happen. So I would say the change going forward is much more focused on our part on technology disruption is a generalization and what are some of the implications of that, particularly for industries that people used to think of we're safe from that. So as a generalization, I would say that's getting the most attention right now.
Great. Thank you very much.
Your next question will be from the line of Robert Lee, KBW.
Great. Thanks. Good morning, everyone. If I think of over the last several years, as you've highlighted repeatedly, so many more products, so many more strategies across the franchise. Can you talk a little bit about how some of the investments or changes you've made or you think you need to make in kind of your delivery pipes, your distribution to effectively, I mean, you've raised huge amounts of capital, but all the new products can often strain an organization's ability to market them effectively over time.
So can you maybe talk a little bit about some of the changes you've made there, if any, or changes you think you need to make internally to handle
all these new strategies? Sure. Happy to. So we have a fairly complex distribution system. It's both decentralized and centralized.
It's both product oriented and regionally oriented. So I'm just going to take you through that a little bit. Generally speaking, when we set up a new product group, they tend to be discrete businesses, discrete teams, discrete management, discrete P and L and bonus firms and discrete distribution around their product area. Now that would be true more true in the big markets like the United States and Europe, which are mature and where the LPs are highly specialized. In less mature markets, Asia, the Middle East, for example, Latin America, where the LPs are less specialized, then we have more of a regional coverage model.
And so as we grow products, we are of course bulking up our regional teams just to handle more. And our products teams naturally bulk up in the mature markets as we add products because they each have their own some of their own marketing resources. And then in Joan's area, she was talking about, that's probably the fastest growth in our distribution. That's why it's growing as a percentage of our AUM. And she's doing the biggest buildup of all.
And of course, that is a central group that on a global basis distributes all products for all the groups. So in a nutshell, we've built distribution not only along with the new products, we've built it ahead of the new products.
Great. Thank you. And maybe just one follow-up also on kind of the new product front. I mean, if I look across whether it's core plus, core PE, infrastructure, the non traded REIT, I mean many of your new strategies are in either permanent capital vehicles or maybe some type of evergreen structure with
Yes.
So as an organization, is that something you're specifically targeting as a or did you think about that in terms of half your asset base being that?
Well, so I think this is something, yes, we're specifically targeting for a couple of reasons. First of all, for investors, having if the compounded the zero interest rates have pulled down the compounding rates that investors can get And a way for them to compensate from the loss of high compounding rates is to put money out at a little lower rates of return, but longer durations and ultimately and if they do that well, they actually get richer at the end of the day than these yo yo kind of drawdown funds where they get very high compounding rates for short holding periods. So we think it's an investor's interest 1st and foremost, which is why we're doing it. Beyond that from our firm, it's powerful. It's powerful because it gives us a very stable asset base.
It gives us an asset base which generally grows with net asset value, not just management fees on the commitment upfront. Thirdly, we don't have to the irony of drawdown funds is you're often obligated to sell your best assets earliest to harvest those gains. We love to hold our winners. So it allows us to do that, but then NAV grows and we get growing management fees. And it allows us to take our incentive fees more gradually and more smoothly over time.
So all of those things make it good for us. So I think it's good for our LPs first and foremost, but it's also good for us. So yes, generally speaking, we see moving the firm towards more and more permanent capital vehicles. And I think you'll see them growing as a percentage of AUM. But we have a very large drawdown business and it's hard to see permanent capital ever being and which is robust and growing also.
So it's hard to see permanent capital ever being more than you said half. I don't see it ever quite getting there, but we'll see how it plays out.
Great. Thank you for taking my questions.
Your next question will be from the line of Alex Blostein, Goldman Sachs.
Hey, good morning everybody. Just a follow-up back to the infrastructure business for a second. What kind of investments do you guys need to make in that business, both in terms of hiring new people, bringing in people internally, externally, anything on non comp side of the equation? Just trying to get a sense of the incremental margins we could expect from this new business segment from you guys once it's fully scaled? Thanks.
Yes. Well, we're going to we've moved half a dozen key people, including the group head from other parts of the firm. We've got a couple of 3 partners in there now that we've moved internally as well as some support people. We're going to be adding for without side hire some other partners with expertise in particular silos, a world class operating partner that I think will just knock people's socks off and some other things like that. So we're going to be in investment spending mode for a while, certainly for the balance of 2017 and for, in my opinion, for most of 'eighteen.
But we'll have to see a little bit how the combination of the new hiring matched up against the pace of fundraising and the pace of deployment, all that goes into the mix. But I think you should assume that for 'seventeen and 'eighteen, it's not going to add to our earnings.
Okay. Thank you. Your next question will be from the line of Mike Carrier, Bank of America Merrill Lynch.
Thanks guys. Just a question on hedge fund solutions. So I know seasonally in this second quarter you always have a higher level of redemptions, but it seems like it ticked up a little bit yet performance has gotten a lot better. There's a lot of different trends in the industry. So just wanted to get your view on what you guys are working with clients in that segment and what's the outlook when you look at the fundraising opportunity given the improving performance?
Yes, Mike, it's Michael. Just to put the flows in some context, it's a great question. First, as you noted, we typically do see seasonally higher redemptions in the second quarter. 2nd, I think fundamentally, it's important to note that flows and redemptions lag performance. And what you're seeing here is obviously that sort of perfect storm of challenges in the hedge fund industry overall playing out in the last 2, 3, 4 quarters in terms of flows.
And that can reverse itself and we expect it to following periods of good performance, which we've seen over the last four quarters. And so more specifically, let's break apart sort of our retail individual investor solutions area and our traditional institutional area. On the IIS retail area, the lag is sort of naturally shorter given the daily liquidity character of the products. And sure enough, in late 2016, Q1 2017, we did see elevated redemptions in that area. However, we're also seeing we saw it in the 2nd quarter and we're seeing it kind of in real time that those flows have turned the corner.
We've had great performance. That mutual fund was up BICS mix was up around 8%. Actually, Morningstar, if you look on their website, has just awarded us a 5 star rating. And that segment returned to healthy net inflows in the Q2, and we continue to see strengthening of those flows for sort of the balance of the year. Conversely, in the institutional area, the decision making lag effect is a little slower.
You have a tough first half, investment committees of institutions make decisions around year end, then there's a notice period. So I think what you saw in the second quarter was sort of actually that playing through in the institutional and our traditional fund to funds area. But look, stepping back, I'd say the outlook is very positive for us in terms of momentum. We noted in the 8 ks, we have July 1 inflows that aren't in AUM about $500,000,000 Retail, I mentioned, has turned the corner. And in that traditional area, we have very significant mandates that we've won that are being papered and are not yet reflected in AUM in the order of $2,000,000,000 plus.
And if you look overall at our business, our AUM is still up 6% year over year with very good forms that you noted. And in terms of industry position, it's never been better. Of the top 5 hedge fund allocators, we were the only one with positive growth in 2016. We're number 1 and we're more than 2 times our next competitor in size. So, I'd sort of give you that overall picture.
That's helpful. Thanks a lot.
Thanks.
Your next question will come from the line of Glenn Schorr, Evercore.
Just a follow-up on energy. I wonder if you could either quantify or provide any color on its impact in both private equity and GSO, If I'm someone that doesn't think that's going to repeat, I'm just kind of looking for how much of an impact it had in the quarter and maybe included in that you could just give a reminder on overall money in the segment, maybe breaking down by bucket and how much dry powder you have dedicated to the sector? Thank you.
Sure, Lynn. In terms of let's start with exposure. And I think either from you or someone else in the last quarter, we got that question and I answered it's about 10% of the firm overall in terms of AUM and it's about 20% of the private equity and GSO segments in aggregate and that those percentages remain the case. Within that, obviously, we're very diversified by sector upstream, midstream, power, renewables, and those have very different stories and reactions or non reactions to commodity price movements. We also have private investments and public investments.
Relatively manageable a relatively manageable impact on performance even in those segments that were affected and a quite modest impact on E and I. So in private equity, on balance, it was actually sort of slightly positive or neutral contributor to E and I in the second quarter. Although relative to the degree of higher positive appreciation in our non energy portfolio, it did have a slightly dilutive impact on the overall performance and returns. In GSO, again, we are modestly more impacted on performance and E and I, but it was not material from an E and I standpoint to the overall scope of the firm. It's important to note that all of the impacts were unrealized, unrealized marks, not realized marks in either business.
And those marks were based not on company issues, but on commodity price fluctuation that we reflected appropriately. So we feel good about the portfolio. We feel in general in terms of the cost basis, the breakevens, the quality of the assets, private equity, in terms of the investments being unlevered or relatively lowly levered and so forth. But look, that said, we're going to watch this. And as commodity price fluctuate or stay at depressed levels, we'll watch that carefully.
Glenn, we've got about $7,000,000,000 of dry powder in the energy funds, just to answer the last piece of your question.
Across both private equity and GSO. But that's really kind of energy dedicated dry powder. There's other general pools of capital that are also available.
Excellent. Thank you.
Your next question will be from the line of Gerald O'Hara, Jefferies.
Thanks. Maybe just one on dry powder, well, down modestly quarter over quarter for you all. It'd be interesting to hear some thoughts on the sheer abundance of capital being raised across the industry and how it might impact the opportunity set at current valuations and perhaps impact on future IRRs? Thank you.
Okay. Well, it's Tony. There's it's obviously been a good fundraising cycle and particularly for private equity, there's a lot of capital that's being raised and has been raised. And in general, there's just a whole lot of capital sloshing around the world looking for returns. And I think we're more impacted frankly by the aggregate in the public markets than the amount of private equity capital.
Our business is to find needles in haystacks. That's what we do. We're not really chasing public market values and we're not really that impacted by them. And our businesses, once we find the needle, it would have to be an asset into which we can intervene and change the course of EBITDA. So we create our own value, so to speak, as opposed to being slaves to the public market valuations.
If you look at a lot of our investments, particularly in say private equity, you'll see a lot of stuff with both no leverage, but they're not companies that trade, they're new build stuff. So in those things we're getting in essentially at book value. So our business is to find ways around the big trends and to buck those big trends and to disconnect our investors' returns from the vicissitudes of those megatrends that we can't control. And we're still able to do that. And the activity, the high level of activity that we've had across our businesses in the 1st 6 months tells you that we're happy with what we're finding.
And I don't see any reduction in IRRs versus what you've seen in the past.
Fair enough. Thank you.
Your next question will come from the line of Brian Bedell, Deutsche Bank.
Great. Thanks. Good morning, guys. Just a bit back on infrastructure, maybe either Tony or Steve, if you can talk about or Michael, talk about the dynamic of fundraising and deployment. I guess, when you go in the market close, are you doing that with the intent of immediately deploying those assets or into investments or is there more of a lag?
And I guess maybe just thinking about you said over a multiyear period, are you viewing the deployment pace over a multiyear period? Or do you see some opportunities that where you can deploy that faster? And maybe in that context of that, how we can think about the gross fee outlook into 2018 given the infrastructure fund?
Yes. Okay. We're going to be in the deployment business right away. In fact, we're already having incoming opportunities. And we'll find if there's an interesting deal on a risk reward basis, we'll find a way to do it.
We have interested investors. Frankly, we've had a lot of conversations. Short of a fund close where you got to herd a lot of cats, we got people that are ready to go now. So we'll be able to do deals as they come. We'll have probably, as I mentioned, either later this year or early next year, an official close with a bunch of investors.
And we'll but we'll be up and running in business ready to put money out this year. In terms of I don't think it's going to be the hugest impact of 2018 because of the investment spending. And we're in one of those businesses where you build the infrastructure, you build the team that takes some of the investment, but once it's there, this is very powerful.
Great. That's good color. Thank you. And then on just on the back on the retail question, you mentioned obviously a number of I think Joan you went through 3 different distribution initiatives. Have you thought about partnering with traditional asset managers to the extent that they already have pretty vast distribution in a lot of these areas and where you would bundle say sort of active product with some illiquid sort of juice to it, so to speak?
Or is that an area that you don't really want to go into and you rather just distribute on your own?
Well, I think it's a good question. I would say to date, we've been able to offer both liquid and illiquid. And actually, if we look at sales to date this year, it's been heavily tilted towards liquid product in real estate and on the hedge fund side. So I'll give you some sense of various pools. So we can weave together products that we have to create multi asset solutions and we do that already and we do it with drawdown products.
In the Harrington example, we do it with both liquid and illiquid. I would say we haven't really heard of demand in the market for us to partner with someone else. And in this realm, if you look at our performance across all of our buckets, all of our strategies, it's quite strong in every asset category. And so I think we're quite comfortable with the products that we have now. And I don't think we are limited in our distribution.
So I'll just give you also a little color on what we have. So we've built out a wholesaling team. We've built out sales desk and full operations across processing, finance, etcetera. We're building globally. And so I think we have a unique distribution system in retail versus any of our peers that has quite a bit of reach.
And then of course, we leverage already the big institutions, the global investment banks, private banks overseas, independent broker dealers, firms, larger firms like Schwab's, etcetera. So I think that's going to serve us very well.
Brian, let me put some added color on that.
Yes, great.
Some of our distribution is constructed to actually harness existing distribution systems, as Joan mentioned, but up against them and interface flawlessly with them in terms of a systems, a training and everything else where we train other people's brokers for example. Other aspects of the distribution system that we have and Joan is building are direct distribution where you go direct to the client. Those are more rifle shot. They're not the mass market, obviously. They tend to be bigger things.
We would never really depend on other people's distribution for our product in replacement for ours, because our we feel we can do this really well. We want people really, really knowledgeable and well trained about our product specialty, our specialty. Our products are specialty products. That's kind of the definition of alternatives. And so I think we're going to depend on our own distribution.
However, I do think the big prize out there that we've talked about in past calls is marrying our high absolute return illiquid products with some sort of that could be active, but probably passive and packaging those in target date funds or something to like the 401 market. And I think there are trillions of need for our product as part of an investment solution. And that I think is a big prize and that is something that we're doing a lot of thinking about. Let me just put it that way.
That's actually an interesting topic. I mean just cracking that 401 market obviously with the liquidity that's demanded is difficult. But I've often wondered to what extent, you can actually get those types of products in that. And what you're saying essentially is through the target date vehicle, you may be able to actually sort of wedge into that market. Is that am I hearing that correctly?
Is that something something near term rather than longer term?
When I but when you say we may be able to wedge in the market, we'd be part of an investment solution in a target they fund. I'm not saying we're going to manage the whole target they fund.
Absolutely. And that's a huge asset class obviously from a
product perspective. Okay.
And that is a near term effort rather than a longer term effort?
Well,
it's a near term effort and a longer term payoff.
Yes. Okay. Fair enough. Thank you.
Your final question will come from the line of Chris Suttler, William Blair.
Hey, guys. Good morning. On core plus real estate and core private equity, I think you're up to AUM of $17,000,000,000 $5,000,000,000 respectively. Can you just talk about how deployment opportunities are shaping up in each of those areas and maybe give us a sense of what how should we expect an average deployment year to look for both of those? Thanks.
Well, okay. They're different. But in so let me generalize across the 2. We're seeing an awful lot of interesting deployment opportunities in both. Now by definition, core private equity will be lumpier and more episodic because you're buying fewer bigger assets in the fund.
So it's very hard to do an average. I just I don't think it would mean much. You maybe have to assume something for your model, but I'll let you work with Weston on that. In core plus real estate, there's a lot of granular assets and that steadier, I would say that you've seen the deployment pace and I don't see any reason that that changes radically. As the way and by the way, the structure of those two funds is different too.
I think you know that. But if you want Weston to take you through how the 2 work in terms of money raised, money deployed, one is a drawdown fund, if you will, and one is an open ended fund where you get a queue of investors and then take the money as you find the deal. So there's some differences there. But I'll leave you to Weston on that one.
Fair enough. And then just quickly on the Logicor sale, the $0.35 to $0.40 that Michael mentioned of DE, I just want to confirm that's before the 15% holdback?
That's correct.
Okay. Thank you.
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