Q3 2022 Blackstone Inc Earnings Call
Good day, everyone and welcome to the Blackstone third quarter 2022 investor call hosted by best in Tucker head of shareholder Relations. My name is Ben and I'm. Your event manager during the presentation. Your lines will remain on listen only if you require assistance at any time. Please press star zero on your device.
NATO, but I'd be happy to assist you I would like to advice all parties that this conference is being recorded for replay purposes for questions. Please press star one on your device and now I would like to hand, it over to your host burst in the floor is yours.
Great. Thanks, Dan and good morning, everyone and welcome to Blackstone's third quarter conference call joining.
Joining me today are Steve Schwarzman, Chairman and CEO , Jon Gray, President and Chief operating Officer, and Michael <unk>, Chief Financial Officer.
Earlier. This morning, we issued a press release, a slide presentation, which are available on our website, we expect to file our 10-Q report in a few weeks I'd.
I would 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.
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.
So please note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Blackstone fund. So audiocast is copyrighted material of Blackstone and may not be duplicated without consent.
On results, we reported GAAP net income for the quarter of $4 million distributable earnings were $1 4 billion or $1.06 per common share and we declared a dividend of <unk> 90 per common share, which will be paid to holders of record as of October 31.
With that I'll turn the call over to Steve.
Thank you Wes.
Good morning, Thank you for joining our call.
Third quarter 2022 is a continuation of one of the most difficult periods for markets in decades.
Bull markets extended dramatic sell off that characterized the first half of the year.
The S&P 500, following another 5%, bringing the year to date decline in.
24%.
Public REIT index.
Down 10% in just the quarter and 28% year to date.
The NASDAQ so 32%.
Year to date.
That market's high grade and high yield bonds.
Mind, 14% to 15% in the first nine months of the year.
I inflation.
Using interest rates and the slowing economy combined with ongoing geopolitical turmoil.
Created an extremely difficult environment for investors to navigate.
The traditional 60 40 portfolio is down over 20% year to date.
It's worse performance in nearly 50 years.
Sentiment.
In almost all areas is likely to remain negative given the fed's commitment to continue increasing interest rates to combat inflation.
Against this highly challenging backdrop.
Blackstone delivered excellent results for our shareholders.
Fee related earnings third quarter rose, 51% year over year to.
One $2 billion, representing our second best quarter on record.
We generated strong distributable earnings of $1 $4 billion $4 six a share as west noted.
While most money managers focusing on liquid markets.
Seen declining.
We've continued to grow.
Our assets under management increased 30% year over year to a record $951 billion with strong.
Demand for our products across the institutional.
Private wealth and insurance channels.
Just last week, we announced our fourth major partnership in the insurance space with resolution life, a leading life and annuity block consolidator.
We expect to comprise approximately $25 billion.
AUM in the first year and over 60 billion overtime.
Platform grows.
Key to Blackstone success with our customers is that we.
Have protected their capital.
Through these remarkable market declines.
One of our core principles since we founded the firm and 1985 is to avoid losing our clients' money.
And we've done an excellent job of that.
That's the largest and most diverse alternatives firm in the world.
We have unique access to data.
Insights on what is happening in the global economy.
Allowing us to anticipate trends and we believe.
Minimize risk.
We then carefully choose sectors, which type of assets to buy.
Actively.
Great companies and platforms.
We used this advantage as well to help determine areas of focus and more liquid securities area.
This synergistic approach that's led to distinctly strong positioning.
Our business today for example in.
In real estate.
Approximately 80% of our portfolio is in sectors, where rents are growing above the rate of inflation.
Including logistics.
Housing slide.
Life Science office.
And hotels.
In corporate private equity our.
Our emphasis on faster growing companies.
This resulted in a 17% year over year revenue growth and our operating companies in the third quarter led by our travel.
Leisure related holdings.
17% growth in revenue.
I think the economy is slowing all over the world.
This is a stunning result.
The size of our portfolio.
Which in total across our private equity business employs approximately 500000 people.
Corporate and real estate credit.
We benefit from close to 100% floating rate exposure.
And we are experiencing.
<unk> two folds.
Our hedge fund solutions business is performing remarkably well.
The bps composite achieving positive returns in the third quarter.
And every quarter so far in 2022.
This is a highly differentiated outcome and liquid securities <unk>.
Compared to the year to date decline of 24%.
The S&P.
Blackstone's long history of outperformance in capital protection is of course critically important to our Lps and their constituents.
They have found it difficult to achieve their objectives by investing in traditional asset classes alone.
That's why Lps around the world are choosing to increase allocations to alternatives in particular.
Blackstone.
Recent research from Morgan Stanley estimates through private markets AUM will grow 12% annually over the next five years with share growth in areas such as infrastructure.
Real estate and private credit.
As investors seek yield and inflation protection.
All areas.
Distinctive our confidence here at Blackstone.
From a channel perspective, Morgan Stanley predicts the greatest growth among individual investors with allocations to alternatives from high net worth investors more than doubling in five years to 8% to 10% of their portfolios.
This represents a major paradigm change.
When we identified over a decade ago, and trillions of dollars of opportunity, which John will discuss in more detail.
Blackstone is a clear leader in this channel.
With the largest market share among.
Among alternative managers.
Blackstone occupies a special stages with customers and potential customers around the world.
They are facing significant uncertainties today, and they're looking to us to help them navigate these challenges.
We believe we are uniquely positioned to do so.
We are proud of the trust they place in us and we remain steadfast in our mission to serve them.
In closing.
Our firm has prospered.
The many cycles of the past 37 years since we started.
We had no assets.
And today with <unk>.
Hosing in on a trillion dollars of AUM.
Historically, we've taken advantage of the pullbacks to deploy significant capital at attractive prices.
Extend our leadership position across business lines and invest in new initiatives as well as in our people.
For our shareholders. This has translated into extraordinary growth and.
And we have no intention of slowing down.
We are in the early innings of penetrating new channels and markets with enormous potential.
The firm's earnings power continues to expand concentrated in the highest quality earnings.
Even though the investment climate is challenging.
We have the confidence our resources from the.
Loyalty of our customers and our people to.
We continue to develop our franchise.
Benefit from.
All of our constituencies.
And with that.
Ill turn it over to John Thank you Steve Good morning, everyone. Our business is all about delivering for our customers in rain or shine in the third quarter was no exception.
Our investment performance again demonstrated the durability of our model along with the benefits of our thematic investing as Steve highlighted.
Meanwhile, the firm's strong results have allowed us to continue expanding who we serve and where we can invest even in the most difficult times.
I'll update you on the multiple avenues of growth we have in front of us starting with our drawdown fund business with the support of our Lps, we are progressing toward our $150 billion target with more than half achieved at this point wed.
We've largely completed the fund raised for two of our three largest flagships global real estate and private equity secondaries and have launched their respective investment periods.
Our corporate private equity flagship hedge raised $14 billion to date, and we expect it to be at least as large as the prior fund.
In credit we've closed on $4 billion for new strategy focused on renewables in the energy transition and expect to reach our target of 6% to $7 billion in the coming quarters, we believe the largest private credit vehicles of its kind.
This is an area, where we see tremendous secular tailwind.
We reported additional inflows in the quarter and growth equity tactical opportunities in private equity energy.
While the market environment will remain a headwind for the industry. Overall, we are in a differentiated position given the diversity of our platform global reach and the power of our brand.
Turning to private wealth one of the long term megatrends transforming the market landscape is that individual investors are finally, getting access to alternatives and a form and structure that works for them.
This development has been led by Blackstone and our distribution partners and the response has been powerful we now manage $236 billion of private wealth AUM up 43% in the past 12 months alone in the third quarter sales in this channel totaled <unk> 8 billion.
Including $6 6 billion.
For our perpetual vehicles.
We do also offer limited repurchases in the perpetuals, which totaled $3 7 billion.
As we discussed last quarter stock market volatility meaningfully impacts net flows in these vehicles.
That said this is a vast and underpenetrated market and our products have outstanding performance and positioning.
<unk> net returns since inception, six years ago is 13% per year or four times the public REIT index nearly 80% of <unk> portfolio is comprised of logistics and rental housing some of the best performing sectors with short duration leases.
And rents outpacing inflation.
<unk> has generated an 8% annual net returns since inception, and with a floating rate portfolio returns benefit as interest rates move higher looks.
Looking forward, we plan to launch more products in this channel deepened penetration with existing partners and add new relationships around the world.
Moving to our institutional perpetual business, which is over $100 billion across 42 vehicles up 37% year over year, including our institutional real estate core plus platform and infrastructure.
Our infrastructure business nearly doubled year over year to $31 billion on the back of excellent performance. Both platforms continue to benefit from their focus on hard assets, great sectors with strong fundamentals, helping drive positive appreciation in the quarter and year to date.
Turning to insurance, our AUM has doubled in the past 12 months to over a $150 billion. We've now added a fourth large scale mandate with resolution life as Steve noted, which is one of the leading closed block consolidators servicing the multi trillion dollar life and annuity market on a global base.
This is another example of our strategy to serve as an investment manager a multiple insurance clients without becoming an insurance company ourselves are taking on liabilities over time, we expect more than $250 billion of AUM.
AUM from existing clients alone several of which have an added tailwind from greatly accelerated annuity sales are deep investment expertise and capabilities in private credit in particular uniquely position us to serve insurance clients.
Stepping back private credit represents another long term megatrend in the alternative sector, we can leverage our expansive platform to directly originate yield oriented investment products for our clients, including insurance companies as well as institutional and individual investors.
And we see a particularly favorable environment for deployment today as base rates have increased significantly and spreads have widened.
All while traditional sources of financing have pulled back.
With over 320 billion of AUM across our credit and real estate credit businesses. We built one of the largest platforms in our industry, but still comprise a tiny fraction of these margins overall, we are quite excited about the long term potential.
Taken together our diverse range of growth engines drove total inflows of $45 billion in the third quarter and a record $183 billion year to date, a period in which market experienced some of the worst declines on record as Steve discussed.
These results more than anything speak to the strength of our brand and the trust our clients place in us and with a record $182 billion of dry powder capital, we have the ability to take advantage of dislocations.
In closing despite the many challenges of today's investment environment, we are well positioned to navigate the road ahead.
I could not have more confidence in our firm and our people.
For our shareholders, we continue to achieve significant growth, while remaining true to our capital light model, allowing us to return 100% of earnings over the past five years through dividends and share buybacks. We are totally focused on delivering for all of our stakeholders and with that I will turn to.
<unk> sales are to Michael Thanks, John and good morning, everyone.
The firm's third quarter results highlight a business model designed to provide resiliency in difficult markets at.
At the same time, we are advancing through the largest fundraising cycle in our history, which coupled with our expanding platform of perpetual capital strategies is setting the foundation for a material step up in FRE.
I'll discuss each of these areas in more detail.
Starting with results one of the best illustrations of the durability of our financial model and the continued powerful trajectory of fee related earnings.
In the third quarter, FRE increased 51% year over year to $1 2 billion.
For <unk> 98 per share.
Powered by 42% growth in fee revenues, along with significant margin expansion.
With respect to revenues the firm's expansive breadth of growth engines lifted management fees to a record $1 6 billion.
Up 22% year over year, and 4% sequentially from quarter two.
At the same time continued scaling of our perpetual strategies combined with strong investment performance across those strategies led to $372 million of fee related performance revenues.
With respect to margins.
<unk> margin for the nine months year to date period expanded nearly 100 basis points from the prior year comparable period to 56, 5% and is tracking above our previous expectations.
We now expect full year 2022 margin to be in the same 56% area in line with 2021.
Distributable earnings were $1 4 billion in the third quarter underpinned by the robust momentum in FRE.
Net realizations declined year over year as the market environment unit activity levels as expected.
While the backdrop for exits is likely to remain less favorable in the near term one of the key attributes of our model that we can focus on executing our operating plans and creating value for the long term patiently waiting to identify the multiple opportunities for monetization and.
In the meantime, the firm's performance revenue potential continues to build.
Performance revenue eligible AUM in the ground grew 26% year over year to a record 494 billion.
Net accrued performance revenues on the balance sheet stand at $7 1 billion.
For nearly $6 per share.
Down over the past few quarters, primarily due to record realization activity, but still double its level of two years.
Moving to investment performance as Steve noted against the backdrop of continued pressure in global equity and credit markets, our funds protected investor capital.
Core plus real estate credit and Bam appreciated 1% to 3% in the quarter.
In corporate private equity and opportunistic real estate bellies were largely stable.
And black ops saw modest depreciation of approximately 2%.
These returns included the negative impact of currency translation for our non U S holdings related to the stronger U S dollar.
Few additional observations on our returns.
First in private equity our portfolio companies historically have been held at a meaningful discount to public comps in terms of valuation multiples, which continues to be true today.
In alignment with that in terms of outcomes exits have occurred at a significant premium compared to unaffected carrying values.
Second in real estate in the context of rising interest rates, we've materially increased cap rate assumptions across the portfolio.
Notwithstanding this impact our real estate strategies is still seeing strong appreciation year to date as cash flow growth and dividends have more than offset the impact of wider cap rates.
Turning to the outlook, which is characterized by the firm's continuing progression toward higher and more recurring earnings as.
As we highlighted last quarter, we expect the combination of our drawdown fund raising cycle, along with a growing contribution from perpetual strategies.
Our lead to a structural step up in FRE over the next several years.
In terms of the drawdown funds, we launched the investment period for the global real estate flagship in August with an effective four month fee holiday for first closers.
We'll launch other funds over time, depending on deployment.
With respect to the perpetual strategies, we previously discussed the layering effect of fee related performance revenues and noted that BCP in particular has four times more AUM subject to crystallization in 2023, then in 2022.
At the same time, the private wealth perpetual vehicles have continue to compound and value with fee, earning AUM, increasing $27 billion into the <unk>.
<unk> this year to $94 billion in total setting.
Setting a higher baseline for fee revenues going forward.
As John described these vehicles remain exceptionally well positioned.
And for <unk>, specifically, it's worth highlighting that the driver of fee related performance revenues as investment income borrowers paying interest, which is a high degree of visibility.
Overall, the dual catalyst of our drawdown fund raising cycle and the ongoing perpetuals nation of our business give us confidence in the multiyear outlook for FRE.
One final item of note last month, our insurance client corbridge successfully completed its IPO, despite the extremely difficult capital markets backdrop.
This represented an important milestone in their evolution as a standalone public company.
Blackstone was not a seller in the offering nor was court ridge and we're committed to being shareholders for years to come.
Have a very positive view on the value of the company, including the expected benefits from increasing base rates widening spreads.
<unk> been pleased with the success of our partnership to date and look forward to continuing to deliver for them as their exclusive investment manager for key asset classes.
In closing.
The firm is in an excellent position today.
Our all weather model protects us in times of stress and provides a powerful foundation for future growth.
We have great confidence in what the firm will achieve in the years ahead.
With that we thank you for joining the call and would like to open it up now for questions.
Sure.
Thank you let me kindly remind everyone. If you wish to ask a question. Please press star one on your device.
Allow me to kindly request our audience to keep it to one question and a follow up at that time, so everyone has a chance to participate.
And with that I would like to proceed to our first question, which is coming from Craig Siegenthaler from Bank of America.
Please go ahead.
Hey, good morning, Steve John Hope everyone's doing well.
Good morning, Craig.
My question is on fundraising.
Multiple headwinds this year with the crowded private equity backdrop denominator effect and it seems some weakness with U S pension plans, although probably more strength from sovereign wealth funds, but we haven't seen it really impact blackstone's results, yet with strong fundraising again last quarter.
Can you provide us an update on the fundraising front end blackstone's overall ability to grow organically if the bear market extends into next year.
So Craig I think it's worth starting with our quarter and first nine months. The fact that we raised $45 billion in the quarter of $183 billion in the first nine months, which is 60% higher than our previous best.
In an environment when equities were down 25% bonds down 15% is pretty remarkable and I think what it reflects of course is our long term track record delivering for customers.
The power of our brand.
Breadth of what we're doing today, obviously the expansion into these new areas in insurance.
Core plus real estate indirect lending alternative fixed income and then continuing to grow our traditional drawdown business as well where.
Where we move into new spaces like life Sciences and growth equity continue to grow our original businesses and so what you see as sort of a growing platform built on the backbone of successful performance and then exploiting all of these new channels and then geographically I think unlike some other managers.
Got the benefit of raising money in the U S. But also around the world in other regions that are not as capital constrained and all of that has led to our strong performance to your specific question I would acknowledge it's harder out there.
Masters or more capital constrained I think it will be tougher for many groups to raise capital.
And that that will be until markets get better a bit tougher, but I would say overall when you talk to our customers you don't hear a lot, saying they want to reduce their allocation to alternatives they've got a favorable view, it's been their best performing area. It may be a bit constrained by the denominator effect today, but they want to continue it.
And then for US we've got this differentiated spot so tougher, but we feel very good about where we sit.
I would just add John starting from art, Steve from our first fund.
1987.
A significant component.
Non U S investors.
And I think.
At a time when the U S is less favorable because of the factors you mentioned.
The pension funds and the fact that we are so global firm so long.
Those type of relationships.
<unk> tend to be.
During and personal.
Because people are coming from foreign countries and foreign cultures and when they decide.
What interests you made significant commitments.
And then you deliver.
After time after time Theres, a certain bond that you have in the flows as John mentioned.
It has been more directed.
Outside the United States and that gives us.
Terrific balance.
Where we can go to raise money.
Thank you Ed bed before we move on to the next question if I could just clarify the operator instructions <unk>.
<unk> and I want to make sure we get to everyone. So we can limit. The first one question. If you have a follow up questions. Please come back into the queue I just want to make sure we can get to everyone. This morning.
Perfect. Thank you. Our next question is coming from Ben British firm Barclays. Please proceed.
Hi, guys. Thanks, so much for taking the question I wanted to ask about your kind of your outlook for the underlying portfolio companies. John I know you gave some commentary. This morning that there is a little bit more caution and you guys kind of mentioned in the prepared remarks that there was a bit of a skew towards travel and leisure which are a bit more discretionary. So could you maybe comment on how you see performance there over the next six to 12 months.
So as I said, what's remarkable is the U S economy. In particular has been very strong Europe has held up better than people expected places like India are strong as a data point here. The fact that we saw 17% revenue growth in our private <unk>.
Equity portfolio said, something I think pretty profound.
But theres still a lot of strength and it also reflects that sector selection. So the fact that we've done so much in private equity in travel and leisure bodes well for us our energy energy infrastructure energy transition assets are all doing quite well.
I think where we positioned ourselves has helped us.
And it's similar for us in the real estate market as Michael commented on that positioning and such a big way in logistics and then rental housing hotels all areas with strong growth overall back to your comment we do think we'll see a slowdown here. It's just inevitable when you take.
The cost of capital from a zero percent to 4%.
And that capital widens, even more with spreads widening.
People start to think about deleveraging paying down there that they are less focused on expansion. There is more caution and thats going to lead to a slowing that will happen over time.
And that's what we're anticipating and that's what we're telling our companies.
So I think that's something that all companies need to think about in terms of how severe it is I think it's hard to say what I would comment on is we're in a much better spot as a global economy than we were back in <unk> nine we don't have the same kind of over leverage we had back then in housing.
Commercial real estate and banking institutions. So that makes you feel better but there is no question. There is a slowing coming here, we should anticipate that and obviously the stock stock market's been thinking about that.
Okay, great. Thanks, so much for taking my question.
The following question comes from Michael Cyprus from Morgan Stanley Michael. Please proceed.
Hey, good morning, Thanks for taking the question.
Can I ask about the U K and Europe , we've seen some very sharp moves in currency and interest rates. There. So just curious how you see the opportunities set there evolving for putting capital to work is now the time for buying trophy properties are companies in the UK or Europe .
<unk> seen some funds that implement LTI strategies become for sellers of assets. So just curious what youre seeing on that front and what sort of opportunity set that might offer for you. Thank you.
Thanks, Mike.
Obviously, the UK and Europe faced some real challenges in the near term there is the inflation challenge.
Driven by their energy challenges, which are much more pronounced than what we have in the United States.
Theyre central banks.
Need to raise rates.
Order to maintain their currencies and not have further inflation.
In addition, as they raise rates their housing markets. Many of them tend to have floating rate mortgages versus our 30 year fixed rate model, which put additional pressure on the European economies.
I would say to date things have held up better and our companies have performed better than you would expect companies or adopt adapting to the higher energy prices and their usage and efficiency, but it is going to be a challenging period I think as investors. What you have to overlay against that is just how much the currencies have moved.
And how much the valuations have moved out you've seen currency movements here of nearly 20% in Europe and the U K and you look at the UK in particular, the stock market. There is trading at below nine times earnings.
So we look at that and say Wow. These are interesting places a bunch of the somatic trends, we like could be around travel could be around technology infrastructure.
<unk> there is still attractive assets in continental Europe , and the U K and yet prices and investor enthusiasm has gone down and so to us that makes for an attractive entry point, sometimes it takes time for these things to manifest themselves, but we think we will be busy in Europe over the next few years I would say.
On the <unk> question in particular.
There was some selling as you know of CLO paper, we like others participated in that.
It seems to have abated at this point, but I wouldn't be surprised as rates move up that there are other forced sellers as pressure grows in the system and back to our model of $182 billion of dry powder the ability to make decisions really quickly to move quickly when there are periods of dislocation.
It happened back in Brexit that happened back in <unk> nine we tried to take the opportunity to deploy capital on behalf of our investors. So I think you have to be cognizant of the economic challenges in Europe , but open minded to the opportunities given the repricing that's underway there.
Great. Thank you.
The following question comes from Brian Bedell from Deutsche Bank, Brian . Please go ahead.
Great. Thanks, good morning folks.
Maybe just wanted to touch on the energy transition John that you mentioned.
The successful we think the private credit green.
Energy strategy.
I guess, maybe talk a little bit about.
That strategy in general in terms of the investment.
The opportunity set and then are you seeing demand.
Come more from retail in this product or is this really more.
Traditional and I know and I know, you're baking in ESG considerations across the investment processes across all investments but.
What is the desire to expand in more dedicated impact.
Energy transition platform across the across all the verticals.
Yeah.
Thank you Brian .
I would say this area is about for US is providing credit to this enormous energy transition that is underway.
So if you think about the trillions of dollars that need to be spent to move us from 85% dependency in the U S. A little bit lower in Europe on hydrocarbons to a lower number it's going to require a lot of equity it's going to require a lot of debt.
To us.
Form of financing is not necessarily financing finished projects, which liquid investors will pay.
Well, except very low thus for in order to hit their net zero targets. We think if you back developers.
We've been doing successfully of projects if you lend to some of the service providers in this space. If you lend to consumers we've been a very active in providing financing.
In the solar market to consumers. We think this is a good way to go because there is an enormous need for capital and so we're excited about it.
We're also excited about our energy equity area as well for similar reasons.
Because of the need for capital and in our interest.
We've been doing a lot we made a large investment we talked about six months ago and in <unk>, which is the largest builder of solar and wind projects in the <unk>.
States.
I'd say as it relates to ESG overall, the driver for us is being a fiduciary fiduciary and deliver for our customers. They are focused on this area. We also see a big opportunity set because of the need for both debt and equity capital. We think we are building.
Platform and ecosystem, we said publicly and we want to invest a $100 billion in this area across our various platforms over the next decade, I think we can do that and generate favorable returns. So I'd say, it's an exciting area that is still in the early days of its expansion.
Okay.
I'll get back in the queue for another question.
Moving to our next question from Alexander <unk> from Goldman.
Alexander Please proceed.
Hi, good morning, Thanks, everybody. Thanks for taking the question.
I was hoping we could spend a couple of minutes on real estate.
That's a concern in the public markets and where the shares are trading for public creates John you've been very clear in terms of how Blackstone portfolio is different.
Gran Tierra yourself, staying short duration and leading into areas of secular growth.
Curious from a fund raising perspective power institutional real estate today in the context of kind of private markets location broadly.
With rates I guess, where they are today why is real estate still an interesting place to be particularly around core product and as you think about the forward growth for Blackstone and real estate outside of the opportunistic funds, how do you envision those drive.
The next call it 18 to 24 months.
Thanks, Alex I guess I'd step back and say the region.
By hard assets are interesting and in an environment like this is because the replacement cost goes up pretty significantly.
Inflationary environment, the cost to build the labor costs, which is a big component has gone up.
And probably the largest input cost us money goes up significantly and the yield on costs that you need to build a new project goes up so I was talking into a major apartment developer.
Who we build 15000 units he has under construction today. He sat next to cut his budget to 4000 units at 75% decline in terms of his new construction. So what you see happening environment. Like this is you start to see a reduction in new supply.
<unk>, which is obviously helpful. In the long term and these hard assets are beneficial because they don't have much exposure the input costs and theres going to be fewer and fewer of them as I said belt. So that argument for investing into hard assets. The challenge of course is in a.
A rising rate environment, if you own a hard ask.
Feels like a bond or worse.
Older Office building that I think youre going to see a challenge to value because the income is not growing much in.
And rates have gone up on the other hand, if you're in rental housing and you have pricing power.
<unk>, where we're still seeing in the U S 30% increases in rents in Europe , nearly 20% increases in rates the duration of.
Even as the cap rates go up you can still see value appreciation, albeit at a lower rate so as it relates to institution.
Yes, they become more cautious in this environment. So they don't allocate quite as much they pause we've seen this before but.
Get to the other side of this healthy real estate fundamentals and by the way. Unlike almost every other downcycle, what we have going into this particularly in rental housing is low rates of vacancy and limited new supply and a lot less leverage. So we go into this in a better shape.
And then as a result, we start to see this sharp decline in new supply it should be even better coming out so I think launch costs.
<unk> real estate, which is obviously a big area of focus for us.
It's a really good area to be in and then I would just say obviously we haven't.
Where our scale is larger than anyone else in the world, we see more on the ground and anybody we have access to capital both debt.
So it's an area we continue to have a lot of confidence in even if there are some near term headwinds.
Great. Thanks very much.
The following question comes from Jerry O'hara from Jefferies. Please go ahead.
Great. Thanks for the question this morning.
Just maybe sticking with the rate environment, a little bit and picking up on some questions.
Steve made earlier, but earlier, but can you kind of talk broadly a little bit about how the rising rate environment could potentially put pressure on the LP dynamics from someone.
From an LP and I'm thinking about kind of.
Getting more attractive rate exposure from fixed income.
And relative to less liquid private markets just kind of.
Would be curious to get some color on how that dynamic might play out going forward.
Well it does I think impact some investors.
Fixed income starts to look more attractive.
If you think about our clients and their long term obligations the rates. They want to produce are generally above investment grade fixed income and so I don't think they can move their portfolios out of alternatives in a meaningful way. It has been their best performing sector and if any.
What they May say is you know what I'm really interested in private credit because I get the benefit of short duration, Inc.
Income as the fed raises rates, so blackstone I'm interested in doing that.
That's attractive I'm interested potentially in infrastructure, because it's got inflation hedges and income streams that are often tied to CPI or RPI in Europe , and so I'm interested in that we haven't really seen a movement out of the complex.
We still see people interested in the sector the composition of where they allocate could change, but the other thing I'd say about our investors as they've been at this a long time, the institutional ones in particular and they don't want to just be pro cyclical. So they know that to leave growth equity after the tech markets sold off in a big way doesn't make a ton of.
The same thing in private equity and if you went back to the early 2000, you went back to OE dollars nine leaving these sectors into time prices go down is that the best decision. So I would say they take a longer term view theyre sticking with what they've done they may reallocate a little bit I think private credit will be a beneficiary and that's something.
Obviously, we do in scale, but I don't see any sort of large scale movement away from this very attractive asset class.
Great. Thank you.
Yeah.
The next question comes from Bill Katz from Credit Suisse. Please proceed.
Okay. Thank you very much and good morning, everyone. Thank you for taking the question, maybe one for Michael and mixed up a little bit.
Just wanted to unpack your discussion on the FRE margin of 56, 5%, which sounds like a bit of a pickup in guidance can we unpack that a little bit just between how you sort of see the FRE dynamics, if you would strip out the performance fee related.
Contribution and maybe you could comment on just sort of the base payout rate of comp payout rate.
This quarter looks like it was particularly low ex performance fees and how you sort of see the two payout ratios into the new year. Thank you.
Sure Bill.
Look I think.
As you know, we always encourage folks to look at margins over longer time frame is not just a single quarter given entry and movements and puts and takes in any period and so as I said and framed on the in my remarks on a nine month year to date basis margin is up 100 basis points and in terms of the key drivers, which is getting at your question on the <unk>.
Side, just unpack it.
With respect to compensation expense.
Really looking at that on a year to date basis, our comp ratio.
It's stable it's right in line with a year ago, maybe within 30 basis points and then in terms of Opex non comp operating expense and actually declined quarter over quarter about 6% driven by a range of factors TD, which we talked about in the past couple of quarters is still higher than a year ago, but it is actually down quarter over quarter and other factor.
So overall I think what this reflects is a few things very strong year over year and good quarter over quarter topline growth obviously.
Bind with a disciplined approach to cost management, we feel very comfortable in our ability to control and carefully managed costs in our business.
All within the context of continuing to invest in our people and infrastructure to support growth. So the result of all of US. We think continues to be very stable and healthy margin picture.
Okay.
Okay. Thank you.
The following question comes from Ken Worthington from JP Morgan. Please go ahead hi.
Good morning.
Hoping you could speak to be read and PPP. So first on fee rate. It looks like gross sales have been slowing gross redemptions have been picking up I think Jonathan you said.
Higher volatility impact flows could be rate go into redemption in coming months. It looks like it may be poised there and then on PPP I think assets fell during the quarter I thought that was largely permanent capital and I think you highlighted that core plus returns were higher what drove the decline there in AUM.
So one on BP I think a specific answer on that is currency I think was the specific answer because the translation of our European GDP and Asia and Asia. So I think Thats, what you saw there not outflows out of the complex.
As it relates to be read as I said in my remarks.
It's not a surprise that you would see a deceleration in flows from individual investors. When you've had this kind of market decline I think the number in <unk>.
Active equity and fixed income something like 500 billion of outflows.
And remarkably as you know we've had positive inflows throughout the year, which which has been pretty exceptional.
I would say as it relates to near term flows yes, it's possible that we could see negatives over some period of time, but the key which we keep pointing out is the performance that we've delivered and the portfolio. We built so if you look at <unk>. The fact that we've delivered.
13%.
<unk> per year for six years versus.
Four times greater than the public REIT index or the <unk> has delivered 8% versus significant losses in fixed income over two years that of course makes an enormous difference. There is also the positioning of these portfolios, which is if you look at.
What <unk>, we keep talking about it.
Rental housing, which is the biggest contributor now to inflation.
And then you look at what.
B Craig.
It's floating rate debt, which is benefiting of course every time the fed raises rates and just to put a point on performance again.
If you look at <unk> read up 9% this year, which versus the rest of the world is of course quite striking so when you look at this not necessarily in the context of months or this quarter. We look at this over time and we see individual investors at 1% to 2%.
Allocated to alternatives versus institutions that are 25% to 30% allocated in our view is with these products. What we're offering is attractive to individual investors and they will continue to find itself doesn't mean, we have times when things are a little bit for a cult yes in terms of flows we saw.
All of that in March 2020, but in the fullness of time, we think we're going to see as investors respond to our investment management performance. That's the key driver over time.
Great. Thank you very much.
The next question is from Adam Beatty from UBS. Please go ahead.
Thank you and good morning, I wanted to ask about capital deployment, which seems to pretty.
Pretty much moderated across the various asset classes and categories. One of the themes in the industry echoed at Blackstone is the idea that market dislocation provides a good time to kind of deploy dry powder with with higher expected returns. So I guess the directionally it was a little bit unexpected.
Now a couple of minutes ago, John said that sometimes referred to Europe that sometimes opportunities just take a while to manifest. So was it just a question of timing is there a reason that you've been holding back a little bit and could we expect deployment to increase next quarter. Thank you.
So Adam its exactly what you referenced here, which is in a moment of dislocation.
It takes time.
Sellers' expectations change Dave pause.
Obviously lenders in some cases moved to the sidelines and transaction activity slows and if you went back again to the OE dollars nine dislocation it took a bit of time, but then ultimately of course, we were able to plant a lot of good seeds into the right kind of environment.
I would expect deployment will be muted for a bit of time that doesn't mean, we're not going to find some opportunities and that sellers wont start to get creative providing financing.
Maybe taking back some equity in a transaction I think it will build over time, but until you get I think a little more certainty out there until people become more confident about inflation starting to head down that rates have hit their peak levels I think youll see a slower level of transaction activity I think the key for us.
US is that we don't have to be forced investors at any time, neither buyers nor sellers. So if there is a slowdown in market activity, we can afford to be a little patient and then win opportunity emerges. We can move and I would just say that as our platform grows I think youll see us be able to do more and more.
Even in a tougher environment areas like insurance, we can deploy capital on an unleveraged basis, and a very low cost relative to others I think that will be a busy area, but I would say an expectation of slower deployment in the near term is reasonable but at some point picking up meaningfully and Adam It's Michael I'd, just add a couple of points one is.
History, and we have 37 years of it showed that the vintages. The straddle these periods of dislocation, which do take time to play out proved to be really good vintages over time in terms of investment returns.
And that second our platform as Sean referenced our franchise.
So strong distinctive and so our ability to access capital and debt capital in tougher markets.
And also our ability I think to engage in sort of dialogues with corporations are public companies privately held companies founders around capital solutions at a tough time again is I think quite advantage. So we.
We will have to be patient and will take time to play out in terms of activity levels.
But these periods of dislocation ultimately proved to be opportunities for value creation.
Excellent. Thank you guys much appreciate it.
The following question is from.
Patrick Davitt from molten Emmis Patrick Please proceed.
Hey, good morning, everyone. My questions on us on that same topic more specific to private credit obviously I. Appreciate your comments on better spreads and lack of competition, helping you and it looks like the deployment held up pretty well in <unk>, but how should we think.
Great.
Patrick we're glad youre cutting out there.
Hello can you hear me now.
Okay.
So yes, so I appreciate the comments on better spreads and competition helping.
Credit deployment and that held up pretty good in <unk>, but how should we think about the pace of credit deployment through a period of continued deterioration in deal markets. Do you think it can hold up if M&A and sponsored deal volumes in particular are getting increasingly anemic and if so what do you think kind of offsets the deal volume speak a lot lower.
I think what offsets.
The fact of deal volumes are lower is a certainty that direct lenders provide to borrowers. So in an environment like this if you're a financial institution in the distribution business youre going to be cautious.
Because you don't know where the end market is and so I think direct lenders providers of capital who arent distributing the paper, but just holding it will have an advantage in this kind of volatile market and so I think we're seeing that today.
It's definitely a movement towards direct lending and it's a similar dynamic in insurance, where rather than <unk>.
Somebody distributing paint for investment grade paper, we're doing the direct origination for our insurance clients. So I think.
I think there will be opportunities and I will say when you look at the private equity market Theres still a lot of equity capital out there Theres a lot of discussion there are transactions getting done at a lower level at some point here inflation as we've talked about we'll get to a top point rates will get there people will begin to feel a little.
Better and things will continue to go and what's been amazing throughout this is we've continued to deliver good performance. We found some opportunities along the way and investors continue to allocate capital to us. So it gives us confidence and we've been through other cycles before we sort of built as a firm for this and we think there'll be plenty of.
Opportunities as we get through this and get to the other side.
Our next question is from Jimmy <unk> from Wells Fargo.
Please go ahead.
Hi, everyone. Good morning, plus sort of staying on the same pool can you talk about the financing markets.
Funds.
If you see any impact there on growth.
Ross the platform or in any particular strategies.
When you say financing for funds, you mean transaction financing.
We will say borrowing from banks securitization capital markets sometimes.
But yes transaction.
Yes, yes.
Yes, we've definitely as I said, we've seen a slowdown.
Banks risk appetite is lower than it was before.
Brands have gapped out so the cost of capital if youre buying a company or buying real estate has gone up materially.
We're still because of our unique spot if anyone can get our financing done somewhere it's us and I think you'll see some examples of that in the not too distant future, but it is harder to borrow money and as I said, we're going to see I think sellers do a little bit who want to sell is potentially provide some seller financing to get things done.
There's a lot of creativity in the deal market and I think that some of that will emerge in this uncertain environment, but overall messages financing is generally tougher.
And it makes transaction charter, but I would point out if you'd looked at investors. If you said are you better off in periods like 2000, 2007, 2021, where debt markets.
Our abundant that is low cost, but you have to pay a lot for assets versus in an environment like today, we're definitely better off as investors in an environment like today, where capital is more scarce, where we may have to <unk>. The deal and then ultimately finance it when markets come down a bit in the future.
Thank you.
The following question comes from Brian Mckenna from JMP Securities Brian . Please go ahead.
Thanks, Good morning, everyone. So I had a question on hedge fund solutions year to date performance has actually been pretty healthy. Despite the tough backdrop for public markets. So are you starting to see any increased demand for the product on the heels of this performance and then related how is the business tracking for year end incentive fees in the fourth quarter.
Well I'll just comment on the fact that we brought in Joe Dowling, who previously ran the brown and down in a couple of years ago.
We actually had our LP meeting this week.
And we were highlighting the team the additional investment professionals Jos brought onboard and really this outstanding performance. The fact that here we are into the worst 60 40 environment since the early seventies and the band business has been positive all three quarters.
It is exceptional particularly.
Particularly given the scale of capital they operate.
I think.
It's still a bit early in terms of investors, who have been I think a little more cautious on the hedge fund sector now recognizing in an environment like this that some of these non directional strategies in macro quant credit related strategies can generate attractive returns and I think that.
We will give us momentum over time, it takes a bit of time for investors to see what's happening here, but we feel really good about it we cannot be more proud of the investment performance. The <unk> team has delivered.
Thank you just following question comes from Chris Kotowski Oppenheimer, Chris Doherty.
Yes, good morning, Thanks, I guess.
<unk> thing to me is that if you look at the public apartment logistics and lodging rates. The earnings are up the estimates are up the estimates for next year are higher than for this year, but the stocks are down.
30%.
And so it.
I guess it leads me to think one.
A do you need to run be read with more liquidity just in case the perception there gets a negative and then b. When you use your methodology for looking at that.
The asset values and be right and if you apply that to the public companies do those all of a sudden look a whole bunch more attractive relative to your valuations.
Yeah, I'll start on I'll start on valuations whats interesting about the public real estate market is pretty small, it's probably seven or 8% of the U S commercial real estate market. It trades with a lot of volatility as you pointed out in fact, since 2010 and Scott it up or down in a 60 day period by more than 10%.
<unk>.
Which hasn't happened in the private real estate market during that period I don't think so.
And at King of course trade above NAV.
And below and part of the decline <unk> seen was the public markets heading into this we're actually above in many cases, the private market. So some of that was giving back and if you look at the analysts today, who will cover our real estate. They would say they are trading below the private market.
And the short answer is does it create opportunity for us as the largest real estate investor does.
We've done many many public to privates in the real estate space.
And generally its because the public markets tend to go back and forth between euphoria in depression, and what we've seen here is now the idea as rates have gone up and therefore real estate values go down very very sharply below the private market value, which can create an opportunity for us certainly.
And we do believe if you look at the logistics space at a phenomenal performance that's happening in market the market. The public markets don't don't seem to appreciate that but those can create opportunities over time, similarly rental housing as it relates to be read.
We built this product keeping in mind that there can be volatility in markets. So we run the vehicle with ample liquidity.
Amounts of cash and revolver.
Large amounts of liquid securities, we met 100% of the repurchase.
Quest since we started six years ago, including throughout Covid.
And the structure means we're never a forced seller of assets. So we feel really good about <unk> REIT and its ability to weather pretty much any storm and again back to what I talked about earlier, focusing on rental housing and logistics, where the vast majority of the assets are in the southern United States you could not.
<unk> built a better portfolio for the environment, we're in and we feel really good about where be reached going over time.
Very interesting thank you.
Our next question comes from Bruce <unk> from BMO.
Please go ahead.
Okay.
Great. Good morning, Thanks, very much I.
I was hoping to get an update on how your private equity portfolio companies are performing and also on their ability to manage higher debt service costs as the economy slows down.
Related to that I was curious to know how you structured the debt portfolio companies. If you could share roughly what the mix is between fixed and floating rate debt and to what extent you might have hedged the floating portion that would be really helpful. Thank.
Thank you.
Every business Michael I'll start with the last question.
We've been we've been at this for a while obviously financing our private equity portfolio feel really good about the <unk>.
<unk> companies are in our average debt maturity.
Winning maturity in our private equity portfolio is around five years.
In terms of hedging while the baseline is.
This is obviously a floating rate component of especially the senior debt.
There is a fixed component as it relates to a high yield or sub debt portion in most cases and then we also hedge a significant portion of our portfolio to fixed over a period of time and.
And then I'd say from an interest coverage level.
In very very good position from a cushion standpoint, even anticipating higher base rates.
And I would say performance wise third quarter again remarkable 17% revenue growth.
Real strength as we talked about in travel and leisure.
Businesses like Crown resorts.
Merlin Entertainment, we have <unk>.
Recent processing business all of these companies.
Seeing very strong revenue growth.
We have large exposure to energy and energy transition.
Of course, that's that's been one of the best areas in the global economy.
And that sector positioning for US I think has made a very big difference relative to sort of the overall mix of companies out. There. We also when we did technology investing we focus on profitable Tech businesses Enterprise Tech businesses, which are continuing to grow nicely. So we are as we said in the opening.
<unk>.
We're seeing a slowdown economically, but still really good momentum and particularly in our companies. There is still some margin pressure out there labor costs.
At the bottom line is not growing as fast as the revenue line is but I would say on the ground today at least for our portfolio is still pretty good.
Thank you.
Next is <unk> <unk> from BNP.
Yeah.
Okay.
Hi, Good morning, My question is on.
The opportunities in secondary markets is a little news flows just in the pension fund.
Some of the LP Stakes in the U S and Europe I was wondering if you could comment on that volume has picked up markedly and is pricing.
Definitely a secondary funds. Thank you.
We think it's a really great time for what will be a $20 billion industry leader Secondary fund.
What happens in moments like this a little bit like my earlier comments is you see a pause.
From sellers.
They want to wait and see where valuations come out.
Sometimes they may not be enthused about potential discounts.
As that as the funds may get marked down.
And they accept that the valuations are different than they were 12 months earlier than you see transaction activity pick up.
I would say overall as alternatives have grown.
In a big way.
<unk> business is very well positioned because people need liquidity for a wide variety of reasons and there just hasnt been enough growth in the secondary space and again it speaks to the power Blackstone. The fact that we've got a leading industry platform in this area as well is really advantageous.
We believe that we will see a pickup in volumes. It may take six months for that to happen thats been the history, but when it happens because of the scale of our platform and our ability to invest in all sorts of funds were invested in more than 4000 funds, which gives us a real competitive advantage. When somebody is looking for a holistic solution. So we.
Like the space, we think it's going to be a busy space. It may just be a little bit slower in here for a couple of quarters.
Thank you very much.
Thank you.
Our final question comes from Brian Bedell from Deutsche Bank. Please go ahead.
Oh, great. Thanks for taking my follow up just wanted to go back to resolution life for a second.
So your confidence on that being a block aggregator and I think you mentioned 250 billion.
Potential fundraising insurance.
Sure.
Are you able to unpack that a little bit in terms of the different components of those drivers in a rough timeframe.
Yes, the $2 50, that's really the $1 50 today, plus where we think both.
Core bridge is going to grow two plus resolution plus a little bit of organic growth as well and the 150 is our total insurance AUR managed theres about $110 billion or so a subset of that from these four big partnerships. That's genre John's referencing it's that number that will contractually, we expect to grow to $2 50, or so over time, yes.
On resolution whats attractive to us is that they are focused on these legacy closed blocks and so there are a lot of insurance companies out there today.
<unk> is an area, where there is a lot of deal flow, who want to move out of their old call. It life insurance book, whereas solution is uniquely positioned.
Oh <unk>.
<unk> has been doing this for a very long time, he's built a terrific team to not only underwrite the liabilities, but then to service the customers what he hadn't done historically was focus as much on the asset side generally buying liquid rated fixed income and what we're bringing to resolute.
<unk> is new capital to help them grow and what we think is a very good time and the ability to directly originate credit and this is this mega trend I talked about but the ability to make real estate loans corporate loans infrastructure loans asset backed loans and do that at scale. We think that is a very compelling opportunity.
<unk> resolution was excitement about it and it gives us another engine. So we've obviously got resolution focused on these closed blocks in the case of core bridge and also LNG, we have firmed.
Firms that are growing in the fixed annuity space in a big way. So we've got multiple engines of growth for assets in that space and the base rates have moved up in the spreads have widened. So if you think about a market where it's a very attractive time to be deploying capital and repositioning out of traditional fixed income in the <unk>.
<unk> credit this is that moment, we're excited about this and we really like this model as we talked about which is asset light. We don't have to take on insurance liabilities and multi client. We are not just limited by one balance sheet. We can work with a variety of clients, who all benefit from the scale and diversification we can.
Give them.
Great that's very interesting thank you.
Allow me to now hand, it back to vest and sucker for closing remarks.
Great. Thank you everyone for joining us today and look forward to following up after the call.
Thank you for joining everyone that concludes your conference you may now disconnect ladies enjoy the rest of your day Goodbye.
Goodbye.
Okay.
Okay.
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