The Blackstone Group’s (BX) CEO Steve Schwarzman on Q3 2014 Results – Earnings Call Transcript

Source: Seeking Alpha


The Blackstone Group Q3 2014 Results Earnings Call – Webcast Audio


The Blackstone Group L.P. (NYSE:BX)

Q3 2014 Earnings Conference Call

October 16, 2014 11:00 am ET


Joan Solotar – Senior Managing Director, External Relations & Strategy

Steve Schwarzman – Chairman, CEO, Founder

Laurence Tosi – CFO

Tony James – President, COO


Craig Siegenthaler – Credit Suisse

Bill Katz – Citi

Michael Kim – Sandler O’Neill

Glenn Schorr – ISI

Patrick Davitt – Autonomous

Robert Lee – KBW

Devin Ryan – JMP Securities

Mike Carrier – Bank of America

Marc Irizarry – Goldman Sachs

Brian Bedell – Deutsche Bank

Bulent Ozcan – Royal Bank of Canada


Good day ladies and gentlemen and welcome to the Blackstone Third Quarter 2014 Investor Call. My name is Lisa and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Ms. Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. Please proceed ma’am.

Joan Solotar – Senior Managing Director, External Relations & Strategy

Thanks Lisa. Good morning, everyone. Welcome to Blackstone’s third quarter 2014 conference call. So I’m joined today by Steve Schwarzman, Chairman and CEO; Tony James; President and Chief Operating Officer; Laurence Tosi, CFO and Weston Tucker, Head of IR. Earlier this morning we issued our press release and slide presentation illustrating our results which are available on the Web site. We expect to file the 10-Q in the next few weeks.

So I’d like to remind you that the call may include forward-looking statements, which are uncertain and outside of the firm’s control. And actual results may differ materially. After a discussion of some of the risks, please see the Risk Factor section of our 10-K. We don’t undertake any duty to update forward-looking statements. We will refer to non-GAAP measures on the call and you could find the reconciliations in our press release. I’d also like to remind you that nothing on this call constitutes and offer to sell or solicitation of an offer to purchase an interest in any of our funds. The audiocast is copyrighted and can’t be duplicated, reproduced or rebroadcast without consent.

So quick recap of our results. We reported record third quarter economic net income or ENI of $0.66 that’s up from $0.56 in last year’s third quarter and it was driven by both higher performance and management fees. Distributable earnings of $672 million or $0.53 per common unit were also a third quarter and more than doubled last year’s third quarter and of that amount we will be paying a distribution of $0.44 per unit to shareholders of record as of October 27.

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And with that, I will turn it over to Steve Schwarzman.

Steve Schwarzman – Chairman, CEO, Founder

Good morning and thank you for joining our call or maybe not such a good morning depending upon what you own in the markets today. Blackstone, however, has had a terrific quarter, which was a record third quarter for ENI, cash earnings and assets under management, in fact every major area, investment performance, capital raising, investment activity levels, realization, the firm is producing record or near record results.

Our investment performance continues to significantly outperform the public markets. Over the past 12 months, we have created $35 billion in total appreciation across our firm, staggering number. Even in the third quarter, most of our funds delivered returns that were multiples of their comparable market indices.

Our real estate funds were up 6% for the quarter, 28% for the past year. And our private equity fund were up 4% overall for the quarter, 28% for the prior year. Our credit to drawdown funds as Tony indicated earlier were up between 8% and 15% gross for the quarter. The stock market barely went up. And 30% to 34% for the year, altogether this is really stunning performance.

This performance along with strong demand for our alternative products continues to drive significant capital inflows to the firms. Again, it’s a positive secular backdrop of limited partner investors allocating more to alternatives, which I think we told you in prior calls was going to happen. And also reducing the number of managers, they do business with which we also indicated we thought would happen.

Blackstone is, I believe best positioned firm to capturing grow market share and that’s occurring. We are doing this in all of our business. As our global investing platforms have become more diversified, we continually have new funds in the market and our capital inflows are no longer the step functions they were years ago when we were a lot smaller firm.

Blackstone has raised $13 billion, just in the current quarter and $55 billion over the past year, which is by far a record. In the past two years, we have raised $100 billion. That’s greater than the total size of many of our closest competitors. It’s a real testament to the performance of our products and our relationships, and depth of relationship with our limited partners.

We have $42 billion in dry powder capital to invest, and with leading global platforms each of our investment businesses we were able to find many interesting opportunities to deploy this capital.

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We invested or committed a record amount in the third quarter of $10 billion bringing us to nearly $30 billion over the past year as a result of our unique decision. Over 30% of this $30 billion was in Europe primarily in real estate as we were taking advantage of the current distress, DSO completed the largest investment in its history for example, $1 billion acquisition financing package that they were uniquely positioned to execute. And private equity investment in several very carefully selected and conservatively structured deals.

Our new European real estate fund as Tony mentioned is now 2/3rds invested or permitted after only one-year. We were waiting for the European real estate sales to break open and it did and we were ready and we’ve executed. Because of our rapid deployment, we have agreed with our investors to expand the size of what was already the largest fund of its kind ever raised in Europe, by additional €1.5 billion that will bring the total fund to €6.6 billion or approximately $8.8 billion bringing us well to continue to take advantage, fresh opportunities in Europe. This is really quite remarkable and exemplifies how quickly Blackstone can raise and deploy large scale capital to take advantage of a vintage or market opportunity minimizing any J curve.

Private equity, we very selectively pursued transactions usually with low double-digit unleveraged target returns and enhanced those returns further with prudent levels of leverage. We have been doing this for about 28 years and it really works out extremely well for our investors. In fact, despite having an active weekly calendar deal sheet, the vast majority of our corporate private equity capital deployed was actually only in 10 to 15 transactions a year. It’s a very small number of actual transactions when you look at it in a global basis, which is why we can be so careful in terms of setting up things, we think are very sensible for our investors with minimum downside and a lot of upside. Our behavior remains contrary what you may hear about capital chasing deals and sacrifice the returns or taking additional risks in order to move capital.

Since the end of the third quarter, obviously, public markets have clearly deteriorated significantly with a sharp increase in volatility that you can see on your screens and see on televisions. S&P and global indices are both down 6%, credit indices have also declined with widening spreads and frankly a lot less liquidity that people expected. Hedge funds are being forced to unwise positions and sometimes they will do it voluntarily and capital markets generally have seen a decreased liquidity as I mentioned.

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