Good day, ladies and gentlemen, and welcome to the Blackstone fourth quarter and full year 2016 investor call. My name is Mark, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question during that session, please press star one. If at any time you require operator assistance, please press star zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Weston Tucker, Head of Investor Relations. Please proceed, sir.
Great. Thanks, Mark, and good morning, and welcome to Blackstone's fourth quarter 2016 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; Michael Chae, our Chief Financial Officer; and Joan Solotar, Head of Multi-Asset Investing as well as External Relations. Earlier this morning, we issued a press release and slide presentation of our results, which are available on our website. We expect to file our 10-K report later next month. 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 the firm's results, please see the Risk Factors section of our 10-K.
We will also refer to non-GAAP measures on this call, and you'll find reconciliations in the press release on 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. A quick recap of our results. We reported GAAP net income of $770 million for the fourth quarter and $2.2 billion for the full year, up 95% and 38% respectively from the prior year comparable periods. Economic net income, or ENI per unit, was $0.68 for the fourth quarter and $2.00 for the full year, both of which were up materially from the prior year periods due to greater appreciation across the funds.
Distributable earnings per unit were $0.55 for the quarter and $1.78 for the full year. We declared a distribution of $0.47 per common unit to be paid to holders of record as of February 6th, and that brings us to $1.52 paid out with respect to 2016. With that, I'll now turn the call over to Steve.
Good morning, thank you for joining our call. Blackstone closed 2016 with strong fourth quarter results, as Weston just mentioned, and powerful momentum heading into 2017. Fourth quarter revenues and economic net income rose by 79% and 86%, respectively. For the full year, revenue reached $5.1 billion, while ENI rose to $2.4 billion, both up 11%, as compared to only slight earnings growth for the broader market. We generated full-year cash earnings of $2.2 billion and continue to pay very healthy distributions to our unitholders. In fact, over the past three years, Blackstone has actually distributed over $8 billion in value to our unitholders, which is more than any other public firm in our industry, no one close, and we remain one of the highest yielding equity securities of any large company in the world.
We've delivered these good results during what was a really unprecedented period for markets and active managers in particular. Last year, January marked the worst start to a year for equities in history. Came the Brexit referendum and its subsequent violent fallout across many asset classes, and then, of course, the unexpected U.S. presidential election. The fact that the S&P ended up 9.5% on the year with positive momentum and surging investment confidence, in fact, the highest confidence level in 15 years, is really extraordinary. Needless to say, many active managers didn't participate in this 9.5% gain.
Looking beyond markets, investors, businesses, governments, and individuals around the world are trying to assess the scope and potential impacts of new U.S. policy in many areas, including tax reform, a variety of new trade initiatives, immigration issues, deregulation and de-bottlenecking across the board, healthcare changes, energy policy, infrastructure proposals, and a more pro-growth posture towards our financial institutions. I've spent a great deal of time recently traveling and meeting with different heads of state and business and political leaders from around the world who are looking for insights into the new administration. It's clear there's a good deal of anxiety, both inside and outside the country, around potential changes in U.S. policy. The major changes that are underway are designed to create significantly higher GDP growth in the United States, targeting a rate of growth as high as double the average of the past eight years.
Higher growth should drive higher employment and wages, as well as greater labor force participation. We believe this will also extend the business cycle. Against the better growth backdrop in the United States, the largest market in the world, there should be opportunities for everyone to benefit. The stock market is clearly anticipating a lot of fundamental pro-business reform, which I don't think is unreasonable. We could see a prolonged continuation of current bull market equities. How does all this impact Blackstone, our investors, and our unitholders? While we don't have all the answers, I'm quite optimistic about our prospects. The largest determinant of our fund returns is our ability to grow the cash flows of our assets, which of course, benefit in an environment of better economic growth.
While we've invested much to develop our global capabilities, Blackstone is still today predominantly a U.S.-focused company, and I expect we will see greater capital inflows and more opportunities to have realizations as international capital is attracted to the United States. By the same token, after the new reform agenda is implemented, we could see a divergence between winners and losers in the United States, which we're extremely well-positioned to anticipate. Similarly, we could see greater opportunities outside the country as values and markets go through an adjustment period. The benefits of our business model are well highlighted in this type of environment. We're able to move quickly to deploy capital and scale when opportunities arise, and then hold assets through periods of volatility to achieve the optimal outcome. The result over the long term is material outperformance against any relevant measure.
Not necessarily every quarter or year, but across business cycles. Taking the long view at Blackstone has helped us deliver to our investors outperformance versus the S&P and private equity of approximately 700 basis points per year after fees over nearly 30 years. In real estate, that outperformance is 900 basis points per year after fees versus the real estate index over 25 years. Our patient capital and large dry powder, it's about $100 billion now, benefits our investors over time, and there are many examples of how this works to ultimately create the great track record I've just described. For example, following the Brexit referendum last June, there was a period when markets seized up and transaction activity stalled. We were able to acquire attractively priced assets from sellers needing to fund redemptions, if you'll remember that.
In our private equity energy area, we were patient and waited on the sidelines through most of the turbulent 2015 for oil prices to settle, selling basically nothing. When pricing looked like it had bottomed early last year, we became active purchasers, closing or committing to eight oil and gas investments for a total of close to $3 billion. Simultaneously, we took advantage of record low interest rates to sell power assets at a significant profit. We also issued a 1% bond, the lowest rate, I believe, that was obtained in the European financial markets, denominated in euros. Oil prices obviously have risen very sharply since we put out this $3 billion. Our 2011 and 2015 dedicated private equity energy funds have generated returns from an exception of 13% and 36%, respectively, despite the carnage that occurred in the energy markets during this period.
In late 2015, when interest rate concerns caused REIT stocks to trade off sharply, we moved quickly to acquire both Strategic Hotels and BioMed for a combined $15 billion, as they were suddenly trading below the value of what we thought their high quality underlying real estate was worth. In barely one year, these two investments have already delivered early results that are terrific. We've sold most of Strategic assets at a significant profit, and we've sold or have contract to sell non-core assets representing about 30% of BioMed, with sustained healthy fundamentals across the remaining portfolio. A list of these types of things goes on and on, this is how investing works at Blackstone, driving outperformance. Plus, it's a lot of fun to work here.
Our track record provides the growth engine of the firm, combined with a high degree of entrepreneurialism, which helps us figure out what new businesses to enter. We're always looking to pioneer innovative new product areas that take advantage of shifts in the market. The outcome of this multi-decade record of providing great solutions for our LPs, who in turn are happy and want to give us more money, including for new strategies, is a wonderful way to run a business. We apply a tremendous standard of care when launching new businesses with a strict focus on protecting capital. That's why our LPs are willing to give us large scale capital even for new things like Tactical Opportunities . Our new fund, last few years, which is now up to $17 billion in assets under management.
Our real estate Core Plus , which in a few years has gotten to $14 billion. Strategic Partners , which does our secondaries, now over $20 billion, more than double the size of the platform when we acquired it three years ago. We are fiercely protective of what the Blackstone brand means to our clients and try to only launch products that we think will be truly great. The result is best in class fundraising for basically any period of time you want to look at. We continue to diversify our sources of capital, including bringing our institutional quality solutions to the retail high net worth area and family office channels. We've built out this effort carefully with a focus on maintaining a terrific experience for the end investor. Besides developing the distribution channel itself, we're also designing customized products for these investors.
The early results, as Tony mentioned on the earlier call, speak for themselves. With 15%-20% of Blackstone's total capital raise now coming from retail. I have great expectations for our ability to continue growing this initiative across each of our investment platforms and around the world. In conclusion, looking forward, I envision excellent prospects for the next several years for our firm and for our limited partners. Our business is flexible and responsive to changing dynamics, which is ideal for the period we're entering. For our unitholders, we're coming off a period of record fundraising, significant investment activity, and have a powerful near-term earnings trajectory, which Michael Chae will describe to you in more detail. Thanks a lot for investing with us. Now, Michael.
Thanks, Steve. Good morning, everyone. Our fourth quarter results represented a strong finish to the year with positive trends in revenue, economic net income, distributable earnings, and AUM. We achieved positive sequential growth in every one of these metrics each quarter of 2016, with all reaching their best level of the year in the fourth quarter, that momentum has clearly continued into 2017. Total ENI nearly doubled in the quarter to $812 million, our best performance in seven quarters, as performance fees and investment income surged in every business. ENI for the full year rose 11% to $2.4 billion, as Steve said. Fee earning AUM rose 13% to a record $277 billion. Total AUM rose 9% to $367 billion, with every business up sequentially and year-over-year.
We saw $17 billion of gross inflows in the quarter and $70 billion for the year, our second-best year ever, despite not having our private equity or real estate flagship funds in the market in 2016. That brings us to nearly $220 billion of gross inflows for the past three years, entirely organic, which is more than the total size of any of our peers. Fee-related earnings for the full year rose 7% to exceed $1 billion, despite the spin of our advisory business, as well as the six-month fee holiday for our $19 billion BCP VII fund. FRE margin expanded nearly 350 basis points to 40%, a firm record for an annual period driven by several factors, the spin-off of the lower margin advisory business, the strong incremental margins on our added AUM, and active management of our cost structure as reflected in our historically low fee comp ratio.
We received a benefit to FRE in the fourth quarter from favorable FX effects in our treasury, with the euro's movement in the quarter being advantageous in relation to our euro-denominated bond liabilities, which include what in retrospect was a quite well-timed September issuance of a 1% euro bond. Adjusting for that benefit and also the advisory spin-off, our underlying 2016 FRE growth was in the low double-digit level, and we expect to remain on this organic growth trajectory moving into 2017. Distributable earnings were a healthy $692 million for the quarter and $2.2 billion for the full year. Good annual performance, down from record 2015 levels as higher FRE was offset by lower realized carry, due mostly to the sequencing of realizations in our BCP V fund that I covered on recent calls.
I'll share a positive update on this in a moment, first, I'd like to review some highlights for each business, starting with real estate. Real estate's fourth quarter was a continuation of recent trends of stable operating fundamentals, active deployments totaling $4 billion and significant realizations of $3.5 billion. The carrying value of our opportunistic funds rose nearly 5% in the quarter through best performance of the year, while Core Plus was up 2%. For the full year, both were up about 11%. As you know, the story of this business has been sustained outperformance, leading to global expansion and diversification into new areas at scale. Starting with one single global fund 25 years ago, we're now on our fifth dedicated Europe fund, currently at $7 billion, which launched its investment period in December.
We'll likely start raising our second dedicated Asia fund this year on the heels of a successful first Asia fund. Our real estate debt business has evolved from an initiative to acquire oversold loans during the crisis to a $14 billion platform of mezzanine liquid CMBS, a commercial mortgage REIT, Blackstone Mortgage Trust, and most recently, a new high-grade product. Our Core Plus business is up to $14 billion and should begin contributing realized cash incentive fees in the fourth quarter of this year. All of this together has driven real estate's total AUM up 9% year-over-year to a record $102 billion, with an increasing mix of continuously raised permanent or quasi-permanent AUM. We've achieved this growth despite several years in a row of sustained very large-scale realizations. $18 billion in 2016 and $58 billion over the past three years.
We think the outlook for continued strong realizations is very good. In credit, GSO had a standout year in 2016, with fourth quarter gross returns of 4.7% for our performing credit strategies and 6.4% for distressed, bringing them to 22.6% and 17.5% respectively for 2016. Performance was driven by continued appreciation of energy investments as well as of distressed and event-driven debt positions across funds. Global demand for GSO's products continues unabated, driving the highest inflows of the firm for both the quarter and the year. GSO's fourth quarter inflows of over $8 billion included $2.9 billion for our mezzanine strategy. That positions us with one of the very largest pools of mezzanine capital in the world, and five new CLOs totaling $2.6 billion, bringing us to $4.8 billion raised this year, and ranks us as the largest global CLO issuer for the fourth year in a row.
Total AUM at GSO rose a stunning 18% this year to $93 billion. GSO also had its strongest deployment quarter in the year, with $1.4 billion invested and another $1.7 billion of pending deals as of year-end, most of which should close in the first quarter. In hedge fund solutions, BAAM's composite gross return was up 2.3% in the quarter, 5.3% in the past six months, and 6.7% for the past nine months, an excellent recovery since the challenging start to 2016. I'll take a moment to put BAAM's 2016 performance in perspective by providing a breakdown of the key drivers of performance. The performance issue principally resided in one strategy, long-short equities, in one quarter, the first quarter, where a perfect storm of factors greatly pressured performance in this area.
Indeed, relative to a full year composite gross return of 3.5% for BAAM overall, our performance outside of long-short equities across eight other strategies was 7.5% for the full year. Furthermore, within long-short equities, the pressure was focused in the first quarter, with returns of positive 5.2% for the last nine months of the year. On a relative basis, BAAM continues to outperform its direct competition. For the year, we outperformed various fund of funds competitive sets by approximately 250 to 500 basis points. Following these last three consecutive quarters of positive returns, 78% of BAAM's incentive fee-eligible AUM was back above the high water mark at year-end, up from 67% at September 30th. In the end, 2016 revenues and economic income for BAAM were basically stable with 2015, notwithstanding the turbulence.
Similarly, our gross inflows of $10.8 billion marked the third straight year of inflows at around the $11 billion level, reflecting continued strong demand for BAAM's products that reinforces our leadership position as the largest allocator of capital in the hedge fund area in the world. Moving to private equity, our corporate private equity funds appreciated 4.5% in the quarter and 11% on the year. As with real estate, the fourth quarter capped a year of steady sequential improvement in investment returns throughout the year. Total deployment for the private equity segment rose to $2.5 billion in the fourth quarter, the highest of the year, with an additional $3.1 billion currently committed but not yet invested.
We have never been better positioned with multiple fund platforms and greater firepower in corporate private equity than now, with our $28 billion in committed capital across BCP VII, our second energy fund, and our new core private equity vehicle. Three significant deals to which we have recently committed are great illustrations of the distinctive ways we leverage our unique capabilities across these three different fund platforms to find value in a tricky environment. First, in the energy area, we recently partnered with Sanchez Energy in a $2.3 billion transaction to acquire Anadarko's interest in assets in the Eagle Ford Basin in Texas. This was a highly complex deal involving both our private equity and our credit businesses, where collectively, we and our partners at Sanchez developed a partnership structure and financing solution that worked for all parties to enable the deal.
It's a great illustration of the breadth and synergies among Blackstone's investment platforms. We believe no single firm in the market other than us could have made this happen by itself. Second, in the fourth quarter, BCP VII agreed to acquire TeamHealth, a leading healthcare services provider, which we previously and very successfully owned for eight years in our BCP IV fund. BCP VII's scale and our deep knowledge and experience with the company gave us the unique ability to expeditiously assess and execute a $6 billion public to private transaction. We expect to close this deal in the first quarter. Finally, our agreement at year-end to acquire SESAC, a leading music rights company, represents the first investment in our core private equity strategy, designed to pursue investments in high-quality, stable franchises on a very long-term hold basis.
Our Core Private Equity strategy, alongside our Real Estate Core Plus business, now together represent nearly $20 billion of capital for the firm in long-duration fund strategies. We view this area as a major, recently developed strategic dimension to our product set, an excellent reflection of our ability to innovate at scale. Expect these strategies to drive a large, growing, and sticky stream of recurring long-term earnings for unitholders. Finally, on private equity, as discussed on prior calls, BCP V sales had for the most part not been converting to distributable earnings for much of 2016 due to an interim shortfall to the preferred return on a realized basis, produced mainly by the sale of some lower multiple of invested capital, or MOIC, longer-hold, larger positions. To put some numbers around that, prior to 2016, our BCP V realizations had an aggregate MOIC of around 2.1 times.
In 2016, our BCP V realizations had an aggregate MOIC of 1.3 times. Looking forward, our remaining public positions, which comprise approximately 75% of the remaining BCP V portfolio and are liquidating, have a MOIC of 2.7 times. You could call this something of an air pocket that we hit for a few quarters in 2016 in generating unrealized carry for a fund that remains overall in a substantial unrealized net carry receivable position. We said previously that we expected this to resolve in early 2017. I'm pleased to say that in fact, based on sales already closed at this point this year, we've closed out that shortfall in BCP V and are back into generating realized carry in the fund. That's a good segue to the final topic, the overall outlook for distributable earnings, which is very positive.
As discussed previously, we expect continued healthy growth in FRE, with key drivers including a full year of full BCP VII management fees in 2017, the onset of full management fees from the fifth Europe fund after its fee holiday ends in April, and the ongoing scaling of other funds that earn fees as invested. With respect to realizations, our pipelines are strong. We expect to remain very active, and importantly, we start the year with great momentum in terms of DE from sales that are effectively locked in. Specifically, we currently have $8.7 billion in realization under contract or already closed in January that are expected to drive over $700 million or over $0.60 per unit in distributable earnings, most of which we expect to close in the first quarter.
These sales include the Hilton stake sale, transactions involving Change Healthcare, Optiv, Pactera, and our Japan residential portfolio, among others, and a number of significant public stock sales that have already been completed just in the first few weeks of the quarter. From where we sit in January, we see a very strong trajectory in terms of DE and cash distribution to our unitholders for the year. In closing, overall, we would underscore two themes, momentum and positioning. We finished 2016 and have entered 2017 with a feeling of great momentum across nearly every dimension of our business and from a financial point of view for the firm. As Steve discussed, we believe we are extraordinarily well-positioned to understand the dynamic landscape and external environment and take advantage of the opportunities it will create.
With that, we thank you for joining the call and would like to open it up now for questions.
Great job.
Ladies and gentlemen, if you'd like to ask an audio question, please press star one on your phone. If your question has been answered or you'd like to withdraw your question, press star two. Your first question comes from Glenn Schorr from Evercore. Please proceed, sir.
Hi. Thanks very much. First non-fund question. I'm curious for Steve, you chair the Strategic and Policy Forum for the new administration. I'm just curious on how that differs from your current role and how you chair the firm and where it takes you, how demanding on your time, and what type of things you're advising on.
Well, actually, my wife's asked me the same question. You just pack more stuff in and you sleep less. It's a very interesting type of position to have because you touch a lot of people in the administration. The whole administration is in a startup phase. As you know, most of the cabinet heads aren't even confirmed yet. There's a startup element of it where, that in terms of my role, which is I'm not a member of the administration, I'm chairing a committee.
I'm like a full-time person at Blackstone that's getting sort of sucked into a lot of interesting things that are happening because, as I said in my remarks, a lot of people around the world are sort of observing all these changes, which seem to come out every day, and are looking for some type of interpretation of what that means or might mean. That's created, I think, a short-term bubble for me to do a lot of stuff. I don't think that'll continue at the same level for a sustained period of time once they stand up all the cabinet heads. We will have regular meetings with the president, and it's supposed to be every month. That's a very interesting thing in a rapidly changing environment. My full-time job is at Blackstone, and I'm shoehorning all this other stuff in.
One other thing, you have to recognize Blackstone is a really terrific place, and I'm just one person. I happen to lead off this call, but that's a little illusory. At every place at the firm, led by Tony, it's really an extraordinary place. I'm still reading every memo. I'm doing all that stuff. Eventually I'll go back to a more normal life.
I appreciate that. I can't wait to see what basketball player you compare the president to. Okay. I heard the fee-related earning guidance. I'm curious on outlook for fundraising. You mentioned the second-best fundraising ever despite having the flagship private equity and real estate funds not in the market. Can we just talk a little bit more on the outlook for fundraising? I know Strategic Partners just closed New Asia Focused Real Estate Fund, but I guess just looking for a little more color on how big and which, any of the flagship funds are coming to market.
Glenn, it's Tony. I think it's a mistake to focus too much on the flagship funds. We have such a diverse palette of funds right now, all of which are pretty big, actually. Plus, we have a lot of new initiatives in the pipeline.
I think without any new initiatives, we'd be slightly less than in 2016, but still a very good year for fundraising. It doesn't take too many of the new initiatives we're looking at to push this up to be a comparable year.
Of the core funds, how do we think about how often they open for new rounds? Is that frequently?
Generally speaking, it was a drawdown fund. It's every three to four years, but increasingly, we've got funds that are open all the time, taking in money every month.
When you talk about funds, Michael, in terms of Core Plus real estate , that is basically always taking in money, as Tony said. Core private equity operates a little bit more like a classic drawdown fund in terms of episodic fundraising.
The last cleanup one is on core real estate. I think you've mentioned in the past that $100 billion potential market. Your growth has been great. Is anything there you've seen that would dissuade us from thinking the size of the market isn't as you described in the past?
I think Steve's goals are the same.
All right. Thanks very much.
Thanks, Glenn.
I think Tony just spoke for me. I just want to remind everybody, we've got a pretty full queue, so if we could, just on the first round, limit it to one question and one follow-on, just to make sure we get through everybody, that'd be great.
Your next question comes from Craig Siegenthaler from Credit Suisse. Please proceed.
Thanks. Good morning. The infrastructure segment could represent a very large profit opportunity for Blackstone, and it's a logical extension of some of the teams and products you're managing now. I'm just wondering, are there any plans to raise funds in the infrastructure space, and what are you working on there now?
Well, Craig, as you point out, it's a logical target, and it's something we've been looking at for a while, and I'm not going to give you any idea of timing, but yes, there are plans to add funds in that space.
Got it. Just as my follow-up on retail, can you circle back to remind us what you're doing across retail, how the liquid alt product is doing, any new products you've launched there? That's actually a big space you guys can tackle. That'd be helpful.
Sure, Craig, I'll take that. Basically, the distribution systems that we're targeting have investable assets collectively of over $10 trillion. I would say we're very early in penetrating those. Retail high net worth assets today are about 17% of the total, and it's a mix of the liquid perpetual products as well as the drawdown. If you were to segment it through the major wirehouses, you really focus on QPs, qualified purchasers, who could really buy anything, although we have daily liquidity products on those platforms as well. We're entering the independent broker dealer channel, which is just as large in assets, but there it's really more accredited investors and going down to dollar one. You'd have a mix that would be less drawdown and more perpetual offerings, if you will.
We also have family office, et cetera, which is more of an institutional type sale. I would say, the mix partly depends on which funds Blackstone on the drawdown side happens to be offering in that year. I think you'll see a growing number in the more liquid perpetual fund space as we're entering these new systems and developing more products. Just finally, I think one of the most interesting things that we do is also weave together different runs that we already have to create bespoke solutions for these different channels. I think you'll see more of that coming over the next 12 months.
Thank you, Joan.
One thing I'd say, this is Steve, at the risk of prolonging this answer, is that in life, you have to have a dream. One of the dreams is our desire, and the market's need to have more access at retail to alternative asset products. As I said in my prepared remarks, if you look at those returns, those are really stunning. At the moment, a lot of people are not allowed to put those into retirement vehicles and other types. One of the interesting issues when you have a new government, is whether they want to continue that type of prohibition or not, because what it's doing is denying people sort of a better retirement. If there's a change in that area, that becomes a huge opportunity for the firm.
We already have lots of white space that Joan was talking about. We're not defective in terms of things to do every day to increase penetration. There's an ability for something to get changed that could be really impactful, and we'll see what happens with that.
Thank you, Steve.
Operator, next question, please.
Your next question comes from Devin Ryan from JMP Securities. Please proceed.
Hey, thanks. Good morning, everyone. Maybe just one starting here on taxes. One of your peers had mentioned a 20% corporate tax rate and a 33% personal tax rate is a level that would make the economics to them essentially wash for converting to C corp. I'm just curious, as you guys are looking at, I'm sure, examining what's happening in D.C., are you thinking about levels where, at least from an economic perspective, it would seem to be a wash? Just how you're kind of more broadly thinking about that topic right now, given all the changes occurring.
Hey, Devin, it's Michael. Look, I'd say, obviously no proposal's been put on the table around taxes. We're studying it and I think have a good positioning to understand how it'll unfold. We're going to watch what happens. We'll be open-minded. We're not religious about a structure. We want to basically pursue a structure and have a structure that's in the best interests, and maximizes value for our shareholders. We go into this as students of what will happen, and we'll see.
Got it. Okay. That's helpful. Figured I'd ask. With respect to the CLO business and five new CLOs in the quarter, some nice growth there. Just curious, what's driving that and just the outlook that just seemed a little bit elevated to me.
Actually, for GSO, as I mentioned, they've been the leader for almost half a decade. That volume of, I think, nine issuances throughout the year, and it picked up in the fourth quarter, I think just reinforces their leadership position both in the U.S. and Europe. We certainly see, we've had a long-term success record, like 20 years almost, our team in the CLO area. The returns have been terrific. The performance's been terrific. It's actually, we think, been a good market moment and opportunity for the economics of those vehicles. I think it's really a reinforcement of momentum in that business for us that's continued for a long time.
Great. Okay. Thanks, guys.
Thanks, Devin.
Your next question comes from Michael Cyprys from Morgan Stanley. Please proceed.
Hi. Good morning. Thanks for taking the question. Just curious if you could talk a little bit about where you're underwriting new investments today across your business, just in terms of return expectations, exit multiples, exit cap rates, and just how that's evolved over the past few months as the market has gotten a little bit more optimistic on growth, and rising rates.
Okay. Well, we don't try to take current short-term markets, over-weight those in our exit multiples. We tend to look at, in all of our businesses, what's a normalized kind of exit multiple or cap rate environment and financing environment for when we exit. We're in the illiquid business, so we make an investment now. We're having to guess what the conditions will be five years from now, and obviously there's always reversion to the mean. Frankly, it doesn't change much whether quarter is good markets. In terms of our basic returns, as I said before, they haven't changed much either. We have capital that we invest through the cycle. We won't sort of lower our returns because interest rates are down, typically. We might get less active if there's not much to do and make more active when there's a lot to do.
We try to keep our returns pretty stable and deliver to our LPs results consistent with what we've delivered them in the past across all the funds.
Okay. If I could just ask a little follow-up there just on that point. In terms of exit multiples or exit cap rates, are you baking in any sort of expansion of cap rates or multiples on the back end upon exit? How are you thinking about that as you're underwriting today?
Well, with respect to cap rates in real estate, we've always baked in and continue to higher cap rates. In this world, with respect to multiples, we're baking in lower multiples on the private equity side. As we have been.
Got it. No change there. Okay. Super. Thank you.
Thanks.
Your next question comes from Alex Blostein from Goldman Sachs. Please proceed.
Hey, everybody. Good morning. Question around back to the tax situation. Lots of questions around interest expense deductibility. Wondering if you guys could either, as you think about the change here, how would you, I guess, peg the probability of this making its way into the final sort of proposal and, I guess, broader. I understand there's a lot of moving pieces, but how do you guys think about that impacting the IRRs and the private equity and real estate businesses for you, if that were to happen?
Yeah, I think, and Tony did a really good job with this on our earlier media call, that these proposals really can't be unbundled. Because the way they're being looked at in the Congress is an integrated approach, whether it's the border-adjustable tax and the lack of ability to deduct interest, but you get 100% write-off immediately on capital assets, and you also get a much lower tax rate. If you bake all these things together, net, it's neutral to positive for the way we look at what we've heard would be considered. On the other hand, this is such a monumental
Set of changes from a tax perspective and the way we look at the system. This would be the biggest tax reform in certainly 75 years, maybe 100. It all fits together, and it's meant to fit together, not to just take one piece out and say, "Well, this is unfavorable." You have to look at it all, which is the way the people are putting the law together, are looking at it. On the other hand, you have to get a law passed. This is not the easiest lift with all these new concepts. My guess is that you'll get it out of the House, because it's got enormous momentum in the House. You have to go through the Senate, which is not nearly as up to date on what's going to be coming at them.
You have to go to conference and make it work. It's a lot on the table, a lot that has to happen. If the package, as people describe it, even though it hasn't been introduced, it's basically backstage whispering, gets through, this stuff all really balances out for a firm like ours and may be a net positive depending upon where the corporate tax rate finishes.
Yeah.
Yeah.
I might just add a couple of color things for you to think about. With a typical private equity deal, often we get an asset step up, which gives us a higher tax basis, which we depreciate, which allows us actually to have tax shelter anyway, away from the interest for a while. Number one. Number two, debt is still cheaper than equity. We're looking at equity returns pre-tax sort of 20%-ish gross. That's a lot cheaper than that. There'll still be ability to use your debt to capture that arbitrage. Number three, if some of the things going on are enacted into law, you could argue that other things being equal, interest rates should come down. They should come down because corporations will issue less debt. Yet there'll still be the demand on the part of investors for yield securities.
You could also argue that corporate debt will now be taxable at a much lower rate, it'll be more appealing as an investment class. There's a lot of things playing through here that are hard to predict. As Steve said, the way we look at the package of things that are being put on the table collectively is it's probably net beneficial for our portfolio to some degree.
Got it. Thanks for that answer. A quick follow-up from Michael around core plus real estate. I think you mentioned that some of that money becomes eligible for carry in Q4 of 2017. Can you, I guess, just remind us based on the, I think you said $14 billion in total AUM in that product now, how the stack works over the next couple of years, how much becomes eligible for carry? I think the carry feels almost recurring because I think it's based on the absolute yield level in the portfolio.
Yeah, Alex, the basic thing to keep in mind is that carry feature begins on the third anniversary of when the capital was taken in from the investor. In the fourth quarter of this year, that's when that first group of investors from what will then have been three years ago, is sort of eligible for that. What will follow is sort of a rolling thing where as the money has been raised over the last few years, it will become eligible for that feature and it'll smooth out over time. As we've talked about in the past, that's a very powerful feature of that fund for us.
Yeah. I just want to note, it is very much recurring. A, we don't have to sell the asset. It's done on a mark basis. It's not as lumpy as the other kinds of DE you think about. It's just based on the mark. B, since it's investor by investor, and since we're taking investors in each quarter, you'll be getting this every quarter. As the business matures and as it accumulates, it'll become smoother and smoother and smoother. We view this as very much recurring income, and it'll be reflected in our recurring income.
Yep. Makes sense. Thanks very much.
Your next question comes from William Katz from Citigroup. Please proceed.
Thanks. Taking the question. This is Jack Keeler pulling in for Bill. Just a quick question on hedge fund solutions. Obviously, you've seen strong growth and better returns than peers in the space. Many, whether it's funds of funds or hedge funds themselves, have seen fee pressure as well as outflows. Can you kind of comment on why you think that you're more resilient than they have been and how that might project going forward, both for you and the industry at large?
Yeah. Okay, Jack. Well, first of all, we're using our scale to actually lower the fees that we pay to the underlying managers as much as we possibly can. I think we've been actually one of the leaders in that. Our goal, ideally, what I'd love to do is have our volume discount because we're so much larger than anyone else in terms of allocating to hedge funds, sufficient to offset all of our fees. Maybe we'll get there. We're getting pretty close, actually. I think that this is an asset class which there's been a lot of press about. Michael talked about, you've really got to break it down into different strategies. We're seeing no diminution whatsoever in investor appetite. As Michael said, we're still raising the same amount of money we have in the last few years.
It's an asset class that will underperform in bull markets because it's hedged. What investors get is they get less volatility. Less volatility means, of course, protection on the downside, but it also means you don't fully participate on the upside. You'd expect this product to lag in the kind of bull market certainly we've had in the last few months. A lot of investors look at the markets today and say they're pretty fully valued. How do they play equities through the cycle with less risk? How do they protect against the downside that may be embedded with sort of the market prices where they are? This looks pretty good to them.
If I could just add, in terms of BAAM-specific positioning. If you're looking to have a hedge fund piece in your portfolio, their performance relative to peers is really quite strong. As investors have looked to reduce the number of managers, not just in hedge funds, but frankly, in a lot of asset classes, we continue to be a beneficiary of that. So they've continued to gain quite a lot of market share.
Great. Thanks for taking my question.
Thanks, Jack.
Your next question comes from Mike Carrier from Bank of America. Please proceed.
All right. Thanks a lot. Michael Chae, maybe first question just on the DE outlook. You guys have said in the past that over time, you kind of expect a range of maybe $1-$3 either dollars on the distribution side or the DE side. It seems like you gave some guidance on 1Q in terms of things that have closed. FRE looks like it's set to continue to have some momentum, even ex the FX benefit this quarter. When you think about the net accrued or the seasoned capital, the outlook there, particularly if the capital markets are favorable, just wanted to get a sense of where are we maybe in this range of that $1-$3 if the trends continue in your favor.
Thanks, Mike Carrier. A lot in that question. Can't quite talk you through our whole model as part of this answer. Look, I think first of all, the $1-$3 range that you mentioned, we should put a fine point on that. The low end of that range is basically anchored on sort of what's the FRE, right? Which is under contract typically for a long time. It's not really, I would say, a real-world low end of what we think our DE will be in the absence of some period of time which is really unusual. Let me just anchor on that. That $1 is meant to be a really positive thing about one component of our DE that really is a great foundation for everything else that comes from it, from realizations.
I think in terms of how to think about the trajectory and outlook, I talked about how if you look at the last few years of DE, what was obviously notable about 2016 was while we had pretty good growth realizations, actually even closer in line with 2015, the conversion in particular in the corporate private equity area because of the BCP V issue I mentioned was lower. I talked about why we think just mathematically in terms of the structure of funds, this is a year where we'll come out of that, and that's a good thing. In terms of that realization pipeline, we feel good about it, but we'll see what the year brings. There's good momentum. There's a lot of things you can look at about focusing on our sort of invested capital base and how it's seasoning.
Our invested capital base on our drawdown funds has basically tripled in the last six years. That's obviously the seeds for and the crops for future harvests. Another thing to think about is we're sort of even though some of these older funds like BCP V and BREP VI have been the gift that keeps on giving and there's still more to go. There are, for example, the 2011 vintage funds, BCP VI, BREP VII, BEP I which are really, I think coming into their own as well. I think there's something like $33 billion of unrealized value in those funds. I think the average ownership period for that capital is like three years in terms of the unrealized amount. You know how our business works.
three-year-old investments on average are just coming into their own in terms of potential monetization events, IPOs, which will set up subsequent years of harvest, et cetera. All those things come together, and we feel very good about the outlook.
Yeah. It's helpful. Just as a follow-up, you guys mentioned a lot on the policy changes, whether it's taxes, improving economic growth and what that means for the portfolio companies. Just in terms of maybe fundraising opportunities with potential changes. Anything stick out? I think, Tony, you spend a ton of time in the retirement space. What potentially could change or what the opportunity could be for you guys or for others in the industry.
Well, I think Steve hit on it in his comments. The really big, vast untapped territory is the $27 trillion that's in 401s that we as an industry don't sell anything into. I would say that severely penalizes 401 savers because they earn typically two to 3% on their money. There isn't a pension fund in America that hasn't earned more than six, and their targets today are about seven on average going forward. You can see the cost, if you will, of forcing investors into short-term, daily mark-to-market, daily liquidity, liquid stuff. If we could open up those pools of capital to our kind of investing, I can assure you that retiring Americans will be vastly better off both short-term and long-term.
Okay. Thanks a lot.
Your next question comes from Brian Bedell from Deutsche Bank. Please proceed.
Great. Thanks very much. Just to piggyback on that last question. It makes a ton of sense to be able to have longer dated liquid products in 401(k)s, if restrictions were such that you wouldn't sell them. How do you think you would go about influencing that policy? Do you think it's a chance that you can do that with the new administration?
This has been a bit of a crusade for me over the last 18 months. We have a plan that all the details of which may not survive, but one of the core premises of that is that people's retirement savings have to work harder for them. The beauty of that is, you're enhancing people's retirement security without taxing anyone higher, without creating new government welfare programs. That capital, which is now available to be invested in the economy and things, longer lived assets like infrastructure, will be good for economic growth as well. We've obviously spent a lot of, or I've spent a lot of time with both Republicans and Democrats on this, and I've got an awful lot of favorable reactions from both sides of the aisle. I'm hopeful that we can make some progress on this with the new administration.
One of the things that Speaker Ryan has highlighted in his A Better Way, is that we need to come up with something, a plan, to help Americans' retirement security. As you might know, Speaker Ryan's A Better Way is a very detailed policy prescription. On this issue, he's highlighted the need without the policy. We're hopeful that we can get in front of him and give him some thoughts that will help address the issue. Certainly investing better is the easiest, cheapest, most painless way to get that done.
Mm-hmm. Okay, good. That makes sense. Maybe just while we're on the topic of new administration, maybe Steve and/or Tony, your view on, you've been very patient in the energy arena with some of the changes that are beginning to happen with the new administration. How does this impact your view on energy deployment? I guess while we're at it, deployment outside the U.S., and maybe in the context of global trade.
Well, okay. It's obviously a more favorable environment in the U.S. for energy exploration and transportation. That should pull costs down in the United States, and barriers down, and encourage development. I think the way we think of this playing out is you'll have more production. Although more production probably puts a lid on prices in the United States. You probably saw it yesterday, a spokesman from BP came out and said that we're never going to see $100 oil again because there's a lot more oil out in the world than we thought, and more of it's being produced both from technology advances, regulatory reform, like in the United States. Also big countries in the Middle East being able to produce and get onto global markets again. Their view is that over time, demand tapers down.
Over a long time, demand tapers down due to renewables and whatnot, and changes in transportation technology. They think that demand will mean that we don't have the kind of $100 oil that we had before. I'm not so sure about that myself. I know they've been saying that before. They're kind of a little bit out there on that, and most industry observers wouldn't necessarily agree with them. One thing that we do know is there's a lot of oil in unstable parts of the world, and any geopolitical risk can cause a spike at any time.
I think the effects on energy of the new administration are net good for the U.S. energy industry.
Mm-hmm. Then on the deployment opportunities outside the U.S. with the viewpoint of the new administration?
Well, we've been deploying capital outside the United States around the world. I don't think we're looking at a terribly different picture there, frankly.
Well, it depends what happens with all these changes. If the dollar gets a lot stronger, and trade changes a bit, could put pressure on individual companies outside the United States and also on individual countries, particularly have dollar borrowings. There may be interesting valuation changes which can provide opportunities for our firm to buy businesses at different prices, which may end up going through an adjustment period where, if you're in at the right time, that could be very interesting. You have to look at U.S. and then also non-U.S. as a function of some of these really big macro trends.
Mm-hmm. You would just be a little more patient, say, in the near to intermediate term, to see how this shakes out?
Yeah, I don't have an answer for that today.
Okay. No worries. No, thanks so much for all the color.
Brian.
Your next question comes from the line of Gerald O'Hara. Please proceed.
Great. Thanks. Just a quick one on BCP V as it sort of transitions into carry or above the preferred threshold. How should we think about the potential for catch-up management fees or performance fees, I suppose, going forward and the runway around that? I guess, for Michael.
Yeah. This being back into cash carry, think about it as just stepping back into the shoes of the catch-up position we've been in for a while now. I think last quarter, that stat we use being 64% through the catch-up this quarter or something like 69%. We talked about half of the LPs being in full carry, about half not. That basic situation stays the same. There's not a structural change there.
Okay. Thank you. Could you just remind us the size of Europe V that's coming online, I guess April 1st? Just trying to get a sense about kind of sizing base management fees now that BCP VII is off holiday and Europe V, I guess, will be also coming off in 2017.
Yeah. Jerry, we've raised about $7 billion for the fifth Europe fund, about five and a half or six of that'll be under fee holiday until April.
Okay, great. Thanks for taking my questions.
Your next question comes from Chris Shutler from William Blair. Please proceed.
Hey, guys. Good afternoon. Just one quick one on the topic of new initiatives. You already talked about infrastructure, which I know you're not putting a timeline on, but what other business segments should we expect to see some innovation from in the near term? Is it fair to think that the things that you're considering are more FRE centric? Thanks.
Oh, boy. I'd have to inventory that, but I would say, let's define it by A, investment category, B, target market, C, structure. In target market, you'll see more from retail investors and some of the new segments that Joan talked about. Many of those will have more permanent capital structures. Some of them are always open, but some of them will also be things where we actually don't really redeem. There are other ways investors can get exit. A BDC, for example, is a good example of that, where people put in and then ultimately it's floated as a public entity, and that keeps its AUM indefinitely. With respect to new categories, one of the other areas we're looking at is more growth-oriented investing, earlier stage stuff. I think we have some interesting ideas on that. We're not ready to come public with those yet.
That's an area that we've been also studying for a couple of years now and playing around. Then just even businesses like our strategic products investment, which started off with one private equity secondaries business, now has real estate secondaries, has infrastructure secondaries. It's got a primaries business. It'll be looking at emerging managers and some other things. In every one of our business you'll see that kind of innovation and new categories growing. Although from your sort of financial model of the firm standpoint, it'll be a while before they get big enough where you're talking about $7 billion-$10 billion to where you need to start changing your models.
Okay. Thanks, Tony.
I would now like to turn it over to Weston Tucker for closing remarks.
Okay, great. Thanks everyone for your time today, and I look forward to following up after the call.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.