Q2 2020 Blackstone Group Inc Earnings Call
Released on the shareholders page of our website.
Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase and interest in any Blackstone fund.
It's audiocast is copyrighted material of Blackstone, you may not be duplicated without consent.
So quick recap of our results we reported GAAP net income for the quarter of $1.4 billion.
Distributable earnings were $548 million or 43 cents per common share and we declared a dividend of 38 cents per share to be paid to holders of record as of August threerd with that I'll turn the call over to Steve.
Thanks, Weston and good morning, and thank you for joining our call.
The second quarter, so an extremely strong rebound in virtually every liquid asset class from their March lows as governments around the world implemented unprecedented fiscal and monetary stimulus to counter the economic impact of the Covance 19 pandemic.
In the United States fiscal support as equal to approximately 15% of GDP and will likely exceed 20% with the expected passage of a fourth bill by the end of this summer as we estimated for you on our April earnings call.
In addition, the federal reserve has increased its balance sheet, thus far by three trillion dollars supporting new credit and liquidity facilities with potentially trillions more at their discretion if needy.
The global economy has started to reopen but as we discussed previously the road to recovery will be uneven.
With divergent trends across regions in sectors.
Asia is clearly further along as is Europe, both of which were impacted by covert 19 first.
In the US the economy was surprisingly strong in terms of employment gains in May and June was 7.5 million jobs added and a reduction in the unemployment rate from 14.7% to 11.1%.
We've learned to people are anxious to reestablish their lives on a personal level and in terms of their work.
However, with persistent or accelerating infection levels in many states, we're seeing some reversals of reopening plans, which will likely reduce the pace of future employment gains.
While no one knows the exact course of the us economy.
It is likely to be slower than anticipated over the next several months as a result, however, once infection level subside a stronger economic recovery should occur.
On a positive note a large number of vaccine candidates or in development with several demonstrating strong efficacy in early trials.
Some of the vaccines will move into phase three trials soon which will provide better insights not only into effectiveness, but also any side effects.
To the extent side effects are not a significant factor I would anticipate having a vaccine in large scale production within a year.
Against this backdrop.
Blackstone remains the partner of choice in the alternatives world and an anchor of stability for our investors.
Our Lps entrusted us with over $20 billion of inflows in the second quarter driving AUM.
To $564 billion.
We have a remarkable 156 billion of dry powder by far the most in the industry uniquely positioning us to deploy capital.
We successfully completed the major fundraising initiatives, we discussed at our 2018 Investor day and as a result.
Fee related earnings grew 28% for the quarter.
The valuations of our investments rebounded strongly from the unrealized marks experienced in the first quarter, which as we said at the time represented a point in time valuation and not the ultimate outcome, we expect to achieve.
In private equity credit hedge fund solutions, our returns have already retraced much of those declines in fact, Bam our hedge funds solution unit reported its best composite gross return in 20 years.
In real estate, where we are the global leader.
Our performance remains highly differentiated positively so.
As our investors have come to respect expect in the first half of the year, our opportunistic BREP funds outperformed the public REIT index by 1100 basis points.
A good reason to invest with Blackstone.
Our performance and our platform overall continues to benefit from superior sectors selection and asset quality.
That is not overly concentrated in shopping malls or hotels like many other real estate funds, which has negatively impacted their performance.
In our be read vehicle.
The largest non traded Reid.
Approximately 90% of our real estate investments are in the well performing asset classes logistics.
Multifamily housing and net leased assets, which are performing extremely well relative to other sectors in this environment.
Michael will discuss our portfolio and returns in more detail.
Throughout this challenging period, our employees have been working remotely and have continued to operate with the same level of quality and intensity.
Our culture. We're teamwork is Paramount is built on many core principles, including communication.
Each of our businesses is fully integrated with a global investment Committee that has utilized video conferencing for over 20 years in order to remain connected across all of our offices.
This model helped us transition seamlessly to remote work environment.
That said, we believe it is important to be together physically to train new people and reinforce our culture.
To that end our offices in New York in London, Begetting careful and voluntary reopening last week.
It's wonderful to see many of our senior people back in the office smiling and not looking like they just came back from a four month campus.
Camp out in a National Park.
In order to work at Blackstone, you must embrace the core values those distinguished us for 35 years.
The from was built on the idea that by having an inclusive environment.
And im very sing diversity of ideas and perspectives, we can create better outcomes.
We have been deeply disturbed by the terrible acts of racial injustice that had been observed in recent months.
We believe it is imperative to speak out against discrimination of any type.
And we have repeatedly done so.
And we are redoubling, our efforts, both internally and externally to support diversity and the quality of opportunity.
Blackstone remains committed to be a force of positive change in our society.
In closing I'm extremely proud of our Blackstone family.
And the spirit of perseverance, they've shown during these difficult times.
We will emerge we remain alert and hard working.
With unwavering dedication to serving our investors.
Whatever course, the world follows our firm is exceptionally well positioned to navigate the road ahead.
And with that.
Ill now turn things over to John.
Thank you Stephen Good morning, everyone. The power of our business model delivered again in the second quarter.
We've been consistently emphasizing the foundational elements of this strategy over the last several years, which include a number of pillars.
First if we produced strong performance, our investors will allocate more capital to us for both existing and new strategies.
Over the past few years since our Investor day, we've reported nearly $250 billion of inflows and launched several new businesses in the areas we outlined.
Our momentum remained quite positive even during the most abrupt market correction in modern history with $48 billion of inflows in the first half the year, including over 20 billion in the second quarter.
All while our Lps are operating with few people physically in their offices, a testament to the significant trust they placed in us.
Specifically in the Secondaries area, we finished fund raising both Sps, new real estate and infrastructure funds, bringing AUM on that platform to nearly $40 billion up over four fold since we acquired it in 2013.
Both funds were meaningfully larger than prior vintages, including nearly doubling the infrastructure strategy to $3.8 billion. Several weeks ago SP acquired a billion dollars of infrastructure secondary interests, which we believe is larger sever transaction in the sector and a classic exam.
All of the advantages of Blackstone scale.
We also raised additional capital for our fourth real estate debt fund in the quarter and post quarter end, bringing it to $7 billion significantly larger than the prior fund and in our corporate credit segment inflows were nearly 7 billion in the quarter across multiple areas.
Including liquid strategies direct lending and our fourth mezzanine fund.
LPG demand for credit products in this environment, coupled with the Blackstone franchise had been a powerful combination.
In growth equity post quarter end, we closed on approximately $1 billion and have strong momentum.
In life Sciences, our new fund hit its cap raising $4.6 billion with significant excess demand.
Blackstone Life Sciences, five is the largest of its kind ever raised and five times larger than the predecessor fund launch before the team joined Blackstone.
We are excited about the compelling deal pipeline in this space and we've already committed 26% of the new fund.
Looking forward, we now have fewer flagship funds in the market, but longer term investor demand for our products remains extremely high.
Number two.
With respect to investing we've spoken regularly about our thematic approach emphasizing faster growing parts of the global economy, which now have accelerated in the post coded world.
These include life Sciences last mile Logistics E commerce content creation cloud migration and telecom infrastructure.
In the second quarter, we announced three deals in life Sciences that will advance lifesaving treatments, including our nei therapies medicine for kidney disease in children and next generation diabetes management devices.
In our BPP core plus real estate vehicle, we committed to a 1.7 billion dollar transaction in film Studios and offices in Hollywood anchored by Netflix and Disney Global leaders in content creation. This complements our significant media related holdings of over half the class.
Office space in Burbank, California.
And our private equity segment, we closed on a healthcare software business and a stake in a data center operators in China.
We also created one of the largest cloud enabled software companies through our merger of our portfolio companies Ultimate software and Kronos and just last week, we announced the second investment in our growth equity business only and emerging leader in the plant based dairy alternatives category.
We also talked last quarter about pursuing opportunities created by the dislocation having purchased a $11 billion of public equities and liquid debt in March and April when markets were at their lows, we focus on areas, we knew well such as retail MLP is in leverage loans and these have been success.
Capital investments for US our credit team was also involved in a number of rescue financings and we expect to see more in the months ahead.
But regular way control deals in private equity in real estate do take time to play out, particularly in periods of uncertainty.
Third we have been reminding investors about the importance of staying power and fight firepower to navigate difficult periods.
Our model based on long term commitments from investors is designed to withstand a storm.
Last quarter, we described the unrealized markdowns in our funds as temporary reflecting a moment of great dislocation and said they should reverse given time.
You can see that recovery underway in our second quarter returns, including double digit appreciation in corporate private equity tactical opportunities and credit.
We feel quite good about the positioning of our portfolio, which is concentrated in sectors that are resilient to covert related headwinds in fact, the firm's four largest investments consist of real estate logistics platforms in the us in Europe.
Our were finished IV data analytics business and our Biomed Life Sciences Office company, all of which continue to perform very well.
For investments in sectors more directly exposed to cove. It in a number of cases, we are encouraged by the green shoots we're seeing but the recovery path will be choppy for these most impacted areas.
In terms of fire power or fundraising success has lifted our dry powder to a record $156 billion as Steve noted, providing us enormous flexibility to deploy.
Fourth we have been describing the ongoing transformation of our firm in which a shift towards greater perpetual capital would grow and improve the quality of our earnings. We now manage $110 billion of perpetual AUM up from 64 billion at the time of our Investor day.
We outlined a path to to $2 per share of annual fee related earnings, which has since grown nearly 50% on an LTM basis.
The more recurring and predictable nature of fr should serve as a meaningful ballast for our shareholders.
In terms of performance revenues, we stated last quarter that more volatile markets would mute our realization activity something we expect to continue in the near term.
That said with the recent market recovery, we've been able to restart some sales processes if markets continue to be supportive it should be positive for realizations overtime.
Importantly in our business, we are able to control when we exit in order to maximize value for our investors.
Fifth we've said that the limited need for capital in our model will allow us to keep delivering for our shareholders. We've continued to operate with virtually no net debt approximately $150 million versus our $70 billion market cap and no change in share count over the.
The last several years, while paying out approximately 100% of earnings through dividends and buybacks. We are very focused on driving shareholder value.
In closing despite a challenging environment, we remain extremely optimistic about our future prospects and with that I will turn things over to Michael.
Thanks, John and good morning, everyone. I'll first review the firm's financial results highlighted by the continued robust growth in fee related earnings I'll, then discuss the key drivers of investment performance and the outlook.
Starting with results fee, earning AUM continued on its trajectory of strong double digit growth up 12% year over year to a record $436 billion with positive growth in every segment.
Total AUM, which includes the impact of market appreciation or depreciation rose, 3% to $564 billion with $94 billion of gross inflows over the last 12 months, despite $35 billion of realizations.
Management fees increased 16% year over year to $977 million also a record on higher SLM and the onset of full fees for several new funds.
Fee related earnings Rose, a remarkable 28% to $541 million or 45 cents per share powered by the growth in management fees at expanding margins.
For the last 12 months, if our re rose a record $2 billion or $1.67 per share up 27% year over year.
Distributable earnings were $548 million for the second quarter or 43 cents per common share strong growth in fr Ray was offset by decline in net realizations as the market environment muted activity levels.
That said positive returns across the firm drove a 24% sequential increase in the net accrued performance revenue receivable on the balance sheet $2.7 billion and at the same time invested performance revenue eligible AUM grew to a record $249 billion up 10% year.
Over a year. These are both important indicators of realization potential overtime.
Turning to investment performance, Steven John highlighted the strong rebound in our fund returns in the second quarter, including double digit appreciation in corporate private equity Tac ops and credit and a record quarter for Bam.
I will provide more context.
While the impact of Cobot has been broad based across the economy. There has been notable dispersion in performance across sectors and regions in our own portfolios, we remain well positioned overall, resulting from careful sector and asset selection.
Firms key investment themes are benefiting from strong fundamentals, leading to healthy value appreciation in those areas.
Our investments in sectors, most directly impacted by Covance, our valuations continue to reflect a cautious outlook recognizing the ongoing uncertainty around the timing and shape of recovery curves for individual assets.
Corporate private equity funds appreciated 12.8% in the quarter driven by sharp rebound in the public's and with gains in particular in our technology oriented consumer finance and midstream holdings.
Travel leisure and events oriented businesses remain under pressure given the environment.
The two significant fully invested global funds in private equity BCP, six and seven both posted strong gains in the quarter and their combined performance revenue receivable more than doubled from the first quarter to $828 million.
The tactical opportunities funds appreciated 10.8% in the second quarter.
In credit the composite increased 10.1% gross reflective of the significant improvement in the credit backdrop, let.
The leverage loan market or average loan pricing has fallen to 76 in relation to 76 cents in relation to par at the lows in March recovered to 90 in the second quarter, while high yield spreads tightened by over 700 basis points from the lows.
And in band.
EPS composite rose, 6% gross in the quarter and is now down 3.1% year to date.
Performing global equity market benchmarks with significantly lower volatility.
Turning to real estate I'll provide a more detailed review of our positioning and how that has translated to investment performance.
The opportunistic funds appreciated 1.6% in the second quarter and are down 7.6% year to date compared to the public REIT index down nearly 20%.
The core plus funds appreciated 3% in the second quarter largely erasing the declines in the first quarter.
As we discussed on last quarter's call approximately 80% of the total real estate portfolio is in sectors shelling strong resiliency to covert related headwinds, including logistics and most of our residential and office holdings or exposed investments include hospitality retail and a smaller proportion of our office and urban residential holdings.
I'll break that down further.
Logistics as as firms largest exposure overall in comprises over one third of the real estate portfolio.
These investments continue to benefit from growing ecommerce demand, which based on our internal data analysis is up over 60% year over year in the U.S since the onset of the crisis.
Indeed market pricing for warehouses today is higher than it was pre coded reflective of these positive trends.
And office approximately 90% of our holdings are in very resilient areas, including life Sciences office.
Our fast growing India platform focused on global Tech company tenants.
Assets in select markets, such as Berlin, where there is healthy tenant demand and vacancy is low and.
And West Coast Office, where we're one of the largest landlords to content creators and tech companies.
And in residential our us multifamily portfolio is more concentrated in suburban garden style apartments and attractive smiles state markets.
Occupancy in this area has remained stable in the mid ninetys with steady rents and increasing leasing activity.
Hospitality and retail materials two areas most impacted by cobot together represent 13% of the real estate portfolio.
Hospitality there has been encouraging early demand at certain key assets that have reopened.
Corporate and group business travel will likely remain depressed for some time and we're preparing for a long recovery.
Finally within retail.
Proximately two thirds of our holdings are in more resilience grocery anchored assets or high quality Asian malls, where trends are more favorable and indeed, we don't own any enclosed malls in the U.S.
In summary, the firm's investment performance reflects two overarching dynamics.
First the significant rebound in public markets in the second quarter and second in terms of fundamentals the dispersion of performance across industries, where are some attic approach and sector selection has been a source of resiliency for our portfolio.
Finally in terms of the outlook.
While the market volatility has impacted near term realization activity our momentum in F. Ari and the earnings ballast. It provides remains robust.
All four of the flagship funds have been activated and are now, earning full fees, including BCT, which exited spi holiday at the end of June.
We previously discussed a path to $2 per share of fr read and we remain firmly on this path.
In closing the from continues to operate from physician great strengths and we believe our value proposition remains highly compelling and all environments.
With that we thank you for joining the call and would like to open it up now for questions.
Turnkey.
Question answer session. When I became if you decide to ask a question Keith Keith and one on your Tennessee.
Hi to retool your question Keith Keith.
And we'll be absent any originally seating you will be attorneys trend to ask your question on that line will remain on lifted Amy just a quick reminder to ask a question it.
And then one on your tenant and thank Steve.
And open questions today comes from the line of Craig Siegenthaler from Credit Suisse. Please proceed.
Thanks, Good morning, everyone.
Just given the strong returns in your hedge fund business and also attractive yields available in the private debt markets today relative to really low yields were seeing the public fixed income markets. What are your thoughts on the future migration to both the hedge fund segments and also private credit and out of traditional fixed income.
[music].
Well, Craig I think Thats, a very important question.
Everybody naturally has been focused on the impacts of the dislocation in the short term and what it's meant for the economy I think go longer term impacts that we are in an extremely low interest rate environment everywhere in the world and if you are large pool of capital or even individual investor.
You are willing to trade some liquidity.
In order to generate higher yield for the idea that folks who will make choices to allocate more to private credit potentially as well to hedge funds.
We think that makes a lot of sense, we think there will be more of a move towards private assets. Overall, that's what we've been seeing prior to this recent step down in rates, we expect to continue to see that and that's what really underlies our businesses Mega trend and movement towards alternatives and private credit is no exception.
Yes.
Thank you John.
Thank you and our next question comes from the Marine Attenborough.
Hi, Steve Hatten.
Good morning. Thank you for taking the question just wanted to ask about the outlook for FRG margin.
Like a healthy expansion in the quarter, and particularly well controlled.
Hurry comp expense. So just wanted to know if there were any particular drivers in the quarter that we should be aware of and how we should think about that going forward. Thank you.
Thank you Adam it's Michael so.
Good question and just stepping back I think as we said on prior calls first of all just in terms of the the numbers. It's best to look at margins and expense growth, we think over multiple quarters and really the full year as we do have a degree of entry year, moving our expenses, but with that said obviously.
Over the first half as well margin is up significantly.
Two key drivers of that that I would highlight or first and primarily basically strong operating leverages with simply put revenues growing well in excess of expenses and particularly in our real estate segment, where you can see fee revenues were up over 40% and fee compensations up 11%.
So that really is the first headline and then second.
Similar to other companies, we are seeing some margin benefit from lower discretionary expense such as teeny related to the current period and encoded which is more of a temporary impact but overall, we feel confident as we said before in our ability to drive operating leverage across the firm I think this quarter shown that.
And so we're certainly pleased with the results.
Great. Thank you Michael appreciate.
Thank you have to my next question comes from the line of Chris Harris with Wells Fargo TCPC Craig.
Thanks.
Question on be rate getting the.
The fund raising their demand slowed down a bit in the quarter.
Starting to see a fund raising recovery.
And related to that how is the investment performance at the holding up is it sounds like it's holding up quite well, but that little bit more color there would be appreciated.
Sure.
So.
You're right in terms of what happened and be ready to share. We started in the year with a lot of momentum on fundraising.
When we had the.
The crisis.
We saw retail investors pulled back.
Like all investors, but I think retail little more.
And we saw sharp slowdown in fundraising activity, we've begun to rebuild and we're starting to see more positive momentum what really will drive be read over time gets to your point, which is.
Really about performance. So yes. This year, we're right now I think sitting at negative 3% year to date, which is pretty strong relative to other real estate indices, but inception to date, a 7% not net IR, which also has greatly outperformed but looking forward back to steves comment 90 per se.
End of that portfolio in logistics.
Rental housing and net lease assets positions it very well so our confidence in be read is high we think investors as they see the performance even in this challenge economic climate will start to return in a meaningful way. So be we think we'll continue to be a real engine for the firm over time.
[music].
Thank you Craig next question comes from the line of Glenn Schorr with Evercore ISI Keith crises.
Hi, Thanks very much.
Yes, I wanted to see if you get a quick comment about your insurance business and what what you're seeing the space. It looks like a lot of your largest peers have made periodic moves everybody's got a big platform. It's a huge wide open canvas I heard your comments loud and clear on on rates and the credit opportunity maybe you could just talk.
Your insurance franchise, specifically that'd be great.
Sure. So as background, we have $62 billion of assets from that sector today.
We strengthened our relationship with our largest client fidelity and guarantee in connection with their merger with FNF, we have a terrific leader of our business in jail del art and we're looking at a range of opportunities. There is enormous amount of assets in this space and low.
Low interest rates make it a challenging investment environment as a platform. We think we have fairly unique origination capabilities in both corporate and real estate and other areas of credit and we think that positions us quite well to serve a range of insurance clients.
We're spending a lot of time here and I would just say stay tuned.
Okay. Thanks.
Thanks next question comes from the line of my co Cypress from Morgan Stanley. Please proceed.
Hey, good morning, Thanks for taking the question I'd just be curious to hear your perspective on what if any or what sort of lesson learned do you take away from the past couple of months with this crisis and how that informs your decision making process maybe in what way does it impact or alter your strategy in any way where approach to execute.
Yeah.
Well I think one thing it reminds us is.
Sort of expect the unexpected it's hard to anticipated global pandemic at shuts down the economy, but you want to run your business in a very disciplined way as an investor. So make sure you have structures that allow you to hold assets long term capital commitments debt structures that give you tie.
I'm all of that is more important than ever and we've seen over the last 20 years things happened. This is obviously the largest single event, but it was a strong reminder, and and then the recovery here. We've seen in markets quickly shows you again, the importance of that staying power because assets can recover.
I think the other.
Important lesson in my mind is the transformation that's been happening in the global economy, driven by technology, which we have been talking about here on these calls last couple of years in terms of how we position the business where we invest.
That continues to gain momentum and the crisis is clearly accelerated that and so.
Sort of betting against those trends has not been a good decision we've been fortunate Mike highlighted it in this in his commentary around real estate and other areas of the firm that exposure to those areas faster growing areas has made a difference and we talk about Steve talks about the importance of of good neighborhoods investing in good neighborhood.
This crisis reaffirmed that that investing in the right sectors really has been the difference maker I think thats reaffirm overall, so big takeaway you've got a have a real fortress in terms of how you run your business had certainly how we run Blackstone overall and you've got to be mindful of the transformation that's taking.
Place those are both key takeaways I think from the coated crisis and I might just build on that might that from an internal and operational standpoint, we like other businesses have talked a lot about how relatively well it's worked sort of remotely but the reason why it's worked so well remotely for us in quite seamlessly is because of 35 years.
The building culture, and a very integrated from and so forth. So we didnt Miss a beat when we had to go remote so that's been a critical thing and sort of weve.
What we benefited from that history as well as benefiting from 35 years of building relationships and trust under brand in a franchise with our clients, which allowed us to seamlessly continue to obviously raise capital and.
I continue to win the trust appliance in this even in this environment.
Yes.
We're doing a pile on Mike.
This thing, but it's important question and Steven.
One thing we've also learned through the crisis is the Reemphasis on outstanding management, because in time, where they are winners and losers and enormous dislocation.
The managers who are tens.
On a scale attend we'll find a way to be in the right place at the right time with the right emphasis the right capital allocation, it's hard to micromanage everybody's.
Behavior from Afar, if you will.
If the right people are in the right seeds.
You can get enormous.
Good outcomes and fragility in a way of certain business models, and it's not related to us in particular, but but you know is more apparent.
That is and it was.
And the needs to manage changer are much greater and I think.
That's really been drilled into the organization Observationally.
And also we've learned that different parts of our organization can uniquely help other parts.
Of the business and.
That we use in king combining certain functions.
No not just to do with more.
Effectively but to add enormous value.
By doing that and so I think we've all found that these types of periods.
Lead lead to different type of refocus if you will.
The potential for value add.
In our different business. So what I would say is you know as strong as Blackstone is.
Debt that we will be stronger.
Coming out of this.
In terms of lessons, we've learned and how we apply them.
For for growth and performance in the future.
Great question.
Thank you.
Our next question comes from the line also had switched to decrease. Please proceed your like in the call them.
Okay. Thank you very much taking the questions. Good morning, everybody just a clarification in a bigger picture question on the comp expense.
Is that a good run rate I didnt quite hear what you said on that in the bigger picture is just as you think about the private equity opportunity retail I just given some of the department of Labor rulings. How quickly do you think that that could potentially kick in and how do you think about the economic opportunity associated with those volumes. Thank you.
Hey, Bill it's Michael first on comp expense I started by talking about don't look at one quarter look at sort of overtime and really the balance of year. So notwithstanding what the growth rates were in the first quarter first stab at also sort of point you to the LTM for example, where else the LTM comp expense.
Basically grew at something like 11% over the prior LTM period, So I think thats closer to sort of certainly very near term.
Expectation on on that.
So on the four one Kay.
I'd say bill this is a very interesting opportunity for us in our industry.
Going forward, there, obviously retirement savings challenges for Americans.
And we think this decision by the Deo Elwood to step into right direction for sure because as a strong performance of alternatives.
And the size.
It could be in a multiple 100 billions dollars for the industry terms of additional assets, we as a market leader, we think we'd get a healthy reasonable share that based on our performance our track record and brand, but I want to qualify this by saying we think it's a long journey because there are intermediaries.
There's a system that's in place and we have to work with folks over time to get them to move in this direction. So we see it is a real opportunity, but something that will take time to emerge.
Thank you.
Our next question comes from the line of Ken Worthington with JP Morgan. Please proceed.
Hi, good morning.
I was hoping you could speak more about your outlook for dislocation based investment opportunities. So you mentioned the $11 billion put to work in public market opportunities brought about by cobot. What is the outlook for dislocated driven investment opportunities as we look out over the next 12 months.
And the potential to see accelerated deployment of your record dry powder and maybe is your thoughts at the best of Cobot driven opportunities are in the past or is the better opportunities still out there in the future.
So I wouldn't I bifurcate that answer I think in the public markets. There was that brief window, which proved to be.
Attractive and we were fortunate to take advantage of it and move a significant amount of capital.
And depending what happens on markets.
That seems less likely I think to see that kind of dislocation again in the near term, particularly given the fiscal and monetary policies that have been put in place.
In the private markets. It takes more time, so a company that has limited capital, we'll obviously utilize that capital to get through a difficult period of time and at some point they may hit the proverbial wall.
If you have real estate assets, a foreclosure process takes time, so I think as you think about more distressed opportunities in the private markets. Those are ahead of us in the public markets, it's always hard to predict but I think this serious levels of market decline doesnt.
I would not predict that so I think that we may see less of it although there may be industries that come under more pressure, particularly if the virus persist, but I think the real opportunity still lies ahead of us in the private space.
Okay. Thank you.
Thank you. Our next question comes from the line of unexplained seen from Goldman Sachs. Please proceed.
Hi, good morning, everyone.
I was hoping to fall back haul on on some of the comments you guys made around real estate and Michael Thanks for incremental disclosure there with respect to exposures, but.
As you thinking about the current dry powder within real estate today, how much of that you expect to support.
Existing assets, how are you thinking about the path to recovery.
Real estate and John to the last question I didn't hear you talk much about opportunity specifically within real estate I imagine that could be some meaningful dislocation theres, while summit, maybe address that as well. Thanks.
Okay. So I would start in terms of protecting the portfolio I would see that is generally pretty small percentage of of the dry powder. We have given that we have as Michael described just 13% of our assets in hotel in retail and some of those are in better position.
And we don't have a large number of what we think of is deeply troubled assets. There are some additional assets in other sectors, but overall as a percentage of our holdings. It's relatively small so we don't expect a lot of dry powder going in that direction.
In terms of the path of the recovery, what I'd say about real estate is we have this very wide dispersion in terms of performance post scope. It. So we talked about logistics and life science offices.
Garden apartments, all recovering we're seeing places like China, where there's a faster recovery economically.
And so we're seeing areas that have had strength then we talked about hotel and retail where will you have significant headwinds to give you a sense collections for us in office apartments in logistics are running 95% of typical levels retail that numbers more like 50 or 60.
<unk> percent. So that gives you a sense of the challenges in the retail sector office I would say is probably somewhere in the middle we talked about our portfolio, having more exposure to places like European office Continental European office, or India, NIE T. Parks life Science office.
And even in the us more west coast sort of content technology oriented we do have some exposures as Michael outlined in places like New York in Washington, DC in Chicago, but it's a very small percentage of our overall portfolio I would expect in in urban markets in the US that this is going to be a challenging couple.
Full year period, because you've got people working remotely today.
Have high unemployment companies are going to be resistant to making long term commitments and thats going to put pressure in the near term over time, we think people will return to office buildings, it's very hard to run businesses remotely. We think there will be less density is certainly going to be a lot less new construction and we think there'll be a return.
Turn, but turning to the investment opportunity what that means is if you fundamentally believe this is more cyclical in nature as we do in categories like office or in hotels. Then you should have a good opportunity to deploy capital in retail enclosed malls, where we think the challenges more secular then we're going to be more has.
Isn't in putting our capital.
Thank you. Our next question comes from the line of roughly we tightened jellies Keith Thanks, Rob.
Thank you good morning, everyone openings well.
Rob.
Thank you I guess my question is maybe a one.
It's a little more political buttons.
Maybe have kind of in addition to alone and then.
Okay.
Lunching year.
Lot of uncertainty.
And the reason soon.
Part of your opening the hospitals with the industry.
So how do you incorporate that into more.
Investment process, you know, maybe it's more the USA truck's thing, but how is that.
Planes are you thinking of capital deployment, a willingness to deploy capital in certain types of strategies.
Were.
Well, I guess I step back and say.
Our business has been deploying capital now for 35 years and we've done it in all different political environments. We've done it in all raid all blue divided government and we've managed to.
Get through it in growth through all those different political cycles. I also think it's really important to keep in mind that our clients who are primarily pension funds believe we provide a vital service to them and we agree with them and Thats why they continue to allocate capital and we're really an important component in terms of.
Providing retirement security to many Americans in many folks around the world.
We believe regardless of the political environment, we can continue to grow our business and serve our clients I do think that given the fiscal shortfalls that exists.
If the city state and federal level higher taxes are seem increasingly like a likelihood and that's something we're thinking about as we deploy the capital.
But these things are always fluid is hard to predict what's going to come we feel good about our position in the importance of the roll off from please.
Thank you appreciate.
Yes.
Thank you and our next question comes from Michael Caveats from Bank of America. Please proceed.
Hi, good morning, Thanks for taking the question.
You guys provided good color on their real estate before portfolio and I may have missed it just was curious if you can provide some of the similar metrics on their private equity portfolio, whether it's in terms of revenue or EBITDA trends sector exposures, particularly just given that we're seeing nuances between the private universe the public markets. Thanks.
So what I would say about the private equity portfolio.
Is similar to real estate is we've had this heavy orientation recently in faster growing industries, which have held up quite well.
And we believe about 70% of our portfolio is in what we call covidien resilient sectors, but big holdings like for infinitive investments like Magic lab Blue Yonder fungal what we've done in some of the faster growing Asian markets, we feel quite good about those.
Ultimate Kronos Similarly.
Thats been really important and as a result, when you look at our overall private equity portfolio in the quarter.
Revenues were basically flat in the quarter and EBITDA was down fairly modestly which was better than we certainly would have anticipated 90 days ago.
Got it thanks.
Thank you Michael next question comes from the line of caveat higher with Jefferies TPC.
Great. Thanks, perhaps a slight pivot on an earlier question, but I think on the prior call. John you May have mentioned that that asset trades regular way I think.
You can take up.
A year setting experience from from the GNC. So curious if anything perhaps Lee you to believe differently at this point or is there still sort of that nine to 12 12 month runway before activity picks up beyond sort of the distress situations cited earlier and I guess on a related note are they.
In any particular follow through risks that you're kind of watching for or see that could prolong that.
That return to regular way transactions. Thank you.
Yes, I think fee.
When you when you think about deployment in transaction activity a backdrop of high uncertainty makes it harder to do control transactions not necessarily on our side as the investor, but if you think about sellers. So.
Given the reduced the resurgence of the virus in the United States that I think has made some sellers a little more cautious now in those sectors that are not covanta impacted or been positively impacted more.
Life Sciences growth equity technology oriented deal, we're still seeing reasonable transaction volumes, but in a lot of the sort of traditional economy people are little more cautious I.
I would expect that to continue as it relates to larger size control deals.
We would be more than willing and weve shown a willingness to deploy capital even into the most impacted areas, but but there tends to be a little more resistance to that as as people want to sell into a little bit of a healthier market and so I would say I think certain sectors will remain active.
It will take time, it's hard to say exactly how long, but if you look at M&A volumes I think they're down since the crisis about 50%.
She is an indication of what's happening in most of that is concentrated in those healthier sector. So at some point here.
Businesses will trend transact opportunities will emerge and the great thing about our model is we can be patient if necessary and then when the opportunities emerge. We can move very very quickly and having that $156 billion of dry powder is very helpful.
Thank you Sir your next question comes from the line.
Hi, Keith and I have been Hyman PCC.
Yes, good good morning, Thank you.
I guess ticking off on the political for bulk question.
Hi, Chris It sounds like we lost your your volume there can you still hear us.
Joann why do we go back to the next question and Chris can re prompt and saw the if he's able to get a connection again.
Thank you see and.
Our next question comes alive shutdown from William Blair PTC C.
Hi, good morning.
Curious to understand how your approach to valuing assets is changing in this environment, particularly in light of.
No zero interest rates and the potential for those rates remained very low for some time as indicated by the tenure and we all we all understand the sensitivity of DCF models to the to the discount rate. So just just curious to get your thoughts there.
Well with respect to valuing our existing portfolios developing new investments look our approach remains the same and terms our process. It remained the same in the first quarter I had a very challenging dynamic time in March and that certainly remains the same now.
And.
In terms of the rate environment, obviously in the context of say Dcs that is generally expressed or impounded in.
In discount rates and indirectly on a second order basis on exit multiples assumptions.
Which we look at based on historical levels.
And it in a in a way that has the outcome of being quite conservative, which you've seen in terms of the values. We've achieved upon exits versus where we've been where we carried assets on an unaffected basis, which generally has implied a meaningful discount.
So we've been through a lot of different rate environment over 35 years, and every quarter, we value our assets and as rates fluctuate again those are translated through into our discount rates our cost of debt as part of that thats embedded in that and also in exit multiples and I would just say in terms of new investments we have now.
Hi.
Started expanding exit multiples based on the low rate environment, but it is an interesting question when you get to more stable infrastructure real estate.
Resilient corporate businesses as we've seen in the stock market. It is possible that there will be a re rating high higher for those businesses and so we have not adopted data in our models, but it's obviously something we're looking at in terms of the market environment.
Alright, thank you.
Thank you Chris Our next question comes from the line of Jeff in line with JMP Securities. Please proceed.
Great. Thanks for taking the question just a follow up on some of the realization commentary and I. If the question really is that it sounds like some sales processes have started back up in certain areas and then obviously valuations.
In areas of recovered quite a bit I'm curious how critical.
The ability to meet and person is to sell on asset meeting, we really need a broader economic reopening for M&A that to really come back here you M&A historically has been a business where people.
I want to see in touch an asset or meet with management or employees and person. So I'm just trying to think about that and on the other side im assuming that the processes today or virtual just given that dynamic and so we've seen record equity capital raising over the past few months deck operations incredibly active so just trying to think about.
You know how much we're learning about what can be done virtually and maybe the benefits of that either from the ability to sell assets.
Through through follow on offerings, or even ipos or even M&A in kind of the virtual an evolution here.
Well, it's interesting I do think as it relates to selling securities. This world has probably been a tool that is more advantageous.
Doing an IPO roadshow, reaching a larger audience for liquid securities I think it's a positive but to your earlier comments it is a headwind.
Transactions have gotten done we announced a number of deals.
This quarter only some of the life science deals we announced.
In the studio deal we did on the West coast in real estate, but it's definitely harder and I do think it weighs on the transaction environment, So as a virus as the virus.
60, 90 days ago seem to be receding. It felt like the deal activity was going to really pick up there was a lot of pent up demand to do transactions now that has made it hard sort of logistically to do deals and obviously is impacted businesses a bit I.
I do think back to Steve's earlier comments as the virus goes away. Once we have a vaccine I do think you'll see probably a step function increase in deal activity and so this is a headwind to that deal activity today, but nevertheless, remarkably we've done a number of transactions others have people are for.
Finding a way to do do business, but it's definitely a bit harder.
There's also a global dimension that is probably as much of anything use centric comment in Europe and Asia. There is more I think ability to.
Convene and.
And managed transaction processing, but the overall point stands obviously.
Great. Thank you.
Thank you and our next question comes from the line of Prime Patel from Deutsche Bank piece Pacey Permian.
Great. Thanks, very much for taking my question most questions have been asked and answered, but maybe just going back to private equity informal okay.
Realize it's a very long term endeavor, but I.
And it's.
Working with planned sponsors.
On this.
Topic already so maybe if you could just to comment on whether you think.
The.
50% allocation from the deal right now is as one way to do it but.
The potential for direct investments.
In in private equity.
In form 10-K, and then.
Whether you think it would be.
It could be achieved in more core private equity products like the lump the series at BCP funds or where would that be more facilitated through things like your secondaries business or or or Tac ops.
No.
I would say I think it's unlikely that you're going to see direct investments I think target date funds run by plan sponsors is the most likely vehicle for accessing for one came money.
And then I think within sectors.
Real estate is probably the easiest place to start.
Because there is some real estate already in the four one key market private real estate, so that seems like a logical area I think our secondaries business because of the diversification there and liquidity.
Is another area and overtime hopefully, we'll move to traditional private equity. So as I said earlier I think it's a journey we tend to get focus on large market opportunities like this and we work for a long time. So this stuff does not happen overnight, but we think our track record and what we can offer individual into.
Masters is compelling and we're going to we're going to spend a fair amount of time trying to figure it out.
Okay, and you've been working asking with large plan sponsors or.
For this morning, I'm not going to comment on who we're talking too, but it's as I said, it's an area of focus.
Okay fair enough. Thank you.
Thank you final final question comes from the line of Chris Kotowski from anything behind the company PPC.
Hi, I'm sorry, thank you because having problems with my headset.
Yes, there was this story in the S.T. yesterday that the attorney General's, Kentucky joined the lawsuit against you and KKR for excessive fees I imagine you can comment on that directly but I guess it illustrates the point or the earlier question about how.
It's become.
Okay political football and I guess I wonder in private equity started out primarily serving public pension funds and.
Just given the politicisation.
Does it does.
Is the riskiness of taking money from that source increase than does it make it less attractive to you, especially since there's so many other.
Places that want to give you money.
Yes.
Yes this suit.
I'm limited in what I can say of course, but this was focused in the hedge fund area.
Just as background to suit has already been dismissed one spy that Kentucky Supreme Court.
Bam our hedge fund area actually beat the benchmark by threefold in this case in generated more than 150 million of gain for the pension fund. We think the claims here are completely without merit and if the broader question is do we think our pension fund clients appreciate what we do in our per.
Performance stands up and were excellent fiduciary the answer to all of that is yes, and we do not see this as a in underlying sort of trend in our business.
Okay.
Thank you that's it for me.
Thanks, Chris.
Thank you I'm not sure Nikolaivich Weston Tucker for closing comments.
Great. Thanks, everyone for joining us this morning, and please give me a call like you have any questions.
Thank you that concludes your culprits kofler today you may now disconnect. Thank you.