The Blackstone Group's (BX) CEO Steve Schwarzman on Q2 2014 Results - Earnings Call Transcript

Jul.17.14 | About: The Blackstone (BX)

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

Q2 2014 Earnings Conference Call

July 17, 2014 11:00 AM ET

Executives

Joan Solotar - Senior Managing Director and Head, External Relations

Steve Schwarzman - CEO

Laurence Tosi - CFO

Tony James - President and COO

Analysts

Luke Montgomery - Sanford Bernstein

Bill Katz - Citigroup

Michael Carrier - Bank of America Merrill Lynch

Michael Kim - Sandler O'Neill

Marc Irizarry - Goldman Sachs

Dan Fannon - Jefferies

Glenn Schorr - ISI

Robert Lee - KBW

Patrick Davitt - Autonomous

Devin Ryan - JMP Securities

Craig Siegenthaler - Credit Suisse

Brian Bedell - Deutsche Bank

Warren Gardiner - Evercore

Chris Kotowski - Oppenheimer & Company

Operator

Blackstone Second Quarter 2014 Investor Call. I would now like to turn the call over to Joan Solotar, Senior Managing Director, Head of External Relations and Strategy.

Joan Solotar

Thanks, Patrick. Good morning, everyone. Welcome to our second quarter 2014 conference call. I'm joined today by Steve Schwarzman, who is actually calling in from out of the country, 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 that are available on the website and then we’re going to follow up with filing of our 10-Q in a couple of weeks.

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

So a quick recap of the results. We reported record economic net income, or ENI, for the second quarter of $1.15. That’s up very sharply from $0.62 in last year’s second quarter. Performance as you may have seen already was strong across the board with greater appreciation in the underlying portfolio assets as well as higher management fees.

Distributable earnings were $771 million for the second quarter or $0.65 per common unit. That’s more than double last year’s second quarter’s distribution. We’re repaying a distribution of $0.55 per common unit and that’s to shareholders of record as of July 28. So thanks all who are on the call and also those who attended our recent Investor Day in person or via Web cast. But if you missed it, we have it posted on our Web site, so you can roll through by segment.

And with that I’m going to turn the call over to Steve Schwarzman.

Steve Schwarzman

Thank you, Joan and good morning and thank you for joining our call. Our results announced this morning reflect one of the two strongest quarters in the Firm’s history in all respects. Our ENI of $1.3 billion was our second best quarter ever, up 89% from last year and indicates the significant value we’re creating across our platform. For the past 12 months, earnings were $4.3 billion and I’ll repeat that. Our earnings in the last 12 months were $4.3 billion or $3.76 per unit, which is a record for any 12 month period for any publicly listed asset manager in the world.

If we look at the growth in earnings from year end 2007 before the financial crisis, we compounded at a rate of 12% per year and grown our assets three times despite the impact of a once in a generation local financial collapse. Despite this challenge, Blackstone has shown impressive growth in earnings and AUM, in fact one of the strongest performances in the financial sector in the world.

Our current cash earnings also increased sharply as Joan mentioned, up 120% in the quarter. Realizations continue to pick up, as we’ve indicated they would on previously calls, exceeding $13 billion in the quarter. While disposition activity has been accelerating to record levels, we’ve also been investing record levels of capital, creating new value and we’re getting additional balance from having more assets with a current yield or annual performance fee payout due to the significant growth in our credit and hedge fund solution businesses. In effect, all is going well, the strength (ph), some would say very well.

The strength of our results today is entirely a result of our singular focus on delivering good investment performance to our limited partner investors. And our returns frankly have been some of our best yet. In private equity, our portfolio rose 8.4% in the quarter and 28% as Tony reported over the past year driven by strong portfolio operating performance. Revenue and EBITDA trends in our Company is some of the best we’ve seen in years, up 8% and 11% respectively. Our 2005 vintage BCP V main fund crossed its preferred return threshold in the second quarter and is now in catch-up as Tony and L.T. explained and you will hear more on that later.

Our real estate funds also continue to generation stellar returns, with the portfolio up 6% for the quarter and 28%, surprisingly the same number as private equity for the last year. Strength has been broad based in real estate, with all of our major sub-segments gaining significantly. Our credit funds had gross returns between 2% and 5% for the quarter and 16% to 31% for last year, which is actually quite astounding for credit investing as Tony said in a 2% world. And our hedge fund solutions business or BAAM produced a 2% composite gross return for the quarter and 11% over the past year also quite favorable.

One of the current debates given strong markets particularly in the U.S. is around manager’s ability to find new attractive investments to deploy large scale capital. At Blackstone we’ve invested significantly over the years developing global capabilities for our local offices are fully integrated into the broader platform. In this way we can identify opportunities anywhere in the world and move capital to where they are most attractive. Our fund structures also give us great flexibility around when and where to invest and our scale lets us do deals that most others simply can’t do.

As such, we continue to invest record amounts of capital, deploying $6 billion in the quarter and $20 billion over the past year with an additional $8 billion committed to deals but not yet deployed at quarter end. That’s a total of $28 billion. Roughly half of our investments were outside the United States. I want to repeat that because it’s really an important thing. Roughly half of our investments were committed outside of North America. In fact, we’ve already invested and committed 34% of our new European real estate fund as at quarter-end and 27% of our new Asia real estate fund that we’ve not even finished raising it. In credit, 50% of our backlog is in Europe, where we see a lot of interesting opportunities very much as we have in real estate.

So despite the challenges that exist today for investing in some regions and asset classes, I’m excited about the opportunities we are seeing. Our capabilities are greater today than at any time in our history and our sustained high pace of capital deployment is building the foundation for future value.

Due to our active pace of deployment, we continue to raise new money from investors. Despite the sharp increase in realizations, we again grew our total AUM by greater than 20%, ending the quarter with $279 billion of AUM. In the second quarter we raised $14.5 billion in capital, bringing us to over $62 billion in gross inflows for the past year, which was predominantly organic.

Just so you don’t miss it, $62 billion in gross inflows for the past year. The monies we raised over the last 12 months equal as much as 50% to 100% of the entire AUM of many of the publicly traded alternative asset managers. And we have several significant fund raising initiatives currently underway in virtually all of our businesses.

In real estate, our Core+ initiative is in early days with good momentum. We started with a number of separately managed accounts and we now have launched our first U.S. focused commingled fund. We also are having active discussions for additional SMAs in Europe and Asia and we think this combined platform could exceed $5 billion from the standing start within the next year. And by the way I think we believe it’s going to grow a lot bigger from there if the trends remain consistent.

Our current global flagship fund, which started $13 billion in size is now nearly $15 billion on its own, $16 billion with co-investors due to favorable recycling provisions and will likely grow further. At our current investment pace, we’ll likely be back in the market with our next global fund early next year, which gives out fund deployment life of about 2.5 years.

Our Asia focused real estate fund continues to march along and has raised $4.4 billion and we expect it to hit our cap of $5 billion. Our debt strategy’s business is expanding, with additional capital raised for our liquid CMBS investment vehicle, as well as our commercial mortgage REIT, Blackstone Mortgage Trust.

In private equity we’ve got a very busy year. We commenced the fundraising of our second energy fund, for which we’re targeting $4 billion plus with an expected first close in the fall. And strategic partners, our secondary’s business is making great progress on their new fund, benefiting from the synergies of being part of Blackstone with $3.2 billion raised on our way to the cap of $4.4 billion. That's nearly twice the size of the previous fund before they joined Blackstone.

In credit, investor demand remained strong and we have inflows into our hedge fund vehicles, as well as several separate account mandates from large investors. We’ve also just started the marketing process for direct lending fund in Europe given the opportunity set there. And lastly BAAM continues to take share in the quarter with $2.3 billion of fee earning net inflows including July 1 subscriptions. This included an additional close for the new GT fund interest, which is now $2.3 billion in size, as well as the launch of our second 40 Act fund, which raised $300 million just in the quarter.

There is a lot going on from a fundraising perspective. And as Tony said, this isn’t episodic anymore. This comes from all over the firm on a reasonably consistent basis. And I’m confident of the firm’s continued growth trajectory even with our heightened levels of realizations.

Our second quarter realization included several strategic sales, as well as five public market dispositions, one of which was our first sale of Hilton shares. We also successfully executed a loan against part of our Hilton position, which returned over $2 billion of capital to our limited partners, helped preserve future upside on the shares, which continue to perform very well.

Hilton’s current share price equates to a multiple of 2.8 times our original investment and implies a total gain of almost $12 billion, which we believe is the largest private equity gain in history. We also brought Michael’s Public in the quarter, although we didn’t sell down any of our shares and we have three other companies on file for IPOs with more to come, market’s permitting.

We now have $32 billion in our private equity and real estate funds, which we will sell down on an orderly basis over time. We also have a substantial portfolio of office assets when the process of liquidating. You’ve probably seen news reports on the pending sale of more than $2 billion of our Boston office assets. And in credit, we continue to see realizations out of our first mezzanine and rescue lending funds in many cases as our borrowers call us out at a premium in favor of lower cost payments (ph). Looking forward, our realization momentum is significant. And given our investment performance, the positive cycle of the business continues with our LPs returning those dollars to us in newly raised funds.

In summary, Blackstone’s results continue to demonstrate the unique and compelling strength by our business model. I believe we are the best positioned firm in the fastest growing part, the asset management business with the most recognized and most trusted brand name.

Our investment performance is outstanding and is driving record levels of demand for our products, resulting in sustained double digit AUM growth, at least double to triple, the rate of almost all traditional asset managers. And I believe there is much more to come for Blackstone, as each of our business lines introduce exciting new investment products which will appeal to potential investors.

I foresee continued controlled expansion at the firm on an organic basis, consistent with us maintaining our unique culture of meritocracy, hard work, unflinching integrity and service to the public and all of our constituencies. The alternatives are revolving as a publically listed class and have become a required course in financial services investing, not an elective. And Blackstone is the core curriculum, with global leading platform in each of the major asset classes.

Thank you for your support and with that I will ask Laurence Tosi to takeover with a review of our financial results.

Laurence Tosi

Okay, thanks Steve and thank you everyone on the call for your continued interest in Blackstone. I’d like to begin my comments today by addressing what appears to be a couple of common misconceptions about alternative managers in general. First, that firms cannot create value and realize it at the same time; that asset growth in inherently constrained by returns of capital; or that firms cannot be both the smart buyer and a smart seller at the same time; and finally that our results are more volatile than the assets we manage. Our performance we think overtime shows why these assumptions are unwarranted.

For the quarter, Blackstone had distributable earnings of $0.65 per unit, more than double the prior year period, bringing the last 12 months to $2 per unit. As we continue to realize seasoned investments while continuing to invest and raise new capital.

Strong returns across all of our investment platforms drove 61% growth in ENI to $2.1 billion year-to-date. Importantly, realized performance fees of 1.1 billion for the first six months were up 85% year-over-year. Following 11 sequential quarters of increases, we now have $4.2 billion in net accrued performance fees, of which roughly three quarters is either in public equities or assets that are pending exits. Another way to look at what we call the compounding effect in our financials is the fact that with approximately the same level of fund appreciation as the first half of last year, the first half of this year produced record ENI and distributable earnings, up 61% and 72% respectively. All indications are that we are actually at the early stages of exiting a number of scale assets, which means $2.51 per unit of the net performance fees is associated with public holdings or pending exits, which should become realizations in the foreseeable future. What we are seeing is not just market driven, nor is it temporary.

You can see the long-term fundamental trends at play in private equity as Steve mentioned and in our BCP V fund in particular. Private equity funds achieved 8.4% appreciation in the second quarter and 28% over the last 12 months and the 11% growth in EBITDA that Steve pointed out, well ahead of the S&P average. BCP V, the industry’s largest fund, generated 10.5% appreciation in the second quarter alone and 34% over the prior year and has reached its 80-20 catch up phase of performance fees for the first time.

To give you some specific numbers, the fund BCP V generated $579 million in revenues and $487 million in economic income in the quarter. Of those amounts, $274 million of those revenues and $225 million of the economic income are related solely to the catch up. Additionally and importantly, the fund generated a $174 million in net realizations. BCP V is currently 34% of the way through the catch up and needs 13% appreciation for a $2.5 billion increase in value to reach full carry.

While we generally guide you to a 40% to 45% competition ratio on many of our drawdown funds, some of the larger pre IPO funds have lower compensation ratios as partners sold carry and exchange for Blackstone units. This is the case in BCP V, where we currently estimate 80% of the carried interest generated will go to unit holders. This lower compensation ratio obviously has a favorable impact on operating margin, which was 59% for the quarter.

Consistently strong AUM growth also continues to positively impact our performance. There are two ways Blackstone’s assets grow, value creation and inflows. Over the last year the firm grew $37 billion by value creation and $62 billon by gross inflows, for a combined of $100 billion from these two drivers. That is precisely how we were able to grow AUM 21% and fee earnings 23% in the past year, despite returning $50 billion in capital to investors.

We also view the $50 billion returned as an asset, as most of our LPs have to put return capital back to work to meet investment targets. In fact, almost 90% of our LPs invest in successive Blackstone funds and history shows that returns of capital are highly correlated to fund demand, explaining why all of our major fund raises have sold out over the few years and why Blackstone itself has grown every single year since inception. You can return capital and growth.

Despite $20 billion invested over the last year, our Dry Powder managed to grow to $45 billion, giving us plenty of capital to leverage the unique investment capabilities that we have built. Of the $11 billion we have put to work in the first six months, 43% of that were in funds that did not even exist in 2007 and almost half was outside the U.S. something we were not capable of achieving just a few years ago.

We can be both the profitable seller and discriminating buyer at record levels at the same time, capitalizing on our unmatched breadth of strategies, regional presence, vintages and assets, sometimes within the same fund. It will never be the case for Blackstone that one fund needs to lose when another fund wins. That is why Blackstone’s fund returns are more balanced with higher growth than the markets overtime, and are less susceptible to short term market fluctuations than investors think.

When we look to invest we look it long term fundamental trends, not short term market prices, because all of our funds are designed to have flexible mandates and patient capital that allows them to be consistently buying, creating value and selling for above market returns. That is what makes Blackstone different. It can all work at the same time. That is the way the firm was designed, with a core mission to build by constant innovation and develop a balanced set of world-class investment platforms that can use patient capital and operating expertise to outperformance across all cycles.

And with that we’d be happy to take any questions.

Joan Solotar

And operator, we are ready for questions, but I could remind everyone to just stick to one question the first go around and then we’re happy to pick your second and third and whatever on the second round.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Luke Montgomery with Sanford Bernstein. Please proceed.

Luke Montgomery - Sanford Bernstein

So it looks like the aggregate industry data suggests that PV multiples have spiked in 2014. I think by one vendor it was 11.5 times during the first half of this year. That’s up from eight times in 2009. So that’s been accompanied obviously by easy debt financing and the median debt percentage is now around 70%. Given the amount of Dry Powder you’ve been sitting on, it’s encouraging to see you put $2.2 billion to work in the quarter. That’s a good pace. But your firm hasn’t been shy about calling out the pitfalls of the investment environment. So I’m just really wondering how you’re staying disciplined in this environment. How we can get some confidence that we might not have another BCP V coming down the pike?

Steve Schwarzman

Well, I was okay with you until you added that last clause. Our BCP V is going to double our investor’s money on $20 billion. I think it will be a spectacular success. And our LPs are very happy with it. So let me just start with that. In general values are high. I think the last cycle was challenging, not so much because the values were high, which they got high in 2007, but had we not had a historic meltdown or all meltdowns, you would have had very different investment results too.

And it’s too simplistic to just look at values. You’ve really got to look at what you’re buying. And I would say -- and I can’t comment on the industry because I think there’s a lot of stuff which is going for too high a price, driven by too much leverage and of course our job is to not chase those. What we are investing in and we’re finding a lot of good opportunities is companies that need capital to grow. So they have very strong organic growth. And like any company it’s a little simple to just say well, that’s the bad -- that Company X is a bad deal, because it’s got a 20 P/E and Company Y is a good deal because it has got a 15 P/E, when Company X might be growing twice as fast or three times as fast. So markets pay and values will reflect growth rates. So we’re investing in much more than before, higher growth companies and that’s -- and I don’t think those multiples are particularly pricy often for the growth. So that’s one area.

The second area is we’re putting work and we’re putting a lot of money to work in sort of new build stuff. So we might be building a pipeline or a wind farm or a power plant somewhere and in the sense, if you look at trailing multiples, that’s an infinite multiple because we’re putting money to work in a company that doesn’t exist. But the other sense is we’re buying assets at book value and assets that we believe will earn a very nice return on equity, much higher than the cap rate if you will that we’ll sell that asset for once it’s developed. So we’ll capture not only the profit of the higher return equity while we hold it, but then we’ll get a higher multiple on sale because we’ll be selling cash flow at the higher multiple we went in.

So I think we’re finding some interesting things to do. They’re not traditional public to privates of mature companies without a lot of value creation. And in general everything we do, everything is dependent on value creation. So the one big sort of LBL we did, Gates is a company where we think with our super star fantastic manager Dave Calhoun, we can -- working with the management team that’s in place at Gates which is very solid, we can create a lot of value to that company that hasn’t been created yet. And it’s just a great company, great business with great market positions and by the way at right the part of the cycle.

So we like that business a lot and we had a lot of co-investment in that business and a lot of our very sophisticated institutional investors looked at that and joined us and put money into that company so we had -- if you’re worried about what we paid on that, there is a lot of market value validation from sophisticated third parties. So, all in all, we feel very good about what we’re doing.

Operator

Your next question comes from the line of Bill Katz with Citigroup. Please proceed.

Bill Katz - Citigroup

Maybe a bit of a narrow question for today’s call, but L.T., you mentioned that on the BCP V you have sort of a favorable margin opportunity as that moves further long, just given the dynamics between (indiscernible) ownership. When you look at the second quarter earnings, you did few late earnings, looks like you had a little bit elevated comp and other expenses. I’m wondering if you could maybe walk through some of the dynamics there. And how you see the dynamic between the seasoning of the realization opportunity versus maybe new investments you need over the next 12 to 18 months?

Laurence Tosi

So a couple of comments. I’ll take it in reverse, Bill. I think the comps generally in line to fee comp related ratio tends to be around 49% to 50% and I think that’s in line with where we’ve been for some time. I think the difference in the non-compensation operating or other operating expenses or non-compensation was really related, Bill, to business development expenses. And so we had some fund closing and some fund initiation expenses that were one time in the quarter. Of course those expenses will come up from time to time as other funds close. But if you back out bond interest and business development expenses, the growth rate on our non-comp or other operating expenses is 4%, which is less than half of the growth in our fee related revenues, which is about where we’ve been over the last couple of years just on a disciplined basis. And I expect that to be the case going forward. We don’t have any foreseeable large increases in basic operating expenses going forward.

Operator

Your next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed.

Michael Carrier - Bank of America Merrill Lynch

L.T. just on BCP V, you gave some detail but you went through it relatively fast. So I just want to understand, in terms of the 80-20, what portion of the catch up we saw this quarter and I think I got like the 13% in terms of getting that further catch up. But I just wanted to make sure we got the details of that because obviously it will be important over the next couple of quarters?

Laurence Tosi

Sure. First of all, Mike, my partners are chuckling at me because that was for me relative slow. But I’ll say it again. So the way I would look at the quarter is about 50% of the revenues and the economic income in private equity for the quarter were related to BCP V. About a third of the revenues and economic income in the segment were related to just the catch up fees, and that’s how I look at it. So, to give you roughly speaking, BCP V’s revenues for the quarter were $580 million. Just the catch up fees was $274 million. The economic income was $486 million and the catch up portion of that was $224 million.

Michael Carrier - Bank of America Merrill Lynch

Okay that make sense there. I think I was just referring more to the forward looking meaning, I think you mentioned that if you had another 13% increase in the fund, then that would reach full carry. So I was just trying to understand where the fund is and then how would we get to there and why you have that gap in order to get to the full carry?

Laurence Tosi

Sure. First Tony had a question which was he asked what the realizations were. So the net realizations in the quarter, which is investment income and net realized performance fees were $175 million. So there is cash carry come out of the fund.

Joan Solotar

And that’s net of compensation and expenses.

Laurence Tosi

So, Michael going forward the numbers I gave you was, in order for the fund to reach full carry, you need 13 percentage points of appreciation above the hurdle? That’s about $2.5 billion of appreciation. If we were to get to the full 13%, it would be about $1.7 billion of carry generated during that period, during the catch up, and of which I said 35% of the catch up we’ve already been through. So 65 remaining. Is that helpful?

Michael Carrier - Bank of America Merrill Lynch

Yes, guys. Thanks a lot.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Marc Irizarry - Goldman Sachs

Yes, so just a one question on private equity and I guess two parts. First is on, on Hilton and the loan on the position. Is that unusual for your private equity business to take a loan on the equity and maybe you can help explain how that maybe can enhance returns to LPs and if that’s unusual? And then has everybody saw their exit opportunities in the P/E front, how do you think strategic M&A, just given what we’ve seen some big headline deals in certain industries, what’s sort of outlook for strategic M&A exits for you guys?

Tony James

Okay, Marc, its Tony. I’d say that recapitalizations as a general category are not at all unusual and with private companies sometimes it will be, you leave the same leverage at the operating company, but you will do a holding company debenture of some sort and payout a dividend. In a sense -- with public companies, you have the option because as they are publically traded. Securities are doing more of a margin loan. And so as our portfolio shifted from predominately private to a lot of public positions, some of them quite large, I think you will see some more of that here and there. And the way it -- and what it does of course is it arbitrages a little bit of cost of funds. So we can borrow a margin loan at very low interest rates.

I hope you could probably give me the specific one but I don’t remember it off the top of my head, and replace with that and give that back to our LPs that are looking to get 20% a year return. So by arbitraging that, they are very happy and even the press on our funds which was -- in the old days the preferred return was set at about government bond rates. Today it’s like 8% government bond rates are due or less. It’s gotten -- so the preferred return has become a really significant hurdle and so if we can borrow at much less than the pref, it allows us to accrue carry faster on the remaining gains. So there is some interesting things about that and so that’s why we do it. So as a general category of things to do, it’s not usual, but we haven’t done a lot of it in this particular form because we haven’t -- until recently we haven’t had big public positions. And by the way we could sell stock too but we love the Company and the Company is doing spectacularly well.

So we’re accruing what we think is a lot of value fill on that equity. So this allows us to sort of have our cake and eat it too, get some money off the table at very low cost and continue to have 100% upside in the stock. So we sort of like that. On the strategic market, we’re clearly seeing the strategic has come back and I think you should expect that that will accrue benefits to our exits over time and I would expect more of our sales -- the evolution of the form of exits started off and the credit markets were the first thing to rally and so it started off with recapitalizations and then the equity markets rallied and so we did a lot of IPOs and secondaries and now that strategic M&A is coming back, it is just later in the cycle and more of our exits will shift to that, including some companies that are already public of course, so you will -- some of these things or have been recapped. So these things can go together but that should be a beneficial trend to us and it feels like it’s still at the early stages of that.

Operator

Your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed.

Michael Kim - Sandler O'Neill

So your cash continues to build, you just raised some debt and the value of your GP investments continue to rise as well as season. So as your funds increasingly exit some of those investments, just wondering does the thinking change at some point in terms of still retaining capital for investment spending versus maybe looking at potentially changing the payout ratio?

Tony James

This is Tony. We payout about 85% of our distributable earnings and I think that’s kind of -- we feel comfortable with that that ratio at this point in the cycle. We like to retain some earrings because we have -- in my time at Blackstone I don’t think I have even had -- seen as many really exciting new products and new initiatives that we have today. As we grow bigger, the irony is we have more and more exciting new things to do. And each of those things takes alignment of interest from our LPs and therefore skinning (ph) the game in there for capital. So when I look forward, some of the biggest -- some of the new things we have can be the biggest businesses we have in AUM. Core+ real-estate for example can be gargantuan and we have some other really, really interesting things in other businesses.

So we’re optimistic if you will that we’ve got tremendous growth needs ahead of us and that will require capital even though as you point out our traditional portfolio has been maturing. So we’re going to continue to retain capital at this rate unless something significant changes in the outlook.

Steve Schwarzman

I would add to that though Michael, exactly what Tony said. I think we feel really good about where we are. We had a blow up on earlier in the quarter. Obviously 2.7 billion in cash and corporate investments, liquid investments is a good place to be, the A+ rating, we’re solidly in the middle of that range. In this quarter to get to the 85% payout ratio we did pay out about half of the gains that we had on our investments. So we have a good realization quarter. We obviously got return to capital and we had about $220 million of actual gains realized cash in the quarter and about half of that we paid out to get to the 85%, which I think frankly reflects both our confidence in the forward operating outlook and in the balance sheet and having enough capital to do what Tony just referred to.

Operator

Your next question comes from the line of Dan Fannon with Jefferies. Please proceed.

Dan Fannon - Jefferies

One more question on some of the BCP V metrics LTE, on comp ratio and the favorable to you guys, is that just during the catch up period or is that throughout the life of the fund?

Steve Schwarzman

So Dan that’s for the whole fund and it won’t always be consistent but if the fund plays out over time, it should be -- it’s all deal by deal Dan. So it’s not (indiscernible) over time it should be 80% whether we’re in catch up or whether we’re not.

Operator

Your next question comes from the line of Glenn Schorr with ISI. Please proceed.

Glenn Schorr - ISI

Maybe just a quickie; fee revenues up 7% year-over-year, despite 19% fee earning asset growth. Is that just a function of geography of what’s being distributed -- where you are exiting and where the new money flows are coming?

Steve Schwarzman

I think it’s partly mix and where the new inflows are coming and some of the inflows also are not yet fee paying. So that’s really the impact.

Glenn Schorr - ISI

So something could be a fee earning asset but not fee paying?

Joan Solotar

Yes, so just looking at the roll forward the fee earning assets, you had year-over-year a higher mix of areas like in credit. I think it was a mix.

Steve Schwarzman

It’s mix. Mostly mix, but that ebbs and flows. We also have a number of products where you have one the fee paying assets but there is one fee for committed and un-invested and then that fee jumps up once the assets gets invested. And so when you have a lot of new funds with that kind of money obviously it starts off at lower fee roll out. In general business, there will be some exchanges but in general in our business if you look at business line by business line, we are not seeing significant price cutting or fee reductions.

Operator

Your next question comes from the line of Robert Lee with KBW. Please proceed.

Robert Lee - KBW

I guess maybe it’s a little bit of a text book question for LT but if memory serves me, I think FASB recently had to rule that on a GAAP basis at least, everyone is going to have to go to method one. So should we be thinking there is going to be any change though in your financial reporting, at least for the public, not going to change ENI or what not?

Laurence Tosi

So ruling is not definitive. They are still working through the application rules, obviously we’ve been -- as the leader in the market we’ve been intimately involved in the discussions. I’ve met with the FASB twice directly on this specific issue to work through both when the rule is been promulgated as well as its applications. So the application base is yet to come out Rob and so we’ll see how it applies. There are some interpretation of the rule as written that might not require us to go to what you would refer to as method one, which is accrual of performance fees only after all the capital is returned. Even still if that happens, we’ll have all the same metrics; just that our reconciliations to GAAP will change if that happens. So I don’t see any impact.

By the way if it were to go through and it were to have the impact that our GAAP numbers then would have that type of accrual, it wouldn’t be till 2017. And I’d like to point out that the two public managers, Fortress and Oaktree that are on that basis today also show ENI on the same basis we do. So I actually think while it will be a lot more work, it will be the exact results and it won’t have any impact on how they reflect it.

Operator

Your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.

Patrick Davitt - Autonomous

I want to talk a little bit about your discussion of the growth capital opportunities you are seeing. Can you compare and contrast how you approach something like that relative to how VC firm would what and should we take that to mean that you are now more comfortable in taking non-controlling stakes than maybe you have in the past?

Steve Schwarzman

Well, we’ve always taken non-controlling stakes and really our positioning in the market has always been, the big fund can certainly do big deals but basically does the full spectrum of stuff. And in fact large buyouts and I think that’s, let’s just say total enterprise value over 3 billion has never been more than about 25% of any fund that we’ve done. So we’ve got a long history of doing sort of smaller stuff and more growthy stuff. And of course outside the United States, we if we are talking about Asia for example, it’s almost all growth stuff and lot of it’s in our control. And some of the growth equity we are doing is control. There are just companies that have a lot of growth and tremendous opportunities. So I’m not sure if the control is the dimension to think about and we’re certainly not becoming a venture firm however. These are all companies with well-defined business models, well-defined profits and market position and customers and developed management team and on. Our skill set is not finding the next Google or understanding how someone is going to invest in that semiconductor and betting on science or anything like that. That’s not what we are doing.

Operator

The next question comes from the line of Devin Ryan with JMP Securities. Please proceed.

Devin Ryan - JMP Securities

Thank you, good morning. I just had a question on a longer-term outlook for fund raising. At the recent Analyst Day, Steve hosted a really interesting interview with Mario Giannini, the CEO of Hamilton Lane and I think one comment that stood out to me at least was just that many institutions are moving from a zero allocation to alternatives to something and in some cases the example I think that was given was moving to a $50 billion maiden investment. So it would be great to maybe put some perspective on how large do you think this untapped opportunity is where our institutions are still exploring the merits of alternatives, but just aren’t there yet. Maybe it’s more outside the U.S., or is this example that was given maybe more of the exception than a rule in your opinion?

Steve Schwarzman

I will take a little of that. I was last week in a foreign country with a capital pool that was in the $50 billion to $100 billion range that has no exposure to the alternative class and wants to do it. And they’ve made a decision to that and I think we’re well positioned to be in there first group of companies that they give money to. And these things are happening periodically, where not being in the alternative asset classes has really mathematically sort of been unsound for decades. And so people can see that that’s a smart thing to do mathematically. And what that’s leading to is new pools of capital that have been created or have been managed with a very heavy emphasis on debt are switching and they start small and then they go up to typically a 10% to 20% allocation and existing investors are increasing sort of their allocations and the retail class, which has only 2% exposure which is mostly just hedge funds. It’s still a huge area of growth.

And so if you -- in an asset class where you can perform for firms like ours by 1,000 basis points or more in terms of your products, you should expect that those institutions that observe that phenomena would like part of that and will increase their allocations because the asset class has been very resistant to loss in the down part of the cycle. That’s something that is very important to understand. Actual loss is almost negligible. There is some mark-to-market type of loss near -- at bottoms of cycles. But I think we’ve now shown as a public company and also as a private company that’s just a very transitory issue, these marks and we historically have boomed back with very large profits.

So I think we’re seeing increases from virtually every asset classification. There is an endowment that has been super huge and alternatives that is trimming back a tiny bit, but that's only because they’ve got exposures that are double and triple than the normal investor. So I think there is a lot of white space to come here with big numbers.

Operator

Your next question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.

Craig Siegenthaler - Credit Suisse

If we look at the entire business here, increasing you’re seeing high organic growth outside the private equity and real estate boxes. I’m just wondering do you think this is partly a function of where we are in the macro cycle or do you think this represents the longer term scale advantages in the hedge fund and credit platforms here?

Steve Schwarzman

I’ll take that. I think it’s some of both. We’re clearly in a favorable market cycle, return to high, flows to alternatives are increasing and so on and they are increasing because the reverse denominator affect partly and because a big chunk of traditional portfolios are in fixed income where people are earning very little and they just need more returns.

So there’s clearly a favorable environment for fund flows in our industry. At the same time, we’re opening a lot of new asset classes in new regions, new products and with great people and great returns and that's secular, that's going to continue. There will be a cycle overlaid on that, but over the long-term, it stuns me to say this, but I think looking forward our long-term secular growth rate, takes this cycle out of it at $270 billion is just as high as it was at $70 billion.

Operator

Your next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.

Brian Bedell - Deutsche Bank

Just to go back on BCP V, if we look at this longer term in terms of its lifetime realization potential, just to make sure I have the math right here, if you’ve got about total fund value of roughly $33 billion and even if we use a conservative $1.6 billion multiple invested capital, about $12 billion of profit essentially, if we just take 20% of that, we will be in a lifetime realization of $2.5 billion assuming that you get through the 13% and can accrue carry inflows. Is that correct, and then how much have you realized in cash carry on BCP V so far?

Steve Schwarzman

Okay. So, your math is directionally correct, that you just went through on the $2.5 billion $2.6 billion, given the assumptions that you gave. And I think the end of your question was how much have we realized in BCP V life-to-date?

Brian Bedell - Deutsche Bank

In cash carry, yes.

Steve Schwarzman

It’s about $320 million gross life-to-date.

Brian Bedell - Deutsche Bank

And just one last one on the fundraising. It looks like you had a solid pace of $15 billion plus fundraising, not just this quarter but over the last year and from everything that you’ve said in terms of new markets including Core+ being gargantuan in potential side, should we be thinking of that $15 million going in on sort of on an annualized pace moving up?

Steve Schwarzman

So you’ve gone that way, we would be at $15 billion pace net gross inflows per quarter. Is that what you’re asking about?

Brian Bedell - Deutsche Bank

Yes, correct.

Laurence Tosi

Well, if you look at -- the $62.4 billion over the last year has about $10 billion of inorganic, which is the acquisition of SP. So it normalized around $52 billion. That's higher than it’s been the last couple of years. We’ve been somewhere around $45 billion, $48 billion and then $52 billion. So directionally I guess your $15 billion is right. It won’t be consistent like that, but if you -- I'm sorry, I would say it’s a little bit high. I think somewhere between $45 billion and $50 billion is a more normalized run rate.

Brian Bedell - Deutsche Bank

Great. But however…

Steve Schwarzman

It’s not a static business that's grown overtime. And incidentally, I want to note that your 1-6 assumption on where that ultimately comes out, we're already at 1-6.

Operator

Your next question comes from the line of (indiscernible) with Royal Bank of Canada. Please proceed.

Unidentified Analyst

I had a quick a question on capital deployment. I heard your first comments, but I’d like to dig a little deeper into just given the records of Dry Powder -- for instance Catalunya Banc came out today stating that it’s selling its loan portfolio to Blackstone. That’s a $8.6 billion worth of portfolio. It seems like it was a very competitive bidding process, with a lot of your peers participating in this process. My question is what is it for Blackstone that makes this deal work? What is it that allows you to the IRRs that targeting? Potentially, what’s the secret sauce, because I would think that it’s a plain vanilla kind of asset that you’re buying and maybe I’ll ask you all on that (ph), but I just want to understand that we will get, that that will get to the targeted IRRs when we deploy $2 billion or so of capital?

Laurence Tosi

Yes, okay. Well, first of all, it obviously got attention from some other bidders but there weren’t a lot of them. There were very few of them, not only because it was complex. It’s a portfolio with a lot of -- you have work it. It’s not just a passive asset. These are non-performing loans. Secondly, our real estate people owned a servicer in Spain already but we are positioned to do the servicing -- a lot of the servicing of loans are stealth and have unique insight into how these loans can get worked out and how we can deal with the home owner and so on and so forth. And then we’re buying it at a huge discount to face and with leverage and with our view and a discount to the underlying replacement value of the physical assets, if we were to own them. So we have the downside covered. We have leverage and with a view of what we can do with them through our servicer and our view frankly that Spain at least has bottomed out and the wind will probably be in our backs in terms of values. We think we’ll get to our returns.

Unidentified Analyst

I see, maybe on a similar transaction. I guess, you guys brought an office in London from Carlyle. They’re basically saying that it’s a great time to sell right now and it seems like no, it’s not a (indiscernible) product or office property anymore. What drove the decision to buy the property from Carlyle? What is your view like -- what’s the difference in your view versus Carlyle’s view?

Laurence Tosi

Well, I couldn’t tell you what Carlyle’s view is expect we’ll wait -- that’s being brought by our Core+ business. So its lower risk, stabilized assets with somewhat lower return hurdles but we think we’ll get a double digit return for our investors. We’re very confident about that. And by the way, I didn’t even know they are in the real estate business actually, but our real estate people are the best operators in the world. We can buy an asset for anyone and run it better and get more cash flow out of it.

Operator

Your next question comes from line of the Warren Gardiner with Evercore. Please proceed.

Warren Gardiner - Evercore

So you may have kind of already answered this but can you just kind of remind us what your policy around -- the distribution of cash carriers, now that BCP V is cross? Will you or did you kind of hold some of it the back just to build kind of a buffer or is it more sort of formulaic?

Laurence Tosi

Okay. It’s L.T., Warren. All of our funds and all of our deals, we calculate carry on a deal by deal basis. When a fund is generating carry, i.e. it’s above the hurdle, we pay out realizations as they are earned. So there is no concept of holding things back. Now, in order to do that, you have to look at where you think the entire fund will end up and if you’re conservative in forecasting the future values of the whole fund, you should be conservative then in calculating what you’re paying out and that should cover you with respect to future changes and so that’s how we do it. So BCP V actually has been paying cash carry for a couple of quarters because it consists of two separate funds and there are LPs in one of the segments that we’re already paying carry going back to the first quarter. Now a larger percentage of them, in both sides of the fund, all in the smaller fund and part of the larger fund are paying carry as well. But there’s no concept of just, indiscriminately kind of holding things back. It all goes to the conservative outlook that you have and that will make your calculation of payouts conservative.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer & Company. Please proceed.

Chris Kotowski - Oppenheimer & Company

Mine was just asked. Thank you.

Joan Solotar

Ben, I see that we have two follow up questions.

Operator

The first follow-up question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.

Brian Bedell - Deutsche Bank

Just wanted to circle back on the Core+. You based $2 billion so far in that, I don’t know if there’s a way you can sort of size that opportunity on rates and giving your expertise in real estate over the next two to three years in terms of going back to the fund raising size question. And then also can you remind us of the types of IRRs that you are underwriting Core+ portfolio overall?

Laurence Tosi

Let me just clarify one thing and then I am going to turn the ultimate size over to Steve, because he’s our dreamer and he sets our standards and goals here. And whatever he -- whenever he sets it, we accomplish it. So I said near $2 billion. Between what we’ve closed and another transaction we have in process, it’s actually about $1.8 billion now. Someone tell me if I am (indiscernible). So that’s where we are now and then I’ll turn it over to Steve for how big this business can be. And let me just comment on the returns. The returns are in the low double digit net area. Steve.

Steve Schwarzman

This is an interesting one, because the Core+ asset class is about three times the size of what we’re doing in the opportunity class and the opportunity segment, now I guess we’re up to around $80 billion some odd, not all of which is equity. We have probably LT somewhere around $10 billion of debt products in there and a little bit, something like about 10 billion.

So as I think about this and this is my own personal view and not everybody always agrees with me even, within the firm that’s for sure when we get into these new areas, but I look at a business like that, we’re going to be -- if what we think is going to happen year one is about $5 billion and if we can continue do the kinds of things we think we can do in terms of producing the returns Tony was just talking about, then you could look at a business like this over 10 year period and have a $100 billion under management. Now that’s something that would make my general counsel really squirm, which apparently I can see him, he’s squirming.

And there is no guarantee. That’s what I would call an aspirational goal. Most people would say, if you could do half of that that would be pretty terrific. So I think the reality is somewhere in between. I am a believer in the higher end of that. I think, if you can deliver 10, 11, 12 returns to institutions who are really focused on making 8, and if you can do it with real safety, you will have good flows there, and the advantage we have is that we have the most active deal flow in the world in real estate. And for us, all we’re doing is chopping off the lower return end of properties that don’t need our opportunistic criteria for our fund.

So we should see an awful lot of this type of thing and we’re set up perfectly with a major asset management capability to improve properties. And we also have a terrific set of relationships with people who give out real estate money around the world in the opportunity area. I guess we’re like somewhere in the last year or two. I forget whether we’ve raised six times more money than anybody else in the world or eight times. It’s some number that L.T. can or John can get you after the meeting, but it dwarfs what everybody else is doing and so I think with a really good product like this within asset class, that that is already three times the size, we should be able to do the kind of numbers overtime that I’m talking about.

Brian Bedell - Deutsche Bank

And it sounds like LPs have been asking for this or is it more of a creation on your side. It sounds like the demand would be very strong given the increasing desire date immunized portfolios (indiscernible)?

Steve Schwarzman

Yes, finance is like a very funny business. What passes or innovation isn’t so innovative and that -- this is the kind of things where we have product and really quality buildings that would fit this kind of model that really just simply do not meet the criteria for the opportunity part of our business. And we took these products. You start with one opportunity, then you go onto others and it was a huge amount of receptivity on the part of the institutional community. And what happens is once you discover that, you do a second, you do a third, you do a fourth and you see that there is really big demand. And so what we’ve realized is that we could take our same set of skills and basically just segment them, and the market would respond to it, and that’s why we did it.

Operator

And the last question comes from the line of Robert Lee with KBW. Please proceed.

Robert Lee - KBW

Last follow-up is, clearly you guys had a lot success in a lot of places launching new strategies, reaping assets in those strategies, starting some 40 Act product but I guess just kind of curious, I’m sure, I think most businesses, successful as they may be always have one of two things that they have tried that didn’t pan out as expected or as hoped. And I’m just curious over last couple of years if there is some new strategy that you’ve launched or took a stab at or new markets or geographies that you were thinking of entering, that didn’t seem to pan out. Just trying to get a feel for maybe what some of those were but more importantly maybe why you think those didn’t succeed as you had hoped and how that maybe altered how you approach new product development going forward?

Steve Schwarzman

Well I guess I’ll take that one, and of course we’ve had initiatives that didn’t pan out as we hoped. Sometimes the performance wasn’t what we’d hoped. Sometimes we’d feel it was a great idea but the market just didn’t want to fund it or the timing was wrong. And sometimes whatever premise or whatever the business premise was, the world changed and therefore the opportunities sort of disappeared. We had at one point in this business a mutual fund business that ran closed-end funds. They were the largest mutual fund in India and they had one invested in non-India, Asia. And it was a closed-end fund as I mentioned. It was -- obviously the meltdown in global markets and those currencies and their stock markets in particular made that performance not very good and it kind of got sub-scale and we just decided; having owned the business for a while, we decided there weren’t a lot of synergies and we went our way. And one of the earlier calls, somebody asked about getting a loan only business and I think one of the learnings there was there is not a lot of synergies between a loan only business and what we do generally.

So that’s an example. We tried other things, whether that be office or not or products, but nothing big. I think we do a pretty good job focusing on really good opportunities and getting really good talent to do it. And I think the most important thing that we have, we have to attract the best talent in the world, we have to train it, we have to get it - adapt our culture and the way we think about things and if we do that and we put really great talent against the opportunities we see, we don’t miss that much. And so we’re not perfect but we feel very confident about the opportunities on the page.

Joan Solotar

Thanks everyone for dialing in and we look forward to any follow up questions off the call.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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