Good day, ladies and gentlemen, and welcome to the Blackstone Third Quarter 2016 Investor Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. 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 Q3 2016 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer Michael Che, our Chief Financial Officer and Joan Solitar, 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 ks. 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 Black 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 $692,000,000 for the quarter $1,500,000,000 year to date, and the year to date period was up 20% from the prior year. Economic net income or ENI rose sharply to $687,000,000 in the 3rd quarter or $0.57 per common unit. Distributable earnings were $593,000,000 in the quarter or $0.48 per common unit and that equates to a distribution of $0.41 and that will be paid to holders of record as of November 7. With that, I'll now turn the call over to Steve.
Thanks, Weston, and thank you all for joining our call. Blackstone delivered a compelling set of results in the 3rd quarter with strong economic net income and substantial distributable earnings, as Weston mentioned, and 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 $70,000,000,000 in new capital, which despite $38,000,000,000 in realizations, brings us to another record for assets under management of $361,000,000,000 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 United States for the 12 months ending June 30 lost between 1% 3% on their portfolio. The best performing major endowment in the United States that I'm aware of earned only about 3%, but most lost money. The average public pension fund, I think is sort of shocking results, basically earned approximately 0 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% to 8% per year, but is invested in a mix of mostly public stocks, fixed income and treasuries, but 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 and 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 5, 10 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 1,000,000,000 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 Q3 specifically, our corporate private equity and real estate funds were up 3% to 4%, bringing them to 7% to 9% year to date, broadly outperforming global markets with less volatility. In credit, our various strategies were up 6% gross for the quarter and 11% to 17% year to date.
In our hedge fund area, BAAM's composite was up around 3% gross in the quarter with continued low volatility of only about 1 third that of the S and T. Our consistent performance at high levels is why our investors keep coming back to us with greater and greater commitments across more of our phones. We've raised $14,700,000,000 just in the 3rd quarter. Here's a pretty stunning fact. In the past 10 quarters, we've raised nearly $200,000,000,000 more than the aggregate size of any of our domestic alternative peers.
And 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 1 of the largest, if not the largest platforms in each vertical area, private equity, real estate, hedge funds and credit. We are able to accept and responsibly deploy 1,000,000,000 of dollars from individual LPs, which is a critical capability that few, if any, other firms can offer. Against the 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 2 most recent global real estate funds, 17% for our 2013 Asia Real Estate Fund, 14% for our 2011 Energy Fund and 11% for BCP6. We stick to a religious and rigorous discipline around investing and 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, but we have no shock 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 fund 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. And our entrepreneurial mindset lets us create new products to take advantage of new opportunity sets, which translates into greater capital deployment. For example, our 3 largest new initiatives, Real Estate Core Plus, Tactical Opportunities and our strategic partners secondary business, together invested $10,000,000,000 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 focused on unleveraged free cash flow yields where our basis is derisked 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 we're closing 10 deals for 2 point $7,000,000,000 equity investment 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 at 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, and 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 stress 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 costs.
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've concentrated our deployment. We focused on debt higher up in the capital structure with sufficient downside protection and attractive yields. Overall, we are 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 remain 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 $13,600,000,000 of realizations just in the 3rd quarter, bringing us to over $29,000,000,000 year to date and our pipeline for sales is strong. There is enormous liquidity around the globe now looking for a home. And so in addition to the many realizations we've already signed up, which will close over the next several months, I am optimistic we will see many more and that would be positive for our distributable earnings. Michael will discuss our distributable earnings outlook in more detail, but one realizations I would like to highlight is our agreement to sell the majority of our remaining stake in Hilton.
The sale price reflects 3 times our original basis and combined with past sales and remaining unrealized value, we have generated a total profit of more than $12,000,000,000 which I think is 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 2,007 leverage buy off. 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 are 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 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 yields, but who needs yield when you can invest at 1% in government bonds. Meanwhile, the S and 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's stock and afford us a premium value the same way our LPs put a premium value on our funds.
In the meantime, we continue to focus on what we do best, creating great investment solutions, which should ultimately translate to growing distributions for our unitholders. 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 3rd 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 remains strong across the board, and we continue to attract significant new capital, driving sustained growth in AUM, again, in every business. E and I rose sharply to 687,000,000 our best performance in the past 6 quarters, driven by accelerating performance fees and investment income across the businesses. Indeed, in the Q3, each of our businesses posted their highest level of performance fee revenue in at least 5 quarters.
Total AUM rose 8% year over year to a record $361,000,000,000 driven by nearly $70,000,000,000 of inflows over the past 12 months. The diversity and scale of those inflows was impressive, between $10,000,000,000 $21,000,000,000 in each of our business segments. Total fee earning AUM again rose by double digits, up 11% to a record $268,000,000,000 Fee related earnings rose sequentially to $229,000,000 in the quarter despite the 1st full quarter impact of the BCP6 step down triggered in May and in advance of BCP7 commencing full fees in early November. Year to date FRE was $675,000,000 up 8% despite the spin of our advisory businesses on October 1 last year. Adjusting for the spin, year to date fee related earnings were up 21% year over year, reflecting approximately 2 30 basis points of underlying FRE margin expansion.
Now 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 $1,700,000,000 deployed and another $3,400,000,000 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. 3rd quarter realizations in real estate reached $7,300,000,000 the 2nd highest quarter ever for that segment, generating $466,000,000 in realized performance fees, which was our 3rd highest quarter ever.
This brings real estate realizations to $14,000,000,000 year to date and keeps us on track to approach $20,000,000,000 again in 20 16, which would be the 3rd year in a row at that level. That is an extraordinary data point. And 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 $56,000,000,000 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 $5,700,000,000 of inflows in the quarter, the highest of any of our businesses and $15,000,000,000 year to date. In the 5 months since its first closing, GSO has raised $6,500,000,000 for its next flagship mezzanine fund with expectations to hit its cap imminently.
We added over $600,000,000 in separate accounts with large LPs in the quarter, and we raised over $500,000,000 for a new European CLO, bringing us to $2,300,000,000 of global CLO issuance through September and $3,400,000,000 including 2 more new issuances this month, making us the largest global CLO issuer for the 4th year in a row. While the deployment environment is currently challenging, GSOs remain quite active investing $2,000,000,000 year to date with another $1,300,000,000 committed to deals that should close in the next few months and a strong backlog of deal flow that could result in a robust Q4 of new commitments. We earned management fees on GSO's drawdown capital as it is invested, so 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 brands, by using our size to be a unique scale solutions 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 $20,000,000,000 attractively in the coming years, driving meaningful upside to our segment earnings over time.
In Hedge Fund Solutions, BAM's composite gross return was up nearly 3% in the quarter, putting 67% of their eligible AUM above the high watermark and resulting in the resumption of positive performance fees. That 67% figure compares to 10% as of the end of the second quarter, so significant progress was obviously made. Demand across the BAM platform remains quite strong with no abatement in our inflows, which were $3,300,000,000 in the quarter, including October 1 subscriptions and $8,500,000,000 year to date. Our fee earning inflows for the 1st 9 months of 2016 were stable with the same period in 2015. We've won a number of large mandates in our core business, plus we're seeing continued consistent gross inflows of over $1,000,000,000 per quarter in our individual investor solutions area, which has now reached $7,200,000,000 in AUM, up 28% year over year.
Overall, year to date net inflows, including October 1, were positive $1,700,000,000 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 BAM 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 $4,500,000,000 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 3 upstream deals representing $1,300,000,000 of aggregate equity capital. Together with the 4th deal closed in the 2nd quarter, we deployed or committed just under $2,000,000,000 of capital into 4 high quality upstream oil deals where we set the price earlier in the year near the bottom of the market. And indeed, since then, there have been multiple handfuls of deals by others in substantially similar acreages, valuing like assets at approximately 2x to 3x 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.
And so this year, we have agreed to sell 5 different power assets located across 4 different continents, North America, Europe, Asia and Africa, for aggregate equity proceeds of $2,400,000,000 $1,400,000,000 of gain. One closed this quarter and the other for 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. And even within a single industry, in this case, energy, we can be active buyers of 1 subsector 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 Cary on a total fund basis and we're accruing Cary 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, but the carrying MOIC on the remaining portfolio is 1.7x, and 3 quarters of this is in liquid public positions.
And so if we sold everything today, we'd crystallize and pay out BCP V's entire net accrued performance fee receivable of $306,000,000 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 BCP7 ends. In total, we have over $65,000,000,000 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.
2nd, we expect to remain very active from a realization perspective. Besides closing $13,500,000,000 of sales in the 3rd quarter, we have approximately $8,000,000,000 of pending realizations under contract or letter of intent, which will close in the Q4 or early 2017. Those realizations are successful deals with good returns averaging around 2.7x the original basis. About half of the $8,000,000,000 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 $17,000,000,000 in Publix across the firm, which we're actively selling down and which traded at values of 2.6x 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 $6,500,000,000 or $4,600,000,000 after the pro rata pay down of existing margin debt.
In addition to the net performance fees generated, we will 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 Q1 of 2017 by closing out over 3 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 $500,000,000 or over $0.40 per unit in distributable earnings in the early part of 2017. So 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 €600,000,000 issuance of 10 year notes at a 1% coupon, priced within a couple of basis points of the benchmark rates all time low. This was our 2nd 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 plus rating was reaffirmed by both agencies, a testament to our rock solid balance sheet and prospects. We ended the quarter with a $3,900,000,000 cash and treasury position or $1,100,000,000 in excess of $2,800,000,000 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. And 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 and 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.
And we have a fairly sizable queue here. So 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.
And 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's just 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. So I'd like to respond to you, but we can't, so we won't.
Okay. I appreciate it.
Sorry, Glenn. We'll give you another question for
that. No problem. No problem. The flip side, there's been tons of questions on the traditional asset managers and how they're adapting to traditional 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 all 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?
And are you actively pursuing that? Obviously, the institutional world is a bigger driver of your flows, but just curious how you think about it?
Yes, I think it's a great question. And the approach is really to take institutional quality product and make it accessible to where it wasn't previously. And so a lot of this is pull from the different institutions who, 1, want to increase the individual allocations, which are creeping up, but still low single digits, and they want it from high quality asset managers. And 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 the spoke product for those channels. So we think it's a huge opportunity actually in very early stage.
And yes, and a lot of our products will be our products are being designed in structures such where they'll fully qualify for any Department of Labor standards that we could want or anyone could want, number 1. And number 2, we're finding that if you take the commission based salesman out of that, that, there's actually more appetite in some ways for our products because commission based salesman can sometimes like liquidity because they can buy and sell things and there's activity for its own sake. And so what we're finding that some of the investment advisors are not commission based, but 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?
So we are accelerating the efforts and 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. So it's very much person by person. And I think our scale in that sense hugely benefits us. I mean, what we've put in place just over the last 6 years, I believe, is really unmatched in the alternative industry, and we're continuing to move forward.
And 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. And so 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 the fundamental level. So there's a big educational component of this. Then you have to design products that fit with the different regulatory needs and market appetites all around the world, not just the United States. So there's a major product structuring aspect of this.
And so 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 of or a few bits of private equity. And 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, really high quality counterpart for any kind of distribution organization out there to retail investors. And essentially no other alternative firm has a scale and breadth of products and quality of products to be able to do that. And as Steve points out, and the brand name.
Great.
Thank you.
Thanks, Glenn.
And our next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hey, good morning. Thanks. So there's been a lot of press and announcements about hedge fund redemptions and fee cuts. And I wanted to ask around that from 2 perspectives. 1, do you feel like there's an opportunity there for BAM to have even more pricing power?
And 2, 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 and but it's not so much like the whole industry is under duress despite what you might read is there are some big winners. There are some sectors losing, but there are some big winners too. And 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. And I think your pricing power is kind of a function of where you are in that equation.
The other thing is there are 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. And 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. And so you'll see some people maybe taking slightly lower fees, but having more locked up capital. And we think the net net for our businesses, that's a good trade.
But as far as BAM goes, I don't know that BAM is getting more pricing power necessarily, but I think the fact that the area is there's a lot of change going on is good for BAM 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, because again people want someone that really knows what they're doing, where the winners, where the losers are. And so I think it's not good for BAM. I'm not sure it's reflected in pricing power so much as AUM.
But remember, FAM is the largest investor in hedge funds and has very substantial
ability to
have an impact on fees paid. And that's one of the reasons why people like to invest with us, because you get a very good economic thing. And the hedge fund industry is really the total redemptions is about 3% this year and BAM is up. So that's Right.
And so I probably answered the wrong question. If you're talking about BAM's ability to extract price concessions from managers, then yes, obviously that's gone up. I was more talking about BAM's ability to charge its investors.
That's what I was referring to. And then the direct investments in 3rd party hedge funds, are you still kind of comfortable with that strategy despite
In the GPs and the managers themselves? Yes. Yes. We have a pool of capital. We're very optimistic that will earn very high returns for its
investors. Okay.
But it's a managed pool of capital. We are not doing it on our balance sheet
like some
other places.
Okay. Thanks.
And our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
It looks like 5 larger funds may have just hit their final closes or are pretty close. And Core Plus and BREP Europe 5 are 2 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? And 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 94,000,000,000 dollars LTM, we've raised $69,000,000,000 This year, I think we said this in prior calls, year to date, it's been $53,000,000,000 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 fundraisers you mentioned, significant drawdown funds coming up. We've got next year possibly a 3rd second Asia fund, a third capital solutions vehicle, possibly a third co mingled tech ops vehicle. So 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.
And so 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.
And 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 $1,000,000,000 in Europe, obviously at
a very attractive rate.
The balance sheet continues to have lots of liquidity. So 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. And I'm sure Steve and Tony may want to chime in. Look, and 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.
1st of all, as a general matter, to kind of paraphrase a term of art, we have fortress balance sheet that in all environments, all business conditions, all market conditions, will more than ensure that our firm is will thrive, not only thrive, but capitalize on moments of dislocation in the greater world. In terms of kind 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 5 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. And we continue to see a great universe of opportunities there.
And then as you know, on an inorganic M and A basis, strategic basis, we've been very selective in making investments over our post IPO history. We've done 8 of them. And they've been we've been very selective, and they've been very successful. They've generated returns as sort of portfolio of investments in the 30% annualized rate of return area. And we continue to see, in all modesty, we think we're sort of the partner of choice for most people who want to do a deal.
And so we see lots of things, and we're looking at lots of things. And so and also moreover, we think we carefully manage our share count dilution to help mitigate or negate the need for repurchase. So since our IPO, we've averaged about 0.7 percent dilution per year in our unit growth. And I think in the last 5 or 6 quarters, it's been about 0.4%. And if you actually compare that to many of our peers with so called share repurchase programs on, I think it's pretty competitive.
So that's sort of the framework. And we never say never. At some share price, a repurchase could become more attractive than other capital uses, but we apply very rigorous lens to analyzing that. And that lens is not short term value creation, but long term sustainable value creation for our shareholders.
Okay, thanks.
And our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Hi, 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? Because obviously, like you said, I think you said, it's the market share is creeping up. But 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?
Yes. So currently today, it's
approximately well,
just through the wirehouses alone, we probably raised more than that, about $18,000,000,000 and 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. And as we grow into new channels within retail, we'll be able to go from the ultrahighnetworth down to dollar 1 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. And so we can continue to do that.
And just to add to Joan's point, Brian, inception to date, our cumulative percentage of total capital raised in retail has been about 10%. But in recent years, as we've amped up the effort, it's run at between sort of 15% to 20% of the total for the last 3 years. So that gives you a sense of the trajectory.
And that's in an environment where our drawdown funds are all oversubscribed. So we're turning away retail demand. And 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. So it could have been a much bigger than that. Right.
And that's another good follow on question I suppose in terms of, is there product creation capacity to satisfy that retail demand or do you think you'll be in that dynamic whereby the supply is a little limited relative to the demand?
Yes. I mean, I think each of the channels has different appetites. And so if you think about the independent broker dealer channel, they're much more focused on liquid product, where we are not currently capacity constrained. And so I think over the next several years, you'll continue to see us accelerate that and you'll see that build out. And with that, again, we can't talk about specific products, but one of the nice elements of it is that you grow by both inflows and asset appreciation.
So 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.
And 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? And just secondly, on 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. But 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. So, 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. But at the same time, economic growth may not be spectacular, but it's steady and population growth chugs along at 0.8% and obsolescence in commercial real estate chugs along at 0.4% and the combination of economic growth, obsolescence, population growth and not a lot of new building means that occupancies continue to rise and when occupancies rise, rents rise and when you get those two things with basically a fixed cost asset, you get very healthy operating income.
So that's the general in the United States, so we can go around the world if you want, but I assume your question is primarily U. S. Based. Now there are certain segments and certain markets where the picture is a little different based on the regional thing. In Houston, given what's happened in energy, obviously, the office market is a little softer.
In high end residential, pretty much all over the world, condos and things like that, the market is soft. Fortunately, we don't do those. And you have I think New York City, we've got near record building, but at the same time, the city is 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 did not was not fully passed through on cap rates. In other words, the spread over base rates came up.
So as rates rise, some of that will be absorbed, we think, by a return to more normal spreads. And 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. So 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. And again, we make our money by particularly in the Brett 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. And if I could just ask a follow-up for Michael. You have quantified the Hilton monetization of, I think, around 0.2 $7 that you came through in the Q1 of 'seventeen. Just given that you locked in the sales price here, how should we think about the impact to E and I in the 4th quarter?
Do you mark up that position to the sale price? Is there any sort of discount? And then how should we think about the moving pieces around the portion that's in the DCP V fund, given that's kind of sitting right at the 8% pref? Should we think about it, catch up that around 80% or so or something less?
Good question, Mike. And on the first part, I guess we'll say you're saving us having to do a lot of individual questions to help you guys 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 Q4, we'll look at deal certainty and so forth in timing and make a decision. I will say in terms of kind of the quantum of E and I pickup for that stake, which we're selling at that price, all else equal, it would be in the $100,000,000 area in terms of pickup to E and I. 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 BCP5 that I mentioned about 3 quarters of it, and put us in position to generate cash carry again in that fund in sort of the as early as the Q1.
Got it. Okay. And then
I guess just the question was also around the E and I aspect of that in the Q4, if there's any sort of catch up Is that coming through? I think you mentioned $100,000,000 area, so that I guess is reflective of any sort of catch up that comes through?
The $100,000,000 is kind of across the firm in aggregate.
And our next question comes from the line of Gerry 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 2 thirds of the BAM segment was now above high water. I was just sort of curious if we can update as to where the remaining third was with respect to those hurdles?
Sure, Jerry. So 67% at the end of September and 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 Q3, about a 2% further appreciation in the BAM composite would take that 67% to about 90%.
Okay, helpful. And then just a follow-up. I think earlier this morning, it's sort of a question came up around capacity and expanding into new sectors or asset classes that perhaps Blackstone hadn't been before. I 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, I don't think we want to be terribly specific until we've done it for a lot of obvious reasons. But 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. And then I think there's we're working on some interesting applications of technology to drive new products.
And 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. And then finally, I talked generically about longer duration products that are where you keep the assets and so the AUM compounds and you also get the appreciation of the net asset value as the assets grow in value. So we feel we have plenty of choices without getting too specific about precisely what products when. Understood. Thank you.
And our next question comes from the line of Mike Carrier with Bank of America. Please proceed.
Hi. Thanks guys. Just on the private equity side, the returns in the quarter were pretty strong despite the public side, not apparent as well. So just wanted to get some perspective on the private side in terms of the portfolio trends. Then probably most specifically, in B36, 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, so not one single theme. So our energy investments did very well, as we alluded to. We have certain assets that are in queue for to be sold, have contracts to be sold, and there was some pickup from that as we move towards closing. And then really, it varied by region.
We had assets in Asia that appreciated nicely, assets in the U. S. And assets in Europe. So 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. And Mike, just on the expenses. So 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 had the fees coming on, but just how should we think about expenses like as fees are coming on and where that will take the FRE margin?
Sure. Look, we had both kind of an actual and an underlying basis adjusting for the spin, 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. And 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. And that was in part, not wholly, but in part because of the spin off of the advisory business.
Yes. And I just want to comment, we try to run we don't talk much about this because we tend to look at the opportunities of the market and the growth and so on. But we try to run here a very tight ship expense wise. And 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. And 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.
And 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. So 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? And then 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 is going to start and then I'll chime in.
So Devin, first of all, stepping back, as I mentioned in my remarks, I mean, our CLO business is really, really strong. We're basically a global leader. We're the biggest manager, have had most issuances in the last 4 or 5 years, and the performance has been really good. So it's a very good business for us, an important one. And 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. And 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. And so 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 uses of attractive use of capital, ample balance sheet resources to make the investment required to capitalize the vehicles in the future. And moreover, we regard those required investments as quite attractive actually from a firm point of view.
And then 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.
And the only I think that's 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. And 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 in the various buckets of where that's going to come from and ultimately what AUM could look like a few years from now.
So when you look into the future, do you see the mix shifting to lower yielding products, I guess, relative to where it is today? And 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. And the reason is there is safety, there is high return and there is fundamentally no place else to go. And so that's a wonderful position.
And we'll be like an army that's moving forward on all fronts. So there will be a variety of different products that will be expanding into 2 major channels. 1 is 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.
I mean, one very large institution just said they wanted to cut from 100 GPs down to 30. And we're in a unique position. And so they basically asked us how much money more or less could they just give us. And that's going to be repeated in a variety of different areas. It's not breakthrough, it's happening already and that trend, I think, will accelerate.
And 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. And so that will be lower margin, but the potential for growth is very, very large. So this is a situation where basically everything is working and everything is going forward. And so 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, that each of those products or verticals will have very substantial growth. And it will 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 is going to be except whether it's going to be really good or whether it's going to be not so good or there's going to be bad. My view is that we're in a really great series of fundamentals with more and more products into 2 major markets with the best brand name in the world, we believe in the alternative space.
And so we're in the really good zone.
And just to add on
that Let me just just for your model, let me just make a couple of points. Some of these products that have lower revenue per AUM are not necessarily by any means lower margin because they have inherently lower cost structures. I would say our highest margin business could be BAM with the lowest revenue per AUM. So and private equity, which could arguably have the highest revenue per AUM, is not a particularly high margin business today. So it's a mistake to equate revenues to margins, number 1.
Number 2, a lot of the add additions that Steve is talking about are, we already have the foundation and the infrastructure. So we can add a lot of AUM, all incremental revenues and very low incremental cost. So 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, the capabilities we have, incremental revenues are extremely profitable.
In fact, 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 fairly is quite stable for the long term actually.
For taking my questions guys.
Thanks, Devin.
And 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 2018?
Yes. Chris, we'll start seeing we'll see management fees immediately. The performance fees are generated usually 3 years after the LP comes in. So we should start seeing meaningful performance fees in 2018.
And as you know, those performance fees under that structure will be taken on an unrealized basis, not just a realized basis.
Yes. Just to make that we'll actually get the cash, but without having to sell the assets based on the mark.
So I'll crystallize similar to our hedge fund solutions business. It will just be on a 3 year cycle rather than a 1 year cycle.
But were you asking for like magnitude of revenue or profit or something out a few years? Was that your question?
Yes, kind of magnitude of the how it could actually impact the distributable earnings?
Yes, it will be dependent on the growth of the platform. Today, it's about $13,000,000,000 after 3 years. As you know, it will compound with the NAV. So if we achieve our sort of target level of returns, that will continue to grow and we'll add assets, but it's tough to know the exact AUM model.
Well, we obviously model this. The revenue generating potential of this program is very large in terms of crossing the $100,000,000 of annual revenue mark. That is kind of there's visibility on that. And so we're very excited, notwithstanding there are some variables in the rate of growth going forward.
Yes, understood.
When 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 drop and then we have to wait a period to raise again. We really have never had that and 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. And that will only continue to increase with the product you mentioned as well as several others. And 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.