Q2 2021 Blackstone Group Inc Earnings Call
[music].
Good day and welcome to the Blackstone second quarter 2021 investor Cool joined the presentation. Your lines will remain on listen only I'd like to advice. All parties. This conference is being recorded and now I'd like to hand over to Weston Tucker head of shareholder relations. Please proceed.
Great. Thanks, Joanna and good morning, and welcome to Blackstone second quarter Conference call. Joining 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-Q report in a few weeks.
I'd like to remind everyone 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, we'll also refer to non-GAAP measures and you'll find reconciliations in the press release on the shareholders page of our website.
Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone funds. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent.
So quick recap of our results we reported GAAP net income for the quarter of $2.9 billion.
Distributable earnings were $1.1 billion or <unk> 82 per common share and we declared a dividend of 70 to.
To be paid to holders of record as of August 2nd.
1 additional item of note, we announced a change in Blackstone's legal name from the Blackstone group to Blackstone, which I think is how most already referred to US we anticipate Dx shares will trade under the new name on the New York Stock Exchange on August night.
With that I'll turn the call over to Steve.
Thanks, Weston and good morning, and thank you for joining our call.
The firm's results were truly outstanding in the second quarter.
Distributable earnings nearly doubled year over year to $1.1 billion.
Fee related earnings increased 30% to over $700 million.
Last 12 months, both TCE and FRE reached record levels.
Our investment performance represented the best quarter in.
And 12 months period on funded pre each day appreciate.
In our <unk> 35, and a half year history.
In addition.
AUM grew 21% year over year to another record.
$684 billion.
The second quarter and my view.
It was the most consequential in our history.
Not just in terms of financial results.
But more importantly.
In terms of setting the foundation from the firm's long term growth.
Trajectory.
We're seeing significant momentum with our expansion into the retail on insurance channels, including landmark announcements last week from our partnership with AIG comprising.
Comprising at least 92 billion.
AUM over time.
These channels represent vast new markets for Blackstone.
On a new paradigm for growth and confirm.
Looking forward.
I believe we are positioned for an acceleration of growth on.
Almost every dimension.
Including meaningful expansion of our earnings power and in particular <unk>.
Fee related earnings.
Taken together the retail on the insurance channels of approximately 110 trillion dollars of assets globally.
This is nearly double the size of the institutional channel.
Where blackstone exclusively focused historically.
And these 2 channels are dramatically under penetrated and there are allocations to alternatives.
We've invested significantly over the last 10 years to build out our distribution capabilities in these channels.
<unk> and material cost to us early on without commensurate revenue.
Now the wisdom of that approach is becoming apparent.
We expand our product lineup, including moving into lower risk return areas like core plus real estate and private credit.
In retail.
Which is in the 80 trillion addressable market.
Our long term strategy.
So it is not just to sell 1 on products.
To develop the highest quality support organization for retail customers.
And to service in depth, the largest private wealth distribution systems in the world.
We are establishing the leading platform in our industry.
With the menu piece, both products, including our non traded REIT fee rate.
And our new DTC E Chris.
The response from individual investors from.
Blackstone managed private real estate and credit.
Has been powerful.
We are now raising nearly $4 billion per month.
That's $4 billion per month.
<unk> and <unk> together.
We believe the demand for these.
These 2 products will continue for years to come on.
I believe we will continue to grow.
That is powerful distribution channel.
Ideal for other products, we're developing as well.
We currently are launching a new vehicle in Europe that is similar to <unk>.
With sales to start in September.
And we have additional products in the planning and development stage.
In insurance, we announced that Blackstone will become the exclusive external manager of a significant portion of Aig's life of retirement portfolio.
Which would rank as the third largest U S public life insurer.
This partnership meaningfully accelerates our growth.
<unk> 30 trillion global insurance market with.
With Blackstone, becoming 1 of the 2 largest alternative managers in this space.
We will receive 50 billion of AUM later, this year growing to at least $92 billion overtime as I mentioned.
And we're excited about the long term prospects of this relationship.
This announcement was the culmination of nearly a year's work.
Between our 2 companies from a reflects a remarkable team effort across virtually every area of Blackstone.
I'd like to congratulate John Gray and Michael J <unk> from Dillard.
Our insurance solutions area.
Along with the very large number of people at the firm or Taiwan tirelessly to bring the partnership to fruition.
Across the firm <unk>.
Blackstone has never been in a better competitive position than we are today.
We have established deep and enduring relationships with limited partners around the world, including institutional individual and insurance clients.
Our flagship strategies have materially outperformed relevant benchmarks overtime <unk>.
<unk>, 15% net returns annually.
In both corporate private equity and the <unk>.
Opportunistic real estate.
3.
Okay.
Leading the comparable public indices by approximately 500 to 900 basis points per year.
We've continued to grow rapidly principally organically.
Because we keep inventing new things and today, we offer our clients over 50 different investment strategies.
We have more talented people at the firm today.
Than ever before.
Operating at the highest level of excellence and commitment.
Blackstone is.
The gold standard in the alternative management business.
With the most powerful brand.
Our market capitalization of about.
$127 billion.
Equates to the 17th largest public company in the United States.
And our forward momentum has never been stronger.
As we grow.
Our core mission remains unchanged.
To generate outstanding long term performance for all of our investors with the highest integrity.
On a significant focus on sustainability.
PSG.
I couldnt be more proud of our people.
And what we've become.
With that I'll.
I'll turn things over to John.
Thank you Steve good morning to everyone.
We have consistently outlined a simple vision for the firm deliver strong investment performance and we will attract more capital.
This powers the Blackstone innovation machine and allows us to broaden the customers. We can serve and the investments we can make our second quarter results were a picture. Perfect example of this model at work.
Starting with investment performance all of our flagship strategies again posted outstanding returns leading to the best quarter for fund depreciation in the firm's history as Steve mentioned.
This performance is reflective of the way, we position investor capital over the past several years towards fast growing areas of the economy, including logistics life Sciences sustainability and tech enabled businesses. These sectors have continued to benefit from strong fundamentals further.
Accelerated by the onset of the pandemic.
We're also now starting to see a recovery in some of the areas that were more impacted by the pandemic such as leisure and hospitality. Although it is still early Michael will discuss our portfolio performance in more detail.
The strength of our returns over decades reinforces the Blackstone brand, leading to the extraordinary growth and platform expansion that Steve described.
Total inflows were $37 billion in the second quarter and $116 billion over the past 12 months perpetual AUM increased 55% year over year to nearly $170 billion.
As we've discussed growth in perpetual capital is like planting perennials, which have a recurring and compounding contribution to the firm's financials and meaningfully accelerates growth in fee related earnings.
The largest single engine, a perpetual capital and fee related earnings at the firm is our real estate core plus business.
AUM has grown to $85 billion across 5 vehicles. The largest of these b REIT raised nearly $6 billion in the second quarter and an additional $2.6 billion of <unk>.
Monthly subscriptions after quarter end on July 1, bringing it to $34 billion in total size.
We are launching our 6 core plus vehicle <unk>, which like <unk> will target high quality income producing assets on behalf of retail investors. This time focused on European real estate.
Moving to the AIG partnership.
It is a compelling illustration of the continued expansion of our business model and marks our third large scale mandate with a major insurance client and will bring our total insurance AUM to $150 billion. Later this year 1 of the largest platforms amongst our peers and at least 200 billion when fully phased in.
This partnership is a testament to the strength of our direct credit origination capabilities and our proven ability to deliver for insurance clients.
Theory will separately acquire Aig's affordable housing portfolio in the U S for $5.1 billion.
This speaks to the leading scale of our <unk> franchise, and the advantages of long duration capital Black.
Blackstone will also acquire a 9.9% stake in AIG life, and retirement, which is consistent with the disciplined capital light approach, we've talked about previously as well as our other insurance partnerships. We are not taking on an insurance company balance sheet, rather we are making a minority investment in a company in which we see.
Full value.
I will also join this new company's board.
We are excited about the long term prospects of this strategic relationship and we are incredibly grateful to Peter Zaffino and the AIG board for their confidence in us.
Around the firm other areas are seeing tremendous momentum as well our credit segment. The fastest growing segment at the firm reported 19 billion of inflows in the quarter with robust LP demand across direct lending liquid strategies, and our fourth mezzanine vintage our $14 billion infrastructure vehicle and.
Another perpetual capital strategy Athene investment activity accelerate over the past several quarters and is now over 70% committed.
We expect to reopen fund raising in the next few months.
And the secondaries area, we launched the fund raise for Sps, new flagship private equity vehicle, which we expect to be far larger than its $11 billion predecessor, with a first close targeted for September and activation prior to year end.
We also had a first close of approximately $800 million for Sps, New GP solution strategy, which invests alongside GPS and high quality assets that they want to hold beyond the initial fund churn.
In Asia, we've raised over $5 billion, so far for our second private equity vintage and fully expect to hit the $6.4 billion cap, which is nearly 3 times the previous fund we'd.
We began raising our third real estate vintage in Asia, which we expect to be larger than the prior $7 billion Fund and then Bam we began fundraising for our innovative horizon crossover platform with an initial close of nearly $2 billion post quarter end. This platform focused on focus.
Does on minority investments in SaaS growing companies as they prepare to go public overall.
Overall, the fund raising outlook is very positive for the firm.
On last quarter's call. We said we were highly confident that total inflows would exceed $100 billion again in 2021, the fifth year on a row approaching or exceeding this level.
We now expect to approach $200 billion of inflows this year, including our pending insurance partnerships.
Stone's expansion has also significantly widened the aperture of where we can deploy capital we invested $24 billion in the quarter and committed an additional $28 billion to pending deals are most active commitment quarter ever.
For the past 12 months, we've deployed or committed well over $100 billion.
We remain focused on our high conviction thematic areas such as sustainability logistics digital infrastructure housing and the post Covid travel recovery.
Our largest new commitments in the quarter included a $10 billion enterprise value datacenter business 1 of the largest platforms of single family rental homes in the U S. European toll road, operator, Aspie, which represents the largest buyout in Europe in the past decade and industry, leading healthcare supply.
Distribution company Medline, the largest buyout globally over the same period.
Post quarter end, we announced the acquisition of Sferra, a sustainability management software company.
The scale of our platform and our reputation as a trusted partner are enormous advantages when it comes to investing.
In closing our mission is broadening and we're bringing our investment solutions to a larger audience.
We are still in the early days of this journey.
And with that I will turn things over to Michael.
Thanks, John and good morning, everyone.
I will first review the firm's financial results highlighted by continued strong momentum across our key metrics I'll, then discuss investment performance and share additional details on the partnership with AIG.
Starting with results total AUM rose, 21% year over year or by 120 billion.
To record levels, driven by robust gross inflows of $116 billion over the last 12 months and despite record realizations of $63 billion.
The sustained strength of the firm's recent inflows without raising any of our largest flagship funds highlights the significant expansion of product offerings and growth in perpetual capital at Stephen John described.
Fee, earning AUM rose, 14% year over year to 499 billion.
Nearly 1 third of which is now perpetual driving 24% growth in management fees to a record $1.2 billion in the second quarter.
Fee related earnings increased 30% year over year to $704 million in the quarter or <unk> 58 per share for.
For the last 12 months FRE increased a remarkable 40% to a record $2.8 billion.
Or $2.33 per share more than double our annual FRE at the time of our Investor day, just 3 years ago.
Key drivers as we've talked about include the continued expansion of existing strategies scaling of new businesses, which are increasingly contributing to profitability.
The transformational effect on earnings power from perpetual capital strategies, and the firm's robust margin position.
FRE margin expanded to 54, 4% for the trailing 12 months and we continue to expect full year 2021 margin to be approximately in this area.
Overall, we remain highly confident in the outlook for this high quality, earning stream.
Distributable earnings nearly doubled year over year to $1.1 billion from the second quarter or <unk> 82 per share underpinned by the growth in FRE and a more than 6 fold increase in net realizations from the pandemic trough to $518 million as the market environment supported strong activity levels.
On realizations reached nearly $20 billion on the quarter with an additional $5.9 billion currently under contract or closed after quarter end.
During the quarter, we sold our Australian logistics portfolio and broader number of holdings public and executed sales of public positions, including Sony Comscore task Us customer truck 1 source Apria finance of America and post quarter end alight.
Since the start of the year, we publicly listed 20 companies and 33% of the corporate private equity portfolio is now public.
Turning to investment performance, which remains outstanding across the firm our portfolio companies reporting some of the best trends, we've seen against the backdrop of continued strength in global equity and credit markets and the broad based economic recovery that is underway.
In real estate, the breath opportunistic funds appreciated 9.4% in the quarter, while the core plus funds appreciated 5.7% from.
For the last 12 months the funds appreciated 25, 4% and core plus appreciated 18%.
<unk> continues to show particular strength driving the inflows that Stephen John highlighted with depreciation of 8.3% in the second quarter.
Since inception 5 years ago.
<unk> has delivered 11% net returns annually.
Our overall real estate returns continue to be driven by gains on logistics, which now comprises approximately 40% of the global portfolio.
Along with U S suburban multifamily life Sciences office and in the second quarter U S hospitality.
In private equity the corporate private equity funds appreciated 13, 8% in the quarter, the fifth consecutive quarter of double digit appreciation and 52% over the last 12 months.
The corporate PE funds have appreciated 45% from pre crisis levels, well ahead of public market indices over the same period.
Strength remains broad based across both private and public portfolios led by our technology related and energy holdings.
Notable gains in the quarter include those from the Ipos of tooth automatically driven investments led by our India team.
So on a Comstock India's largest component supplier for electric vehicles and tasked us a technology services company for leading online platforms comps.
<unk> was valued at a multiple of original cost of nearly 10 times at the end of the quarter and tasked us at nearly 8 times further building upon the firm's highly successful track record in Asia.
Our credit business delivered strong results from the second quarter, driven by improving fundamentals and spread tightening across both private and public holdings, along with strength in energy.
The private credit strategies reported a gross return of 4.8% in the quarter and 29% from the last 12 months.
Our liquid credit strategies reported a gross return of 1.7% in the quarter and 11% for the last 12 months.
Finally, BAMS bps composite return was 3.5% growth in the quarter and 15, 3% for the last 12 months.
Overall exceptional investment performance across the firm powered over $2 billion of net accrued performance revenues in the quarter and lifted the balance sheet receivable up 30% sequentially $6.8 billion.
Our highest level ever and up over 1.6 times, the pre COVID-19 balance highlighting the very strong fundamental positioning of our portfolio.
At the same time the firms invested performance revenue eligible AUM increased 41% year over year to a record $351 billion.
These are both important leading indicators of future value.
Moving to the AIG partnership, which is both strategically and financially compelling for our firm.
By yearend, we expect AIG to transfer the initial $50 billion of their life and retirement portfolio to Blackstone.
Which over time as the portfolio matures, we'll be primarily reinvested in Blackstone originated investments in private and structured credit.
And each of years 2 through 6 of the relationship our partner has committed an additional $8.5 billion in new assets per year.
Total committed assets to $92.5 billion overtime.
Following the initial 6 year period, the partnership for new subject to long term relative performance measures we.
We anticipate fee revenues to Blackstone of approximately $150 million in 2022.
Increasing to approximately $400 million by year 6.
These revenues will carry attractive incremental margins given our extensive existing capabilities.
We will also invest $2.2 billion for a 9.9% stake in the new company upon closing of the transaction.
With over $5 billion of cash and corporate treasury investments and minimal net debt, our balance sheet and access to low cost capital for us full flexibility to execute the strategic investment.
Following AIG Lnr's IPO, we will hold publicly traded common stock subject to certain phased lockup restrictions and what will be the third largest public U S life insurance.
In closing as Blackstone moves into the second half of 2021 and pass the second anniversary of our conversion.
We have never been better positioned as a firm.
1 of the several benefits of conversion has been our inclusion in most of the market indices, including being added last month to Russell's U S indices, a key benchmark for both index and active money managers.
Dual catalysts of exceptional financial performance, coupled with a much broader universe of investors that can own our stock has.
Has translated into a powerful value proposition for shareholders. We.
We believe there is significant support to continue this momentum.
With that we thank you for joining the call and we'd like to open it up now for questions.
Thanks, Keith if you wish to ask a question. Please key star then 1 on your telephone we request 1 question Amy on please rejoin the queue for a follow up question. If you decide to withdraw your question Keith Dot team you will be advised when to ask your question as a reminder to ask a question. Please key star.
Then 1 on your.
First question comes from the line of Glenn Schorr Evercore ISI. Please proceed your line in the call.
Good morning, Glenn can you hear us.
Hi, Joanne it's seems like Glen do you have any issue with those line, maybe we should move to the next question.
Thank you. Thank you and our next question comes from the line of Alex <unk> from Goldman Sachs. Please proceed Alexander.
Great. Good morning, Thanks, everybody.
So maybe starting with the retail platform and given success of both be read and be Craig.
And obviously the footprint in the retail channel continues to grow you talked about expansion into several new products. So so maybe we'll dig in a little bit more there first.
I know you mentioned.
You sort of be read product how quickly do you guys expect that to ramp I think I heard September launch and then broadly it feels like Theres a lot of runway still to leverage your distribution and brand and retail broadly.
Curious what other type of product might be suitable for the retail channel that you guys could walk on overtime.
Thanks, Alex.
Backup and Steve touched on this but.
The size of the retail market globally. I think is 80 trillion for folks who have more than $1 billion of assets and <unk>.
Today their allocation to alternatives is in the low single digits and so we think that the market is very big and they are just starting to come to <unk> as you are seeing.
And we're having great success domestically first.
Frankly globally, but first with be reached now with B Craig.
And yes, we do think there are more products that we can deliver.
Noted the European focused product I think it's too early to say how big it can be.
What we do know is if we deliver strong performance in a world where people have limited investment options, particularly around getting attractive yield we tend to attract assets. So.
What we do is we create a product that we think can deliver for the customers. That's the most important thing we distribute it and then we keep executing and we signed more and more investors find it attractive and Thats exactly whats happened with theory, it's what's happened would be credit and we would expect hopefully with <unk> over time, although I don't.
Want to Dimensionalize the size because I think it's just too early in terms of future products I don't I don't know if I want to go into specifics yet, but there are a number of areas, where we can do this given the scale of our platform and that is a great competitive advantage that we're sort of everywhere around the world where in each of these verticals.
But the bar is set by can we deliver for the customers. So I don't think we have anything yet to talk about but I would expect over time, we will rollout more of these sequentially and if we deliver as we have in the past we think it can grow to be quite substantial.
Great. Thanks very much.
Thank you and our next question comes from the line of Bill.
Bill Your line Nicole Okay. Thank you very much.
A lot of detail here I appreciate all of that just as you think about the capital raising in the insurance opportunity and congratulations on Buffalo State on the AIG deals now at this point, what's the path forward here in terms of gathering more assets is it incremental investments.
Such as AIG or is it just sort of leveraging your <unk>.
Your origination capability.
And working with other third parties, just trying to see how you're sort of on tap into a big market from here. Thank you.
Thanks, Bill I would say.
We'll start with the strength of the platform we built.
Which is in the strength of our brand and our track record. We've said on this call a number of times that we wanted to not become an insurance company that we would make strategic investments minority investments than we thought because of the brand and our ability to originate credit that we could create the kind of long term.
Relationships, where we could grow in insurance and I think given what we've done with these last 2 transactions I think we've proven that to the marketplace.
In terms of how we go and grow from here I think we have multiple avenues, where we can have success these relationships.
Each of them I think has the potential to grow because they are with the exception of of all state, which is run off portfolio. Our 2 other clients here with FG and AIG. These are growing businesses and we think they can continue to grow and as they grow benefitting from our expertise in asset management.
We'll get more assets, so thats existing clients and then like our traditional business. We think we can serve more clients over time and what we found is that scale is a real competitive advantage. If you think about making a $50 million mortgage loans is pretty competitive, but making a $501 billion mortgage loans is less competitive.
As we get more and more scale in commercial real estate lending corporate lending asset back lending infrastructure lending that's going to benefit all of these clients and so it creates a bit of a virtuous cycle. So we think as we continue to grow our capabilities will serve these clients, particularly well build grow and we can get additional.
Clients and we really like the momentum we have in the space today.
Thank you very much on.
Thank you and our next question comes from the line of Michael Cyprus with Morgan Stanley. Please proceed.
Hey, good morning. So you guys had mentioned some very large Tam that you think are addressable, including the 30 trillion in insurance 80 trillion in retail private wealth in the past you also mentioned I think around 50 trillion on the traditional institutional side, but I guess as you look at your investment capabilities today, what portion of that Tam is realistically.
Serviceable and your view on how do you think about increasing that serviceable Tam or Sam.
With new capability adds and extensions to other parts of the marketplace, certainly Dci and harvest are giving you more liquid market capabilities, but I guess, how would you describe your overall vision and aspiration here.
I think our vision led by our founder and CEO is to do something very large that that the horizon here. What we look out at is not really limited because of the scale of those markets and how underpenetrated alternatives are so.
I think our number today on the institutional side is probably 60 trillion.
There that market.
Has moved much further along on the alternatives curve I think we'll see these other areas, particularly if you think about insurance retail the idea of trading some liquidity for higher returns is highly line logical in this environment.
What exactly the numbers are again I'm not sure I want to put a number against it but I think youre seeing here that what we talked about the $4 billion in a single month of perpetual capital from just 2 products gives you a sense of the potential here I think the Tam here is much larger than people.
<unk> I think they have historically looked at our business is operating I said this on TV earlier on in a sort of.
<unk> channel and now we're really moving into these open waters and so we think we can do more with institutional clients and obviously much much more here with with retail on insurance and so besides on the markets are big our platform as large because we're in all the different verticals. We think we can do a lot of putting it.
Number against it I think it's just a little bit early but the momentum as I said in my last question feels incredibly positive.
Thank you and our next question comes from the line of Adam Beatty at UBS. Please proceed.
Hi, Good morning. Thank you for taking the question wanted to ask about the real estate portfolio. Specifically you know I appreciate the rundown and you mentioned hospitality or travel and leisure real estate, which is was obviously dented during the pandemic and has been a historical strength of Blackstone just wanted to get your thoughts on maybe a little more color on.
How youre approaching that market now where do you see opportunities and.
In terms of.
Portion of the portfolio you you envision over the next couple of years. Thank you.
Yes, hospitality for us used to be in real estate, a very large portion.
We Fortunately and it wasn't because we anticipated the pandemic. It was just where we saw the most attractive returns had deemphasize that so.
Today, it represents about 7% of our portfolio.
I think that number will go up.
1 I think we're going to see more of a recovery in our existing assets, but too that's the sector that was hit hard by Covid and so you've seen in recent announcements we bought.
In real estate and private equity jointly born leisure in the UK, which is the leading leisure park business there.
We acquired extended stay hotels, and our real estate business again, a play on the recovery in travel and I wouldn't be surprised if we continue to do more in this space that that percentage goes up we do think people will return to travel individual in leisure travel first overtime corporate and group travel.
And so it's a sector we like.
We definitely have by far the lowest exposure, we've had to it but we'd like to increase net exposure going forward.
Thank you much appreciate it.
Thank you and our next question comes from the line of Gerry O'hara with Jefferies. Please proceed.
Great. Thanks, perhaps picking up on the on net.
Comments as it relates to the infrastructure business and.
I guess heading back into the market for fundraising, perhaps you could talk a little bit about the demand there.
What some of the trends are and what you what you might expect as you go back into the market for fund raising and infrastructure.
So on infrastructure our team there led by Sean Klimczak has done a terrific job deploying the capital and the returns have been really strong.
And as you know that's the key consideration.
For investors do deliver positive returns have you built a good portfolio I think it's worth noting here that we're doing this in an open ended.
Format, and that's important because unlike our drawdown funds, it's not that we're going on we raised $14 billion. Initially we've got this large matching commitment, but it won't be that we'll do another big clothes and wait 3 years it'll be like our Blackstone property partner funds institutionally and core plus real estate.
We're we're open every quarter its an open ended perpetual vehicle.
Our expectation is given the portfolio we've assembled given the strong performance that investors will respond and on a quarterly basis, we'll continue to see inflows just as we've seen and we've talked a lot about retail core plus but institutional core plus has grown to be quite significant now I think it's over 60 billion.
Yeah.
And so I think you could see a lot of potential for infrastructure. Another engine for us another perpetual capital vehicle, where we're not forced to sell assets and another way to serve our clients and deliver what theyre looking for so I would say a sector that we see a lot of potential on our team has done a great job on the first few years with business.
Great. Thank you.
Thank you. Our next question comes from the line of Robert Lee with Peggy Kelsey Pricey.
Great. Thanks. Thanks, Good morning, Thanks for taking my question.
Pulling back.
AIG.
Capital on the balance sheet, so understanding the disease.
Committed capital light model and distributing the lion's share of the day.
But if I look at.
Committing $2.2 billion from the state.
We view that there's some capital you have.
On the Allstate transaction.
As you look to drive deeper into the insurance.
Industry, maybe future reinsurance or other transaction.
Better all at the medians is marginal, but adjusting how youre thinking on capital.
Is there any possibility that.
How youre thinking about the 85 roughly 85%.
Our ratio you've had for many years now it could.
On the tweak to accommodate.
Growth.
<unk> business.
So I would say I'll, let Michael talk about the payout ratio.
I think the 9.9 given the scale of these.
Contracts and their long duration.
Is a sensible thing for us to view it doesn't really reflect the deviation of our long term capital light strategy.
We're not looking to take on insurance liabilities.
Or do spread investing really want to be the best alternative asset manager out there.
What I'd also point out on the capital on the context of AIG, we will be getting public shares which are subject to certain lockups, but ultimately will be freely tradable and so again, we think this makes a lot of sense the way we've done this.
No.
Wouldn't anticipate this would change the payout ratio, but Michael you should comment on that I think that's really all the needs of incentive.
The payout ratio will not change in connection with this deal.
It's not something we considered or an EBIT.
Thank you.
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed.
Hey, good morning, everyone.
The AIG revenue guide seems too.
Suggest an increase in the fee rate to something around 43 bps in year, 6 which is well above other relationships. We've seen so could you explain what about the mix shift is driving that increase and then and then longer term. How we should think about the risk to that fee agreement through the lens of LNR, probably being an independent public company at that time.
Total Patrick I think on the sort of fee rates that you're inferring or implying.
From from the numbers, we provided I think what's important to underscore is versus some other.
Agreements or partnerships in the market that involve both the base <unk> and then also series of SMA business.
There was not an IMA here its SMA focused around a portfolio of certain asset classes, where we have high expertise and where sort of the return on yield profile is higher and thats critical to the relationship. So it's a bit of an apple and an orange to compare that maybe just some on other relationships on a total blended basis.
On the on the term as I mentioned.
There is an initial 6 year period, and then it's subject.
To renewal based on a long term relative performance measures and I would just add to Michael's comment to reinforce what he said what AIG did here was retained us on the private assets.
And they also lessen sales the flexibility to do what they want on their liquid fixed income assets and so I think to Michael's point, it's an apples and orange to compare to other relationships. Because this is obviously just on those direct credit assets, which are obviously more expensive to manage an originate and why.
We won't speak for our friends at AIG, who will speak for themselves I think from their point of view they are moving towards trying to achieve a very attractive low cost overall approach to asset management.
With obviously.
Attractive yield uplift and return profile.
Yeah.
Thanks, Dan on next.
Churn comes from the line of Glenn Schorr with Evercore ISI. Please proceed.
Thank you very much.
I'm curious on to your previous comments on the call talked about an acceleration of growth, which is amazing comment given how good growth has been.
And you rightfully up the guide on on $100 to 200 billion range given the insurance deal. So.
My question is on FRE, specifically, it was up 30% year on year with all that momentum behind it and capital raising do you have any thoughts.
To held our hands on what we should expect out of FRE over the next say couple of years.
And I think we'll just stick to our normal policy of not giving guidance on that end.
Just I think reinforced the our sense of optimism around it that you are probably picking up from my remarks.
Yes.
Fair enough then I'll squeeze a little 1 in on on secondary you didn't give much color.
On when you were talking about the performance numbers, but the performance was up 17, 7% in the quarter that'd be pretty good year.
In any period of time, how much of that is the lag catch up from from previous quarters, but again. This is a good strong quarter in the open markets, what should we be expecting out of secondary.
On the Gulf from Glen.
Thanks, a lot you you got it.
That reflects the historical traditional 2 quarter lag relative to the underlying GP.
Marks and return so thats Q4 of last year, and we know that was a strong quarter across the.
Industry.
I will note that we are actually more on this next quarter on moving.
Endeavoring to move to a more closer to a 1 quarter lag in terms of the reporting at that business.
So, we'll hopefully narrow that gap.
And I think you can you can look at whether it publicly traded alts managers on the returns they reported in Q1.
And now Q2 to see where that will go on a secondary space bodes well, obviously since the private equity space was up a fair amount industry wide in Q1, and I think we'll do well.
Like we've done well in Q2, so our secondaries business has a lot of momentum and I think you can grow to be.
Significantly larger given what burn parity and the team have done for investors.
Okay. Thank you.
Thank you. Our next question comes from the line of Nokia flat ex.
Exane BNP. Please proceed.
Yes. Good morning. Thank you for taking my question can you talk about the potential capital gains tax changes in the U S and how that's impacting you on your deal flow although many.
Other companies seeking to exit.
Advantage over the non top 10.
Tax rate before that changes.
Yes, it's a good question I think it has impacted deal flow this year.
Thank you our owners.
Both family owners of businesses.
On private equity firms, who see the potential increase in capital gains and have accelerated their decision making.
I don't know where it ultimately lands, but I do think it's been a factor in the uptick in deal activity, obviously the growth of our platform and all of these different cost of capital and the scale of what we can do is certainly help but there is some element it's hard to quantify of people pushing forward some sales.
Great. Thanks.
Thank you. Our next question comes from the line of Devin Ryan JMP Securities. Please proceed.
Great. Thanks, very much good morning, just.
Just a question on realization activity clearly a lot of momentum right now so I just wanted to dig in on a couple of the businesses. So within real estate, you really nice to see the acceleration in the quarter.
Maybe if you could talk a bit more about the trajectory or momentum there that would be helpful. And then within private equity.
Also really favorable backdrop at the moment.
You guys on that certainly things like this but are we moving maybe towards peak realizations in that business or how would you frame on private equity as well. Thanks.
So, we obviously have a constructive market environment.
And that is helpful for realizations, Michael talked about the accrued carry receivable rising to a record level.
We also have record investment performance revenue eligible AUM on a my favorite terms.
Which is another forward indicator.
I would say real estate has lagged a little bit the private equity world because it was more impacted by Covid.
But.
As the World Reopens, we're seeing strength in real estate and particularly in the sectors that we were focused on so.
More than 2 thirds of our portfolio in real estate is in logistics life Science office buildings and rental housing.
All of those areas are doing quite well.
And we've begun to see as we talked about earlier snapback in some of the hospitality and leisure asset so.
I think you will see more over time and real estate.
I think youll see more gains and more realizations were most were focused of course on exiting at the optimal moment. So it's very hard to say when it will happen, but we're seeing sort of a step function increase in values in private real estate markets, particularly in some of our most favored categories and that bodes well.
In private equity.
You know Michael commented on this but a third of our corporate private equity portfolio as public. That's obviously helpful for as a forward indicator of realizations.
Their strength in the marketplace for private businesses, we own again, we'll do it at the optimal time I think what's changed versus the past is just the breadth of the businesses. We're in we know 2 years ago. We didn't have a growth business. We didn't have the life sciences business the scale of our secondaries.
Business has got it has gotten much bigger even our credit business, which 12 months ago didn't have the kind of performance when we mark things down has seen a real recovery and I think we'll begin to see some realizations thats more of a European type waterfall. So I.
I see it is broad based it's obviously connected to markets, but I would say, we're pretty optimistic optimistic across the whole firm as it relates to realizations and Devin I would just add I mentioned in my remarks.
Since the beginning of the year, something like 20 sort of listings.
Companies across the firm.
Another way of saying that is we've created a lot of public market cap out there.
It's something like $17 billion associated with those 2 transactions and in aggregate at significant.
Unrealized gains relative to the sort of prior marks as private company. So thats whats thats, what youre seeing fueling in part the growth from the.
The <unk>.
Net accrued.
And that's obviously a reflection of the strength of the company is on also of the markets and I think in terms of peak, we'll see but I think when you see the carry receivable elevated as it is right now.
And the scale of the platinum breadth of the platform and the growth on it as John said.
The realizations come subsequently and so we if markets hold up and hang in there that's a forward indicator not a lagging indicator of the future trajectory of realizations.
Yes.
Really appreciate it thank you.
Thank you. Our next question comes from the line of Chris Kotowski Oppenheimer. Please proceed.
Good morning, and thank you I guess question for John and I know that office Hasnt been a focus of yours in real estate for the last couple of years, but I'm curious if you have.
On early read on how kind of the.
Post vaccine reopening is impacting new usage patterns and I guess in particular, I'm wondering kind of our white collar employers to the extent that they're negotiating their space needs an hour or are they taking down more space less space. The same amount on the shops and restaurants and central office districts around the world.
We opened an anticipation of full occupancy.
Is that not happening.
So I think I'd say it.
It varies by region.
To frame things Youre right office for US has not been a big component traditional U S office represents 4% of our overall real estate portfolio I would say in places like China.
Employees have gone back to the office.
On Europe.
The U K, we are seeing more of that.
The U S. I would say has been the slowest.
Particularly in the large markets the coastal markets, New York and San Francisco.
Vacancies are elevated so in places like New York vacancy I think 15 or 16% San Francisco as high as 20% and that obviously gives tenants more leverage I think a lot of tenants are being cautious because they are not sure about their space needs, but we are seeing some upticks technology firms are definitely out there.
Sure.
And I think a lot of companies are concluding that ultimately they need to have people together and that they will return to the office, even if there's more flexibility. So I think our forecast is a challenging near term environment until we get through Covid.
There'll be probably more vacancy as we've seen but ultimately markets will recover there'll be a lot less building, but it is it is definitely a sector that's facing some near term headwinds, particularly in the U S.
Okay. Thank you that's it from me.
Thanks, Chris you want on that.
Question comes from the line of Bill Katz. Thank you.
E Mail.
Okay. Thank you for taking the follow up question, maybe a little bit more of a modeling question.
Just from Michael.
Trying to triangulate your commentary around your FRE margin for this year versus maybe some of the quarter to quarter swings between Bay.
Base comp and the G&A line, how do you sort of see those going forward. How much was maybe seasonal on <unk> versus more exit run rate levels. Thank you.
Yes Bill.
Good question as I mentioned in my remarks.
Sort of best to look at margins over multiple quarters, and really on an LTM basis, and the LTM margin of $54 for a similar comment as last quarter is a reasonable sort of proxy a reflection of what we think the run rate for the full year will be obviously, there are variables, including on non comp operating expense sort of the pace and timing of.
Yes.
The rebound from Covid and resumed spending on <unk> and so forth. So.
But when you when you step back again on a sort of trailing 12 months basis, our fee related revenues as a firm grew at 30% and our sort of total fee expenses grew at 20% and that's really the dynamic youre seeing in the operating leverage dynamic youre seeing in terms of revenue is growing in excess of expenses. So.
I think focus on that sort of LTM margin and that's a good sort of baseline starting point from here.
Okay. Thank you Michael.
Thank you. Our final question comes from the line of Robert Lee with K B W. P.
Thanks for taking my follow up on that Michael had another on a modeling question for you. So no taxes on related payables on those kind of bounces around the jump.
About 60.
$60 million this quarter.
As it relates to the TRA payment, but is there any kind of color or maybe guidance you can give us on how we should expect that.
That line to behave in maybe.
Or.
Commentary around.
Migration from tax rate.
Going forward.
Yes, I think I got the question Rob.
There is.
Give us similar in terms of looking over a 12 month period, but theres seasonality.
Intra year and our tax rates.
With the second and fourth quarters being seasonally higher first and third seasonally lower based on really the timing of deductions throughout the year. So.
If you look at our Q1.
De per common effective tax rate is about 90, 910% this quarter, 18%, averaging about 14% from the first half again, that's and that's more or less in line with our full year expectation, So and if you step back at the time conversion, we talked about over the near to medium term sort of a low to mid teens effective tax rate for <unk>.
And so that call at that 14% first half.
Baseline is is in line with that so.
Just to connect those dots for you.
Alright, Thank you very much.
Thanks, Roger and now I'd like to hand over to Weston Tucker for closing remarks. Please proceed.
Thanks, everyone for joining us this morning, and look forward to following up after the call.
Thank you and that concludes your conference call for today you may now disconnect. Thank you for joining and have a very good day. Thank you.
Okay.
Hi, Steve It's Jose can you 1 supplement on print.
The backend goodbye.
Yes.
Okay.