Good day, ladies and gentlemen, and welcome to the Blackstone Third Quarter 2015 Investor Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the conference over to your host for today, Ms. Joan Solotar, Senior Managing Director, Head of Multi Asset Investing and External Relations.
Terrific. Thanks, Jasmine. Good morning, everyone. Thanks for joining us today for Blackstone's 3rd quarter 2015 conference call. I'm joined by Steve Schwarzman, Chairman and CEO Tony James, President and Chief Operating Officer Michael Chae, our newly appointed Chief Financial Officer and Weston Tucker, Head of IR.
So earlier this morning, we issued a press release and a slide presentation illustrating our results and that's available on our website and we expect to file the 10 Q in the next few weeks. So 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 don't undertake any duty to update the forward looking statements. And if it's for a discussion of some of the risks that could affect the firm's results, please the Risk Factors section that's in our 10 ks. We will refer to non GAAP measures and you'll find the reconciliations for those on the press release and I'd like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone funds.
This audio cast is copyrighted material Blackstone and may not be duplicated, reproduced or rebroadcast without our consent. So just a very quick recap, we reported economic net income or ENI per unit of negative $0.35 for the 3rd quarter due to the unrealized marks on our public holdings in private equity, real estate and credit. And for the year to date period, we reported positive ENI of $1.45 per unit. Distributable earnings were $692,000,000 in the quarter or $0.58 per common unit, that's up 7% from the prior year as realization activity was strong and we will be paying a distribution of $0.49 per common unit. That's the unitholders of record as of October 26, 2015.
That brings us to $2.90 paid over the past 12 months, which if you want to calculate it equates to a pretty compelling yield of 9% on the current stock price, which makes it actually one of the highest yields of any large company in the world. And with that, I'm going to turn it over to Steve and we'll take questions after Steve and Michael speak. And I just want to remind you to please keep it to one question on the first round because we have a lot of folks on the call. Steve?
Good morning and thanks for joining the call and thanks Joan. The Q3, as you know, was a turbulent period for global markets with sharp declines and heightened volatility in basically every publicly traded asset class. Volatility in the U. S. Stock market for example reached its highest level in 4 years.
Markets have moved as though the world is heading into a recession or at the very least that the world is facing an enhanced risk of slowing growth. From our perspective, we do not see a recession, but we are seeing slowing in certain regions and sectors with some excess coming out of markets. Here in the United States with the dollar up 10% to 25% versus many other currencies around the world, we've effectively experienced the Fed rate hike without actually having one. With that said, we're seeing lots of positive signs as well. Restrictive building in real estate around the world leave supply often below demand.
Housing in the U. S. Is strong and expected to get stronger. Office leasing is good. The auto and tech sectors are healthy and low oil prices should be good for the consumer.
In the lodging space, which has been one of the hardest hit sectors this year, in terms of public market valuations, revenue trends actually remain quite strong with industry RevPAR estimated at around 6% year over year, which certainly is not reflective of a recession that I find is very surprising in terms of a public market evaluation. Overall, we see good growth in the U. S. Perhaps slowing a bit from 2014 levels, while Europe appears to have bottomed and is growing slightly faster than we anticipated. Emerging markets, India is in very good shape growing at over 7%.
While China is definitely slowing, it's still growing faster than much of the world and certainly faster than the doomsday scenarios I sometimes see on television. Brazil is facing significant challenges in a serious recession, but it's becoming more interesting as an investment opportunity ironically as it weakens. In Japan, stimulus appears to be working with slow growth expected for next year. These are generalizations however and our holdings are not reflective of a market. We carefully select sectors and companies and then implement a specific plan to improve those companies and create value and that's what gives us the super performance we've had historically.
Against this backdrop of significant public market weaknesses, Blackstone D and I was negatively impacted as the value of our public holdings declined and I think Tony gave you this. Importantly, these declines historically have been temporary. With locked in capital in our drawdown funds, we are never forced sellers and can ride out any period of volatility. Already in the Q4, our publics have rebounded sharply, up 7.3% and based on where they are today, our E and I of course would have been significantly higher. Most importantly, the growth of our underlying portfolio companies and the long term value of our holdings continue to build just as the stock market says just the opposite.
In private equity, our company's reported aggregate EBITDA growth of 9% year over year. That's 9% year over year, doesn't quite match what the stock market thinks. In real estate, our companies continue to see strong fundamentals across the board, including high single growth in office rents in the U. S. And the U.
K. And healthy hotel RevPAR growth. In India, which is one of the hottest office leasing markets in the world, we're seeing 17% rent growth on new leases. And our Chinese shopping malls, which will shock you, are reporting same store sales growth in the area of 15% to 16%. Global recession, go figure.
So overall, we're not seeing recessionary signs in the portfolio and we feel very good about our current investments. All of this positive performance underlying companies simply does not square with the large declines we've seen in several of the stocks, and we're in the decline of Blackstone stocks. Volatility is however ultimately good for our business, a little bit painful from time to time. We are uniquely positioned to take advantage of dislocations. We've seen the public markets correct many times before.
And as always, it presents the potential for greater deal flow with favorable risk adjusted returns. We have the confidence of our limited partner investors and we've raised nearly $100,000,000,000 in new capital in the past 12 months. Just think about that. That is a stunning number, giving us the industry's largest dry powder balance at a time of significant market dislocation. We have great flexibility in how and where we can invest depending on the environment.
It's a good thing. For example, in real estate, as public REITs declined 15% and lodging REITs went down unbelievably 30% peak to trough as well as some individual companies. We public we pivoted to public to private transactions. We've already announced 3 this year, representing over $5,000,000,000 of invested or committed equity capital, that's forgetting the debt side of the deal, which is infinitely bigger, of course, with the largest pool of opportunistic capital globally by far. We don't need partners and we can move with speed and certainty to close the largest transactions in the world.
In private equity, where it's been more difficult to invest recently because of high prices, the pullback in markets broadly is helpful. To the extent that financing becomes less available, we can continue to pursue proprietary transactions with well defined value creation strategies and less leverage at the outset. Easy credit, the opposite of what you think tends to simply drive pricing higher, which benefits the seller, but not us when we're buying. For GSO, the recent increase in spreads combined with the lack of liquidity and high yield generally means greater opportunity to deploy our $17,000,000,000 in dry powder, which includes new dedicated energy and direct lending funds. In terms of our existing portfolio, we've taken a cautious approach towards rates and concentrated on floating rate exposures, not fixed rate, positioning us well in the current investment environment.
For BAM, our hedge fund complex, we can selectively invest in difficult markets to produce strong risk adjusted returns. BAM's lower volatility approach to investing has produced positive returns year on year, outperforming the S and P and many other market indexes. BAM continues to be an engine of innovation at the firm. The firm itself is like an innovation machine, creating successful scale products such as our new multi manager hedge fund. This fund is off to a terrific start raising $1,400,000,000 and substantially outperforming its peers and any relevant index through September 30.
In terms of realizations, given the long term and locked up nature of our drawdown funds with no redemptions. We don't have to sell at the wrong time. And while sustained weakness in public markets might delay certain dispositions in the near term, the public markets alone do not dictate realizations the way many people think they do. We rely also on strategic and private sale opportunities and we have several that will close in the coming quarters, which Michael Che will describe in more detail, driving healthy expected realizations. In other words, the perception that our cupboard will run dry is misplaced.
It's misplaced. Some of you still believe it. You're wrong. Even with the recent market volatility, we returned, as Tony mentioned, dollars 9,000,000,000 to our investors through realizations in the 3rd quarter alone and $45,000,000,000 in the past 12 months. And that is clearly not a melting ice cube.
We've been both raising and deploying record amounts of capital into what we believe are very attractive opportunities across all of our businesses. This is not the result of raising and investing bigger and bigger funds, but rather having broader, more global platforms and capabilities. In real estate, for example, our Core Plus business has already invested nearly $3,000,000,000 this year, helping to put real estate on track for another record year of deployment and Core Plus is a business that didn't even exist here 2 years ago. Our average investment pace over the past 4 years exceeds $20,000,000,000 per year from our drawdown funds alone, which is multiples of the investment pace that planted the original seeds for what you see as today's quite good level of distributions at areas that are at our strongest levels ever. The logic holds that if you believe in our ability to invest well and we've proven that over 30 years and our LPs believe it obviously, then you should believe today's investments are planting the seeds for potential distributions of a larger order of magnitude than what we are harvesting today.
It's all logical. From a BX stock perspective, the firm has demonstrated an incredible ability to generate high levels of current cash flow for our unitholders with sustained growth over time and I am confident this will continue through any reasonable market and economic backdrop. To maintain an above average distribution yield on today's depressed stock price, the medium yield of the S and P is around 2%. We don't need any realizations for us to have a 2% yield, which is average for the S and P. That's no realizations whatsoever.
We generate more with just our fee earnings, most of which is locked in. To generate a top decile 4% yield, we would need to realize just $0.60 per unit in net performance fees from our nearly $250,000,000,000 of performance fee eligible AUM. This is far below our long term expectations. By comparison, in the past year, we've generated $2.30 per year in net realized performance fees. So generating 25% of last year's performance fees gets us to the top decile
of yield
for the S and P companies. It doesn't sound so hard. Anything can always happen, my General Counsel would say, but it seems pretty reasonable to me. As evidenced by the recent declines in stocks including Blackstone's, it is clear that the public markets really don't take the long view. At Blackstone, that's all we do.
And I believe that's why our funds have outperformed the public markets since inception, typically at about double the S and P return in our high performance products. This month, as Tony mentioned, is Blackstone's 30th anniversary. The firm has come a long way in the past 30 years from our $400,000 in start up capital, half of which was mine, to a market cap of $52,000,000,000 earlier this year. That's not a bad rate of return. We've built the strongest brand name in the alternative space by delivering consistently strong returns through the use of our unique intellectual capital and ability to analyze market cycles and select successful strategies to benefit our customers.
Our brand allows us to raise large scale capital for basically any investment opportunity that we see around the world now. While the past 30 years have brought much success to Blackstone, I am most excited for what I think is in store. The firm is getting better and better. We have remarkable people here and great processes. I am confident in the long term trajectory of our business and our ability to outperform over time, driving significant benefits to our unitholders and to the people who work at the firm.
I'd like to thank everyone for joining our call today. I'm going to turn things over to our new Chief Financial Officer, Michael Che. For many of you, this is your first opportunity to interact with Michael. For those of us who've been here a long time, we work with Michael closely for 18 years. He's a tremendously talented individual and is already off to a great start.
As you get to know Michael, I think you'll come to understand that our company is in great hands in the financial area and part of the fun of Blackstone is that people grow and they get new responsibilities. And when we know them and trust them and we think they're super smart, that's the way to grow a great firm. So now with that big build up, which your mother will be very happy with, Michael. Go for it.
She thanks you, Steve. And thank you, Steve, and good morning to everyone. With respect to our financial results, performance and outlook, I'd like to cover 3 key areas: 1st, digging into our E and I results a bit more and putting it in context second, highlighting key performance trends in the business and finally, discussing the outlook for distributable earnings and the cash generating power of the business. So first on E and I. The driver of the negative E and I result for the quarter was decline in Republic Holdings and the associated unrealized performance fee reversals.
As you know, unrealized performance fees and unrealized investment income are 2 of the key components of ENI. These unrealized metrics are driven by the change in marks between 2 days, the 1st day and the last day of the quarter, and are a snapshot based upon that beginning and end point. As Steve mentioned, in the brief period since quarter end, our publics in both corporate private equity and real estate have depreciated over 7% as of yesterday's close, and the effect of that is to largely reverse the E and I decline in the 3rd quarter and the 1st 2 weeks of Q4. Now this is not to minimize ENI as a metric, especially over longer measurement periods, but to step back and put it in context over the shorter term, particularly during volatile periods. We also want to highlight the effect of the BCP5 catch up, which amplified the E and I impact of the markdowns in our public positions.
A substantial portion of the overall decline in the firm's economic income came from the impact of the catch up in BCP V, which declined 7% in the quarter due entirely to its publics, which now comprise about 59% of that fund's value. The fund overall has performed very well, particularly given its vintage and ended the third quarter marked at 1.8 times regional cost. BCP V's publics are up meaningfully so far in the Q4, and we feel good about the fund's position. With that as context, in terms of reviewing specific E and I drivers within the overall public's movement, 2 contributors were our Hilton position and the energy area. Hilton traded down in the quarter along with much of the lodging sector.
We continue to feel great about the company and indeed its stock has bounced back since quarter end. In energy, again, it was largely about public positions And similarly since quarter end, we have seen meaningful rebound in the public prices of certain positions. Looking past the headline E and I number, trends in the business remain very healthy, as Steve described. AUM. Total AUM rose 17% over the last 12 months to a record 334,000,000,000 dollars as $97,000,000,000 of inflows and capital raised, plus market appreciation of $12,000,000,000 well returned in that period to investors of $60,000,000,000 The strong growth was broad based across all businesses.
Investment performance. The competitiveness and growth of our firm begins and ends with investment performance. Our overall investment performance so far this year has been strong on an absolute basis. And relative to broader market indices, we've delivered quite extraordinary outperformance. Our private equity segment funds are up 8% for the 1st 9 months of the year, and our real estate opportunistic funds are up 9% versus declines in the S and P and other global indices as well as real estate indices, this represents outperformance of 1400 to 1800 basis points.
AAM is up 3% year to date versus a 3% decline in the global hedge fund index, outperformance of 600 basis points. And our credit strategies are also outperforming their benchmarks across their broad array of strategies. Our balance sheet is strong with $4,200,000,000 of cash, corporate treasury and liquid investments. We have $5.25 per unit of total cash, liquid and illiquid investments. Our outstanding debt has attractive cost with a very long dated maturity structure, a weighted average maturity of 15 years.
Both S and P and Fitch recently affirmed our A plus credit rating. Let me now turn to the distributable earnings picture and shed some light on the engines firing our cash generation. In addition to reviewing the recent strong DE performance, I'll talk about a few different drivers of the outlook for cash generation: the near term distribution picture, the FRE dynamics around the business and the performance fee outlook. 1st, in terms of the quarter and year to date, our realization activity has remained very strong, helping drive year over year growth distributable earnings in the quarter, notwithstanding the markets, for total DE of $692,000,000 in the quarter and $0.58 of DE per common unit, which represents an increase of 7% versus the Q3 of last year. The quarter contributed to a record $2,970,000,000 of DE year to date, 54% higher than the same period last year and to DE of $4,100,000,000 over the last 12 months.
Looking forward, our realization pipeline is fairly robust, and I'd expect a favorable Q4 for distributable earnings based solely on what's already been signed and This includes the sale of Iintiv, which closed on October 1, the pending closings of announced sales of Allied Barton, Sunguard, Vivint Solar and some of our office properties in Boston. There are other potential asset sales in process and of course market conditions permitting, we would evaluate secondary offerings of certain publics. So that's the near term tactical outlook for DE and realizations. Now let me step back and talk a bit about the fundamental drivers. Because the fundamental driver versus structural position of the firm to produce cash for our shareholders over time are very, very strong.
First, with respect to fee related earnings. Our FRE for the quarter was $266,000,000 up 12% over last year and just over $1,000,000,000 over the last 12 months. And as we find ourselves in a period of public market volatility that can cause swings in our marks and in E and I, it's worth focusing on the mass and stability of the substantially that weighed heavily on E and I was the Q3 of 2011, and our current fee related earnings are nearly double now what they were back then. And that's because the fee earning AUM of the firm is $241,000,000,000 now versus $133,000,000,000 then, over $100,000,000,000 higher. This large stable base of fees is an extraordinary asset of and balanced for the firm in all markets.
Furthermore, we have significant embedded near and medium term growth in fee revenues from funds that have been raised but are not yet contributing full management fees. As you know, our 8th global real estate fund was activated this year and will experience its Q1 of full fees in the current quarter and 1st year of full fees in 2016. Our 7th flagship private equity fund is expected to activate in 2016 and will experience its 1st year of full fees, we expect, in 2017. Projecting forward the combined management fee revenue stream from these 2 new funds and their immediate predecessor funds, we anticipate incremental management fee revenues in 2017 of $200,000,000 to $250,000,000 over the current year base of approximately $415,000,000 just those funds. This is but one example, though a significant one, of the structural embedded growth in our fee base.
Turning to performance fee drivers going forward, we know a key question on investors' minds is, what will future harvest be like? Well, the sources of current and future harvest, we believe, are rich and deep. I would think about these drivers in 3 parts. 1st, our mature liquidating vintages. Just over half of our net accrued performance fee receivable is from vintages 20 10 prior, and 90% of these are public and or liquidating.
Consider these as producing proven reserves, so to speak, in terms of having been a well established and continuing source of realizations. The firm has over $24,000,000,000 of public market cap across its private equity and real estate portfolios, with a large portion from these older vintages. 2nd is our more recent last 5 years vintages. These portfolios are fundamentally strong and performing well, as exemplified by the returns of the major funds of the time period. BREP7's inception to date net IRR of 24%, BREPYERP4 is 21%, BEP is 20% and BCP6 is 12%, with that fund continuing to appreciate through a J curve with a realized IRR of 47%.
We believe our teams chose well and selectively in a pricier vintage period. The value of these investments is seasoning steadily, but the ultimate realizable carry potential, we believe, is not reflected in the current marks nor in the performance fee receivable on the balance sheet. And we're seeing proof of that and in the ability to generate monetization events even in a younger portfolio in very recent IPOs in the last two weeks of companies like Scout24 and InterTrust, whose public market values imply approximately 2.4x our invested capital in aggregate on 1.5- and 2.5 year old investments and represent premium over the prior private marks. We anticipate that these more recent vintages will be steadily coming into their own in terms of monetization and realization events for a while to come. Finally, the 3rd driver of future performance fees is from the deployment of the $85,000,000,000 of the dry powder we have amassed.
The average lockup period on this capital is 9 years, which is at the heart of the fundamental advantage of our business model to be able to patiently attack opportunities and sell only at the right times. We are extraordinarily positioned in massive scale with our strategies made to be deployed opportunistically in times of dislocation and volatility. Our new lease case is at record levels, with $25,000,000,000 deployed over the past 12 months, dollars 6,500,000,000 deployed in the 3rd quarter and $11,000,000,000 currently committed but not yet funded, which with much of this recently committed and our ability to do so directly benefited by the volatility in the market. So like Steve, I feel very good about the underlying momentum of the business, the deployment environment and our ability to generate robust distributed earnings for our unitholders over the long term. We have a significant base performance fee generating assets with great diversity across vintage year and asset class.
In addition, our management fee base continues to grow in size and diversity, ultimately driving an upward trajectory in fee earnings. Looking ahead to the Q4, our advisory segment will no longer be included in our financials following completion of the spin on October 1, so we will no longer have that segment's contribution to earnings, which was approximately 0 point 0 $6 E and I per unit in our last fiscal year. It comprised in the area of 3 percent of firm DE over time. And so from a financial contribution point of view, we feel our growth will absorb its effect fairly readily. So in closing, I feel great about Blackstone's position and our ability to thrive through any environment.
I look forward to working with all of you going forward. Thank you for joining our call and we'd like to open it up now for any questions.
And our first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks. Good morning, everyone. So I know this question may sound a little premature, but how do you think about individual investor hedge fund products, especially given their fast ramp here?
Craig, it's Tony. There's obviously some capacity limitations to our individual hedge fund products, but we're a long way from testing those right now. We've we set up a as you know, we set up that product with Fidelity. And because of exclusivity arrangements, we sort of mimicked it actually. So we've shown we can replicate it already.
So if any one of those products runs out in capacity, we can sort of recreate a look alike. And I think we'll be we can scale that business quite substantially over
time. And our next question comes from the line of Bill Katz with Citigroup. Please proceed.
Okay. Thanks so much. Appreciate all the color, Michael, as well. Thank you. So there's been, I think, some uncertainty about what's going on with some of the sovereign wealth funds.
I think this industry has been quite a big beneficiary of a lot of growth coming out of sovereign wealth funds. Can you frame your exposure to some of the sovereign wealth funds, what you might be seeing in terms of any kind of liquidation or redemption pressure and more broadly what you're seeing in the social channel for incremental demand?
Yes, I think the Sovereign Wealth Fund, Steve, Sovereign Wealth Fund Group is divided into sort of 2 categories. 1 are the ones that are most affected typically by the oil business and then the others are all else. The all else group is continuing to enter some of the first time investors in our asset class, and some of those funds will be very, very substantial, new investors in the asset classes. So it's sort of business as usual with that group. And the other group of the energy oriented economies have had mixed approaches.
We've not really dealt with redemptions and things of that type because what's also going on in that group as well as the non oil people is that they're increasing their allocations to alternatives. And then within alternatives, they're increasing their allocations to their best performing managers and we're sort of it. And so we don't experience a lot of problems. It's the biggest issue with the oil oriented sovereigns is that some of them are not increasing their aggregate money in their funds, which means that for us to grow with them, we either have to take we have to take share, which is happening. But even some of them interestingly are significantly increasing their share of alternatives because of the performance characteristics.
So we're not really affecting feeling the effect of anything particularly major. In fact, we're growing in that asset group.
And one other point, as you know, 2 thirds of the capital we have is locked up for life of asset or life of fund, and we just raised the flagship product. So on that 2 thirds, the average life remaining is like 9 years.
The other thing I'd mentioned is that in terms of taking more share in both of these categories, oil and non oil sovereigns that were engaged in a number of discussions, which is quite interesting, where they want to very significantly increase their exposure and are talking about a multi $1,000,000,000 commitments to us as opposed to just commitments on single funds. So it's quite an interesting area, an important area and a growing area for us, just the opposite of what the underlying assumption was, I think, of your question.
And I'll put one more fact in there. The most sophisticated investors in the U. S, which are really the endowments have about 50% of their assets in alternatives. Most pensions have 20% to 25%. Sovereigns are still way behind that and have a long way to go.
Okay. Thanks very much.
And your next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed.
Great. Good morning, everybody. Thanks for taking the question. As a follow-up to the, I guess, distribution discussion and the outlook there, understanding that it's obviously pretty difficult to predict with a lot of precision and what realizations will look like. But if we take a step back and think through just a more stressed capital markets scenario, whether or not it's more difficult to exit via equity markets or via M and A transactions, which businesses do you guys expect to contribute the most in that scenario to your realized investment income and incentive income businesses?
Just to kind of help us again gauge what potential downside could be because the upside cases, excluding it, could be quite significant, but I think the market is just more concerned on the downside front.
Yes. Hi, this is Steve. And we'll have an open discussion with Michael and Tony on this one, because it's an interesting question. I think the real estate sector will power on in that environment. The only difficulty that sector would have would be access to capital that would slow it down.
At the moment, that does not appear to be happening. The leverage sector has had the price and availability in some kind of mix affected in certainly on the junk side, less so on bank debt. Real estate will continue in all probability quite strong because their exits are not typically through public offering, they're through sales of individual properties or groups of properties. And the supply demand characteristic in real estate in many, many places around the world is very good. So what you would need to really negatively impact that is just literally sort of recession, huge number of sort of non performing loans generally so that banks wouldn't be financing, capital markets sort of locked up and turned off and then it's hard for anybody to do Now the number of times that that scenario happens is quite low.
It's usually around I thought we to not study it, but just sort of do it by field. It's like once every 10 years, something like that happens for a relatively brief period of time. So I think we've got a very good situation there if you're asking us what would be the part of the business that would be the least susceptible.
Yes. And I realize even then, if you don't get over building in real estate, then you're going to have a lot of values. And so to get over building, you have to have an extended good part of the cycle before you come to that. Otherwise, inexorably, people need more space and rents go up and you get the leverage on the operating income. So even in higher interest rate environments in that scenario without overbuilding, real estate holds value.
And I would just chime in, in real estate and agreeing with Steve and Tony that there has been a bifurcation recently between the public market performance where there's been a pullback and the private cap rate environment for real estate assets, which has remained very strong. And we are in the market with some assets. We apparently unaffected by the public market turmoil. And as Steve alluded to, particularly in the real estate business, we can sort of buy wholesale and sell retail. We can buy big enterprises, but then sell individual assets in smaller chunks to those private buyers.
The other thing is if you get economic softness, we should have low rates And at some point, even if you can't exit a private equity company into the IPO market or into the M and A market, Then you have the advantage of recaps where we can as long as our companies continue to perform, which they are with EBITDA of 9% this year, that's great performance. I mean, that's none of us lose sight of that. Those companies delever quickly at that and with growing EBITDA, you can pay yourself some nice dividends. So the credit markets are sort of an offset to the equity markets in this whole sustaining our distribution question.
And meanwhile, just to finish, on private equity, in the face of obviously quite choppy markets in the last few weeks, we did successfully execute 3 IPOs in the last 3 weeks. It's an environment where markets are not closed. They're open from time to time for good companies and so.
Yes, that's because the performance of those companies was really terrific And people like to buy terrific things. And if that's what you have on order, what the heck works out.
Yes, got it. Thanks so much for taking the time answering the question.
And our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed.
Thanks. Good morning.
So you have a greater skew to public holdings that you did even just a couple of years ago and it seems to make your E and I a little bit more correlated to public markets than in the past. So I guess just more strategically, how are you thinking about balancing your portfolio exits from here? Do you want to be more skewed towards strategic sales as opposed to IPOs perhaps to reduce some of the volatility in your E and I? And then separately, how do you balance some of the strategic exits potential challenges, whether it could be a larger portfolio sale, which could be maybe more challenging to do or even some of the antitrust concerns that have come up with some strategic sales recently?
Michael, let me just hit the first couple. It's Michael Choeh, nice to talk to you. I hit the first couple of parts of your question. First of all, in terms of the public component of our portfolios, I did allude to BCP V, which obviously is a quite mature fund at 59% publics. But for real estate overall, their portfolio, the public component of that is in the low 20s percentage.
And for private equity overall, it's about a onethree, and that's obviously concentrated in BCP V. So when you step back, that's still the balance around it. And I'd say certainly to something you alluded to, we don't manage our exits to E and I. We're patient and we manage our exits as we have for 30 years against what the right moment is for our and how to optimize the outcome for our limited partners.
And let me chime in a couple of things too. A number of times when we go public, we actually don't exit very much. So it's important to keep that in mind. And a lot of times, once a company is public, we can actually exit either with subsequent equity sales or as a strategic sale of the whole company. Sometimes we go public and then sell the company.
So it's a little as Michael says, all we're trying to do is exit in the best way at the best time for our aluminum partners and drive underlying investment returns that are actually realized. The mark to market returns quarter to quarter, we don't worry about.
And actually this isn't so hard, right. You do what the market will give you. If you have a hot equity market, you take companies public and you make money that way. If those markets aren't so good, you don't worry about it because our businesses typically don't need the capital. We've got like almost an infinite ability to fund these companies.
And then you just sell them if the sale market is good and if not, you recap them and you make money that way. So we just sort of go with the flow if you
will. Great. Thanks very much.
And our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.
Hi, good morning. Thanks for taking
my question. Maybe just to flip it around to deployment, obviously with the market pulling back late in the Q3, how are you feeling about that going into the Q4? I know we've had some rebound here, of course, but maybe if you want to comment on some specific sectors, particularly energy, also overseas and in real estate in terms of putting some of the $85,000,000,000 of dry powder to work in the near to intermediate
term? Yes. Well, energy is a major area of focus both in our credit markets and in our credit business and in our equity business. So that jumps to mind when you sit back in the world and say where is their distress, where is their value, that's clearly while there's certainly risk and certainly issues, I think we feel pretty comfortable that the energy is not going to be down here forever. And so that there is a value opportunity to create value and capture value with the companies that can get through this.
And energy is a subset of broader commodities. There's other commodity areas, I'd say the same thing about. Real estate, we're putting a lot of money to work in Europe still. There's still a lot of ability to buy it below replacement costs there. Those markets, the capital markets for real estate is not really recovered.
Here, obviously, we're trying to arbitrage the difference between fairly robust values asset by asset, but public REIT stocks that have been hit with the market drops overall. So that's created some values. We're focused on that obviously with 2 big transactions we've announced recently. And I think we're also doing a lot of looking around sort of new build building new stuff, particularly power assets around the world. A lot of the world needs electric power, whether that be traditional power plants or whether that be renewables.
They need the infrastructure that goes with that to move gas, to move oil, to move electricity. And all of that stuff, we can build our money goes in at cost, goes in at book value. And as long as the underlying economics of the projects are good, we know we're going to get our return on that and it's decoupled from market movements. So, we've got $85,000,000,000 sounds like a lot, but we've also we're also putting the work a lot. I think if you I think we've put the work I think we mentioned what 6 it was about 16.5, we've put the work in the last year, sorry, year to date and we've got another 10 that's drawn that's committed and not even drawn down yet.
So just this year, with just what we've got on the plate, that's already like $25,000,000,000
So, I feel I think we'll be able to make some really good investments in here. Yes. If I could chime in, as Tony mentioned, that $10,700,000,000 or close to $11,000,000,000 of currently committed but undrawn, much of it recent, I think is a good metric for the opportunity set improving. I would say for real estate and our credit business, the last couple of months, there's been a tangible, I would say, shift in the deployment environment and a good one in terms of the ability to be opportunistic and find more opportunities for sure. And I think in private equity, these things tend to take a little while to season a little bit longer.
But I can tell you, my partner Joe Barata is happy when he sees market pullbacks from the perspective of being an investor. Market pullbacks, we think, and volatility are ultimately good for creating good private equity deals. It takes some time. But I would say, even in private equity, or as well in private equity, there are a number of situations where some months ago we felt like we were priced out of the situation, but that now they're coming back in line as actionable opportunities.
Great. That's great color. Thanks so much.
And our next question comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Hi, thanks. This is Kaimon Chung for Glenn Schorr. Just want to get an update on the progress of core plus real estate. Also, I was just wondering how long before core private equity rolls out? Can you run that just with your existing infrastructure?
And any color on that would help. Thanks.
Well, core plus real estate, we're at about $8,500,000,000
There's a lot of investor interest and there's a lot of transactions. We try to kind of balance those two things. We try to take in money when we've got our sights on money to put to work. So I think that will continue to grow steadily and well. Core private equity, we're really doing that.
We don't need much new infrastructure at all. And we're kind of in the process of assembling capital for that. We have a couple of transactions we're looking at, but nothing we're about to announce.
And our next question comes from the line of Dan Fannon with Jefferies. Please proceed.
Thanks. Could you guys update us with regards to BCP V as to where we sit in the catch up period? I think there's a gap between E and I and D and just I assume they went opposite directions this quarter, but can you give us where you are at that as of the end of the quarter?
Yes, Dan, it's Michael. I think in previous calls, we've used this parlance of what percent were through the catch up. And I think in the last call, we talked about 84% on an unrealized and realized basis. That same metric would be about 73% today. But I think maybe the right, simplest way to think about it, frankly, is about half of our BCP V LPs by value are at full carry, including all the BCP, AC LPs and about half are in catch up mode.
And over time, with hopefully more appreciation, more will go from the ketchup bucket into the full carry bucket. So I tend to think about it that way as opposed to a percent through the catch up.
Great. Thank you.
And our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please proceed.
Thanks everyone.
Just
had a question on both credit and energy. And I hear your comments on the portfolio companies in terms of the outlook versus people worried about a recession. But I guess in both areas, just given they were under pressure during the quarter, if you can give us an update in energy, just what your current kind of
I don't know if you look at it
from a private equity standpoint, things that you invested maybe prior to 2013 versus the capital that's ready to be deployed or that the opportunity to take advantage of the pressures? And then same thing on the credit side, like when I think about the private equity business, like the average leverage or the maturity, the debt that's in these companies, like how stable are they versus maybe past cycles? And then same thing in the credit side, how much dry powder you have available to take advantage of certain industries that might come under pressure? I know it's a long question, but it's just a couple of areas that I feel like we keep getting questions on.
Michael, do you want to start on that?
Sure. Look, I think with respect to energy, certainly, first from an opportunity standpoint, both our second energy fund, which as you know was activated at the beginning of the year, and our new opportunity fund, which we call ESOP in GSO, Both, I think, showed great discipline by not deploying capital in that first half of the year where it turned out there was a bit of a false dawn in the sector. So between the 2 of them, they stand with combined something like $7,500,000 to $8,000,000 of dry powder to face into that opportunity set. I think from an exposure standpoint, we feel good about it. Our private equity fund, as we talked about in past calls, we think did a nice job divesting assets, particularly ones directly impacted by oil prices.
And today, the exposure to companies directly affected by oil prices, we think, is manageable. It's about a 5th of the portfolio. They've done an excellent job putting in hedging. I think importantly, most of our the vast majority of our investments in BP are not highly levered. They are investments with little or no leverage going in.
And so compared to some of the more infamous large deals in the sector, if you will, in the past few years, it's a distinct difference. And I think on the And
they're still marked above cost. That's right.
On the credit side, we obviously have different kinds of investments and exposures in energy and GSO. Energy investments in our private drawdown funds and then liquid investments in our hedge funds and in our BDC. And certainly, energy credit in terms of the indices overall has took a beating in the Q3. And so from a mark to market perspective, that's going to impact to some degree some of our portfolios. But overall, I noted the discipline we showed in our investing strategy earlier in the year.
We feel good about that and we feel good about our overall portfolio.
I mean one thing just to mention I guess is that our first energy fund is despite just the collapse of the oil business is still up approximately 25%, 26%. This is not what you would call a national tragedy. And there are many people who've gotten severely damaged in this sector and we've done quite well.
Just to clarify, Steve's kind of 26% is the IRR, that's actually 2.5x multiple of money for investors. So Steve says
they're happy. It's pretty amazing, right? And I was at a conference yesterday with a lot of LPs and the people who put money out in the 1st 6 months of this year, it's hard not to do that. But our people put out really in Israel, a great discipline. Wow, I mean people got crushed.
It really got destroyed. And part of what you do in our business is don't do things where you think there's real risk. And I think we'll be well rewarded deploying our money at the right time.
Obviously, we've had in the credit side some investments in companies that had a lot of leverage that are suffering. I mean, I don't want to say we've been flawless on this, we haven't. And we've also taken some we've written we've in private equity, we had bigger write ups than we have today. So we've written some of the write ups down a little bit. We're still ahead of the game, but we've definitely given back some value on a temporary basis.
But I think the strength of the company and our conviction that, as I say, that this is not today's spot prices are not long term energy prices. And I think if we're right about that, we'll earn some very nice returns from our investors. We've been very careful also in investing in companies that you're unlevered, as Michael said, or have plenty of liquidity to ride through the next couple of years to prove ourselves right. We're not making speculative bets that require quick bounces in energy prices.
And our next question comes from the line of Luke Montgomery with Bernstein Research. Please proceed.
Hi, thank you. So I think there's a tendency to view the accrued carry balances as a key indicator of where distributions are headed. It's declined about 25% in the last two quarters. I think clearly a key driver of that has been BCEP5 in the catch up. My question is whether you think the focus on that metric is appropriate and how concerned you think we ought to be about the trajectory of the balance and accrued carry as we think through whether distributions could step down over the intermediate term?
And I think finally, maybe an answer to the question would be approximately how much better might the balance look today versus at the end of the
Q3? So Luke, it's Michael. In
terms of
the receivable, as you know, when we have it in the 8 ks, the vast majority of the decline quarter over quarter was from BCP V and BREP VI. To break that down for you a little bit, about a third of that decline was just from realizations. And of the remainder, to your latter question, about half of that decline has now been on a mark to market basis, been made up by the rally in the publics in the last 2 weeks. So without maybe directly answering your question about what I think of the deep meaning of this metric, because I think it is an interesting metric. Maybe what I just described gives you a sense of how you have to put it in context.
Okay, thank you.
And our next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Hey, guys. Good morning. Maybe more of a conceptual question, just given the more recent underperformance of the stock and the alternative asset managers more broadly. Just curious if you're thinking on the PPP structure has evolved at all. And then related to that, any sense that the chatter around potential tax changes for publicly traded partnerships has maybe started to pick up a bit more these days?
Well, I think it's a political season. And there used to be 19 candidates on the Republican side and I guess I watched, was it 4 or 5 of them on the Democratic side. Everybody's got a point of view. And you have to distinguish yourself in a crowd and there are a lot of different ways to do it. And one of the ways is obviously to look at different kinds of businesses, asset classes, tax approaches and so forth.
And we see the same stuff you see. And we also see sort of a very complex congressional array and some people who don't want to do anything under any circumstances and some people who will do almost anything to anybody at any time. And so I think we're just sort of like cautious interested observers. And I don't know that there's any way you could sort of handicap what's going on. It's very difficult.
So we'll see what happens. It runs the gamut from overall tax reform, which could take a whole variety of different things and targeted things against our industry, which some people are in favor of. And this has only been going on now for 8 years. And so I think we just take an active watching posture on America has become an unbelievably complicated place with a variety of different positions that some of which hadn't existed in my lifetime certainly. And the societal figure out what it wants to do and hopefully it'll really do a good tax reform thing.
It's very simple and treats people without enormous preferences and has very low rates. And this is my personal view, not a Black Citizen view. And that would be great for society. I don't even know if anything like that's even vaguely possible. I think it's the right thing to do, but jeez, with different people in Congress opposed to this, that and so forth, sort of tough.
Okay, fair enough. Thanks for taking my question.
And our next question comes from the line of Ken Hill with Barclays. Please proceed.
Hi, everyone. So you've recently raised significant amount of capital through some of the flagship funds like BCP7 and BREP8. Do you anticipate any sort of step down after such a robust period that and kind of how do you think about fundraising moving forward in general? Are there any key funds you think in particular that are going to drive some inflows over 2016?
Well, our fundraising is episodic. So yes, I mean, it's lumpy. Those are big funds and they all came in at the beginning of the year and it's going to be hard to keep that pace. However, core plus real estate we talked about has huge potential. And we're just beginning on that.
In addition, we've got tremendous potential with different kinds of retail products that we're just beginning on. So I think those are 2 big areas where you can see a lot of assets. We've in real estate, we're coming to the end of a couple of funds that are chunky funds. So, REP Europe will at some point will be in the market. We've got and we've had other real estate funds.
So, yes, it's not going to fall off a cliff by any means, but it's going to be hard to equal the pace of the first half of this year.
There's also the 3rd real estate hedge fund that's going to be in the market later this year and the secondary buyout fund is launching this year.
4 plus. Yes. And then there's other perpetual hedge fund products like the long only, etcetera, that are on the platforms. Yes.
And I'd add in, we're all chiming in here that GSO, some of their major drawdown funds will have fundraisers over next year or 2. So, and then stepping back, I'd say, if one could sort of time one's life and business perfectly, obviously, we feel great about the timing of our flagship fundraisers for real estate and private equity, and are excited to have that capital in this environment.
Yes. And just to go back to Michael's earlier comments, if you recall, a lot of that money hasn't even been turned on, so to speak, from a fee perspective. So we raised the large private equity funds, but it's not even in its investment period yet. So it's not in our fee earning AUM.
Thanks for taking my question. Appreciate all the color there.
And our next question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Yes, thanks. Good morning. Just want to come back to the question on potential tax changes on carry interest. I think we're clear on where you guys stand. I know that you also prepare for a number of scenarios.
So just in that scenario where distributions experience higher taxes, does that change your view on capital allocation and maybe make buyback stock become more attractive as an alternative? And then kind of on the same theme, the stock's bounced around a bit here, it's recovered from below, but is there a price or point where you say there's really no better opportunity than buying back your own stock? Michael, look, we're not contingency planning in that regard, and I'm not sure in that scenario those are the contingencies we would consider strategically. So what you're hearing in this room is it's just not something we're focused on at this point
in time to those kinds of plans. Let me jump in on this. We're a business because we pay out all of our earnings. We don't generate a lot of capital. We see as far as we can see, we've got double digit growth ahead of us at AUM and that's going to require given the way structure of funds, the way LPs want to see have a skin on the game, it's going to require us to keep putting money up.
And those underlying properties, those underlying investments have very high returns. So the combination of the returns on the underlying capital and then the carries and the fees and all that that's generated for the firm means that the return on our money, if it's key to raising more capital, is extremely high. And we're going to our view is we're going to keep growing and we're going to need to husband our capital to keep supporting that growth. So I don't see near term buy ins, I
really don't. And if anything,
as you've seen over the last few years, we've raised additional external capital for the debt markets. So I think that tells you kind of where we are. We're not running out of growth. If we go ex growth, it might be
a different discussion. And just to put it simply really on the first part of your question, we said it I think before and we say it every time and it's true, which is we manage and run our business the way we always have, which is to generate the highest returns over the long term for our LPs, period. So whatever regulatory changes may come or other exogenous factors, that won't change it.
And our next question comes from the line of Erik Berg with RBC. Please proceed.
Thank you and good afternoon.
Hey, Eric, can you either dial back in?
I understood the question. So the question was basically, if the publics were down, what does it imply for the private mark? Do you want to take that 1 minute?
Thank you.
And what does it imply about the performance of the underlying portfolios? And I would say generally the underlying portfolios are outperforming what you would see in the market. And as you know, we're very careful about choosing sectors and companies. So we saw positive performance in both private equity and real estate. And so the privates actually were up.
And our final question comes from the line of Bill Katz with Citigroup. Please proceed.
Thank you very much.
I just want to come back to his notion of capital allocation because I think it's a sticking point on the sector. I think one of the issues for this group overall is relevancy relative to attritional managers. Steve, you've often compared yourself to BlackRock and they have a higher multiple than you and half the growth rate you did this quarter on quarter. So when I look at your stock price when you went public, it was 31%. And you add back to dividends, you've compounded growth of the stock by about 3.5% and yet the underlying fundamentals, it's hard to argue that you've out executed everybody.
So how do you help the shareholders get comfort that this is a good stock at this point in time, right? The age old question is do you invest in Blackstone the funds or Blackstone the stock and what I hear you saying now is, there's no interest in buyback, but why not? I just don't understand why you can't possibly lower the payout ratio. You're not getting credit for the carry anyway and then buy back some stock and maybe a little bit more forceful statement of confidence relative to some of your peers who do buy back a lot of stock in the traditional space? A convoluted question, but
I'm so curious.
Well, one of the advantages that the long only managers have is they don't have to invest one dime in what they do. And so they can do anything they want with their cash flow. And if they want to buy in some stock at a high price, look not so smarter at a low price and look smarter, they can do that. What happens with our business is sometimes we have unbelievable opportunities when markets go down. And for us to raise money, we must invest large amounts of money alongside our limited partners.
And as the world gets worse, they want you to put up more and more money because they think perhaps it's not such a wonderful idea. And that is the most wonderful time to be investing. And we can do nothing that inhibits that. And by the way, when times are terrible, we can't sell stock to replenish. We can't even sometimes go to banks because banks freak out and regulators freak out.
And so just when we need money to grow and make great investments, you would have us be out of money. And frankly, that slide doesn't work. If we're trying to service our customers, have great products, we have to not just look at the world as it is today. We have to plan on all the different types of contingencies. And one of those contingencies is always be liquid, don't run out of money, have amazing products and grow your business and we are a great example of that, right.
And the fact that people don't still sort of buy into what we're doing, Didn't somebody say in this call we had a 9% yield? I guess that's a bad idea. Why would we want to do that, right? That's like a bad idea. And we will have very strong cash generation and growth over a very long period of time.
I think Joan has explained repeatedly what we see as the bands for growth with a 10 year model, with a stock price somewhere around, you know, in terms of the assumptions that we've used, $85 stock price with another $25 to $30 of cash income. Now if that is not good enough for you, then I can't help you, right? I just can't help you. And I think we can easily do that. That's my personal opinion.
And go out and buy something else. And the people who believe what we're doing only because we've been doing it for 30 years, right. We've had the same basic rates of return on what we do and we're getting better and better at what we're doing. And I get a little sort of frustrated, but I know in the end, those kinds of returns will be terrific for investors. They're terrific in our funds and they'll be terrific for public investors.
And I realize I sound a little adversarial. I'm not really adversarial. I'm frustrated because we can demonstrate all these things, but it's hard to deal with fear. And so maybe we have to go through another cycle or something. And you come out, we are in this huge amount of money and that will be perceived as an accident again.
It's an accident.
And Phil, just to correct something, being a little picky here, but the return is actually a little higher than you alluded to. So we returned over $10 in cash. You also have to include the PJT spin out, which shareholders got. And when you do the compound growth rate from the IPO till now, it's actually closer to 5%. Now that's well below how the firm has grown assets, how the firm has grown earnings and we're triple the size that we were at the time of the IPO.
And as Steve said, the earnings power is meaningfully greater than what the market is giving us credit to before. So we agree with your frustration, but the structure of the firm is that we get taxed on the full amount of earnings regardless of what we distribute. And so retaining capital is just not as efficient for those receiving the distribution.
Okay. I appreciate the
Also one other thing I would say, my own people around the table telling me to say nothing. But we went public at a time of sort of very high valuations. It was really the top of the cycle that the somewhere between 2 3 weeks after we went public, there was a start of like the most massive credit crisis that we've had since the Depression. And it drove our stock down to $3.55 If you had bought at $3.55 you wouldn't have the same mediocre return you were talking about. And so we can't control what the market was like the day we went public.
But we sure as heck can control the growth of our business and what we've paid out and all of those types of things. And so I think the analysis has a bit of a false premise, which is that we went public at an absolute market peak and you're measuring us off of that. I wish the multiples were all the same because then that would be the performance that will drive it that much higher. But multiples changed and they changed for almost all financials. And our performance against all financials is actually I think quite good, quite good.
But something happened to the overall marketplace. And we're sort of we're out there right at the top. So I think if you want to measure against the top, then you can generate numbers that are somewhat like you were saying. If we went public in a more normalized environment, it would have been much I would like though, if
Bill can get into
our funds, I'd love to have him.
I don't
think we're down that low in the minimums, but thank you. Thanks, Leah.
Thanks. And thanks, everyone. And we're here, of course, this afternoon to answer any other
To you all, have a great day.