BlackRock, Inc. Q1 2008 Earnings Call Transcript

Apr.16.08 | About: BlackRock, Inc. (BLK)

BlackRock,Inc. (NYSE:BLK)

Q1 FY08 Earnings Call

April 16, 2008, 09:00 AM ET

Executives

Robert P. Connolly - Managing Director and General Counsel

Paul L. Audet - Managing Director and CFO and Head of Cash Management

Laurence D. Fink - Chairman and CEO

Analysts

Craig Siegenthaler - Credit Suisse

Mark Irizarry - Goldman Sachs & Company

Michael Hecht - Banc of America

Douglas Sipkin - Wachovia

Robert Lee - Keefe, Bruyette & Woods

William R. Katz - Buckingham Research

Operator

Good morning. My name is Luanne, and I will be your conference facilitator today. At this time I'd like to welcome everyone to the BlackRock Incorporated First Quarter 2008 Earnings Teleconference.

Our host for today's call will be; Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Paul L. Audet; and General Counsel, Robert P. Connolly.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you.

Mr. Connolly, you may begin your conference.

Robert P. Connolly - Managing Director and General Counsel

Good morning, everyone. This is Bob Connolly I'm General Counsel of BlackRock. Before Larry and Paul make the remarks, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. We call to your attention the fact that BlackRock's actual results may differ from these statements.

As you know BlackRock has filed with the SEC reports, which list some of the factors which may cause our results to differ materially from these statements.

Finally, BlackRock assumes no duty to and does not undertake to update any of these forward-looking statements.

With that I'll turn it over Paul L. Audet, our Chief Financial Officer.

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Good morning. Our first quarter results clearly reflect two different stories. One a very strong core business operating fundamentals, but also the impact of adverse financial markets on non-operating income where we saw earnings decline by $0.12 associated with non-operating income as opposed to a contribution of $0.16 for the first quarter of 2007, and $0.10 for the fourth quarter of 2007.

First let's discuss core business. Operating income, as adjusted, totaled $417 million for the first quarter, this represented an increase of 34% compared to the prior first quarter... prior year first quarter. On a per share basis, operating earnings increased 41% to $2.02 compared with $1.43 earned in the first quarter of 2007.

Adjusted operating margin also rose in the first quarter to 37.6% compared to 36.7% in the first quarter of '07. These results were driven by organic AUM growth over the past 12 months, which totaled $158 billion including $35 billion of organic flows in the first quarter of 2008.

Long-dated organic asset growth over the last year totaled $56 billion or approximately 6%. Cash management assets increased over $102 billion to $349 billion at March 31, 2008. First quarter organic growth of $35 billion was largely concentrating in cash management flows as new long-dated fundings were offset by client withdrawals ended at generating either liquidity or changed investment strategies.

Overall AUM finished the quarter at $1.364 trillion, up 1% from December 31st. The $35 billion of organic AUM growth is largely offset by the impact of declining equity markets as equity asset depreciation net of Apex totaled $32 billion or 7% of beginning AUM for equities. Fixed income assets appreciated approximately 1% for the quarter while alternative products depreciated 1%.

Larry is going to talk about pipeline, so I am going to leave that for him to discuss. One thing that we would like to know with respect to the first quarter we incurred no additional charges in the first quarter on enhanced cash funds and have returned over 50% of invested capital to-date. BlackRock did... has not recorded nor has ever recorded any charges with respect to our money market mutual funds.

Our remaining SIV exposure, complies only top tier financial institutions all of which have been restructured or guaranteed by the sponsors. Total SIV assets will approximate $1,800 million by June 30th or 4.2% of overall cash management AUM, and we have no remaining SIVs in our 2a-7 mutual... money market mutual funds.

For the quarter investment advisory fees were $1.13 billion up 30% from 2007, but down 2.2% from the fourth quarter obviously restructuring the strong year-over-year asset growth but as... but also declining asset, equity market since year-end. Performance fees of $41.5 million for the first quarter were largely due to positive results in international institutional separate accounts, which overcame our reduced forecast for fund of hedge fund performance fees.

A significant percentage of the company's performance fee products have contractual periods, which conclude in the third and fourth quarters. Last year in 2007, 86% of our performance fees were earned in the third and the fourth quarter of the year. This remains represents a primary factor driving the $111 million decline in performance fees from the fourth quarter of 2007.

BlackRock Solutions continues to generate significant growth in new business volumes both on the Aladdin system, as well as risk advisory assignments. First quarter revenues totaled $60 million and it was up 41% year-over-year. Compensation costs for the first quarter were $469 million or representing 36.1% of totaled revenue and included a reduction in our forecasted and expected bonus accrual rates as we've generated lower than expected non-operating income.

During the quarter we also saw very good management of the expenses especially, on general and administrative. We were only up $10 million year-over-year and general, administrative expense, and all of that represents FX remeasurement changes. For the fourth... for the first quarter we had actually incurred FX remeasurement cost of $8 million as compared to $2 million income in the first quarter of last year at $10 million differential and we actually had $5 million of excess FX remeasurement gains in the fourth quarter. This remeasurement is largely due to obviously the escalation of the euro, as it relates to both the sterling and the U.S dollar.

For the first quarter, our effective tax rate was 35% that was 36% in the first quarter of 2007 and up 35.4% for all... full year 2007. With respect to the non-operating side, we have provided in our release a breakdown of where that resided, but largely reflected mark-to-markets in our investment portfolio. We right now run economic investments of about $1.4 billion. The change... the $24 million loss largely reflects the fact that and it was $50 million... $57 million change year-over-year.

With respect to declining net investment income associated with higher interest expense as we've raised $700 million of debt last year; approximately $13 million of net changes year-over-year with respect to our real estate valuations. Little less than $25 million change year-over-year with respect to hedge fund in fund-to-fund that co-investment valuations. Approximately $10 million of which was associated with the write-off of one investment with respect to a fund in liquidation.

The balance of the changes were largely comprised and CDO and CDS impairments, as well as other mark-to-markets on equity balances. Clearly, this is a change from prior periods, but I would note that for the fourth quarter, our non-operating income reflected about 2% of our overall investment portfolio on a positive basis, and in the first quarter we are showing 2% decline as against very significant market declines across the board.

With that I will turn it over to Larry to discuss the business.

Laurence D. Fink - Chairman and Chief Executive Officer

Good morning, everyone. Thank you for turning in. As Paul discussed the quarter clearly reflected two stories to try to give color on both, so let me start off with all this market turmoil will always the tremendous changes in values and the fixed income market, and the equity markets and many of the alternative markets.

We're very clear to the management team of BlackRock that our model is working and working extremely well. Having a diversified global business model has allowed us to have... to work with clients worldwide, and it allowed us to work in terms of clients who are seeking solutions to balance sheet issues, and it will also, this global models helping us explain why in... why our pipeline is so robust, which we'll discuss in a minute.

Our pipeline has... as discussed in the... in our release is about $106 billion. $20 billion of cash which about $15 billion of it has been funded already, so as of this moment our cash management, which is very volatile, is back to almost into late March average of about $50 billion, as we ended the quarter about $35 billion, and we just saw some... for preparation for tax, and we saw in this quarter rebalancing in cash. We saw outflows in last few days. So nothing disturbing and this is very customary, I think in the first quarter in terms of what we saw.

Impressively also we have $23 billion in terms of long-dated pipeline wins in our core franchise, and what we are trying to explain our... I will put a little more emphasis, little later in my talk. A new category called advisory asset management and this is our position business in which BlackRock Solutions are working with our clients, in terms of long-term distributions and dispositions of positions are held by different institutions that totals about $62 billion.

Our asset mix in my mind has really differentiated of showing that despite of 7% decline in our equity business that we still have net asset growth. It once again proves to me and hopefully to all of you that having a strong cash, strong fixed income, strong equity, and strong alternative business allows us to migrate alongside with our clients, and I will describe some of the migration we saw in the first quarter little later.

And also importantly is having the strength of two distribution channels, a very strong retail channel where we at BlackRock are still... are seeing growth in our equity retail channels in the U.S. We saw some outflows in our global equity platform, so netting basically zero, but our U.S open-end platform we saw growth in our equity platform, which is in the backdrop of mutual fund outflows in equities, we had a very good quarter.

And then the institutional side where we are working alongside with Long, with some very, very large clients. I should also add our RFP pipeline has never been stronger. We have some RFPs right now that are in the tens of billions of dollars, I am not here to suggest we're going to win those, but there are some very large reallocations that we are seeing from clients, that we are participating and I'll describe that a little later.

As Paul described our operating income was $202 million, which in my mind is a very indicative indication of how strong the core franchise was in the first quarter and the momentum we have going into the second quarter, this as Paul suggested represent about a 41% increase from the year-to-year change. So our core business is very strong, and we are responding to these global markets that are... that are experiencing some severe strains and difficulty.

Let me go over the flows, which are very unusual. For the first time we are seeing some strong outflows in fixed income going into cash, about 50% of the outflows in fixed income were clients who were saying, I need to... I am very uncertain about the market. Many clients are saying I cannot make the appropriate return owning fixed income or certainly treasuries and 350 were the 10 years approximately, plus or minus a few basis points. So more and more clients were saying, I can't make an enough return on some of the fixed income products, for the moment until I feel more comfortable let me be in cash.

We see some of those clients are going out of traditional fixed income to alternatives, much of our alternative growth, which we had a nice growth in the first quarter was in the special situations. Our mortgaged, distressed mortgage fund we created, the distressed debt fund that we created, that was more an alternative basis, but if you look at the makeup of those alternative wins, they were very fixed income oriented. So lot of that alternative win is how we define alternatives, but the 100s of those alternative wins are fixed income and they are more alternative in terms of fee structure also I should add.

And so we saw some very unusual flows. And I think that will persist, I am not... I'm not here to suggest that we are not going to see flows that are not going out of fixed income, I think flows will go on a fixed income the liquidity into alternatives, what we are now trying to say the clients, it is time to take on more risks and we are suggesting many clients to start looking to move away from treasury oriented strategies to more credit-oriented and mortgage-oriented strategies. So we are recommending, and this is why I think our pipeline are appear so strong for clients to start relooking at how they look at fixed income.

In one of our pipeline wins, was $1.3 billion win in high yield, so some of our work with our clients are starting to take hold in which clients are agreeing with us, but then it's very hard to make any real return on owning treasury securities or be it even in a core fixed income strategy and so we're looking again at working with clients to try to really look a rather reoriented our positions to more credit to more mortgage strategies, and in many cases some of our clients are still looking to do long-dated liability types of strategies too. So they are trying to... irrespective of the low interest rate environment many of our clients were just saying, I don't want to have a volatility and I am locking in long duration strategies were we still see some real opportunities.

So our clients are confused. Our clients have put more than huge sums of money in our liquidity business. I don't think we are unusual in this liquidity business is very robust right now, as Paul suggest it is important for us to know again that we are not experiencing any real credit issues that we are putting on to our balance sheet unlike so many other institutions, and I think so many other institutions will be reporting in the next few weeks.

We've had a very strong credit story in our liquidity business. Our team has done a very good job in navigating this, and as Paul suggested we are very happy and which how we are trying to rapidly reduce the exposure we have with our clients in those two cash strategy funds where we flows those positions last year, and we are now as Paul suggested 50% of the money have been returned at par to our clients, and over the course and balance of this year we believe our clients all will receive all their money back at par, and so this is what we are working towards.

As Paul discussed our non-operating income obviously this is the other side of the story with global assets impaired, and as we invest in global assets working alongside with our clients some of our positions have been impaired. It's a 2% loss in the overall portfolio, as Paul suggested. It's the mere side of gain we had in the fourth quarter, I will tell you very loud and clear we continue to do expect to investing in alternatives, in real estate alongside with our customers as we rollout more strategies in the alternative space we will be investing alongside with our clients, and so much of that this is our philosophy, this is what we are going to do.

I will also say though it is not a dollar of our assets that we employ for proprietary trading. There is not a dollar of our market capitalization that we use for any thing, but fiduciary business with our clients. And so the impairment that we have here in our non-operating income is all related to investing alongside with our clients and strategies.

I should also add some other issues that were... where we've had on a mark-to-market basis some impairment. We are a strong believer that investing in credit and mortgages is a great opportunity. Obviously, I've not hit the bottom yet and so we actually are experiencing some modest impairment in some of the strategy that we're investing in, in the first quarter. We will continue to invest in those strategies because we could believe over the course of the next two years, these are going to be great opportunities invest in the bank loan markets, great strategies invested in mortgages, and other distressed areas.

So, unfortunately we are not going to be able to call bonds, we are not going to be immediately investing and making huge gains, but we believe as we need to start adding those positions now and we are working very carefully with our clients. And unfortunately in the first reporting period, some of those have short-term losses and in fact our clients are calling us and asking can they put more money in these strategies and then some of these strategies were closed, so even this week we had a client saying can we actually put more money in these strategies and we said no we have closed. Obviously, we're going to announce and rollout some other products and we're pretty excited about one or two of them right now. But, I think this is just part of our long-term strategy that we believe we're being paid to take on some of these risks in these product areas.

So it's important to understand the non-operating income area is... it is disappointing for me and however, it is our strategies that continue to build our investments alongside with our clients, and if the marketplace does turn itself around, obviously we are going to show some vast improvements in those areas.

Let me talk about BlackRock Solutions and the BlackRock advisory business. We are in a unique position. We are one of a handful and I don't know who the other handful are, but I will be... it's fair to say we are one of the handful of organizations that have a fiduciary business in this advisory side whereby we have a total separation from our investment management team in terms of understanding and working on this risks.

BlackRock Solutions now has over $7 trillion in assets that we do analytics for, and so we have a broad base of assets that we evaluate on a third-party basis working with our clients. We have this advisory team that is working with our clients in turn, helping our clients understand their embedded risks, and we are trying to work out strategies. This is a business that's been heavily in the news with some substantial assignments. And so we are trying to create more transparency to all of you of where these assignments are and what they are? It is fair to say these are temporary assignments, but it's also fair for me to say in many of these cases, these contracts are five to 10 years long. These are not temporary assignments in the terms of being a three month assignment. These are going to be assignments that are going to take whatever it takes up to 10 years in many case... in some cases to work out a long-term solution.

Now it is our hope that the market rebalanced. It is our hope that we are going to be able to work with our clients and that the portfolios are reduced in a much shorter period of time, but we have no ability to predict what is going to happen in the capital markets in this time. Obviously, by our views that I discussed about our co-investments with our clients, in mortgage and credit, we do believe there will be a turnaround, and we believe during that turn around, we will be in a liquidation mode with some of our clients in these portfolios. We... there are many more assignments like that, that are percolating around right now.

We believe this is not going to be just a short-term business. And I believe this business will be... at least an intermediate type of business. We see and are talking to many other clients. We are sitting with impaired assets, are sitting with assets that they don't have the full capacity to understand and to manage. And so we are actively engaged with many other institutions right now in terms of working with them, and trying to assess what they should do in this area. We are also working with many new institutions that are saying okay, I can't afford, or not have a better risk management system, and so unfortunately for our clients who are experiencing these problems, this is all... we are working with our clients to help them put on better risk systems in some cases there are the Aladdin system at BlackRock and some cases they are using other investment system. But, I do believe the business of our... solutions business will continue to grow at very fast... at a very fast rate.

As I said in the past, this is the business that's very hard in terms of staffing. We are aggressively recruiting and hiring, aggressively growing our people. But, I must tell everyone that in the first quarter working on these very cumbersome, very visible assignments, I saw as a CEO some extraordinary work done on behalf of the team.

We saw examples of work done that I had never seen in 20 year history of BlackRock. We are able to work with these clients who are a very visible in terms of their issues and we've been able to work very closely with them and held them as array and assessment of the risks, and are working with them with a long term plan in terms of reducing the exposure in these asset categories. So, we are quite constructive on this business we believe this business is going to be extremely robust for the coming months, quarters and years to come.

New business mix, we continue to see as I said earlier very large RFPs in two of the cases or more than $10 billion in terms of assignments. These are all long-dated assignments. These are both in fixed income. We are very involved with many other institutions right now who are looking for opportunities to invest in credit, in mortgages, and other types of distressed products, and so we believe what's there is a little more stability, and I am not... I'm not sure when that'll be, but once there is a little more stability, we believe there'll be some large, large flows into the long-dated fix fixed income products that were in distress. And we believe we will be one of the firms that will be able to take advantage of those flows in those businesses.

Our cash management business continued to be very strong, as I said earlier. We've been able to avoid the good majority of credit issues. We are very well positioned. We continued to stop [ph] that area too, and we continued to differentiate ourselves due to the fact that we are not sitting here with any large exposures that we had in our 2a-7 products and our other cash management strategies.

Our equity business continued us to grow. We continued to grow in terms of the knowledge based in the world that BlackRock has a lot more than bonds. And as I said in our domestic retail open-end fund business, we've had some very good flows in our equity business. Our global opportunities fund it is going from to strength-to-strength worldwide. It is one of the most noted mutual funds in the world right now, in terms of growth. Dennis Stattman and his team have shown an extraordinary abilities to navigate these global markets and outperform in these vital markets, and we are continuing to see some substantial flows in that product area.

We are continuing to build out our equity products, we are thrilled with the new European equity team that we have in placed in the first quarter, and we expect to see flows with them. We continued to see some great opportunities in our agricultural equity funds, in our mineral and mining funds, or our natural resource funds. Our UK equity teams had an extraordinary performance, and we continue to be one of the dominant equity firms in that area. So we have more and more opportunities in the equity business, and we think this will continue to build more momentum in the balance of the year.

So overall I would say the platform is well positioned to handle the inquires in Solutions. We are very well positioned in the fixed income area to take advantage when the market goes from fear, and when we see rebalancing not a treasury oriented products into more mortgage and credit oriented products. I think I said in a speech earlier this year that I think the next bubble is U.S treasuries. U.S treasuries just represent a fear security and so we are pretty loud in terms of telling clients to try to rebalance, as much as possible out of treasuries and to go into CMBS, MBS and other credit products.

We continue to do... so we continue to see those opportunities in fixed income. We can see those opportunities in equities. And on the alternative space we are working on some very, very large ideas, in terms of working out a large scale opportunities in terms of, in the distressed mortgage, the distressed credit areas that we are actively working on right now, and we hope to have something very large in the second quarter in terms of working with our clients and investing in these distressed opportunities.

We also would like to just tell everyone, we did have our 20th anniversary in the first quarter. It was an extraordinary event in terms of the recognition of where this firm came from, and where we are today. And I will say to everyone, the momentum in the firm, the culture, the enthusiasm on a global basis has never been greater.

Our teams are one, we talk all the time about one BlackRock, one team representing our platform, I could tell you very loud and clear, we have achieved mass in terms of the opportunities that we have representing our clients globally as a one BlackRock organization.

We also will be very proud on May 1st of this year when we formally become BlackRock worldwide in terms of our mutual fund retail platform. We will drop the hyphenated name on April 29th this month, with the hyphenated BlackRock Merrill Lynch advisors in Europe and Asia and in terms of our mutual funds, and so the branding has been very successful. We have achieved scale in terms of the knowledge base of BlackRock, and we have achieved the ability to be very comfortable and excited about representing ourselves globally, worldwide on May 1st as one BlackRock.

I would like to thank all the employees for all the hard wok in the first quarter. I know it's been quite stressful, and with that I will open it for questions.

Question And Answer

Operator

[Operator Instructions] Your first question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thanks a lot. Just two questions here. The first question was on the fee rate in the alternative and fixed income businesses, which declined sequentially. Has new business wins when the driver of few reduction here or is there anything kind of unusual numbers?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Craig what I would like to do is probably do with you that, with that online. What I can tell you is there's two issues where fixed income, we did announce in the release of reclassification. We did have a balance product that got reclassified on mix [ph] revenues in the fourth quarter between equity and fixed income incorrectly from what you would have seen in the prior release, and that is implicating the fixed income decline in rates of good amount. The other part of that is just so everyone knows two different factors in fixed income, a large CDO issuance Tourmaline II in the fourth quarter which added $2 million of one-time origination fees in the fourth quarter. And also if you remember we did reduce a lot of our ownership and through impairments of some of our CDOs in the fourth quarter. As soon as we did that, we also turned off fee arrangements on a lot of the subordinated tranches of those and that implicated fixed income revenues about $6 million. So that is the appropriate decline, but it's not necessarily anything other than those. Alternative is merely a factor of timing, and so I think the quarter rate that you saw in the first quarter is appropriate.

Craig Siegenthaler - Credit Suisse

Okay, so that's appropriate for forward run rate?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Yes.

Craig Siegenthaler - Credit Suisse

Okay. Second question was on the auction rate preferred and closing fund. I was wondering if you can provide a little more color, because I am wondering, it looks like you just refinanced about 20% of your ARP paper. That's outstanding. When I look at what current needs are to refinance them in a muni paper, it's something like yields under 4% and it's maybe the perpetual quantity [ph] from a third-party. I am wondering if you think, with the current liquidity situation if that's maybe realistic or through some other type of solutions. They know you've been mentioning in your press release yesterday pending option bonds and also the credit puts solutions. So I'm wondering if maybe you think those type of solutions will work over the next year?

Laurence D. Fink - Chairman and Chief Executive Officer

We are working very closely right now with institutions like your institution, a few other institutions in terms of trying to work out a solution. We have been engaged working with the Federal Reserve and the SEC in... creating different structures. We are very sensitive to our clients in terms of we are sitting with these auction rate preferred. We will know if we have a solution for the entire auction rate market in the next, probably week or two, but we've been working very closely with lot of the... with the selling agents and the distribution agents. We believe this is a very difficult process. We have two classes of shareholders and we have to be very sensitive with our... in helping the preferred shareholders if we do something that harms the equity shareholders, we are in trouble. The SEC doesn't like that and so what we are trying to work on as you suggested, different financing techniques in which we could help the preferred holders without impairing the equity holders, and as you suggested the yield spread between the auction rate preferred, and we are 2a-7 money market funds for munis are trading. There's a huge yield spread, and so if we could work on put strategies to make the products 2a-7 eligible and working with the regulators. We could find a solution in which both parties could win.

Craig Siegenthaler - Credit Suisse

Got it. And because --

Laurence D. Fink - Chairman and Chief Executive Officer

So the answer is... we'll know in a week or so whether there's going to be enough liquidity to do that and enough opportunity.

Craig Siegenthaler - Credit Suisse

Got it, and the fact that you are registered I guess regulated as under the Bank Holding Company Act, the PNC ownership, does that at all impact the solutions you are looking at here or is that not really?

Laurence D. Fink - Chairman and Chief Executive Officer

No, by no means, not at all. I don't think we have any from the BlackRock's, we don't have anything that would inhibitor or impair our opportunities. The real opportunity inhibitor would be well banks even put a LC behind this. At this time they don't even have the capital to put on more LC or capital to offset this. So we're not the inhibitor, well the banking system might be.

Craig Siegenthaler - Credit Suisse

All right, great. Thanks a lot.

Operator

Your next question comes from Marc Irizarry with Goldman Sachs.

Mark Irizarry - Goldman Sachs & Company

Great, thanks. Hi, everybody.

Laurence D. Fink - Chairman and Chief Executive Officer

Hi, Mark.

Mark Irizarry - Goldman Sachs & Company

Actually Paul's might be a question sort of with the $1.4 billion in balance sheet investments that you have. Can you just break out by type of investment what's in there? And also if you can just talk about the end of the quarter your CDO max loss exposure? Thanks.

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Remaining CDO investment exposure is approximately $8 million, but $5 million of that is a cash flow CDO, which I would not anticipate any and further impairment adjustments on. So for our intensive purposes we are pretty much down to nothing on our remaining CDO co-investments. With respect to the $1.4 billion, I think it would be better to go through that offline with you because that really is our economic value, essentially our total investment portfolio as you know runs over $2 billion, but we take out the non-controlling interest pieces and it gets into a pretty detailed discussions, which I think is better for offline, but and I and certainly and go over that with you later on.

Mark Irizarry - Goldman Sachs & Company

Okay, great. But just following onto that if you look at private equity it looks like some of those investments are actually written up while real estate and hedge funds were written down during the quarter. Can you sort of just characterize performance between those two was there any one particular partnership in private equity that drove the write-up and I don't know if PMI [ph] is in there?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

The most I can give you at this point is that you had some negative performance in private equity domestic U.S versus some positive performance internationally. I think that for all intense and purposes as you well know most private equity is a mark-to-model process. So ultimately it's not necessarily moving with the market movements in pricing. It's moving with whether or not the cash flows for the underlying portfolio investors are moving, that would be the... that was the one area where we didn't have quite as much movement in it. The other assets were obviously, you have a lot more mark-to-market exposure because of level 1 and level 2 assets and that's why I say we should really talk about that more off-line.

Mark Irizarry - Goldman Sachs & Company

Perfect. And then Larry in terms of timing, I mean I know it's hard to predict that exactly when this re-risking or the reversal of the safety trade will happen, but what do you think it's going to take? Or what milestones or mileposts are you looking for to sort of say, hey there is more re-risking happening and just, what do you sort of expect on a go forward basis?

Laurence D. Fink - Chairman and Chief Executive Officer

Mark, we aren't actually seeing it now, albeit small, we are seeing more and more institutions are raising the questions, I think almost a good part of the RFPs that we are looking at now are more risk-oriented in the fixed income area. We are working on a couple of substantial assignments right now in terms of taking down large blocks of some of the distressed products, working with our clients right now in terms of evaluation of this. So we are beginning to see it, I think the one mile... there's two milestones that I would look for, one is, as the financial institutions and their first quarter as a... with a new marks, we believe we're at, as I said before at the capitulation stage where we believe now where the marks are occurring are closer to clearing prices now. And so we're actually seeing more movement, I think, I saw it today that Deutsche just sold a big block of their bank loans on the tape today at a dollar price of 90. This is... we're starting to see the clearing institutions were marking or starting to mark in our mind closer to mark or at market and we are starting with the clearing prices occur. And so as more and more institution starting to, I guess to capitulate and now reduce their balance sheets, I believe there's quite a bit of equity out there to invest in these products. And so we believe we are at the beginning of a capitulation stage. We believe we are at the beginning of a stage in which investors are willing to have a strong appetite to put money in these areas.

And then I think the third thing that I am looking forward to really create a more stable economic environment in United States. I believe we as a country need to find a solution to lower income housing, the Republicans and Democrats continue to battle on what is the appropriate policy, but we need to create a new FHA housing program in which we stabilize low income housing. I think what the administration did in lower.... and the reason the loan limits for Fannie and Freddie will stabilize the jumble mortgages up to 775,000. And so we're beginning the healing process in lot of areas. I think monetary policy is a healing process, certainly what the Federal Reserve did, terms in opening the discount when there was a healing process. Now we need to see something in terms of really helping the lower income housing market and creating that stability there. If we could do that and stabilize housings in America, we will then stabilize consumer confidence, and then I think we will see obviously a big up swing in credit probably a bigger up swing in the equity markets, and we'd see a great out flow in liquidity. But we're... we're beginning that process there Mark.

Mark Irizarry - Goldman Sachs & Company

Great, great. And then just one question on your distress your bank loan and your mortgage distress securities funds. Can you tell me how much... how much dry powder you have left if any in those funds and how much did you invest during the quarter?

Laurence D. Fink - Chairman and Chief Executive Officer

For the private placements and I don't want to get in to too much detail, I see my General Council's shaking my head; I can't talk about it that much. We still have a lot more powder and we're in the process of raising some more funds in those areas right now.

Mark Irizarry - Goldman Sachs & Company

Okay, great. Thanks.

Operator

Your next question comes from Michael Hecht with Banc of America.

Laurence D. Fink - Chairman and Chief Executive Officer

Hello, Michael.

Michael Hecht - Banc of America

Hey, good morning, guys, how are you doing?

Laurence D. Fink - Chairman and Chief Executive Officer

Very well.

Michael Hecht - Banc of America

I'm wondering if you can you give any more detail on the economics or fee rates I guess on the $62.5 billion of advisory assets? And then talk a little bit more about where you would see those show up optically in the P&L other core fees or more other income?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

The core fees it will be I don't think we have decided how we are going to show that up in the solution box or the I assume we're going to show in our solution box because it is the advisory side of it so that's where it's going to show up. So our fees are very competitive and that's all I really can say. As know and one of our assignments there maybe much more visible if there are congressional hearings on it, but our fees are very competitive in our mind, and I believe they are competitive in terms of the work we are doing and it's obviously a lot of work.

Michael Hecht - Banc of America

I got, I understand, its common sensitive subject. As far as like the assets go to will those show up as actual flows in the different buckets, you know, fixed income versus...

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

No.

Michael Hecht - Banc of America

Ever or no?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

No, keep them separate. We are going to keep them separate just to give that more transparency because if indeed the marketplace does improve a lot, we are going to show you a clarity where those positions are.

Michael Hecht - Banc of America

Okay, that's helpful. And then, can you talk a little bit about I guess aggregate investment performance metrics. I think, last quarter you guys had said something like 58% of fixed income turns were outperforming. The comparable look for [ph] averages is over one, three and five years or more and then 84% for equity funds. Do you have those kind of broad --

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

I don't have in front of me, I think equity was 70% something like that, excuse me how much we'll assume?

Unidentified Company Representative

Over 80%.

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Over 80%, equities again in fixed income... in the first quarter they are actually mediocre, they are probably right 50ish percent, that's lower than we want, a lot of it is because we are started to put on more risk in some of these credit areas, and the market... the only thing that did really well in the first quarter was treasuries and specially in the short and the treasury, so we are going... we did not have any real massive exposure there. I could say with some of our largest, largest competitors we did very well. I would also identify PIMCO did a spectacular job in the first quarter. But, most of our large competitors had inferior returns to us in the first quarter.

Michael Hecht - Banc of America

Okay, that's helpful. I am hoping to get a little bit more color on I guess the types of cash management products that are getting the flows. I guess, in other words the mix of prime funds versus government funds. I think from the release I was able to learn further about $7 billion of the $35 billion in money transposable, retail but I was hoping to get a little bit more color by fund type?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Most of it is prime institutional, and I would say of that breakage, probably about one-thirds or two-thirds, one-third between government related and what I would call your prime institutional base of your taxable. So I think somewhere around there.

Michael Hecht - Banc of America

Okay. And then the $7 billion retails, is that about right?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

Yes.

Michael Hecht - Banc of America

Okay. And then any areas I think you are alluded to one or two in these in your prepared remarks where you're experiencing capacity problems, such as BlackRock Solutions or other wise?

Laurence D. Fink - Chairman and Chief Executive Officer

Well, actually we are not in Solutions. We are just very mindful of where we are in Solutions. And we... as I said, we have done a lot of hiring. We continue to do a lot more hiring. I don't want to give any indication that we are at our max in this area. I can tell you we are working very hard in this area and we have a lot of people working endless hours and a real tribute to the entire team, but there are really no areas right now where we've really maxed out or capacity constrained.

Michael Hecht - Banc of America

Okay, that's great. And then just last question. Can you talk a little bit about the balance sheet I guess where cash and cash equivalents ended the quarter versus the $1.65 billion at year end? And then I guess also the outlook for capital management in share repurchase and as part of that? Can you also talk about the capacity and appetite for additional acquisitions and maybe just outlook for consolidations the industry broadens [ph]?

Laurence D. Fink - Chairman and Chief Executive Officer

Let me do that first and then I let Paul go into the mix on the balance sheet.

Michael Hecht - Banc of America

Okay.

Laurence D. Fink - Chairman and Chief Executive Officer

I expect to see a dramatic consolidation in the investment management business. I believe you are going to see institutions, who were struggling with low PEs or struggling with asset quality problems, who are going to look to embellish their capital through other sales of their asset management business or contributions into their asset management business. So we... I believe the M&A market for asset management is going to be very strong. I think in terms of the alternative space people are certainly the witness and obviously some set backs, and I think people are... and I would say very clearly we are seeing from our global clients more and more brand names becoming more and more important and having a financial strength has been become more and more important. So what we believe, we will have at BlackRock many M&A opportunities, I will also caution you, we have always had very many M&A opportunities and we have been very judicious in terms of making sure that they work culturally with our firm working with our distribution platform, working with our strategic views and where growth will be in the future. So I don't want to suggest that we will be doing a transaction anytime soon, I can't suggest that we have seen... we have had many enquiries from many institutions about opportunities and working alongside or doing something with BlackRock.

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

As to the other side of equation, as you know we don't publish a balance sheet, but what I can tell you at this point in time is traditionally in the first quarter our cash and cash equivalents usually show some element of decline because we paid bonuses in the first quarter, which are unusually much more substantial in our cash flow, but I don't think it should be material amount.

Michael Hecht - Banc of America

Okay, great. Thanks a lot guys.

Operator

Your next question comes from Douglas Sipkin with Wachovia.

Douglas Sipkin - Wachovia

Yeah, thanks. Just two follow-ups, most of my stuff has been answered. I know it's early first quarter Paul, but can you give us any sense of how the performance fee outlook is going to trend throughout the quarter, obviously the back half is stronger. Any early read there, how should we be thinking about it relative to last year or is it just too early for that?

Paul L. Audet - Managing Director and Chief Financial Officer and Head of Cash Management

You answered your own question it really is early, the best that I can say is obviously you know, second quarter we will see a fall down which we normally do, it's our lowest product lock that we have. We did see and I think that one can assume that we're going to be a probably a little bit less than we would have... you would have otherwise expected because I don't we're seeing a little bit of a southward movement and our expectations on fund-to-funds, related performance fees and that's as you probably well know most of the fund-to-fund businesses we're having some declines in the first quarter and that is to be expected. As to the second half, it is so a much a characteristic of where the markets move over the balance part of the year. I couldn't give you a total if you were to ask me I probably say it will be hard for us to overcome last year based on where we see markets today, but at this in point in time I can't do any better than that.

Douglas Sipkin - Wachovia

Fair point.And then a question for Larry, how important is confidence in the U.S currency going to be for potential re-risking because I see today the euro setting a new high on the back I guess there are inflation news, I am just wondering do you view that is one and same as belief in the U.S will took a more risk taking or that doesn't necessarily have to go hand-in-hand via the stronger currency?

Laurence D. Fink - Chairman and Chief Executive Officer

There is no question we are seeing from a global client a greater interest in investing in non-dollar assets, so we're seeing that everywhere. And we also understand in many countries outside the United States are experiencing extraordinary inflation and the inflation rates in China are 8% the inflation rates in the Middle East are above 8% and so that is why because basically we're more peg to the dollar and so we are obviously a lot more... we have to be a lot more confident in the type of investment they do in dollar based assets. I can tell in many areas in the world now there is a great appetite, or great interest, like let me restate that in terms of investing in the distressed area in the United States. We did see in the take-flow yesterday that feign is about $72 billion of dollar based assets last month, so it's clearly still a lot of investing going on. But, you are absolutely right the deterioration of the dollar is creating a lot of consternation, investing in dollar based assets have really underperformed terribly for our global investors, and yet we are still seeing huge interests in some of these special situations.

Douglas Sipkin - Wachovia

Okay, great. And then any broader concerned around funds-of-funds or any fear in regards to potential increased hedge fund regulation, just in light of what is transpired with the broker dealer industry or do you feel like the strong will survive and the weak would fall off anyway?

Laurence D. Fink - Chairman and Chief Executive Officer

Well and I am a big believer that we have that secretarial pulse and there's a proposal there is something that everyone should look at we believe there is need for global... a global regulator in the capital markets. We believe the capital markets are growing a lot faster then regulation. We believe there should be a review of how one regulates everybody who is a big participant in the global capital markets and that includes private equity firms and that includes hedge funds. So there should be a systematic review on a global basis on that. I think your point about, the good are going to get better and the weak are going to get weaker, I think that's going to be the case. We are irrespective of the setbacks in many hedge fund strategies, there are still some hedge fund strategies that did quite well and we still see a very good pipeline, and clients were looking for fund-to-fund strategies. There is a view, and I think it's proven to be the right case that you have less event risk in a fund-to-fund strategy than you do in investing in one or two hedge funds. Obviously, if you pick the right one or two hedge funds you have no event risk, but systematically if you have a more diversified or systematic approach to investing in hedge funds like a fund-to-funds products should, then one would expect to see increase flows and indeed we are seeing in our pipeline and in terms of our RFPs quite a bit of interest in our fund-to-fund strategies.

Douglas Sipkin - Wachovia

Great. Thanks for answering all my questions.

Operator

[Operator Instructions] Your next question comes from Robert Lee with KBW.

Robert Lee - Keefe, Bruyette & Woods

Thank you. Good morning, everyone.

Laurence D. Fink - Chairman and Chief Executive Officer

Hey, Rob.

Robert Lee - Keefe, Bruyette & Woods

There's a couple of quick questions most of them have been asked, but I just know that it's in the reconciliation for to operating income yet you had some closed-end fund origination fees, we're surprise to see that, I mean was that for some products outside the U.S or?

Laurence D. Fink - Chairman and Chief Executive Officer

No, we closed... we actually closed one fund in the first quarter, and so therefore there are... it was not a large fund indicative of the origination cost it's only about $3 million, 5 or so, but we did close a new fund.

Robert Lee - Keefe, Bruyette & Woods

Okay, great. There is a follow-up question on the... you've talked a little bit about competitive environment... Larry you've talked a little bit about in a relative performance in the recently, but are you seeing any kind of shift in the landscape, I assume there were some competitors having some weak numbers the past year, so there is an addition to your sales there is... in PIMCO there is plenty of others out there climbing [ph] to kind of break into the oligopoly I mean, are you seeing the shifting in the landscape in anyway?

Laurence D. Fink - Chairman and Chief Executive Officer

First of all, I don't think there is an oligopoly anymore. I think it's more of a myth. What we are seeing now in the fixed income area is very a keen [ph] to how the equity business became and we are seeing more specialized mandates in fixed income than ever before. I think the old times when you had the core strategies that were the prominent mandates that's when the oligopoly truly was representative of the business. Today you were seeing more and more clients were looking more for a more of a diversified portfolio approach in fixed income with much more credit strategies, tip strategies, global fixed income strategies and so there are... there are certainly rooms for a lot of specialty managers in those certain... in those product areas. But, I would say, our large competitors and peers are benefiting also because they can't go to these clients and discuss with them not just a core strategy, but all these specialized strategies too. So we are seeing more and more diversity and demands from clients in terms of fixed income strategies, and I believe the giant client managers are all benefiting from that. We are seeing certainly a much greater interest in long duration strategies, so there is certainly ample room for more investment managers in the fixed income area, but I would still say the top five or six whoever they maybe are winning a good shot... a good percentage of those mandates. The areas where we continue to see a real dominance at BlackRock versus other firms is in our insurance business. Our number one competitors are not a PIMCO or WAMCO, but it's Deutsche Bank. So there are different depending on the strategies or the business product there are different competitors.

Robert Lee - Keefe, Bruyette & Woods

All right, great. That was it, thank you.

Operator

Your next question comes from Bill Katz with Buckingham Research.

Laurence D. Fink - Chairman and Chief Executive Officer

Hey, Bill.

William R. Katz - Buckingham Research

Hi, good morning. Thank you very much sort of couple of type of questions and some bigger pictures ones. Larry you said that you have sort of angling for two of sizeable fixed income RFPs, are those in the 23 billion long-term RFPs?

Laurence D. Fink - Chairman and Chief Executive Officer

No, they're not. These are RFPs. I mean these are not pipelines.

William R. Katz - Buckingham Research

Okay, that's helpful. From a rotation prospect, I guess when I was walking a little bit is, I mean you had a pretty big fixed income pipeline coming into the quarter and then you had outflows coming out of the quarter and...

Laurence D. Fink - Chairman and Chief Executive Officer

Yes.

William R. Katz - Buckingham Research

Itseems to be a more decisive shift back to risk. Are we going into the situation where your legacy business could attrite that would offset the incremental shift to more of a credit centric back to up so at the end of the day you really not able to grow that business significantly?

Laurence D. Fink - Chairman and Chief Executive Officer

I think that certainly a legitimate question and we certainly saw that in the first quarter. I actually believe it will ultimately be the opposite. I believe once there is greater comfort we are going to see huge flows amount of cash.

William R. Katz - Buckingham Research

Right, cash management.

Laurence D. Fink - Chairman and Chief Executive Officer

Into the longer-dated strategies.

William R. Katz - Buckingham Research

Okay.

Laurence D. Fink - Chairman and Chief Executive Officer

But in that first quarter we had that rotation. We had continued client outflows longer-dated fixed income strategies to cash strategies. We did had some rotations on a fixed income into equities as equity fell in bonds basically were stable so we did see that too. So the first quarter would... was certainly what you described Bill. I don't believe that will remain... that will be the case...

William R. Katz - Buckingham Research

It's more a function.

Laurence D. Fink - Chairman and Chief Executive Officer

In the third or fourth quarter. It might be the same in the second quarter, you know, look at I believe it's a very hard for clients with their liabilities to make any real return with 350 tenure, and so there... if we persist with these lower treasury rates for a long time, you could be right, if that's... but because a credit spend so wide, I think that will not be the case, we're just going to see a much greater migration into these credit-oriented strategies or other types of strategies. They maybe recategorized as alternatives too Bill. There because a lot of these strategies that we are working on are fixed income oriented, but they are alternative products.

William R. Katz - Buckingham Research

As you can talk about that before, so that... from a pricing perspective and that's my third question, the $62.5 billion which will I presume one from a recently taken over broker dealer. Are these things priced closer to what you gave up in the state of Florida or more typical of the institutional fixed income legacy pricing?

Laurence D. Fink - Chairman and Chief Executive Officer

I really can't talk about it. What I will say the Florida situation was entirely different. To give you some color without describing what it is.

William R. Katz - Buckingham Research

Okay. And then couple of bigger picture questions, if you look at the valuation of some of these alternative managers out there, they are trading at a fraction where they went public and a sharp discount to the typical asset manager including your own multiple. Are you worried in anyway about the implications for the valuation of BlackRock to the extent the alternative business gets significantly bigger?

Laurence D. Fink - Chairman and Chief Executive Officer

No, not really because what we are... our alternative business is going to be... is not in private equity, and where most of the ones went public. It's going to be special situations in distressed debt where we are working on a strategy with our clients. I... our core business is continuing to grow. The solution business is as long-dated business, if any business you could ever have. So I think it is a legitimate question but I don't... but I think if anything our first quarter is a great example of how we differentiated ourselves versus some of these other alternative only platforms.

William R. Katz - Buckingham Research

There is two final questions; one is given all the capacity being taken out of some of the sort of the affect of competition of the broker dealers and on the banks and structure products and other fixed income businesses. Do you anticipate any compensation relief if you will as you look at in the second half of this year and '09, I think there was a pressure point in last few years, given so the height of the bubble on structure product at all?

Laurence D. Fink - Chairman and Chief Executive Officer

Are talking about compensation?

William R. Katz - Buckingham Research

Yes.

Laurence D. Fink - Chairman and Chief Executive Officer

Well I have two employees here are listening to me. The answer is clearly yes, compensation will be moderating quite a bit in terms of the growth rates. I think that's not just a New York phenomenon. I think that's a financial industry phenomenon. So there is no question, we have... we are part of the financial system and when the markets places pay up for a lot for your talent, we have to be part of that one it's moderated like I think it will be moderated this year and the next year, and I think you could see some moderation in our compensation expense. But, one thing I can't say Bill, in terms of opportunities for us as it's been rumored in the marketplace in terms of down sizing at some of these institutions in terms of headcount. We have a great ability in terms of hiring people as we continue to build on our businesses. So I am pretty excited about some of the people we are interviewing right now. It's a real positive indication of the type on people we could be attracting to BlackRock.

William R. Katz - Buckingham Research

And then the final question, last quarter you've had mentioned that you were studying the ETF business in Summer Garden. I am so curious maybe it is more from an institutional angle and retail angle. Where do you stand on that in terms of what you think the implications of the industry?

Laurence D. Fink - Chairman and Chief Executive Officer

We are still in the ETF business, it is a... obviously our market is installed quite a bit, which I am quite surprise that the end-market will continue to grow. It's a market that we're studying... we're studying in actually with one large player who is in the ETF business right now and see if we can do things together and we are studying it with our large distributor who are working together and trying to create a different ETF tactual ideas. It's a great product. It's a product that obviously we don't have on our shelf, and on the other hand like I've said we are surprised that how much it installed in terms of the growth in the first quarter, which gives us an opportunity to study it and really assess, it doesn't make sense for us to be a part of that platform or that product.

William R. Katz - Buckingham Research

All right, thanks for entertaining all my questions.

Laurence D. Fink - Chairman and Chief Executive Officer

Thank you very much.

Operator

There are no further questions at this time. I'd now like to turn the call back to management for any closing remarks.

Laurence D. Fink - Chairman and Chief Executive Officer

Well I'd just like to thank everybody. It's obviously been a quarter that we can all remember. And for good and for bad, I think we are as I said earlier, really well positioned for the remaining nine months in this year. I am pretty excited about where BlackRock has grown and the opportunities we see in a global basis, and hopefully we can transform all those opportunities into robust earnings for the... for remaining nine months. Everyone have a good quarter, and I will be talking to you soon. Thank you. Bye-bye.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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