Blackstone Inc. (BX) Earnings Call Transcript & Summary

Good morning, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it's my pleasure to introduce Michael Chae from Blackstone. Michael is the firm's Chief Financial Officer and also a member of the firm's management committee. His responsibilities span across finance, treasury, technology and corporate development. He joined Blackstone back in 1997 and eventually came up through the investing side of the business and ran the international PE business. Blackstone is also one of the most fascinating names that we cover. It's the largest alternative asset management in the world with almost $600 billion in assets under management. It has also grown its AUM by more than 6x since the 2007 IPO. The firm is also highly diverse with scaled businesses across real estate, private equity, credit and hedge funds. With that, let's begin.

Good morning, Michael. Great to have you here with us.

Great. Nice to be here. Thank you. Nice to see everybody.

So just starting off with that 6x AUM figure. It's really impressive and highlights the benefits of the secular migration to liquid alts. What inning do you think we're in, in the second migration?

Well, an appropriate question because we're in Florida and spring training is beginning, I guess, for baseball. But you probably won't be surprised to hear me say, I think it's early. It's early in the game. It's early innings of the game. And I would sort of take that at a few different levels, sort of the macro level, the customer level and the channel level. So at the macro level, we are talking it's still about very low levels of penetration currently in terms of private markets against vast addressable market. So whether it's global private equity where, compared to the global public equity markets, it's about 2% or something of $100 trillion global equity market. In credit, the private credit market, and we've all heard about its growth in the press over the past handful of years, still less than 1% of the $100 trillion-plus global debt market. Commercial real estate is a $30 trillion market. So these are enormous total addressable markets we're talking about, and private markets, it's still quite underpenetrated, we think. At the customer level, and folks have heard myself and my colleagues say this before, what we consistently still hear, we could then expect to continue to hear among our customers, among the largest pools of capital around the world, the same thing, which is that the only way in a world of ultra-low interest rates and very muted expectations about prospective liquid markets returns, the only way these pools of capital can sort of think they have a chance sort of before the fact to service their liabilities and long-term obligations is by basically maxing out their liquid budgets. That's kind of the term you hear among consultants, by maxing out their allocation and growing their allocations to private markets. So that's a consistent theme. We don't see that changing. They need to do it in scale, which obviously plays into our hands, if you will. And then at the channel level, obviously, sort of traditional institutions, U.S. public pension funds, endowments and foundations have been at it for a while in alternatives, although, again, that group continues to grow. But now we have, what I would call, a second and third leg to the stool for us, and that's retail and insurance, which are vast markets, $70 trillion-plus, depending how you account it for retail, less than 5% allocated alternatives; insurance, $30 trillion-plus global market, maybe 5% allocated to alternatives. And so those are tremendous opportunities for our firm. So look, overall, I'd say huge tailwinds. And with our brand's performance, ability to innovate, I would say it's fair to say, demand for our products is fundamentally not constrained by market demand.

So we're up the same question, but as I look across your different businesses, do you think private equity is maybe, longer in the cycle, more competitive than some of your other businesses would seem newer, more upside like real estate and infrastructure?

Look, I -- obviously, all of our -- we think there's tailwinds across basically all these private markets, and our trajectory, I think, reflects that across these businesses. I think it is fair to say from a secular growth opportunity standpoint, if you look at real estate, if you look at infrastructure, I'd probably add actually secondaries to that, really compelling. So in real estate, I mentioned big commercial real estate market. And for us, for our first 30 of our 35 years as a firm, we've built this fairly dominant, opportunistic, as we call it, real estate business, sort of real estate private equity, higher octane, higher return real estate. That is the core of our business globally. And really -- and that was great. It also happens that's only about 10% of the sort of real estate deal market. The other part of it is what we would call core, core+. And so only about 5 years ago did we really extend our business into that space. As you know, we've -- in about 4 or 5 years' time, we've gone from basically nothing in that core, core+ area to about $46 billion. So -- and that's our BPP business. That's our BREIT business. In infrastructure, we all know the statistics, trillions of dollars of funding gap, trillions of dollars over kind of the medium to long term with demand for private capital around the world in infrastructure. And again, 2.5 years ago, we weren't in this business. We announced we'd enter it a couple of years ago. And within about a year or so we raised $14 billion of committed capital, making us one of the 3 largest pools of capital in a very short period of time. So for us, I don't know, it's -- I would say it's top of the first inning for us in infrastructure. And it's just like core+, that's a perpetual capital fund structure for us. And then I mentioned secondaries. This one -- secondaries, I think, is a bit underappreciated story. But -- so big private market around the world, trillions of dollars of NAV. And yet every year, there's only about 3% of that total market sort of change its hands on the secondary market. And so if you think about public markets, obviously, all of the public liquid markets can trade every day on a secondary basis. This tiny percentage of privates have a secondary market outlet. And so that's a big opportunity. There's still excess return in that space. And that's why our strategic partners business, our secondaries business, has grown to a $34 billion business, grew 30% -- sorry, 40% in 2019 versus the year before. So that is also early days, even though you've been hearing about secondaries for a long time. So I would agree, big tailwinds in those areas, but not to give private equity a short strip. That's a business in core private equity that we basically doubled in the last 8 years. And we've done that by not just growing the kind of flagship global fund, but by adding regional funds, sector funds, our long-dated core strategy and so forth. So for us, again, secular tailwinds, not headwinds across the business.

Michael, because you've been so successful in the fundraising side, and not just you, some of your competitors, too, even though you're larger, there's a lot of dry powder out there. And that is a function of higher AUM levels. But as the industry deploys that capital, do you think it can still generate double-digit returns?

Look, we've been hearing the question and the sort of concern about dry powder really for as long as I can remember in this business, when they probably started using the term dry powder. Yes, I will say, I think the McKinsey private markets report came out this week and I was looking at it on the plane, and it had a stat that said, dry powder is basically still within kind of historical norms. So it had a -- over time, it sort of ranged between sort of 1.5 years to 2 years of sort of inventory, dry powder, relative to like annual deal pace. And today -- in 2019, we're kind of at 1.9% or something, but still within that range. Having said that, a lot of dry powder. But I think what you really have to look at is, from our point of view, first, the composition of that and where you play and how you play. So for us, yes, we talked about $151 billion of dry powder at the end of the year. That's spread across 40 strategies, probably double the number. Our called dry powder stat was spread across years ago. And in terms of where we play, if you look at the sort of larger cap space, obviously, in real estate, we have a very distinctive competitive position given our scale. And in large-cap private equity, 10 years ago, there was something like 6 funds in the world over $15 billion in size, and 10 years later, it's 7. Yes, that will probably grow by 1 or 2 over the next couple of years. But my point is, when you unpack the dry powder, you look at that sort of on a strategy basis, and then you look at sort of where you play in that -- within that space. But to answer your question, and maybe with that as context, I think the industry can continue to deliver double-digit returns net, can continue to deliver, over the long term, a sufficient premium to public market performance that really is what clients look for. And for us, over 30 years, whether it's sort of that net '15, '16 in private equity and real estate or that achieving 2x plus multiple invested capital, sometimes over a shorter period of time, sometimes over a bit longer, 4, 5, 6 years, but delivering those dollar profits for our LPs and for our shareholders, we feel very confident we can continue to do that.

Michael, you mentioned competitive advantages. So just focusing on that for a second. Can you talk about the key points of differentiation that will allow Blackstone to continue to outperform in this business?

Sure. I love talking about that. So I think it's a few key things. One, and I've used these words already, I know, but scale and the ability to move increasingly across the risk return spectrum and basically deliver as one firm with a number of businesses, basically, every kind of capital solution that a company, a Board and an owner of assets meets, and that enables us to do things that others can't do. And a couple high-profile examples of that are our Refinitiv deal from only 2.5 years ago or so $20 billion deal. Basically, we're the only party involved with Thomson, who were looking for a partner, not just a buyer and somebody who could create a lot of value in the assets, and we could deliver that sort of scale capital solution by ourselves in a confidential way. GLP, $19 billion, so logistics deal from a year ago. We were the only cash buyer for that set of assets, and it was because of our scale overall in real estate, our knowledge in logistics space. And then also we utilized, this is back to sort of doing other things other people can't do, both our opportunistic strategy and also our nontraded REIT because the portfolio of assets they own were really 2 different kinds, one at kind of higher growth, less stabilized set of assets that were ideal for our opportunistic fund and then a more stabilized income-oriented portfolio that was perfect for our nontraded REIT. Second, I'd say, in terms of what's distinctive about us, our breadth of strategies. And so we deployed $63 billion of capital last year. It's a big number. But actually, over half of it, 55% or so of that amount came from strategies that, if you remember on Investor Day, we called them emerging leaders, I think. And so again, it's not doing more deals, more capital in the same historical strategies, it's that growth across the firm. And by the way, each one of those businesses, strategies, funds makes the others better in terms of the sharing of intellectual capital, the ability to partner, like I mentioned, on the GLP deal, et cetera. And then finally, it's part of our model, which is really about the fundamental model of our firm and others, which is control investing in scale with long-dated, locked-up capital, right? So on average, our capital is locked up for over 12 years across our business, and that allows that long-term approach to value creation and deploying our very large sort of portfolio operations and asset management capabilities, hundreds of people across the firm in real estate, private equity, et cetera. And that's a big part of our edge. So when you put that all together and you combine it with our brand and our reputation for fair dealing, which we believe is very robust, we think -- and all of those capital -- all of those capabilities to provide capital solutions, we really like our position.

One competitive advantage is -- that I think is pretty special is product innovation, as I've watched how you guys have evolved over the last 20 years, and you've been a first mover in many products. Maybe some commentary on that? And also which of your kind of recent product launches are you guys internally the most excited about?

We love all our children equally. So it's -- we love that word, innovation. Performance and innovation are kind of the 2 pillars for us, and it really is an incredibly exciting time from an innovation standpoint. And innovation for us kind of begets innovation. It leads to other things as we extend our business model, our strategies and our channels. So first, I'd say a few areas. Again, sort of moving across the risk-return spectrum from the traditional kind of sort of high return, higher octane strategies to take advantage of -- and this is -- I'm talking about core+, BREIT, core private equity infrastructure, to take advantage of this huge global appetite among investors for stabilized, long duration, double-digit compounding capital with a yield component. There's almost an endless appetite for that delivered in scale with quality and consistency. And the thing is we're able to leverage all of our long-standing capabilities in our sort of more traditional areas to originate and manufacture opportunities in this space. It also -- this area also lends itself to perpetual capital fund structures, which is extraordinarily attractive for us financially. Second, you've heard us talk about this, but more growth-oriented strategies, to which we believe 10, 15 years ago, we were underexposed probably as a firm. But we're going to do it, and we're doing it, in a, we think, a really distinctive way, a Blackstone way, if you will, so if you look at life sciences, if you look at growth equity, life sciences. So when I said to you 2, 3 years ago, if you think Blackstone could have the biggest pool of private capital directed at life sciences in the world, you might say, "Well, I think they're pretty good in a lot of areas, but that area?" And so we obviously -- we spent years looking at this area. We saw a huge opportunity. We decided to partner and buy a small firm called Clarus with a very distinctive, scalable strategy. We had a first closing of over $3 billion in the fourth quarter. We're heading towards $4 billion, $4.5 billion fund with an incredibly attractive position. In growth equity, we're in the middle of fundraising, and we're very confident about our ability to scale that. And there, we see -- again, you'd say, "Well, that's -- there's a lot of people in growth equity." We're going to bring to that, I think, a approach to be, call it, sort of the life cycle capital provider and to bring forward private growth companies, which in markets like this, I think will only be even more compelling. And then also bring in a way that I think will be very distinctive, our long-standing value creation capabilities, operational, governance, board, et cetera, to these companies, which I think others don't really do like we can do. So that's very exciting. And then lastly, it's sort of a channel strategy. So retail market, where last year we raised $24 billion or so and we're confident this year will be even higher, insurance, over $60 billion of AUM, but we're just getting started. So all 3 of those dimensions are exciting. And in terms of our children we all love equally, we do like to talk about BREIT, this nontraded REIT. It's an exceptional story. It cuts across a number of these themes that I mentioned, risk return spectrum, retail channel. And basically, as people know, the nontraded REIT channel, historically, not such like distinguished one, basically, the channel shut down for a period of time. We saw an opportunity to leverage our platform and use our brand in real estate, launch a product that basically sets 10-point loads, have basically the same fee structure we have for our institutions over the long term. And it's been amazing. And over the last 3 years, I think we've been about 2/3 or 70% of the total flows in this market. It's incredibly well suited to our capabilities. We can do distinctive investments, whether it's the -- some of the Las Vegas investments we entered recently, GLP. And this strategy, over time, perpetual capital, can be one of the, if not the single most powerful profit driver of any single strategy of the firm.

Maybe moving to conversation over a little bit to the macro front. What worries you more at this point? And one seems more like the other, higher interest rates or lower interest rates?

Well, the kind of safe answer is, it depends on what's the context and -- look, I think in terms of more like -- what's the more -- in the real world, more likely practical worry or scenario, it would be low rates. And there's no -- I see no end in sight on accommodative central banks. It's -- even more so this week. But obviously, if that continues to be paired with more muted economic growth, depending on what part of the world you are, then eventually, you get to a point where the downturn happens, and those same central banks don't have the tools and the arsenal to stimulate through the other part of the cycle. So that would be, and I don't want to use the D word around this, deflation. But I think theoretic -- I think that set of conditions is more likely than the former, than the high rate one. And what you would worry about, is it evolving that way? Although I also think there is -- harder to say this week, but the sort of longer runway for positive economic growth relative to the crisis, I think those statistics are compelling that we're -- we still got a ways to go in terms of cumulative growth.

Got it. As you take a step back, what are your updated thoughts on industry consolidation in the illiquid alts? And do you actually think we could see a pickup in M&A at the corporate, at the center level? And we're watching a lot of traditionals trying to move more into your neighborhood. And do you actually think, eventually, the alts could move more into the long-only world? And we're actually seeing this in some of the insurance businesses from your competitors. So what are your thoughts on those?