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

Q3 2012 Earnings Call

October 18, 2012 11:00 am ET

Executives

Stephen Schwarzman – Chairman, Chief Executive Officer & Co-Founder

Tony James – President & Chief Operating Officer

Laurence Tosi – Senior Managing Director & Chief Financial Officer

Joan Solotar – Senior Managing Director & Head of External Relations and Strategy

Analysts

Howard Chen – Credit Suisse

Michael Kim – Sandler O’Neill

Matt Kelley – Morgan Stanley

Marc Irizarry – Goldman Sachs

Robert Lee – KBW

Roger Freeman – Barclays

Jeff Hopson – Stifel Nicolaus

Chris Kotowski – Oppenheimer

Operator

Welcome to the Blackstone Q3 2012 Earnings Conference Call. Our speakers today are Stephen A. Schwarzman, Chairman, CEO and Co-Founder; Tony James, President and Chief Operating Officer; Laurence Tosi, Chief Financial Officer; and Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. And now I’d like to turn the call over to Joan Solotar. Please proceed.

Joan Solotar

Great, thank you. Good morning everyone, and welcome to our Q3 2012 conference call. I’m here today with Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; and Laurence Tosi, our CFO.

Earlier this morning hopefully you’ve seen that we’ve issued a press release and slide presentation illustrating our results and that’s all available on the website. We expect to file the 10(q) in a few weeks.

I’d like to remind you that today’s call may include forward-looking statements which, by their nature, are uncertain and outside of the firm’s control. Actual results may differ materially. For a discussion of some of the risks that could affect the firm’s results please see the “Risk Factors” section of our 10(k). We don’t undertake any duties to update any forward-looking statements.

We will refer to non-GAAP measures on the call. For reconciliations of those please refer to the press release. I’d also like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blackstone funds. This audio cast is copyrighted material of Blackstone and may not be duplicated, reproduced, or rebroadcast without consent.

So a quick recap of our results: we reported economic net income or ENI of $0.55 per unit for Q3. That’s up sharply from $0.19 in Q2 of this year and up from a (-)$0.34 in Q3 of last year. Improvement was mainly driven by greater appreciation in the underlying portfolio assets across the board in every one of our investing businesses.

For Q3 2012, distributable earnings were $190 million or $0.15 per common unit – that’s up 50% from the same period a year ago. We’ll be paying the $0.10 per unit distribution related to Q3 to common holders of record November 15th. As you know, we’ll have a catch-up following Q4. As always, if you have any questions on anything in the earnings materials please follow up with either me or Weston Tucker after the call. And with that I’m going to turn it over to Steve.

Stephen Schwarzman

Thanks a lot, Joan, and good morning, and thank you all for joining the call. Today I’ll briefly discuss the state of the global markets and I’ll highlight our Q3 results in the context of what really matters in our business over the long term. LT will then briefly review financial results and then we’ll focus most of the time today on taking your questions, which we think is perhaps a little better approach than we’ve had in the past.

As you all know we saw sharp increases in global equities and credit markets in Q3 attributed to massive liquidity from central banks around the world and in spite of very mixed economic data and pretty much slowing economic data around the world. What does that mean for our business? There are three things that matter that I’ll focus on today: first, our LPs’ – limited partners’ – willingness to entrust Blackstone with the managing of their investments; second, our ability to deploy our investors’ capital into attractive investments; third, our ability to improve upon the assets we invest in and create value, which is eventually realized. These measurements are more meaningful over time versus any one quarter, but I’ll show you what’s happening now.

On the first point, investors are continually seeking those managers who can deliver good returns. Today, investors around the world are seeking returns in illiquid investments, because returns from government – riskless securities, supposedly – or high-grade bonds are very, very low as you all know. Beyond that, the pension funds are experiencing funding shortfalls which has been a long-running secular development. We are in the midst of a mega-cycle where Blackstone stands out in having significant experience across the illiquid asset classes where the returns are substantially greater historically.

We’ve been the recipient of greater inflows from these institutional investors, in fact more than any of our peers. I’ll run through those numbers, but importantly the reason we’re raising so much money is because we are delivering good returns for our limited partners. In Q3 for example, we had gross inflows across our businesses of $10 billion – that’s in one quarter – for $38 billion over the last twelve months excluding acquisitions. These are really big numbers.

Combined with limited outflows, our ongoing success in fundraising resulted in record total assets under management of $205 billion, and that is up 30% year-over-year which is actually a pretty stunning number in terms of growth – 30% growth year-over-year. We completed our fundraising, for example, for our seventh Global Real Estate Fund which hit its $3.3 billion cap and was oversubscribed in addition. We believe this is multiples the size of what any of our competitors will be able to raise and it is a testament to our limited partners’ confidence in our business and our strategy, and our ability to protect and grow their capital in virtually any market environment.

Also in real estate, our Debt Strategies Platform which is nearly $4 billion in aggregate size has launched fundraising for its next draw-down fund. We grew this business organically from zero in 2008 and it now complements our opportunistic business nicely. A few weeks ago we announced the acquisition of Capital Trust Real Estate debt business which will add $2.4 billion in AUM to the platform when it closes.

In Private Equity we had our final close on our Energy Fund with $2.4 billion of commitments, and we’ve already deployed or committed 40% of this capital which really goes a long way to addressing any kind of J-curve type issues. Our Tactical Opportunities Platform, which I think we’ve talked to you about before, which invests in attractive opportunities we see around the firm that do not fit neatly within the investment mandates of our existing funds is now $1.4 billion in size which is just starting to expand the marketing effort to a broader list of our largest LPs.

BAAM, our Hedge Fund Solutions Business had another $1.7 billion in net inflows in Q3 and an additional $500 million on October 1. On a year-to-date basis we’ve generated $3.7 billion in net inflows. This continues our strong performance from last year when the traditional hedge fund of funds industry reported net outflows while Blackstone, with its differentiated Hedge Fund Solutions approach captured 10% of the entire hedge fund industry’s net inflows. In fact, we were just again rated the largest allocator to hedge funds globally. We’ve differentiated ourselves from the competition and today we couldn’t be more different from the traditional fund of funds model since we provide a superior level of customization and innovation to our institutional LPs.

In Credit there’s a whole variety of things that we’re doing, such as new CLOs, business development companies, exchange traded funds, a large mezzanine, and rescue lending fund. It’s a very busy time for our GSO Group. We’re seeing good inflows and strong LP demand for our products and we continue to launch new products and diversify, and they’re all working. At $55 billion in total assets, our Credit Platform grew 62% from last year or 32% excluding acquisitions, a huge expansion of this business in large part because we’re selling high returns in a world where investors are having trouble in some cases making money at all.

A few weeks ago we successfully launched our third Closed-End Fund which trades under the ticker BGB, and raised nearly $1 billion. Following the successful performance of our first Rescue Lending Fund, which we call Capital Solutions, we’re in the process of raising our second fund which is likely to start investing early next year. In total, across the firm, we’ve amassed the largest global pool of “dry powder” to capitalize on market opportunities across strategies and across regions at $36 billion. That’s money that ultimately we’ll be investing on your behalf.

We’ll remain prudent in how we deploy this diversifying by the region, [specture] and vintage. But the potential earnings power of this capital is running through the firm is quite substantial as you might imagine.

Moving into the second critical driver of value for our public market investors is our ability to source great investments, and this is actually the most fun. In Q3 we maintained a very active investment pace, deploying or committing $6 billion across the firm bringing us to over $13 billion on a year-to-date basis. Roughly half of this amount was deployed in our Real Estate business where we remain uniquely positioned as the largest capital pool in the world and are in many cases the sole bidder for properties. Our strategy remains as Jon Gray would say it: “Buy it, fix it, sell it” where we acquire good assets that need improvement often in distressed or over-leveraged situations.

Since Q4 2009 when markets bottomed, we’ve invested $17.6 billion across our Real Estate Funds which we believe we are the largest purchaser of real estate in the world. We have high expectations for the ultimate returns we expect to generate on this capital we’ve deployed in this extremely favorable environment. In Private Equity, while investors’ risk appetites have increased recently driving up multiples across most sectors and regions, valuations still look generally attractive relative to historical levels. The environment remains fragile as I think you heard from Tony on the earlier call, and there is substantial uncertainty and hesitation in the markets.

While it is the highest price of course that wins a competitive auction, we continue to focus on investments where we have some advantage or bring some unique value that we believe others can’t. We rely on proprietary sourcing of transactions and the majority of our new deals in Private Equity are exclusive. We leverage the Blackstone brand name to be the partner of choice for entrepreneurials around the world seeking growth capital and for corporate partnership investments.

During Q3 we closed on the first two tranches of our investment in Cheniere, a $1.5 billion equity investment to fund the construction of a natural gas liquefaction export facility. With equity coming from our BCP VI Fund, our Blackstone Energy Partners Fund and [two] LPs who are co-investing in this. Our financing in the construction consists of a convertible fixed security which is convertible at a price well below today’s stock price and has attractive pick and cash yields features in the interim.

As you’ve probably read, we also provided rescue financing to Knight Capital which is a company we were already looking at prior to the technology error that occurred in early August. We’d already conducted diligence and were positioned to swiftly react and invest as part of a broader capital infusion funded by Blackstone and other strategic investors. Our equity investment is immediately convertible into common shares at a level well below today’s price, implying a substantial marked to market gain.

The third notable private equity investment was Vivint, a large residential security monitoring and home automation company which also has a rapidly growing residential solar business. It should close by the end of the year. Lastly, at the end of the quarter, BCP VI and Blackstone Energy Partners – our energy fund – [signed] a commitment to fund a minimum of $650 million into a privately-owned oil and gas company which we expect will close before year-end. Like Cheniere, this is a unique opportunity that was negotiated on a proprietary basis.

The financing environment for new deals remains highly attractive and we’re seeing record levels of new issuances of US high-yield and leveraged loans. No one could have predicted that one four or five years ago. The new issuance is a mix of funding for new LBOs, dividend recaps and re-pricing – some of which reflect re-pricing from May and July, 2012, issuance where borrowers are paying to lock in even more attractive terms from what they negotiated just a few months ago. In our credit business, GSO, we have one of the largest and fastest-growing platforms in the world. We are well positioned to provide financing to good companies in the current vacuum of traditional bank lending and junk lending for smaller-sized companies as a rule. We deployed $720 million from our Credit platform in the quarter and have another $5 billion in “dry powder” to put to work again in a very favorable investing climate.

The final critical area for public market investors that I’d like to focus on today is our ability to create value and generate outstanding realized returns. This remains an area of misunderstanding about our business, that we are solely financial engineers generating returns via a manipulation of capital structures – and this couldn’t be farther from reality. We are true operators of assets. We develop a bottom-up strategy of transformation before investing; we carefully select the very best management teams; and we breathe new life into broken assets. But we propel great assets and management teams to the next level by providing much needed capital and advice that they could not access otherwise, and then we exit these investments when we’ve completed our work.

Our business model is structured so that we can be patient about this process and take a very long-term view. Long-term investors with patient capital, we make decisions based on the best outcomes over the life of the funds, which can be ten years or longer; and it takes time to truly affect change and correct issues. Because our business is largely immune from investor redemptions, much different from a regular money management firm, we are never forced to sell assets into weak markets.

Through market cycles and over our 27-year history we’ve generated net annualized returns on realized investments of 23% in private equity, and 28% in our global real estate business which dwarfs performance of virtually any other investment class. We’ve had $1.8 billion of realizations in Q3 across the firm, bringing us to total realizations of nearly $6 billion on a year-to-date basis. Q3 included another follow-on sale of a portion of our interest in Team Health which generated a multiple of invested capital of 3.7x and $35 million of distributable earnings from just this one medium-sized investment.

In real estate, you may have seen the recent announcement – I believe it was yesterday – of the sale of Sunwest Senior Living which BREP VI acquired majority control of out of bankruptcy in 2010. The assets had fallen into disrepair and we invested substantial capital along with our partner Emeritus to improve them, increasing occupancy in two years by 900 basis points – 9%. Two years later we are selling the $225 million investment at 2.4x multiple of investment capital which is roughly 40% above the current quarter’s mark.

I’ll just repeat that for you – 40% above the quarterly mark. And I know all of you in the analyst community look at our financials as to where marks are, and we’ve had a historical experience of significantly higher exits than those marks. The Legal Team would say we can’t promise that in the future but that has been our experience – typically in the 25% to 30% area over our marks historically. We expect the sale of Sunwest Senior Living to be completed in Q4. If you can make 2.4x your money in two years when the stock market performance is probably average – I didn’t do this math and we’ll get it for you, but probably average; somewhere around 6% or 7% over a two-year period.

This is a massive outperformance because this investment – and it’s just a for example – was compounding at 45%. What we do for a living is do things like this and it’s really what justifies people giving us these very large amounts of money, because we think we can replicate very favorable investment outcomes. This is a prime example of how our “Buy it, fix it, sell it” strategy works. As we look at the maturity profile of our real estate assets that we expect 2013 and 2014 to be substantial years for realizations of funds that are fully in carry.

In summary, our Q3 results demonstrate more of the same but with really substantially strong fundamentals in the firm in terms of positive trends as we continue to see strong capital formation and share gains in all of our businesses. We continue to invest and build value across our investment portfolio, positioning ourselves to generate great returns for our investors. We can’t do that without the support of our limited partners and the absolutely terrific people who work at the firm. This is really our biggest asset and where I think we’re in terrific shape.

With that, I’ll ask Laurence Tosi to take over with a brief review of our financial results and then we’ll open it for questions.

Laurence Tosi

Thank you, Steve. Good morning and thank you very much for joining our call. Q3 ENI of $622 million brings Blackstone’s year-to-date earnings to $1.3 billion or $1.18 per unit, up 23% over last year and a record first nine months for Blackstone. The firm generated $190 million in distributable earnings in the quarter, up 51% from the prior year bringing the year-to-date total to $540 million.

Revenues were up 20% to $2.8 billion for the first nine months of the year, driven primarily by a sharp increase in values across all of our investment businesses generating performance fee revenues of $1.1 billion year-to-date, up 38% from the same period last year. Blackstone now has over $2 billion in accrued net performance fees including $160 million or $0.14 per unit in accrued net incentive fees. Incentive fees are typically realized on an annual basis.

Over the last year alone, the net performance fee receivable grew 75% as a result of strong fund performance. Blackstone reached a record $66 billion of performance fee earning assets in Q3, doubling from the prior-year period despite the fact that we had realization events which generated $8 billion in proceeds.

Following on Steve’s thoughts on core drivers of value, I’d like to offer a few thoughts on the core growth drivers at Blackstone. A central characteristic of Blackstone’s culture is innovation. That instinct is perhaps nowhere more evident than in the $82 billion of organic inflows we have experienced over just the last two years. Even more telling is the fact that $32 billion of the $82 billion in organic inflows comes from strategies that did not even exist four years ago and are spread across our four investing businesses, with each contributing materially. Blackstone’s unmatched business breadth allows us to always look for ways to leverage our expertise in asset classes and markets to create new strategies adjacent to existing ones where we believe we can deliver consistent outperformance for our LPs across our distinctively wide range of industry-leading businesses.

Importantly, all of these new strategies are built on our existing platforms, people, and expertise, which allows us to create lasting LP synergies by offering a deeper set of high-quality funds. More than half of the investors in these organically-grown funds came from other Blackstone funds, a reflection of the sustained relationship building impact of our organic growth.

Now, turning to a few observations about Blackstone’s balance sheet and assets: at the end of the quarter, Blackstone had $6.4 billion of total net asset value on the balance sheet, up 30% over the past year to $5.66 per unit, including $2.01 per unit in cash and liquids. We retain our best in class A/A+ ratings.

During the quarter, Blackstone took advantage of favorable credit markets and launched a $650 million bond offering. While marketing our issuance to institutional investors, we were afforded the opportunity to highlight the fundamentals of our competitive positioning and our ability to create value: cash flow – long-term contracts generate largely redemption-free and consistent 30% cash margin across cycles; asset returns – realized cash revenues on assets is 2.5x that of traditional asset managers; operating leverage – normalized ENI margins are 10 percentage points higher than traditional asset managers; organic growth – Blackstone has grown 3x faster than the leading traditional asset manager since 2009 and 20x faster since 2006; and finally, yield – Blackstone’s results currently to date pay 2x the dividend yield of a traditional asset manager.

Our investors enthusiastically embrace the message and the Blackstone operating fundamentals with $4 billion of orders in one of the most successful offerings of the year, driving the spreads at the offering and through to today 100 basis points tighter on our debt, largely wiping out the pricing differential between Blackstone and the highest rated traditional asset managers.

Perhaps more importantly, the overwhelming interest allowed us to issue the first ever 30-year debt for an alternative manager and allowed us to fix in favorable rates on funding that gives us strategic flexibility to continue to grow our business organically and inorganically and create long-term unit holder value. On behalf of everyone at Blackstone we thank you for your time in joining the call, and we welcome any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Your first question comes from the line of Howard Chen with Credit Suisse. Please proceed.

Howard Chen – Credit Suisse

Hi, good morning, everyone. Steve or Tony, there have been moments in the firm’s history where your thinking has led the market. You earlier identified the real estate crisis; you spoke about the tapering of growth in your private equity portfolio the last couple years, but what about now? US housing seems like one opportunity where you’re early to kind of be around the opportunity, but what are some of the others?

Stephen Schwarzman

I’d say just to amplify on the housing situation and then we can go on to some others, but in terms of housing we made a judgment about six months ago, over a year ago and started auctioning things – nine months ago probably, although we can refine that for you, that we saw the bottom happening in housing, US housing. And because we’re in so many different areas throughout the firm, virtually every one of these areas has decided on a strategy to play that.

So for example, the Real Estate Group has thus far bought approximately $1 billion of houses. We didn’t buy companies; we’re buying individual houses. This is hard to do – it’s somewhere around $150,000 a house. And what we’re doing is we’re renting those houses to people who are either in them or we’re taking foreclosed homes and we’re renting to the people. It’s only taking 26 days from when we put a house on the market until somebody goes into it.

Now, this is a very difficult strategy to do for almost anyone else because there is no housing market – there are just individual cities. And so you have to set up the infrastructure to make sure that when you take control of the house the house gets fixed up; you have to find rentals and this requires experts all over the country. And what we’re doing is we’re moving across the country, setting up first-rate operations everywhere. It’s not a secondary market where you want to buy size; you’re buying individual houses.

And we’re buying there, just for example, over $100 million a week of houses – I mean this is a lot of houses. We have our GSO Group, for example, doing financing structures for homebuilders. We have our Tac Opps Group buying nonperforming loans and not only that, we’re looking at investing in mortgage-related securities which we think have a very significant upside. Our BAAM Group has its own strategy for taking advantage of this kind of play. So this is the kind of thing that happens once every once in a while where you see something that’s a market-turning trend, and we are loading the boat as they say, I guess colloquially, on this type of play which is turning out to be sort of a very wise thing.

I think another trend we’re seeing is for smaller types of companies that are looking for capital with a banking system. Although it’s strong in the United States it’s not strong through medium-size to smaller-size banks – it’s more the large banks that have really done a good job with their capital. And so we’re taking an approach with our Capital Solutions Fund of putting a top-to-bottom type of operation.

We’re looking in Europe in real estate. We’ve been the largest purchaser in Europe of distressed real estate bank loans, which we use to basically get control of individual properties or a group of properties and take advantage of the selling trend that’s happening there.

Another thing we’re doing that’s really quite interesting, because on the call with Tony earlier we were talking about sort of our success in energy; and as a trend, energy is one of the really interesting areas in which to make investments. And the reason is, there’s way more demand for capital than the world has to give, and so the opportunity set is really very large. The return, if you actually know what you’re doing – know how to structure transactions to protect your downside from commodity risk and let the upside run – is very substantial; and our performance just on the Energy Fund which has been investing for seven months and has invested 40% of its capital is our mark in that Fund… Can I say this, [John, about the market]? It’s like 1.6x investors’ money.

1.6x in seven months’ average? It’s outstanding. This is like really neat. So we’re seeing that as a very interesting trend. I think we can take you around the world geographically and also by theme, and when we make investments it really has to fit into what we see as a compelling opportunity. And that’s why as Tony said, when asked the question how do we look at return, aren’t returns really coming down in a world that isn’t as interesting from an overall growth perspective? I may be giving you too long an answer, but we’re seeing in a way more opportunity around the world that’s working for us. I don’t know if it works for everybody else but it’s working for us.

Howard Chen – Credit Suisse

That’s all really interesting and comprehensive, thanks. Just switching gears, you focused some of your LP commentary on the larger institutions but I was hoping you just could update us on your efforts to get deeper into retail in the high net worth arena?

Stephen Schwarzman

Yeah, we’re very interested in that general area. We’ve always raised money to retail here at the firm. Taking you back to the middle ages when we’d started the company that’s now called BlackRock with Larry Fink, the first two capital raises for what was then called Blackstone Financial – we changed the name when the business was sold, were big closed-end funds at retail. And they were very successful offerings with terrific performance, and so we like that channel and we have a variety of potential fundraises through different areas.

That’s a market where people need return as well. If you’re like sort of a normal type of retail investor and you’ve got surplus money, and you’re looking at junk bonds getting down to the yield where they are – sort of the 6% yield , or you’re looking at Treasuries; and I don’t know where they are today, whether a 10-year is 1.6% or 1.7% – your opportunity to have a return if you’re a retired person or almost any normal person who needs some yield, and you look at what’s going on with our products that historically, and what we think we’re doing now is certainly mid-teens returns after fees…

It can vary a little bit based on the type of product, or sometimes higher, but if that’s what you’re looking at in terms of an alternative to world or central banks who are driving rates down to the floor, you know, the desire for our types of products is very, very high and we’re pursuing that because they become new, hopefully loyal sort of customers of Blackstone and we can sell other things to them. And as long as our performance is what it has been historically – very strong – we’ll do more and more in that sector as well.

Howard Chen – Credit Suisse

Thanks, Steve. And just finally from me, we’ve got a few policy events here in the country ahead of us over the coming months. I realize your model’s built to weather near-term volatility but I’m just curious, how are those events potentially shaping your thinking about being tactical or positioning the firm over the near term? Thanks.

Stephen Schwarzman

I think that’s a good question. I mean over the near-term, Tony and I think about that a lot because you’ve got some real built-in volatility. And as you get closer towards year-end you’ve got this issue of the fiscal cliff, what happens if you drive over the cliff? There’s some people who want to do that for tactical reasons to create a panic so that it can be resolved by bringing all the parties together, and we don’t view that as a zero probability.

So in terms of fashioning what the firm does, I think we think there could be some risk to markets in terms of volatility as a result of that. I think that our overall view, if we had to articulate it, is that there will be a solution to a global budget deal at some point next year. I think we don’t look for that in the lame duck; it’s just too complex – too many pieces and too little time. But I think in that sense we believe that some rationality regardless of who’s President will return and we’ll start basically addressing our country’s problems, which our country is capable of doing.

If we do that then I think we believe that growth rates should go up for GDP if there’s visible elements of getting our house in order as a country, and that will also affect the global economy if we start paying attention to and resolving our problems. So at least for myself I’m actually somewhat optimistic on this although I think we look at the prospect of genuine volatility either around year-end or accelerated earlier as people declare where they come out – whether they’re going to kick the can down the road or just drive off a cliff and see if they can wreck the car when it gets on the rocks at the bottom of the ravine.

So that’s sort of how we more or less look at things. Tony may have his own view on this one.

Tony James

I don’t think we’re betting on a strong upswing. As Steve mentioned, we think we caught the bottom of housing just about right and we were able to get conviction about that and then sort of find ways to play that conviction. But other than that I think we’re cautious. Yeah, this is an environment with slow growth and risk around that growth because external shocks could – whether that be the fiscal cliff or a problem in the Middle East or one thing or another – knock it askew. We don’t have the momentum where it could ride through much in the way of added headwinds.

So we’re cautious. We’re cautious about markets. The equity market has been on a tear; interest rates are really low, i.e. bond prices are really high and we’re cautious about economies. So what we buy needs to be resilient under all those different scenarios that we test, and a number of the things we’re actually looking at play on continued malaise I would say, are premised on that.

Stephen Schwarzman

We can make really good money like that. For example, if you’re buying a real estate asset in Europe where our expectation is for either a very low rate of growth or a potential recession – when we look at buying something there we’re not expecting as a rule for those markets to help real estate improve. You’ve got to make your money on the buy because there’s a lack of liquidity there and you’ve got to price it, and when you put some leverage on it you’ve got a successful deal close to when… Because growth is not going to take care of that problem. We’re, you know, in the US we look at it because of different fundamentals – even if the growth rate is low we look at it incorporating growth. So each part of the world we have a different model where we feel it’s safe first of all and also high return to make those investments.

Howard Chen – Credit Suisse

Great, thanks for your helpful thoughts.

Operator

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

Michael Kim – Sandler O’Neill

Hey guys, good afternoon. First, so Tony on the media call you talked about being able to generate double-digit organic growth for the foreseeable future. So I was just wondering if you could give us some color in terms of the drivers behind that growth; so how much is related to continuing to gain market share across your existing businesses versus maybe further building out your capabilities beyond what you already have, similar to what LT just talked about?

Tony James

Well, I think both those play in. So as I mentioned on the press call, we’re seeing the big institutions that we serve – I think there’s a necessity for them to shift more of their assets to alternatives. So you get the growth of AUM in general that goes to the economy, and then you get alternatives getting a bigger share because they must shift assets to alternatives in order to earn the returns to meet their obligations. And then on top of that we have been and continue to expect to pick up market share.

So you’ve got the compounding effects of that driving organic growth. In addition, you have as Steve mentioned and Howard asked, we have retail products. In general, our industry is underrepresented in retail. Most institutions have 10% to 20% of their assets in alternatives. Retail has typically less than 1%, and frankly the return sacrifice that retail investors are making by not having what I consider to be an appropriate allocation to higher-returning products that aren’t correlated to public markets, so they actually reduce risk at the same time they increase returns – that’s a high cost to the retail investor. We’d like to help them solve that problem and drive more retail assets.

And so I think that will be another source of growth for us because as I say it’s underrepresented. Within our different product categories we have lots of growth opportunities that are adjacent to what we do now, utilize the same skillset, utilize in many cases the same information, sources of information and market knowledge. In real estate for example, moving from real estate equity to real estate debt, sort of less-than-investment-grade debt so to speak to investment-grade real estate debt – it’s all on a continuum. Moving from we had a Global Real Estate Fund and then we had a European Real Estate Fund, and International Real Estate Fund so they’re regional plays.

And each of our business areas has the ability to create adjacent products and do so with a high degree of success because it’s already building on a platform that’s been built, the team is in place, the information is in place, the discipline, and really the experience and track record is in place. So we continue to see that, and then as I say we will continue to tuck in acquisitions.

Our investment in Patria in Brazil has been a dramatic success. I think they’ve almost doubled their AUM in 18 months to two years since we invested in them. So there’s regional plays and then there’s industry plays, like for example in Private Equity – adding an Energy Fund to our existing Multi-Industry Global Fund. So we should see no shortage of growth opportunities. Our challenge is to make sure that everything we do we do really well and are best-in-class at it. We never want to grow for growth’s sake.

We pride ourselves, we get our fun only by being the best at what we do and the best is measured by returns to our investors. And what limits that, our ability to do that of course is talent. And so we’re going to grow within the limits that are comfortable for us where we can put the best talent in the right seats and achieve the best results.

Michael Kim – Sandler O’Neill

Okay, that’s helpful, and then just maybe moving on to the realization side. I understand each individual investment is unique and they all carry their own timeline, but can you talk a little bit about maybe the dynamic of rising real estate realizations more broadly versus just the amount of dry powder that you now have available with BREP VII and the fact that it sounds like you’ve already committed a good chunk of that capita for new investments – just maybe how that plays out and how you’re thinking about sort of the different subsectors within real estate; so office versus retail versus hotels, etc.? Thanks.

Stephen Schwarzman

Yeah, let me take that in one second. This is an interesting question because just to set a scene for you, other than apartments where we’re not a particularly important player, one way to think about real estate is to take a simplistic view where there’s virtually no construction going on in the commercial real estate world; and take a position where you have a 2% growth in the economy – nothing. And just take a model office building, which is just assume it’s 10% vacant. In two years that’ll be 6% vacant, and then what happens when you get down to a 6% vacant building, or at two-and-a-half years 5%, is that the pricing of the rents in that building tend to go out asintotically.

And if you know that’s coming by doing nothing, and you assume just for the moment that central bankers are good to their word that they’re going to keep rates – because most countries don’t have the ability to stimulate fiscally – that you’re going to have real estate values that continue to go up and that’s doing nothing special to that piece of real estate. It’s just like great fundamentals. Every day, in fact, that we go to work our properties should be worth more and they’re virtually all on significant leverage which means that that value accrues disproportionately to the value of those properties.

Now, at some point you decide to get off at that train and stop at the station, and the train moves on and you’re not on the train anymore. And that’s a decision that we make for a variety of reasons, and sometimes it’s because we’ve improved the thing as much as we can; other times there might be something going on in that market. But at the moment we’re on a winning play, whether it’s in hotels where virtually around the world except in Europe it’s very good with strong RevPAR growth in the shopping business, where we’re experiencing that as well; in the industrial area where we’re also seeing that because there’s very little construction there.

So sort of the trend is really our friend, just to take real estate where you asked the question. So we’ll reach a point where we think that growth won’t be good; where we’ve completed our mission like in the assisted living center that we talked about – in two years, 2.4x your money, that was fine. And we’ll do our best to monitor each of those trends, but we think we’re like winners virtually across the board in the current market in the US. And then we’ll get off and we’ll earn very substantial amounts of money for our investors both as limited partners and for our public shareholders.

And that time is closer than it was two years ago, and as we’re sitting here contemplating what we should do we’re making more money almost every day. So it’s not like a bad situation because the flows to our investors, most of our assets in that area are having very big realizations in that area. So I’m not trying to talk around it; I’m trying to give you the dynamic for decision making.

Tony James

So Michael, let me just comment a little bit in a [circular] area. As you know, we put a lot of money out in the last few years and we haven’t harvested much, and we’re through BREP VI and into BREP VII; and at some point, I think as Steve mentioned, we’re not trying to move our whole real estate portfolio in and out based on some cyclical “Now’s the time to sell real estate, now’s the time to buy real estate.” It’s property-by-property. We buy it, we fix it; once it’s fixed and optimized we sell it.

There’s actually a pretty good bid today for real estate because CAF rates are so low. And so once something’s fixed we’ll start to peel it off, but it takes us a few years to fix the properties. And so with the money we’ve put out in the last few years, a number of those investments will start to mature and I think you’ll start to see a ramp-up from here over the next couple years in the real estate disposition.

So what does that mean for AUM, which I think was underlying your question there? Yes, we’ll continue to draw down some BREP VII but most of that money’s already in AUM, and we’ll peel off some investments and harvest some investments that as Steve mentioned have done very well. So I would expect Real Estate AUM not to grow very much in the short term as we go through the disposition process in our core equity product.

Now, there are some other, you know, our International Fund is coming into its life so we have some fundraising there. There’s some other opportunities, and then in Real Estate, too, when we do a really big deal and we bring in investors to co-invest because of the economic arrangements on those deals, that adds to AUM in Real Estate where it doesn’t in Private Equity. So I do think you’ve got some growth engines in AUM but it’ll be a bit against the tide of disposition, so to speak. So I wouldn’t expect a lot of AUM growth in real estate equity. I don’t know if that’s clear.

Michael Kim – Sandler O’Neill

Yep, that’s very helpful. Thanks for taking my questions.

Operator

Your next question comes from the line of Matt Kelley with Morgan Stanley. Please proceed.

Matt Kelley – Morgan Stanley

Good morning, thanks for taking my question. So I was hoping to touch base on the Energy Platform. Obviously you’ve put some money, a small amount of money to work in a dedicated fund with a pretty strong return. Just curious if this is something you see longer term based on the performance of this fund and past investments in your other private equity funds as a standalone platform and how big it could potentially be.

Tony James

Yeah, so I think this could be huge. There are dedicated funds in the industry that have as much as $10 billion in an energy fund and they don’t have the record that we have. Energy is our single best industry sector in private equity. As I mentioned on the press call we’ve never had a loss in Energy; our average realization is 6x our money, the returns are very high. And so we really like this sector a lot but it’s not a separate business. I just want to be clear about that. It’s a way for some of our LPs that want to be over weighted in energy to get added exposure but yet let us maintain the diversification for risk management and other purposes that many of our LPs expect in a given multi-industry global fund.

So the Energy Fund that we raised, $2.4 billion, is essentially going to be invested 50/50 in any energy deal; the other half of that will come out of the main fund, the main Global Fund. So to invest that $2.4 billion, which by the way is about half invested today even though we had the final closing in August, we have to put out $5 billion or thereabouts – half of which goes into the Energy Fund, half of which goes to the main fund. When the Energy Fund is fully invested it’s absolutely our intention to go out and raise another hopefully larger Energy Fund.

Stephen Schwarzman

But just so you understand our model, which you probably do so maybe this is just redundant, but the way we grow the firm is by doing a great job for our limited partners. So if you look at the Energy Fund, it was actually agony to raise this $2.4 billion. Given our record the marketplace regarded us as like a first-time fund where we just saw complete continuity in what we were doing, as Tony mentioned. The next time we come to market, assuming our performance is as impressive as it’s been in this sector over the last ten years, I would venture to say that the acceptance of this fund with [Blackstone] Energy Partners II will be much greater; and marketing that would be infinitely easier than the original thing.

And what number that gets you to is not our job to predict right now and what we think is comfortable given the opportunity. Just the ability to go to market with this type of product again, what one would think is just an example of drivers of the firm growth and delivering also great performance – which is our number one focus for our limited partners and new ones.

Matt Kelley – Morgan Stanley

Great, thanks, that’s helpful. And then if I can ask on the European real estate side, I know you mentioned distressed European bank loans being more available. Just stepping back to a little bit of a higher level, are you seeing pretty substantially increased deal flow out of the European banks or is that something that’s still you’re more waiting for down the road?

Tony James

I’d say that’s still a little [cludgey] on balance up but not nearly what it should be, and the reason for that is Basel III because the banking system in Europe has been asked to double its equity capital and it’s got a lot of loans that are probably not marked accurately on its balance sheets. And if they want to clear out at market-clearing prices they’ll be taking losses, not gains against their net worth mark. So it’s very difficult to double your net worth and at the same time you’re losing money on the sales of these assets.

Now, different parts of Europe will face up to these issues at different times, and there are a variety of things that we’re very actively buying. If you turned on all the troubled loans in Europe and the banks could take the hit you would dwarf what’s coming out in the market. As it is we’re seeing a lot of opportunities. We’ve had a lot of success in terms of buying this compared pretty much to the asset allocation we would have globally of how much we would want in Europe.

So it’s actually pretty good for us I would say right now, and but for people other than one or two or three buyers through the whole European system it doesn’t provide as much opportunity, and we haven’t been one of those, as one might think.

Laurence Tosi

And Matt, let me also – another, even if the banks aren’t directly selling troubled loans, which I think was the form of your question – in many cases they’re not making much in the way of new loans. So some of our investing in Europe is in actually pretty good countries where there’s a lot of growth, particularly in Eastern Europe and places like that in some instances where they just can’t get financing that they once did anymore. And that’s opening up some nice opportunities for us as well in Europe.

Stephen Schwarzman

Tony’s point is really, I’m almost embarrassed to admit to have forgotten such a good point, but that somebody just like turned the spigot off in Europe. Trying to get real estate loans in Europe is exceptionally difficult and that’s sort of understating it. And so there’s an enormous opportunity for us because of our size and scale to provide that function of advancing capital to people who can’t refinance. It’s like big-time opportunity for us, big time.

Matt Kelley – Morgan Stanley

Okay, and then one just quick housekeeping item I guess for LT: on the GSO business, the Credit business, under other operating expenses I see you have a $20 million cost, a one-time associated with a fund launch. So is it fair for us to assume a $13 million to $14 million run rate or is there any other noise in that number?

Laurence Tosi

Nope, that’s it – that’s exactly the right number, Matt.

Matt Kelley – Morgan Stanley

Okay, thanks.

Operator

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

Marc Irizarry – Goldman Sachs

Great, thanks. Steve, you definitely have a large array of what institutions clearly are looking to invest in these days. A question on the business of distribution for you: where are you in terms of sort of cross-selling the firm if you will? Are we sort of looking ahead at you maybe adding a more robust global distribution sort of footprint and adding some headcount there, or how should we think about how you sort of cross-sell the firm or cross-sell some of the product?

Stephen Schwarzman

Well you know, Marc, we were just talking about this at Executive [Day] yesterday. Based on what I’ve seen as our costs for running our distribution operation globally, we’ve got a big distribution. And you know, the firm’s coming together really in a terrific way. And the way it works out is that in certain accounts… We’ve got roughly 1200 LPs throughout the firm and on different accounts, one of our businesses becomes the first product in, and assuming we do a really great job which we have been then there’s a natural receptivity to other products since they’re also performing at a world-scale level.

And so there’s a very high level of cooperation between the different parts of the firm. We have a lot of white space still to go. I think Joan has the statistic, and if she doesn’t I’m shocking her, to answer the question in terms of how penetrated we are across our four major groups against you know, a model LP.

Joan Solotar

Yeah, so we have two-thirds of our clients are in more than one product, but still less than 20% are in all four. And so I would say we’ve absolutely been focused on it but it’s still early days. I mean we just think it’s a huge opportunity, and if you think about how new the Credit Platform is to us or Tactical Opportunities and Energy, and we’ve added new LPs to the firm in Energy for example – I mean there’s just a long runway from here.

Laurence Tosi

I would just add, Marc, that – and Tony I think touched on this just about a year ago, that one of the key investments we made during the downturn and one of the flexibilities of not only our growing asset base but the way our fees are structured is that one of the key investments was marketing. So we’ve been making investments over the last 24 to 36 months that you see us bearing some of the fruit of that. There’s certainly both LPs in areas that we can continue in but I wouldn’t expect a big uptick in expense because we’ve been planting those seeds for some time. It’s been a key initiative for us for a number of years.

Marc Irizarry – Goldman Sachs

Okay, and then just to get back on the real estate realization topic, can you talk a little bit about your preferred means of exits from some of your real estate portfolios? It looks like stuff that’s coming out is clearly coming out at a higher value where you have it marked currently, but how do you think about the portfolio sort of in terms of public exits versus private sales?

Tony James

Yeah, I think it’ll be mostly private sales but we will definitely have some public exits as well. A company like Hilton is a multi-asset company, it’s an operating company; it’s more likely to have a public exit. But an office building here or there is more apt to have a private exit. In addition, when it comes to homes and things like that we’ve got the opportunity to do some securitizations and some sort of dedicated REIT-type vehicles and some things like that. So it’ll be a mix of all those things but mostly we buy large-scale commercial assets that’ll go on private market. I don’t mean that they’ll be sold privately but in the private market.

Joan Solotar

We have a fairly long queue of questions so I’m just going to ask if everyone can just ask one or two and then get back in the queue if you still have follow-ups, just so we can get to everyone. Yes, it is fun for us. [laughter]

Stephen Schwarzman

We like talking about our business.

Marc Irizarry – Goldman Sachs

Great, thanks.

Operator

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

Robert Lee – KBW

Thanks, good morning everyone. The question I had is actually on the Private Equity business: can you give me just an update on BCP V? I know there’s still some ways to go to get to carry but I’m kind of curious, when you have conversations with LPs in that fund what are you communicating to them about your own ultimate return expectations for that fund at this point?

Stephen Schwarzman

Well, we tell them and we believe that it’ll be between 1.8x and 2.0x their money.

Robert Lee – KBW

I mean besides that, are we thinking of… Because obviously if it’s over ten years versus, you know.

Tony James

Yeah, that’s a fund that’s an ’06 vintage fund and now we’re 2012. As you know we haven’t harvested a lot of it so the average life of that fund’s going to be fairly long. I expect we’ll have a bunch of dispositions in the next few years, but given the cycle that they’re in and when they put that money up I think they’re happy with the performance. It doesn’t necessarily lead to a lot of carry, and how much carry will be a function of the timing of the realizations. That’s a function of economies and markets and can we do IPOs at reasonable prices and all that sort of stuff.

Steven Schwarzman

But what we’ve been doing is that, Tony and I have been meeting with each of the large companies. In fact, we have a meeting with the CEO of another one today at 2:30. We want to hear what everybody’s growth plans are, whether they need more capital. And what we’re doing is we’re building these businesses rapidly, something like sort of Fund V is a little bit hostage to the economy. If we have an increased growth in US GDP which will then lead to higher stock prices, higher earnings growth – because this firm has a lot of US exposure – then you’ll see some very nice acceleration of trend.

If you stay in a 1.7% GDP growth it’s not a particularly hospitable environment for companies generally. I think a little bit of when are we going to be over that hurdle? You know, we’re doing all the stuff that we can do to maximize the growth but we actually could use a little bit of cooperation from the US government and the US economy. And what we’ve seen in our experience managing these funds over 27 years is that at some point things look like they’re slowing down and it’s not as much fun; and then something happens to the world in a favorable way and then you have this rapid sort of catch-up that works.

And if you keep your companies in great shape, investing in them and so forth, that change in the growth curve gives us an opportunity for big gains. I can’t predict exactly when that will happen. Form watching these Presidential debates I’m not sure that they can really predict that either. And it’s something that you know, it’s part of the real world today but it’s not going to stay like that forever. The public won’t tolerate it and we have the ability as a society to address those issues and change them, and that will be for the benefit of our Private Equity funds that were down more towards the top of the market than where we are over since that time with very high returns.

Tony James

Yeah, as Steve points out, when this thing swings it can swing really big. And one of our funds, BGB III I think has swung from bottom to top I think by a factor of 4x in terms of value.

Stephen Schwarzman

Yeah, I mean some of these are really funny. I mean it’s hard for you to have sort of a real feel for this, but I mean we had a company called Graham Packaging that was hanging around for years doing next to nothing. It was gaining market share, it was growing but it was consuming a lot of capital to grow and we had this thing marked at cost for like eight years or something. And we ended up exiting because we bought a company, we got a lot of synergies, it became much more interesting. Somebody came and approached us at a very high price. Somebody else liked it even more so they wanted to pay, but we ended up in a bidding war for this thing and we made 4x, or 4.2x or something like that our money out of something that had been hanging around as an investment for years.

So we have a lot of experience with things like this, and we keep investing and there’s a moment. And then that moment happens and everybody looks back and says “Wow! How did that happen?” Well, it happens. So we’re in one of those more funky periods generally because of low GDP growth, but that won’t last very long.

Robert Lee – KBW

Well, I appreciate the color, and maybe just one quick one, my follow-up question on capital management. As you aptly pointed out, there’s a lot of growth potential through acquisitions and bringing in new products, who you make your own commitments to. And you obviously have a strong focus on distribution but at the same time I’m assuming you’re somewhat frustrated with how the stock has performed over time. And so any thoughts or how should we think about some of the recent cheap debt you’ve raised, some of that being put towards buying back some of the common, particularly since there is some creep through share issuance over time [on its] employees?

Stephen Schwarzman

Well, that’s one thing we could do. I think LT, you all on the receiving end of a call like this get this blizzard of numbers and data that we throw at you. We go over this really careful because we think each number is meaningful, but it’s impossible to absorb. If you have the time to go back over what LT was saying, and look at the firm’s growth and compare us to asset classes and financial services that grow infinitely slower, where your money can be redeemed like on a daily basis; and you look at the business model that we have growing at many, many times the rate of almost everyone in financial services with the kind of multiple we have, I think you used the word… Did you say “frustrated”? Frustrated really doesn’t adequately express how I feel. [laughter]

Tony James

I wish you hadn’t asked this, Robert. [laughter]

Stephen Schwarzman

You know, I wouldn’t give us an A for sort of getting our point across to a market and having them truly understand the earning power of the firm, the growth of the firm, the position of where we are. So we’re going to really focus on this in a more fulsome way. I mean we’ve done a really good job being pioneers in this industry, describing it, and that has not been an easy task for either Joan or for LT, particularly with some of the financial policies we’ve been given by sort of the government.

But the reality is that the firm in my view is significantly undervalued. Everybody you talk to says that but actually this is one of the cases where it’s true and we’re going to demonstrate that to people. And I think we have to take a more active role which we’ve already decided on [in the senior] levels of the firm. Tony and I spend only very limited time on this part of our business. I guess you’d call it managing the multiple – I mean we just haven’t done it because we’re busy growing our business. And we’re going to have to chop off a little piece of us to spend more time with that along with the other members of our Management Committee – Jon Gray and Bennett Goodman, Tom Hill.

So I think over the next six months people are going to be seeing more of us. Now whether that’s a good use of your time I leave to you but I agree with your characterization. We actually in terms of stuff like share buybacks or whatever, you know, we were more interested in terms of building liquidity on our balance sheet for a variety of reasons. It’s something we can [look at].

Tony James

I have some comment on the buyback. One of the, I mean organic growth is great but our LPs expect us to have some skin in the game, and the kind of organic growth we’ve had and the scale of the business we have requires capital. And so we did the financing really to support growth. It’s not like it’s excess cash we don’t have a use for that creates a lot of value for shareholders. So I do not think you should expect any buybacks.

Laurence Tosi

You started the question without asking us about different shareholder dilution over time. Since the IPO, to be clear, we’ve issued only 3% more shares for a company that’s grown 2.5x. So we’ve more than outgrown the issuance of the shares so that’s not an issue for us and we don’t anticipate it will be. And following what Tony just said, it’s a good use of capital. At the time we did the bond deal we were bumping up against AA. There’s not a lot of AA companies out there that grow anywhere near our level so it made sense for us to effectively fund that and then put it back into the business.

Robert Lee – KBW

Great, well I appreciate all of the color and for you taking all the time and taking my questions.

Operator

Your next question comes from the line of Roger Freeman with Barclays. Please proceed.

Roger Freeman – Barclays

Good morning. On the debt raise that you did, you’ve got what, I guess another what - $2.3 billion of cash and liquid investments? I think the June quarter had $1.3 billion of commitments. As you look at that, was this just part of your longer-term capitalization strategy to kind of fund the co-investments that you anticipate making as opposed to kind of the ramp over the intermediate term?

Laurence Tosi

Actually, Roger, it’s much less that. So if you look at the $1.3 billion at the close of Q2, that’s the gross commitment. If you net out the commitments that are for the insiders that are not the responsibility of DX itself it’s only about $850 million, and that number has actually come down over the last couple of years. So it was less, and as Tony said we’re growing but it’s not that we think our commitments as a percent of the size of the firm will grow; and the primary use of the capital will be – and I know it’s a generic term- general corporate uses, but some of the initiatives that you’ve heard us talk about in terms of investing in the business for its growth over time. But there has not been an increase in the overall commitment of the firm to the fund.

Roger Freeman – Barclays

Okay. So you took advantage of cheap rates and receptive markets for the longer term.

Laurence Tosi

It was the right point in time we thought and we also thought frankly, and I mentioned this in my comments – we thought the market had frankly mispriced Blackstone’s credit much like we’ve been working on the equity side of the story that Steve just mentioned, and we were trading more like a BBB traditional asset manager rather than an A. And this gave Joan and I the chance to go out and meet with a lot of people and the proof is in the fact that we’ve tightened to the way that we should be trading. And so partially that as well.

Roger Freeman – Barclays

Absolutely. Okay, and then just the other question is Tony, on the earlier media call you made an interesting comment about BGB VI potentially being off to the best start of any fund in history. I was wondering if you can kind of expand on that a bit. I mean if you look at the IRR that you reported, I think it’s like 8% which probably is hampered just by all the un-invested capital. What is sort of the multiple and (inaudible) asked it already, but maybe saying it from the perspective of what you expect the returns eventually to be on what you’ve done.

Tony James

Well, I guess really it’s a combination of both, Roger. We’ve had some deals like Chineire that have an immediate markup. We made an investment in an Indian company that went public with an immediate double I think or close to it. We invested in Knight Capital where we had to close on an immediate double. So some of the investments we put up have an immediate public market mark so it’s not our own marking.

Our general policy when it comes to private investment is not to change the mark in the first year, but when there is an actual transaction or a public market – we do market to the public market and that’s required under accounting, so we try to carry new investments at cost figuring that our cost is the best indicator of value. And we also do try to be conservative in our marks which is why you see virtually all of our dispositions at significant bumps over our marks.

But with a new fund, you’re lugging the management fee on the entire corpus of the fund - $16 billion – and you’ve just got a few investments, maybe it’s 20% invested, maybe it’s 10% on average. In the last year it’s been probably less than 10% invested and you’re trying to carry the management fees on the whole thing and it’s very hard to get IRRs on a fund. The fact that we’re over the hurdle at all is unusual.

Roger Freeman – Barclays

Sure. Okay. Knight was in BGB VI and not the Tactical Fund?

Tony James

Yes.

Roger Freeman – Barclays

Okay. Alright, thanks a lot.

Operator

Your next question comes from the line of Jeff Hopson with Stifel Nicolaus. Please proceed.

Jeff Hopson – Stifel Nicolaus

Okay, thanks a lot. So two questions; one of the hedge fund of funds business, I guess more customized products. Can you remind us of maybe one or two of these as far as where the growth and/or the interest is? And then a follow-up on P Fund V; so that is a bigger fund, so if we assume decent returns but still lower than the previous and the subsequent funds, what would the investor come out of that thinking that this is just the down cycle and over multiple funds he’s done well or how would you…

Tony James

Okay, well I’ll do both I guess. On BAAM, I’m not quite sure I understand your question, but why do investors invest in BAAM? Is that what you’re asking?

Jeff Hopson – Stifel Nicolaus

No, I meant-

Joan Solotar

Which strategies, because you called it a fund of funds but really it’s a hedge fund strategy.

Tony James

So customized means customized, so a lot of LPs will come to us and they’ll want a specific product to meet specific return and correlation objectives, so you really can’t generalize on that. But in addition to creating those things we do have some comingled funds where people can come in, and there’s about twenty or something of them, and there might be some with emerging markets and some that are of high beta, some that are low beta; some that are based on commodities, some that are based on different things like that.

Then we have several other products that are comingled products but are specialty products in that business. We have sort of a strategic opportunities kind of fund, taking advantage of market anomalies. We have a fund that seeds new hedge fund managers and by doing that owns a piece of the GP; and we have a new product that we’re working on which we’ll be announcing shortly but haven’t announced yet.

So it’s quite a diverse… All of these businesses are big businesses with diverse products and diverse business groups within them, and the BAAM product is no exception to that. And then on Fund V, our LPs are happy. I mean frankly, none of them have made 1.8x their money on any of their other 2007 investments so there’s no issue there.

Jeff Hopson – Stifel Nicolaus

Okay, great. Thank you.

Operator

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

Chris Kotowski – Oppenheimer

Hi. The realizations or the realized carry and incentive fees in your Real Estate Fund were the best in many years, I think probably going back to 2007. It was about what 2010 and 2011 were combined, so that strikes me as something new. And I’m wondering is that reflective of a whole bunch of little transactions or just one big opportunistic sale? And you’ve been talking about the fact that realizations in real estate would be more likely to increase – is this kind of the opening salvo of that?

Laurence Tosi

I’ll start and maybe Tony will finish it. The answer is yes as to the small transactions, and I noted in your research you were looking at big, publicly-announced deals. That’s actually not necessarily the nature of how we exit our real estate investments. While we may have done deals in different packages when we did them sometimes we break them up and sell pieces, so year-to-date there’s been 55 separate realization events inside of Real Estate and there has been a strengthening of that trend as the year has progressed on. So hopefully that answers that one.

Tony James

Yeah, and hopefully, Chris, you know, we’ve been talking now for the better part of a year that real estate would start to build into a fairly heavy realization part of the cycle and you’re seeing the beginnings of that. And you know, the big chunky ones are still ahead of us.

Chris Kotowski – Oppenheimer

Okay. And then just as a follow-up, you announced the Capital Trust acquisition and it looked like you were just buying a real estate management company, and I would have thought you’d had that or did that come with properties attached to it?

Tony James

That was not a fun investment; that was a Blackstone investment so we did in fact buy the management company and we wanted the management company. There’s a very good team there and it opens up a few opportunities for us. The opportunities are first of all it gets us into the high-grade real estate debt business. We’ve been in the sort of less-than-investment-grade real estate debt business and so this extends the product line that we have in Real Estate number one. Number two, it gets us some new LPs that we didn’t have before and of course we think they’ll benefit from some of the LPs that we have that they weren’t before.

Number three, it gives us a special servicer where we can feed some businesses. We can also get a lot of information and we think some deal flow from having a special servicer. So we’ve got a lot of synergies and we think it will open up some nice opportunities for future growth.

Chris Kotowski – Oppenheimer

Great, that’s it for me. Thank you.

Operator

Ladies and gentlemen, that’s all the time we have for questions.

Joan Solotar

Actually we have one more.

Operator

[Bill Ketz] is no longer in the queue.

Joan Solotar

Okay. Well thanks, everybody. If you have any follow-ups just give us a call.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day.

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