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.
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.
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.
I would like to make two important points on this development. First, we are uniquely positioned to take advantage of the market volatility across all of our businesses. We have seen the public markets correct many times before. And it’s always represents the potential for abnormal deal flow with favorable risk adjusted returns. With one of the largest pools of dry powder capital, we can and will move quickly to respond to market dislocations. These types investment environments end up becoming some of our vintage – best vintages, our job is to look at these markets and the world objectively, not emotionally.
Second, as it relates to Blackstone’s current investments and our performance going forward, public markets alone do not dictate realizations for us. We also rely on strategic sales – sales to strategic buyers and other private sale opportunities, which will include the liquidation for example of our office portfolio in real estate.
We closed sale $2 billion of our Boston office portfolio in the third quarter and have approximately $12 billion of office assets remaining in liquidation. In addition, our growing base and expanding diversity of monies under management drives greater ongoing fee-related earnings, which in part by our distributions to shareholders.
In other words, we are not hostages of the stock market, we have a lot of mechanism for realizing investments and we are never or sell unlike almost all other market operators. Given the long-term, locked up nature of our fund with no redemptions, we do not sell in opportune times as I have seen people do repeatedly in markets – times of market uncertainties.
In fact, our portfolio companies are in great shape, best shape they have been in many, many years and continue to see strong operating principles. So we have to wait from time to time for realization. It’s not a bad option. Our market readjustment might delay certain public market disposition in the near term. I think it has the habit of changing, but if the timing is impacted we would expect our company to continue to grow very nicely while we wait compounding our returns to our investors where they end up being very pleased when we sell these investments.
The public markets tend to overshoot and undershoot what’s going on in the economy, investment sentiment, now, we all know very negative. What we see however, is that the U.S. is growing nicely particularly in our real estate area where we are seeing sustained positive fundamentals across every sector of our portfolio.
In our private equity companies, revenue and EBITDA trends remain quite strong up 7% and 10% respectively year-over-year well ahead of the average company. The U.S. market is currently trading somewhere around 15x earnings although that seems to move around a lot everyday, which doesn’t seem unreasonable, very low interest rate is declining oil prices should be good for growth in most countries of the world. We feel very good about our current portfolio and particularly good about our ability to invest when other people have fear.
On the advisory side, we also have tremendous momentum. Our M&A backlog is more than doubled what it was this time last year that’s doubled. Our restructuring group is just recognized by Thomas Reuters as the number one distress advisory business in the world and Park Hill is the clear number one in the placement business in the world and it’s projecting a record year this year.
As we announced last week, we will be spinning these businesses into an independent publicly traded firm at some point next year. And we are very excited about the opportunity. There couldn’t be a better time other than the market uncertainty to launch this new company given the significant market opportunities that exists for a top notch independent and diversified advisory practice. With such a talented team, untethered from our larger asset-management business which creates conflict, and under Paul Taubman’s leadership, one of the top bankers advisors in the world. I believe we are creating something that is really special.
Feedback from our clients and potential clients has been extraordinarily favorable. Our shareholders benefit as standalone advisory businesses generally trade at significantly higher multiples in the public markets than Blackstone does. A better earning trajectory coupled with better multiple should equal a compelling value for our shareholders.
Summary, I couldn’t be more pleased with our third quarter performance, excited about the firm, we are wonderfully positioned. I expect a lot of good things to happen in the forthcoming years.
With that, I will ask Laurence Tosi to go through the review of our financial results and then we will be taking questions and there are a lot of them for us because I think the current market environment gets people curious as to what’s going on generally and what we are seeing.
Laurence Tosi – CFO
Okay. Thank you, Steve. And thank you everyone for joining the call.
The one way takeaway we want to leave investors with today is that while market movements are by their very nature temporary, the momentum of Blackstone’s performance is not. In the third quarter, the S&P saw volatility and a peak trough value differential 5.3% similar to the volatility you have seen in the fourth quarter to-date. It still ended up largely flat on low growth and earnings for the next companies.
Against this rather lackluster backdrop, Blackstone produced record third quarter in year-to-date earnings while posting above market fund performance in almost all of our investing businesses. The key to Blackstone lies not in short term public market fluctuations but in longer term trends like the availability of credit, the mispricing of liquidity, bank downsizing, regional capital constraints, supply and demand imbalances, strategic opportunities, lack of new construction, asset price devaluation and operating under performance. These are operating in risk drivers that make up Blackstone’s expertise not public market metrics.
The 30% returns across private equity real estate and credit funds over the last 12 months reflects strong underlying portfolio company and asset performances Steve outlined. These are some of the best fundamentals in operating performances we have seen across these asset classes. Similarly, BAAM outperforms most in difficult markets while also maintaining 1/3rd of the volatile to the S&P which is why that business is seeing both record inflows of $12 billion over the last 12 months while outpacing the broader market in returns year-to-date.
More than anyone, our fund investors understand and appreciate the long cycle benefits of investing with Blackstone. Over the last year, we had record organic inflows of $55 billion. But perhaps most interesting is that 65% of that amount or almost $36 billion of the inflows came from new funds, new businesses and new strategies we didn’t want until a few years ago as we continued to innovate best in class product, ideas and extensions across Blackstone.
We also had $18 billion of inflows over the last year in Evergreen funds that are always in the market giving us continuing access to new capital. Some of those funds are specifically created for high net worth individuals where we have raised a record $10 billion over the last 12 months representing a new and growing market for us where there is a broad demand for Blackstone’s unmatched product quality, depth, brand and performance.
Over the last several years, almost all the Blackstone’s draw down funds have hit their caps. This strength is continuing for alternatives in general and Blackstone in particular. We are currently fund raising our second energy fund which is well on its way towards our $4.5 billion cap. We are also raising our second tackle opportunity strategy which we think could exceed the $5 billion we raised for the first fund. Our new core plus real estate platform is nearing $2 billion in commitments. We are launching new strategies in our secondary’s business which just closed on $4.4 billion for its newest fund nearly doubling the last pre-Blackstone fund in part by accessing channels uniquely developed by Blackstone.
We are also adding €1.5 billion to our fourth European real estate fund which is double the size of its predecessor fund. These fund raisers will drive growth for Blackstone and that is before we even begin the launch of flagship seventh global private equity fund this year and our eighth global real estate fund early next year. All of this comes at a time when we are returning record levels of capital to our investors at attractive returns.
Record AUM and consistent fund performance on growing base of assets accelerates earnings and distributions even in volatile or flat public markets. This is exactly what we have already been seeing so far this year. Our record year-to-date ENI easily outpace record fund performance posting a 47% increase to $2.9 billion.
Realization activity was also robust and continued unabated in a flat but sometimes volatile market driving distributable earnings up 85% to $1.9 billion another record. In both cases, the performance was broad based and that for investors is a unique balance only Blackstone can deliver.
Further note that when markets can impact ENI temporarily, distributable earnings is a longer cycle reflection of both sustained inflows and the value created in our funds when we focused on decade long returns and never on just quarters or even single years.
First, we are record levels of locked in fee revenues and profits up 22% on record inflows a consistent source of cash earnings regardless of market conditions. Secondly, our realizations are also a greater scale and more diverse across a wider set of growing businesses than ever before.
Some details, the momentum of realizations has been building over the last several quarters with the second and third quarters of this year marking our best realized performance fees ever. Distributable earnings year-to-date reflect over a 150 different transactions only 50% of those transactions involve public markets, the reminder was generated by private sales and operating earnings and refinancing. None of that activity is depended on public market or occurs at a spot price.
Our forward outlook for realizations has a similar public and private split. Blackstone’s financial profile has also been strengthening at a rate greater than the broader markets. At the end of the quarter, Blackstone had a great $8.72 a unit on our balance sheet up 34% in just one year. Our liquidity profile has also improved as we ended the quarter with record cash and treasury investments of $2.56. We currently have $4.3 billion or $3.78 per unit in net accrued performance fees and another $931 million or $0.81 per unit of investment gains on the balance sheet. Together, this represents $4.59 a unit of future cash earnings and 64% of that amount is in assets that are public liquidating or paid annually.
Our record results for the quarter, the year in the last 12 months reflects sustained fund returns strengthening of our market position and earnings momentum that will certainly outlast current market volatility. For whatever reason, what drives Blackstone or what drives Blackstone’s stock price appears to-date to be too entirely different and somewhat unrelated dynamics. We do know that Blackstone’s performance is driven by long-term value creation in our funds which in turn drives the growth of our asset base and our earnings performance. Today those dynamics are unchanged and have never been stronger.
And with that we will open it up to questions.
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