Q3 2020 Blackstone Group Inc Earnings Call
As ultra low interest rates have made it an extraordinarily challenging environment for global investors to earn an acceptable return through traditional asset classes alone.
At the same time, the pandemic is continuing to create enormous disruption and uncertainty in the global economy and society in large we're seeing it in the markets today of course.
As history has shown.
It is in the difficult periods that distinguish the best asset managers.
We saw this during the global financial crisis, when the competitive landscape was dramatically altered.
Whether it was in credit hedge funds were most notably in real estate. Many of the largest managers were either put out of business or severely damaged.
Blackstone's performance, however was highly differentiated.
We emerged from the financial crisis, even stronger them before.
We extended our leadership position in every area.
Launched multiple new business lines, and strategies and meaningfully deepened our LP relationships.
The current dislocation is again, highlighting blackstones distinctive position.
This is particularly true in real estate.
We're despite concerns over the impact to the pandemic.
Our phones continued to outperform significantly.
That's because we've concentrated actively our portfolio in fast growing resilience sectors.
Logistics for example, now comprises 36% of our global real estate portfolio.
Or nearly 90 billion of gross asset value, including debt.
As a result.
While while the public REIT index has declined 18% over the last 12 months, our opportunistic funds have seen positive appreciation of 3.5%.
That's 2150 basis points of outperformance.
Our core plus funds, including be read.
Appreciated 4.9% over the same period.
So thats almost.
2300 basis points of outperformance.
After declining amidst the first quarter market downdraft B. Riley is up nearly 11% over the past two quarters with strong performance leading to a re acceleration of demand that I anticipate will continue.
Michael Jay will discuss our investment performance in more detail.
Since founding Blackstone with my partner Pete Peterson, a 1985, we have faced many challenging periods.
And each one has validated the trust our limited partners place in us and further widened the moat around the firm.
This month, we celebrated the firm's 30 fiveth anniversary bye.
By delivering strong performance through cycles and by innovating Blackstone has grown tremendously over the last 35 years, becoming one of the largest 110 public companies in the United States by market cap.
We have over 3000 employees across 24 offices worldwide have created something truly special in virtually every area of alternatives.
Our reputation and brand represent the gold standard in our sector.
The foundation of our success is our unique culture.
Everyone at Blackstone shares the same core values, including the drive to win.
The highest standards of integrity.
And an unwavering dedication to serving our investors.
It is our culture that has allowed the firm to continue to operate with the same standards of excellence in a remote environment since the start of the pandemic.
And is the desire to protect and perpetuate our culture.
That informed our focus on reopening our offices once we were confident it.
It could be done safely.
There is no substitute for the benefits of in person collaboration in our work and in our culture and.
And we must also train our newest professionals in our values and processes.
In this context, we began a careful reopening of our New York headquarters in July.
And meaningfully expanded that effort in September.
We've implemented extensive safety measures, including providing mandatory weekly covert testing.
And specialized contact tracing technology on all of our devices.
We are performing enhance cleaning measures across our facilities.
And we're providing transportation subsidies to support community.
While attendance remains entirely voluntary we're gratified that the majority of our investment professionals have been coming into the office.
We take immense pride in being consistently ranked as the best place to work in our industry.
And in this extraordinarily challenging environment, we believe were going as far as any workplace to protect our people and our culture.
In closing despite.
Despite the substantial difficulties the world is facing sales.
Like stone will continue to be an anchor of stability for our investors.
As always we are enormously alert to risk and the tuned to changing conditions.
And we remain totally committed to supporting our employees.
Folio companies and clients.
With that I'll.
Ill now turn things over to John.
Thanks, Steve and good morning, everyone. The firm reported a terrific quarter across all metrics as Steve said, we weathered the worst of the storm and now we're seeing a re acceleration of activity.
I've never had more confidence in our business.
I say that because across the firm our short and long term investment performance, we remain outstanding including 15% annual net returns since inception in opportunistic real estate in corporate private equity.
We've also spoken previously about the importance of staying power in fire power, which are the product of our long term committed capital model. Despite the severity of the downturn earlier this year nearly all our major strategies has now reversed the unrealized marks we experienced there were no fee.
For sales at the bottom and we've been able to deploy substantial capital as opportunities emerge looking.
Looking forward investors around the world are facing an adverse investment environment interest rates at nearly zero, meaning even greater demand for alternatives and from Blackstone in particular.
While liquid markets have largely recovered it has not been a return to normal for the global economy. Our transformation is underway with the pandemic, both accelerating and disrupting certain trends in sectors, such as legacy retail and media secular declines have intensified Meanwhile businesses connect.
Good to the digital economy in the life Sciences Revolution have benefited.
We've been emphasizing these winning areas for years, focusing on buying high quality companies and assets that have the wind at their backs in terms of technological disruption, where we can pay a reasonable price and add value.
In real estate, specifically, we've been underscoring the importance of sector selection as Steve noted resilient income producing assets such as logistics Garden apartments in life Science office properties are re rating higher in value in the current interest rate environment.
Our investment in Biomed is a prime example of this dynamic five years ago, we recognize that the rapid growth of biomedical research would transform demand for life science space and where it is concentrated we privatized biomed during a downdraft in the public REIT market and grew into the largest private owner of life.
Science office properties in the us with 97% occupancy.
We are extremely proud like we are Blackstone life Sciences business of the critical medical research Biomed supports.
Two weeks ago, we announced a $14.6 billion recapitalization of the company, which will generate six and a half billion of profits, including prior proceeds.
We simultaneously raised a new seven and a half billion dollar life Science office perpetual capital vehicles on our real estate core plus platform in which biomed will become the anchor holding subject to a 30 day go shop period.
This is an exceptional outcome for both our fund investors and shareholders.
As with all perpetual capital our shareholders will further benefit from the long term compounding of this new vehicle.
At our Investor day, two years ago, we highlighted the ongoing transformation of the firm towards a greater mix of perpetual capital in fee related earnings since that time, we've nearly doubled perpetual capital AUM to $115 billion led by growth in our real estate core plus platform, even before the impact.
Of this new vehicle.
In corporate private equity, we reported an especially strong quarter with double digit fund appreciation on the back of our large exposure to the digital economy.
And then the realization front, we closed two major dispositions in the energy space Shinier and a partial sale of our stake in Vivint solar wishes.
This year, we helped grow the company into the largest exporter of natural gas in the us creating over 5000 jobs in the process and we transformed even from a tiny startup with less than a thousand customers into one of the leading installers of residential solar in the country installing systems for over 200000 customers.
In both cases, our investments helped significantly reduce carbon dioxide emissions, while also generating favorable returns for our investors.
We told you on the last call that we had restarted some of our sales processes, which accelerated given the faster market recovery.
We also told you we expected more deployment opportunities, but that it would take time, particularly for regular weight control deals those opportunities have started to materialize, we invested $9 billion in the third quarter and committed $19 billion to pending deals, including several subsequent to quarter end the largest.
The outstanding commitment pipeline in the firm's history.
In private equity, we announced the acquisition of ancestry Dot Com a leader in digital family history services and the corporate carve out of Takeda consumer healthcare the largest private equity investment in Japan since 2017.
In Tac ops, we announced investments in Cryoport logistics solution provider to life science companies and Chi a digitally enabled insurance platform in partnership with Lloyds of London and in credit, we launched a clean energy lending platform and our financing a provider of loans for home solar panels turning.
To fund raising inflows were 15.1 in the third quarter and $63 billion year to date, while there can be lumpiness in fund raising from quarter to quarter investor confidence in our firm remains as strong as ever third.
Third quarter inflows included $2.3 billion for growth equity $2.3 billion for the real estate core plus funds, including be reached and the final close for our fourth real estate debt fund, which reached an industry record $8 billion demand for credit products remains robust and our corporate credit segment reported FFO.
5.6 billion of inflows across liquid strategies direct lending and our fourth mezzanine fund.
We expect to complete to raise for our BDC in the next few weeks one of the largest ever and have built a global direct lending business to 21 billion of AUM only two and a half years after selling our prior JV in the US. We also launched fund raising for B credit a new perpetual capital BDC.
For retail investors that will invest across our credit platform.
Just as we re imagine the non traded REIT with B. Riley, we're doing the same in credit and in private equity last week, we completed the race for our second long dated core fund at $8.2 billion the largest ever raise of third party capital for this type of long dated strategy and this is another element of the.
Firms migration towards longer duration capital.
Overall fund raising momentum remains strong and with a $152 billion of dry powder capital, we have tremendous firepower to invest.
One final note from me on ESG deferred.
The firm continues to deepen our commitment across a number of important areas, including recently announced programs related to sustainability diversity and economic mobility.
First we have set a carbon emissions reduction goal of 15% across all new control investments within the first three years of ownership.
This initiative is a natural extension of our decade long program of helping our portfolio companies utilize energy more cleanly and efficiently second we've announced a target for the boards of all new control investments to be composed of at least one third people of diverse backgrounds and third we launched a program to create economic opportunities and crew.
Career mobility at our portfolio companies for underserved demographic groups. We're proud of the impact that firm is making in these areas and we remain fully dedicated to driving positive change in.
In closing, we continue to deliver for both our customers and our shareholders. We remain well positioned to navigate the road ahead, whatever it may bring and with that I will turn things over to Michael.
Thanks, John and good morning, everyone.
Firms third quarter results were characterized by robust momentum across our key metrics.
Earning AUM continued on its strong long term trajectory of double digit growth up 13% year over year to a record $445 billion.
Total AUM rose, 5% year over year to $584 billion also a record with $89 billion of gross inflows over the last 12 months, despite $33 billion of realizations.
Management fees increased 20% year over year to $1.1 billion in the third quarter.
The first time exceeding $1 billion in a single quarter and rose 8% sequentially.
A sequential strength was driven by the onset of full fees from BCP, eight which exited its fee holiday in June as well as from our life Sciences and third private equity energy funds.
Fee related earnings increased a remarkable 39% year over year to $611 million powered by the growth in management fees, along with significant margin expansion.
For the last 12 months Fr Ray rose to a record $2.2 billion or $1.81 per share.
Two years ago, we outlined a target of achieving greater than a $1.70 per share of that already in 2020.
And I am pleased to say, we have delivered on that target ahead of schedule highlighting the exceptional durability of this earnings stream in any market environment.
And we remain highly confident in the path forward.
Distributable earnings were $772 million for the quarter or 63 cents per common share up 9% year over year, a significant achievement given the environment.
Turning to investment performance it was another excellent quarter across the board this.
This was reflective of two key drivers first the ongoing strength in equity and credit markets and second the favorable positioning of our portfolio in terms of sector and asset selection.
In real estate, the breadth opportunistic funds appreciated 6.4% in the third quarter and are now down only 1.1% year to date compared to a 17% year to date decline in the public REIT index.
The core plus funds appreciated 3.5% in the quarter and are now up 2.2% year to date with fee rate of 2.8% year to date.
As I explained last quarter, approximately 80% of the portfolio is in sectors, showing not just resiliency, but fundamental strength, including our holdings and logistics suburban multifamily and life Sciences office.
This positioning is well illustrated by Biomed, which is now being recapitalized at a value of nearly 50% higher than its carrying value at the end of last year.
Travel oriented and certain urban office and apartment assets remain under pressure. Meanwhile, given the environment.
In private equity, we've now had two consecutive quarters of double digit appreciation in both corporate PE and Tac ops, the corporate private equity funds appreciated 12.2% in the quarter and have now fully retraced the first quarter declines.
The Tac ops funds appreciated 10.7% in the quarter and are up 4% year to date.
Gains were driven most notably by strengthen our technology consumer finance and renewable energy holdings.
The firm's largest fully invested fund BCP seven is weighted towards the technology sector, including investments like refitted and bumble, which continue to perform very well.
At BCP six is a seasoned highly liquid portfolio, which has experienced broad based appreciation in value over the past two quarters, particularly in its public holdings.
Overall strong fundamentals across our key sectors helped drive an acceleration of revenue and EBITDA growth for the corporate private equity portfolio in the third quarter.
Our secondaries funds, which report on a two quarter lag declined 13% in the quarter reflective of the first quarter market Downdraft, we expect this should reverse over the coming quarters.
In both credit and hedge fund solutions.
Healthy appreciation in the third quarter has now largely erased the first quarter declines the credit composite is up 15% growth over the past two quarters, including 4.4% in the third quarter reflective of the significant improvement in the credit backdrop, and our strong portfolio performance.
Indeed, the default rate in our us loan portfolio for the last six months was only 25 basis points, 0.25% compared to a rate of 2.9% for the market overall.
And lastly for Bam the bps composite has increased 9% gross in the past two quarters, including 3% in the third quarter.
Strong investment performance across the firm generated over $1 billion of net accrued performance revenues in the quarter and push the balance sheet receivable up to $3.6 billion.
A 31% sequential increase and up 62% from the March low.
At the same time the firms invested performance revenue eligible AUM increased to a record $267 billion up 13% year over year.
Taken together these indicators bode well for future realizations over the long term.
Moving a realizations and the D. outlook following a more muted period since the onset of the crisis activity Reaccelerated realizations were $7.9 billion in the third quarter with an additional $12 billion now under contract we.
We closed the Salish near the firm's largest ever investment in the energy sector and one of the most profitable at any type of.
Along with stock in two of our private equity public holdings.
We also signed up the sales of electric utility platform in the US a large pension insurer in the UK and a number of other public and private sales, including biomed subsequent to quarter end.
In total realizations and breadth and corporate PE that closed in the third quarter or are under contract equate to an aggregate multiple of 3.6 times invested capital of remarkable result, and well above the firm's long term historical average in terms of earnings impact. These pending contracted realizations are expected to.
Contribute approximately 54 cents per share to de over the next couple of quarters prior to the impact of any additional sales.
Combined with growing fee related earnings the near term outlook for D is strong.
I'll close by remarks today with a comment on our balance sheet.
Last month, we issued $900 million of 10.5 year, and 30 year notes with coupons of 1.6% and 2.8%, respectively, which further fortified the firm's exceptional financial liquidity position.
The offering was highly oversubscribed and indeed, the coupon on the tenure notes set a record for the lowest ever in the asset management space the rating agencies reaffirmed our a plus ratings the highest of any alternative manager.
And we ended the quarter with $5.6 billion of cash and liquid investments and effectively no net debt.
The weighted average after tax cost of debt is only 2.5% with an average maturity of approximately 15 years.
Our balance sheet remains a source of considerable strength and strategic flexibility.
In closing this was an outstanding quarter for Blackstone.
The firm's momentum is significant and the broader environment. Despite its challenges is fundamentally supportive of our business.
With that we thank you for joining the call and we'd like to open it up now for questions.
Thank you and everyone just to remind one Keith question.
We could do this today just invite you to ask one question is occurring.
Thank you. The first question comes from Alexander Blostein from Goldman Sachs. Thanks, Alexander.
Great. Thanks, Good morning, everyone. Thanks, so much for the question.
I wanted to start with the prospect I guess of a blue wave election, and I understand that might be it might be difficult to to answer with a lot of specificity, but rifling wrongly. So it feels like the narrative around the stock in the sector broadly is that Ed Democratic sweep will be net negative for the space and whether it's higher taxes or change in cash.
Little gains tax credit trends et cetera, So help us maybe unpack that a little bit where do you see a real impact on the business versus maybe some of the narrative and then specifically with respect to higher tax rate.
If we were to Q1 can you just help us think through the implications of that for the public shareholders. Thanks.
Thanks, Alex.
So I'd start stepping back in saying that this firms been around for 35 years, we've been environments that have been already.
All blue mixed we've been in an environment of rising taxes, and regulatory focus declining taxes regulatory focus and the thing Thats been consistent is we have delivered great results for our clients and the firm's grown and we don't expect that to be any different as we look forward now in term.
As of specifics certainly there could be some headwinds and Michael can talk about specifics on corporate tax rates, you could see areas to get more regulatory focus and so those are headwinds, but on the positive side, there will be sectors have benefit infrastructure, where we have a large fund could certainly benefit.
Renewables, where we've been quite active and then some of the urban centers like New York and San Francisco.
Where there are fiscal challenges you could see more.
The more funding coming from the federal government, which would be helpful. So we look at it and say, yes, we recognize there'll be challenges I think we still have to wait and see how the election turns out what happens, but we feel confident about the business regardless of sort of what comes out of this particular election, Michael I don't know if you want to talk about the tax.
Sure Alex Good morning, you know on that on the tax side, let me take it at the firm level and then add briefly at the portfolio level and as you mentioned, it's obviously too early to know exactly what the clinical outcome would be there will be theres lot of permutations or what the details of any new tax plan will ultimately look like.
With that said when we decided to convert to a corporation to let's take it at the Blackstone level.
We certainly took into account the possibility and potential impact of future higher tax rates.
And in fact, you might even recall that at the time of announcement of conversion. We were asked about higher tax rates and at the time, we said that a 25% to 28% future corporate tax rate theoretically would result in low single digits of additional average earnings dilution over the next several years and that remains true today.
And modestly higher beyond that so as John said, we'll deal with whatever comes our way.
And at the portfolio level I think the short answer is.
The long term impact of corporate tax changes will be mostly reflected in market multiples and how they take into account tax rate changes and not and all the other factors. So at that level I would just leave it at that.
Great. Thank you both.
Thank you Charles.
Thank you Ms. from Chris Harris Wells Fargo. Thank you Craig.
Thanks, guys my questions on investment performance you highlighted that.
You guys are really putting up outstanding numbers the.
So when we look at the return in public markets you see the NASDAQ in particular up 25% or something year to date.
Is that a potential risk.
For the industry and Blackstone in particular, I'm thinking about potential risks to fund raising or just the private equity business in general.
So you're saying the risk that as the public markets perform well that investors would migrate more to public shy away from alternatives was that the question.
Yes exactly.
Yes, I think you know our investors, obviously take a longer term approach and they're looking in individual quarters public markets can outperform but if you look in the fullness of time, the 15% net that we produced in private equity and real estate private equity is really outperformed.
And Thats I think the metric they look at long term outperformance I would also point out of course the decisions, they're making are not just about.
Substitution for public equities, but their whole portfolio and in particular I think the most important thing is to think about in a classic 60, 40 model, 40% fixed income where long rates are zero or less than 1% around the world and so fewer the CIO of a large pool of capital you wanted to achieve so.
7% target you'd say I need to do some different things and that is really pushing more and more into alternatives. Just like we've seen an acceleration I think we've seen in the digital world coming through this pandemic of trends already heading in one direction I think theres a dynamic that could be similar in alternatives that this final leg down.
Now in rate is going to push even more into alternatives beyond private equity into a real estate into private credit and so on and so we feel very good about our performance on a relative basis and what we can offer to our customers.
Thanks.
Thank you next question Glenn Schorr from Evercore ISI. Thank you Brian.
Hmm.
Thank you very much so.
So maybe I'll follow up on on performance I'll switch over to the credit side, you talked about the composite which is helpful. But.
When I look at the slide back in I guess 20, which goes through the funds.
Im looking for guidance on how we were supposed to judge and long term performance across NAS distressed Europe BDC.
Individually, obviously you are taking a lot of money. So I think Lps are art and allocated so looking at okay, but maybe you could talk about performance of the of the most important pieces and if more money is coming from the retail side where their appetite.
Product wise, thanks, a lot.
So I'd say a couple of things Glenn first.
In the leverage loan area, where we are the market leader that is non here, we're continuing to see very good inflows in that area I would also point out so.
Strength in our mezzanine funds, which have begun a recovery obviously aftermarket is traded off you can see we are in the market today, raising our fourth fund.
You can see the strong performance in a very low interest rate environment from the first front second third fund.
We have had more challenges and we've talked about in the past in energy in distress, which had been more challenged areas.
I think going forward given the dislocation those areas will perform better, but we've talked about that in the past. If you look at our credit business in its totality because of the large portion in leverage loans the strength of our mezzanine business. Some of our direct lending platforms, which are also on on this schedule. This is really just our closed end drawdown.
On funds the performance for our customers has been good and we're raising money both institutionally and from retail customers. So yes, there have been some pockets of weakness, but overall the picture has been solid and Thats why you continue to see the inflows.
Yes.
Thanks very much.
Yes. This is Craig Siegenthaler from credit Suisse. Thank you Craig.
Hey, good morning, everyone.
Good morning, Craig.
So the officer unique among other financial services industries as low rates are generally positive for the firms, but I wanted to see if you can walk us through the different dynamics, including fund raising and investing and explain how very low rates for an extended period of time could actually benefit the business.
So low rates the key benefit is the one we talked about which is.
Investors, not just I talked about institutional investors, but individual investors as well.
Our seeking higher returns and in an environment of zero percent rates. They are willing to trade liquidity for higher returns and that's the choice that has been made and we think is likely to continue to be made.
As it relates to our business.
For assets, we own it can have a powerful impact in re rating values of assets, particularly assets that have stable or growing cash flows. So if you think about real estate or infrastructure or some of our private equity business is particularly those in the best sectors.
You are seeing this re rating process.
Take place I think biomed in the quarter after the quarter ends a great example of this.
And that results in significant gains for our investors strengthens our track record and allows us to raise more capital. It also of course low rates. When you buy assets you can borrowers lower rates and still generate favorable equity returns and as you know we use leverage in a number of our strategies. So there are a variety of.
Benefits I think the flip side of course is you've got to be mindful at some point in the future rates can normalize and when that happens what will that mean for values and multiples and we keep our eyes on that and we don't assume that rates will stay at 70 basis points forever in short rates at zero. So I think in the near term.
It feels like a real tailwind, but it's something we've got to watch over time.
[music].
Thank you John.
Thank you. This is now on a G block from Exane BNP Paribas. Thank you Ana.
Good morning, Thank you for taking the question.
Just wondering if you could discuss pass which asset classes.
It's exciting about.
In.
In terms of being able to deploy capital.
Over the next few years and the ability to add value. Thank you.
So I would say being semantic for us continues to be really important we talked about this yesterday on our partners call.
That big changes are happening in the global economy and.
And you want to have those tailwinds with you and some of those are obviously well known like technology, what's happening in E commerce, what's happening in content creation migration to the cloud.
Digital infrastructure, what's happening in energy as we move increasingly to a more sustainable energy business as as the global economy, what's happening in life Sciences. All of those things are advancing in our interesting. The challenges can you buy them at reasonable prices and one of the ways to do that.
It is to buy things that are sort of one derivative off maybe you can't buy media.
Media company or Tech company, but you can own their real estate in life Sciences, we made an investment in tactical opportunities.
In the cold storage logistics area. So we're looking for ways to play this into fine businesses for instance, ancestry, which is a digital consumer business, but because its growth. The last few years haven't been as strong we felt we could buy it at a reasonable price and we're very excited about the potential. So it's about buying these on team Bill.
Businesses of finding the right ways to act to enter at reasonable multiples. The other area I would say are places where themes have been disrupted so the travel area.
Location based entertainment tickled water parks in Disneyworld and sporting events urbanization people right now are fleeing cities. Those are all trends, we think that will come back, but there is an opportunity to invest in them at what could be attractive prices there could be distressed, but again what were really looking at is these long term team.
And having the wind at our back and that can create value over time, plus our ability to add value to the assets and that are now. So thats. Those are two key dimensions and the third one I'd add is scale. So the scale of our platform and the capital solutions. We can provide quickly to companies like El Nio women the life Sciences space earlier this year.
And those larger assets and companies Theres also much more surface area to improve and create value as John mentioned, so I would say those three dimensions sector selection, which is incredibly important.
Scale and also the ability to intervene and improve businesses.
Thank you very much.
Thank you. So we now have Michael Cyprys from Morgan Stanley. Thank you Michael.
Hey, good morning, Thanks for taking the question I was just hoping you could talk a little bit about your infrastructure business, maybe how thats come together over the past couple of years payment platform that you've built out where that stands today and what your view is unique and differentiated about this platform and John you had mentioned maybe if there is a blue wave.
That could be helpful. Maybe you could just elaborate on that and how you're thinking about catalysts that can accelerate the pace of deployment and growth in your infrastructure business. Thank you.
So we raised a 14 billion dollar fund, which we talked about over the last year or two.
I'd say the good news is we were very disciplined in putting out the capital. We did a couple of investments in the energy infrastructure space, which we feel good about.
But we were we were patient.
The dislocation in infrastructure, particularly around transportation infrastructure is starting to create opportunities for us.
I would expect over the next six months, we'll be able to make some investments there potentially in digital infrastructure as well, although that is more competitive and it is an area I think if you can buy high quality assets you can improve them.
Their value will go up over time in this low rate environment, we've been talking about and as we continue.
Continue to deploy capital I think we'll raise more capital and ultimately this will grow to be what I believe will be a very large business at Blackstone in terms of the blue wave.
It's possible here you could see a multi trillion dollar infrastructure package that could lead to more public private partnerships. There is a need for capital there is a need for operating expertise and given our team in our capital I think we can do some interesting things and then in terms of our advantage is I would say there are a couple one is just this.
Scaled what we do many of the deals in infrastructure involve real estate and being the largest real estate investor in the World is hugely helpful. Our private equity team is very helpful. On the operating side with infrastructure assets I think scale for US continues to be as Michael noted a calling card. The fact that we can write very large.
[noise] checks not just from the fund, but from co investors as well puts us in a pretty unique category. So we can move quickly when we find things have high conviction.
And we have an overall from that can add a lot of value. So we think we're well positioned in infrastructure. It's a huge scale area and we think it will grow a lot here over time.
Great. Thank you.
Thank you next.
Thank you Mike carrier from Bank of America. Thank you Mike.
Hi, Thanks for taking the question.
John You mentioned.
The opportunity to see credit and just in the direct lending in the BDC space.
I guess, if you can just provide a little bit of context around it can product structure.
But the opportunity is obviously you get that big that'd be great just want to understand that a little bit more thanks.
Yes. So the thought process has been retail investors want access to private real estate private credit to higher returns potentially an end to the Blackstone platform and the question is can we create products that work.
And we did that in private real estate as you probably recall historically private Reits charge.
Charge very high fees generally didnt deliver great performance and we showed up with something where we sort of re thought the business.
And investors have reacted quite positively that business is going to very large scale today $20 billion of equity under management.
What I would say as it relates to be created the thought process is again could we create a structure fees that are favorable to individual investors also use the breadth and depth of our credit platform and provide lending and access to to private debt to individual investors into.
Liver solid yield in this very low rate environment and Thats the objective and our expectation is given the Blackstone brand, which is really why.
One of the most powerful things in this from me I am not sure everyone fully appreciate what it means why we were able to grow. So quickly is the confidence that investors have in us, bringing that here to the private debt market into retail investors were hopeful like could be read we can build something of scale overtime.
Thanks.
Thank you, we now have Adam Beatty from media. Thanks, Adam.
Good morning, and thank you for taking the question wanted to ask about the secondaries business I. Appreciate your explaining the dynamics around the wag performance reporting, which it sounds like you expect to to rebound I think you also closed on a couple of secondaries fund in the quarter. So in that context I could get your thoughts on sort of the health of private capital management you will be.
On Blackstone, which in some sense is reflected in that secondary business and what the deployment opportunities look like they're also maybe.
The level of LP activity and interest on any effects of the pandemic plus or minus on that thank you.
So stop.
Starting with the results you hit on it.
What what our SP secondary group's results reflect is the weather six months ago.
So that gives you a high degree of calm confidence about what they will be reporting over the next quarter or two.
I think more importantly, this is a mega trend, we talked about some technology driven mega trends, but alternatives are real mega trend and this business is derivative of that which is today, there's over six trillion dollars of alternatives.
Only about 100 billion a year that trade hands, and obviously as an asset class grows there are needs for liquidity into.
Institutions change strategies, they change CIO coach and yet this business just does not have many scale players. So SP Vern Perry leads it has done a tremendous job we broaden the business as you noted beyond just private equity secondary into real estate and infrastructure. We think there are more.
Our opportunities in that space I think we've grown that business since we since we brought it into the firm fivefold something like that to nearly $40 billion.
And we think you know investors seeing the very positive net returns in that business had been extraordinarily good and so the combination of those returns and the growth in the underlying asset class is a real positive for this business and we would expect that business to continue to be on an upward Slant I think next year will raise.
What will be the ninth vintage I think.
SP private equity given its investment pace and we expect given performance was strong investor response.
Excellent. Thank you John.
Thank you we now have Gerald O'hara from Jefferies. Thank you Carol.
Great. Thanks, perhaps we could connections get an update on the on the insurance initiative and how you're looking to position.
That platform within within Blackstone overall, thank you.
Yeah, So insurance.
Really is undergoing a structural change here and again, it's tied back to what we keep talking about is low interest rates.
Insurers have long duration liabilities and with interest rates coming down so sharply its creating a real challenge in terms of meeting those liabilities with the returns on the asset side and so what you see happening across the industry is insurance balance sheets are lining up with asset managers, who can.
And.
Originate credit can underwrite structured credits can maybe add some alternatives to help that return mix and so we think this trend will continue.
We are in a number of active dialogues today with folks in this space. We don't have anything to report yet, but I can tell you we're highly focused on it.
Okay. Thank you so in Atlanta, William Katz from Citigroup. Thanks, William.
Okay. Thank you for squeezing me in this morning I appreciate that maybe a two part question perhaps for Michael.
In your commentary around the carried interest.
Taxation leakage is that simply a function of higher taxes or is there any risk within the portfolio the comp structure as a partial offset and then the second question. I have is you mentioned new highly confident in the path forward I Wonder if you could just to level set navy the exit pacing on fr. We just given we're pretty elevated.
Performance fees, and what looks like to be somewhat soft comp. Thank you.
Thanks, Bill on the tax question the comment I made Q1, a the first Q Nate I was really talking about corporate tax rates.
And and sort of the manageable stacked on that and as it relates to what you're talking about there are couple different elements of it it part of the question is.
Changes in compensation in reaction to potential changes in.
The carried interest taxation the answer is.
We do not expect that.
That will not happen in response to any such change.
As for the path forward.
As you know.
That original those original top set of targets, we put out back on Investor Day on September 2018, and at that time.
Trailing 12 month fiery was $1.14. So obviously, we're very happy with the path that we traveled from there.
It's not our habit to give guidance or even as we've shown update targets.
So, we'll just let our remarks or speak for themselves, but we're obviously very competent in the past.
Thank you.
Lee from KBW, Thank you Ralph.
Great. Thanks, Good morning, everyone hope for one's doing well.
Just a question on mix working home office.
Thank you doesn't cost as much as the Bam.
Am I mean.
I mean clearly.
Growing more slowly than the other.
And more miles you may be update is there and kind of how you're thinking about that business, then and maybe in particular the role that.
The liquid alternatives, such as wind and claiming in LP portfolio feels like a normal diminished importance. So how do you think that that business going forward.
Yes, Rob look I'd start by from a sort of numbers point of view.
Yes, I think you're probably observing.
It was down somewhat.
In the course of the year, which I think for all of US with wood was not entirely surprising given the drowned out downdrafts in the markets and probably in particular with respect to individual investors response to that but as you also saw in that same time period over the last year, our revenues are up 4%.
And what that reflects is that the business mix shifting towards higher fee strategies, including perpetual capital Stakes business, our direct investing businesses and so forth and so you actually kind of do the math on the implied management fee rate in the third quarter. It was around 82 basis points, which is actually up eight basis points year over year.
And that reflects significant positive net flows in our strategic capital and.
Direct investing business so from a financial point of view that pivot has been important in helpful. I think overall in terms of the secular dynamics and John can comment certainly.
Certainly hedge funds and absolute return strategies have had there.
Relative challenges in the face of.
As the only in equity markets over time, but at the same time, what I would say in John was talking about this before.
In this current rate environment for many many investors and some of the biggest investors looking for fixed income replacement strategies.
With lower correlation to equity markets is really critical and so.
Bam is the leader in this area.
And they we expect will be a compelling solutions provider to investors looking for that solution over time.
Okay.
Great. Thank you.
Thank you.
We have Kenneth Worthington from JP Morgan Thank you Kevin.
Hi, Good morning, Im just following up on Alex's earlier question on tax.
Right, a much higher dividend tax rate impact the way you think about capital allocation say buybacks versus dividends versus even investment back into the business.
And then how might a higher dividend and capital gains tax rate impact your initiatives that target the high net worth.
The higher taxes on the wealthy either negatively impact the relative attractiveness of alternative products versus more tax efficient products out there and maybe are there ways to make the high net worth focus products more attractive to the wealthy in this potentially higher tax environment.
Well I'll start with the second part.
I think.
Would appear to be the tax program out there today would be raising capital gain so a lot of what we do in the retail space to return comes from dividends from from ordinary income or dividend income.
And and depending on.
Lastly, how that gets treated that's.
Thats going to make a big difference.
You know I think investors are still going to need to deploy capital regardless is it possible you could change some of the structures.
Certainly, but if you look at things like reach I'm not sure. There are proposals necessarily that would change the taxation there as dramatically I guess, we'd have to see what comes out of this but I think it's too early to say the focus.
Obviously as maximizing returns and investor still need to find interesting places to deploy capital or Michael Yes, I'd add at the plant level I mean, obviously, you're you're sort of we're speculating about second and third order effects and responses to something that hasn't happened yet so we'll have to bear with each other on that but what I would say stepping back which is true universally true.
With our conversion.
Obviously gone from a PDP, where dividends received were tax based on the underlying character of income for for investors to one where our dividends are taxed like every other corporate issuers. So I think that is another reason why we're very happy about the structural change and it really leaves us within the same because a similarly situated to every other quarter.
Our dividend payer. So every corporate dividend payer will have to face up to that I'm also happy to say our dividend yield is basically exactly double the S&P at sort of current prices. So.
On a pre tax and after tax investor level basis, we feel pretty good about the.
The level of our dividend.
Okay, great. Thank you.
Thank you and I, we have Patrick Davitt from Autonomous me, Sir Thank you Patrick.
Hi, good morning, everyone.
I guess since March I feel like your commentary on calls and conferences have suggested that there is a view internally maybe the credit markets have gaps with with your view on maybe what the underlying fundamentals really are so first is that still your view and second how should we think about the gives and takes of the current portfolio exposure again.
Essential for a significant uptick in the investment opportunity if you're right that the underlying credit fundamentals are actually quite worse than what we see in markets.
You know im not.
Im not sure I would characterize it as strongly as that I would say that there are sectors that are deeply impacted by coded where credits rallied a lot in those areas I think we've been a little more cautious in areas less impacted or positively impacted I think the likelihood is in this low yield environment.
Admit that spreads could grind tighter, but yes, I would say the main impact would be those businesses, where people have come in and made an assumption how quickly things get resolved.
How quickly the business recovers, that's where we've probably been a little more cautious I would say in maybe the distressed area, but overall when I look at credit.
We my gut is we'll probably see tighter spreads over time, given this yield challenge.
Thanks.
Thanks, Patrick.
Thank you and then last question now is from Devin Ryan from JMP Securities. Thank you Devin.
Great. Thanks for squeezing me in here a question on sustainable investing clearly there's a lot of focus in the market right. Now you outlined some of the changes already being employed at Blackstone, which we've been following it and really I'm curious whether DSG, it's going to be more of an overlay on.
Existing strategies or could this actually become a standalone and potentially even large business for the firm just given what seems like a pretty strong position for blackstone to to be able to marry.
Investing capabilities with what I think is going to be increasing and substantial demand capital towards these types of strategies. So just kind of curious how you guys are looking at the bigger picture.
It's a great question I think initially it will come out of our existing strategies, because we have big footprints, which which overlap here shortly on the sustainability side. So yesterday in private equity in our energy business, we were looking at something.
In the sustainable space, we've done a bunch in our credit area to firm around solar and financing different projects commercial and residential projects.
We are shareholders and Sunrun.
Our infrastructure business is well positioned I.
I think potentially in the utility space, where this transformation is going to happen, we're going to move off of coal certainly to more renewable energy sources.
And we will get this in our secondaries business indirectly as well.
And there are some elements of this in real estate too. So I think it will probably come from our existing platform and existing verticals over time as we develop track records is it possible, we create something more dedicated because of the huge capital needs in this space, particularly in a different administration NASA.
Possibility for now I think it will come out of our existing areas and so far of course, it's been a very good place to invest.
Great. Thank you.
Thank you and now I'll hand over to listen to the closing remarks. Thanks Weston.
Great. Thanks, everyone for joining us this morning, and look forward to following up after the call.
Thank you.
Good bye.
Yes.
[music].