Q3 2024 Blackstone Inc Earnings Call
K. K. K.
Speaker Change: Good day and welcome to the Blackstone 3rd quarter, 2024 investor call. Today's conference has been recorded. At this time, all participants are in a listening mode. If you require operator assistance at any time, please press star zero. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to retire equipment. If you'd like to ask a question, please sign up.
Speaker Change: At this time, I would like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead.
Weston Tucker: Great, thank you, Katie and good morning and welcome to Blackstone Third Quarter Conference Call. Joining today are Steve Schwarzman, Chairman and CEO, John Gray, President and Chief Operator, and Michael Chae, Chief Financial Officer.
Weston Tucker: Rolir this morning we issued a press release in flight presentation which are available on our website. We expect to file our 10Q report in a few weeks.
Weston Tucker: I'd like to remind you that today's call may include forward-looking statements which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. And for a discussion of some of the factors that could affect results, we see the risk factor section of our 10K. We'll also refer to non-gap measures and you'll find reconciliation in the press release on the shareholders page of our website.
Weston Tucker: Also please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any blackstone fund. This audio cast is copyrighted material of blackstone and may not be duplicated without consent.
Weston Tucker: On Results, we reported gap netting comfort to quarter of $1.6 billion. Distributable earnings were $1.3 billion or $1.1 per common share and we declared a dividend of 86 cents per share, which will be paid to holders of record as of October 28.
Speaker Change: with that, I'll turn the call over to Steve.
Steve Schwarzman: Thank you, Weston. Good morning and thank you for joining our call. Blackstone reported strong third-quarter results, including distributive learnings of $1.3 billion as Weston mentioned.
Steve Schwarzman: and the highest sea related earnings in two years.
Steve Schwarzman: Since the third began its interest rate tightening cycle in 2022. We've spent considerable time on our earnings calls discussing how we see the macro environment unfold.
Steve Schwarzman: This included sharing our view on inflation.
Steve Schwarzman: And we saw it moderating more quickly than many other market participants.
Steve Schwarzman: Schwarzman, which paved the way for the Fed to begin cutting interest rates for last month.
Steve Schwarzman: We also stated our belief that an easing of the cost of capital would be very positive for Blackstone's asset values and would be a catalyst for transaction activity, including deployment, and ultimately realizations which in turn fuel fundraising.
Steve Schwarzman: This is the virtuous cycle of powers or business.
Steve Schwarzman: We believe we're now advancing towards the stage in the cycle.
Steve Schwarzman: Hall. It is always the most fun.
Steve Schwarzman: in anticipating an anticipation of improving markets.
Steve Schwarzman: We substantially increased our investment pace, starting in the fourth quarter.
Steve Schwarzman: I'm 2023 close to a year ago.
Steve Schwarzman: We, which coincided with the peak of the ten-year treasury yields.
Speaker Change: Sinsham, over the last 12 months, Blackstone has deployed $123 billion, representing one of the most active periods in our history.
Speaker Change: and Double, the prior year comparable period.
Speaker Change: We've been planning to seize the future value of what we believe is a favorable time.
Speaker Change: In terms of future harvesting, the third quarter mark, the highest amount of overall fund appreciation in three years.
Speaker Change: Stepping back, this is a time of profound transformation across the economy and markets.
Speaker Change: as well as geopolitically.
Speaker Change: Today, more than ever, we believe Blackson is the partner of choice to help investors navigate a complex world.
Speaker Change: Our scale and reputation provides a foundation for deep engagement and ongoing dialogue with our limited partners.
Speaker Change: As the reference firm in our industry.
Speaker Change: We have a distinctive ability to convene the key decision makers from our limited partners.
Speaker Change: to discuss what's happening around the world.
Speaker Change: The insights we draw from our expansive platform in Portfolio.
Speaker Change: are highly valuable to them.
Speaker Change: Most recently, we've been engaging with our clients in a number of important areas.
Speaker Change: including.
Speaker Change: the Revolution underway in artificial intelligence.
Speaker Change: The Build Out, the Digital Energy Infrastructure needed to support AI.
Speaker Change: Renewable Energy Transition.
Speaker Change: The Rise of Private Credit.
Speaker Change: The development of the secondaries market are alternatives.
Speaker Change: Extraordinary advances in truck development in the life sciences area.
Speaker Change: The emergence of India is one of the most important major economies.
Speaker Change: and the cyclopoeu recovery in commercial real estate.
Speaker Change: I'll spend a moment discussing two of these areas in more detail. The platforms we are building, the support of artificial intelligence, and the recovery and real estate.
Speaker Change: First with respect to AI.
Speaker Change: On previous calls, we've provided updates on our data-centered investments.
Speaker Change: Today, Blackstone is the largest state-of-center provider in the world.
Speaker Change: with Holvings across the U.S. Europe.
Speaker Change: and Dina in Japan.
Speaker Change: Blast month, we announced another major expansion by agreeing to acquire air trunk, the largest status center operator in the Asia Pacific region for $16 billion.
Speaker Change: We were uniquely positioned to execute on this investment, given our date, expertise in this sector.
Speaker Change: the scale of our capital.
Speaker Change: The global integration of our teams and our connectivity to the world's largest status and our customers.
Speaker Change: Arbilidia is served these customers.
Speaker Change: Ruppers and say powerful illustration of how Blackstone has become a trusted solutions provider on a massive global scale.
Speaker Change: to many of the largest and most valuable companies in the world.
Speaker Change: The Blackstone Portfolio consists of $70 billion of data centers.
Speaker Change: and over 100 billion in prospective pipeline development, including air Trump and facilities under construction.
Speaker Change: We've conceptualized this new business area, built conviction, and in only three years, scaled it to the largest platform in the world.
Speaker Change: And there is much more we're doing and plan to do in this area, including addressing the sectors growing power needs, which we believe will create enormous additional opportunities from Weston and over time.
Speaker Change: Turning to the recovery in commercial real estate.
Speaker Change: with a constant capital moving lower.
Speaker Change: We've previously discussed our expectation of a new cycle of increasing values and improving investors' sentiment towards the sector.
Speaker Change: One indication of this shift now underway is that renewed interest in the asset class from limited partners and financial advisors.
Speaker Change: and notably for Beeryt.
Speaker Change: We've purchased requests in September. We're down over 90% from their peak.
Speaker Change: and we're seeing encouraging signs in terms of new sales.
Speaker Change: B. Reed is clearly moving towards positive net flows based on current trends.
Speaker Change: The vehicle's largest share class has outform outperform the public read index by approximately 50% annually since its inception nearly eight years ago.
Speaker Change: We believe Beeread's standing as the largest vehicle of its kind by far, with strong investment performance and exceptional portfolio construction.
Speaker Change: and including nearly 90% concentrated in warehouses, rental housing, and data centers.
Speaker Change: positions the vehicle extremely well in the context of improving flows of the traffic real estate.
Speaker Change: Desarquely in multi-year recovery periods following a downturn.
Speaker Change: Private Real Estate has delivered approximately double the returns of all parents.
Speaker Change: has the largest owner of commercial real estate, this dynamic should be quite positive for Blackstone and our investors.
Speaker Change: Overall, our limited partners have benefited significantly from the exceptional balance of the firm and the careful way we've positioned their capital in a volatile world.
Speaker Change: Looking forward.
Speaker Change: Our business is accelerating, and we are in the early days of penetrating markets of enormous size and potential.
Speaker Change: We've established leading platforms in what we view as the most compelling, high-growth areas.
Speaker Change: the alternative industry.
Speaker Change: Still represents a small portion of the festival acids globally.
Speaker Change: and I believe Blackstone is the best position found in the world to capitalize on its long-term growth trajectory.
Speaker Change: In closing, we've navigated many cycles since our founding in 1985. Each has presented challenges. It's also created opportunities to invest.
Speaker Change: Expanen Market Chair in existing product lines, into innovate and launch altogether new businesses.
Speaker Change: Blackstone has emerged from every cycle, even stronger than before, with our firm moving along to extraordinary new heights.
Speaker Change: I fully expect the most recent cycle will lead to the same result.
Speaker Change: Wooden.
Speaker Change: Turn it over to John. Thank you, Steve. Good morning, everyone.
John Gray: Over the past several quarters, we've been advancing along the path we outlined for investors. As we emerge from the high cost of capital environment, we are pleased to see our business progressing on this path, especially the strong investment performance with broad-based acceleration across the firm.
John Gray: First, we said we would deploy significant capital ahead of the all-clear sign.
John Gray: As we believe some of the best investments are made during times of uncertainty.
John Gray: In 2, 3, for the second consecutive quarter, we invested or committed over $50 billion, the highest in more than two years. New commitments were concentrated in some of our favorite, thematic neighborhoods, including digital infrastructure, renewable energy and power solutions, and an enterprise software.
Speaker Change: Our largest commitment in the quarter was airtruck, it's Steve noted, across multiple blackstone funds.
Speaker Change: In private equity, we agreed to acquire work management software company smartsheet for $8.4 billion. Representing one of the largest take privates of the year.
Speaker Change: and our credit business had its second-busiest deployment quarter in history, investing over $18 billion, up more than 50% from Q2. Driven by significant activity in global direct lending, as well as our infrastructure and asset-based credit strategies.
Speaker Change: Turning to the second key development we've been highlighting, the recovery underway in commercial real estate.
Speaker Change: and January, we made the call that values in the sector were bottoming. This informed our decision to invest or commit $22 billion in real estate in the first nine months of the year. Nearly two and a half times the same period last year.
Speaker Change: are $30 billion. Global flagship fund is now nearly 40% committed.
Speaker Change: Green Street's index of private real estate values has increased each quarter since, while the public real estate market has rallied sharply.
Speaker Change: The liquidity in the private market is also improving meaningfully, providing the foundation for greater transaction activity.
Speaker Change: At the same time, new construction starts are falling dramatically for most times to real estate, including declines of approximately 40 to 75% from recent peak levels in logistics and US apartment buildings are two largest sectors in real estate.
Speaker Change: While the recovery will play out over time, the combination of lower base rates, lower borrowing spreads, and lower new supply makes the direction of travel quite positive for our real estate business.
Speaker Change: The third key development we've been speaking about regularly is the secular rise of private credit. And the integrated platform we've been building to offer clients and borrowers in one stop solution across the full spectrum of credit strategies.
Speaker Change: Today we manage the largest third party private credit business in the world with $432 billion across corporate and real estate credit. Up a remarkable 20% year over year.
Speaker Change: We have one of the largest, if not the largest businesses in direct lending, C.L.O.s, real estate debt, and private investment grade credit.
Speaker Change: Total inflows across the combined platform were over $100 billion in the last 12 months.
Speaker Change: and our non-investment grade strategies, even as base rates move lower, there continues to be significant opportunity to generate excess returns for clients relative to liquid markets.
Speaker Change: Meanwhile, we expect lower base rates will be supported, supportive of transaction activity and deployment.
Speaker Change: Importantly, private credit markets are expanding rapidly beyond financing M&A and we're seeing a dramatic increase in demand for all forms of investment-grade, private credit, including for many of the largest insurance companies and institutions in the world.
Speaker Change: Our Farm Detailable Approach which brings investors directly to borrowers, results in a strong value proposition for clients.
Speaker Change: In the insurance channel, our business has grown to $221 billion, but 24% year over year, including forced strategic relationships and 20 additional FMA clients.
Speaker Change: We placed or originated a record, $38 billion of a-rated credits on average here to date for a private IG focus client.
Speaker Change: Up nearly 70%, which generated approximately 185 basis points of the excess spread versus comparably rated liquid credits.
Speaker Change: Overall, Blackstone's scale and reach create extraordinary connectivity with borrowers across the market, resulting in more opportunities to originate high quality private credit investments.
Speaker Change: Our equity and debt strategies operate in multi trillion dollar markets that generate enormous flow of investment-grade debt, often where blackstone is the leading player, including data centers, energy infrastructure and real estate.
Speaker Change: In the energy area, we estimate we were a lead financing provider for nearly 15% of all renewable projects in the U.S. in the last 12 months.
Speaker Change: We've also established contractual relationships and forward flow agreements with banks and other originators across a wide range of areas, including credit card receivables, home improvement, fund finance and equipment finance.
Speaker Change: We are building a third-party performing credit juggernaut, and we expect our business to grow significantly from here.
Speaker Change: The Ford T development we've been talking about is our momentum in private wealth.
Speaker Change: Following a challenging two-year period for markets, we've seen a robust re-exeleration of sales in 2024.
Speaker Change: We raised $21 billion in the channel year-to-date through September, nearly double what we raised from individuals in the same period last year, including $18 billion for the perpetual vehicles.
Speaker Change: Becred led the way with over $9 billion raised in the first nine months of 2024, including $3 billion in the third quarter.
Speaker Change: BXPE is approaching $6 billion only nine months after launch, and for Beery, flows are trending favorably as Steve discussed.
Speaker Change: We're also in the process of launching two more private wealth perpetual vehicles in credit and infrastructure as we noted previously.
Speaker Change: with the track record of our products, the depths of our relationships with financial advisors and their clients, and the strength of the blackstone brand. We are more confident about our prospects in this channel than ever.
Speaker Change: In addition to private wealth, momentum is building in our draw-down fund area with a number of exciting new initiatives in front of us. The Receptivity from our limited partners feels more positive today than in the past several years.
Speaker Change: We will soon complete fundraising for a number of our flagship vehicles including corporate private equity, private equity, energy transition, European real estate and real estate debt.
Speaker Change: In credit, we recently launched fundraising for the successor to our $9 billion opportunistic strategy with initial closings of $2.4 billion.
Speaker Change: and in our equity-oriented business, we've launched or will soon launch fundraising for the next vintage of three highly successful strategies, our $22 billion private equity secondary strategy, $6 billion private equity, age or strategy, and $5 billion life science and strategy.
Speaker Change: We expect its successors to be at least as large or larger than the current
Speaker Change: Also worth noting, as of this week, we've closed on 1 billion euros for our new open-ended Europe-focused infrastructure vehicle, a very promising development.
Speaker Change: Finally, alongside these multiple positive developments unfolding in our business, something that is not changing is our commitment to our capital light, brand heavy, open architecture model.
Speaker Change: We rely on our track record, our people, and the power of our brand to grow.
Speaker Change: The firm's balance sheet investments comprise less than 1% of AUM. We have virtually no net debt, no insurance liabilities, and a share count that is almost unchanged over the past seven years, despite the extraordinary growth we've achieved.
Speaker Change: We've done that while also returning a hundred percent of earnings to shareholders over this period through dividends and share repurchases totaling over $30 billion.
Speaker Change: In closing the firm is in terrific shape by any measure. We have powerful tailwinds at our back and the virtuous cycle underpinning our business is accelerating.
Speaker Change: With that, I'll turn things over to Michael Chae.
Michael Chae: Thanks John and good morning everyone.
Michael Chae: The firm delivered strong results in the third quarter, and as we've highlighted previously, we are moving toward a meaningful step up in the firm's earnings power. I will first review financial results and we'll then discuss investment performance in the outlook.
Michael Chae: Starting with results, the Farms Extraordinary Breath continues to power a-wem to new record levels.
Michael Chae: So to lay you win increased 10% year a year to $1.1 trillion. With inflows of $41 billion in the third order and $167 billion over the last 12 months.
Michael Chae: Fierning in flows were $161 billion for the LTM period, lifting Fierning a A1 by 12% to $820 billion.
Michael Chae: We activated the investment periods for corporate private equity and PE energy transition flagships in the second quarter, and our infrastructure secondary strategy in the third quarter, representing $26 billion of VAEM in aggregate.
Michael Chae: These vehicles were in their respective feed holidays for most or all of Q3, depending on the strategy.
Michael Chae: Notwithstanding the temporary impact from these fee holidays, management fees in the third quarter increase to 8% year a year to a record $1.8 billion. And the forward outlook is quite positive, which I'll discuss in a moment.
Michael Chae: He related our earnings were $1.2 billion in the third quarter, or 96 cents per share, up 5% year over year, under pin by the growth and management fees.
Michael Chae: The firm also generated $264 million dollars of fee-related performance revenues in the third quarter. These revenues included $186 million in the credit and insurance segment, up 27% year of a year, reflective of the steadily growing contribution from our direct lending business.
Michael Chae: along with the contribution from a co-investment vehicle in the BPP platform.
Michael Chae: Distributable earnings were $1.3 billion in the third quarter, or $1 cents per common share. Up to 7% on a per share basis.
Michael Chae: Matt Realizations for $226 million in the quarter primarily generated by the sale of public stock of an India-based retail rate and certain energy positions along with proceeds from other public and private holdings.
Michael Chae: Overall, this position activity has remained more limited in the current environment, characterized by nearly three-year period of lower activity levels in the broader capital markets. However, we are optimistic about a meaningfully more constructive environment for civilizations in 2025.
Michael Chae: Moving to investment performance, our funds generated the highest overall dollar appreciation in three years and the third quarter highlighted by corporate private equity and infrastructure.
Michael Chae: The corporate PE funds appreciated 6.2% in the quarter and 15% over the last 12 months. Our operating companies overall reported stable, mid-singled digit year-rear revenue growth in the quarter, along with continued notable margins strength.
Michael Chae: In-Prostructure reported 5.5% appreciation in the third quarter, and 18% for the LTM period, with significant gains across digital transportation and energy infrastructure.
Michael Chae: Our data center platform was, again, the Singalard's Driver Appreciation in our infrastructure real-state businesses and for the firm overall in the third quarter.
Michael Chae: The co-mingled VIP strategy has generated 16% net returns annually since inception. Powering continued robust growth with total VIP platform AUM increasing 32% year-rear to $53 billion.
Michael Chae: are granted business also reported another strong quarter against a healthy backdrop for private debt markets.
Michael Chae: The non-investment grade private credit strategies generated a growth return at 3.6% in the quarter and 17% for the LTAM peers.
Michael Chae: The default rate across our 2000 plus non-investment grade credits was less than 50 basis points for the last 12 months.
Michael Chae: Our multi-ass and investing platform, BXMA, reported a 2.2% gross return for the absolute return composite, the 18th consecutive quarter of positive performance, and 12% for the last 12 months.
Michael Chae: In real estate, values were stable overall in the third quarter, supported by strengthened data centers, rental housing, and global logistics.
Michael Chae: Offset primarily by decline in the unrealized value of our interest rate hedges, as Treasury yields fell in the quarter. These hedges, which locked in low cost, fixed rate financing ahead of the rise in interest rates, had the effect of reducing appreciation in the third quarter by approximately 50 basis points for the opportunistic funds and 200 basis points for the core plus funds.
Michael Chae: with in-core plus B-reets class I net return was flat in third quarter, but positive 2.3% excluding the effect of its industry pitch.
Michael Chae: Finally, outside of the firm's major report business lines, we have a number of strategies and various stages of development that have been generating outstanding results. I'll highlight two of them. Our GP Stakes platform appreciated 12.6% in Q3 and 31% over the last 12 months, reflecting the attractiveness and investing in high quality alternative managers.
Michael Chae: and our life sciences fund appreciated 5.9% in the third quarter and 28% for the LTM period. benefiting from key milestones achieved for multiple treatments under development.
Michael Chae: and including medicines for the prevention of heart failure and a rhythmita, along with a vaccine for pneumonia.
Michael Chae: The firm's investment performance lifted net accrued performance revenue on the balance sheet of 13% sequentially from Q2 to $7 billion, or $5.72 per share, the highest level in two years.
Michael Chae: Meanwhile, performance revenue eligible A1 in the ground increased weight record $553 billion. These are strong indicators of the future realization potential.
Michael Chae: Turning to the Outlook.
Michael Chae: We anticipate a material step up in FRE in the fourth quarter, driven by several factors.
Michael Chae: These include the onset of full management fees from multiple funds exiting fee holidays.
Michael Chae: We also expect robust growth in fee-related performance revenues, in particular from a scheduled crystallization event for the co-mendled VIP infrastructure strategy, comprising the substantial portion of the strategies associated net fee-related performance revenue accrual on the balance sheet. We do expect a sequentially lower FRE margin in Q4 compared to Q3 related to the infrastructure crystallization and other seasonal expense factors. But for the full year 2024, as we noted last quarter, we continue to expect margin to be within a reasonable range of 2023.
Speaker Change: In closing, looking forward to 2025 and beyond, we have powerful momentum across the firm. And the outlook for Blackstone is very positive.
Speaker Change: with that. We thank you for joining the call and would like to open up an offer request.
Speaker Change: Thank you, as a reminder, please press star 1 to ask the question. We ask you limit yourself to one question to allow as many colors to participate as possible.
Speaker Change: We'll go first to Michael Cyprus with Morgan Stanley.
Michael Cyprus: Hey, good morning. Thanks for taking the question. Maybe just on insurance, the platform continues to grow nicer there. So I hope that you can maybe comment on the opportunity on both fronts on the strategic partnership side with the existing partners, how you're helping them grow, how are the conversations progressing for new potential relationships. And then on the regular way third party side, I think you mentioned 20 or so separate accounts if you could help size that part of the business today and how you envision that continuing to grow from here. Thank you.
Speaker Change: Thank you, Michael. So the overall insurance business as we noted $221 billion, up 24% year on year.
Speaker Change: We do have these forced strategic relationships 20 SMAs.
Speaker Change: I would say the dialogue with insurance companies is exceptionally strong.
Speaker Change: On the strategic side, those take time. You need to find a party who's interested in doing something broader. We continue to have dialogues. It's hard to predict when and how those will happen.
Speaker Change: On the SMA side, we're just seeing more insurance companies recognizing the benefit of investment grade private credit, particularly in the asset base space.
Speaker Change: As you know, they've always done commercial real estate on a private basis.
Speaker Change: Some have done private placements, but the movement into this $25 trillion asset base arena feels like it's in its very early days.
Speaker Change: and we have been meeting with CIOs on a regular basis, Gild L.R., who runs our credit and insurance business, came from this area in his past.
Speaker Change: has terrific relationships, and we're continuing to build out our capabilities. And I would just say the tenor of the conversations is very open.
Speaker Change: and it starts with $500 million commitment. We fill that up. It can grow over time. You add to that the strategic relationships where we've got contractual flows coming in and hopefully some new partners over time. It's hard to put a number on it, but it feels like to us, this should continue to grow at a very high rate for the foreseeable future because when you look at the insurance companies, their allocations are still pretty small to the area. And the 185 basis points of access return for a rated paper is very valuable to them. And so I would say the optimism around this space for us is very high. And then of course the open architecture model is helpful. We're not in the market.
Speaker Change: is calling the newities we are a third party investment manager and that definitely helps the conversations and helps our momentum here.
Speaker Change: Great, thank you.
Speaker Change: We'll take our next question from Mike Brown with Wells Fargo's securities.
Mike Brown: Good morning, something if you could expand on the increase in the operating expenses this quarter, how much is driven by placement fees and where could that go and then if we think about the embedded FRE growth through 2025, how should we think about how that operating leverage could drive margin expansion next year, could it be north of, called the basis points that you've kind of historically delivered over the years?
Mike Brown: Thank you.
Speaker Change: Sure. Thanks, Mike. Good morning. On the operating expense growth, it was a few items in the mix of a few different elements. First, there was a third-party service or fees relating to our signature debt portfolio acquisition. Second, as you noted, placement fees primarily related to BXP. And then there was some initiative driven consulting spend and some other items. These are obviously all associated with very compelling growth areas, but they did add to HOPPEX. And I'd say adjusting for these items, the underlying growth in HOPPEX is running fairly close to last year, which was very low double digits.
Speaker Change: and I would say for Q4, we would expect a lower rate of growth year-to-year than what you're seeing in Q3. So that's, I would say, the overall outlook on that and some of the background. In terms of 2025 margins, as you know, it's sort of early on that. We don't like to get too granular, especially this early. I would just say that given the overall drivers both the top line and our expense structure, you know, we continue to feel very good about the idea of stability as a starting point in the short term, and then upside from there and over the long-term continued operating leverage.
Speaker Change: Thank you, we'll go next to Glenn Schor with Evercore.
Glenn Schor: Hi, thanks.
Glenn Schor: Big picture and Blackstone's specific question on the asset back world. So, I wonder if you could size the asset back opportunity in your mind in terms of maybe put in relative terms to what we've seen in the direct lending market. Just, you know, multiples bigger in the range of the same size, you know, something like that. And then for you specifically, you talked about the different pieces of your juggernaut. I'm curious if you think relative to that back drop that we could be looking at in terms of shareship from the banks. Do you think you've done enough to get your fair share in terms of bank partnerships and owning or a third party origination?
Glenn Schor: P.C. is together for that job or not. Thanks.
Speaker Change: Thanks, Glenn. I would say to size it up, if you look at the leverage finance world, it's roughly a $5 trillion universe today. About a third of that is in high yield, a third of that is in leverage lending, and a third of that is in direct lending. And it certainly feels like direct lending will continue to get more share because of the certainty we can deliver to borrowers and that farm-to-table approach. But that's that universe, and we have a $120 billion dollar platform in that space.
Speaker Change: Um, if you compare that to the asset-based world, including commercial real estate, residential real estate.
Speaker Change: Transportation, Digital Infrastructure, Energy, Fundance and Ants at Whole World, we estimate that at 25 trillion.
Speaker Change: And whereas private players have a third of the leverage finance world, which is a much smaller world we just described, of that 25 trillion, I think we're private players today are one-two percent of that.
Speaker Change: So, the multiple in terms of scale is much larger and the penetration is much lower. And that's the reason why you heard that enthusiasm for me on the insurance side. Because these clients see the opportunity. And I think over time it's going to move beyond insurance. We're having good dialogue with pension clients. I think we'll see sovereign wealth funds start to do this as well. It's probably less of an individual investor market. But I think almost all institutions will look at this premium making get for making asset based loans and at the same or lower risk and will choose to do some of this. And that means that number can grow a lot. And as we get scale, we can speak for.
Speaker Change: Hall Transactions.
Speaker Change: Billion, two billion, three billion dollars, put it amongst our twenty different clients today, and that creates a really good cycle for us. So I'd say overall, I think this market can grow a lot. I would expect our numbers here to grow a lot. On the bank partnership front, what I would say is, we kind of have a bias for do it yourself, but there are areas where partnerships make sense. So for us, direct lending where we have so much scale wouldn't make a lot of sense, but definitely in certain origination areas, and we've done partnerships in in terms of home, home improvement loans, we've done some in fund finance with some.
Speaker Change: Banks. We've done a number of things with originators and certain verticals. I think we'll continue to do more of those. We haven't done as many announcements, but we have a lot of wars in the water in terms of origination. I think our origination volume in investment grade, private was up 40%. I think we'll continue to do that. We'll continue to do that. We'll continue to do that.
Speaker Change: Year on Year. So this is an area where we have a lot of momentum. The other thing that I think is important to remember is our scale as an equity investor, you know, massive scale and digital infrastructure in real estate and energy. The relationships we have there, that deal flow is very helpful to our credit business as well. So we feel good about what we're doing, will we find some more partnership in specific areas? Yes, will we continue to build out our own origination capabilities? Yes, we still think there's a long way to go.
Speaker Change: Thank you. We'll go next to Craig Seagun's Honor with Bank of America.
Craig Seagun: Good morning, Steve, John Michael, hope everyone's doing well. We have a big picture question on the investing pipeline, and we heard a lot of positive commentary in the prepared remarks, but it looks like 25 will be a lot stronger overall, so we wanted your perspective on two key points. One, how much is the November election delaying investment decisions in the next year, and two, is the backdrop broadly more favorable in real estate or private equity given the declining setup and both discount rates and capital rates?
Speaker Change: So I would say on the election, we haven't really seen a slowdown. I mean, I do think there are some folks who are waiting to launch to get through the election. So maybe, you know, sellers or IPOs have been a little bit delayed, either later into the fourth quarter or first quarter. So.
Speaker Change: You know I haven't seen people pulling back from buying but it's probably delayed a few sales processes and that should be a good sign for deal activity in terms of relative pickup and activity.
Speaker Change: You know, percentage wise probably real estate because it was coming off such a low base.
Speaker Change: and we've now seen borrowing spreads and borrowing costs come down a ton. But I think in both areas, you're going to see a pickup and activity.
Speaker Change: and you have all the conditions sort of the recipe for more transaction activity.
Speaker Change: Bayes Shrades, both at the long and short end, have come down. I think they'll come down further on the short end as the Fed eases.
Speaker Change: Spreads have tightened a bunch. I mean, we were looking, you know, high yield today between spread and base rates down 300 basis points. In some cases in real estate down 400 basis points, really meaningful movement. And that is obviously very helpful for transaction activity. A strong equity market, of course, you know, helps things and people's confidence. And then I would say investors, of course, their sentiment is improving as well. So I think we've been a little ahead of the curve in our investing before the all clear signs. Steve talked about the $120 billion we've invested, but it feels like things are picking up and anecdotal anecdotally. I was talking with the private equity guys.
Speaker Change: West Air Show, and the number of non-disclosure agreements, confidentiality agreements, is up two-and-a-half-fold in September versus where was a year ago. Now, that doesn't necessarily mean it's going to turn into that volume of deals, but it clearly shows you there is more enthusiasm, and we know in the private equity world, there's a lot of companies that need to be sold similar-story and real estate. So, it feels like there's a lot of pent-up demand for realizations for DPI, and I think we'll see that in 2025.
Speaker Change: Thank you, we'll go next to Alex Plowshin with Goldman Sachs.
Alex Plowshin: Hey John , good morning everybody. Just maybe piggybacking on that a little bit and zoning it on real estate a little more specifically. It's obviously very encouraging conditions improving. Can you talk a little bit about your outlook of the next 12 to 18 months in terms of Blackstone being a net buyer or a net seller or real estate assets and maybe a little bit on which asset classes in particular you expect to be more active in on both sides of that equation. Thank you very much.
Speaker Change: Well, we definitely have been a net buyer here the last nine months, and we do think that the sentiment is improving, but it's still negative and people look at the headlines, you know, sort of the wreckage from the past and that concerns them and they're waiting to see, hey, is it safe to go back in, we tend to be in the seed planting mode for that.
Speaker Change: But at the same time, as we look into next year, as the public reach rally, as, you know, debt becomes more available at lower cost, we're seeing more people show up. So we've seen, call it two to three times a number of buyers showing up to buy things like apartments and logistics. So I think the balance this year has been very heavy towards the investing relative to the harvesting. I think that'll start to balance out still probably more investing earlier on as we work through the year. I would then expect to see more realizations. In terms of sectors we like, we continue to be heavily leaning towards.
Speaker Change: Erie's like logistics with a global trends long term, particularly as we get through the supply bubble. We think we'll look very good, rental housing, there's a shortage of housing around the globe, particularly in developed markets.
Speaker Change: Data Centers, we've talked about it length, has been a huge theme for us in real estate, it's really powered a number of our vehicles and so I think we will find interesting places to deploy capital and it's possible in office on a selected basis that you could find some interesting things, particularly higher quality buildings and even retail around the grocery anchored space as opposed to the enclosed malls. So I think we're in the middle of a broad base recovery in real estate, we're trying to capture that as much as possible, US, Europe , and Asia, deploying capital. As we work through the cycle and values recover, you'll see a pickup in sales and you can feel that happening now.
Speaker Change: Thank you, we'll go next to Dan Fannon with Jeffries.
Dan Fannon: Thanks. Good morning. You know, several funds came off the holiday in the third quarter. Can you repeat the size of that AUM and also just given the elevated levels of deployment that have been going on and seem to be continuing. Can you talk about what that means for some of the larger funds are fundraising into 2025?
Speaker Change: Sure. On the fee holiday side, I mentioned the main items, our new private equity corporate fund, global fund, BCP-9, our fourth energy transition fund, and then our SP infrastructure fund. Those were in partial or full holiday in the third quarter. They'll all be in full fees in the fourth quarter. Just to quantify, it was sort of based on the fee holidays, foregone fees from just those brief funds of around 40 million dollars or so.
Speaker Change: So that maybe will help you with the math.
Speaker Change: What I'm going to talk about, I mean, look is it relates to the pipeline what I would say is
Speaker Change: and institutional investors are certainly feeling better.
Speaker Change: The quality of the dialogue is getting better as equity markets have rallied, denominator, a fact looks a lot better today. I think the key thing will be a DPI is picking up as we move into next year as the IPO market gets better as we have more sales. That's that virtuous cycle of capital moving back to them and them allocating more. I would expect that we talked about in the remarks, some of the things that are working their way through the system. Our next private equity Asia fund, our next life science fund, at some point next year, our next large private equity second area business, we've got the opportunistic credit business.
Speaker Change: We'll go next to Brian Bedell with Deutsche Bank.
Brian Bedell: and thanks for taking my question. Maybe just move back to the AI and the Data Center theme. And just try to connect the deployment opportunities, which you've obviously described as pretty massive in the space.
Brian Bedell: Just connecting that, trying to connect that with the supply of investment capital from fund raising. So as you see that deployment come through, you know, to what extent do you think, you know, the fund raising can't keep up or, or, you know, to what extent will this theme accelerate fundraising, we'll say over the next two years. Maybe just one example, there would be the breadth fund is 40% committed, I know data centers are a part of that. You know, could be becoming back to market, even by the end of 2025 for the next vintage of that, is it too early.
Brian Bedell: Well, it's an important question. What I would say on data centers is the fact that we have large-scale pools of capital that we've been able to deploy has been a huge competitive advantage. So the ability to privatize QTS.
Brian Bedell: A $10 billion company at the time, which we've since grown eightfold in lease capacity. We did that jointly with Infrastructure and various BREED and BPP in real estate. The AirTron Transaction, we just did a $16 billion deal. We were able, I think, to be in a very favorable competitive dynamic because we did it really on our own with one institutional partner. And in that case, we had Infrastructure, Opportunistic, Real Estate, Asia, Global, our tactical opportunities area, our strategy for individual investors and private equity. We were able to bring all this capital together. And that enabled us to do this at scale because it does require a lot of capital to both by these
Brian Bedell: and then have the firepower to build these out. And so I do think it is a meaningful area of deployment. Will it lead to an acceleration of fundraising in real estate, let's say, opportunistic globally? I think it's too early to say, but it certainly has helped us. It's helped us in performance. It's been the lead driver in our infrastructure business. Michael talked about the 16 percent net since inception, the biggest driver of that has been data centers. And it feels like we've got more momentum ahead for us in the US, Europe and Asia. So it's one of the most exciting areas. And I would say just more broadly,
Brian Bedell: playing this sort of need for compute power, AI and electrification on a broad base. And so it's clearly the data centers, but it's also the energy and power. And in that area, again, having infrastructure, having our energy credit funds, having our energy equity funds, that consortium, and even some of this that's gone into real estate and then what we're doing in credit, that's another area. So when you think about where alternative firms are positioned, particularly our firm, there's a huge need for capital in a few of these areas. And we have what we think are the right vehicles to invest in it. I think it will lead to faster deployment and it should lead to higher returns as well, and that gives us a bunch of optimism.
Speaker Change: Thank you very much.
Speaker Change: We'll take our next question from Brennan Hawkins with UBS.
Brennan Hawkins: Good morning, thanks for taking my questions. So rates declining, you spoke to that helping out many of your businesses. But I was curious to hear how to think about the impact of lower-based rates and tighter spreads on a credit business. And maybe specifically, how should we think about the rate sensitivity of FRPR within credit?
Speaker Change: So what I can credit is, certainly we've generated very favorable returns for customers, nearly 17% in private investment grade appreciation over the last year. And some of that, of course, goes away as base rate comes down and spreads come down.
Speaker Change: But the real question, I think, for investors is...
Speaker Change: Can they earn a premium to liquid fixed income? And when you look at liquid fixed income where corporate triple bees are paying a little over a hundred over, I think we can produce a durable premium. I think we can do it certainly in non investment grade. If you look at our B cred product, it's delivered 700 basis points.
Speaker Change: over base rates since inception. So even as base rates come down, a very attractive return. And when you look in the investment grade space, as we talked about earlier, the idea that we can deliver 185 basis points over comparable single A rated credit is also very encouraging. So yes, there will be some pressure on absolute returns as spreads and base rates come down, but relative returns, that durable premium, I think will continue. And that's the reason why I think we'll continue to see investors migrate towards private credit, both investment grade and non-investment grade.
Speaker Change: and Brian Magisatt on your question on impact on fear-like forms of revenues.
Speaker Change: I would actually, in isolation, talk about
Speaker Change: You know, what's the effect of a decline in yields for an investment income? Not necessarily with not necessarily base rates for reasons I'll mention, but so it's called a 50 basis points decline in yields or an investment income. It equates to pretty minimal impact, something like in the low mid-single digits around 3 or 4 percent on sort of run rate, fee-related performance revenues, that sort of the math, which you could probably derive yourself. But you know, importantly, there are offsets. These are under levered vehicles, these are non-traded and traded BDCs. The cost of liabilities, even though they're lowly levered, that also moves in tandem down. And so there will be offsets, I think, in terms of just what's the impact all well-sequel of a move down in base rates. It really becomes a question of, where are we on yields and investment income?
Speaker Change: We'll go next to Benjamin Grisch with a barclay.
Speaker Change: Hi, good morning and thanks for taking the question. I wanted to ask maybe ask another question on the FRE outlook for next year. Maybe thinking about the the Comprehatio in management fees versus realized performance revenues. I know in the past you've commented that you're not really looking to make a structural change like some of your peers have done, but when we look back across the last like three, four, five years it does look like overall the overall fee related Comprehatio has come down a little bit and the opposite on the performance side. And so just taking through next year I'm curious what your appetite is, particularly given if we do see a big pick up in performance revenues, it could be an opportune time given it would really smooth out the total comp picture for your employees. So I appreciate any thoughts there. Thank you.
Schwarzman: Schwarzman. Sure Benjamin, look we, first of all as you know, our calm model has multiple levers.
Schwarzman: and we work with them in an integrated way and feel like we've got a fair degree of control around them and we want to optimize across them.
Schwarzman: So you've seen some of that movement, I would say in terms of the performance.
Speaker Change: Revenue, Corporation House.
Speaker Change: Reloads at the fee-comprehaceers.
Speaker Change: and, you know, in certain businesses, you know, we've had the ability in from time to time, we've chosen to allocate more performance comp to certain professionals and we've managed to mix incentives that way. You know, we haven't done it in the larger scale programmatic way, but it's a tool in our toolkit we can use along with others. So that is really how we think about it. We have these controls. There are multiple elements to sort of overall comp model, and I would just step back and say, as we've, I think, delivered on from a margin standpoint, compression standpoint. You know, we feel good about the path forward.
Speaker Change: Thank you very much.
Speaker Change: We'll go next to Stephen Schwarz with Wolf Research.
Speaker Change: Good morning. Good morning, Stephen.
Stephen Schwarz: I just started Stephen on sort of the overall outlook. I mean, the overall outlook, longer-term certainly within the 20th, we talked about the fourth quarter.
Stephen Schwarz: Zrande Farrie 2025.
Speaker Change: We don't get sort of granular guidance and there isn't really an algorithm for it, but the building blocks that are in place for 2025 of a regrowth.
Speaker Change: We are very optimistic about between.
Speaker Change: Basedman, you can see the sort of structural embedded upper cramp.
Speaker Change: The Folier Benefit of the Flagship Data Coles, we've activated this year, which we've talked about, additional drawdown funds to be activated, new raises underway, continued expansion and broadening of our perpetual strategies, including the XP.
Speaker Change: Schwarzman, significant Roman M in credit insurance, man, can fees, you know, up 18% year a day.
Speaker Change: and Fee relate performance revs, which you touched on, you know, the direct lining BDCs just steadily expanding earnings power. B-read sort of a bit of a sleeping giant in terms of this embedded incentive Fee earnings power. There, Fee related performance rowing earnings power, and then BXB, which I mentioned, continued to scale.
Speaker Change: and then in credit inferences generally, you know, year to year, every week, but up 26% so.
Speaker Change: So, we think about the drivers, I think, less in terms of equations and more around across different building blocks and across the overall business. You know, really good, I think, near a medium-term and longer-term momentum and path forward. So, I would really frame it that way rather than sort of a net flow or kind of quarter-to-quarter, sort of the algorithm around that.
Speaker Change: Now, I'd very helpful contact. Thanks for taking my question.
Speaker Change: We'll go next to Ken Worthington with JP Morgan.
Ken Worthington: Hi, good morning. Thanks for taking the question. So lots of areas and elements in Blackstone are performing well, are recovering. Secondaries continues to lag, and we witnessed IRRs in SP9, Infra3, SP8 all fell this quarter by a couple of percentage points, and returns and aggregate in secondaries for 2023 and 24 are well below your hurdle rates. So help us understand why performance here continues to lag, is the path forward to better results just a function of time, and if that's the case, when do we see it? Or is there really like a different bigger issue here?
Speaker Change: Oh, I would say we feel great about our secondary business. You know, we were today at $82 billion of AUM, if you look in our filings here and you look at the SP funds, their net return since inception, you know, high teens returns are higher in the flagship private equity vehicles. So we have extremely happy customers. In the near term, yes, you know, that business reports on a lag of a couple quarters. So you're seeing what were challenging reports that come in the last few quarters. There's been modest growth in terms of appreciation there. But
Speaker Change: I would say the overall sort of embedded discount in buying funds at attractive prices, particularly what we focus on, which is eight-year-old funds on average.
Speaker Change: and being able to show up and we own today. I think interest in 4,000 different funds to give a holistic solution to sellers due to across real estate and private equity and infrastructure and credit.
Speaker Change: I think it puts us in a really unique spot. So I would say near term, there's a little bit of, you know, a slowdown in performance, but when you look at this business, what we've done for the customers, they're very pleased with it and I feel quite good as we go out to rates and next vintage. It kind of is like, I just add to that on a couple things. One, just to reframe what John said or reiterated the investment performance been outstanding. I think if you did a channel check, you would hear that. I think on the recent performance, just to add to what John said, I think there are two factors, which are kind of the key elements to the math and the short term of the secondary fund returns. One is,
Speaker Change: is the immediate games from buying new deals at a discount. That volume was lower as you know last year and early this year, it's definitely accelerating now. That will help returns.
Speaker Change: and then, in terms of the underlying performance of the funds themselves. John reference this, you know, the nature of secondary buyers is they tend to be more mature funds. So yes, in the period of the last couple of years or so, and even more recently, the performance of some of these more mature funds across the industry, naturally during this recovery, you know, lacks. And so that's being sort of transmitted as well, as opposed to say, you know, our latest, our latest corporate private equity funds, with a younger portfolio, and you see the performance that it's delivered, you know, in recent quarters.
Speaker Change: So those are really the two factors. They're structural, but they also have to do with structural in the context of where we are in the cycle and overall SB's been through the cycles. Their important investment performance delivery has been outstanding.
Speaker Change: Great, we'll stay tuned, thank you so much.
Speaker Change: and we'll go next to Bill Katz with TD Cowland.
Bill Katz: Thank you very much for the update and take them a question this morning. Maybe a big picture on wealth management. Obviously you have a tremendous first movement of energy and a great brand. How do you sort of see the platform evolving here just in terms of impact of rising competition and maybe what you're seeing in terms of investor demand as interest rate expectation shift? Thank you.
Speaker Change: Thanks for all of us.
Speaker Change: I would start with, we definitely have a first mover advantage. The $250 billion speaks to our scale and is much larger than others.
Speaker Change: It speaks to the fact that we started here earlier than others, and we built up incredible relationships with financial advisors as well as their underlying clients. And I think that's very important. We had a bunch of them in town the last couple weeks, and the goodwill towards the firm is extraordinary, particularly because of the performance. Both of the drawdowns, and more recently, of course, because of the perpetuals. How be read has delivered. How be credits delivered. How be XP is started. This builds up a lot of goodwill with underlying customers. I'd also point out that if you look at our institutional investors, they're now 30, 33% allocated to privates in the $80 trillion wealth space.
Speaker Change: is there probably allocated one to two percent. It is early days here, even earlier outside of the United States.
Speaker Change: So if you said, you know...
Speaker Change: What do we see here? We see an enormous opportunity with our existing sort of flagship products. We talked about going into infrastructure, another version of credit. I think you'll see us put more people on the ground around the world. We think the benefits of alternatives will continue to grow. We think these semi-liquid structures which have reporting that's more timely in many cases are more tax-efficient. They provide semi-liquidity as well. This works for advisors and their underlying customers. I would say yes, there will be more competitors moving into the space, but the overall market is very, very large. I
Speaker Change: Our Reach will get shelf space, which is different as you know, versus let's say traditional institutional private equity, where there you can have an unlimited number of participants in this world. I think it's smaller, a smaller number of groups will be able to play. Our first mover advantage, the performance we've delivered, the brand, all of that is super helpful in this context.
Speaker Change: and I would say one other thing I just thought about that's worth noting is as base rates come down.
Speaker Change: That makes investors enthusiasm for these products go up when you are earning 6% in a money market fund.
Speaker Change: Thank you. We'll take our last question from Kristen Love with Piper Samar.
Kristen Love: Thanks, Good morning, I've got a just a big picture of question here so just from your seat, what are you seeing with regards to M&A and IPO activity in the IPO pipeline? And do you see a scenario where there are less IPOs companies staying private longer and what could that mean for you? Are there both positive and negative implications there for black zones in this type of environment? Thank you.
Speaker Change: You know, I'm a believer that the environment's falling into place, both for more IPOs and more M&A. On the M&A front, in terms of the private side, certainly debt costs the capital coming down, makes a huge difference. If you looked when we bought Emerson Electrics,
Speaker Change: Copeland Business
Speaker Change: Um, you know, when we bought that, we were struggling to get any dead capital across 13, 14%, that may do in transaction is very difficult.
Speaker Change: As death cost of capital comes down.
Speaker Change: People can borrow more and it allows the private market to become much more robust.
Speaker Change: and stock prices go up. Obviously, strategic requires become more active in M&A.
Speaker Change: on the IPO fronts. That's obviously been the laggard we've had.
Speaker Change: We had two very slow years in 22 and 23. 24, you've watched the momentum build up. And as I said, on TV earlier, as the price of the public market goes up, it's like a magnet pulling private companies into the market. And so I think you'll begin to see more. You've seen some sponsor IPOs come out that have done quite well. Overall, I think IPOs in the US are up something like 30% from IPO to today. That will get people investors more motivated to invest in IPOs. And when we just talk about what's happening in our firm, I walked into a meeting yesterday, and we were talking about a potential IPO, and we've really gone from sort of this theoretical to the practical. What's the right.
Speaker Change: Sides, should we do it in February or April? So my expectation is the IPO market, which is historically cyclical, will pick back up. You know, the private market has grown, there may be companies that stay in continuation vehicles, so there will be some of that, but I think we will see a much better IPO market in 2025, and obviously for our business, realization, CPI, that's a very good thing.
Speaker Change: Thank you, Jonathan. Appreciate the color.
Speaker Change: With no additional questions in queue, I would like to turn the call back over to Mr. Weston.
Speaker Change: and Tucker for an additional closure remarks.
Weston Tucker: Thank you everyone for joining us today, and we look forward to following up after the call of a great day.
Weston Tucker: Good-bye.
Weston Tucker: The New Year's Day.
Weston Tucker: and John.