Good day, ladies and gentlemen, and welcome to the Black Stone Second 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. And 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 Q2 2016 conference call. I'm joined today by Steve Schwarzman, Chairman and CEO, who is joining us from Europe Tony James, President and Chief Operating Officer Michael Chae, 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 illustrating our results, which are available on the website.
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 results, please see 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.
Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audio cast is copyrighted material of Blackstone and may not be duplicated without consent. So a quick recap of our results. We reported GAAP net income of $463,000,000 for the quarter, that's up 32% from the prior year and GAAP net income attributable to the Blackstone Group of $199,000,000 Economic net income or ENI rose to $520,000,000 or $0.44 per unit and distributable earnings were $503,000,000 in the 2nd quarter or $0.42 per common unit, which equates to a distribution of $0.36 and that will be paid to holders of record as of August 1. With that, I'll now turn the call over to Steve.
Thanks, Weston, and thank you for joining our call. Blackstone delivered strong results in the Q2 with healthy economic net income, substantial distributable earnings and another quarter of what I expect will be the best fundraising success in the alternative space. Our LPs continue to entrust us with more of their capital to manage in these uncertain markets. And despite strong realization activity, we again grew our assets under management to a record level, reaching $356,000,000,000 We're executing against a macro background characterized by uncertainty, low and slowing growth and an astonishing low interest rates around the world. The 10 year U.
S. Treasury recently hit its lowest point ever and 1 third of developed nations' sovereign debt is trading at negative yields and I think twothree trading below 1%. We've been going through an extraordinarily strange period recently, really starting last summer with the scare set off by China's currency devaluation. We then experienced the worst start of the year for equities since the Great Depression and even greater chaos in the debt markets, caused by an incorrect read of weakness in China and weakening trends in the U. S.
That was followed by a sharp and surprising market rally, which left many money managers wrong footed only to be hit again by Brexit in the last week of the quarter. And today, the S and P has moved back to an all time high. Go figure. All kinds of odd things are happening that are affecting markets generally and are presenting what we expect could be very interesting investment opportunities. Blackstone's fund structure with over 70% of our capital locked up for the life of the fund and a weighted average remaining life of greater than 8 years gives us enormous flexibility.
Coupled with our large scale dry powder capital of nearly $100,000,000,000 we are perhaps best positioned of any firm to move quickly on opportunities around the world. Limited partner investors are seeking better returns and less volatility in this challenging environment. Current very low interest rates globally, coupled with high market valuations in many areas, means that many LPs simply can't earn satisfactory returns with their current portfolios and are increasingly looking for the types of investment solutions that alternative managers can offer. Blackstone has been and I believe will continue to be one of the greatest beneficiaries of this trend, coming off a period where we've raised $132,000,000,000 in the past 18 months. Our global scale then helps us find interesting ways to deploy that capital across all our platforms.
In Private Equity, for example, we're seeing much higher levels of deal flow, particularly in the energy area. We've also been very active recently, as Tony mentioned, in Europe, in real estate and credit. Importantly, we are not passive buyers of any market and only need to do relatively few deals in each of our areas, focusing on those unique opportunities where we can create value. This ultimately translates into better performance. Our private equity and real estate funds were up 2% to 2.5% in the quarter, 4% to 6.5% year to date and 8% to 15% annualized since the start of last year, outperforming global markets over all of these periods.
In credit, our gross returns were between 7% to 10% for the quarter, outperforming the relevant indices and frankly, on an absolute basis, really shooting the lights out. In our hedge fund area, BAM's composite, as Tony mentioned, were up 1.4% gross in the quarter with roughly 1 third the volatility of the market. All of our businesses are effectively navigating this unusual and challenging environment. That fundamental performance, which I mentioned, has not yet translated into significant appreciation for Blackstone stock, which has suffered from shifting investor sentiment, concerns over the macro environment and most recently Brexit as compared to where we were a year ago. The Brexit result has created fallout in markets and politics, most obviously pronounced in the U.
K. The immediate adverse impact of public security prices has largely reversed early in the Q3, although certain currencies like the pound, of course, have not recovered. In the near term, transaction activity in the U. K. Should be slower as decision makers for businesses remains uncertain and market participants digest the potential impacts of the many different ways that Brexit can evolve.
Longer term, Brexit will likely have some modest adverse impact on global GDP, although it's too early to assess the full extent given unanswered questions like whether the U. K. Will retain access to the European single market. Brexit will possibly constrain access to capital in Europe, and you're seeing those tremors hitting the banks and will embolden the populist, anti trade, anti immigration movements across the continent, which is not good for the flow of capital and trade. For Blackstone, roughly 4% of our invested assets are in the UK, primarily in our real estate and tactical opportunities areas.
We believe this direct exposure is quite manageable, although we did adjust the private valuations for certain affected investments to reflect a more cautious outlook, which Michael will discuss in more detail. Our 2nd quarter marks also reflected currency and public stock movement, the latter of which has reversed. I believe this is further illustration of why investors shouldn't put undue reliance on short term mark to market fluctuations. The referendum had a big impact on risk settlement and notably on asset management stocks. BS similarly declined from already depressed levels, although we've rebounded a bit.
I believe this was overdone given our very manageable exposure to the region and the fundamental underlying strength of our firm. However, as we've seen many times in the past, markets tend to overshoot when there is uncertainty added to the equation. On the positive side, I expect Brexit to create many investment opportunities over time, which we're well positioned to assess and pursue. Importantly, since the results of the referendum, which seems on the one hand, it happened just yesterday and on the other hand, feels like it happened long time ago now, but it was only 4 weeks ago. Blackstone invested or committed over $2,000,000,000 in the last 4 weeks to new deals.
Several of those were in Europe, including a stake in a Swedish residential business and office complex in Berlin, and most importantly and recently, a logistics portfolio in the U. K. We bought from a property fund seeking liquidity. We also invested in 2 new oil and gas deals in the U. S, one of which was the first investment in our BCP 7 Private Equity Fund.
And we completed several new deals in tac ops and GSO. We also completed or signed up in the last 4 weeks $7,000,000,000 of realization since Brexit. So if you think the world stopped, you should keep thinking. It hasn't. These sales were mostly in real estate, including several office and hotel assets in the U.
S, most of our stake of a public company in Asia and 6 successful stock sales across private equity and real estate. It's pretty amazing. We also formed a joint venture with our private equity company Change Healthcare with McKesson and received a 6.6 $1,000,000,000 debt financing commitment, which will result in substantial realization early next year. And also, it's been a busy 4 weeks. We won multiple LP mandates of $1,000,000,000 or greater each.
That's not an aggregate of $1,000,000,000 those are several commitments of $1,000,000,000 plus. Our businesses are in terrific shape. 2016 should be a big year for fundraising with $38,000,000,000 already raised in the first half. We've generated attractive investment performances and performance and protected and grew our LPs capital. And we continue to invest in our people and our businesses and build on our leadership position in every area.
We had $16,000,000,000 of realizations in the first half despite some delays and weakness in the Q1. In fact, basically the world locked up for the 1st week of the quarter and almost nothing could be done. I expect 2016 to continue to be a good year for realizations. The U. S.
And Asia are certainly still wide open for business. The U. S. In particular is a safe haven in today's world and there is enormous liquidity around the globe looking for a home. As a result, I would expect significant cash flows to U.
S. Markets as interest rates remain globally depressed. As I said, over 70% of Blackstone's invested capital is in the U. S. And so we could see many opportunities for realizations, which should also be positive for our distributable earnings.
For our unitholders, if you simply ignore realizations and focus solely on our fee related earnings, we have a clear line of sight towards strong double digit growth in fee earnings for next year. This alone could generate approximately $1 per unit or more depending upon the timing of certain events, particularly funds being launched. You should know, which I actually didn't, that the S and P is yielding around 2% today. It's incredibly low. And we don't see why our mostly locked up fee earnings shouldn't be capitalized in our stock price at a similar, if not lower yield to the S and P.
You can do the math. A 2% yield, the same as the S and P on $1 of fee related earnings implies a $50 stock price, not the $26 where we are today. I know this seems hard to believe, but it happens to be mathematically true and finance is supposed to have something to do with mathematics. At a 3% yield, which is a 50% premium to the S and P for long term locked in cash income, and I wouldn't understand why you'd need a premium. It implies a stock price of over $30 and that's giving no consideration to realization, which have already added $0.40 per unit to distributable earnings in the first half of the year and which have averaged almost $2 per unit in distributable earnings over the past 3 years.
So when you put this all together, I think the math is sort of simple. And Blackstone sort of has earnings in 2 pieces. 1, fee earning income, which is highly predictable and which deserves a market multiple at a minimum. And that takes you to much, much higher levels than where you are today, as well as our distributions from realizations, which always happen. And that's our primary business, doing good investments for our limited partners.
And that's why they give us so much money. So I leave that all to you. Blackstone is the dominant firm and reference institution in the alternative asset management industry. You may be surprised to learn that Blackstone's market cap is roughly the same size as our next 5 public competitors combined. I'll say that one again because it surprised me a bit.
Blackstone's market cap is roughly the same size as our next 5 public competitors combined. And I hope we can all agree that Blackstone is very much on sale today. I remain confident that this valuation mismatch will correct itself over time, but that's up to you, not to me. In the meanwhile, we'll continue to focus on what we've always done, creating great investment products and returns for our limited partners, I'm really so proud of what all of our colleagues have achieved at Blackstone. Now thank you for joining the call.
I'm going to turn things over to our Chief Financial Officer, Michael Chae. Michael?
Thanks, Steve, and good morning, everyone. Our results in the second quarter and first half of the year reflect strong execution across all of our businesses despite the volatile market backdrop that Steve discussed. Our funds delivered good returns across the board, beating benchmarks. Our economic net income and distributable earnings both rose significantly from the Q1. And our capital metrics remain strong with healthy realization and investment activity and continued very powerful fundraising trends.
Total AUM rose 7% year over year to a record $356,000,000,000 driven by $21,000,000,000 of inflows in the quarter $70,000,000,000 over the past 12 months. Fee earning AUM rose double digits by 11% to a record $266,000,000,000 partly driven by the launch of the investment period for BCP 7 in early May. That launch triggered a step down in management fees in BCP6 and the onset of a 6 month fee holiday for BCP7, which will end in November. BCP7 alone will generate nearly $250,000,000 per year in fee revenues starting next year. Despite the temporary negative impact of the fee holiday, fee related earnings rose 27% in the Q2 to $226,000,000 There is some noise in the comparison to last year's Q2, which included the advisory businesses and a significant one time expense item.
But even adjusting for those, the increase was a robust 16%. E and I was a healthy $520,000,000 in the 2nd quarter, our best performance in the past 5 quarters. Performance fees increased from more muted first quarter with good relative returns across businesses. I'll provide more context to returns in a moment, but first I'd like to address the impact of Brexit on our financials, which we know you're interested in. There are 3 components: currency, marks in our private portfolio and movement in our publics.
First, in terms of currency, only 4% of our invested capital is denominated in British pounds, and this represents less than 3% of our total AUM. The exposure is further mitigated in a couple of respects. A meaningful portion of these assets is currency hedged in some form and much of it sits in euro denominated funds, which helps mute the impact from a fund performance standpoint as the pound weakened less against the euro than the U. S. Dollar.
All of this amounted to E and I impact in the quarter from the pound evaluation of less than $50,000,000 across the firm. 2nd, the mark to market impact to our private investment portfolio outside of currency effects was also around $50,000,000 on an E and I basis. The areas of our private portfolio exposure are discrete and in aggregate quite manageable, we believe. 4% of our real estate AUM and 6.5% of its invested capital is UK based, comprised of a mix of high quality logistics assets, fully leased student housing, hotel and office properties. We marked down our UK office portfolio, notwithstanding how comfortable we feel with our basis in these assets.
This represented the bulk of the total firm wide private mark to market impact mentioned above, yet its overall financial impact to the firm was small relative to the scale and diversity of the firm's asset base. The firm's remaining direct equity exposure is primarily in our tactical opportunities business, which had several high quality assets in the UK. While the immediate operational impact from Brexit to these assets appears limited, a subset was marked down modestly to reflect a generally more conservative market outlook. The E and I impact was minimal in the single digit millions. In Corporate Private Equity, the direct Brexit impact was de minimis as we had sold almost $4,000,000,000 of seasoned U.
K. Assets in 2014 2015 at a significant profit, substantially exiting our portfolio there. And finally, in credit, the impact was also modest. Most of our investments are currency hedged on a principal basis and we have a limited number of investments with operational exposure in the UK. The 3rd and remaining area of impact to E and I was from the general equity market downdraft in the days after Brexit that impacted our publics.
This too constituted less than $50,000,000 of E and I impact. Importantly, the aggregate decline in our publics quickly reversed itself in this quarter and then some in the 1st several weeks of Q3. Further to this, against the backdrop of this market rebound, in the 4 weeks since Brexit, as Steve mentioned, we've in fact signed or closed over $7,000,000,000 of realizations in over 15 transactions across the firm. Now I'd like to review briefly the highlights of the results for each of our businesses. In credit, GSO had an excellent Q2.
Gross returns for the performing credit and stress strategies were plus 10% and plus 7% respectively, marking a strong rebound following a particularly difficult period in the markets. This was driven in significant part by strong performance in the energy portfolio across the platform and by liquid portfolio gains. GSO had a tremendous fundraising quarter, dollars 7,300,000,000 of inflows, its 2nd best fundraising quarter ever. The list is long and interesting. First, we closed on $4,200,000,000 for our 3rd mezzanine fund in the Q2 July and expect to hit our hard cap of $6,500,000,000 based on strong global demand.
2nd, we quickly raised a new $1,000,000,000 vehicle targeting liquid opportunities arising from market location. 3rd, we priced 3 CLOs this year, totaling $1,700,000,000 including the largest deals in the U. S. And Europe this year. And 4th, GSL will receive a significant allocation from the capital recently raised by our newly formed Harrington Re Reinsurance Company in partnership with Axis Capital, which raised $600,000,000 in the largest such offering in the market this year.
GSO is also quite active in deploying capital, investing or committing $1,700,000,000 this quarter. The 2 most significant areas of activity are in Europe, including a unitranche debt commitment of over €600,000,000 that is the largest to date in the European market and energy where the 2nd quarter marked a resumption in activity and enhanced deal flow, which continues apace. In Hedge Fund Solutions, BAM's composite gross return was up 1.4% in the quarter, making up some ground after a challenging first quarter. While much of BAM's incentive fee eligible AUM fell below its high watermark in the Q1 given the market headwinds, the 2nd quarter's positive progress leaves a significant portion of this capital closer to the point of crossing back over. Demand for BAM's products remained strong.
Including July 1 subscriptions, year to date gross inflows were over $6,000,000,000 Net inflows for the same period were over $1,400,000,000 despite the impact of the expected large redemption in our individual Investor Solutions area, which we discussed last quarter. Excluding that redemption, year to date net inflows were a very strong $2,600,000,000 We've also locked in some very large mandates, which will come in later this year and are having active discussions for several more. So the outlook for the second half is quite positive from a flow perspective. So the picture here is one of fundamental strength and momentum in the BAM business, notwithstanding the broader questions about the industry, which reached a heightened level in the same quarter. In corporate private equity, our funds appreciated 2.5% in the quarter.
We've been carefully navigating a low growth, high priced environment with a disciplined focus that has helped us avoid some of the problem areas in the market over the past few years. With $30,000,000,000 of dry powder today in corporate private equity, including our new BCP 7 fund and new core platform, we're well positioned to take advantage of dislocation. In the energy space in particular, as we've discussed for several quarters, although we've raised a lot of capital, we chose to keep our powder dry over the last year and wait for the right moment. That patience paid off, and this quarter we started to really see the opportunity set ripening and have recently committed or deployed about $1,500,000,000 of equity of several investments and have a strong pipeline. We've remained active on the realization side in corporate private equity with $3,100,000,000 sold in the 2nd quarter, mostly in BCP V.
As you know, BCP V is substantially in carry on a total fund basis, and we continue to accrue carry with additional gains. If everything were sold today, we'd crystallize and pay out the fund's entire current net performance receivable of $373,000,000 Despite this, some of our recent sales in BCP V have not yet converted into distributable earnings. The reason is that we've recently sold some large investments at lower multiples of invested capital that given the long hold periods did not exceed the accumulated preferred return, and we need to make up such deals shortfall with additional realized gains elsewhere before carry can be paid. Simply put, this is a timing issue that arises from the sequencing of investment realizations. And as I highlighted on last quarter's call, this could persist over the next couple of quarters.
That said, we have good momentum in realization activity that we expect will drive distributable earnings, particularly from our real estate business. With regard to real estate, our overall performance remains very strong. Despite some bumpiness in the quarter in public markets and the markdowns in our UK office portfolio that I discussed, our opportunistic funds were up 2.2 percent and core plus up 2.1% in the quarter. The overall healthy fundamental operating environment and positive supply demand dynamics in most regions and subsectors creates continued opportunities. We deployed or committed $2,600,000,000 in the quarter.
And in the 1st 2 weeks of Q3, we've consummated 4 new transactions, including 3 in Europe that emanated to different degrees from the post Brexit turmoil. We realized $3,400,000,000 in the quarter and the global hunt for yield is sustaining demand for the type of real estate we own, particularly in the U. S. In addition, we currently have an excess of $4,000,000,000 of equity realizations from asset sales under contract and an upbeat outlook for the pipeline in private and public market realization opportunities. I'd like to close my remarks today with a bit of a longer term perspective for our business to complement and echo what Steve said about our value.
The dual drivers of our long term value, as Steve said, are, of course, our fee related earnings and our performance fees. As Steve said and as I've discussed in the past, we expect a powerful upswing in FRE next year based on capital already raised. And Steve said, this is a recurring, dependable, high margin cash flow stream mostly generated by management fees from capital locked up contractually for an average of 8.5 years. And as that stream grows, we'll become an even more visible part of our earnings machine. With respect to our performance fees, the driver of that future value is the capital that is put to work that will season in value and eventually be harvested, and it's important to step back and appreciate the extraordinary position that we are in, in that regard.
At the end of the quarter, we had $269,000,000,000 of performance fee eligible AUM, of which $174,000,000,000 was invested with $121,000,000,000 in drawdown funds. That's what I call our value in the ground position. That is approximately triple the amount we had in the ground 5 years ago. In 2015, we generated around $2.50 per unit in performance fee distributions, over 80% of which was with 3x the value in the ground today, we believe that bodes very well for the growth and value of our future performance fees. And while performance fees can be less predictable in the short term, over longer periods of time, we believe they are highly predictable given our track record.
While public investors have only been witnessing this dynamic for a relatively short period of time since our IPO, our LPs have seen us do this consistently for 30 years. And the fact that these investors continue to entrust us with more and more of their capital to manage is indeed the best endorsement. With that, we thank you for joining the call and would like to open it up now for
questions. Thanks, Jasmine. If you could open up for questions, but before you do, if I could just ask everybody in the line, we have a fairly full queue So please limit your first call into one question and one follow on, that would be terrific.
Thank And our first question comes from the line of Alex Blostein with Goldman Sachs. Please proceed.
Thanks. Good morning, everybody. Just want to start off with a backdrop for fee related earnings. So $60,000,000,000 not currently earning management fees up quite significantly from the prior quarter. So clearly very large number.
So I was hoping you guys can run us through the expected timing how this is going to play into the management fee growth over the next year to year and a half. And then more importantly, I guess, as we think about the margins, they've been range bound on the fewer littering side for the last couple of years. So again, as we kind of start to think about the growth on the top line, how should the margins progress on the back of it?
Well, I think taking the second one first, Alex, I think we will see we've seen obviously low double digit AUM growth over a long period of time now, and we expect that to continue as well as fee earning AUM growth in the high single digits to low double digits over time. On a margin fee related earnings margin basis, there's obviously some noise from time to time in the numbers and you have to adjust for those. But if you step back and look at sort of the longer trajectory of the last 5 years, we did 36 point 4% FRE margin in the Q2. That's exactly what it was for all of 2015, although we kind of got there differently. And if you look over a longer period of time, that has grown by 700 basis points over a 5 year period.
And again, while there's occasional ebbs and flows in that trajectory, the trajectory has been on an upward trend and we expect that to continue.
Got you. And then just for my follow-up, Steve, I may just ask you again around the capital return dynamic. It comes up pretty frequently, but given the underperformance in the shares, obviously, over the last several months here, just wondering if you guys have given any thought to the buyback because it does seem to come up pretty frequently for you guys.
Why don't I delegate that one to Tony?
Alex,
we looked at that again after the last quarter, frankly. And we just feel a few things. We can earn a huge return on the capital that we have on our balance sheet. It tends to be as we tend to put up a small amount of the fund. It's an enabling it's enabling capital that allows us to raise LP capital.
And if you look at the return on that capital that comes from LP's management fees, performance fees, it's compellingly high. Now we're in a business where we pay out 85% of our earnings. We don't accumulate a lot of cash flow and it's double digit growth, high single digit, low double digit growth, as Michael said, we're needing that to feed that capital in and drive growth of business. And we've continued to conclude that our LPs, our unitholders are better off by us continuing to grow this business and put this capital work with very, very high returns than to buy in shares. And so far, as we've analyzed it, we think that's the better view.
At some point, of course, our stock gets we think the stock's a bargain here. And at some point, even though we can earn sort of 40%, 50% returns on incremental capital, we will look at buying our shares. But that so far, we've been more concerned about building a great company and continuing the growth serving our LPs than trying to manage short term stock
price. And then I'll just follow-up on your first question, just some of the dimension of that $60,000,000,000 not earning management fees. A big chunk of that is our BCP 7 fund, as Michael mentioned, that will flip on in the Q4 in November. We've also got a fair amount of dry powder in credit in our mezzanine our new mezzanine fund in real estate that earns as invested and that will be over the next several years. So it's a bit of a mix between capital that will be turned on in the next year versus when it's invested.
Yes, got it. Thanks so much.
Our next question comes from the line of Dan Fannon with Jefferies. Please proceed.
Hey, Dan. Good morning. Dan, are you there? Let's take the next question, Jasmine.
Yes, sir. Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Hey, good morning.
Good morning, Craig. Good morning.
So on Fundraising First, it's been a very strong 2 year capital raising cycle here for Blackstone. And I think the $21,000,000,000 in 2Q is probably much better than anyone's forecasting. But I wanted to get your perspective on how aggregate capital raising trends could really trend over the next 12 months just with all the recent fund closings? And maybe you can also help us with the largest potential strategies that are either open or could open given the majority of the last fund is now committed or invested?
Okay. You want me to start on that? Fundraising for our business is lumpy. And when it comes to drawdown funds, when you have the flagship funds, you tend to have a big year and then it tends to slow down a little bit. However, as our business as our firms become more diversified, we have more and more funds all the time that are in the market.
And any one time we might have dozens or more, number 1. Number 2, we're constantly I want to emphasize innovation. What really drives this company is innovation and we were constantly having new products. And a lot of times that starts off with a separate account with a few big investors to do something different. And once we get that money invested, then we convert it more towards a fund to and take it to a broader market.
And then 3rd, increasingly we have always open funds and permanent capital vehicles and things that are in the market every quarter and every month and every day. We take in daily capital with a bunch of our products. So our mix what you're seeing is the business shifting. We continue to have the big flagship funds and those hit in 15, but the business is shifting towards constant new things and more always open. So you're seeing the that lumpiness level out and that's why you're having surprisingly high fundraisings in the absence of the big global funds.
I'm going to turn it over to Michael to talk specifically about how that plays out a little bit.
Without mentioning that.
And then we in terms of specific funds that we are going to be entering the market, the private placement exemptions require that we not mention them by name. So you can take that offline with some of the people.
Craig, I'll just briefly put a fine point on what Tony said. If you step back and look at our annual inflow pace, last year, we obviously had a monster year $94,000,000,000 or so. In the prior 3 years, 2012, 2013, 2014, when we were definitely a smaller firm in terms of product set, we averaged between kind of $47,000,000,000 $60,000,000,000 actually in those each of those 3 years. And I think over the next year or so, it will probably fall within that range. It will we've generally outperformed our kind of prior year forecast on our fundraising because things just happen and we innovate, as Tony said.
And that pipeline is a combination, without getting into specifics, of both, I think obvious successor funds to funds you're well aware of, roman numerals III and so forth of different funds around credit, real estate, regional funds, etcetera. And then also, new products. And then as Tony said, some of these always on fundraising products like in the real estate area.
There is no segment of our business that doesn't have multiple new products entering the market.
Thanks. And just as my follow-up on fees, parts of the hedge fund industry are adjusting their fee structures lower, but there's actually a few good examples in the Alt segment where actually you're seeing higher fees. And I think BCP 7, you saw modest fee increase from Fund 6. So I'm just wondering, can you talk about where the industry is seeing fee pressure and also contrast that to how Blackstone's fees are trending? Because I don't think you've actually seen any sort of negative fee adjustments significantly even in the hedge fund side of your business.
Yes. I think your perception is generally right. We're not seeing across the board much in the way of fee pressure at this moment. Of course, we've kind of led the industry with, I think, good fees for our LPs all the way through. We've never been a fee gouger.
And we voluntarily led the industry in changing how we treated certain transaction oriented fees and voluntarily rely more on management fees than those things. But at this point, it's pretty stable and even in the hedge fund area. And then we have a mix shift going on, though, that overlays against that. So in the hedge fund area, we're adding more high margin products. But in some of the other areas like real estate, BPP, for example, is a somewhat lower fee product and so is core private equity and PE.
So there are some variations going on in the mix of products by segment. But in general, if you look at product by product, we're not seeing significant fee pressures.
And to Tony's point, if you to put numbers on it, if you do the math, which I think you can from public data of management fee rates across the whole platform, I. E. Our management fees, our base fees over our weighted average fee earning AUM over any period of time. As Tony said, the numbers will tell you over the last year, two and a half years, it's been very stable. So within like 1 or 2 basis points across the whole firm over the last couple of years now.
There's different things going on within that, the mix shift Tony mentioned, but then also in terms of underlying funds. And I think I mentioned this a couple of quarters ago. If you look at our flagship private equity funds, if you look at our flagship global real estate fund or flagship European fund, the effective management fee rate once you get through the fee holiday, but taking that into account, will be higher in those three products than in their predecessor funds.
Thank you.
And we do have Mr. Dan Fannon back with Jefferies. Please proceed.
Thanks. Can you hear me now?
Hey, Dan, we can.
All right. Sorry about that. Can you provide some additional color around BAM? Obviously, the industry headwinds are there, but you continue to take inflows, you're adding new clients. Just wondering if you're getting a greater share of the wallet from existing clients or what's coming from any kind of new clients to firm?
Well, I think we've been getting greater share from the clients for a long time. I mean, the actual step back from the hedge fund industry and look at the hedge fund to funds industry, that's been in decline for several years, yet our business has been growing rapidly over that period of time. And it's really hard. I mean, it's a remarkable job that they've done in that business because to be the industry leader and a dominant industry leader and still grow market share, it's not too easy to find examples of that around the world and they've pulled that off. They've pulled that off though again by innovation.
If all they were was a standard hedge fund fund to funds, you wouldn't see this picture, but their ability to create new products and serve their customers in new ways and have those be higher margin products has been remarkable. And they've got some really big ideas coming that could add tens of 1,000,000,000, and I'm not going to get into what those are. But I think that they may be heading for a growth spurt actually here. So yes, we're taking market share, but it's by being creative and it's creating new things. It's not trying to just grab more of the old.
Thanks. That's helpful. And then on the $7,000,000,000 in sales that you guys have highlighted thus far in the Q3, I know it's across a multitude of strategies and products. But I guess, can you highlight specifically kind of the end markets and kind of some of the bigger transactions and kind of how we can think about the flow through potentially through the distributor earnings?
Sure, Michael. Sure, Dan. The $7,000,000,000 which is both realizations we put under contract and actually sold, It's a mix across the firm. The biggest part comes from real estate. And then within that for real estate and private equity, it is a mix of public sales.
We've done a bunch actually in the last 2 or 3 weeks and also private sales, particularly with respect to real estate, but also take into account, for example, that change McKesson deal, which is a quite a transformational deal that we signed up that Steve mentioned. So it's really it's a lot of different deals. And in terms of contribution, especially as it relates to real estate, it should be very healthy.
Great. Thank you.
And our next question comes from the line of Robert Lee with KBW. Please proceed.
Thanks. Good morning, everyone. Just maybe going back to the hedge fund solutions, I'm just wondering if maybe you can give put a little bit more finer point on where you stand with high watermarks, I mean, kind of how far away is kind of the bulk of assets? And what would it take to start pushing more of the strategies there into fee generating excuse me, incentive generating?
Sure. Robert, it's Michael. Much of the dollars under the high watermark, vast majority, They weren't they were above the high watermark at the end of the Q4 and they went below it in the Q1 because the industry pressures have been down 2.9% 2.9% across the platform. So the numbers are basically that 90% of the incentive fee eligible AUM is below the high watermark. But of that 90%, the vast, vast majority, again, about 90% of it is on average 2.5% below the high watermark.
So those are the numbers and they're kind of intuitive when you think about what happened in the Q1 and then what happened in the Q2. And obviously our team at BAM feels optimistic about near term getting back out of that. The reality is it's investor by investor in terms of what the high water market, but that's a sense of the kind of blended average across the platform.
All right, great. And just maybe a follow-up and sticking with the Head Fund Solutions business. I'm just curious if any of your recent experience maybe with Fidelity funding and taking money out of the product pretty rapidly, I would think. Any thoughts that maybe, Gee, the liquid alts part of that business is targeting the high net worth market, while maybe a lot of potential assets rethinking that, geez, given that potential volatility of assets and uncertainty around flows lower fee points in some cases that it's maybe really still the opportunity you thought it was a few years ago or any change in sentiment around that?
No. Well, I think it's I think we're just as optimistic about it as ever. In fact, it was the very success of that product that led to the redemption. So let me explain that. We originally worked this out, took 3 years of R and D and whatnot worked out until the facility, but they got a pretty good deal.
We then created a product for which there was a lot of,
there was an awful lot
of demand elsewhere and frankly better fees. And we didn't have infinite capacity in that product. So, needless to say, we weren't going to continue to grow the low fee, the low fee form of it. And so we moved our focus on to other investors and that's continued to grow. So the AUM in that business is growing very nicely and I expect it to continue to grow very nicely.
I mean, what a great product for retail investors be able to get access to what only institutions haven't, but do it with a lot of liquidity.
Great. Thanks for taking my questions.
Thanks, Rob.
And our next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hi, good morning. Thanks for taking my question. You highlighted Energy on the very strong credit performance. Is there anything idiosyncratic within those marks or specific to certain positions that drove the very strong performance? Or is it really just the shift in spreads and commodity prices?
Well, we don't have hundreds of names in that. So yes, there's certainly there are certainly a few big deals which moved it. But at the same time, the shift in perceptions in commodity prices moved everything. So I think the answer is both. But we saw some bonds of energy companies that and I'm not saying we own these companies, but if you look in the market, you'll see bonds of energy companies traded down to single digit prices and now they're back up in the 20s and they're still insolvent companies, but wow, what a run.
So I think you really have to unpack it name by name. However, all names move together. So I think, as I say, the answer is both.
Okay, great. That's all I got.
And our next question comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Hi, thanks very much. Quickly on Invitation Homes. It's A, if you can remind us what it's marked at on the books. And more importantly, it's been this great growth story, but I'm curious, at some point, does it transition from growth and acquisition story to just more of a management company? Just a quick comment would be great.
We don't do specific marks on specific assets. So I'm not going to get into that. I would say it's been a great investment. We continue to be very optimistic about where home prices are in the cycle. I don't even think we're in mid cycle yet.
So I think there's a in terms of home building and general activities, prices have come up a lot. As a result, we're still buying some homes, but it's harder to buy in the volume that we once did. And so it's becoming more a more mature investment in terms of rate of growth. And but we're still we still think there's potential to be had. And is it more of a management coming?
Sure, it is. Because we got a lot of homes and we want to serve those renters really well. We want to be a great landlord. And we're continuing to try to do that in a flawless way. And it's a big global business with lots and lots of customers and you never get it perfectly.
So we're working on that.
Okay. Just appreciate that. Just one quickie on the CLO business, you mentioned you did a couple of them already. So a lot of players in the market had slowed down because of some of the risk retention rules, but I think there's some workarounds starting to happen or risk retention vehicles potentially. I'm not sure if you're creating something
Well, I think that it will be market driven. We need to buy assets at good prices and we need to have liabilities at good prices and we kind of operate both have to be available. I think that we're a good provider of capital. I think if anything structured products are being harder for the banks and it's opening up more opportunity for us. It's not just in CLOs, but it's also in on the mortgage side.
And we're as I think creative as anyone in having risk or capital relief and sort of vehicles.
And on risk retention, as Tony just said, obviously there's Europe and the U. S. In Europe, the rules have been in place for longer and we have structures that deal with that nicely. And in the U. S, we think we have our arms around it as well.
And the rules are somewhat different in between the two areas. So yes, but anyway yes, so we're working on that along with everyone else.
Okay. Thanks so much.
And our next question comes from the line of William Katz with Citigroup. Please proceed.
Okay. Good afternoon, everybody. So Tore, I think in prior statements somewhere you had mentioned that you wouldn't be surprised if there was a pretty sizable shakeout in the hedge fund industry. So wondering if you could sort of update your thoughts on that? And then how does Blackstone sort of do in that backdrop?
And where might some of those assets go to? Yes.
So you can't read headlines and know what was said. So what we're seeing is, I don't think we see a collapse in the head front industry at all. But what we're seeing is a lot of turmoil in there. And then the turmoil is moving assets are moving from one form of manager to another form of manager. Frankly, we expect to see assets move from human managers to machine managers.
We also expect to see assets moving from high fee managers to lower fee managers or lower fee vehicles. And in some cases, assets moving from vehicles with lots of liquidity to assets with less liquidity. And all this is happening at once. But I do think I think fundamentally, when you have an industry which has underperformed the market averages and charges 2 in 20, there's going to be a lot of fee pressure on a lot of managers. And indeed, a 2% manager fee is one thing if you're earning 10% gross.
It's another thing if you're earning 4% gross, obviously. So those forces are playing through. As far as we're concerned, we still think hedge funds play a very important role in the portfolio and give investors exposure to all kinds of different markets. So they can pick their market and they can mix and match different exposures, commodities, emerging markets, takeovers, negative beta, positive high beta, etcetera, etcetera, etcetera. And they're very important for portfolio construction.
And we think we're pretty uniquely situated to do that. And that we're in a position to use our market clout to extract better economics from the managers and largely offset our fees. So as a result, we are people get an awful lot of value from us and it's one of the reasons they're we're continuing to pick up assets. And I think all this turmoil is actually helping us.
Okay. Just a broad follow-up here. As you think about a world of slow economic growth, is it still fair to try and underwrite 20% returns in private equity real estate as historically been the case? Or should we be thinking about something a little bit more realistic?
20% growth in private equity and estate is totally realistic. So we are thinking about something that's realistic. Just want to be clear about that. Remember, we're not buying the market. We're not buying economies.
We're buying typically broken assets or under managed assets. And then we're taking those assets, managing them better, significantly increasing the earnings of the cash flow and converting them from orphans or weak players into core assets, either core assets with low cap rates in real estate or core assets with high PEs in private equity. And if we can take a dog and create a great company, we'll get a pickup not only in the earnings, but the multiples. And in real estate, if we're picking a broken asset and creating a core real estate asset, we'll do the same. So as long as we can keep doing that, it's fine.
Whether economic growth is 2% or 3% makes no difference to us. And that's what people worry about when they say it's going to be slower growth. It's that kind of thing. So yes, we can still do very well as long as there are assets in the world or companies in the world that are not perfectly managed.
And our next question comes from the line of Michael Cyprys with Morgan Stanley.
Hi, good morning. Could you talk to some of the strategies behind the new opportunistic credit fund you raised. I think it was about just under $1,000,000,000 that's focused on market dislocation. Just any color you could share around the strategy there, the return targets? How big could this be?
What sort of geographic regions or sectors that you find most appealing for this strategy?
Sure.
One of the areas of greatest dislocation in terms of technical factors is credit. The regulatory changes, the capital pressures on the banks, the weakness of their balance sheets and all those things accumulated to evaporate credit in the credit markets sorry, liquidity in the credit markets, as Steve in particular has been commenting on. And that's created a lot of pricing dislocation. Earlier in the year when we set this up, you could see pricing of credits across the board where you'd have to have default rates higher than in the depths of the financial crisis to justify those low prices. And why?
Because there was a sort of a risk off mentality, investors were pulling their money and there's no liquidity in the market, so the pricing was terrible. So, I basically think credit markets and particularly illiquid credit markets are going to be a really, really great place to be going forward. Thanks to the regulatory regulators and the government that are impairing the banks and the investment banks and the providers of traditional providers of liquidity. So this is very broadly, this is a play on where we're benefiting from regulatory if you arguably overreach. With respect to regions, it's focused on the U.
S. And Europe, where we have big credit markets with good creditor rules. So if you're a creditor, you want to have good bankruptcy rules, good creditor protections. It's not we're not speculating on sort of quasi equity in some of the emerging markets, some of this. It's developed markets focused and it's across all industries and they can buy everything from distressed to normal performing bonds that are just underpriced.
And any color around the structure of the vehicle drawdown style, I would assume, how long and what sort of economics for Blackstone?
Yes. It's drawdown and it's consistent with the economics with all of our other credit deals.
Got it. Okay. And then just lastly on Harrington Re Insurance transaction, dollars 600,000,000 raise I think it was. Could you shed any light on the strategy there and also the economics of Blackstone? Sure.
I for Blackstone?
Sure. I love Harrington Re. I personally tried to take the biggest bite, the rules would let me, because I think there was some and I think Steve did too. And I think there was some limitations on how many insiders could buy. I mean, this is just we're out of we're not we're out of registration, right?
So I
can tell you about it.
Okay. This is a great this is I love this. I'm glad you asked. So this allows retail investors or institutional, but think about small retail investors to get the full panoply of Blackstone products in one set. You don't have to buy go through a lot of brain damage and filling out papers and big minimums and all that to get into all these different funds.
So first of all, so you get you put money up, you get Blackstone returns across the portfolio and diversification, which is very steady. It's high return, but when you get that kind of diversification, it's very steady. We then because we have a reinsurance partner, we get to we invest in the float from the reinsurance. We get free leverage. So we get the returns on $1.50 for every dollar we put up.
The Blackstone returns on $1.50 for every dollar that we put up. Then those returns accumulate tax free because it's an insurance company. So they just keep accumulating, accumulating, accumulating. Instead of having to pay tax on your interest and your gains and all that. They accumulate tax free, they get reinvested.
Then when we want to exit, and so the book value grows, then when we want to exit, we will IPO this thing and we expect to get a premium to book value. So then you get a markup on the all that accumulated earnings accumulated tax free. And guess what, when you sell, it's capital gain. It's just a great product. And for us, so that's from the investor standpoint.
For Blackstone, it's permanent capital. We can put it in any fund we want. And we have a great reinsurance partner, who is a real insurance company that is a really wonderful underwriter. We actually hope to make money on the insurance underwriting side of that as well. So obviously, I like the product a lot for both Blackstone and for the investors.
It's a win win like so many of your products are, which is good for us and it's good for our LPs as well. Great.
Thank you. Thanks, Mike.
And our next question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Hey, thanks. Good afternoon. Maybe first question here is just on retail fundraising. Now that we've had some time to digest the final Department of Labor fiduciary rule, and I'm sure you guys have had conversations with your distribution partners to this point. I'm just curious if you're expecting any changes to product structures or how you sell through the various brokerages, and whether it creates any timing disruption.
Really just trying to get a sense of feeling around the retail opportunity with some of the changes coming to the industry.
Yes. Those fiduciary rules are more focused on retirement plans, 401s and things like that. So, so far, our distribution has been mostly to high net worth individuals. And those that's unaffected, although we're increasingly creating products that are in more of a liquid sort of tradable form, which will be fine for fiduciary and those can go to smaller investors. We're hopeful that my partner Joan will be able to crack open 401s in a big way for alternatives someday, which would open up huge demand for our products.
But that's a ways away and it has nothing to do with the fiduciary rules. I actually think ultimately those will be helpful.
Yes. And in a way, we are in a great position because we're entering these markets after all of the changes. So we've been able to evaluate everything and structure products that we think will be best in class and provide really terrific returns like our others do on a net basis to investors.
Got it. That's very helpful. Thank you. And then just on the real estate platform and landscape, bank regulators are increasing scrutiny just on the commercial real estate lending standards for the banks. And so I'm just curious if your view is shifting at all in the opportunity set in the U.
S, meaning does it feel like we're getting frothy at all there? On the other hand, I hear the comments that momentum is strong with dollars coming in to the U. S. So I'm just trying to get a sense of kind of the deployment trajectory versus kind of the monetization backdrop?
Well, I think we're in reasonable balance is the answer. There are there's a pretty good bid for really high quality stabilized assets because cap rates are low and they're safe assets and it's a great country with really solid economy and so a lot of investors want to are happy to park their capital in those assets. On the other hand, we're not seeing any signs of in general, of overbuilding the kind of frothiness that are precursors to the collapse of real estate values. So some sectors are a little more active building than others. There's more building in multifamily, for example, in terms of where it feels like you are in the cycle than in single family homes, just looking at residential.
So you have to kind of unpack the things. There is great demand for office space in Northern California with a tech boom and less so in suburban office space in some central parts of the country. But across the board, we're still seeing good opportunities to put money out as well. And I would say though that 5 years ago, we were able to buy things at 40%, 50% discounts to physical replacement costs. The disc we're still buying things at discounts to physical replacement costs, but the discounts have narrowed a lot.
However, as long as we're buying at discounts for replacement costs, there's not going to be a lot of new building that crushes us, right? So we feel very, very good about the new stuff we're buying.
Yes. Okay, great. That's great color. Thank you.
And our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please proceed.
All right. Thanks a lot. First question, just on DE and in part the quarter and then just the outlook. So on the quarter, just on fee related earnings, it seems like in the private equity business, there was no step down on the fees. Just wanted to find out the timing of that.
And I understand the outlook in terms of the ramp in FRE in 'seventeen. And then on the realizations, Mike, I think you mentioned that even though there was $9,000,000,000 some of the nuances there in terms of why we didn't see big realized performance fees, was that some of that was in BCP V. Just wanted to make sure that was the bulk of the reasoning. And then when we think about the rest of the portfolio, are there any other nuances like co investments or anything else that could not flow through to DE like we typically expect?
Sure, Mike. On the FRE question, there was a step down in BCP VI in the quarter. And at the same time, the BCP VII lit up with a fee holiday. So that's why you'll see for a couple of quarters sort of a trough period for corporate PE, FRE before as we've talked about on this call, it really takes off. On the realization sort of DE conversion issue, it's I think we've actually covered the two points here.
The first is the BCP5 issue that I addressed pretty specifically in my remarks. And then the other is much less an effect, but a question was asked around, for example, the BAM high watermark in that from an incentive fee collection standpoint, that affects, DE in the near term. So it's really those two things.
And then, hey, Mike, just to follow-up on the first part. The reason you didn't see the sequential decline in base management fees in private equity is, as Michael said earlier, you have a lot of new products coming on. So SP, tac ops, some of these other businesses that are growing that the reporting segment includes is why these sequential management fees look like there wasn't a step down.
Yes. And I think that's a there's a point there that everyone should remember. And we present our business in 4 segments. But we're in a lot more than 4 businesses. And they all have to we have great products in 15 or 16 different businesses led by fantastic discrete teams.
And the breadth, diversity and strength of our business is much more than appears if you just look at 4 silos.
Okay. That's helpful. And then just quick follow-up. When we look at the returns in the quarter, given all the volatility, things held up relatively well. You guys mentioned how much money that's in the ground that you can generate or is that like carry generating eligible.
But obviously, there's a lot of macro factors, Brexit, that are weighing on investors' minds. So just wanted to see if you could give an update on like portfolio company trends across private equity and real estate, just to see how things are trending for the outlook for returns?
Yes. Okay. Well, in general, our portfolio companies in private equity are growing in the low single digits. That has come down. We've had these conversations every quarter for the last 5 or 6 quarters.
That's generally it's kind of been the rate of growth has slowed each quarter over that period of time, I would say, as the recovery in the economy gets a little longer than the tooth. But, it's still, however, exceeding the S and P 500 growth of earnings a lot. In real estate, both occupancies are going up and rents are going up. So and that's generally across the world and across asset classes. So I would and I haven't seen any diminution of that.
So I think those trends are continuing to be winded or back. Okay.
Thanks a lot.
And our next question comes from the line of Chris Shutler with William Blair. Please proceed.
Hi, guys. Good morning. In the hedge fund business with some of the new commitments you talked about having recently closed or in the pipeline, what kind of return expectations do those investors generally have for the hedge fund? Segment? Thanks.
Well, again, you have to break that down by product. And I assume you're basically asking I will assume that you're basically asking about our core hedge fund, fund of funds, asset product. And in that, I think they're hoping to get near S and P returns with about a quarter or a third of the volatility.
Okay, got it. And then maybe just a follow-up on the EBITDA growth question a second ago for Corporate PE. I mean, that's been in the low to mid single digits now for the last couple of quarters. If the EBITDA growth numbers remain, I guess, somewhat muted here, I mean, can you still achieve a 2 times moic? I mean, does it just take longer?
Mathematically, I would say it does, but any thoughts there?
As I mentioned before, we're expecting to get the same returns in private equity that we've earned historically. So I'm very, very comfortable with that. One of the things about I gave you the low to mid single digits, but we're doing more and more things in private equity that are not just buyouts of traditional mature companies that are traded publicly. If you look at where our money is going, there's a lot more buildups where we take a small company, a great management team and assemble a national champion. There's a lot more investment in like oil and gas exploration.
There's a lot more greenfield building of infrastructure like assets around the world. And all those things are not in the EBITDA growth rate because they're not mature sort of companies where you measure it that way. And those things are where most of our money is going and they're offering extremely attractive returns.
Okay, makes sense. Thank you.
And our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Great. Thanks for taking my questions. Maybe just a follow on to that actually. The in terms of deployment, it sounds like you are getting more innovative in trying to find opportunities. Maybe just to talk a little bit about some of the entry multiples in the U.
S. With the market being relatively high here in a safe haven and maybe contrast that with what you are thinking about the European opportunity given Brexit and NPLs there and also the energy cycle in terms of sort of timing of opportunities there?
Okay. Well, in the U. S, and you're focused on private equity, I assume, entry multiples are definitely higher, but I have several caveats. The availability the cost of debt is also definitely lower. The availability of leverage is quite attractive.
So the quantum of debt is higher. And we've shifted our focus towards companies that have, I would say, you'd ordinarily pay more because they're businesses with greater organic growth and ideally ones with where capital expenditures is a low percent or other capital needs to drive that growth are low percentages of the free cash flow. So if we look at the unlevered returns we have, we're getting the same that we always did, but there's mix shift and we react to mark conditions and we try to anticipate to be ahead of it and be clever about that. So, but that plus what I mentioned in the last question, from Chris was, is really why we're still able we think able to deliver really attractive returns in private equity. As we move to Europe, Europe's been a market that where there's relatively less available in private equity, there's been relatively less available.
We've been, I think, pretty public about concerns about the long term growth rate of the growth of the eurozone, strength of the banking system in the eurozone, the refugee crisis and so on and so forth. So a lot of issues in Europe that the U. S. Doesn't face. Yet prices in Europe have been not lowered to reflect those added challenges.
And so that's made Europe a harder place to put a lot of money for us. But we still look at are still looking at a lot of things. I think Brexit actually to the extent it makes people step back and knock some equity values down will enhance our opportunity to do Europe. Europe has been tough for a while. And then in energy, not sure what exactly you're interested in there, but I think it's important to remember that we've been big energy investors for a long time.
This is not new. We're on our 2nd dedicated fund. But even before our 1st dedicated fund, we have a lot of energy, which is why we went out and raised a dedicated energy fund just so we didn't become over concentrated in that. And that energy fund is both a global fund and but does things like oil and gas at the upstream, but it also buys power plants and builds renewable assets. So usually in energy, bad for one in that spectrum can be good for another.
And I think so what you need to keep in mind is as oil and gas might get soft, maybe that means that the buyers of oil and gas have some real interesting opportunities. So we play the full spectrum. And right now we got just a ton of opportunities there.
Maybe just one last one either for you or Steve. As pension plans, you think about allocations going forward and we have lower yields that could theoretically lower discount rates and raise liabilities and we've got full equity markets and low rates for the fixed income side. So LDI strategies could even be perceived as less attractive. Obviously, you would think alternative strategies, particularly in private equity and loan dated would be much more in demand. What are you hearing from pension plans in investing more in alternatives?
And then with the fundraising being so strong and being largely over subscribed, how can you meet the demand for that in terms of investable opportunities? Well,
I think I'll take that one, Steve. On the pension funds, we've been having sort of a pretty remarkable run-in terms of raising money, and it's one a testament to the firm and breadth and excellence of performance. And on the second factor is the fact that these institutions typically are not hitting their assumptions, actuarial based assumptions, and they need to do that. And your assessment, in my view, at any rate, of the way the world lays out is correct. And as we talk with our clients and new clients, they really need to find a way to make things work.
And so we're finding a broader range of people who want to invest more and more money in the alternative space. And our existing clients are tend to be stepping up their size significantly with managers they really like and trust. And I think maybe everybody on a call says something like this, if it's their call that you're a place of choice for those. But I think the numbers that we've put up over years show that, that is indeed the case. And I don't expect that to change certainly in the short term, because there's still enormous pressure to keep global interest rates low.
In fact, that's accelerated after Brexit. My goodness, if 2 thirds of the GDP is sort of 1% or lower for the 10 year, that's really stunning. I mean, how do you get that kind of really good performance? And we create that for them. And so I think that, that will continue.
And as to what we do with the overage, Some of it goes to our competitors actually, good for them. But we don't look at life like that. We keep inventing new things because what we're trying to do is give investors the highest possible returns with the least risk, and we've been very successful at that. And so we just go off on our way and come up with new things. As Tony mentioned, each of our big business areas have sort of as part of their strategic plan, products we'd like to introduce.
There's only so much you can do without straining your people, because we have to continue to keep doing great stuff on what we promised. So but that's a virtuous circle for us right now. And I don't see what's going to change it other than radically higher dramatically, I shouldn't use radically, dramatically higher interest rates and getting excited about 25 basis point moves or a 50 basis point move is being dramatic. It's only it's sort of like the what do they say in the land of the blind, the one eyed man is king. It seems big, but it's in the context of the world.
It's not really going to affect the economy very much. It will bang markets around a little bit. But I think there's really good headway here for the firm.
And let me just say, I don't think this certainly low interest rates And by the way, a perception that the equity market going forward is not going to do much better than 5% or 6% has helped lately. But these no institution, no pension fund out there could earn its return hurdle historically either without a big slug of alternatives. And so this is not new and it's not temporary and it's not a function of today's market conditions. If you go back and look at institutional investors, their highest return asset classes always are alternatives for every holding period you can think of. And those and as a result, those institutions that made a larger commitment to alternatives have higher historical returns.
And one of the really one of the ironies about the global financial crisis, that's good for us is when that everything collapsed, the perception was, well, alternatives are riskier, you're really going to take pain then. Well, guess what? They actually held their values better than public markets, debt or equity. Others and by debt, I mean, not government bonds, obviously, slight quality there. But people saw, wow, they alternatives really held their value in that.
So there's a growing perception of maybe they're not that risky after all. And they're certainly uncorrelated. And so, I don't think the interest in alternatives and the move to alternatives is a temporary thing driven by today's market conditions. It's been going on a long time. The people that move first and move more are have done better, both in terms of consistency of returns and how high their returns are.
And I think it's going to keep on going.
Great. That's great perspective. Thanks so much guys.
And our final question comes from the line of Eric Berg with RBC Capital Markets. Please proceed.
Thanks for fitting me in. I have been struck by how many investors continue to believe even though you've addressed this topic time and again, that the decline in rates and the extremely low rates have helped returns to your LPs in ways that are simply not repeatable. In other words, these investors understand the quality of your people and your business model. They get all of that. But they're concerned that if rates rise from here, you just won't be able to do as well to your LPs as you've done in the past.
So my question is, you keep saying it's not true. They're worried about it. What is your latest thinking about what would happen over the long run to the returns that you would deliver in say real estate and private equity if we went to a more normal rate environment? Thanks.
Well, doesn't some of that have to do with why rates are going up? If you've got an overheated economy, our types of investing tends to do very well in that. If you have high levels of inflation, that's sort of made for the real estate business, and it creates very interesting returns on a nominal basis. And we've lived in this industry, which I've been hanging around since the early '80s when it started. And I think Tony did like 5 years later or something like that.
And we made good money 5 years before, Steve. Really? I didn't realize you were that old. But the you can do well or do poorly in a lot of different environments. And we're not a bond fund per se, it's a firm where rates go down and you make accidental money.
We're trying to create value wherever we go. And sometimes you fix your interest rates so that if you sense things are going up in a way that isn't going to benefit you, you limit your cost. So I'm not trying to be adversarial about it, but I think it's much more nuanced sort of approach. Tony, I cut you off for a sec, so I apologize.
No, no, no. I was just going to say, usually what we find is when rates go up, it's in the, I guess, the backdrop of economic strength. So it's probably going to if we kind of bump along with a really a Neiman economy, rates probably stay low a long time. If they go up to what you're talking about, then it's probably a pretty strong economy and that's going to be good for us across the board, first of all. So secondly, in terms of putting new money out, it'll just be easier.
I mean, the a rising tide lifts all boats and you hear about the 0 interest rates being financial repression. So as the financial repression goes away and the new money will I think have an easier time earning returns. Now your existing assets to the extent they're interest rate sensitive could be hurt in that if you're holding them in at their long duration. And so what we've done like for example in our credit business, we don't have a lot of long duration fixed rate assets. We have we're short duration.
We've got a lot of cash. We've got there are a lot transformational stories. There are restructurings. There are recapitalizations. There are things that are not going to be particularly interest rate driven.
In real estate, as Steve mentioned, you get inflation, you're going to get rent growth, you're going to get and so on and so forth. That should be okay. And in our mortgage REIT, everything we have in that mortgage REIT, everything is floating rate. So actually interest rates, higher interest, there are right through right a pass through that are good. And private equity, I think, again, we might pay a little bit more for debt, but again, strong economic background has got to be helpful.
So no matter where I look in the business, I think it generally becomes easier and better for us.
Thank you.
Thanks, Eric.
And at this time, I will now turn the call back over to Mr. Weston Tucker for closing remarks.
Great. Thanks everybody for joining us this morning and looking forward to talking to you next quarter.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. So you all have a great day.