Q4 2020 Blackstone Group Inc Earnings Call
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Good day, everyone and welcome to the Blackstone fourth quarter on full year 2020, Investor Cool hosted by Weston Tucker head of Investor Relations. My name is Leslie and on the event manager during the presentation. Your lines will remain on listen only and if you require assistance at any time. Please key star zero on your telephone on a cool Tonight will be.
To assist to you mail. So if you wish to ask a question and it's just Star then one on your telephone and I'd like to advise all policies at the conference is being recorded for replay purposes, and now I'd like to hand, you over to you hosted your day West Central Deep zone.
Perfect. Thanks, Leslie and good morning, and welcome to Blackstone fourth quarter Conference call. Joining me today are Steve Schwarzman, Chairman and CEO, Jon Gray, President and Chief operating Officer, and Michael J <unk> Chief Financial Officer earlier. This morning, we issued a press release and slide presentation, which are available on our website, we expect to file our 10-K report later.
Next month I'd like to remind you that today's call may include forward looking statements, which are uncertain and outside of the firm's control and may differ from actual results materially we do not undertake any duty to update these statements for a discussion of some of the risks that could affect results. Please see the risk factors section of our 10-K and 10-Q filings.
So refer to certain non-GAAP measures and you'll find reconciliations in the press release on the shareholders page of our web site.
Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone bought this audiocast is copyrighted material of Blackstone and may not be duplicated without consent.
So a quick recap of our results we reported GAAP net income for the quarter of $1 8 billion distributable earnings were $1 5 billion or $1 13 per common share and we declared a dividend of $97 96 per share to be paid to holders of record as of February eight with that.
I'll turn the call over to Steve.
Thanks, Weston and good morning, and thank you for joining our call.
Blackstone group coordinated exceptional results for the fourth quarter, including our best quarter for both.
Distributable earnings and fee related earnings and 35 years.
Realizations rose to a record $21 billion as global markets recovered from the trough of the crisis.
At the same time, we deployed $25 million into new investments.
Also a new record, adding to the foundation of future value.
The power of the Blackstone brand has never been stronger.
We achieved nearly $100 billion of.
The inflows from 2020.
Ending the year with industry record.
Of $619 billion.
While these results would be remarkable in any environment.
And particularly so in a year, where the world finished unprecedented challenges, including the steepest economic downturn modern history.
Our business is built to navigate this difficult periods and to deliver for our investors in good times and debt.
Limited partners around the world know that by investing with the best alternative managers, they can generate better returns and by investing in traditional asset classes alone.
That's why capital flow have increasingly migrated towards the alternatives asset class and to Blackstone.
Particular.
We believe this trend will continue particularly in an environment, where interest rates are expected to remain at historically low.
Blackstone as the reference institution.
In a rapidly growing sector.
Is this radical acknowledged by third parties for example, Morgan Stanley's published a report entitled 30 for 'twenty One day.
On a blackstone as one of the best companies in any industry based on its review of business quality and competitive positioning.
We've continued to take market share raising well over $200 billion over the past two years comparable to the fund raising.
Our next three largest peers combined.
We have the most recognized brands both institutions and retail investors.
And our unique culture continues to set us apart cash.
Moving to rise by the highest standards of excellence and an unwavering dedication to serving our clients.
We have extraordinarily capable people at every level of the firm as well as the ability to recruit exceptional talent in the occasional circumstance. When we look at externally for someone to help us build the business.
Our investment process is highly differentiating, including a rigorous focus on choosing the best sectors and assets.
Please with the priority.
Testing capital.
This is evident in the way, we concentrated nearly half of bonds portfolio and global logistics and life science offices in the years ahead of the recent downturn.
Our positioning helped drive 1100 basis points of outperformance for our opportunistic real estate funds last year as compared to the public R. E T index.
<unk> 1100 basis points outperformance.
And unlike investing in public stocks, we create value in our investments through our expansive portfolio operations and asset management capabilities.
The result is the <unk>.
Exceptional long term investment performance and defines us as a firm.
Excluding 15% net returns annually in both corporate private equity and the opportunity opportunistic real estate for three decades.
The power of our brand has been continuously reinforced by our performance through market cycles of the past 35 years.
This was particularly true during the global financial crisis, when we extended our leadership position in every area on.
On launch multiple new businesses setting the stage for the next decade of remarkable growth.
Since our IPO, which immediately preceded the financial crisis.
We've grown our <unk> seven times.
Launched 34, new strategies and significantly expanded our business internationally.
We are similarly emerging from this most recent downturn with powerful momentum.
Jon will describe the broad range of growth initiatives, we have underway across the firm many of which are in the earliest stages of their vast potential.
As we continue to grow our capital base is shifting towards perpetual strategies, such as real estate core plus.
Infrastructure.
Insurance solutions and private credit.
These areas are characterized by large scale investor allocations as well as a much larger universe of potential deployment opportunities and where we've focused historically.
As the nature of the caffeine.
So it is earnings mix towards steadier and more recurring fee related earnings which is highly valued by the market.
For the full year FRE reached $1 97 per share.
Secondly, achieving our investor day target of $2 per share, but one year earlier and notwithstanding the pandemic.
F R&D comprised approximately two thirds of total learnings in 2020.
Up from only one third in 2017.
Looking forward, we have great confidence in our continued FRE momentum.
Which should further support the reevaluation of our earnings multiple that has been underway since our corporate conversion.
As we move into 2021.
All signs point to it being another strong year from the firm.
The pandemic will further impact the economy.
The next several months.
Widespread and the effective deployment of vaccines, which we anticipate will occur.
We expect a robust recovery in global growth later this year.
And as the economy accelerates.
Stone is well positioned.
We continued strong growth ahead.
I couldnt be more proud of our firms people are.
Our culture and the prospects for the future for both our limited partners and our fellow shareholders and with that.
I'm very glad to turn it over to John.
Thank you, Steve and good morning, everyone.
We just completed a record quarter I'll take you through some of the highlights as well as the extraordinary range of growth engines that are firing across every area of the firm with a major emphasis on perpetual capital.
The foundation of our business of course remains performance when we deliver great returns it builds investor Trust and leads to further inflows.
Virtuous cycle, a circle that also involves attracting top talent moving into new areas and growing meaningfully in the fourth quarter. Our funds again posted exceptional returns across the board.
Past several years, we've been orienting the firm towards faster growing areas, such as life Sciences and nodes connected to the digital economy.
These continue to be amongst the best performing sectors of the market and were the largest drivers of appreciation in our funds, including our holdings in global logistics digital payments and enterprise software.
Our investment performance is creating very favorable dynamics with our customers and they continue to allocate more capital to US inflows were 32 billion in the fourth quarter and reached 95 billion for the full year, the fourth consecutive year approaching or exceeding $100 billion.
Last January before the crisis. We told you we thought we would reach this level again in 2020. We're pleased we were still able to achieve our original goal a testament to the confidence our investors place in us looking forward demand for our products remains as strong as ever including for new areas that represent tremendous potential.
<unk>.
In growth equity, we expect our inaugural vehicle to Shun reach its $4 5 billion hard cap.
Our life Sciences business is deploying capital at a rapid pace and is well positioned for growth.
In private equity, we're raising our second Asia fund, which we expect to be meaningfully larger than the first.
And in tactical opportunities.
We've begun raising our fourth vintage in the context of continued strong performance and deployment.
In real estate, our core plus platform has grown to 69 billion.
Up 50% year over year across five perpetual capital vehicles, we launched the fifth <unk> life Sciences in the fourth quarter with the recapitalization of Biomed, raising eight 4 billion.
So far.
We have been actively investing this new capital and in addition to biomed committed in Q4 to acquire a large portfolio of lab office is adjacent to <unk> in Cambridge, the world's leading biotech hub.
<unk>, our largest core plus vehicle now has 22 billion of AUM up seven fold since our 2018 Investor day.
On the back of strong performance fundraising has re accelerated meaningfully from the bottom of the crisis with approximately $900 million of inflows on January one.
Investor demand for resilient income producing assets, coupled with the Blackstone brand is a powerful combination.
As we've stated before we believe <unk> could become the single largest earnings driver at Blackstone.
Perpetual AUM across the firm has more than doubled since investor day to $135 billion, helping drive a 73% increase in fee related earnings over the same period.
In addition to real estate, our perpetual capital vehicles in infrastructure and direct lending are seeing strong momentum and have grown to leading scale only a few years after launch.
In infrastructure we.
We raised $14 billion initially and are now seeing deal activity accelerate in both the U S and Europe, bringing the fund to approximately 40% committed.
In credit our global direct lending platform has grown to $22 billion one of the largest in the world. Our scale allows us to provide bigger and more comprehensive capital solutions to borrowers and the opportunity is enormous with sub investment grade financing markets in the U S alone totaling nearly three trillion.
Post quarter end, we launched our non traded BDC be Craig with over $800 million of commitments at the first closing as.
As with <unk>, we anticipate strong monthly demand from individual investors for Blackstone managed income solutions.
Also in credit we acquired Dci in the fourth quarter of pioneer and systematic investment strategies, which we see as central to the future of liquid fixed income investing.
Dci will meaningfully expand our capabilities and the vast high yield on investment grade market and will further differentiate our business as we integrate their technology across the credit platform.
In total the credit and insurance segment reported inflows of $13 billion in the quarter and $28 billion for the full year.
Turning to Bam, we continue to see strong demand for our various direct investing strategies, including our second GP Stakes perpetual capital vehicle, which has raised $4 billion to date.
We were excited to announce recently that Joe Dowling former CEO Brown University's investment office is joining Blackstone as co head of Bam alongside John Mccormack.
Joe is a world class talent with proven experience investing and managing risk in his seven years of Brown University ranked number one amongst peers on 135, and seven year returns and achieve the highest sharpe ratio of any major U S endowment driven in large part by their successful hedge fund investment program.
Joe's leadership will be a major asset to Bam as we continue to expand into new areas are.
Our secondaries business remains one of the best positioned globally in a sector with huge tail winds.
2019 flagship fund is over 75% committed and we expect to start raising the successor later. This year. We also continue to grow adjacencies like infrastructure and real estate secondaries, and we recently launched a new strategy investing alongside GPS in high quality assets that they want to continue to own.
Beyond their initial fund term.
Finally in insurance, we just announced the acquisition of our life insurance and annuity company from Allstate with $28 billion of long duration assets. The acquisition will be completed through a new Blackstone managed vehicle of approximately $2 billion and our insurance solutions team will act as the asset manager, bringing the <unk>.
<unk> pro forma insurance AUM to nearly $100 billion.
Given insurers need for better returns in our direct credit origination capabilities, we expect to do more in this sector in support of their policyholders moving forward.
In summary every business at the firm has terrific growth prospects that we're executing against we remain extremely confident in the path forward and with that I'll turn things over to Michael.
Thanks, John and good morning, everyone. The fourth quarter represented a remarkable finish to the year as we achieved record results in nearly every metric distributable earnings fee related earnings AUM realizations deployment and total fund depreciation.
We also reported our fifth best quarter for inflows.
This broad based success in the same year as one of the most severe market declines on record is a powerful illustration of the all weather durability of our business model.
Starting with the results.
The earning AUM increased 15% year over year to 469 billion.
While total AUM rose, 8% to $619 billion.
Driven by robust gross inflows of 90 $95 billion for the year and despite $43 billion of realizations.
The strength of inflows in 2020, despite not raising any of our largest flagship funds during the year highlights the firm's expansive breadth of product offerings and the ongoing shift toward perpetual capital.
Indeed over a quarter of the firm's fee, earning AUM is now perpetual.
Fee related earnings Rose, 33% in 2020 to $2 4 billion.
On a $1 97 per share as Steve highlighted driven by continued strong growth in fee revenues, coupled with significant margin expansion.
Management fees increased 18% to $4 1 billion for the year and are up 35% over the past two years powered by our flagship fund raising and a doubling of the real estate core plus platform in the last two years.
B Reid alone increased AUM by 71% in 2020 and generated strong growth depreciation of 9% for the firm despite the environment.
In terms of margins the firm's overall FRE margin expanded over 400 basis points in 2020 to 52, 8% the highest level ever for an annual period.
Distributable earnings for the full year rose, 16% to $3 3 billion.
For the fourth quarter day increased 60% to $1 5 billion.
Or $1 13 per share on.
<unk> by sharp growth in FRE, and a doubling of net realizations to $897 million.
In addition to strong fund realizations, most advanced liquid strategies crystallized incentive fees annually in the fourth quarter.
Damn strong finish to the year in terms of investment performance with a five 6% growth composite return in the quarter as well as the growing contribution of its direct investment strategies generated a 57% increase from the segments realized performance revenues to $171 million.
Turning to investment performance. It was another excellent quarter for the firm across the board with a record total fund depreciation of $31 billion in the quarter.
As John highlighted we continue to see the benefit of favorable sector and asset selection in our funds against a backdrop of rising global equity and credit markets.
In real estate, the breath of opportunistic funds appreciated four 3% in the quarter, while the core plus funds appreciated five 5%.
As has been the case since the start of the pandemic. The vast majority of the real estate portfolio is demonstrating fundamental strength, particularly our holdings in logistics suburban multifamily and life Sciences office, despite headwinds in certain more effective sectors. The breath funds appreciated three 4% for the full year and the core plus funds appreciated seven nine.
Percentage as compared to a seven 6% decline for the public REIT index.
In private equity the corporate PE and tack up funds appreciated 10, 6% and 11, 3% respectively in the fourth quarter, marking the third consecutive quarter of double digit appreciation for both platforms strength was broad based across both the private and public portfolio led by our technology and consumer Finance holdings.
For the full year net corporate PE funds appreciated 11, 9%, while Tac ops appreciated 14, 1%.
To date returns for the most recent vintages of the corporate private equity in Tac ops funds remains outstanding.
The secondaries funds, which report on a two quarter lag started to recognize the benefit of last year's market recovery and their fourth quarter returns appreciating nine 4%.
We expect strong performance to continue over the coming quarters, given the direction of markets in the second half of 2020.
And in credit and hedge fund solutions, we saw healthy appreciation again in the fourth quarter, including a four 6% gross return for the credit composite.
Strong investment performance across the firm generated $1 $2 billion of net accrued performance revenues in the quarter and lifted the balance sheet receivable to $3 8 billion.
8% sequentially, notwithstanding nearly $1 billion of net realized distributions.
At the same time the firms invested performance revenue eligible AUM increased to a record $294 billion.
Up 18% year over year. These are both important indicators of future value.
One last topic of note 10 years ago, Blackstone made a strategic minority investment in the Brazil based alternatives manager Patria team.
The team we have known for many years.
Last week, Patrick completed a highly oversubscribed initial public offering marking their transition to a valuable public company and a successful investment for Blackstone, while we partly monetized our stake in the offering we remain a continuing shareholder.
In closing the firm's 2020 performance exemplifies the power of Blackstone is extraordinary business model.
Resiliency and staying power during the market dislocation.
And the ability to deliver record results in the fourth quarter across almost every metric in the context of the market recovery.
Looking forward, we continue to scale existing businesses, while also expanding into new areas with deep addressable market opportunities for the firm.
The outlook for robust high quality growth over the long term is strong and we believe the future for Blackstone is very bright.
With that we thank you for joining the call I would like to open it up now for questions.
Great and lastly, before you queue for questions. If I could just remind all the analysts we have a fairly long to hear if you can please limit your questions. Just one question. Initially and then if you have a follow up please reenter the queue.
To USA.
Okay. Thank you everyone on your question and answer session will now begin.
My question is just Star then one on your telephone if you want to withdraw your question itself too and just to remind you. If you wish to ask a question at Star then one on your telephone.
And your first question comes from Alexander <unk> from Goldman Sachs, you on that logged on the call. Alexander. Please go ahead.
Great Great. Good morning, everybody. Thanks for taking the question.
Why don't we start with insurance I guess in light of the off the acquisition announced last night.
Maybe you guys could comment on your bigger picture aspirations for the insurance segment.
You made several simple hires there recently.
We expect more deals like this one I guess over the coming quarters and years.
Or is allstate meant to be set on the platform to build off of and then secondly, maybe you could comment on on the economics as well so that the fee rate on the assets and how you expect that to evolve as well as the funding structure and sounded like the majority of the purchase obviously it comes off the balance sheet right. So $2 billion I think you said, it's third party capital.
Relative to a $2 $8 billion per gigabyte. So a few questions there, but maybe we can try to hit on all of them. Thank you.
Okay. Thanks, Alex I'll start with the Big picture.
Whats driving what Youre seeing.
US do and a number of firms in our industry is the extremely low level of interest rates out there, which is creating the need for <unk>.
Greater returns for insurance company assets, and particularly the ability to have direct origination capabilities, so our ability to.
To originate corporate debt structured debt real estate debt is quite important and we think gives us a real strength in this area of the lineup our insurance solutions business with insurance balance sheet. So.
This is an area we've had success with fidelity Guaranty. We've said on these calls this is something we intend to do more of it's an area of focus we're obviously hiring a number of people.
To help build out this business and capability exactly the form it will take I think each of these transactions may look and feel a little different the underlying sort of path here is the same the idea of us managing these assets driving the returns higher which ultimately helps the policyholders I think all of.
That is key on.
This particular transaction.
And Michael can fill on the blanks, but the $2 8 billion.
There are there are flows related to this transaction plus a bit of debt. So the ultimate check size here.
Is less than a little less than $2 billion back what it is.
More of a typical GP LP setup.
I would say, but we are putting in some capital single digit percentage of the total capital needed. So this is really a third party situation, where we're managing capital and our compensation will come from managing the assets along the lines of what we've done with fidelity Guaranty.
Okay.
Great. Thanks, Thanks, Alex.
Okay. Thank you. The next question comes from Sumit.
From Piper Sandler your line with Nicole. Please go ahead.
Hey, Thanks, Good morning, guys, just sort of a high level question here on creating these new dedicated funds across growing sectors like life Sciences and growth equity. Some of these flagship funds. The raises are now behind you the global growth.
On that seemingly has concentrated here to areas like technology and health care.
When youre, creating these dedicated fund some of these areas.
Like you are doing now on down the road does it kind of crowd out some of these deployment opportunities to the flagship funds or is there just kind of generally a lot of opportunities out there for global private equity funds to take advantage of or kind of along with some of the newer dedicated funds.
It's a good question I would say it does not crowd out our dedicated funds our traditional large scale.
<unk> equity funds and the reason is the mandates here are very different. So if you look at the two funds to focus on.
Let's talk about Blackstone life Sciences. Its mission is to invest primarily in phase III trial drugs something that we would not do in our private equity business have never done before.
So it's a completely new area. It may invest in companies, but again, it's based on drugs that were waiting for FDA approval. This is not something we would do on our private equity business in the growth equity business, we're taking minority Stakes.
With founders, which of course is very different than our private equity model, which is based on control and being able to intervene in these businesses and our growth equity area. We're looking to partner and help these young companies generally working with founders again, a very different model and then some of our other more geographic strategies are similar to.
What we've done in the past.
And where we've raised energy or Asia or other funds and we keep a portion of that in the main funds, but we buy by expanding with the new funds. We don't have over concentration in the main fund in a particular geography or sector. So we're supersensitive to our flagship funds delivering in real estate private equity and corporate.
Private equity.
What we built the business on we want to continue to deliver for those investors. There just happens to be a lot of white space new areas to go into that we as a firm had not historically been in.
Okay.
Thank you.
Our next question comes from Michael <unk>.
Please go ahead.
Hey, good morning, Thanks for taking the question.
Just looking at the dry powder levels here about 147 billion.
Fairly.
Hi, here and certainly similar levels a year ago. So I was hoping you could talk a little bit about how you're expanding your capacity to generate new investment ideas and expanding the capacity to put capital to work, particularly on size and with the new insurance business or expansion of the insurance business that you'll be getting more assets.
I guess, what new sourcing and origination capabilities are you thinking about adding or might be able to add.
Well the good news here is we just have a much broader base of capital today.
<unk> the highest return strategies.
Involves.
Smaller universe potentially of investable assets as you you raised particularly some of this perpetual capital longer duration lower yielding you can look at a much broader view. So yes, we're investing in origination capabilities and particularly in our credit area in corporate and real estate and structured credit but also.
In our equity investing as we move into core private equity or debt real estate core plus business. We're just hiring more people in these areas. It gives us more dialogue.
Oftentimes.
Necessarily using real estate as an example, looking for an empty building or distressed situation, you're just buying a leased apartment project that is high quality you want to own at a reasonable return. So this newer cost of capital enables us to sort of widen. The funnel then you take our existing team you add more people.
And it actually makes our original businesses, even better because we are in more dialogue with more sellers more brokers more investment bankers were just part of the flow and Theres really been a real benefit from expanding our platforms and if you would.
Think about it on the credit side as well if you went in there and you only had the ability to do higher returning mezzanine.
You would only have one discussion, but if you can go in there today and you have a wide variety of capital with different durations lower loan to values longer duration insurance capital.
And what we're getting from our direct lending platform, we have a much more robust discussion and so we're finding the ability to deploy more capital given the range of places given the opportunities and yes to your question we have to build the organization to meet these needs.
Great.
Okay.
Thank you. Your next question comes from the line of Adam Beatty from UBS you are live in the call. Please go ahead.
Oh, Thank you and good morning wanted to ask about the wealth management channel and given the success of <unk>.
A promising start to be Craig.
In terms of distribution, which subsectors segments in the wealth channel do you find attractive and what kind of resources.
On the distribution side are you applying towards debt also maybe what product adjacencies that might be attractive at this point.
But what I'd say about retail is we had a big event here, we had a modest celebration.
Crossing a $100 billion of AUM, Joan <unk> team have done a terrific job.
And it's a mix of the episodic funds that we still distribute.
That's generally targeted to the highest net worth investors as we move into these perpetual capital vehicles <unk> and <unk>.
Which do have elements of liquidity to them that are favorable to two customers. They come down in terms of the availability and it expands the universe of potential customers, who can invest I would say in distribution, we're trying to really cover the waterfront.
We're talking in the United States, and Europe, and Asia were raising money broadly.
It's obviously the largest distribution firms.
It's private banks around the world.
The IBD channel, it's really broad based and what investors are seeking is obviously higher return they want more yield.
They're looking for things done at Blackstone quality, and we're focused on the fees, we charge being quite reasonable debt debt.
We're looking for the customers to have a great experience and I think historically in private assets.
Distributed to retail there was a bias I guess to try to make short term money.
And not necessarily deliver a great customer experience what we're trying to do here is give individual investors. The same experience that our institutional investors have the products may look and feel a little different but the goal is exactly the same obviously the markets are reacting positively investors are the strength of the brand here is.
Very differentiated and Thats why we have so much confidence here on the potential that we said we could grow to be the largest product <unk> has very good momentum out of the box given people's desire per yield letting some of these products will be able to move geographically, where you raised money in different parts of the world. There is more we can do we're not.
Not ready to announce anything but what I'd say is our bias is not necessarily to create a massive number of products, but a smaller number of very large products that can scale and be re getting over $20 billion was another big achievement for us. So as you can tell we're spending a lot of time in this area. It continues to grow the perpetual capital.
And we expect good things from retail in 2021.
Great detail I appreciate it thank you.
Okay.
Your next question comes from the line of Craig Siegenthaler from Credit Suisse go live in the call Craig. Please go ahead.
Good morning, everyone.
From my question I wanted to hit on Blackstone's ability to expand into newer geographies, including in Asia, and South America, and specifically what are the major economies in marketing white space around the globe today, where Blackstone is either not present or has significantly subscale and what is Blackstone.
Appetite to expand into these geographies either through M&A or organically over the next few years.
Well as you know, we definitely have a global business.
I would I would put Asia at the top of the list.
Given the scale of the economies, there, China and India, both have more than 1 billion people.
And what you see there.
In China in particular.
As an economy, that's growing very rapidly will grow to be.
The largest economy in the world at some point in the future I think there is an opportunity over time for us to offer products that are RMB based.
That would be something that could happen over time that could be very large scale.
I think we can do more in countries like Japan, which may not be fast growing.
But there is a strong desire for returns from individual investors and institutions in India, frankly has been our greatest strength in Asia, where we've deployed a lot of capital in both private equity and real estate and that economy is still early days.
I'd say as a caveat that smaller economies for us are a little more challenging given the scale of capital we operate at so.
And more or less developed economies, we I would say our results in places like South America on in Africa, which had been small is very small as a percentage of what we do have been a little more mixed.
There could be opportunities in those markets over time, but I think in terms of geographic growth.
I would say Asia in the big economies in Asia are the most interesting and then I would say that Europe. Despite a slow growth aggregate Lee is the largest economy in the world. If you put all those countries together there are fewer competitors there and there are more of our products that we can distribute their both raising money, but also deploying cash.
<unk> in.
In Europe for Europe. So.
When I look at our one of our great strength of the firm its debt.
We're a global business and so if one market around the world gets too hot we can deploy capital elsewhere customers around the world are facing the same challenges, which is they need higher returns and they want a trusted pair of hands, who takes a long term approach and thats what Blackstone represents so when we look yes theres opportunity in retail.
<unk> insurance and there is certainly opportunities outside the United States.
Thank you Jonathan.
Thank you. Your next question comes from Glenn <unk> from Evercore.
Please go ahead, you're live in the call.
Yeah.
Thanks very much.
So curious to.
To hear your expanded thoughts on on.
The spec market not from the humongous growth necessarily that we've seen but.
They have at minimum several hundred billion.
Buying power and so I think of them as past trend where they could.
Beyond the lookout.
The price of some of your assets and has filed where they're competing against some of the same property Hugo. After so just curious to get your thoughts on on that.
That environment. Thanks.
Well I think the spec Mark and I commented earlier. This morning on TV about this I think it's a good development long term to open up access to capital the public companies, we have seen a reduction in the number of public companies by 50% over the last 25 years.
And this backs have led to the highest number of ipos.
More than 20 years now so I think thats positive now that being said.
There are some challenges around alignment of interests when sponsors earn their economics, what the size of those economics are and I think some of that will change over time.
As it relates to our business, we've announced I think three spec sales in the last few months.
These will all be very good public companies. These are good executions.
And so it's helpful for us on the liquidity front, but I do think it's fair to say for smaller sized businesses in most cases it gets a little more competitive with this back money. The good news is we tend to operate particularly private equity at large scale. So there's not many specs that can do the type of deals we do.
And I would also say not every company wants to go public certainly faster growing companies may want capital to grow Theyre not ready to go public other businesses may not be so it requires a certain type of company.
Certain type of exit and tends to be a bit on the smaller size. So overall for capital markets. As I said I think it's a positive I think there will be some changes and reforms over time to make it even better.
Okay.
Okay.
Okay. Thank you. Your next question comes from Kenneth Worthington from J P. Morgan Youre live on the call. Please go ahead.
Hi, good morning.
With the New administration, and one with an aligned White House and Congress what is top of mind in terms of implications and opportunities here for Blackstone and private markets investing.
So in terms of implications there could be a variety. It's obviously early it is possible, we could see higher corporate taxes, which will impact the entire corporate landscape, we could see.
More regulatory activity.
On the flip side.
Some sectors, where we are active investors could really benefit I think you could see.
Environmental and sustainability areas get a boost we're doing a lot in that space across energy and energy credit we could see more dollars into infrastructure an area, we haven't underwritten a lot of.
Corporate activity or government activity.
That could change with a big push by the government and then I think one of the benefits people may not focus on is an aligned.
Government here could push more dollars to places like New York and San Francisco hard hit urban areas during the Covid period, and that would be beneficial for some of the real estate properties, we own because those areas are under pressure. So I think theres a variety of things as a firm we've operated in all red or Blue <unk>.
<unk> purple environments, and we take a long term approach and we've been able to navigate those issues and as changes come up we expect the same here as well.
Good morning.
Yes.
Thank you. Your next question comes from Patrick Davitt from Autonomous Lee you're live in the call. Please go ahead.
Hey, good morning, everyone.
My sense from investors they tend to want to discount.
Big performance related fees, you put through fee earnings. So could you maybe frame or help us separate out how much of the fee related performance fees in the fourth quarter was really kind of what you guys repeatable each year versus those that are maybe more episodic or based on kind of one year type performance fees.
Sure Patrick look first of all in terms of fee related performance revenues as we've talked about before we think this is a super high quality revenue stream. As you know is derived from perpetual capital is paid on a recurring basis on on contractual timetables well.
Well known.
And without having dispose underlying assets so.
We think it's very much in line with the overall quality.
Picture of FRE and.
You've seen it scaling right.
As we sort of predicted.
In the last few years and you saw that step up again in terms of the composition of it right now the majority the strong majority of the total annual amount is from the core plus platform and.
And of that be REIT is really.
The dominant portion of that and that is you know is it's recurring it's annual it's in the fourth quarter and.
And at that platform grows on a group, 70% as we said year over year.
The fees will continue to scale, both management fees and fee related performance revenues from a smaller portion of that was from the PPP platform.
Those are specific to investments that occur on a.
On a several year basis 345 years.
And so that.
That occurred during the year, both on the third quarter and the fourth quarter and then Youre also seeing a smaller amount, but that over the long term it will scale.
From our direct lending platform, both our BDC and also going forward <unk> are non traded BDC. So it's a.
Our portfolio.
So a different products core plus is the biggest part but not the only part and be radio is the biggest part within core plus and that is share question.
Annual.
Occurrence in the key distinction Michael is that we don't have to sell assets to generate these fees. That's the key distinction of what ends up in Seattle and the effort. That's right and then as we talked about this is not a new thing in terms of I mentioned bdcs the incentive fee portion of that of that.
Income and yields and products like that have been I think for a long time considered.
Much part of.
On the sort of metric.
Okay.
Thanks, Patrick.
Thank you.
Your next question comes from Devin Ryan from JMP Securities. Please go ahead.
Great. Thank you and good morning.
Question just on the FRE margin, obviously saw from some really nice expansion in 2020 over 400 basis points, you had very strong fee growth.
Also the Opex.
Decently below the prior couple of your average growth.
Which we appreciate especially given the lower <unk> from the pandemic. So I'm just trying to think about some of the moving parts as we look forward.
The expectation for the FRE margin from here with maybe some of the pandemic savings for reverse.
And just more broadly how we should think about.
The FRE margin.
You need some of the costs that may come back into the system in 2021.
Devin Thank you for the question.
Look the short answer is stepping back on margins and it was a terrific year on that front.
As our margins are up significantly because of strong operating leverage revenues currently well in excess of expenses I know thats sort of a truism and you can particularly see that in our real estate segment in which was really the biggest driver where fee revenues were up over 30% with operating expenses total operating expenses up 15%.
And Thats why you can do the math overall, the real estate segment accounted for around three three quarters of the overall margin expansion from a business unit breakdown perspective.
You mentioned as we've talked about previously as with almost every other business 2020 did benefit from a substantial reduction in <unk> spending and that to help you out here accounted for around call. It 100 basis points of that 440 basis point margin expansion. So look as we look ahead to 2021.
All of US of course are rooting for normalization sooner.
Rather than later.
And such that the <unk> dynamic would reverse.
And but notwithstanding that even adjusting for that we still expect strength in margins. So that's hopefully will help you on just.
To put in put in context.
The COVID-19.
Component of that.
On that expansion.
That's terrific. Thank you.
Thank you.
Your next question comes from Mike Carrier from Bank of America, You're live in the call. Please go ahead.
Good morning, and thanks for taking the question you guys have had great success in the perpetual vehicles, which obviously provides good visibility on growth in FRE, but it also throw up a lot of performance fees and I'm, assuming that was just be reached in the fourth quarter, having a strong rebound which is longer term, but can you put some context on the type of the year, maybe 2020 was.
<unk> has the potential you see for that type of earnings stream since it's still fairly new and then how can pricing be cred contribute to longer terms. Thanks a lot.
Okay.
Sure Mike.
<unk>.
Picks up a bit on I think patricks question as well.
The simple answer and it's a good one.
Is that over time those the growth in those fee related <unk> revenues.
Well it will basically be aligned with the growth in our perpetual capital strategies.
With again real estate core plus being a huge portion of that right now, but also as you mentioned.
In that direct lending area.
A scaling of that sources.
Performance revenues as well over time so.
That sort of.
Both on the short and long run as kind of the R. Squared on this growth in perpetual growth in core plus growth in direct lending.
Equals over time growth on those related bonus revenues and that is.
A meaningful tailwind.
I would just add debt.
The fact that you don't have to sell assets as we mentioned is important the preferred returns in these vehicles tends to be materially lower because they're lower targeted returns and just as we grow more assets in this space have more vehicles.
This should be a steady source of income for a long time to come.
Alright, Thanks, a lot.
Thank you you on that.
Question comes from.
Rob Lee from K B W. Youre live on the call people.
Great.
<unk> new year hopefully.
Doing well thanks for taking my questions.
Andy Ralph maybe.
So much.
On hedge fund solutions on band.
In the us.
Understanding the warmth and good.
You have a new co leader of the unit growth there has been kind of a challenge.
And I guess more stable.
How do you see growth in that business from breast in D. C. Any signs if theres, maybe increased demand from wood strategies, even have the market run up of late.
What can you do to kind of reinvigorate growth from that business.
We think that business has tremendous potential.
The low rate environment.
Obviously as investors looking for other liquid alternatives.
Where they can get returns.
And then the run up in the stock market has investors looking for for places to put capital where there is some downside protection in both of those factors lead you I think to our hedge fund solutions business.
With the addition of Joe Dowling teaming up with John Mccormack, I think that puts us in a really good place Jos track record has been excellent.
We are going to be looking to try to drive the returns higher in that space, Joe was outstanding at Brown, finding leading cutting edge managers.
Looking at where the economy is transforming either geographically in some of the fastest growing sectors as well and we expect he'll do the same here and as the returns continue to improve or improve we think we'll see more flow. So our hedge fund solutions business, which has flattened off in terms of.
AUM, but it has actually improved on profitability Michael can comment on that I think can grow in AUM and become a growth engine again for our firm.
And I would just add to that I mean, putting some financial surround that versus John said.
AUM was somewhat down this year revenues were up 7% on the AUM side outflows were actually in line with 2019, and maybe not surprisingly inflows slowed somewhat in the wake of the March April volatility.
But revenues were up which reflects the business mix shift towards higher fee strategies, both within bps and also in the direct investing area.
And.
And as a result, you can actually see the fourth quarter management fee rate was actually up eight basis points year over year. So that's sort of unit economics are.
I think are improving.
And.
Its funny for a business that's been in our hands for 20 years, we've never been more excited about potential as John said in the context of the rate environment fixed income market.
The search for sort of absolute return replacements with some more upside as deep in our platform with its scale and its reach and its access to the best managers doing things with them allocating capital as well as the flow within our firm and the IP.
All those things combined along now with.
Additional leadership alongside John with Joe Dowling, We're Super excited.
Yes.
Great. Thank you.
Thank you. Your next question comes from the line of Chris Harris from.
Wells Fargo, you're live in the call Chris. Please go ahead.
Okay.
Great. Thank you.
As you guys know.
Apollo is looking to move to one share class.
Your thoughts about potentially going down this path and I. Appreciate there are pros and cons to consider with that type of a change.
So what I'd say is if you look at our firm over 35 years, our governance structure has served our Lps.
Really well our employees and from last 13 years 14 years, our shareholders. So we're really comfortable with it we're always looking at ways to maximize value per shareholders. We did that in the context of the C Corp conversion, but we're very deliberate in how we do things.
I would say generally the idea of taking a long term approach and the management of the firm.
How we're structured today, we feel good about debt it's delivered for us in the past, we think it will deliver for us in the future.
Okay.
Thanks, Chris.
Got it thanks.
Thank you your net.
Question comes from the line of Chris.
Steve from Oppenheimer Company, you're live in the call. Please go ahead.
Yes, good morning, and thank you.
Yes.
I guess I thought the.
The Biomet transaction was really interesting and cup.
A couple of narrow questions about that one is I'm wondering did it all end up.
DPP life Sciences or was it distributed among a number of different vehicles and then secondly.
What is your I guess long term vision.
<unk> for our PPP life Sciences, and then I guess the broad question I have is.
Over time as you develop more and more of these permanent or very long dated capital structures should we see or your strategy in the opportunistic funds kind of more from the buy it fix it sell it to the buy it fix it.
Moving into a permanent capital vehicles should we see a lot more of that.
So.
There are a number of questions here, let me let me go through each one the first one I want to back up I guess for a second and just say that the Genesis for this transaction was a number of our investors in the breath aid fund wanted to continue to own this.
That really what was what is the catalyst and more than 70% of the capital.
In the <unk> life Sciences vehicle came from existing investors. So I think because they were showing theories about this it made a lot of sense for us.
Where where it ended up the vast majority of the capital did come from this new vehicle, we put some of it into our general DPP fund based on some available capital, but the vast majority ended up in <unk> life Sciences No surprise, our investors are excited about this new vehicle.
I think we raised additional capital beyond the $8 billion for we talked about.
There is a potential for this to grow to be again quite large we announced the deal. Shortly after the initial recapitalization, which I mentioned, where we did a $3 4 billion dollar deal of additional properties in Cambridge, The heart of life Sciences, making us the largest owner in Cambridge, which we think is in.
<unk> strategically. So this is a business that has the potential to grow.
Not only in Cambridge, but in South San Francisco, and San Diego, Cambridge, U K, where the business is focused.
In terms of ambition I guess, we've hit debt I think this is an area that has real growth given the tailwind we see in life Sciences from one of the things. We don't often talk about on these calls is a power of the overall platform. So the fact that we have Blackstone life Sciences gives us more confidence here in biomed. It allows us to do the cryo.
<unk> investment in Tac ops, and frozen logistics. It allows us to do precision medicine, which is a company that commercialize is and does when does the trials for life Science companies was one of our largest investments in private equity in the fourth quarter. So we are really building a powerful life science ecosystem here at Blackstone and DPP life Science.
This will be a big part of it Nick Calochortus, who runs our life Sciences business is actually going to be on the board.
The Biomed Life Sciences fund.
In terms of our opportunistic business no I don't believe this will be the way.
Vast majority of whenever of deals will be so there was a pretty unique set of circumstances. There may be other situations, but I think it will be the exception.
In this case the scale argued for it. We also ran a process a competitive dynamic brought in outside firms had a go shop period, we want to make sure. The most important thing to US is fiduciary is maximizing the return in our private equity and real estate private equity funds. So I think this is a little bit of a unique situation.
<unk>, we had a great process to vector values and long term now we have a bunch of investors excited about this area and a new vehicle that I think will grow in scale.
Okay very helpful. Thank you.
Thank you. Your next question comes from on Road.
A few blocks from the MLP you're live in the call. Please go ahead.
Hi, good morning.
Had a question on capital deployment, it's been very strong in Q4, even if you exclude.
The capital going to the new perpetual capital vehicles.
How much of this is a function on a good market condition or should it on how much is a function of just being able to catch up catch up on deals have kind of identified on the end of the year on where you were not.
Able to execute on that and if you could also elaborate on in terms of the outlook for capital deployment in the quarters to come. Thank you.
Yes.
So I think the biggest factor obviously deal activity in deployment was slow coming off from March for the next couple of quarters and so we saw a resumption.
So again given the expansion of the firm if you look at our secondaries business now, where we have large scale private equity secondaries real estate secondaries infrastructure. We are deploying more capital. If you look in private equity regular way corporate private equity a larger scale fund our Asia business is growing our core private <unk>.
Equity vehicles grew from $5 billion to $8 billion in the latest generation and you can look across the firm and then the expansion in these perpetual vehicles, we keep talking about of course leads to the need for greater capital deployment. So I think a big portion of this is just a function of the engines are there are many more of them and they're large.
And that's leading to more deployment I also think.
We have some sectors, we have high conviction around we're spending a lot of time on some of the COVID-19 impacted businesses travel related.
Location based entertainment hotels, I think we will see more activity in some of those areas and then these big secular themes around digitalization life Sciences, what's happening in Green energy those areas I think will attract a lot of capital and we will continue to invest.
In Europe and Asia on around the globe. So this quarter was particularly active because of the large life sciences transaction, but when you looked overall for the year 2020, I think it's 62 billion was basically the same as it was in 2019.
So I think that indicates it's likely that deployment probably grows over time or will grow over time, just given the scale of our overall business.
Yeah.
Okay.
Great. Okay. Thank you.
Thank you. Your next question comes from Jerry <unk> from Jefferies You're live in the call. Please go ahead.
Okay.
Great. Thanks, maybe one more on insurance initiative, clearly a well documented total addressable market of material size, but also increasingly more buyers in the market. So perhaps you can speak to the competitive dynamics you saw during the Allstate process or just even more more more generally.
We're not obviously, we'll not talk about particular transactions, but I would can see debt the space has gotten more competitive over the last few years.
I think our advantage is one the scale, we can do things at.
And two our origination capabilities I think are pretty unique.
I think gives us an advantage in this space for Counterparties to want to work with us So we like where we sit today.
But I do think it's important to keep in mind beyond actually just our capabilities our brand resonates. So if you're an insurance company and Youre thinking about.
Putting your liabilities in somebody else's hands, you really want to know who that is and so the scale of Blackstone our reputation as a fiduciary helps us and so yes, I can all things there is more competition, but we like our positioning we think theres an opportunity to really grow here.
Okay.
Thanks Jerry.
Okay. Thank you. Your next question comes from the line.
Christopher Butler from William Blair. Your line is Nicole. Please go ahead.
Thanks, Good morning, everybody.
On the strategic partners business, I know youre going to be raising a new fund there I think last time I checked secondaries.
Transaction volume across the market with something like two or two 5% of total private equity NAV.
Do you think that percentage can go over the next handful of years and why.
Well I think two things are going to help the secondaries business. One really importantly is that the denominator is going to grow even if the penetration doesn't grow I'll come back to that in a moment, but alternatives are growing at high single digits double low double digits across the globe.
And by definition that means theres, a bigger addressable market people change their investment strategies. They are unhappy with managers they want to get out of certain spaces and so if you believe in the alternative sort of megatrend, which we certainly do secondaries is a powerful way to play it.
And then as a percentage I, just think 2% of our market trading is not a sign of a market that has sufficient liquidity and so I think that will lead to higher percentages. This is a business that's grown for us I don't know eight fold or something since we took it on five or six years ago.
I think it's a business that can continue to grow at a very rapid rate burn Perry and his team have done an outstanding job. The returns have been excellent. We've said in here that will raise our ninth.
Private equity Secondaries fund, we've talked about moving into the continuation area. We're having success in real estate and infrastructure. I think is alternatives growth. This fund continues to grow this area of the firm continues to grow and I don't think were anywhere near the end for secondary in terms of growth.
Okay.
Okay. Thanks, John Thanks, Scott Thanks, guys.
Thank you. Your next question comes from the line of Brian Bedell from Deutsche Bank, You're live in the call. Please go ahead.
Great. Thanks very much.
It's been answered very very comprehensive answer maybe just one on the retail side.
You said you're on it.
Great momentum in that maybe it's sort of the outlook over the net.
One to two maybe even three years, whether you think that growth.
It can accelerate given your your distribution initiative in the wealth management space and especially the demand.
<unk>.
For your products on the retail side and if you if you can sprinkle in comp.
Rents on sustainable investing in your ESG.
Initiatives, whether youre seeing.
Stronger demand for ESG solutions within your product.
Okay.
I would just echo my earlier comments.
Debt debt retail remains a very favorable.
Favorable channel for us given the brand and the range of products now.
Movement from from beyond just the episodic products, which are obviously continuing to be offered to the highest net worth people, but <unk> and <unk>.
Their distribution capabilities.
The ability to sell those broadly is powerful and I would just point out.
Be read it took a number of years to sort of get lift off momentum it feels like the credit in the early days is having more success because we've opened up those channels and we're broadening the number of channels and so I think as we introduce new products in this area. They can continue to grow and have this success.
And as this is all part of this sort of growth in perpetual capital growth ultimately of course in fee related earnings and bringing this sort of world class service and investment discipline to individual investors. We think that trend will certainly continue and we're at the vanguard of that trend as it relates to ESG.
I think there is opportunity there I think there is more opportunity we talk about it internally I think theres opportunity opportunity, both institutionally and individual investors going back to one of the earlier questions. We just have to make sure. We set it up in a lane that is <unk>.
Very defined.
In a separate area, where we can deliver for the individual investors and do something separate and different than we do in some of our other funds, but I think over time, we'll develop some products in that area.
Great. Thank you.
Thank you. Your final question comes from Smedes Modi from Piper Sandler Your line Nicole. Please go ahead.
Great. Thanks for taking the questions I just had a follow up on the Allstate life acquisition. It looks like the funds, we're purchasing about 80% of the life and annuity business, just leaving about $5 billion of GAAP reserves in the New York Al on Y on the table.
It seems like they intend to sell that as well just curious if you could talk about what went into the decision to not acquire that portion of assets as well.
Well, we make decisions about which jurisdictions and so forth make the most sense for us and we're obviously engaged in discussions with the seller on what maximizes value for them and in this particular transaction. That's how we landed on this we ended up buying the vast majority of the assets.
And that worked for Allstate.
I would say I think Tom Wilson, the CEO has done a terrific job here peer.
<unk> his company.
Getting them focused on higher growth businesses and this was something that made a lot of sense for us and our investors. So we looked at it as a real win win.
Alright, thank you.
Thank you.
I turn the call back to lessen the closing remark.
Thanks, everybody for joining us this morning and look.
Forward to following up after the call.
Goodbye.
Thank you everyone that concludes your conference call for today you may now disconnect. Thank you for joining and enjoy the rest of your day.
Okay.
[music].
Okay.