Laurence A. Tosi - Chief Financial Officer and Senior Managing Director
Joan Solotar - Head of the External Relations and Strategy Group, Senior Managing Director AND Senior Managing Director for External Relations & Strategy
The Blackstone Group LP (BX) Semi-Annual Debt Investor Conference March 7, 2013 11:00 AM ET
Welcome to Blackstone's First Semiannual Debt Investor Call Focusing on 2012 Earnings Results and Balance Sheet. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I would now like to turn the call over to Weston Tucker, Blackstone's Head of Investor Relations.
Great. Thanks, Keith. Good morning, and welcome to our first earnings call for our debt investors. I'm here today with Laurence Tosi, Blackstone's CFO; Joan Solotar, Head of External Relations and Strategy; Kathleen Skero, Principal Accounting Officer; Todd Myers, Head of Business Finance; and Matt Skurbe, Treasurer.
I'd like to remind everyone that today's discussion may include forward-looking statements, which by their nature are uncertain and outside of the firm's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factor section of our 10-K report. Blackstone does not undertake any duty to update any forward-looking statements. We will also refer to non-GAAP measures on today's call. Reconciliations are available in the slide presentation.
Nothing on today's call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated, reproduced or rebroadcast without consent.
So earlier this morning, we issued a slide presentation as a follow-up to our 10-K report, which we filed last Friday. Both are available on our website at blackstone.com. We won't be reviewing the entire slide deck, but rather we'll summarize 2012 highlights and review our financial condition and credit metrics as of year end. The emphasis of today's call is on different points than what we would typically highlight on our quarterly earnings call. For additional detail, we encourage everyone who did not join our January 31 call to listen to the replay, which is available on our website.
We will also ask for questions today from both our investors and analysts so you can follow the operator's instructions and decide whether to identify yourself or simply to ask a question. [Operator Instructions] In addition, if you're more comfortable emailing questions to us directly and not have your name announced, please feel free to do so at firstname.lastname@example.org. That's email@example.com.
Before I turn the call over to LT, I'd like to also remind everyone that we'll be hosting our third Blackstone Investor Day on Friday, May 3, at the Waldorf in New York. We've sent out save the date e-mails, but if you did not receive one and would like to attend, please follow up with me or someone on the team here after the call. In addition, let us know if you have any questions on anything in the slide presentation.
With that, I'll hand things off to LT.
Laurence A. Tosi
Thank you, Weston. Good morning, everyone, and thank you for joining our call. Today is the first call for our fixed-income investors. To date, we have successfully completed 4 separate bond offerings, including the industry's first-ever 30-year issuance, and currently have total issuances outstanding at over $1.6 billion. As we continue to increase our participation in fixed-income markets, we want to make sure we maximize our transparency and accessibility to our debt investors. Today's call in part -- is part of that effort. As always, if you have any feedback on what we can be doing better or differently, please just let us know.
For Blackstone, 2012 can be described as a record by almost any measure. We reported record full year revenues of $4.1 billion, up 24% year-over-year, and record public company earnings, or ENI, of $2 billion, up 30% year-over-year. Revenues rose due to continued industry-leading inflows and asset growth as we reported $34 billion in organic inflows in 2012, bringing our 2-year total to $82 billion. This growth was distributed across the firm with all of our investing businesses registering solid inflows and share gains. Blackstone remains, by a wide margin, the most diversified alternative manager, a competitive positioning that drives synergies for both growth and sustained financial performance.
These strong inflows, coupled with investment gains, drove record total assets under management at year end to $210 billion, up 26%. Fee-earning assets also reached a record $168 billion, up 23%, and this excludes an additional $12 billion of committed assets as of year end, which were not yet earning management fees.
A couple of comments on realizations and earnings mix. The 3 components of Blackstone's earnings are all important for different reasons. Fee-related earnings represent the built-in recurring cash flow from the long-term locked-up management contracts we have with our institutional investors. In fact, 70% of our fee-earning assets are under long-term lockups. This income stream, which nets substantially more than 100% of the firm's operating expenses, has scale, the diversity of the firm's wide range of businesses and a unique stability reflecting the fact that it is largely based on committed capital levels, not current valuations. Fee earnings continue to grow and were up 28% in 2012 to a record $700 million. If you add cash realization activity, related to performance fees and investments, the full year total distributable earnings for the firm were $1 billion and were $1.3 billion on an EBITDA basis, up 49% year-over-year. We saw a marked uptick in realized cash performance fees in 2012 as we began harvesting the value we've created. We had $12.6 billion of realizations in 2012, and half of that came in the fourth quarter alone, due to both increased level of sales, as well as the crystallization of annual cash incentive fees from our marketable businesses. So far in the first quarter of 2013, we've announced 6 follow-on transactions in the public equity markets, several of which will drive realized performance fees. We anticipate this trend to continue if not increase in 2013 and '14 if markets remain favorable. Total earnings or ENI include the unrealized performance fees and investment income generated across our businesses. This value-creation metric is a forward indicator of future cash earnings as that value is realized. 2012 was a year where the cash components of Blackstone's earnings continued to strengthen to 57% of total earnings, capping off a 4-year compound growth rate of 30%. Importantly, our total earnings or ENI also continued to grow, reflecting strong performance across the firm's funds, which created more value to be realized into future cash periods.
An important statistic of that forward cash earnings power is our performance fee receivable, which, net of all compensation expense, stood at a record $2.2 billion as of the end of the year. Additionally, our ongoing successful fundraising has resulted in near-record levels of committed but undrawn, otherwise known as dry powder, capital, which reached $35 billion as of the end of the year, even after investing $15.6 billion in 2012, the second-highest total in Blackstone's history.
A few comments on the balance sheet. Blackstone finished the year with $6.7 billion in total cash and investments, as you can see on Page 5 of the slide presentation, of which $2.3 billion is in cash, Treasury and liquid investments. Another $2.2 billion is in highly diversified investments in our funds, primarily in Private Equity and Real Estate, which grew as carrying values increased and are now being held at 1.3x cost across more than 250 assets in over 95 different funds and fund structures. Additionally, our total partners' capital or total equity was a record $8.5 billion at year end, up 18% year-over-year. Tangible equity also grew sharply, up 22% during the year to $5.4 billion.
Blackstone maintains a conservative approach to our balance sheet. We currently have no net debt. In addition, we maintain a $1.1 billion revolving credit facility, which is 100% undrawn and does not mature until July 2017.
As you can see on Page 6 of the slide presentation, long-term debt to adjusted EBITDA was a conservative 1.3x at year end 2012. Interest coverage was 18.5x at year end, up from 16x last year, despite the additional interest expense from our August 2012 bond issuance as our organic growth and cash flow increases outpaced interest expense. Additionally, our long-term debt to equity ratio stood at just 19% at year end due to our significant equity base. This has been recognized and reflected in the A, A+ ratings from S&P and Fitch, respectively, which both recently reaffirmed our ratings with a stable outlook. S&P published their report confirming our ratings just yesterday. These are the highest credit ratings of any alternative manager and one of the highest of any financial institution, reflecting the strength and stability of the Blackstone business model.
The primary uses of Blackstone's recent bond issuances were general corporate purposes, supporting investments in our own funds and selective strategic M&A. The commitments to our funds are seed capital and for alignment of interest purposes with our limited partners in those funds. At year end 2012, the remaining commitments amounted to $1.2 billion, including employee commitments. Net of those employee commitments, Blackstone's remaining commitments were $800 million. These commitments to the funds represent 1% to 2% of the total funds capital and have been steadily and disproportionately declining as scale has been reached across our newer funds. We expect these commitments to be drawn down over the next several years.
As a pure asset manager, Blackstone does not put our balance sheet at risk for any fund activities. No investments have recourse to the funds or back to Blackstone. Moreover, Blackstone currently retains 100% of realized gains on our own investments, along with a return of capital from our acquisitions, which can be used to fund all commitments. In 2012, the firm retained $140 million of cash flow. Combined with capital retained from realization, the firm generated substantially more capital than we invested in 2012. If markets continue to remain favorable, we expect that cash flow trend to accelerate and the balance sheet to continue to strengthen.
In closing, 2012 was an exciting year for Blackstone as the power of the franchise was demonstrated by our continued strong earnings growth, driven by each of our highly diversified cash generating businesses. That, combined with our earnings momentum, near-record levels of available capital to invest in our funds and a strong well-capitalized balance sheet, make 2013 and beyond even more exciting for all of us here at Blackstone.
On behalf of everyone at Blackstone, we thank you for your time in joining the call. And I'll now turn it back over to Weston.
Thanks, LT. Before we open up the line for questions, just a reminder that you can also email us directly, and we'll read your question without attributing it to you. The email again is tucker, firstname.lastname@example.org. Otherwise, Keith, can you please repeat the instructions for asking a question? Keith, can you please repeat the instructions for the audience?
So why don't we start off? I've got a few questions that have been emailed. The first: Can you comment on the expense growth we saw in the business in 2012, as well as the sustainability of margins over time?
Laurence A. Tosi
Let Todd answer that.
Sure. Thanks, LT. And thanks for the question. A few comments on that. In 2012, we expanded our adjusted EBITDA margin from 38% to 44% through a combination of both growing fee revenue, disciplined expense management and the realization of net performance fees. Our fee revenue grew 15%, while our compensation grew only at 7%, and our operating non-comp expenses rose 11%, all on the scale efficiencies in our business model. While we would expect some year-over-year variance based on market conditions, as LT mentioned, the trend towards greater realizations and the increasing performance-based compensation as a percentage of our total compensation, which carries a lower compensation ratio, in addition to the overall operating leverage in our business across our expense base, will provide greater opportunities for us to continue to drive further EBITDA margin expansion.
And this is a Joan. Just so I could add on to that. As we've mentioned in previous calls for equity investors, we've come through this period where we've continued to invest, raised a lot of money. And we're entering the period, we begun already, the harvesting period. And so the tilt towards carried interest versus fee revenues will continue to grow. The only expense loaded against carry is compensation. And by nature of that, the margin's at least 60%, and that tends to just drop to the bottom line.
Laurence A. Tosi
That was particularly evident if you look at the fourth quarter trend versus the rest of the year last year, you can see that accelerating.
Next question via email. We've got actually a few questions on future plans to raise additional capital through new debt issuance. And if we can tie that into another question, just how we see our debt profile longer term and any issuance opportunities along the credit curve?
Laurence A. Tosi
Okay. First of all, I didn't know bond investors were so shy. I guess they prefer to email than to call in. You're not all that shy when we're on the road with your questions, but certainly -- so let me take that in reverse. Do we have any plans to raise additional capital through debt issuance? Over the last couple of years when we've been going through the process of doing issuances, we have stated that we always want to be a supportive and regular issuer to the extent that the firm has need. Not to over-raise capital, but to create a balance where we are both issuing in the market on a predictable basis and thereby supporting the issuances that are already out there. I will say anecdotally over the last few weeks and months, we have received a tremendous amount of reverse inquiry, almost an overwhelming amount, as to whether or not we would seek a long-term issuance in the near term. We'll certainly consider that. I mean, we're in the market as recently as August. Currently, now you can see the balance sheet is very, very strong. And one of the motivations last summer was that we were bumping up against a AA rating, which sometimes can be a little bit constraining on a growth basis when you have the growth profile that Blackstone does. But I think over the next near term, the next few weeks and months, we'll certainly consider very seriously the frankly overwhelming interest that we've had in potentially doing a deal, particularly another 30-year, but no decisions have been made on that. I think you can expect us, as I said, to be supportive of the bonds in the sense that we'll be transparent with calls like this. We will be a regular issuer, which is consistent with the growth profile of the firm. We do find our rating very important to us. We also find that we don't want to be in a position of excess capital. So the balance that's reflected in where -- how we've managed ourselves over the last 3 years and the discipline we've had towards the balance sheet is something we're absolutely focused on continuing.
A question on our statement that our balance sheet is not at risk from the funds, just a little bit more color on that. And specifically, if we could just review the investments line item on the balance sheet, the $7.3 billion as of December 31.
Laurence A. Tosi
Sure. Let me take the first one, which is really a business model question. So the way that the firm has been set up since the beginning is that we prefer to be evaluated, frankly, and our performance to be judged within the funds based on our ability to create value and compete on that basis. So we have never been a firm that back-levers the fund, and by that I mean, takes recourse across several investments against the fund itself because if one doesn't work out, it can be a problem for the other one. So each investment stands on its own. Each fund stands on its own, and there's therefore no recourse back to the asset manager, Blackstone, in any way. There are no credit agreements, no recourse, no guarantees. While certainly we support with our efforts to create value every investment that we do, there is not a case where the balance sheet of Blackstone is in harm's way for any particular investment that's taken on by the firm. So that's a general statement, really, on our business model. If you want to walk through the specific line items, I'll point you to a page in the deck that we filed today, and we actually put together a call-out box, which we thought would be helpful as you walk through it. It's on Page 13 of the press release. And there's, really, if you look at the call-out box to the right, so this is the de-consolidated balance sheet of the firm. You can see the cash and cash equivalents. Our investment line is $7.3 billion. There are some gross-ups in it. The noncontrolling interests are the portion of the balance sheet that relate to the insiders and their portion of some of the incentive fees and performance fees that have been earned. We also add in some incentive fees to that balance and then we have some financing activities related to Treasury. So that gets you to a total net value of $6.675 billion. If you then go back to -- within the presentation, we'll give you a breakout of what's in the $6.75 billion (sic) [$6.675 billion], you can see that on Page 5. In the middle of page 5, you can see that in the $6.65 billion (sic) [$6.675 billion], you have $2.3 billion of cash and corporate Treasury investments. $2.2 billion of investments, that's primarily Private Equity and Real Estate. As I mentioned before, it's in 250 separate investments across almost 100 funds. And then we have $2.2 billion in net performance fees, that's carried interest plus incentive fees. So that's the makeup of that line item on the balance sheet.
Great. We have another question, just on the specific uses of the proceeds from our most recent bond issuances.
Laurence A. Tosi
When we use the term general corporate purposes, I think we mean exactly that. And if you think about the initiatives that we have undertaken since the IPO, there's really 4 places that we've invested in that we think will create a sustainable competitive advantage or the funds' ability to outperform. That is origination, global footprint, the operations and the scale of the different offerings we offer. So when we think about origination, we think particularly in a market where credit is a little bit easier and there's a lot of competition for deals, our ability to have a global footprint, where we can generate -- essentially, 80% of our deals are self-sourced. We think that's incredibly important for finding value. So one of the key investments we've made over the last several years since the IPO is in expanding that global footprint outside the United States. The second one is on our global footprint and our ability to operate assets. So one of the key parts of our business model, particularly in Private Equity and Real Estate, is that we operate the assets and create the value after we've made the investments. And so we've made a concerted effort to bring in more capability with respect to those operations. The last piece is the fund set. You've seen us do a few small bolt-on acquisitions, where we thought there was a place where we could find a high level of strategic synergy with another company. An example for that would be in early 2012, we completed the transaction to buy Harbourmaster in Europe. That's about $10.5 billion worth of assets. It was a high-quality noninvestment-grade debt management team. It fit very well with our much smaller European franchise. We're now the largest investor in noninvestment-grade fixed income in Europe. That creates certain synergies of its own. We also -- they had an LP list that was very high quality, with very little overlap. So you'll see us from time to time look at strategic alternatives like that even though the firm is largely organic grown. So in large part, we have made those investments. Now it's important to point out, when we make those investments, we do it with, we think, a high degree of discipline. And as Todd pointed out earlier, we've been able to make those consistent investments, put the bond proceeds to work in that respect, but also do so without impacting our margins or profitability.
Great. That looks like all the questions that have been emailed, and it doesn't look like we have any more questions in the queue. So I don't know if, LT, you had any closing comments or...
Laurence A. Tosi
First of all, just thank you very much. We've met many of you that are bond investors over time as we've been out there. We appreciate the support. Obviously, our issuances have performed very well. There's still at discount, we think, to like-rated asset managers in more mature parts of the market like the traditional asset managers. We'll continue to be supportive. If this is helpful, please give us any and all feedback, and we will adapt going forward. We expect to do a similar call at the end of the second quarter to take stock of where we are after the second -- going into the second half of the year. So thank you all, from all of us, very much for your time and attention.
Great. Thank you.
And ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us, and you may now disconnect. Have a good day.
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