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Wall Street Breakfast

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

Q2 2007 Earnings Call

August 13, 2007 11:00 am ET

Executives

Joan Solotar - Senior Managing Director Public Markets

Mike Puglisi - CFO

Tony James - President and COO

Analysts

Roger Freeman - Lehman Brothers

Matt Fischer - Deutsche Bank

Michael Hecht - Banc of America

Prashant Batia - Citigroup

Hojoon Lee - Morgan Stanley

Douglas Sipkin - Wachovia

Presentation

Operator

Good day, ladies and gentlemen, and welcome to The Blackstone Group's Second Quarter 2007 Earnings Call. My name is Camey and it will be my pleasure to be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conduction a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to the Senior Managing Director Public Markets, Ms. Joan Solotar. Please proceed, ma'am.

Joan Solotar

Thank you. Good morning, and welcome to the first earnings call for Blackstone since our IPO in June. I am joined today by Tony James, President and Chief Operating Officer, Mike Puglisi, Chief Financial Officer, and Dennis Walsh, Chief Accounting Officer.

Earlier this morning, we issued a press release announcing second quarter results, which is available on our website. Before we review the quarter, and take your questions, I would like to remind you that today's call may include forward-looking statements, which are not historical facts, but instead represent only Blackstone's belief regarding future events. Many of which by their nature are inherently uncertain and outside of the firms control.

Actual results and financial condition may differ possibly materially from the anticipated results and financial condition indicated in these forward-looking statements. As well, the company does not undertake any duty to update forward-looking statements. I will refer you to the risk factor section of our S-1 document and the MD&A section of our 10-Q, which will be filed later today.

This audiocast is copyrighted material of The Blackstone Group's and may not be duplicated, reproduced, or rebroadcast without consent. I will give you a brief overview of the results; turn it over to Mike, to discuss the details of the quarter, and then to Tony to talk about the business and the environment.

Bottom-line on the quarter ending June is that results were fantastic across our business segments. Pro forma revenues grew 191% year-over-year to $979 million in the second quarter that's down from roughly $1.2 billion in this year's first quarter. After-tax pro forma's net income or ENI totaled $515.5 million that's up more than 300% from last year's $118.1 million, and down from the first quarter $694 million per unit that's $0.46 ENI in the second quarter versus a $0.11 a year ago and $0.62 in this year's s first quarter. Declines in revenue and ENI from the first quarter related to large revenue contribution from the EOP deal in the first quarter.

If you look at adjusted cash flow, which takes out any unrealized gains and unrealized comps associated with those gains that totaled $689 million that's up 200% from last year's second quarter, which was $227 million and it's more than doubled this year's first quarter at $330 million. If you divide that by the appropriate units, it was $0.63 in the second quarter that compared with $0.21 a year ago and $0.30 in this year's first quarter.

Year-over-year you could see that we had robust performance trends across private equity, real estate and the marketable alternate business. We saw growth within the advisory business as well, but to give you a little more clarity, M&A flow and the placement of alternatives was up quite a bit but we were in a weak environment for the corporate restructuring group. Since that time we've actually seen a nice pickup in restructuring activity. Sequentially, we saw meaningful increases other than in real estate where, as I had mentioned earlier, we had a large contribution in the first quarter from EOP transaction.

Regarding the environment, in the last week of June, we experienced the beginnings of significant dislocation in the financial markets, particularly in the US. Generally speaking the market in these floatations are certainly challenging in several ways. A full cycle is ultimately best for our business longer term such that there are periods during which we can acquire properties more cheaply and with less competition, and then other periods where we can more easily harvest investment gains. Regarding our hedge funds, they are actually all solidly up year-to-date.

Overall, we feel good about our properties and our competitive position and we think we could be the beneficiaries of a slight cyclicality in our business. We are also optimistic about our business opportunities ahead of us. Some examples, we have hired a partner in real estate focused on liquid and debt securities, we've opened real estate offices in Tokyo and Hong Kong. Now, we have several new products in planning stages both in liquid and long term strategies, and we are seeing an increased contribution from our European M&A practice which are still in early stages of development.

A couple of comments on the release before I turn it over to Mike. We've given you GAAP results and then reconciled that to economic net income or ENI. ENI is a non-GAAP measurement that we use internally to benchmark performance. It takes out the non-cash vesting of equity comp as well as the amortization of intangibles from GAAP net income and you can see that reconciliation in the release and in the Q. I have given you this pro forma cash flow for the quarter just to remind you that was $0.61 in the second quarter, up from $0.21 a year ago. And I'll now turn it over to Mike to give you the segment results. Mike?

Mike Puglisi

Thank you, Joan. Good morning to all. I will take you through some of the financial results and the metrics for our company, and as well the different 404 business segments. First as to our income statement, we reported second quarter net income of $774 million, up significantly from last year. Similarly, pro forma ENI after tax rose meaningfully as well to $515 million in the June quarter.

For the six months ended June 30, 2007, our net income was $1.9 billion, our pro forma ENI after tax for that six month period was $1.2 billion, a 221% increase over the comparable period and that's a $1.08 per unit. And our pro forma adjusted cash flow from operations for the six months ended June 30, '07 totaled $1.019 billion or $0.94 per unit, a 31% increase over the comparable prior period. Our management fees which are one of least lumpy revenue items for us grew more than 24% to $358 million in the quarter and accounted for 37% of our revenues.

With respect to our business segments, our first segment Private Equity had achieved excellent results with revenue growth of 239% to $426 million. The biggest changes were in performances fees and allocations, which rose to $254 million from $22 million a year ago. This line item will move around from quarter to quarter.

We also grew fee-earning assets under management and private equity by $3 billion to $23.6 billion. In our private equity segment most the LP capital to work this year was in the second quarter at $1.6 billion. As of July 3, 2007, we had $6 billion of additional LP capital commitments for our private equity segment.

Moving on to our Real Estate segment, it too performed very well with revenues up in all categories. In the aggregate, revenues grew 248% in the quarter, we had a fourfold increase in performance fees and allocations and 47% rise in management fees. At the end of the quarter, we had $15.1 billion in real estate fee earning assets under management compared with roughly $9 billion last year.

We put $71 million of LP capital to work in real estate in the second quarter and of note, we announced the Hilton transaction after quarter-end, which remains on track to close in the fourth quarter. Including the Hilton deal, real estate has committed $2.9 billion in transactions as of July 3rd of this year.

As to our Marketable Alternative segment, it also achieved more than fourfold increase in revenues. We had healthy investment performance with all categories out performing benchmark indices and we had great success gathering assets leading to fee earnings assets of period end of $33 billion, up from $18.7 billion a year ago.

Our fourth business segment the Financial Advisory business, realized revenue increases of $98 million up $17.7 from last year's second quarter. We saw healthy M&A deal flow and strong demand for our fund placement businesses, as Joan mentioned. We had, howeve,r with respect to our restructuring group creditors for was not the best environment. However we have seen a pickup in restructuring activity over the last several weeks.

With respect to our capital position, regarding our statement of financial conditions, the primary proceeds from the recent IPO totaled $2.9 billion of which $1.2 billion was used to repay outstanding indebtedness under our revolving credit facility roughly $1.25 has been invested within our Marketable Alternatives segment, and another roughly $150 million has been funded or is in the process of being funded, as general partner interest in our private equity and real estate funds.

Two additional items, I would like to note with respect to our statement of financial condition. You will note that total assets and total liabilities and partner's capital have decreased significantly from December 31st 2006 to June 30th 2007. As we've noted in our S-1 filing, we were undertaking to grant kick-out rates to certain of our Blackstone funds unaffiliated investors. We have done so and our statement of the financial condition as of June 30th reflects that impact mainly the deconsolidation of these funds from our financials, where these kick-out rates were effective prior to June 30th. In the third quarter, you will see deconsolidation of certain fund or hedge funds, which became effective July 1st.

I would also like to highlight, I will point out that our good will and intangible assets totaled $2.2 billion, as of June 30,'07 as compared to approximately $8 billion that was reflected in our pro forma statement of financial condition presented in our S1. Subsequent to our Initial Public Offering, the SEC agreed that we should include the senior management directors of the firm and that solely our founders in our control group, which in effect meant that we recorded their exchange, their interest at their costs therefore reducing goodwill and other intangibles by approximately $6 billion and also lower amortization expense from what we had anticipated in the perspectives.

With that, I would l like to turn it over to Tony James.

Tony James

Okay. Well thank you Mike and thank you everyone for your time. I am going to talk little bit about qualitatively what's going on in each of our segments and then try to give you a feel for the different businesses, and then we can get into more detail on questions.

Starting with our ‘07 Private Equity, we had a very good quarter essentially tripled in both revenues and earnings over last year and also well above sequential quarter, which is the first quarter of the year. The portfolio is in great shape operationally other than a few coming specific issues with the no sign in the general slowdown in the economies or particularly in the US economy. With respect to our European investments, the economy there actually stronger than have been in the last five years as far as the effect at the least and we are gaining the benefit of the appreciation with the dollar in the Europe.

Asia continues very strong growth once again. We see no pullback there. We have in our existing portfolio as you know 50 companies thereabout amongst some of them are already covered. They have about $3.5 billion of power securities in our portfolio, and when the stock markets move of course they move, so there has been some downward movement in post June 30th, but nothing outlined with the market.

In terms of fund raising, we added $1.01 billion to our assets under management and finalized closing ECP 5. ECP 5 at $21.7 billion is the largest fund in history, and it's already 70% invested. It's our typical practice to start raising a new fund, when we get to be about three quarters invested, so that's something we will anticipate doing shortly.

In terms of new investing, I think, we stayed very disciplined this year. In fact, we found the first half of the year extremely frustrating, as we are routinely outbid by 10% to 15% by other bidders and companies that were for sale. 10% to 15% might not sound like a lot, but in the market for corporate control, when you put that as the total enterprise value differential is quite a lot, and that was frustrating. I think that discipline that we show for the first half of the year is paying off very handsomely now. We have a little in the way of hung up deals with lots of dry powder. We have fund in very good shape, and so I think this is kind of our market, if you will.

Meanwhile values are already starting to correct. We are already thinking of willingly taking lower prices doing things like taking paperback and other things, they won't willing to do earlier this year. So I think, on balance the return opportunities that we see in private equity has the best we have seen in at least two years.

Setting up new deals in this environment is clearly harder, and that will have some impact on our near term results in two ways. First of all, it will mean that step up fees, if you are setting up fewer deals will be softer and it also will delay realization. We do try to time our realization to be the right time to sell and with the stock it bar market where they are, we might back off somewhat of that. Although we continue to have a robust scheduled realization on track as well, but there are some mitigates longer term. First of all, as I mentioned, I think we can anticipate better, better returns for all the money we do put to work.

Secondly there is less competition for properties now and we suite that allow the marginal players how the industry, which is good thing. We announced a deal last week, most recent deal, which is $500 million investment in Stiefel pharmaceutical. We were very, very excited about.

So I think that there will be clearly fewer mega deals until the market that market come back a little bit. But there is still a lot of opportunities and things like preferred stock, which was Stiefel investment, smaller buyouts, access, the companies who used to have access to debt or equity markets are now turning to the private markets. That I will know we got to have a very robust pipeline and fields in Asia.

And then finally we are looking hard at taking advantage of distressed credit market by buying actually debt instruments at discount and usually with some attractive special purpose leverage. We have a backlog of closings in private equity of about 10 investments already agreed to involving over $0.5 billion to equity, which closed for the balance of '07, which put us in good shape in the segment for the balance of the year.

In real estate in general the picture is quite similar, although is negative with the corporate market. That's ironical given that the triggering event of this was the problem in the subprime area. But real estate life private equity had a tremendous second quarter to a triple in revenues or more than triple in revenues and earnings. Real estate was slightly below, the second quarter slightly below sequential with first quarter. However, because the first quarter has the benefit of ELP, which was of course the huge deal that generated a lot of fees and also some immediate gains on asset sales.

The portfolio, real estate portfolio is also in terrific shape, rents are still increasing almost every market we are in. And replacement costs are still extremely high and too high to justify new supply. So, I think that the fundamental outlook for the portfolio is very strong as it is with private equity.

All of our real estate properties financed with long term capital and rate caps they are fine from a financial standpoint. We sold over $40 billion of assets this year at very good prices, so in many cases we brought down our, so to speak, our risk and our purchase prices are a basis in the remainder, and feel very good about other fundamental values what we sit today.

In terms of fund raising we had another closing on BREP VI bringing up to $10 billion out of a maximum of $10.2 billion so, we will have a final closing but that's about done. This slight private equity is the largest real estate business fund ever raised and I think that it is 40% divested as we speak. We added in real estate a new partner to build a credit opportunity/mezzanine capability with respect to real estate investments, I think that we added about 6 months ago but I think the timing is the most ideal for that now. And we have couple of different real estate funds in the market.

In terms of the new investing environment for real estate life private equity is challenging with respect to large deals and so, the investment phase will probably climb somewhat from the frenzied level of the past two years. But there is still good deal flow particularly in Asia and Europe. While public stocks are down, individual asset value is pretty stable although clearly some of the froth in the market has gone. As I mentioned I think it's going to be hard to do the [very big trade] so it will be more focused on one-off individual assets which is where the market has traditionally lived.

As of private equity, this is mitigated for us by having the marginal players especially those who lie in the bridge equities piece of the market. So, in an environment like this it's a real advantage for the bigger funds and the ones that have greater access to capital, both of which accrues to our advantage.

In terms of future closings, the biggest here we have in the pipeline is Hilton. And there I should say the that not scheduled, as Mike has said, it closed in the fourth quarter. We got financing in place so, there is no issues there, and results continue very strong in Hilton's businesses.

Our next segment is the marketable alternative assets management business and this too had a great second quarter more than tripling revenue and profits as well. Assets under management in this business were at $31 billion as of at the end of March are now at $41 billion, a 30% increase in just 4 months, and that is growth across all our product lines. The investment performance that were funds, they all of them had a very strong second quarter in terms of both absolute returns and relative to their benchmark to their comparable peer groups. Since June 30th, they have been about flat and are still as John mentioned well up year-to-date and in particular out of the performance in Asia has been spectacular in the Asian fund.

Our credit businesses, which are our CLO business and [merit business], are both doing extremely well. This is an environment which is that were set-up to the price. So, their deal flow is up substantially, and their potential returns from investments, is also up substantially. Our CLOs were not getting much wider spreads over their cost of funds than they were pre-June 30th, and our mezzanine funds have seen return move from the low double-digit to 15% plus on mezzanine investment.

With public markets down, it's a great environment for our credit funds, because there is nowhere else for people looking to do leverage transactions to go. In terms of fund raising in this segment, we continue to gather assets in our existing businesses, and have several new funds, new vehicles in the market and the process has been launched, as we speak.

Our last segment is the Advisory segment, they had a solid second quarter with revenues up 17% year-over-year, and they were also up sequentially over the first quarter. Backlogs were up significantly over last year, and seem to be holding not withstanding their most recent results in the credit market. As you heard restructuring had a weak environment, but there is little move going on now as a result of credit contraction.

Park Hill Group is sold out into well next year in terms of their capacity to take on new business. And in M&A, the corporate business continues unabated, but some of the sellers looking for private equity bid are putting the process on hold temporarily and this could bode some softness in the near term if the market don't stabilize, but usually once they stabilized Stiefel accept the new levels and come back.

Some new initiatives in the advisory segment we continue to build out Europe. We now have four partners with support teams in M&A restructuring and a full complement of people in Park Hill Group in Europe, and once the notable mandates right out of the box including representing Reuters and the merger with Thomson and representing China in the investment in Barclays, they will facilitate ABN Amro bid there is some fantastic wins there for us.

Overall for the whole front, as you heard I think we had a very good quarter both in terms of financial results and where are the businesses. I should say our adjusted cash flow was 680, you heard about the earnings and ENI, earnings net income tripling, adjusted cash flow 688 million compared to 227 million in '06 and with only about half of that 321 million in the first quarter.

Assets under management firm wide went at the end of March 31 from 83 billion and we now have 98.5 million in the assets under management. We realized your focus will be on the future however, not so much the past and I would say I feel that our competitive position in each business is never going to stronger. And we continue to build out our footprint with John [Nash], who just opened a new office in Tokyo. The real estate teams being deployed in Hong Kong and Mumbai and its advisory team is being deployed in Europe.

Our opportunities to earn return are substantially greater then they have been for sometime. That bodes well for future with so much of our earnings eventually come from investments gains. We have seven new funds in the market, which should raise something like $15 to $20 billion in incremental AUM by the end of next year. And that's in addition to the capital that our existing hedge funds will take in the ordinary course.

Finally, we have a number of new initiatives that we were working on, with the new businesses, where we would began starting either de novo or based on our acquisitions to get them started and many of those were very exciting as well. So, that's the summary of the business. I didn't want to talk briefly about the tax situation in Washington because I am sure that's the question in people's mind. And just to save the question, I just though of just going ahead and tell you what I know about that.

Obviously there has been substantial crest about that. There have been several bills proposed that was either a tax carriage income, better capital gain, as current income or we change the way publicly traded partnerships are taxed. However not withstanding the crest of those proposals, of those bills we have gotten, it's also considerable acquisition to those incumbent. And no consensus emerged so far; even to permit a committee vote on any of these initiatives.

That wouldn't surprise me given the makeup of Congress as tax in general, our roads over the next few years especially for high income earners and on capital gains because there is a need to pay for double program. Our goal is just to see that the private equity is treated consistently and fairly in relation to or a similar situated businesses like venture capital, real estate energy and so on.

Well I can't predict what's happened. I can't say that I think the worst case would be at some point between now and 2013 our tax rate on a fully public basis will increase from 15% to 20% to something like 35% to 40%, if we can do something fundamental from a structural standpoint to reduce that tax rate. Now, we hope that it won't happen. But that's the worse that could happen, and we think even that has been more and fully just discounted in the stock price, but you guys would be the better judges of that than I.

With that, that's my summary. With that, I think, we will open it up for questions, and I guess you beep the operator and however that's done.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Roger Freeman with Lehman Brothers. Please proceed sir.

Roger Freeman - Lehman Brothers

Hi, good morning. I guess Tony you made an interesting comment about returns going forward you think the opportunities are good. If you think about the maybe the leverage coming down in future deals, and then I think you've mentioned that housing prices have come down as well. How do you sort of see that all playing out? I mean, I think, you made a comment in the past that increasing leverages is really accrued to seller. So, if leverage comes down and deal prices come down, did your returns go up?

Tony James

Now Roger, the simple answer is yes. It takes what sometimes you have an adjustment period that's does not usually all that long, but you have an adjustment period. But basically what happens is we have raised our return just like all the other asset classes, returns also have gone up.

So, whereas equity returns were sneaking down into towards the mid teens, we tried to resist that but for a great company might have been add there. They are now up in to the high-teens or low 20s again where they have been historically, and you get there with less leverage and you get there with lower purchase price to compensate for the leverage.

In the last six months, every investment while we have gotten a lot of leverage, we assumed that when we exited the deal, we exited at a multiple substantially less than we are paying to go in. So, you have to not only get the leverage to work for you, but you have to and make the operational changes to get the earnings. And those had to compensate for declining multiples. That multiple bites out of the returns much lower now. And so even without the leverage, you can still get higher returns.

Roger Freeman - Lehman Brothers

Okay. That's helpful. I guess one of the other thing I think you have said has been quite beneficial to you is the lack of life covenants in NDOs and I guess that is pretty much off the table now and future deals going forward. As you look at deals that you have done, maybe the first half of this year, I mean how many of those would you not have done if you haven't gotten covenant like terms, and how do you think that is going to impact you going forward?

Tony James

Well, I guess, two comments to that. It's the covenant life becomes much, much more important as your leverage ratio gets higher. So, when you have ten times debt, you need covering it like structures much more when you have fixed on debt because you guys have less room in the whole capital structure. So as leverage ratios comes down that will become less important.

So, I was just want to make that point number one. In simple answer to your question, I think there is a couple of deals in there, we probably wouldn't have done without certainly the prices we did, without covering life structures.

On the other hand in general as you look at it, we were not a very aggressive buyer in the first of this year because, (a) we almost never took all the leverage to market operative and (b) as I mentioned before we just couldn't to get the price that others saw. So, it wasn't changed much of what we would have decided to do, Candley.

Roger Freeman - Lehman Brothers

Okay. Thanks. One just last thing and I will jump back into queue. As you think you had to raising your next private equity fund, you have any thoughts at this point on how they big the fund that might be and is that change at all as you got healthy investment overall the last few weeks?

Tony James

Well, I'll just not to comment on the specific because we have some product placement exemption regulation that we have to, have to respect. But so I'm going to dug that question Roger.

Roger Freeman - Lehman Brothers

Okay. Fair enough. Thank you.

Operator

The next question comes from the line of Matt Fischer with Deutsche Bank. Please proceed.

Matt Fischer - Deutsche Bank

Hi, good morning. In terms of taxes how should we think about give that they will likely fluctuate core into business mix? How do we think about going forward reasonable rate?

Joan Solotar

We have given you the range of 15% to 20% and that's half of the pro forma ENI. And it will vary based as you say on a mix so imperious to where you going to have more non-qualified that tax at the full corporate rate, it will end up more towards the 20% whereas when you have more in the gain side we will end up more towards the 15%. So, it really will vary based on the mix.

Matt Fischer - Deutsche Bank

Okay.

Joan Solotar

You should be taxing the non-qualified at the full corporate rate and then the rest flows through to the partnership at zero.

Matt Fischer - Deutsche Bank

Right. And then, in terms of Tony's statement, the opportunity best in two years, is this across all of the businesses or is there particular pockets of opportunity?

Tony James

Well, when I said that on that I was really talking about private equity. It's a little hard to generalize across all the businesses. So that was a reference to the private.

Matt Fischer - Deutsche Bank

Okay

Tony James

To private equity.

Matt Fischer - Deutsche Bank

And then, within real estate, could you tell us I guess when we look at EOP the carry gains and fees associated with your pay during the quarter and perhaps on what percent of the investment remains at this point?

Tony James

Well, we've sold approximately $27 billion of EOP assets out of fortyish.

Matt Fischer - Deutsche Bank

Okay. And then at quarter-end, can you tell us what that number was, there was some more recent announcement so?

Tony James

May be Joan can get back to you, I am not sure exactly what that was at quarter-end.

Matt Fischer - Deutsche Bank

Okay. I guess that it for now Thank you very much.

Operator

Next question comes from the line for Michael Hecht with Banc of America. Please proceed.

Michael Hecht - Banc of America

Good morning

Joan Solotar

Good morning.

Michael Hecht - Banc of America

So, I just wanted to come back on broadly and think about I mean, you guys have now earned about $0.94 of adjusted cash flow from operations so far in the first six months. And, I assume you're still targeting paying out about a 100% this is a dividend, I mean since you have now are more than 75% of what you committed to pay out as an annual kind of annual rate, I mean, at what point you think you will look at reconsidering what dividend level is most appropriate, I know earnings could be lumpy and stuff but just generally?

Tony James

Well that's a fair question, Michael. We don't want get into the trap of, frankly as we've discussed, may be it's not the trap, we don't want get into the habit of giving guidance. So, what we try to do is give a minimum that we thought was something we comfortably earn.

And each year as we go into the year we probably have a somewhat certainly in the next three years probably pay out $0.30 a quarter in the first few quarters and then sort of have a larger fourth quarter dividend where we have a true up, and it allows us I think to manage our business in the way that's best for all the investors, not the people on this call as well as some of their partners and not have to be managing to a target that might become artificial.

As the last 30 days has showed, it shows how quickly the world can change. And I am just glad, I don't have to manage to something that we put out there 6 or 9 months ago. And I think we are pretty determined to stick on to that. So, I think we will just leave with the $1.20 where it is and pretty well and more and if we do in it will be paid off.

Michael Hecht - Banc of America

Got you. It's fair enough. May be you come back your comments on kind of return environment, I think we are all kind of pleasantly surprise to hear about your outlook on returns I am hearing at that time of the IPO you guys have kind of given some ranges on multiples of invested capital and holding periods across both Corporate Private Equity and Real Estate Private Equity. May be can you just remind us kind of those what those ranges are? And then anything in the recent environment that kind of suggests where we are for both of those, it sounds like may be on the multiple side a little bit higher, but on the holding period also a little bit higher as well?

Tony James

Yeah. I think directionally that's probably right. But to remind you, historically, both the real estate and private equity has been about 2.6 to 1 multiple of money historically, real estate has been about 2.2 to 1. And the holding periods of private equity have been 3.5 years and real estate something short of 2.5 years, I think about.

I think in this environment, I would have said that we were getting close in the early part of the year even on the deals we were doing, and we were I think more disciplined than most of looking at multiples of money where the anticipation was 2 or close to it maybe a little bit more unless you got lucky. And we usually count on being pretty conservative and take that out of it.

So, on our runs, we were looking at often deals that didn't have much over to in them. At this point the deals were looking have 2.5 to 3 on them. But, we are also expecting in this market to put the money out and let it work for a little longer. So, where as the last fund I think, the holding period got down to about 2 years, it will be more verging towards this historical average.

Michael Hecht - Banc of America

Okay, great that's helpful. And then in the press, we kind of read a lot about different deals facing kind of financing issues or kind of investment bank pushing back on unbridged loans and stuff. I mean, can you talk about what kind of sensitivity you guys have that I guess, more so in some of the deals that are either in your backlog or kind of deals that you were working on and seeing today?

Mike Puglisi

Yeah. Okay. Well, lot of pushback in that. I think our backlog generally in pretty good shape. The only issues would be in our view were company's fundamental business prospects are deteriorating, in which case we would have to rethink that because we have a usually material adverse change their results. But just financing market itself, we don't have any worries in that. We don't sign up any deals once we have the money and it's committed and capped and all that sort of thing.

So, assuming that our view of the company that we are buying, the fundamental business hasn't changed, we should in that environment therefore get to the return we bargain for which is still attractive. Because as I say we didn't chase deals in the first half of this year from a return perspective.

So, I think that and we have very few un-builds as I mentioned and I think we are in very good shape there. I will say this, the deal flow continues to be very strong and we are also start to look directly at some of the debt securities, which are trading at the front level, but they are not distressed [from a color] perspective. For companies that we have worked on and we over bid we starting to look at those is being very attractive investment, very frankly I think we maybe able to buy the debt in these companies and get a higher return in underlying equity and we are looking hard at that. That's pretty appealing us.

Michael Hecht - Banc of America

Okay, great. That's interesting. Thanks. Just one last question, a lot of focus today obviously on a kind of quench strategies on the street, some of the Goldman Sachs one for example. Can you just remind us within the marketable alternative business and do you have any products more on the quantitative side that might be impacted by some of the correlation issues we are seeing in some of other products out there.

Tony James

Well, I will say that, the simple answer is that we have limited exposure I think the total exposure bank stuff 3.5% of assets. But I will also say that the press reports that the client funds are having problems, is reflected in what we do see out there. There were a lot of them that‘s have the correlation model suddenly going out of wrack.

Michael Hecht - Banc of America

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Prashant Batia with Citigroup. Please proceed.

Prashant Batia - Citigroup

Hi, you talked about the backlog on the financing side, it seems like you can mange to do that pretty well. Do you think it has implications in terms of the industry there are some other players that have much bigger deals backed up in that backlog, and how long do you think it will take to clear that backlog in terms of the financing that needs to be done?

Tony James

Well, that's a great question and it's one, I must we've been debating a lot. We've got a one of the things that we can do is to create advantage. We've got our debt people, and our equity people and our private equity people all together. So, you can see it from all the different perspectives, our bank loan people, and so on, and I think that's the great advantage. And we've want through that wonderful process and come out with an answer that clear much, no one really knows.

I think, the sense that people will come back right after labor day and this business is usual with some people are still talking about less or today, but you will be surprised even a couple of good days in the market and they started saying that again. I think that sense is way too optimistic to myself. I think it will take a while to work through this. But the good part of it is, it's just imbalances, supply and demand. It's not fundamental credit problems. So, you are not having these credits blowup, and that's kind of why I want to talk about what we see through our portfolio company.

We don't see any signs of an economic slowdown. Although the do and stay scenario is that concern in the credit markets and equity market, and home prices arouse consumer confidence, and consumer starts to pullback, and that does trigger a shorter economy. We are not seeing that yet, but it could happen. But I don't have any clear answers for you honestly.

Prashant Batia - Citigroup

Okay. Great. But either way it sounds like you can be opportunistic, if it takes a lot longer than the next couple of months.

Tony James

Absolutely, I think with respect to all of our new capital that's probably a good thing. With respect to the existing investments obviously if the markets come way down then it will push the realization without further.

Prashant Batia - Citigroup

Okay. And then just in terms of the new capital raise at the IPO, I think after paying off debt, it was roughly a $1.6 billion. Could you just give us an update on have you put some of that to work already or is that kind of on the side lines ready to be put to work later?

Joan Solotar

Mike actually went through some of that. But Mike can you run through it again?

Mike Puglisi

Sure, I will be to. Yes, we took $1.250 share already have invested that in our MAAM segment. We also put another $150 million. We funded and/or the process of funding into our private equity and real estate deals and we've got some other commitments, which we will be funding in both those areas private equity and real estate over the next several months. We are quickly deploying it, as you can see.

Prashant Batia - Citigroup

Okay. And just in the MAAM segment it looks like, I think, from year end you are up over $10 billion. The performance seems, I think, you had year-to-date and even positive post June or flat post June. Where are those flows coming from primarily? Where you are seeing the best traction in terms of getting new inflows?

Tony James

I guess, I will take that. By far the biggest business there of course is our MAAM hedge fund, fund of funds business, and that as a result of bulk of the flows. Although, it's not end results they continue to gather assets at a very attractive rate. And I think, in an environment like this just a little advertisement for MAAM; it's a fantastic place to put money because they are very downside protected as all of our strategies are. And so, I think investors see that, and I think, Joan or someone mentioned size of quality.

I think this is a kind of vehicle that actually benefits in this market environment as well as I think just where we were positioned in each of our segments. I think, the mindset, that's the quality of the MAAM means that people are more gravitate to us. Joan, do you have some specifics you want to add to that?

Joan Solotar

Yeah. Just generally speaking MAAM is the largest dollar amount. But the increases have been strong across the board. So, if you look at the long shot distressed corporate as Asia, etcetera, we have seen very strong double digit it's not triple-digit growth year-over-year.

Prashant Batia - Citigroup

Okay. Great. And then just finally, I know it's still very early, but you are seeing any traction in terms of investment opportunities as they relate to your relationship with China?

Tony James

Well, as we speak, Steve Schwarzman is over there, spending the week in China, and I would say we have a lot of very interesting conversations going on. We actually have a couple of transactions in the works. Our investment transactions and we have obviously benefited from the relationship because when we represented China in their investment in Barclays. Then we have other advisories from China as well. So, it looks promising, but its early days still.

Prashant Batia - Citigroup

Okay, great. Thank you.

Operator

Next question comes from the line of Mike Mayor with Deutsche Bank. Please proceed.

Matt Fischer - Deutsche Bank

Here with Matt Fischer. And I just wanted to follow up. It seems I don't want to misrepresent what you are saying, but you are saying on the one handed tougher set of deal maybe less mega deals, maybe wouldn't have done a couple of deals or didn't like the structure in place; on the other hand you seem to be pretty optimistic it sounds like as far as the potential deal flow. I'm just trying to reconcile the two along with that public to private transaction to really gone up in the private equity space. Do you think that pulls back a little bit?

Mike Puglisi

Let me just comment first of all. I would do again today every investment we have done in the portfolio, just want to be clear about that. So like every investment, unlike it much today is that as I did earlier in the year. So every investment this year like we have done I will do it again. So I don't want to leave the impression there is deal that with retrospect might not do that, that's not the case at all. As I said, we are very disciplined about pricing and life of deals and there are couple of work have lies more important than other us, but I like them all. And I just want to be clear about that.

I do think, but answering you question Mike. I do think that in this environment today it's hard, you are not going to see a lot of mega deals or mega public to private. It's just too hard to get the financing. Ironically it's easier do small deals than large deals today, small being it could still be $1 billion plus deals I'm not talking about really tiny deals, but we have always been a firm that that focused on smaller deals. We've done a number of them that involved equity checks of $100 million or some times even less, and I think that the fact we played the full size structure we will prove to our advantage here.

But the mega public to private in this environment is going to be tough. Now, I do think credit will stabilize at some point and when they do, hopefully prices will be a little lower and I think they will be, and the returns will be attractive and the business and the volume of the business of that sort will be good too.

But in the mean time, we are looking at number of other ways of playing of investing and there is a lot of things that don't pretend on mega public to private. I mentioned some of them, I mentioned that companies that need capital will take on a pipe I mentioned investments in Asia, there is turnaround, there is buildups, there is a lot of things and if you look at our portfolio in fact most of the investments we've done have fallen into categories other than large public to private and those investments continue active today.

Matt Fischer - Deutsche Bank

And when you refer to less competition right now what were you referring to?

Tony James

There are lot, couple of things I guess, first of all, small funds that were bootstrapping themselves with bridge equity are gone. Secondly, to arrange financing today the banks are still making new loans, I don't want to say they are not. But they are being selective about it, and they are leaning obviously towards their biggest and best customers. That helps us versus most other buyout firms.

Thirdly, there are lot of fringe players that were racing in the private equity whether they would be hedge funds or [soften] wealth funds or wealthy individuals and so on that weren't real professionals and with established business practices those guys are largely gone. So, I think the cumulative effective of that and the fact that certain of the big buyout funds, other large funds that distracted they have a lot on their plates means that the room suddenly feels pretty empty.

Matt Fischer - Deutsche Bank

All right. Thank you.

Operator

Your next question comes from the line of Hojoon Lee with Morgan Stanley. Please proceed.

Hojoon Lee - Morgan Stanley

Hello. To start, could you give us a sense of the types of investment opportunities may be location, size that your funds are finding in Asia? And may be how much of the pipeline of commitments you disclose represents deals in that region?

Tony James

Okay. Well, I am going to be little careful with respect to companies that well, there's been nothing disclosed for obvious reasons. But so I am going to avoid third names in the industry generally but in Asia we have a huge pipeline of deals in India, and for the most part the're minority investments to fund the growth of those companies.

In some cases, there are some change in controller investments where we are purchasing the controller of either a public company or a private company but that would be a minority of them, and in some case there of some generational type change type of investments where less growth less volume growth capital to the company then taking out some shareholder company effectuated generational change.

I would say that those are across all industries, for the most part though we have been focusing on investments that are driven by growth of the domestic markets, as opposed to growth of the exports. But once again, there is sum of each, but mostly investments driven by the domestic market.

The investment sizes would range all the way from $50 million at the low end to do $500 million to the high-end. And while there are fewer investments, we were looking out in China they are in general, they are larger size. And then there is scattered divestments around including some in Japan and other and one or two here and there and other Asian countries. So, I don't know, if that addresses your questions but

Hojoon Lee - Morgan Stanley

That's helpful. Just one follow-up on MAAM. You mentioned that from the IPO proceeds you have invested about $1.25 billion, does this represent the total amount constituting principle investments in the segment?

Tony James

Mike?

Mike Puglisi

No. Well, there is roughly round numbers probably another $500 million on top of that.

Hojoon Lee - Morgan Stanley

Great. Thank you very much.

Operator

The final question comes from the line of Douglas Sipkin with Wachovia. Please proceed.

Douglas Sipkin - Wachovia

Yeah. Hi. Good afternoon. Just a couple of follow-ups. First just specifically, I was a little surprised that the real estate gains weren't higher and obviously correct me if I was wrong, where were the extended stay sale show up or how it's shown up already in some of your numbers?

Mike Puglisi

It has. This is Mike Puglisi speaking. I had already shown up.

Douglas Sipkin - Wachovia

You have even though closed in June.

Mike Puglisi

Yeah, because the mark to markets we taken earlier.

Douglas Sipkin - Wachovia

Also you guys had been writing that all the way through I guess.

Mike Puglisi

Yes.

Douglas Sipkin - Wachovia

Okay. That's helpful. And then secondly just any concern on your part that a lot of this yellow funds that there will be buyers of leverage product or leverage loans et cetera I mean a good portion of those no long funded by Wall Street, percentage of mid. Are you guys concerned that although at some point we all hoping that the supply demand balance for bonds or loans comes back, but maybe the demand element does not come back because of that constituency no longer is going to be there, where is that did you guys view short of a short term phenomenon?

Tony James

Well, I think that's a short term phenomenon, the returns CLO three basic components its got the secured to finance liability side. Its got the senior debt which doubly or triply. There is still demand for that although it probably the rates are probably increased from LIBOR plus 35 to 40 LIBOR plus, 60 or 70. And that is got the mezzanine and I'm going to come back to that because that was the problem as we got the equity.

Equity returns are probably increased from sort of low teens to high teens, but there is still equity available. So the missing part is the mezzanine parts there, which are the double and triple stuff in the CLO. That's missing because, that has always been the character might define for CLO and because the providers that were also the people generally they bought structured mortgage product and got hooked by the sub prime, which is how the sub prime leads over into the corporate market that's where the leak ones.

Now the returns are now just sky rocketed and I think that you are going to see that those higher returns pull capital into that because you can justify paying a lot more return to that given where the pricing of loans is now. So, I think that over time you will see correction there and you will see the CLOs back. And I know we were working on some specific properties product to take advantage of that opportunity. And I am sure others as well.

Douglas Sipkin - Wachovia

Okay that's helpful. And then just broadly, I mean, it seems likes you guys are still pretty bullish on longer-term prospects. But I probably miss out anyway, any fear that I guess this sort of blip in now like quantitative funds last week, but I guess sort of the backup in LBOs and things like that. So, there was a little bit of arrange into the bullish argument for increasing allocations to alternatives? And then can you segment that may be versus US versus global, how that might change with what's happened or my sense of that you guys still feel pretty optimistic, but I figure it out asking you anyway?

Tony James

Yeah. Well and it's a fair question. I don't think, if I look at environment like this, and I look at what's happening in the general markets, and quant funds that are of specific nature, we are not in that. So, I don't have any real comment about that. But every single one of our products is way out performing the general market either debt or equity.

And I think it's the classic argument for alternatives. And I think, we will see as good as our absolute performances then our relative performances are then even better. And I think long-term we will start to see what a more robust shift from traditional asset classes into alternatives, and I am talking here in the United States.

In Europe, we are still under penetrated the shift is happening really fast. We have some of the biggest investors of all who are now just moving massive assets into the category and some of my institutional starts the studies of it. So, you can see that coming a year too in advance, so we know that those shifts were coming even though the money has been shifted yet.

And then, when it comes to with our fall emerging market so that there are probably not exactly the right way to look at it. But that includes Russia, the Middle East and Asia particularly China you have seen there is a lot of money still coming into alternatives from those things have been completely undoubted by this. So, I don't think it changes the fundamental flows towards alternative.

Douglas Sipkin - Wachovia

Okay. That's helpful. And then just finally just thinking about the IPO and I get the sense it's going to be tougher to do some of the larger transactions at least right now. How is that all your equity investment deals after management would be trending higher. How you guys viewing that in light of the difficulty in the MAAM markets to provide big deals and also in light of your improved capital positions subsequent to the offering?

Tony James

Well. We buy things cheaper. We exceeded a better multiple relevant to the purchase multiple, and we have less leverage. We will not only have to put up more equity. We will be able to put up more equity and got a higher return on that more equity. And therefore earn more money for our limited partners, and more money for our unit holders. Particularly for the unitholders because you make your money that carry how much underlying investments there is under the carry so to speak, and what the ultimate multiple of money is.

And so, I think this environment is good for the unitholders. And for being able to put more money to work, it's a good thing because you do all the same amount of work. You have all the same amount of busted deals. You have all the same amount of operating management, you have to throw at something, and you have all the same amount out of Park expenses. Whenever I see checks you write, and if we can write more checks, it's just sort of more revenues and more opportunity for the same cost to speak, so it's a good thing.

Douglas Sipkin - Wachovia

Okay. That's helpful thanks.

Tony James

And I think Joan also has a comment on your first question.

Joan Solotar

Yeah. I just wanted to go back to the marks that you are referring to. It's where marking appropriately, you really shouldn't see separate gains when the quarters reported. So, if you think about this quarter with cash being above ENI, it basically means that the realizations were greater than the marks.

Douglas Sipkin - Wachovia

Right.

Joan Solotar

And that was true also in the quarter last year, and it was true in the first quarter of last year. There was a little bit different in the first quarter of '07, which means that we have the mark. So, I would keep track of those, as we think about the future quarters.

Douglas Sipkin - Wachovia

Great. Now, that's definitely helpful for going forward. Thanks a lot.

Operator

And at this time, ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back over to Mr. James for closing remarks.

Tony James

Okay. Well, I just want to say, thank you very much. We have a great attendance. I think we have over 500 people on the call, and I hope this has been useful. If you have input as to what we could do better next time, this is our first time out of the box. We would really appreciate it because we want to be as user friendly, and as open, and as transparent, and it's helpful for you, as we can possibly be. So, please get any inputs, I would welcome it to Joan, and we will try to get better as we go along.

I know the numbers by the way are confusing because we are still in the transition around the public offering, our partnership to corporation and unfortunately we have got a lot of constraints imposed on us by the SEC is that what we can and can't give and in what form.

One of the reasons for example there is some information in the press release is not actually even in the 10-Q. It had to be that way, so be sure you get the press release because it's got separate 10-Q doesn't have. I think as disclose forward our numbers and our format will become much cleaner. We are doing what we can to clean it up, but it's as I say our hands are tied by the SEC at this point. So, thank you everyone very much.

Operator

Thank you for attending today's conference. This concludes the presentation. You may now all disconnect and have a great day.

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