Good day, ladies and gentlemen, and welcome to the Blackstone third quarter 2016 investor call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star zero and an operator would 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, Mr. Weston Tucker, Head of Investor Relations. Please proceed.
Great. Thanks, Jasmine. Good morning and welcome to Blackstone's third 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, and we expect to file our 10-Q report 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 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 any interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. A quick recap of our results. We reported GAAP net income of $692 million for the quarter and $1.5 billion year to date, and the year to date period was up 20% from the prior year. Economic net income, or ENI, rose sharply to $687 million in the third quarter, or $0.57 per common unit. Distributable earnings were $593 million in the quarter, or $0.48 per common unit, and that equates to a distribution of $0.41.
That will be paid to holders of record as of November 7th. With that, I'll now turn the call over to Steve.
Thanks, Weston. Thank you all for joining our call. Blackstone delivered a compelling set of results in the third quarter, with strong economic net income and substantial distributable earnings, as Weston mentioned. Another quarter of great fundraising success, particularly when compared to outflows for many traditional money managers. The past 12 months alone, our limited partners, we call them LPs, have entrusted us with nearly $70 billion in new capital, which despite $38 billion in realizations, brings us to another record for assets under management of $361 billion. We continue to see strong positive growth in every one of our businesses. Blackstone continues to be the solutions provider our limited investors need, perhaps now more than ever, in a world of sluggish growth, record low interest rates, high public market valuations, the resulting very low returns from most asset classes.
These challenges seem likely to persist for some time, which is causing real problems for LPs. Just to cite a few examples for you. The average endowment in the U.S. for the 12 months ending June 30th lost between 1% and 3% on their portfolio. The best performing major endowment in the U.S. that I'm aware of earned only about 3%. Most lost money. The average public pension fund, which I think is sort of shocking results, basically earned approximately zero for the last year. In this context, what are they to do? How can a pension fund, which has got an actuarial target of 7%-8% per year, invested in a mix of mostly public stocks, fixed income, and treasuries, which are returning very little, ensure that it can honor its future obligations?
Blackstone has successfully delivered investment solutions to these LPs over a period of decades and across all market cycles. We've done this by innovating new products in response to changing market dynamics, leveraging our market leading global platforms where information flows around the firm to better source investments, utilizing our asset management expertise to improve the operations of our investments and drive value creation, keeping a long-term perspective with a business model that can ride out and take advantage of periods of volatility due to the locked-in nature of our funds. The result of all this has been really strong performance. Over the past five, 10, and 15-year periods, investment in our flagship drawdown funds would have generated a 15% net IRR to our investors. That's after all fees.
On a realized only basis, which is how some people report, which largely excludes the impact of tens of billions of dollars of recent investments that are still seasoning. That IRR becomes approximately 20% net of all fees here at Blackstone. While we obviously can't guarantee future returns, our historic record is quite compelling, certainly given the mediocre results that almost all organizations are reporting. In the third quarter specifically, our corporate private equity and real estate funds were up 3%-4%, bringing them to 7%-9% year to date, broadly outperforming global markets with less volatility. In credit, our various strategies were up 6% gross for the quarter, 11%-17% year to date. In our hedge fund area, the BAAM's composite was up around 3% gross in the quarter, with continued low volatility of only about one-third that of the S&P.
Our consistent performance at high levels is why our investors keep coming back to us with greater and greater commitments across more of our funds. We've raised $14.7 billion just in the third quarter. Here's a pretty stunning fact. In the past 10 quarters, we've raised nearly $200 billion, more than the aggregate size of any of our domestic alternative peers. Given the secular forces driving capital into the alternatives, which continue to nicely grow, combined with Blackstone's powerful and unique competitive position, I remain quite optimistic on our ability to keep growing. With one of the largest, if not the largest platforms in each vertical area, private equity, real estate, hedge funds, and credit, we're able to accept and responsibly deploy billions of dollars from individual LPs, which is a critical capability that few, if any, other firms can offer.
Against a challenging investment backdrop which has persisted for several years now, our return targets on new investments remain at least equal to the returns we've delivered in the past. In fact, we've already achieved net returns well into the double digits for our most recent vintage funds, including 20% net IRRs for our two most recent global real estate funds, 17% for our 2013 Asia Real Estate Fund, 14% for our 2011 Energy Fund, and 11% for BCP VI. We stick to a religious and rigorous discipline around investing, we stay away from challenged areas like paying full multiples for public companies, unless we have a very specific path towards achieving value creation.
That discipline can constrain certain businesses at certain points in the cycle, we have no shot clock in basketball, so to speak, and we don't have to be fully invested until we see things we like. You're not just buying a market if you invest with Blackstone like you do with public securities. Our locked-up funds structures allow us to do nothing at all, while at the same time our flexible global mandates let us shift to where the opportunities are most attractive. Our entrepreneurial mindset lets us create new products to take advantage of new opportunity sets, which translates into greater capital deployment. For example, our three largest new initiatives, Real Estate Core Plus, Tactical Opportunities, and our strategic partners secondary business, together invested $10 billion in the past 12 months, or 30% of Blackstone's total investments.
Because we're a long-term business which is increasingly diverse across products, regions, and fund structures, even today in the current environment, we're able to deploy significant dollars into new investments. In private equity, we've been very carefully navigating a high-priced environment, largely avoiding auctions where the pricing gets bid up. We focus on unleveraged free cash flow yields, where our basis is de-risked over time. We look into buying companies with scope for operational improvements, structured with very limited downside. We've been active recently in energy, as Tony mentioned in the press call, announcing or closing 10 deals for $2.7 billion in equity investments so far this year. We have the benefit of being able to take a long view here as well, looking for assets with lots of reserves in the ground and a low breakeven, but are in the development stage and may be cash flow constrained.
We typically partner with private companies which don't have the same access to capital as public companies. We're looking to build businesses, bringing individual acreage parcels, for example, together that can be taken public or that can be attractive to a strategic buyer. Real estate remains an attractive asset class globally. Although there is less distress today, we expect fundamentals to remain solid for the foreseeable future. In most markets, supply remains constrained. Demand for high-quality real estate is strong. Debt levels are not excessive, and bank competition is diminished. We've been expecting interest rates to increase for some time and have baked that into our underwriting assumptions for new deals. Historically, when rates have increased, it's generally been reflective of greater economic activity, which in that scenario is good for our business. Against this backdrop, we continue to invest large-scale capital at discounts to physical replacement cost.
We have meaningful advantages, including our global reach, scale, and knowledge, our ability to move quickly and decisively, and our best-in-class asset management capabilities. In addition to remaining active in our opportunistic and debt areas, we're seeing great deal flow in our Core Plus area, which is a bigger and deeper asset class than the opportunistic area. In credit, we've taken advantage of the market drops this year, particularly in energy and Europe, where we have concentrated our deployment. We focused on debt higher up in the capital structure with sufficient downside protection and attractive yields. Overall, we're finding interesting ways to deploy capital across all of our platforms and only need to do a few deals in each of our areas, focusing on those opportunities where we can create value.
While we've remained quite active on the investment side, at the same time, we've taken advantage of market conditions to sell assets and return capital to our LPs. We've had $13.6 billion of realizations just in the third quarter, bringing us to over $29 billion year to date, our pipeline for sales is strong. There is enormous liquidity around the globe now looking for a home. In addition to the many realizations we've already signed up, which will close over the next several months, I'm optimistic we'll see many more, and that would be positive for our distributable earnings. Michael will discuss our distributable earnings outlook in more detail, but one realization I'd like to highlight is our agreement to sell the majority of our remaining stake in Hilton.
The sale price reflects three times our original basis, combined with past sales and remaining unrealized value, we've generated a total profit of more than $12 billion, which I think is either the largest or second largest private equity profit in history, not just for Blackstone, but for the industry. To remind everybody, this was a pre-crisis investment, a so-called peak of the market 2007 leverage buyout. Our thesis was to take a great group of brands and turn them into a tremendous global business with an outstanding management team focused on accelerating growth. Since our acquisition in 2007, we successfully grew Hilton's global system by 60% and doubled the cash flow of the company.
Because of our locked-up capital, even the depths of the financial crisis, we were able to stick to our plan without the pressures of quarterly earnings targets or investors redeeming at the worst possible time. This is how investing works at Blackstone, and this is how we can help our LPs solve the issues they're facing today. With time on our side, we can create significant outperformance operationally versus what can be done in the public markets. Despite these capabilities, as Tony mentioned, our stock today is still yielding nearly 8% based on the last 12 months' distributable earnings or 6.5% based on our distributions. How many large-cap investment grade-rated companies have this high a yield? The answer, as you know, is very, very few. If you listed the top 500 largest companies in the world, Blackstone would be in the top 10 in terms of yield.
Who needs yield when you can invest at 1% in government bonds? Meanwhile, the S&P is yielding just around 2% today. On this basis alone, Blackstone stock seems like a pretty good investment to me, and I obviously own a lot of it, and I'm a happy Blackstone shareholder. Our limited partners, including many of the most sophisticated investors in the world, have selected Blackstone as their partner of choice, with the vast majority of them re-upping into successor funds over time. I look forward to the day when the public markets catch up with our limited partners with respect to Blackstone stock and afford us a premium value the same way our LPs put a premium value on our funds. In the meantime, we'll continue to focus on what we do best, creating great investment solutions, which should ultimately translate to growing distributions for our unit holders.
Thanks for joining the call, and now I'll turn things over to our Chief Financial Officer, Michael Chae.
Thanks, Steve, and good morning, everyone. Blackstone's third quarter results illustrated continued strong momentum in every one of our business lines, with each one reporting both year-over-year and sequential growth in revenue and economic income. Investment performance remained strong across the board, and we continue to attract significant new capital, driving sustained growth in AUM, again, in every business. ENI rose sharply to $687 million, our best performance in the past six quarters, driven by accelerating performance fees and investment income across the businesses. Indeed, in the third quarter, each of our businesses posted their highest level of performance fee revenue in at least five quarters. Total AUM rose 8% year-over-year to a record $361 billion, driven by nearly $70 billion of inflows over the past 12 months. The diversity and scale of those inflows was impressive, between $10 billion and $21 billion in each of our business segments.
Total fee-earning AUM again rose by double digits, up 11%, to a record $268 billion. Fee-related earnings rose sequentially to $229 million in the quarter, despite the first full quarter impact of the BCP VI step down triggered in May and in advance of BCP VII commencing full fees in early November. Year-to-date, FRE was $675 million, up 8%, despite the spin of our advisory businesses on October 1st of last year. Adjusting for the spin, year-to-date fee-related earnings were up 21% year-over-year, reflecting approximately 230 basis points of underlying FRE margin expansion. I'd like to review briefly the highlights of the results for each of our businesses, starting with real estate.
Performance remained strong across all real estate strategies in the quarter, with the opportunistic funds up 3.7% and Core Plus up 2.9%, with continued healthy operating fundamentals evident in substantially all of our global portfolio, as Steve discussed. We continue to be able to find new investment opportunities at scale, even in this environment, with $1.7 billion deployed and another $3.4 billion committed to new deals. There is significant demand globally for income-producing assets, which is sustaining a robust realization pace for our real estate business. Third quarter realizations from real estate reached $7.3 billion, the second highest quarter ever for that segment, generating $466 million in realized performance fees, which was our third highest quarter ever.
This brings real estate realizations to $14 billion year-to-date and keeps us on track to approach $20 billion again in 2016, which would be the third year in a row at that level. That is an extraordinary data point. We are not planning on slowing down with clear visibility on a number of large monetizations over the next 12 to 18 months. I think it's noteworthy that despite $56 billion of realizations in real estate over the past 11 quarters, segment AUM is up nearly 30% over that same period. It's a testament to the dominant platform we've built in this space and our ability to leverage it to build scale new businesses when we see complementary opportunities, such as in the debt and Core Plus areas, all resulting in a replenishing and indeed growing store of value for future harvesting over the long term.
In credit, GSO had another great quarter, with gross returns for the various strategies of over 6% for the quarter, and on a year-to-date basis, 17% for our performing credit strategies cluster and 11% for our distressed strategies cluster. Performance was driven by continued appreciation of energy investments as well as in distressed debt positions across funds. Global demand for our credit product remains very healthy. GSO reported $5.7 billion of inflows in the quarter, the highest of any of our businesses, and $15 billion year-to-date. In the five months since its first closing, GSO has raised $6.5 billion for its next flagship mezzanine fund, with expectations to hit its cap imminently.
We added over $600 million in separate accounts with large LPs in the quarter. We raised over $500 million for a new European CLO, bringing us to $2.3 billion of global CLO issuance through September and $3.4 billion, including two more new issuances this month, making us the largest global CLO issuer for the fourth year in a row. While the deployment environment is currently challenging, GSOs remain quite active, investing $2 billion year to date, with another $1.3 billion committed to deals that should close in the next few months and a strong backlog of deal flow that could result in a robust fourth quarter of new commitments. We earn management fees on GSO's drawdown capital as it is invested. We'll benefit as these pending deals close.
In the face of benign general credit market conditions, we are still able to find good opportunities by leveraging our global origination platform and brands by using our size to be a unique scale solution provider to companies and by going where the need and value may be at a given time. For example, in the energy space and in the European direct lending areas. Against the backdrop of the significant structural changes and retrenchment in the global banking system, we expect that we can deploy GSO's dry powder balance of $20 billion attractively in the coming years, driving meaningful upside to our segment earnings over time. In hedge fund solutions, BAAM's composite gross return was up nearly 3% in the quarter, putting 67% of their eligible AUM above the high water mark and resulting in the resumption of positive performance fees.
That 67% figure compares to 10% as of the end of the second quarter. Significant progress was obviously made. Demand across the BAAM platform remains quite strong, with no abatement in our inflows, which were $3.3 billion in the quarter, including October 1st subscriptions and $8.5 billion year to date. Our fee-earning inflows for the first nine months of 2016 were stable with the same period in 2015. We've won a number of large mandates in our core business, plus are seeing continued consistent gross inflows of over $1 billion per quarter in our individual investor solutions area, which has now reached $7.2 billion in AUM, up 28% year-over-year. Overall, year-to-date net inflows, including October 1st, were a positive $1.7 billion. That compares favorably to moderate net outflows overall for the industry.
Our enduring competitive position in the hedge fund area stems from our leading scale and distinctive value proposition for clients, where nearly 70% of our assets are in strategies customized for BAAM and/or have a fee discount with the underlying managers. Turning to private equity, our corporate private equity funds appreciated 3% in the quarter with strong 5% appreciation in our private portfolio, partly offset by a flat quarter for our publics. Like real estate, our private equity business had a strong quarter for realizations, reaching $4.5 billion, primarily through sales of public positions. I'd like to spend a moment on our energy activities in private equity as it is quite instructive about our model of buying and selling assets and how we operate.
After not investing in any new upstream energy assets in 2015, this quarter, as Steve alluded to, we closed on three upstream deals representing $1.3 billion of aggregate equity capital. Together with a fourth deal closed in the second quarter, we deployed or committed just under $2 billion of capital into four high-quality upstream oil deals where we set the price earlier in the year, near the bottom of the market. Indeed, since then, there have been multiple handfuls of deals by others in substantially similar acreages, valuing like assets at approximately two to three times what we paid on a per acre basis. At the same time, over the past year, we have aggressively pursued sales of many of our contracted power assets in an environment where investors globally have been valuing very highly assets with cash flow certainty and current yield.
This year, we have agreed to sell five different power assets located across four different continents, North America, Europe, Asia, and Africa, for aggregate equity proceeds of $2.4 billion and $1.4 billion of gain. One closed this quarter, and the other four sales we expect to close in the next couple of quarters. The broader point here is that private equity environments are not monochromatic. We look for areas of dislocation and patiently position ourselves to strike when the time is right, even within a single industry, in this case, energy, we can be active buyers of one sub-sector and active sellers of another contemporaneously. As I discussed last quarter and which you can see in our results today, BCP V sales are not currently converting to distributable earnings.
This is due to the sequencing of certain sizable realizations this year at lower multiples of invested capital that, given the long hold periods, did not exceed the accumulated preferred return. The fund remains substantially in carry on a total fund basis and we're accruing carry with additional gains. To be quite specific, prior to this year, the cumulative multiple invested capital or MOIC on BCP V realizations was 2x. The MOIC on realizations this year has been 1.15x. The carrying MOIC on the remaining portfolio is 1.7x, and three-quarters of this is in liquid public positions. If we sold everything today, we'd crystallize and pay out BCP V's entire net accrued performance fee receivable of $306 million. As we said last quarter, this is a timing issue, which we expect to be resolved in the next couple of quarters.
Moving to the outlook for distributable earnings. The outlook, particularly as we begin to look forward to 2017, is quite positive. First, as I've mentioned before, we expect FRE to grow at a strong double-digit percentage next year with one key driver of that growth starting in a couple of weeks as the fee holiday on BCP VII ends. In total, we have over $65 billion of management fee eligible AUM that will start earning fees once certain investment periods begin or when capital is invested, which should drive meaningful FRE growth over time. Second, we expect to remain very active from a realization perspective. Besides closing $13.5 billion of sales in the third quarter, we have approximately $8 billion of pending realizations under contract or letter of intent, which will close in the fourth quarter or early 2017.
Those realizations are successful deals with good returns averaging around 2.7 times the original basis. About half of the $8 billion is in real estate, comprised of Hilton and a diverse set of other assets in the U.S., Europe, and Australia. The other half is in private equity, comprised of energy assets in Asia and Mexico, the previously announced transaction involving Change Healthcare and Hilton. We also have multiple other investments we expect to exit or start the exit process in 2017. We ended the quarter with $17 billion in public across the firm, which we're actively selling down and which traded at values of 2.6 times multiple invested capital in aggregate as of the end of the third quarter. In this context, let me take a minute to provide a little more detail on the Hilton sale because of its magnitude and the impact to DE.
We expect the sale to close in the early part of 2017 and generate gross proceeds of $6.5 billion or $4.6 billion after the pro-rata paydown of existing margin debt. In addition to the net performance fees generated, we'll benefit from the firm's direct investment, resulting in a total DE per unit impact of approximately $0.27 per unit in early 2017. The sale will also drive BCP V towards resuming cash carry possibly in the first quarter of 2017 by closing out over three-quarters of the current preferred return shortfall. Finally, the combination of the Hilton stake sale and the Change Healthcare and power asset sale transactions also scheduled to close early next year, together are expected to drive over $500 million or over $0.40 per unit in distributable earnings in the early part of 2017.
Taken together, our 2017 FRE trajectory and our anticipated 2017 realization pipeline and performance fee momentum, we feel very optimistic about the outlook for a strong 2017 from a DE standpoint. A final note on our balance sheet. Late last month, we opportunistically tapped the Euro bond market with a €600 million issuance of 10-year notes at a 1% coupon, priced within a couple of basis points of the benchmark rate's all-time low. This was our second offering in Europe, and the capital will serve to help hedge our significant operations there, as well as provide us with additional strategic firepower. Investor response was tremendously positive, reflecting not only today's strong demand for yield, but also the strength and health of our franchise and the power of our business model. Our A+ rating was reaffirmed by both agencies, a testament to our rock-solid balance sheet and prospects.
We ended the quarter with a $3.9 billion cash and treasury position or $1.1 billion in excess of $2.8 billion of total debt with a weighted average maturity of about 14 years. In closing, Blackstone continues to benefit from the expansive diversity of our business lines and the durability of our model. We continue to raise a lot as expected. We're selling a lot. Although the environment has been more challenging for deployments, we're deploying a substantial amount as well, building the basis for future realizations. In a world where pensions and endowments have been struggling to earn adequate returns, we believe Blackstone is one of the few firms that can solve their issues in scale and that will continue to be recognized as the partner of choice. With that, we thank you for joining the call and would like to open it up now for questions.
We have a fairly sizable queue here. If everyone could please on the first round and limit your question to one question, one follow-up, and then come back into the queue if you have additional follow-ups, that'd be great.
Ladies and gentlemen, if you wish to ask a question, please press star one on your phone. Again, for audio questions at this time, please press star one to begin.
Our first question comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Thanks very much. I'm curious, I heard your comments on the real estate backdrop pipeline, Core Real Estate Plus, got it all. I'm curious on Blackstone's decision to go the non-traded REIT space in terms of the Blackstone Real Estate Income Trust, and mostly just a question on fee structure of the wrapper that you're going in. I know that goes to the distributor, but it seems a little different than everything else you've done in the past.
Yeah, I think we're basically prohibited at this point in the SEC cycle to be talking about that product. I'd like to respond to you, but we can't, so we won't.
Okay. I appreciate that.
Sorry, Glenn. We'll give you another question for that.
No problem. The flip side, there's been tons of questions on the traditional asset managers and how they're adapting to DOL world, and it's usually related to some version of, you get less assets and you charge less fees, and that's in the traditional side. For you guys, do you think about it as, we've talked in the past, pensions have a large allocation, pensions, endowments, others, have large allocations to alts, wealth management clients don't. Can the DOL world, especially with asset allocation models in place, can that actually accelerate the pickup of your products in the wealth channel? Are you actively pursuing that? Obviously, the institutional world is a bigger driver of your flows, but just curious how you think about it.
I think it's a great question, the approach is really to take institutional quality product and make it accessible to where it wasn't previously. A lot of this is pull from the different institutions who, one, want to increase the individual allocations, which are creeping up but still low single digits, and they want it from high-quality asset managers. When you think about our portfolio going from the most liquid to illiquid in alternatives across the asset classes, we're able to work with them and just design bespoke product for those channels. We think it's a huge opportunity, actually, very early stage.
A lot of our products are being designed and structured in such a way they'll fully qualify for any Department of Labor standards that we could want or anyone could want, number one. Number two, we're finding that, you take the commission-based salesman out of that, there's actually more appetite in some ways for our products because commission-based salesmen can sometimes like liquidity because they can buy and sell things and there's activity for its own sake. What we're finding that some of the investment advisors that are not commission-based have been very good retail clients for us.
Joan, do you have to do anything different or just more of it in terms of penetrating that channel? And are you? In other words, are you accelerating your efforts there, given that opportunity?
We are accelerating the efforts, you do have to do more than just show up. It's a real education process for the advisors and for their clients who, again, traditionally have not been in this asset class. It's very much person by person, I think our scale in that sense hugely benefits us. What we've put in place just over the last six years, I believe, is really unmatched in the alternative industry, we're continuing to move forward.
I've talked about this before, Glenn. This is not simply just throwing your product out there in these systems and letting it sell itself. If you're going to do this right, you take on a real obligation to these investors to provide them world-class service. You have to build a real service organization that deals with different kinds of investors in different ways and different products. You also have to educate the intermediaries, the investment advisors, the brokers, and so on. They're not going to sell products they're not comfortable with at a fundamental level. There's a big educational component of this. You have to design products that fit with the different regulatory needs and market appetites all around the world, not just the U.S. There's a major product structuring aspect of this.
If you're going to really do this right, you're building a whole organization and infrastructure. It's not at all casual and have a booth and let someone come and try to sell them a few shares or a few bits of private equity. I think this is one area where our scale and the diversity of our products is a huge advantage because we can afford to make that investment so that we are a really high-quality counterpart for any kind of distribution organization out there to retail investors. Essentially, no other alternative firm has the scale and breadth of products and quality of products to be able to do that.
All right. Thanks, Joan.
As Steve points out, and the brand name.
Agreed. Thank you.
Thanks, Glenn.
Our next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hey, good morning. Thanks. There's been a lot of press and announcements about hedge fund redempt-
fee cuts. I wanted to ask around that from two perspectives. One, do you feel like there's an opportunity there for BAAM to have even more pricing power? Two, have you started to rethink your direct investments in hedge funds as a result of those trends?
I guess I'll take that one. There's a lot of activity in hedge funds, but it's not so much like the whole industry's under duress despite what you might read. There are some big winners. There are some sectors losing, but there are some big winners, too. What you're really seeing is, you're seeing assets flowing from the sectors that have struggled to distinguish themselves on returns to the sectors that are actually doing quite well. I think your pricing power is a function of where you are in that equation. The other thing is, there's certain segments. One of the things that's happened with regulation is they've impacted liquidity, and Steve's talked about this over the years. They've impacted liquidity of credit markets. So certain kinds of asset classes, like for example, credit funds, don't have liquidity that they used to have.
That has implications for fund structures. So you'll see some people maybe taking slightly lower fees by having more locked-up capital. We think the net net for our businesses, that's a good trade. As far as BAAM goes, I don't know that BAAM's getting more pricing power necessarily, but I think the fact that the area there's a lot of change going on is good for BAAM, and it's one of the reasons that they're seeing a lot of net inflows in an industry where there's probably net outflows. Again, people want someone that really knows what they're doing, where are the winners, where the losers are. So I think it's net good for BAAM. I'm not sure it's reflected in pricing power so much as AUM.
Remember.
The direct investment
BAAM is the largest investor in hedge funds and has very substantial ability to have an impact on fees paid. That's one of the reasons why people like to invest with us, because you get a very good economic thing. Hedge fund industry is really, the total redemptions is about 3% this year, and BAAM is up.
Right. I probably answered the wrong question. If you're talking about BAAM's ability to extract price concessions from managers.
Yes
Yeah, obviously that's gone up. I was more talking about BAAM's ability to charge its investors. Yeah.
That's what I was referring to. Thanks. The direct investments in third-party hedge funds, are you still kind of comfortable with that strategy despite-
In the GPs and-
Yeah
in the managers themselves?
Yes.
Yes. We have a pool of capital. We're very optimistic that'll earn very high returns for its investors.
Okay.
It's a managed pool of capital. We're not doing it on our balance sheet like some other places.
Okay, thanks.
Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks. Good morning, everyone.
Good morning, Craig.
It looks like five larger funds may have just hit their final closes or are pretty close. Core Plus and BREP Europe V are two of the larger funds still open in 4Q, excluding the funds that are always open. Should we expect a deceleration in aggregate fundraising activity as we walk into 2017? Maybe just any other commentary in the fundraising front would be helpful.
Sure, Craig. Look, we're obviously coming off of an extraordinary 2015 where we raised about $94 billion. LTM, we've raised $69 billion. This year, I think we said this in prior calls. Year to date has been $53 billion, and we're working on a really solid year. In terms of the outlook, there's still some significant, in addition to kind of the always-on fundraise, as you mentioned, significant drawdown funds coming up. We've got, next year, possibly a second Asia fund, a third capital solutions vehicle, possibly a third co-mingle Tac Opps vehicle. Certainly the large flagship global private equity and real estate funds were obviously raised in the last couple of years, but there's still chunky drawdown product to come, as well as all manner of other products and products under development.
I think you'll see us next year and into 2018 maintaining, relative to this year's kind of run rate level, a very healthy level of fundraising.
Great. Thanks for the color, Michael.
Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed.
Hey, guys. Good morning. I want to go back to your point around the opportunistic raise of billion dollars in Europe, obviously at a very attractive rate. The balance sheet continues to have lots of liquidity. I was wondering if you could spend a couple of minutes on the use of that firepower, as you called it, and also the secondary to that. Anything we can anticipate from you guys in the share repurchase front? I know that tends to come up every quarter, but given the valuation level and Steve's comments, wondering if there is any evolving thought process there. Thanks.
Sure, Alex. It's Michael, I'm sure Steve and Tony may want to chime in. Obviously we've grown to expect this question, and we're happy to engage on it. We like the balance sheet strategy we've committed to, first of all, as a general matter, to kind of paraphrase a term of art. We have a fortress balance sheet that in all environments, all business conditions, all market conditions will more than ensure that our firm will thrive. Not only thrive, but capitalize on moments of dislocation in the greater world. In terms of going on offense and our capital strategy and uses of capital, obviously, we think in general, we have very attractive internal uses of capital. First, in terms of organic growth, seeding, and investing in our own products.
Look, the return on assets has been in the five to 20 times level in terms of what a new product will deliver for a balance sheet investment for the firm over a 10-year basis. We continue to see a great universe of opportunities there. Then, as you know, on an inorganic M&A basis, strategic basis, we've been very selective in making investments over our post-IPO history. We've done eight of them. We've been very selective, and they've been very successful. They've generated returns as sort of portfolio investments in the 30% annualized rate of return area. We continue to see, in all modesty, and we think we're sort of the partner of choice for most people who want to do a deal. We see lots of things, and we're looking at lots of things.
Also, moreover, we think we carefully manage our share count dilution to help mitigate or negate the need for repurchase. Since our IPO, we've averaged at about 0.7% dilution per year in our unit growth. I think in the last five or six quarters, it's been about 0.4%. If you actually compare that to many of our peers with so-called share repurchase programs on, I think it's pretty competitive. That's sort of the framework. We never say never. At some share price, a repurchase could become more attractive than other capital uses, but we apply a very rigorous lens to analyzing that. That lens is not short-term value creation, but long-term sustainable value creation for our shareholders.
Okay, thanks.
Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Thanks very much. The first question about the retail channel. Obviously, you have extremely compelling case for a lot of your products in the retail channel, post the DOL. Can you talk about how we can track the progress on this? Obviously, I think you said the market share is creeping up. In terms of actually the distribution effort and talking with gatekeepers and getting the product in the channel, having the advisors be educated. Maybe if you could just shed some light on what you would characterize as AUM in the retail channel now, and then how would we go about tracking that?
Yeah. Currently today, just through the wirehouses alone, we've probably raised more than that, about $18 billion. That number continues to grow. It's going to be, without going into specific product, as Tony said, a real mix of illiquid and liquid product. As we grow into new channels within retail, we'll be able to go from the ultra-high net worth down to dollar one investors with appropriate product. I think we can start providing you with more regular information on it in terms of, we do often in our presentations break out at a firm level how much is retail versus institutional. We can continue to do that.
Just to add to Joan's point, Brian, inception to date, our cumulative percentage of total capital raised in retail has been about 10%. In recent years, as we've amped up the effort, it's run at between sort of 15%-20% of the total for the last three years. That gives you a sense of the trajectory.
That's in an environment where our drawdown funds are all oversubscribed. We're turning away retail demand. Inevitably, because historic institutional clients, we're not going to push them out of the nest when they've been with us for several years. It could have been much bigger than that.
Right. That's another good follow-on question, I suppose, in terms of, is there a product creation capacity to satisfy that retail demand? Or do you think you'll be in that dynamic whereby the supply is limited relative to demand?
Yeah. I think each of the channels has different appetites. If you think about the independent broker-dealer channel, they're much more focused on liquid product, where we are not currently capacity constrained. I think over the next several years, you'll continue to see us accelerate that, and you'll see that build out. Without, again, we can't talk about specific product, but one of the nice elements of it is that you grow by both inflows and asset appreciation. It's quite steady, and you're not in the drawdown structure of giving back capital and having to reacquire it, if you will.
Right. Okay, great. Thanks very much.
Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed.
Hey, good morning. Thanks for taking the question. There's been some concerns on commercial real estate. Perhaps too much supply, maybe in certain markets, maybe some pressure on rents. Just curious if you could talk about what you're seeing in terms of pressures in certain parts of the market and how Blackstone is positioned around that. If rates do rise, how do you see that impacting your portfolio? I know you mentioned that historically when rates rise, economic growth is typically growing. What about if that's not necessarily the case, and economic growth is consistent with what we're seeing today? What happens in a rising rate environment?
Okay, Mike. The markets now is very healthy. It's at a healthy moment for real estate. We don't think there's a bubble, and we don't see the amount of new building that presages a downturn. At the same time, economic growth may not be spectacular, but it's steady. Population growth chugs along at 0.8%, and obsolescence in commercial real estate chugs along at 0.4%. The combination of economic growth, obsolescence, population growth, and not a lot of new building means that occupancies continue to rise. When occupancies rise, rents rise. When you get those two things with basically a fixed cost asset, you get very healthy operating income. That's the general picture in the U.S. We could go around the world if you want, but I assume your question is primarily U.S.-based.
There are certain segments and certain markets where the picture's a little different based on the regional thing. In Houston, given what's happened to energy, obviously, the office market's a little softer. In high-end residential, pretty much all over the world, condos and things like that, the market is soft.
We don't do those.
Fortunately, we don't do those. You have, I think New York City, we've got near record building, but at the same time, the city's doing very well, and the market is in a stable position. As rates rise, obviously cap rates will sneak up, but the drop in rates was not fully passed through on cap rates. In other words, the spread over base rates came up. As rates rise, some of that will be absorbed, we think, by a return to more normal spreads. We're not really in the business of betting on cap rates staying where they are. Usually, we buy something, we expect on exit cap rates to be higher anyway, and that's what we underwrite to.
That's our premise, and we think that as long as the environment stays healthy, doesn't have to be hot by any means, it just has to stay healthy the way it is today, then rising rates are what we're expecting, and we're going to get our returns. Again, we make our money, particularly in the BREP fund, by buying unstabilized assets where there's value improvement, improving those assets, converting it into core real estate, which has a fundamentally different lower cap rate than what we pay, and being able to create value that way.
Great. Thanks, Tony. If I could just ask a follow-up for Michael. You've quantified the Hilton monetization event, I think, around $0.27 that should come through in the first quarter of 2017. Just given that you've locked in the sales price here, how should we think about the impact to ENI in the fourth quarter? Do you mark up that position to the sale price? Is there any sort of discount? Then how should we think about the moving pieces around the portion that's in the BCP V fund, given that's kind of sitting right at the 8% pref? Should we think about it catch up at around 80% or so or something less?
Good question, Mike. On the first part, I guess we'll say you're saving us having to do a lot of individual calls to help you guys with your models. In terms of a markup prior to the deal, we'll observe our normal policy where, say, at the end of the fourth quarter, we'll look at deal certainty and so forth and timing and make a decision. I will say in terms of kind of the quantum of ENI pickup for that stake which we're selling at that price, all else equal, it would be in the $100 million area in terms of pickup to ENI. As for your question on BCP V, Mike, was your question in terms of how the Hilton sale will affect the movement?
I think I mentioned quickly in my remarks that one of the great benefits of this Hilton stake sale will be it will substantially close out that preferred return shortfall for BCP V that I mentioned, about three-quarters of it, and put us in position to generate cash carry again in that fund as early as the first quarter.
Got it. Okay. Then I guess just the question was also around the ENI aspect of that in the fourth quarter, if there's any sort of catch-up as that's coming through. I think you mentioned $100 million area, that, I guess, is reflective of any sort of catch-up that comes through.
$100 million is kind of cross the firm in aggregate.
Got it. Super. Thank you.
Our next question comes from the line of Jerry O'Hara with Jefferies. Please proceed.
Great. Thanks for taking my questions. I think I heard on the call or prepared remarks that roughly 67% or, I guess, two-thirds of the BAAM segment was now above high water. I was just sort of curious if we can get an update as to where the remaining third was with respect to those hurdles.
Sure, Jerry. 67% at the end of September versus 10 at the end of March, which just shows you how quickly these things can move around with a bit of return. One way to think about it is subsequent to the end of third quarter. About a 2% further appreciation in the BAAM composite would take that 67% to about 90%.
Okay. Helpful. Then just a follow-up. I think earlier this morning, a question came up around capacity and expanding into new sectors or asset classes that perhaps Blackstone hadn't been before. Was hoping you might be able to maybe be a little bit more specific or give some sense of what those areas or new product development might entail. Thank you.
Well, yeah, I don't think we want to be terribly specific until we've done it for a lot of obvious reasons. You'll be able to look at the big alternative sectors and know where we're not, and you can assume that we're thinking about all of those. In addition, while our most developed business real estate is heavily present in all regions of the world, plenty of our other businesses are really heavily concentrated still in Western markets, so there's geographic expansion. I think we're working on some interesting applications of technology to drive new products. I think those will be some interesting products there, which will probably be lower fee products per dollar of AUM, but quite profitable because of the cost structures, and could be very, very large in terms of AUM.
Finally, I talked generically about longer duration products, the products that are where you keep the assets, the AUM compounds, and you also get the appreciation of the NAV as the assets grow in value. We feel we have plenty of choices without getting too specific about precisely what products when.
Understood. Thank you.
Our next question comes from the line of Mike Carrier with Bank of America. Please proceed.
All right. Thanks, guys. Hey, just on the private equity side, the returns in the quarter were pretty strong despite the public side not faring as well. Just wanted to get some perspective on the private side in terms of the portfolio trends, and then probably most specifically, in BCP VI, just given kind of the strength that we saw in the quarter there.
Sure. On the private side, Mike, it was pretty widespread or spread around, not one single theme. Our energy investments did very well, as we alluded to. We have certain assets that are in queue to be sold, have contracts to be sold, and there was some pickup from that as we move towards closing. Really, it varied by region. We had assets in Asia that appreciated nicely, assets in the U.S. and assets in Europe. Kind of multiple themes around the world as a general matter, energy and also some assets that are on their way to being sold.
Okay, thanks. Mike, just on the expenses. They definitely came in better this quarter. I know you guys usually look at it like on a year-to-date basis, but it did drive a decent amount of improvement in the FRE margin. I understand going into next year, you have the fees coming on, just how should we think about expenses like as those fees are coming on, and where that'll take the FRE margin?
Sure. Look, we had both kind of an actual and an underlying basis adjusting for the spend, good FRE margin pickup as you saw. Given the trajectory we're on in terms of the fee revenue top line, that will be good for margins next year. If you break it down, one thing that's sort of embedded in that is our non-comp expense declined in terms of year-over-year comparisons. That was in part, not wholly, but in part because of the spinoff of the advisory business.
Yeah. I just want to comment. We don't talk much about this because we tend to look at the opportunities of the market and the growth and so on. We try to run here a very tight ship expense-wise. We try to be very disciplined in holding our comp ratios and finding new ways through technology and consolidation and changing our business model to drive savings. We're very, very focused on that. It's one of the parts of Blackstone I think we're particularly good at and we never talk about.
Okay. Thanks a lot.
Our next question comes from the line of Devin Ryan with JMP. Please proceed.
Hey, thanks. Good afternoon. Maybe first one here, just on the outlook for the CLO business broadly, and then with risk retention rules coming later in the year, there's been some press around firms looking at some different structures just to optimize returns there. I'm not sure if there's anything you can share around any potential changes that you might be thinking about making on this front. If there is, how we should think about implications on either the economics or whether those might put you in a better position to capitalize on some opportunities in the space.
Sure. I'll start.
Michael's going to start, then I'll chime in.
Devin, first of all, stepping back, I mentioned in my remarks, our CLO business is really, really strong. We're basically a global leader. We're the biggest manager, have had the most issuances in the last 4 or 5 years. The performance has been really good. It's a very good business for us, an important one. We do it in a high-quality way. In terms of the risk retention rules, and we know there's been some press on this, you won't be surprised to hear that since the rules were promulgated, which obviously won't go in effect for another year or so, we assessed it very carefully with all the right advisors, and worked through what the right structural design was.
We are very comfortable, and we intend to utilize vehicles that are designed to fully comply with both the letter and the spirit of the rules, period. I think, in terms of what it means for the business. Our CLO businesses are attractive and perform well. As an economic and investment matter for the firm, we obviously, first of all, have ample balance sheet resources, going back to the discussion about our attractive use of capital. Ample balance sheet resources to make the investment required to capitalize the vehicles in the future. Moreover, we regard those required investments as quite attractive actually, from a firm point of view.
I think in terms of our competitive position, we think that if anything, it will only potentially further our competitive advantage, because for much of the CLO competition out there with more narrow access to resources, less scale, this will be a more challenging proposition for them.
I think that's a very complete answer. The only thing I would add is from your standpoint, the added capital that we might put up to drive this business will be small in the great scheme of things.
Okay. Very helpful answer. Thank you. Just a follow-up here, maybe bigger picture, and I understand this might be a little bit of a tough one to answer, but just given the comments that you made around LP kind of yield demand, when you think about the pace of AUM growth from here and the various buckets of kind of where that's going to come from, and ultimately what AUM could look like a few years from now. When you look into the future, do you see the mix shifting to lower yielding products, I guess, relative to where it is today? If that is the case, just because maybe there's more demand there, how does that impact the economics on every dollar of AUM?
I'll take a shot at that because there is no right answer. It's like speculating on the future. I see, Steve, that the alternative class is going to continue growing. The reason is there's safety, there's high return, and there's fundamentally no place else to go. That's a wonderful position. We'll be like an army that's moving forward on all fronts. There will be a variety of different products that will be expanding into two major channels. One is the institutional channel, and the other is the retail channel. What's going on in the institutional channel is that limited partners are going to be putting out more and more money, but they're going to be doing it to fewer and fewer general partners. This is a huge trend.
One very large institution just said they wanted to cut from 100 GPs down to 30, and we're in a unique position. They basically asked us how much money, more or less, could they just give us. That's going to be repeated in a variety of different areas. It's not a breakthrough. It's happening already. That trend, I think, will accelerate. There'll be a variety of products that could be sold to meet different needs in the institutional channel. But in the retail channel, there's a whole range from very high return to much more, for us, low return, but for retail customers is great return. That will be lower margin, but the potential for growth is very large. This is a situation where basically everything's working, and everything is going forward.
We don't think as much as you might expect about exactly what the margin is of each product. We think about what's good for individual customers, and if we can deliver something to them that makes them really happy, then each of those products or verticals will have very substantial growth. It'll all come together in some way that's a very happy outcome. I'm not really particularly guilty of sloppy thinking, but I've learned that it's difficult to know exactly what the future's going to be, except whether it's going to be really good or whether it's going to be not so good, or whether it's going to be bad. My view is that we're in a really great series of fundamentals with more and more products into two major markets with the best brand name in the world, we believe in the alternative space.
We're in the really good zone.
Just to add on that.
Hang on. Just for your model, let me just make a couple points. Some of these products that have lower revenue per AUM-
Right
are not necessarily by any means lower margin because they have inherently lower cost structures. I would say maybe our highest margin business could be BAAM with the lowest revenue per AUM. Private equity, which could arguably have the highest revenue per AUM, is not a particularly high margin business today. It's a mistake to equate revenues to margins, number one. Number two, a lot of the add additions that Steve's talking about
We already have the foundation and the infrastructure, so we can add a lot of AUM, all incremental revenues and very low incremental cost. I think this focus on, is it going to be lower margin, by which most people mean lower revenue per AUM, is misplaced, actually. We're in a business that the structure is wonderful. Not only do we have locked-up capital, but with fixed costs and the capabilities we have, incremental revenues are extremely profitable. In effect, we operate with great operating leverage. It's another way, I guess, they talk about it in business school.
I'd also just say in terms of the numbers, when we do our long-term models, which we constantly update, the weighted average management fee just has actually been fairly stable in the last handful of years, is quite stable for the long term, actually.
Great. Okay. Well, really appreciate all that perspective, and thanks for taking my questions, guys.
Thanks, Devin
The final question comes from the line of Chris Shutler with William Blair. Please proceed.
Hey, guys. Good afternoon. Just one quick one. On Core Plus real estate, I know you hit the 3-year point here soon where some of those fees are going to be able to crystallize. I know it's going to start small, but can you just give us some sense of how that could benefit DE in 2017 and 2018?
Yeah. Chris, we'll see management fees immediately. The performance fees are generated usually three years after the LP comes in, so we should start seeing meaningful performance fees in 2018.
As you know, those performance fees under that structure will be taken on an unrealized basis, not just a realized basis.
Right. Yeah. Okay.
Just to make that clear.
We'll actually get the cash, without having to sell the assets based on the marks.
It'll crystallize similar to our hedge fund solutions business. It'll just be on a three-year cycle rather than a one-year cycle. Were you asking for magnitude of revenue or profit or something out a few years? Was that your question?
Yeah, kind of magnitude of how it could actually impact the distributable earnings.
Yeah. It'll be dependent on the growth of the platform. Today, it's about $13 billion after three years. As you know, it'll compound with the NAV. If we achieve our sort of targeted level of returns, that'll continue to grow, and we'll add assets. But it's tough to know the exact AUM marks.
Well, we obviously model this. The revenue-generating potential of this program is very large-
Very large
in terms of crossing the $100 million of annual revenue mark. There's visibility on that. We're very excited, notwithstanding there's some variables in the rate of growth going forward.
Yep, understood.
If you think about assets generally, just reading through a lot of your reports on peer companies, I would say one thing that is quite different is, and you can look all the way back to when we went public, we are not tied to this step function fundraising where we're raising a lot of assets and then we're investing, selling them down where AUM and fee-earning AUM drops, and then we have to wait a period to raise again. We really have never had that. It's a combination of really scale businesses in these different areas that are on different fundraising cycles, and also the buildup of perpetual assets where you don't actually sell those down and give them back. That will only continue to increase with the product you mentioned as well as several others.
I think that will continue to distinguish the steadiness of our fee-earning AUM and earnings generally.
Makes sense. Thank you.
I would now like to turn the conference back to Mr. Weston Tucker for closing remarks.
Great. Thanks, everyone, for your time today, and please reach out with any questions.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a great day.