Good day, ladies and gentlemen, welcome to the Blackstone Third Quarter 2015 Investor Call. At this time, all participants are in listen only mode. Later, we will conduct the question-and-answer session. If at any time during the call you require operator assistance, please press star 0 and the operator will be happy to assist you. 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. Please proceed.
Terrific. Thanks, Jasmine. Good morning, everyone. Thanks for joining us today for Blackstone's Third 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. Earlier this morning, we issued the press release and the slide presentation illustrating our results, that's available on our website, we expect to file the 10-Q in the next 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 don't undertake any duty to update the forward-looking statements, for a discussion of some of the risks that could affect the firm's results, please see the Risk Factors section that's in our 10-K.
We will refer to non-GAAP measures, you'll find the reconciliations for those on the press release, 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 audiocast is copyrighted material of Blackstone and may not be duplicated, reproduced, or rebroadcast without our consent. Just a very quick recap. We reported economic net income, or ENI, per unit of negative $0.35 for the third quarter due to the unrealized marks on our public holdings in private equity, real estate, and credit. For the year-to-date period, we reported positive ENI of $1.45 per unit. Distributable earnings were $692 million in the quarter, or $0.58 per common unit. That's up 7% from the prior year as realization activity was strong.
We will be paying a distribution of $0.49 per common unit. That's to unit holders 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. With that, I'm going to turn it over to Steve, we'll take questions after Steve and Michael speak. 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, thanks for joining the call, and thanks, Joan. The third quarter, 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 four 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%-25% versus many other currencies around the world, we've effectively experienced a 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 leaves 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. 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, and I find it's very surprising in terms of a public markets valuation. Overall, we see good growth in the U.S. perhaps slowing a bit from 2014 levels. Europe appears to have bottomed and is growing slightly faster than we anticipated. Emerging markets, India's in very good shape, growing at over 7%.
China is definitely slowing, it's still growing faster than much of the world, and certainly faster than the doomsday scenarios you 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 DE 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 fourth quarter, our publics have rebounded sharply, up 7.3%. Based on where they are today, our ENI, 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 companies 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. Our Chinese shopping malls, which will shock you, are reporting same-store sales growth in the area of 15%-16%. Global recession, go figure. 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, nor 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 billion 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 pivoted to public to private transactions. We've already announced three this year, representing over $5 billion 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 in high yield generally, means greater opportunity to deploy our $17 billion 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 BAAM, our hedge fund complex, we can selectively invest in difficult markets to produce strong risk-adjusted returns. BAAM's lower volatility approach to investing has produced positive returns year-over-year, outperforming the S&P and many other market indexes. BAAM 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 $1.4 billion and substantially outperforming its peers and any relevant index through September 30th. 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.
While a 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 Chae 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, $9 billion to our investors through realizations in the third quarter alone, and $45 billion in the past 12 months. 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 billion this year, helping to put real estate on track for another record year of deployment. Core Plus is a business that didn't even exist here two years ago. Our average investment pace over the past four years exceeds $20 billion 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 unit holders with sustained growth over time. 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&P is around 2%. We don't need any realizations for us to have a 2% yield, which is average for the S&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 billion 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. Generating 25% of last year's performance fees gets us to the top decile of yield for the S&P companies. 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&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 startup capital, half of which was mine, to a market cap of $52 billion 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 unit holders 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 Chae. 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 worked 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. Part of the fun of Blackstone is that people grow, and they get new responsibilities. When we know them and trust them, and we think they're super smart, that's the way to grow a great firm. Now, with that big build up, which your mother will be very happy with Michael. Go for it.
She thanks you, Steve. Thank you, Steve, and good morning, everyone. With respect to our financial results, performance, and outlook, I'd like to cover three key areas. First, digging into our ENI results a bit more and putting it in context. Second, highlighting key performance trends in the business. Finally, discussing the outlook for distributable earnings and the cash-generating power of the business. First on ENI. The driver of the negative ENI result for the quarter was the decline in our public holdings and the associated unrealized performance fee reversals. As you know, unrealized performance fees and unrealized investment income are two of the key components of ENI. These unrealized metrics are driven by the change in marks between two days, the first day and the last day of the quarter, and are a snapshot based upon that beginning and endpoint.
As Steve mentioned, in the brief period since quarter end, our publics in both corporate private equity and real estate have appreciated over 7% as of yesterday's close, and the effect of that is to largely reverse the ENI decline in the third quarter in the first two weeks of the fourth quarter. 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 BCP V catch-up, which amplified the ENI 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 original cost. BCP V's publics are up meaningfully so far in the fourth quarter, and we feel good about the fund's position. With that as context, in terms of reviewing specific ENI drivers within the overall publics movement, two 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 rebounds in the public prices of certain positions. Looking past the headline ENI 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 billion, as $97 billion of inflows and capital raised, plus market appreciation of $12 billion, well outpaced capital returned in that period to investors of $60 billion. 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 have delivered quite extraordinary outperformance.
Our private equity segment funds are up 8% for the first nine months of the year, and our real estate opportunistic funds are up 9%, versus declines in the S&P and other global indices, as well as real estate indices. This represents outperformance of 1,400 to 1,800 basis points. BAAM is up 3% year to date versus a 3% decline in the Global Hedge Fund Index, outperformance of 600 basis points. Our credit strategies are also outperforming their benchmarks across their broad array of strategies. Our balance sheet is strong with $4.2 billion 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&P and Fitch recently affirmed our A+ 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 will 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. First, in terms of the quarter and year-to-date, our realization activities remain very strong, helping drive year-over-year growth in distributable earnings in the quarter, notwithstanding the markets, for total DE of $692 million in the quarter and $0.58 of DE per common unit, which represents an increase of 7% versus the third quarter of last year. The quarter contributed to a record $2.97 billion in DE year-to-date, 54% higher than the same period last year, and to DE of $4.1 billion over the last 12 months.
Looking forward, our realization pipeline is fairly robust. I would expect a favorable fourth quarter for distributable earnings based solely on what has already been signed and announced. This includes the sale of Avintiv, which closed on October 1st, the pending closings of announced sales of AlliedBarton, SunGard, 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. That is 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 drivers and 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 million, up 12% over last year, and just over $1 billion over the last 12 months. As we find ourselves in a period of public market volatility that can cause swings in our marks and in ENI, it is worth focusing on the mass and stability of the substantially locked-in recurring fee-generating base of the firm. To put this in perspective, the last time we saw a quarter with similar downward pressure in public markets that weighed heavily on ENI was the third quarter of 2011. Our current fee-related earnings are nearly double now what they were back then. That is because the fee-earning AUM of the firm is $241 billion now versus $133 billion then, over $100 billion higher. This large, stable base of fees is an extraordinary asset and balance 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 eighth global real estate fund was activated this year and will experience its first quarter of full fees in the current quarter and first year of full fees in 2016. Our seventh flagship private equity fund is expected to activate in 2016 and will experience its first year of full fees, we expect, in 2017. Projecting forward the combined management fee revenue stream from these two new funds and their immediate predecessor funds, we anticipate incremental management fee revenues in 2017 of $200 million to $250 million over the current year base of approximately $415 million for 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 harvests be like? The sources of current and future harvests, we believe, are rich and deep. I would think about these drivers in three parts. First, our mature liquidating vintages. Just over half of our net accrued performance fee receivable is from vintages 2010 and 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 billion of public market cap across its private equity and real estate portfolios, with a large portion from these older vintages. Second is our more recent last five years vintages.
These portfolios are fundamentally strong and performing well, as exemplified by the returns of the major funds of the time period. BREP VII's inception to date net IRR of 24%, BREP Europe IV's 21%, BEP's 20%, and BCP VI is 12%, with that fund continuing to appreciate through its 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, the ultimate realizable carry potential, we believe, is not reflected in the current marks nor in the performance fee receivable on the balance sheet.
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 one-and-a-half and two-and-a-half-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. The third driver of future performance fees is from the deployment of the $85 billion of the dry powder we've amassed. The average lockup period on this capital is nine 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 net new capital raised is at record levels, with $25 billion deployed over the past 12 months, $6.5 billion deployed in the third quarter, and $11 billion 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. Like Steve, I feel very good about the underlying momentum of the business, the deployment environment, and our ability to generate robust distributable earnings for our unit holders 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 fourth quarter, our advisory segment will no longer be included in our financials following completion of the spin on October 1st. We will no longer have that segment's contribution to earnings, which was approximately $0.06 ENI per unit in our last fiscal year. It comprised in the area of 3% of firm DE over time. From a financial contribution point of view, we feel our growth will absorb its effect fairly readily. 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. We'd like to open it up now for any questions.
Great job.
Ladies and gentlemen, if you wish to ask a question, please press star one. If your question has been answered or you wish to withdraw your question, press star two. Again, please press star one to begin.
Just a reminder, if you could keep it to one question on the first round, we're happy to answer all your questions.
Our first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks. Good morning, everyone. I know this question may sound a little premature, but how do you think about the capacity constraints on the individual investor hedge fund products, especially given their fast ramp here?
One second.
I'll handle that. Craig, it's Tony. There's obviously some capacity limitations to our individual hedge fund products. We're a long way from testing those right now. As you know, we set up that product with Fidelity. Because of exclusivity arrangements, we sort of mimicked it, actually. We've shown we can replicate it already. If any one
Of those products runs out in capacity, we can sort of recreate a lookalike. I think we can scale that business quite substantially over time.
Thank you.
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. 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 the sovereign wealth funds. Could 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 institutional channel for incremental demand?
I think that is Steve. The sovereign wealth fund group is divided into sort of two categories. One are the ones that are most affected, typically by the oil business, and the others are all else. The all else group is continuing to enter some are first-time investors in our asset class. Some of those funds will be very substantial new investors in the asset classes. It's sort of business as usual with that group. 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. Within alternatives, they're increasing their allocations to their best-performing managers, and we're sort of it.
We don't experience a lot of problems. 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 share, which is happening. Even some of them, interestingly, are significantly increasing their share of alternatives because of the performance characteristics. We're not really feeling the effect of anything particularly major. In fact, we're growing in that asset group.
One other point. As you know, two-thirds of the capital we have is locked up for life of asset or life of fund, and we just raised the flagship product. On that two-thirds, the average life remaining is nine years.
The other thing I'd mention is that in terms of taking more share in both of these categories, oil and non-oil sovereigns, that we're engaged in a number of discussions, which is quite interesting, where they want to very significantly increase their exposure and are talking about multi-billion dollar commitments to us as opposed to just commitments on single funds. 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.
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%-25%. Sovereigns are still way behind that and have a long way to go.
Okay, thanks very much.
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 on what realizations will look like. 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&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 could be quite significant, but I think the market is just more concerned on the downside front.
Yeah. This is Steve. 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 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 offerings. They're through sales of individual properties or groups of properties. The supply-demand characteristic in real estate, in many places around the world is very good.
What you would need to really negatively impact that is just literally, sort of recession, huge number of non-performing loans generally so that banks wouldn't be financing. Capital markets sort of locked up and turned off, it's hard for anybody to do business. The number of times that that scenario happens is quite low. It's usually around To not study it, but just sort of do it by feel. It's like once every 10 years something like that happens for a relatively brief period of time. 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.
Yeah. Even then, if you don't get over-building in real estate-
Right
You're going to have a lot of values. To get over-building, you have to have an ex-
Extended cycle.
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. Even in higher interest rate environments, in that scenario, without over-building, real estate holds its value.
I would just chime in that in real estate, 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. We are in the market with some assets. We continue to see strong interest, apparently unaffected by the public market turmoil. 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 we get economic softness, we should have low rates. At some point, even if you can't exit a private equity company into the IPO market or into the M&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 up 9% this year. That's great performance. None of us lose sight of that. Those companies de-lever quickly at that. With growing EBITDA, you can pay yourself some nice dividends. The credit markets are sort of an offset to the equity markets in this whole sustaining our distribution question.
Meanwhile, just to finish. On private equity, in the face of obviously quite choppy markets in the last few weeks, we did successfully execute three IPOs in the last three weeks. It's an environment where markets are not closed. They're open from time to time for good companies.
Yeah, that's because the performance of those companies was really terrific. People like to buy terrific things. If that's what you have on order, what the heck. Works out.
Yep. Got it. Thanks so much for taking the time answering that question.
Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed.
Thanks. Good morning. You have a greater skew to public holdings than you did even just a couple of years ago, and this seems to make your ENI a little bit more correlated to public markets than in the past. 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 ENI? Separately, how do you balance some of the strategic exit 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?
Mike, let me just hit the first couple. It's Michael Chae. Nice to talk to you. Hit the first couple 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% public. For real estate overall, their portfolio, the public component of that is in the low twenties percentage. For private equity overall, it's about a third, and that's obviously concentrated in BCP V. When you step back, that's still the balance around it. I'd say, certainly to something you alluded to, we don't manage our exits to ENI. We're patient and we manage our exits as we have for 30 years against what the right moment is and how to optimize the outcome for our limited partners.
Let me chime in a couple of things too. When we go public, we actually don't exit very much. It's important to keep that in mind. A lot of times once a company's 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. As Michael says, all we're trying to do is exit in the best way at the best Partners and drive underlying investment returns that are actually realized. The mark-to-market returns quarter-to-quarter, we don't worry about.
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. Our businesses typically don't need the capital. We've got almost an infinite ability to fund these companies. Then you just sell them, if the sale market is good, and if not, you recap them, and you make money that way. We just sort of go with the flow, if you will.
Great. Thanks very much.
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 markets pulling back late in the third quarter, how are you feeling about that going into the fourth quarter? I know we've had some rebound here, of course. 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 billion of dry powder to work in the near to intermediate term.
Yeah. Well, energy is a major area of focus both in our credit business and in our equity business. That jumps to mind when you sit back in the world and say, "Where is there distress? Where is there value?" While there's certainly risk and certainly issues, I think we feel pretty comfortable that energy is not going to be down here forever. So that there's an opportunity to create value and capture value with the companies that can get through this. 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 at below replacement costs there. Those markets, the capital markets for real estate have 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. That's created some values. We're focused on that, obviously, with two big transactions we've announced recently. I think we're also doing a lot of looking around sort of 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. All of that stuff we can build. Our money goes in at cost, goes in at book value. 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.
We've got $85 billion. It sounds like a lot, but we're also putting the work a lot. I think we mentioned about $16 and a half we've put to work in the last year. Sorry, year to date. We've got another $10 billion that's committed and not even drawn down yet. Just this year, with just what we've got on the plate, that's already like $25 billion. I think we'll be able to make some really good investments in here. Yeah, if I could chime in. As Tony mentioned, that $10.7 or close to $11 billion 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. I think in private equity, these things tend to take a little while to season, a little bit longer. I can tell you, my partner Joseph Baratta 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. 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.
That now they're coming back in line as actionable opportunities.
Great. That's great color. Thanks so much.
Our next question comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Hi. Thanks. This is Kaimon Chung for Glen Schorr. Just want to get an update on the progress of Core Plus real estate. Also, just wondering how long before Core private equity rolls out. Can you run that just with your existing infrastructure? Any color on that would help. Thanks.
Well, Core Plus real estate, we're at about eight and a half billion. 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. 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.
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.
Our next question comes from the line of Daniel 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 ENI and DE, and I assume they went opposite directions this quarter. Can you give us where you are at that as of the end of the quarter?
Yeah, Dan, it's Michael. I think in previous calls, we've used this parlance of what % we're through the catch-up. I think in the last call, we talked about 84% on an unrealized, realized basis. That same metric would be about 73% today. I think maybe the right, simplest way to think about it, frankly, is about half of our BCP V LPs by value are in full carry, including all the BCP ACLPs, and about half are in catch-up mode. Over time, with hopefully more appreciation, more will go from the catch-up bucket into the full carry bucket. I tend to think about it that way as opposed to a kind of % through the catch-up.
Great. Thank you.
Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed.
Thanks, everyone. Just had a question on both credit and energy. I hear your comments on the portfolio companies in terms of the outlook versus people worried about a recession. I guess in both areas, just given that they were under pressure during the quarter, if you can give an update in energy, either 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 the opportunity to take advantage of the pressures. Then same thing on the credit side. When I think about the private equity business, the average leverage or the maturity, the debt that's in these companies, how stable are they versus maybe past cycles? 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. It's just a couple of areas that I feel like we keep getting questions on.
Mike, whether you want to start on that? Sure. Look, I think with respect to energy, certainly from an opportunity standpoint, both our second energy fund, which, as you know, was activated this beginning of the year, and our new opportunities fund, which we call ESOF 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. Between the two of them, they stand with a combined something like $7.5 billion, $8 billion 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 on past calls, we think did a nice job divesting assets, particularly ones directly impacted by oil prices.
Today, the exposure to companies directly affected by oil prices we think is manageable. It's about a fifth of the portfolio. They've done an excellent job putting in hedging. I think importantly, the vast majority of our investments in BEP are not highly levered. They were investments with little or no leverage going in. 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-
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, then liquid investments in our hedge fund and in our BDC. Certainly, energy credit in terms of the indices overall took a beating in the third quarter. From a mark-to-market perspective, that's going to impact to some degree some of our portfolios. 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.
One thing just to mention, I guess, is that our first energy fund is, despite just the collapse of the oil business, is still off of approximately 25%, 26% for us. This is not what you would call a national tragedy. There are many people who've gotten severely damaged in this sector. We've done quite well.
Yeah, just to clarify, Steve, because the 26% is the IRR.
Right.
It's actually two and a half times multiple of money for investors. As Steve says, they're happy.
It's pretty amazing, right? I was at a conference yesterday with a lot of LPs, and the people who put money out in the first six months of this year. It's hard not to do that. Our people put out really amazingly great discipline. Wow. I mean, people got crushed. They really got destroyed. Part of what you do in our business is We 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.
We've had, on the credit side, some investments
Yeah
in companies that had a lot of leverage that are suffering. I don't want to
Yeah
say we've been flawless on this. We haven't. In private equity, we had bigger write-ups than we have today. We've written
Right
some of the write-ups down a little bit. We're still ahead of the game. We've definitely given back some value on a temporary basis.
I think the strength of the company and our conviction that, as I say, today's spot prices are not the long-term energy prices. I think if we're right about that, we'll earn some very nice returns for our investors. We've been very careful also in investing in companies that are 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.
Our next question comes from the line of Luke Montgomery with Bernstein Research. Please proceed.
Hey, thank you. I think there's a tendency to view the accrued carry balance 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 BCP V and the catch-up. I guess 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. 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 third quarter?
Luke, it's Michael. In terms of the receivable, as you know, when we have it in the 8-K, 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. Of the remainder, to your latter question, about half of that decline has now, on a mark-to-market basis, been made up by the rally in the publics in the last two weeks. 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.
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 your thinking on the PTP structure has evolved at all. 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 political season. There used to be 19 candidates on the Republican side, and I guess I watched, what was it? Four or five of them on the Democratic side. Everybody's got a point of view. You have to distinguish yourself in a crowd, and there are a lot of different ways to do it. One of the ways is obviously to look at different kinds of businesses, asset classes, tax approaches, and so forth. We see the same stuff you see. 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. So I think we're just sort of cautious, interested observers.
I don't know that there's any way you could sort of handicap what's going on. It's very difficult. We'll see what happens. It runs the gamut from overall tax reform, which could take a whole variety of different things, to targeted things against our industry, which some people are in favor of. This has only been going on now for eight years. I think we just take an active watching posture on it. America's become an unbelievably complicated place, with a variety of different positions, some of which hadn't existed in my lifetime, certainly. The societal figure out what it wants to do, and hopefully it'll really do a good tax reform thing that's very simple.
People without enormous preferences and has very low rates. This is my personal view, not a Blackstone's view. 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. Geez, with different people in Congress opposed to this, that, and so forth, it's sort of tough.
Okay, fair enough. Thanks for taking my question.
Our next question comes from the line of Kenneth Hill with Barclays. Please proceed.
Hi, everyone. You've recently raised significant amount of capital through some of the flagship funds like BCP VII and BREP VIII. Do you anticipate any sort of step down after such a robust period? 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 to 2016?
Our fundraising is episodic. It's lumpy. Those are big funds. They all came in 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. I think those are two big areas where you could see a lot of assets. In real estate, we're coming to the end of a couple of funds that are chunky funds. BREP Europe will, at some point, be in the market. We've had other real estate funds. It's not going to fall off a cliff by any means, but it's going to be hard to equal the pace the first half of this year.
There's also the third real estate mezz fund that's going to be in the market later this year, and the secondaries buyout fund is launching this year.
Core Plus.
Yeah.
There is other perpetual hedge fund products like the long only, et cetera, that are on the platforms.
Yeah. I would add in, we are all chiming in here that GSO, some of their major drawdown funds will have fundraisers over the next year or two. Stepping back, I would 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.
Yeah. Just to go back to Michael's earlier comments, if you recall, a lot of that money has not even been turned on, so to speak, from a fee perspective. We have raised a large private equity fund, but it is not even in its investment period yet. It is not in our fee-earning AUM.
Thanks for taking my question. I appreciate all the color there.
Our next question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Yeah, 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. Just in that scenario where distributions experience higher taxes, does that change your view on capital allocation? Maybe make buying back stock become more attractive as an alternative? Then, kind of on the same theme, the stock bounced around a bit here. It's recovered from the low, is there a price or point where you say there's really no better opportunity than buying back your own stock?
Yes.
Michael. Look, we're not contingency planning in that regard. I'm not sure in that scenario those are the contingencies we would consider strategically. What you're hearing in this room is it's just not something we're focused on at this point in terms of 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. 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 the structure of funds, the way LPs want to see have a skin in the game, it's going to require us to keep putting money up. Those underlying properties, those underlying investments, have very high returns. The combination of the returns on the underlying capital and then the carries and the fees and all that gets generated for the firm means that the return on our money, if it's key to raising more capital, is extremely high. Our view is we're going to keep growing, and we're going to need to husband our capital to keep supporting that growth.
I don't see near-term buy-ins. I really don't. If anything, as you've seen over the last few years, we've raised additional external capital through the debt markets. 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.
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. Whatever regulatory changes may come or other exogenous factors, that won't change it.
Got it. Thank you.
Our next question comes from the line of Eric Berg with RBC. Please proceed.
Thank you. Good afternoon. When you have a situation like we had in the September quarter in which the cash flow, especially by EBITDA portfolio company growth, the stock market went down sharply point to point. Where does that lie for your private markets? Are they less negative than they otherwise would be, meaning zero?
Hey, Eric, can you either dial back in?
No, I understood the question.
Well, good.
The question was basically, if the publics were down, what does it imply for the private market? Do you want to take that or do you want me to?
Thank you.
What does it imply about the performance of the underlying portfolios? I would say generally, the underlying portfolios are outperforming what you would see in the market. As you know, we're very careful about choosing sectors and companies. We saw positive performance in both private equity and real estate, and so the privates actually were up.
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 this 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 traditional managers. Steve, you've often compared yourself to BlackRock, and they have a higher multiple than you, and they had half the growth rate you did this quarter-on-quarter. If I look at your stock price when you went public, it was 31. You add back the dividends, you compound the growth of the stock by about 3.5%. Yet, the underlying fundamentals, it's hard to argue that you've out executed everybody. 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? What I hear you saying now is there's no interest in buyback. 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. Convoluted question, but I'm sort of 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. They can do anything they want with their cash flow. If they want to buy in some stock at a high price, look not so smart or 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. For us to raise money, we must invest large amounts of money alongside our limited partners. 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. That is the most wonderful time to be investing. We can do nothing that inhibits that.
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. Just when we need money to grow and make great investments, you would have us be out of money. 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. One of those contingencies is always be liquid, don't run out of money, have amazing products, and grow your business. We are a great example of that, right? 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. 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, in terms of the assumptions that we've used, $85 stock price with another $25 to $30 of cash income. If that is not good enough for you, then I can't help you, right? I just can't help you. I think we can easily do that. That's my personal opinion. Go out and buy something else. 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, we're getting better and better at what we're doing. 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, they'll be terrific for public investors. I realize I sound a little adversarial. I'm not really adversarial. I'm frustrated. We can demonstrate all these things, but it's hard to deal with fear. Maybe we have to go through another cycle or something. You come out and we earn this huge amount of money, and that'll be perceived as an accident again. These aren't accidents.
Bill, this is just to correct something, being a little picky here, but the return is actually a little higher than you alluded to. We returned over $10 in cash. You also have to include the PJT spin-out, which shareholders got. When you do the compound growth rate from the IPO till now, it's actually closer to 5%. 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. As Steve said, the earnings power is meaningfully greater than what the market's giving us credit for. 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.
Retaining capital is just not as efficient for those receiving the distribution.
Okay. I appreciate.
One other thing I would say, my own people around the table are telling me to say nothing. We went public at a time of sort of very high valuations. It was really the top of the cycle. Somewhere between two and three weeks after we went public, there was the start of the most massive credit crisis that we've had since the Depression. 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. We can't control what the market was like the day we went public. We sure as heck can control the growth of our business and what we've paid out and all of those types of things.
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. Multiples changed, and they changed for almost all financials. Our performance against all financials is actually, I think, quite good. Something happened to the overall marketplace, and we're out there right at the top. 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've been much different.
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.
Thanks. Thanks, everyone. We're here, of course, this afternoon to answer any other questions that you have. Thanks for joining.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. To you all, have a great day.