Welcome to the
Blackstone Second Quarter 2015 Investor Call. And now I'd like to hand the call over to Joan Folotour, Senior Managing Director, External Relations and Strategy. Please proceed.
Great. Thank you, Jasmine. Good morning, everybody. Welcome to Blackstone's Q2 2015 conference call. Today, we're joined by Steve Schwarzman, Chairman and CEO, who's joining us from overseas Tony James, President and Chief Operating Officer Laurence Tosi, CFO and Weston Tucker, Head of IR.
So earlier this morning, we issued our press release and slide presentation illustrating the results and that's all available on the website and we'll be filing our 10 Q in a few weeks. So I'd like to remind you that the call may include forward looking statements which are by their nature uncertain and outside of the firm's control and may differ from actual results materially. We don't undertake any duty to update any forward looking statements. And for a discussion of some of the risk factors that could affect the firm's results, please see the Risk Factors section of our 10 ks. We will refer to non GAAP measures on the call.
And for reconciliations of those, please refer to the press release. So I'd also like to remind you that nothing on the call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone fund and the audio cast is copyrighted and may not be duplicated reproduced or rebroadcast without consent. So very quick recap of the results. We reported ENI of $0.43 for the 2nd quarter. That's in line with consensus.
I know one of the well Reuters had reported it incorrectly earlier, but has since corrected that. That's down from last year due to lower appreciation in the private equity and real estate funds, particularly the publics, which were down in line with markets, though performance was actually still quite good overall across all of the businesses. Distributable earnings were up quite a bit, 35% to $1,000,000,000 for the quarter or $0.88 per common unit. We'll be paying a distribution of $0.74 to holders of record as of July 27, which brings us to $2.85 paid out over the last 12 months. And just based on where the stock is today that equates to a compelling yield of 7% on the current price, which is one of the highest of any company anywhere in the world.
And with that, I'll turn the call over to Steve.
Thanks, Joan, and thanks to all of you for joining our call. In the first half of twenty fifteen, Blackstone sustained strong momentum across all of our businesses, private equity, real estate, hedge fund solutions and credit continue to distinguish us in the world of money management. We remain the only manager with leadership positions and strong investment performance in every one of the alternative classes and our limited partner investors recognize that and are rewarding us with more and more of their capital as a result. This is why Blackstone took in $94,000,000,000 of new capital in the last 12 months despite capping which means limiting the size of all of our major funds. In other words, the demand for our products significantly exceeded the money that we could accept.
And in that sense, we could have raised much more than $94,000,000,000 This $94,000,000,000 is a record for Blackstone or any other alternative asset manager and is actually more than the combined fundraising of the other public alternative managers for any year in history. Our fundraising success is unprecedented for our industry and has propelled Blackstone to a record $333,000,000,000 in AUM, up 19% year over year. So what's driving this success and our sustained growth over many, many years? Blackstone is very different from a typical asset manager. We've been able to continually outperform and deliver outperformance for our LPs versus the relevant indices since the firm's inception 3 decades ago.
When our investors give us a dollar, we've generated $2 to $2.50 on average in our private equity and real estate funds across markets and economic cycles for 30 years. This is not a one time event. In the Q2, if you invested in the public stocks of basically any developed market in the world other than Japan, you would have had either achieved flat performance or lost money. Blackstone however despite the headwinds in the public markets continued to deliver superior returns for our investors. In private equity, we outperformed the S and P by 3 70 basis points in the quarter.
And in real estate, we beat the REIT index by 12.50 basis points. Our credit and hedge fund solutions business meaningfully outperformed Fedgemarks as well as which Tony mentioned with our mezzanine fund being up I guess somewhere around 24%, which I think is what Tony said. And when you have performance like that in flat markets, you will have loyal investors and you will have more money from them. This is because when we invest with a specific view of operating and improving assets in our portfolio, growing their cash flows and creating real and lasting value. A great example of this was the in core warehouse company we sold last quarter.
We painstakingly built this platform through 18 different transactions over 4 years, in many cases buying assets from distressed sellers and we consolidated them and created an irreplaceable company of scale. Now we're doing something similar in European Logistics with our company Logicore. In Private Equity, we built up Merlin from the small London Dungeon attraction, which I think we paid about $85,000,000 for to become the 2nd largest theme park company in the world behind only Disney before exiting the investment earlier this year. And in the case of Central Park's investment in the U. K, we leveraged the combined expertise of both our private equity and real estate groups to maximize the value of the property and operations.
And just last month, we announced its sale for more than triple our original invested price. What we do at Blackstone can't be replicated by investors in the public markets and very few can do it anywhere or at our scale. Meanwhile, the public market backdrop as everybody knows has been volatile and challenged lately, largely driven by the drawn out situation in Greece as well as the sharp decline of the stock markets in China. In the case of Greece, we seem to have a temporary solution now, which is calm markets. China's issues may have longer lasting implications, particularly in commodities and related areas.
Despite public market headwinds, our portfolio companies, as Tony mentioned, overall are really in terrific shape. In Private Equity, trends remain healthy with portfolio company revenue and EBITDA up 5% and 12% respectively over a year ago. In other words, that's a 12% increase in earnings. This compares to most estimates for S and P companies showing flat to down earnings. So the outperformance of the company we own is really substantial.
In real estate, our office rents in the U. S. And U. K. Are rising in the double digit percentages, while hotel RevPAR growth improved healthy despite lodging stocks being down between 3% 7% for the quarter.
We've also seen 15 consecutive quarters of base rent increase in our grocery anchored retail portfolio. And surprisingly probably to most of you, Chinese shopping malls are reporting double digit percentage same store sales growth. Trends in our portfolio companies compare favorably to the U. S. Economy, which continues to grow somewhere in the 2% rate.
There's been much focus recently on the Fed potentially increasing interest rates, which still hasn't occurred despite most predictions to the contrary. I think this could happen within the next 6 months, which Janet Yellen seems to be indicating in a well telegraphed and controlled way. In a rising rate environment, I expect our portfolio including real estate and credit to continue to perform well, which it has historically in that type of environment. And that's because rising rates are usually accompanied a better economic activity, which is obviously beneficial to the portfolio. And I personally think that any rate increase would be very, very gradual.
As public markets move up and down, you should expect our public holdings of course to move up and down as well. That's the reality of our business and part of our financial results in the short term. Fortunately, the capital in our fund is largely locked in with approximately 70% of our AUM not subject to any redemption risk. In these businesses, we are not forced sellers and can wait until the time is right to exit our positions, while at the same time continue to compound value for our unlimited partners and ultimately for our shareholders. A volatile market backdrop could also lead us to deploy greater capital to take advantage of dislocation whenever this occurs.
So ironically, our E and I could be temporarily going down at a time of great opportunities for setting up future gains. Blackstone has by far the industry's largest pool of dry powder at $82,000,000,000 and a fully integrated network built around the world positioning us very well to take advantage of any market dislocations. Each of our businesses has continued as Tony mentioned to expand its platform. And by the nature of our size and diversity, we're investing more today than we were 5 years ago. In real estate, in addition to the global fund, we have dedicated opportunistic pools in Europe and Asia, the real estate debt area and now our core plus business.
In private equity, we have our global fund and our energy fund and we've ramped up the size of our tactical opportunities business and have added our secondaries business. In credit, we have rescue lending, mezzanine, a dedicated energy fund, a dedicated Europe fund, CLOs, a hedge fund platform and so on. So Blackstone is not limited to just being in a few big funds. We find unique opportunities and we grow those businesses to where they are at scale. Because of our global footprint, we're able to identify risk reward around the world and move our scale capital quickly and decisively.
And our size and brand give us a significant competitive advantage to win deals or in many cases be the exclusive partner as we were in the GE deal announced in April, which was the largest real estate purchase since before the financial crisis. Despite more difficult investing environments in both private equity and credit, we've still been able to deploy significant capital. We've invested $5,000,000,000 for example in the Q2, bringing us to $26,000,000,000 invested over the last 12 months. The dominant themes include distressed real estate in Europe, European credit, energy and opportunities created by the pullback of financial institutions globally, including mortgage lending and tactical opportunities, special situations deal flow. On average over the past 3 years, we've invested or committed more than $20,000,000,000 per year from our drawdown funds alone, which is far greater than our investment pace prior to the crisis.
Although our capital deployed in a given year may be up or down depending on markets, we're functioning now with a completely different scale of operations than we were even 5 years ago and we're continuing to create fantastic performance despite that. Our greater investment pace today is planting the seeds for future gains and distributions that I believe will be of a significantly larger order of magnitude than what we're harvesting even today, which is quite strong. As we've expanded and further globalized our businesses, we've kept a strong focus on keeping our internal culture intact and ensuring Blackstone quality across regions and products. We never franchise out decision making and we retain one single global investment committee for each of our business lines. Our investors have confidence that when we invest anywhere in the world, we're doing it with the same process driven analytical rigor that has defined us in our performance for the past 30 years.
I expect it will continue to define us for the next 30 years as well. That's why Blackstone remains one of the fastest growing, most profitable asset managers in the world. In fact, there are not many other companies of our scale in any industry that have grown at our rate on a sustained basis. And unlike most other leading companies, we pay out the majority of our earnings on a current basis, in fact a lot more than a majority, equating to one of the highest dividend yields of any major company in the world at 7% as Joan highlighted. I believe these factors make Black Stone's stock a very compelling value for investors and I'm confident that over time the public markets will come to the same conclusion, driving a premium valuation for Blackstone.
In the meantime, Blackstone will continue to operate as we always have, focused on generating exceptional long term performance for our investors with very low risk of loss of capital. With that, I'd like to thank everyone for joining the call and I'm going to turn it over to our CFO, Laurence Tosi. Thank you, Steve.
As Steve pointed out, all of our global investment businesses grew double digits over the last year, amassing a staggering $114,000,000,000 of incremental asset base expansion from $94,000,000,000 of gross inflows and $20,000,000,000 of value created through positive fund performance. That 1 year growth is 40% greater than the entire size of Blackstone at the time we went public. In total, Blackstone's businesses grew AUM at a combined rate of 19%, with each business growing at a multiple of the industry average. That growth comes from generating new ideas, new strategies and continuing to outperform broader market appreciation. This quarter, the contribution of each business shifted demonstrating Blackstone's unique balance.
GSO and BAM had the strongest economic income growth year over year. Private Equity had the highest total distributable earnings and Real Estate had the highest fee revenues. Each business is a market leader, performing well and contributing materially to our results. Total firm E and I is flat year to date at $2,100,000,000 or $1.80 per unit at a margin of greater than 50%. A few points to highlight about E and I and earnings momentum.
Sustainability. Performance fee revenue momentum continued to rise to a record $2,200,000,000 year to date. We have now added $4,500,000,000 dollars of gross performance fees in the last 12 months, which is more than our record level of realizations and managed to grow the accrued performance fee balance year over year. Earnings power. Blackstone's growth reflects our increasing asset base paying performance fees, which grew 13% year over year to a record $158,000,000,000 effectively lowering the level of appreciation needed for earnings growth.
Compounding effect. The compounding effect of performance fees paid on asset appreciation is a key earnings driver and why cumulative results continue to show strong earnings momentum. Total management fees are down slightly year to date and in the quarter as new assets raised are not yet earning fees and lower levels of transaction and advisory fees impacted results. There was also a reduction in PE management fees coupled with an increase in operating expenses related to one time items consisting of fundraising fees and legal reserves. Firm wide however, base management fees are up 4% for the quarter and we expect we will return to double digit growth levels as more of the $57,000,000,000 of committed capital we've raised begins paying fees.
Distributable earnings continued to accelerate in the quarter, continuing a trend we have seen over the last few years. Distributable earnings are up 35% in the quarter and 83% year to date on a 45% surge in realized performance fees. Over the last year, we have returned $46,000,000,000 of capital related to realizations, representing $20,000,000,000 of gains. We have now realized over 70% of performance fees we have accrued as of the end of the Q2 of 2014. That realization rate has accelerated from an average of 45% in the prior years to the current level of 70% And our pipeline for exits remains strong as more than 60% of the $4,500,000,000 in performance fees we've accrued relate to assets that are either public or are liquidating.
Additionally, more than half of the current 4.5 $1,000,000,000 net receivable is related to pre crisis deals and 90% of those are public or in liquidation. Blackstone's deliberate strategic design, which we painstakingly assembled over many years, better positions us today to absorb and materially outperform in periods of market volatility, dislocations and a shifting global opportunity set. Our outperformance comes from the fact that our core fund strategies for finding opportunities and creating value do not depend on public markets. The value created in private equity and real estate comes primarily from operating earnings growth, demonstrated this quarter and over the last year by double digit fundamental growth as Steve pointed out, compared to a backdrop of flat global growth. In credit, our expertise relies on analyzing borrowers, structuring collateral and pricing credit risk.
In hedge funds, the returns come from our expertise and scale in picking managers, innovating new products and ideas and making active allocations across asset classes. All of these strategies and skills are at their core sustainable competitive advantages that are not temporary, cyclical or market dependent. Think about it this way. Blackstone has now generated $5,000,000,000 of performance fees from investments we made before the financial crisis in 2,006 and 2007. The only way to achieve that is by leveraging our unique operating platform to find opportunities to create value through active management and patient capital structures.
The Blackstone platform delivers outperformance even in periods of high asset prices as we have seen over the last few years where investments aged more than 1 year are averaging gross IRRs in private equity of 27%, real estate of 31% and credit of 28%, as Steve pointed out. Our culture learned from our pre percent as Steve pointed out. Our culture learned from our pre crisis experiences and we adapted by building firm capabilities to manage these markets. Strong performance drives growth and sustained performance drives franchise value and investor loyalty. Investors have validated Blackstone's distinctive patient investing and operating model by committing record levels of capital to our funds.
A record of $31,000,000,000 of commitments in the quarter, dollars 61,000,000,000 year to date and $94,000,000,000 over the last year. It's of note that our investor base has drawn strong and growing interest from new global and fast growing pools of capital. In fact, 14% of our capital over the last year came from sovereign wealth funds, 13% from retail investors. Both capital pools were not meaningful contributors just a few years ago. In fact, almost 50% of the capital from our most recent funds comes from outside North America, up from just 15% a few years ago.
The loyalty to our performance runs so deep that BCP 7 and BREP 8, our global flagship funds raised $32,000,000,000 so far this year with demand far exceeding their caps. Moreover, as investors concentrate their capital with the best managers, Blackstone certainly benefits from that powerful consolidation with 81 investors in our recent flagship funds making commitments of over $100,000,000 As of today, we have record levels of capital to deploy 82,000,000,000 dollars to take advantage of opportunities in the marketplace. Is that too much capital? Or will we compromise to put money to work? Absolutely not.
Of the $82,000,000,000 half was raised in the last 2 years. So the time frame for committing capital is long and we are patient by nature. We have also built a unique platform to put that capital to work. We have $15,000,000,000 committed and deployed year to date with approximately 15% of that outside of North America. That puts us on pace to meet or exceed $20,000,000,000 of invested capital in 2015 providing further earnings growth in future years from the value created with that capital.
It is not just our differentiated platform, leading return profile or ability to access new pools of capital to drive our results. It is a new more diverse and capable Blackstone. In private equity and real estate, $28,000,000,000 or 15 percent of our total assets in those segments are public. The rest are subject to long term private values or in funds that are less susceptible to public equity market swings such as tac ops, secondaries, multi strat, real estate debt, real estate core. All of those are new businesses, which now amount to $40,000,000,000 in assets, up from 0 just a few years ago.
Our credit and hedge fund platforms are scale drivers of our financial results. Those businesses are now $150,000,000,000 of AUM or 40% 45% of the firm, up from $39,000,000,000 in 2,007. Those two businesses have generated over $1,400,000,000 in revenues over the last 12 months, marking a significant part of the firm's performance. And in terms of diversity, their performance is driven by very different dynamics than our other businesses. In credit, we earned management and performance fees largely on collateralized assets paying current yield.
In hedge funds, the strategies are either designed to have a third of the volatility of the S and P, be market neutral, long short or relate to asset growth of alternative managers, all of which is a step removed from public markets. I always find it curious when people describe or value Blackstone on a sum of the parts, largely because what makes Blackstone distinct is that the whole is far greater than the parts. All you have to look at is the unprecedented speed and scale with which our newest initiatives have grown as extensions of that whole. Tac Ops, which is 2 years old, now is 11,000,000,000 dollars Core Real Estate 18 months old has $7,000,000,000 Strategic Partners purchased 2 years ago has nearly tripled to 13,000,000,000 dollars And new energy funds created over the last 3 years are reaching $20,000,000,000 between private equity and the BDC and GSO funds. Retail distribution is ahead of our record year last year and has reached nearly $1,000,000,000 a month in flows, up from nothing just a few years ago.
These initiatives are still in their infancy and they are addressing the deepest markets Blackstone has ever accessed. They are nimble extensions of core competencies, gaining scale fast and will materially contribute to the firm's growth for years to come. Lastly, when you think about forward earnings, consider the vintage and scale of assets that are in the ground as the primary driver of those earnings. As of today, we have $220,000,000,000 of invested capital more than a year old and are earning close to $3.50 per unit in both the E and I and distributable earnings. That performance does not account for the $26,000,000,000 we have invested over the last 12 months or the $82,000,000,000 in dry powder we have recently raised.
With the explosive growth of the last 12 months and continuing momentum in our fundraising, we will soon have over $330,000,000,000 of money at work, creating earnings, which will drive significant value for unitholders to a new level, reflective of that 50% increase in assets at work. While we do not and should not try to predict the timing of those earnings, our long history indicates based on prior performance, it is not if Blackstone will generate returns and reach higher levels of earnings, but simply a matter of when. With that, we'd be happy to take your questions.
And our first question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed.
Hey, good morning. Thanks for taking the question. Just on the management fees, is there any color that you could share just in terms of the mechanics of the flagship management funds turning on and the implications for fee related earnings? I think you mentioned about $57,000,000,000 or so of committed capital that's not yet earning fees. Just what's the time frame for that coming online?
And it looks like there was a disconnect in the quarter with management fees possibly stepping down on some of the predecessor funds, but with no benefit from fees coming on some of the new funds. Did I get that right? The second part, no. So there's not an impact on the step down yet because it does an impact in real estate. But let me just go through the 2 major funds that you see.
In PREP 8, we expect to begin earning management fees later this quarter and the 1st full quarter of those management fees will be in the Q4 of this year. And for BCP 7 that will begin sometime next year, 1st or second quarter depending on the investment pace. With respect to tac ops and the other fundraising, those will begin hitting in the next quarter. So you're right, there will be an increase and that's why I mentioned we'll be back to double digit related base management fee growth shortly as those new funds come online. Got it.
Okay, great. Thanks. And then just as a follow-up, if I could just turn to the geographic split. You've certainly grown the platform substantially over the past couple of years and with large amount coming from or increasing amount coming from non U. S.
Clients. And I appreciate some of the disclosure you guys have showing the capital invested by region. But just curious how much of your revenue and your client base today would you say breaks down by geographic region? How has that evolved over the past couple of years? And how do you see that mix evolving say over the next 3 years?
So I would I describe it this way, which I did a little bit in my speech is that the more recent funds are closer to fifty-fifty North American and outside North America. And that's from a level we were 80% to 85% North America just in the last generation of funds. So that clearly is a shift. And those pools of capital outside the U. S.
Are growing quite strongly. We're also seeing balance on the high net worth side. It started off primarily North America. Now we're starting to see some really nice growth internationally. With respect to our revenues and businesses, they're all global funds, so it depends on where you put the capital to work.
The blended average of capital to work today is still about 70 percent North America versus 30% outside, but that's shifting. As you can see, we've now for the last 18 months been pretty close to fifty-fifty North America versus international investments. And even international investors for the most part give us dollars give us investment in dollars. So we get our revenues in dollars from international investors if you will. Got it.
Okay. So about 70% of the invested capital base is in North America with 30% outside? Right. Okay. Great.
Thanks.
And our next question comes from the line of Luke Montgomery with Bernstein Research. Please proceed.
Hey, good morning. In credit, you've been seeing a lot of the capital deployments in Europe. Maybe you could just update on what you're seeing there? And how we think about the strategy in terms of origination versus buying assets? And more specifically, are you considering opportunities in Greece with possible privatization of assets there?
And what's your appetite for buying non performing assets from so called bad banks like real estate from the Irish bad bank and that amount? Okay. So most of our investing in Europe are new loans, in other words as opposed to buying assets in the secondary market. However, we've set up some joint ventures with some of the European banks to do some things around non performing loans. We definitely have an appetite for that regardless of the seller.
It's kind of the question of the underlying asset quality. Although, our real estate debt and our corporate debt are done by different groups. So but we've as you know collectively, we've bought non performing loans substantially in Spain, in Italy, in Ireland and other places. We do not we have not bought anything in Greece to your specific question. And without a presence on the ground in Greece, I don't think that's ever going to be a big part of our mix.
And it's also hard to predict what's going to happen because it's such a political social process not really an economic and business process. And in our kind of assets, it's one thing for people to speculate what's going to happen with Greece and public markets. If you're wrong you can sell out and stop bleeding. Once we buy an asset we own it for a long, long time. So you got to have you got to be able to develop conviction around what's really going to happen and that's hard right now.
Okay. Thank you.
And our next question comes from the line of Michael Carrier with Bank of America. Please proceed.
Thanks guys. LT, just I had a
few questions on the FRE, both the current quarter and then probably more importantly the outlook.
So I guess just on the
current quarter, if you can just give us a little bit of color. I know you said on the transaction fees in PE there were some items. And then also in the non comp expenses, I'm assuming there might have been some fundraising costs in there. But just those two items kind of unusual. So what's maybe more of a normal run rate?
And then if you look at the management fees in the real estate business, it looks like your fee AUM went up, but your management fees didn't go in tandem. And I don't know if in the past quarters there's been some catch up fees that you've been getting as the fundraising has been going on, but just wanted a little color on that. And then finally, just in terms of the outlook, given how broad the business is now, just trying to understand as the fees start to kick in on BREP 8 and BCP 7, what we should be thinking about in terms of the operating leverage or the scale for the margins? Because if we look back and compare the business in prior cycles, it's just vastly different. I just want to get a sense of how much upside we can see on the margin across the cycle?
Okay. A lot of that. Let me take each piece. Let me start with management fees in real estate. You didn't have the impact of BREP 8 in the second quarter.
And so I think that's what you're seeing playing through there. So you don't see the uptick. You did have asset sales, which of course would have the opposite effect of bringing management fees down. With respect to one time items in the quarter, there's really 2 drivers and I'll speak about it across the business is that you do have fundraising expenses that impact for example BCP-seventy, you have fundraising expenses now, but you don't really have the management fees to offset that yet. So it's a timing difference that we've seen in the past.
And you did have some legal reserves that we took inside of the private equity piece. But I would say Mike, if you look back at the Q1 that's closer to the run rate we would expect. Ex interest and fundraising expenses, our non compensation expenses are largely 1% or 2% growth year over year. So we're keeping a tight rein on that. If you ask about the outlook going forward, certainly having we have almost $56,000,000,000 of committed capital that's not paying fees.
That will come online. I gave you some timeline in that in my last answer. And that will certainly have an uptick in our fees going forward. Let's talk a little bit about margin. Margin hovers in and around for fee related earnings in and around somewhere between 29% 31%, 32% to 33% at the height.
And it will fluctuate within that, but it won't you won't see a lot of earnings leverage other than a couple of 100 basis points as those funds come back on. That's just by the way that we design the firm. We reinvest in the firm and the way we do compensation ratios.
Okay. Thanks. And then just on DE, I think last quarter you gave like the percent of catch up related to BCP V. I don't know if you had an update, but obviously the outlook is pretty good for the distributable earnings. But just wanted to get a sense on how far along we are in the catch up phase?
Sure. So there's really two phases of catch up. There's how it hits unrealized fees and then realized fees. The way that you might interpret that is what hits E and I and what hits DE. On an E and I basis, we're 85% of the way through the catch up and on a DE basis, we're 70% through the catch up.
So that's how I would model it.
Okay. Thanks a lot.
And our next question comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Hi. This is Kaimon Chung for Glen Shure. Just trying to isolate further the E and I drivers this quarter. I mean, there were big differences between Q1 and Q2, public service, private, America, Resemia and most of that took place in late June on macro concerns of like recent China and higher rates. Has any of those trends reversed lately?
And more importantly, has anything changed your overall outlook? Thanks.
Well, Glenn, first a couple of things. I think it's always hard to take. When you look at our business, it's really hard to take at one quarter in isolation. Actually, if you look at the year to date numbers on appreciation for private equity and real estate, real estate is at 9, private equity is at 9.5%. You just had a particularly strong Q1.
By the way, you also had a really strong Q2 of last year where we saw near record levels of realizations. So
I would look always take
a longer term and look at the run rate of depreciation because that actually more fairly reflects the underlying operating fundamentals, which Steve pointed out are really good in real estate and they're really good in private equity. With respect And just on that Cai, I mean, I kind of look at LTM and they're in the real estate probably 16.5 percent real estate at 20 percent just chugging along at those kind of levels where they've been for the last several years. And so following on that, we have seen a comeback in the the primary driver of the publics was the was in real estate in the 2nd quarter where you had real estate publics were down in line with the REIT index about 10%. About 35% of that's come back. The disconnect which is good for investing bad for mark to market is that the operating fundamentals of our public real estate holdings are far better than the REIT index which is flat.
So over time that disconnect will play out both in the values of the companies that we hold, but also does create some investing opportunities that we like.
Cool. Thank you. And then just one more. What portion of the ETL is in the numbers and what is not?
Actually very little of it is in the deal. There's it's a complicated transaction across several funds and the closings will take place over time. There's been a couple of small closings, but the bulk of it has not closed yet, Glenn. So it will take over the next quarter maybe quarter plus. It might take more than just the Q3.
Yeah. Thank you.
So for example, you closed in BXMT, which is the first most liquid asset, but you haven't closed the other assets will take some time. Remember there's loans real assets mixed in the business. And there's people to move. It's an organization it's something there's organizational aspects of this as well that take some time to sort out with GE.
And our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks. Good morning, everyone.
Good morning.
So I just have two questions here on real estate. First, is it reasonable to expect an increase in capital raising from core plus just given the distribution resources allocated to BREP8 over the last 9 months? And also could you provide a little more color on the $4,000,000,000 of uninvested reserves at the close of BREP7? Thank you. Okay.
Let me talk about Core Plus. Yes, it's reasonable to assume that that business will continue to raise substantial capital. And that's been ramping up very nicely. I think they raised several $1,000,000,000 just in the last quarter. And the beauty of that business is it's a business where we can scale the money that puts to work to really to match what's raised.
And we get that money in the ground very quickly. And so we're doing some interesting things there, which will expand the target audience for that product as well. So I think that will scale nicely. On in terms of the breakdown of the dry powder, I'll do that. It does look a little unusual Craig because normally you see us take reserves of around 10% or so and then you'll see that when we end a fund.
You'll see that then that capital be retired. In this case, we had so much recall capital in BREP 7 because there were a lot of deals that we actually exited quickly. I mean the fund returns have been excellent in that fund that the number looks bigger at $4,000,000,000 So the size of the reserve is larger than you typically see because of that recall capital.
But of that also a $1,000,000,000 has been committed. It's just not invested yet.
So I think you'll end up with $3,000,000,000 left over on top of that which again will be larger than you'd normally have. Got it. Thank you.
And our next question comes from the line of Patrick Davitt with Autonomous. Please proceed.
Hi, good morning. Thanks for taking my question. There was an article this week about LPs and sovereigns increasingly setting up their own in house management capabilities. I think like it's still in the very early stages, particularly in your world and alternatives. But to what extent are you seeing that?
And how does it affect the conversations you're having with them as you fundraise? And I guess if this really is a trend in the long run, do you think you can coexist peacefully
if that's where it's going?
Yes. Okay. Well, this has been a trend for a long time actually. And certain investors are far down the road than others. To do that well and to do it in scale takes a big company.
So only our biggest LPs are set up to do that. Of the biggest LPs, most of the public funds in the U. S, which is the core of our business for the most part, do not have the mandate to do that, do not have the staff to do that, do not have the budget to hire the staff to do that and will not do that. So where we're seeing large LPs effectively doing direct investing is really the international. It's been led by the Canadian pension funds, but there are certain other international institutions that will do that as well.
But again there many of those international institutions particularly when we're talking about Asia and Middle East, they want to base their operations in their home country. They want to staff it with local nationals. And it's very hard for them to be effective on a global basis. So bottom line is, we don't worry about this as a trend first. Secondly, to the extent they want to do direct investing, for the most part the more enlightened ones and Canadians are a bit of the exception.
What they want to do is they want to use that direct investing to look at co invest with trusted sponsors. So what do they do is they give capital to funds, most particularly our funds. And then in return, they expect us to offer them some co investment opportunities where their deal team will jump on and look at it. And that's been a very symbiotic relationship frankly. And in fact their goal for more direct investing has really encouraged them to concentrate more resources with the biggest players like us.
And so I think we're actually net benefiting from that. However, it is definitely more capital in the market looking to be invested in deals than just the committed capital to funds. And that of course just has an effect on the overall supply and demand of capital. But generally speaking, it's been a trend, but not one that's going to threaten our core business. Okay, great.
Makes sense. And then just quickly, we've seen a few of the announced strategic deals. Could you update us on kind of the filed and maybe even close to filing IPO pipeline, maybe some numbers there, how that's tracking? Well, we have 4 or 5 things in they're not all IPOs necessary. Most of them are secondaries frankly.
But we have 4 or 5 things in the pipeline, I would say in private equity and probably 3 or 4 in real estate, all of which are possible depending on price and market appetite and one thing and other. The real estate sales in the light of the soft quarter for real estate related equities, that's probably a little cooler in the last 90 days, especially because those companies continue to have great EBITDA growth. So we're really paid the way. And we're accruing more value by holding it now. And so that means bigger future gains.
So we're very patient about that. But we keep chipping away at it. Okay. Thank you.
And our next question comes from the line of Bill Katz with Citigroup. Please proceed.
Okay. Thanks very much. I got I really cut off if I was answered, I apologize in advance. You mentioned very strong year on year growth in the unrealized receivable. Sequentially though it looks like it's down about 9%.
Just given the very strong pace of distribution, how do you think that that receivable plays out over the next couple of quarters? Are we at a peak? Or do you think that that could actually start to reverse and climb again, given the pace of distributions what's going on right now?
Okay. First of all, I didn't say very strong. I said it was up year over year, which I think is remarkable given the amount of realizations that we've had. And it's almost I guess about $4,800,000,000 of total let's call it incremental realizations. I mean remember 70% of the receivable as of the close of the Q2 of last year has now been realized.
And so that realization rate's picked up. It was 45% realization rate over the last couple of years now. It's picked up to 70%. I think the comparability sequentially is difficult because in the Q1 you always have the incentive fees related to annual hedge fund high watermarks that hit in. So it's not surprising to us even with lower level of appreciation that the receivable didn't go up this quarter because you do have that comparability issue.
But I think we feel like what's in the ground now by way of example, the investments we've done over the last couple of years are only about 15% of the receivable. So there's a long way to go with a lot of capital. That's about by the way that's $40,000,000,000 of capital we have in the ground. That's only 14% of the receivable. So as those businesses click on, we think there will be forward momentum and growth in receivable.
I'd also point out that the growth isn't uniform when we typically do a real estate or private equity deal. You have relatively low level of value in the 1st year because you're basically holding it largely at cost. What you see is an acceleration over time. And then of course, we're still exiting assets at a 20% to 25% premium to our prior quarter mark. So that will kick in as well.
So we actually feel good about the forward outlook. And that's why I gave you some of those stats in and around the growth of the underlying portfolio and the fact that even with these realization rates we're still adding to the receivables. So we most certainly do not see it
as a peak.
Okay. That's helpful. And then you've been very successful in gathering assets in the retail business. Can you talk a little bit about maybe geographically where you're seeing that growth U. S.
Versus non U. S. And which products and the underlying demand you see going ahead?
Yes. Okay. So it's Tony. The vast bulk of that is in the U. S.
And in fact, we built an international organization, but we're really just coming into the 1st year of that. And the rest year to date, the rest has been domestic. And so we've got a lot of potential untapped potential still in international markets, but we've got but we're starting to get that and we've got people on the ground, the organization on the ground to do it.
And just one last one. Obviously, just tremendous success in both the private equity and real estate respectively. You mentioned you had more demand at the end of the day. What drove you to cap of where it is right now given that you are deploying at a pretty high clip? Is there any sort of supply demand concept you're thinking through in your minds?
Which fund Bill? Both of private equity
real estate right? I think you oversubscribed in both I believe. I recollect. Maybe we're wrong there.
Yes.
Why cap I mean obviously very impressive numbers, so I'll try to quibble. But just good stuff. I'm just trying to understand why I have to go for $20,000,000,000 what in your mind what was the holdback?
Yeah. Sure. Well part of that is the dialogue with your LPs. So you try to find that that magic amount that they're comfortable with and that you can deliver on and balance that with demand. The investment pace has been strong, but particularly in real estate it's been strong.
Private equity, it's a little more challenging to put out capital at record investment levels. In real estate, an awful lot of the money has been put out in America in the last few years and that's markets becoming tighter. And so and it's the biggest market. So we're just trying to be smart about not so much what we're investing today, but what's the right level through the cycle. We've got 4 or 5 years.
We actually have 6 years to invest in these funds, but we try to target to investment 4 5 years much quicker than what we've got in order to deliver on our LPs for our LPs, keep the day curve down. And so we thought these were reasonable levels. They're the 2 biggest funds in the world if they're tight. So we're hardly like being unduly conservative I don't think.
Thanks for taking my questions.
And our next question comes from the line of Robert Lee from KBW. Please proceed.
Great. Thank you and thanks for taking my questions. Maybe the first one is kind of a little bit of a modeling
And I know typically,
I think the second half of the year tends to
also be And I know typically I think the second half of the year tends to also be a little bit higher. So and it was 0 this quarter. So should we be expecting that that's going to ramp back up to kind of what I'll call more normal levels in the second half of the year?
Yes, you should. It's just it has to do with how we calculate it on the different assets that go through and it relates to the tax receivable agreement. So yes, Rob, you should look at it on a more normalized basis.
Okay. Great. And then a question on Financial Advisory. I know in the presentation you talked about that being on track for the second half. But just kind of curious the spin of the advisory business, when do you think you may be able to expect kind of more details on it, so we can kind of start thinking about value for BX shareholders that will be unlocked by that spin and putting some value on it?
Okay. So Rob, we filed a Form 10, which you can go through and it will show what the basically the carved out financials for PJTR. So that idea gives you the detail. I think right now, we're expecting that the spin will happen sometime this fall, which we're expecting to do. With respect to their earnings to date and this is in the press release, but let me reemphasize this that that business will from time to time be lumpy with respect to its returns.
And we think by the end of the Q3 it will be up year over year. So there's a bit of a comparability issue. In fact, if I just took the results through today as we sit here 16th July, they're actually up year over year. So they have some scale deals closed just after the end of the quarter. With respect to the distribution itself and valuation, I think there's already some reports out there on valuation.
I'm not going to speculate on that piece. The impact on Blackstone is it's about 3% on E and I and about 5% on DE both of which are numbers that we frankly would grow through in 6 to 9 months with respect to the regular activities in Blackstone. So it will be a good one time distribution to the shareholders, which as I said we expect to happen this fall. And we think with respect to the impact on Blackstone, it will not be material over time. And the timing to be a little more specific about timing somewhere near the end of Q3 or the beginning of Q4
right in there. Great. Great. I appreciate that. And then my last question is and I'm sure it's probably one you guys have heard in the past, but just going back to the balance sheet and capital, I mean, you've done a great job expanding the business and it doesn't actually feel like you've had to commit a lot more capital to newer strategies or at least been able to maintain a very steady raised a lot of cash within a very cheap debt.
And I think you make a pretty compelling case about the stock being cheap and undervalued. So just still kind of wondering what the reticence is about thinking of putting share repurchase in the mix given your liquidity, given you haven't really used a lot of that, you haven't needed to use a lot of it to kind of expand the franchise. And you do make a pretty good case about I think
on the value. Yes. Well, we love the value. But we also think we have a huge number of growth opportunities frankly. And you're right, we've done a pretty good job managing down some of the percentage capital commitments in our core funds.
If you look at what we did a few years ago on BCB V and BREP V, I guess, 4, I can't remember. They were big bigger much bigger percentages of the capital than they are today. Having said that, some of these new vehicles we're doing have huge potential scale. Just core plus real estate that got to $50,000,000,000 which is I think within certainly within the realm of possibility. It could take it could take a lot of capital.
And some of the things our businesses are doing could really scale. The other thing is we've the acquisitions we've done all of them have been very, very accretive. We've been disciplined about it. But I think if you add up the number, it's more than people perceive. It's probably LT 6, 7 acquisitions.
We've done 8 acquisitions since 2000 since the IPO. 8 acquisitions. And so the capital puts up work was about $1,000,000,000 And those are very lumpy. It's a little hard to predict those. And the other thing is we don't generate positive cash really because we pay it out to our LPs.
So we do need to be careful about our balance sheet to be able to fund the growth and have available capital for the opportunistic things like acquisitions. And then we're just very conservative financial managers, which is we think that our LPs when they give us money for 10 or 12 years, they should know they're giving it to the Rock of Gibraltar in terms of its solidity. And so that's kind of our view and that's been our driving our driving view about the balance sheet is not to lever up. Can I add 2 things to that? So the acquisitions have turned out really well.
I mean they're better than a 30 percent IRR on the deals that we've done and that reflects the fact that there's so much synergy when we find the right teams and the right thing. The other thing I'd say is that what's unusual is we don't have the same dilution you see in a lot of financial services companies or asset managers with giving out a lot of stock every year because the characteristics of performance fees has a certain vesting period with it. So if you look at over the last 8 years, we've averaged just over 100 and 50 basis points of dilution from stock given out over time. So we're not creating that type of headwind. And of course, we've done good things with the capital and we've earned our way through it.
Great. I appreciate the color. Thank you so much.
And our next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.
Yes. Good morning. Just first wanted to comment the outlook for realizations maybe a bit differently. I know there's a lot of moving parts and it's difficult to make generalizations across the different businesses. But just curious to maybe get your thoughts or perspective on sort of the potential trajectory for realized performance fees.
Just at a high level, it seems like there's a bit of a push pull in terms of more seasoned portfolios on the one hand versus maybe a bit more of a more volatile market backdrop going forward. So just curious to get your thoughts on how that might play out as it relates to exit activity?
Okay. Well, I think if the market conditions of today are reasonably stable, you'll continue to see a high level of realizations. Obviously, if the markets fall out of bed they'll go down. And if the market gets hotter, you will probably accelerate. But in today's markets, which the S and Ps at about 16 PE, they feel not undervalued, but not peaky either, at least equity markets.
You'll see a high level you'll consider to see strong realizations. Having said that and so our realization activity will be there is some variation in that, but it's not near as big as I think what most of the what the market expects. So I look at the kind of level maybe we're slightly above normal this year. I think last year was about a normal level in an average year going forward that we could expect to distribute. And there'll be some years we're a little below, but this isn't we're not like it's some kind of huge peak way above normal now.
So if you look at what we did last year you think okay a little higher in strong market years a little lower in weak market years, you wouldn't be too far off in my opinion.
Got it. That's helpful. And then just maybe to follow-up on the fundraising side. Obviously, a lot of demand from LPs and it does seem like GP rationalization is starting to pick up. So just wondering if maybe the balance of power, if you will, has shifted a bit back in favor of the GPs in terms of fees and or structures to the point where maybe you're hearing less noise from LPs as it relates to the terms?
Well, we're hearing less noise, but we've also improved the terms for LPs. So if you look at our private equity fund for example, you look at fee splits, it's gone from fifty-fifty I. E. We got 50% of each fee and they did to 65, 35 to 80, 20. And our most recent private equity funds are essentially 100% of the fees go to LPs.
So but and there's never been any particular pressure on carry in the core funds. So I think at this point that's stable, partly because sure the market environment maybe the balance of powers to the GPs that have good records. But as much as anything the LPs have got made some progress. On some of the newer funds that we started like TAC ops and some things like you'll see there rising fees and carry as we've established those track records. And so there should be some good news for that with certain of our products.
But overall base fees for the core products really haven't changed. They didn't go down in prior years and there's where they were.
Got it. And
really, really nice to freshen it out. Actually, we increased base fees slightly on private equity as we shifted from deal fee splits into base fees. So generally speaking, it's a very stable picture.
Got it. Okay. Thanks for taking my questions.
And our next question comes from the line of Brian Bedell from Deutsche Bank. Please proceed.
Hi, good afternoon. Thanks for taking my questions. Just quickly on the outlook on energy.
Maybe Tony, if
you or else you want to describe how you thought energy impacted the portfolio performance broadly across the franchise, I guess, mostly in private equity and the credit segments this quarter. And then the deployment outlook near term, I know longer term, it's a good backdrop, but if you can comment on what you're thinking over the next say few quarters for the deployment outlook in the segments in energy areas? Thanks.
Okay. Energy prices I mean maybe LT has a more specific answer. But in general energy prices have dampened the returns in both private equity and credit. And by energy prices, I really mean oil and gas prices, which is what I assume you mean. But and those are fully reflected in our returns.
And so however, we don't have that much exposure really to oil and gas. A lot of our energy portfolio is in power, power generation, renewable power and things so on and so forth. And most of our companies are in very solid shape. So we haven't been hit near as hard as most of the other big energy investors. We actually actually for the most part our guys are very nimble.
They got into gas early. They got out of gas at the right time, got into oil. They got out of the oil for the most part before the oil prices went down. So our portfolio is very robust. And they still are reporting good positive returns notwithstanding what's happened in energy prices quarter by quarter.
So we're very happy with that overall. But if oil and gas prices oil was up at 100, we'd have higher marks, I'm sure. I haven't played that through, but I'm sure we would. In terms of the deployment outlook, it's picking up and I think it will be very strong. A high percentage of the likely closings in our private or announcements, new commitments in our private equity portfolio are energy related And on the credit side too with a new fund and some big new deals they've got handshakes on that's about to pick up as well.
Okay.
Great. That's helpful. And then maybe just a broader picture on the fundraising environment. Obviously, it's been so incredibly strong dry powder now
up to
$82,000,000,000 from $64,000,000,000 last quarter. Did you deploy at about $26,000,000,000 in 2014 and I believe $10,000,000,000 so far in the first half this year. If we think about going into the second half, just if you can frame the sort of conundrum of the heavy demand, oversubscribed demand for the products and the ability to find new places to deploy that, does that make you want to slow down the fundraising pace even aside from the 2 big flagship funds?
Well, remember the fundraising for the kind of funds we do is episodic in that sense of we go raise we have $16,700,000,000 closing our fund raisings for BCP 7. All we can have since there's a hard cap of 17.5 percent, all we can have left on that in the next few years is $800,000,000 $800,000,000 So and similarly with BREP 8 closed, it's going to be a while before we do another big BREP 8. So the fund rate was so we've been through a phase now of our big flagship funds having very successful fundraisers and year to date both BREP-eight and BCB-seven had closings and TACOPS is in the market. And so those are major bites, which will kind of be behind us. Now there's a lot of other products and new products and other things, which are coming up.
I'm not it's not going to fall out of bed. But it's not something you decide, oh, let's raise a little more this quarter or next quarter, because we're kind of we do it fund by fund and those are episodic. But the investment pace I think is very sustainable at where it is now. The returns have been great. We don't feel we're having compromise at all to get high returns.
And I don't see any reason why we can't run it that sort of $20,000,000,000 investment pace for a while. Some markets are cooling a little bit, but we're still finding things to do. Other markets are heating up. So and then as I say some of the new products are just really big scale. So I think we're in a pretty balanced area here.
But I think you also have to look at where you're fundraising is as Tony said. So in areas like real estate credit after GE deal, they used up a lot of capital, European real estate, etcetera. So it's really based on the piece of investing rather than when we want to take in money.
Great. And I think you quoted
a number for the core plus fundraise in the quarter and I missed that. What was that number?
Yes. So total in core plus is about $7,000,000,000
$7,000,000,000 total, yes. Okay, great. Great. Thanks so much
for taking my questions.
And our next question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Hey, thanks. Good afternoon. Appreciate the view that credit in real estate will do well when rates move higher. Just given the expectation that rates could move over the next 6 months and looking I guess maybe within private equity specifically, I know that you guys underwrite every deal that the buyer is going to have more expensive financing. I think that's probably been conservative assumption in recent years.
But with the view on potentially moving, does that change the premium relative to the existing market you guys have kind of benefited from recently? And then I guess also do you see any shifts in competition from higher rates that could impact your ability to sell products or buy assets?
Okay. Not sure I completely understand all the question, but let me just sort of meander around a little bit. As you say, when we go into a deal, we assume that the buyer is going to be buying from us 5 years from now in a normal credit market whatever we think that may be. That in today's by comparison today's world that would be lower debt to EBITDA multiples than is available today at higher rates. Could we be wrong on that?
Yes. And but I don't think that and if we are wrong, I think it's more apt to be better credit markets. But we're already assuming rates rise in that. And but a lot of our investments are not just public to private LBOs where you put the maximum amount of debt on it. Many times frankly, we're not taking all the debt available because we want more conservative capital structures.
And the guiding principle in our investing in private equity is not levered returns, it's unlevered returns. So we have to be able to drive unlevered returns 0 not a dollar of leverage on a portfolio company investment to higher rates than investors can earn in the S and P, for us to want to do the deal. And so then so if we're doing that, we become much less sensitive in our investing to amounts of leverage. Also to the extent we do a lot of things built on developing or building new assets whether they be energy or infrastructure things like that things in emerging markets. Again, we're not those returns are driven not so much by the amount of leverage available.
The other big themes in private equity that we do are consolidations where we back a great management team to buy a leverage. The return on those deals is driven by our ability to continue to effectuate acquisitions and get the operating synergies. And then the other kind of business that we've moved to actually because we felt like the most overpriced assets in this market are slow growing cash flowing assets almost like bonds. So bonds are the most overpriced financial asset, but slow growing mature companies with lots of cash flow are the values where leverage has pushed up the values the most. So and where you're most vulnerable if rates come up.
So we've moved away from those kinds of assets in our acquisition activity. And if you look at in addition to energy, in addition to the consolidation plays, the other thing you'll see us is doing growth investing actually where you always had a high percentage of those capital structure for those investments in equity. So if you're paying 12 times EBITDA for a company and you had 5 times debt, the fact that you can get 5.5 now doesn't affect your price very much. And but you and you're still getting a high quality company with real organic growth. So again, I think that the value and returns on those companies will be contingent on us continuing to get the growth, continuing to have a franchise not on credit markets.
So I feel very good about the fact that we're not premising our investment strategy on these credit markets. We're not even really in some ways even taking advantage very much of them.
Got it. Thanks. That answers my question. I appreciate it.
The final question is coming from the line of Eric Burke with RBC. Please proceed.
Thanks. Just a couple of questions. First, I would have thought that given the underlying given the strength of the fundamentals of your underlying investments, your portfolio companies, EBITDA and other measures of fundamental strength and given to the strength of the stock markets, especially outside the United States in the Q1 of this year, I would have thought that your year to date economic net income would have been up, but it too was kind of flat. What is what's your interpretation of that? Why would that happen given the factors that I mentioned?
Yes. Okay. So let's I mean, let me take a whack at that and then maybe everyone will jump in if they want. But first of all, our economic net income this quarter versus the same quarter last year is not so much a function of what's happening now. Yes, we're recruiting values.
We're recruiting good values. That's why we gave you the returns on these funds, which are private FE 16.5 percent real estate 20% over last year. Those are great returns. But if we compare ourselves to a quarter last year when the markets boomed, you might have had even bigger markets. And so it's a mistake to think about you're kind of conflating a little bit absolute return and relative return for a given quarter, first of all.
Secondly, remember too that while the European foreign market has been strong, the dollar has been strong too. So currencies are a factor here, because we translate back into dollars. And then we have different fund dynamics where some funds are in catch up and other funds aren't. Funds go in and out of catch up. And that affects the amount of the gain, which shifts.
And then some funds have different comp ratios than others. And so depending on where the gains are, it affects how much flows to ENI in a different quarter.
Okay.
My second question is, sir, then I'll wrap on it. May I ask the second question real quick? Do you have time to take it in?
Sure. Go ahead, Eric.
Thanks very much. It's a broader non numerical question. It's more on sort of the business plan at Blackstone. One of the things that occurred to me, I'm deeply involved with following the retirement savings business. And given your success as both agents and principals, let's talk about as agents for others, given the fact that you have been that you have so far outperformed the stock market and credit market indices and given this retirement crisis that we continue to have in this country, Can a weight be found to sort of obviously, you're contributing to the solution by working for your pension fund clients.
But what about defined contribution 401 and related areas? I would love to get the management's view on how either in coming in the next year or in coming years, your investment success in ProAss could be put to work in helping solve ordinary people's income needs in retirement? Or was that not realistic? Well, first
of all, let me say that you're my new favorite person and we're going to get you on the road spend have to spend some time in Washington and everywhere else in the world. We completely agree. Let's just start with that. And frankly have been spending some considerable time on this. I have the view that the hidden crisis in America that no one's talking about is what's going to happen with all these 20, 30, 40 year olds who are who no longer have corporate pension funds with the 5 benefits.
So they've got 401s and they're making little contributions in there, which is earning very, very little. When they retire at 65 and they don't have enough to live on and it's an entire generation maybe 2 generations of people, we're going to go, oh my god what happened? And if they can't invest money at higher returns than 4% to 5%, which is all the public markets are going to give you, we're going to be in trouble as a country. So I think that Blackstone has an obligation to save the country by delivering superior returns consistently with reduced I'd say reduced lower risk in public markets to retail investors. Now there's a lot of institutional barriers to do that.
But retail investors need these products just as badly or worse than institutional products because they have fewer less options today. And the reason that institutions have moved over the years from 5% of their assets into alternatives to the average pension being 20% and the average endowment being over 50%. The more sophisticated the institutional investor the higher the percentage of the assets they have in alternatives is because that's the only way they've been able to are and will be able to get returns. But there are a lot of institutional barriers for retail investors, not starting with Department of Labor and a lot of other things, which just now prohibited, because they require daily liquidity, daily mark to market. Some of our products don't lend themselves to that.
We're creating products that can accommodate that, but it's a small subset of what we do. And a lot of the returns we make come from the fact that we can free ourselves from the tyranny of daily liquidity and take advantage of the substantially enhanced returns that come when you can do that without taking more risk. So as a society, we will need to work on this. And I promise you eventually people will recognize this has to happen and we're there to serve when it does.
Okay. I look forward to talking to you more about it. Yes. I'd say this is Steve that Tony has given a terrific answer on it. This is basically a political issue and it's a misunderstanding of risk.
And somebody thinks that they're protecting the public from firms and asset classes like that we're in. We've been doing this for 30 years and have averaged about double the stock market. And some of our asset classes have lost virtually nothing. And so any rational look at this situation would come to the kind of conclusion that was implicit in your question and explicit in Tony's answer. And this should really happen.
But there are certain political beliefs that just don't want to encounter reality. They have a theory that things actually are different than they are. And so as we go through political cycles, there may be changes in this. But there's an economic reality that the performance is there and people need this stuff. They need the returns.
They've solved that problem institutionally. When we started in the business, alternatives were somewhere around 2% of institutional portfolios. They're now somewhere around 17% to 20%. Some institutions are at 40 and the public's at 2. And they're being held back unfairly.
And in terms of their own retirements and well-being. And I'm optimistic that this will ultimately be addressed and it would be a terrific legacy frankly for an administration to do something like that for people. Because if you don't have a good retirement at the given the age people live to now, I mean that could be
30% of your life
and people need to be supported. So you hit a hot button with us whether you can tell by Tony's answer or my answer. And if we can unlock that the scale of the firm, we get to a really remarkable thing. I mean there are people who have $4,000,000,000,000 plus managing public money with returns that are a fraction of ours. Now we can't deploy that much money in our current mode.
But just think about that. I mean, it's huge opportunity for us at some point in the cycle. Again, good luck to you on getting that done. Thank you.
Thanks, Eric. Thanks, everybody. If you have follow-up, please feel free to give us a ring.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. You all have a great day.