Blackstone Inc. (BX) Earnings Call Transcript & Summary

Before we get started, I've been asked to direct your attention to important disclosures on the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone, and welcome back to Morgan Stanley's Financials Conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research, and welcome to our fireside chat with Blackstone. And we're excited to have with us today, Michael Chae, CFO of Blackstone. With $649 billion of assets under management, Blackstone is one of the world's leading investment firms. Michael, thank you so much for joining us today, and welcome back to the Morgan Stanley conference.

Hey, Mike. Great to be here. Nice to see you.

Great. Likewise. So I'm going to kick off with some questions, and we'll see maybe if we have a time or -- towards the end for any audience questions. But why don't we start off with some of the priorities at Blackstone today? Blackstone has posted a record 2020, setting some records for fee-related earnings, deployment, realizations, despite a very challenging backdrop presented by the pandemic. Maybe you could just talk a little bit about what underpins the strength. And what lessons learned do you take away from the pandemic as your employees return to the office?

Sure, Mike. Well, I'd highlight a couple of things, a couple of themes maybe, and I'll elaborate on them. First, the fundamental strength of the business and our business model; and second, the importance of culture in terms of lessons learned from the crisis. First, with respect to the strength of the model, we said at the outset of the crisis, I think, on our Q1 2020 earnings call, that it gave us -- that we had both the staying power to get through it by virtue of our business and the firepower to capitalize on opportunities coming out of it. And I think, in the last 5 quarters, both have turned out to be quite right. In terms of staying power, as you know well, the essence of our business is long-term, locked-up committed capital. We're never forced sellers. It allows us to operate patiently and calmly and with a very long-term view even when things are dislocated. And in terms of firepower, we have the trust of the -- of our LPs and a very large capital base to allow us to take advantage of opportunities. And so we entered the pandemic with $150 billion of dry powder. And subsequently, in the time since then, we know we've had about $100 billion of inflows over the last 12 months. We invested actually almost another $100 billion invested or committed in the time since the pandemic. So not only didn't we miss a beat, but I think our business activity levels have remained extraordinarily high and our firm very, very productive. And I think, importantly, as part of that, our portfolios in investing businesses are really, really well-positioned. We were well positioned heading into the crisis and remain so, not only to be resilient and play defense, but also to have significant momentum as the pandemic, obviously, accelerated a lot of existing trends in many areas. So as examples, and we've talked a lot about this, whether it's in logistics, where we had assembled over a multiple year period, a logistics portfolio of almost 1 billion square feet globally, about 40% of our overall real estate portfolio. And so at a time when e-commerce had already been growing 15% or so a year and then double that growth rate during the pandemic, 30% or so, we obviously -- we're well positioned for that or recognizing, 3 or 4 years ago, strategically, how important having a significant life sciences effort would be in the face of this -- what we saw as a longer-term life sciences revolution. And of course, that accelerated and the opportunities that accelerated in the -- over the last year or so. And in private equity, just as a final example of our portfolio positioning, we had oriented our business more around technology and growth. Our seventh flagship fund, BCP VII, which is now fully in -- our most recent fully invested fund, that's about 50% of the capital was invested in technology or technology-enabled areas. And so, obviously, that positioned us well. And then finally, I would say, from an earnings power and earnings quality standpoint, the crisis really highlighted the exceptional ballast of what is now versus, say, back in the global financial crisis 13 years ago, an FRE-driven financial model. And so our FRE was up basically almost 30% in the first half of last year. So really, I think, number one, the strength of our business and our business model. Then second, in terms of the importance of culture, I talk a lot internally and also externally about how special and distinctive, I think, our culture is in terms of our being an investment firm that both is characterized by, I think, the ability to deliver investment performance and returns and also has a culture of innovation around developing the business, which I think is a distinctive combination in finance. And during the pandemic, on the one hand, the strength in years of investment, in building that culture, allowed us not to miss a beat in terms of operating and executing as an organization, notwithstanding physically apart. But at the same time, as time went on, we always obsessed over doing everything we can to protect our culture and sustain it for the long term, and we obsessed over it even more during the pandemic. And so we did things like convening our whole firm every Monday. We call it Blackstone TV, BXTV, as a way of bringing people together virtually, updating them, talking about what was going on in the firm, supporting them, keeping them connected to us and to each other. We invested heavily. It will end up being around $20 million or so around various measures to keep our employees safe and our offices sort of going, with things like twice-a-week on-site rapid PCR testing, contact tracing, methodology, et cetera. So all of these things allowed us to actually bring many of our people back safely as early as last July. And we really have operated close to normal for the majority of this time period, and now we're basically back in business full strength. And we have a pretty happy office. So we know organizations have been graded over this time period by sort of how people -- their people felt like they were treated and we feel like we did a pretty good job on that front. So look, difficult periods distinguish, I think, the best investment managers. We talked for many of the past years about how we came through the financial crisis of 2008 even stronger. And I think that will prove to be the case here as well, where we would have extended our leadership positions in existing areas and continue to innovate in new ones.

And Michael, you've been in the CFO seat at Blackstone now, I think, for 6 years, correct me if I'm wrong, or thereabouts, after building out Blackstone's private equity business in Asia. So I guess looking back over the past few years, what has surprised you most coming into the CFO seat? And can you give us a sense about how you're allocating your time today and how that has evolved?

Sure. Well, I mean, in terms of surprises, I would say it's never been dull. I recall, in my first 2 weeks as CFO back in August of 2015, we've been in some pretty benign markets. And then you had the dislocation of the markets, first catalyzed by the China currency dislocation. I think the S&P was like down 10% in a few weeks. The high-yield spreads were gapping out. And we've reported a negative ENI, I remember that acronym, in my first earnings call and then, last year, obviously, the book end of another crisis with the global pandemic. So never dull. The future is always uncertain. But look, to sit in the seat during times like that or like this, I think for me, is really to see and appreciate the resilience of the incredible power and potency of this business and our organization. And I would just say, in substance, looking back over those 6 years, retrospect, when I started in the role, there was still, I think, really significant doubt in the market and I think, misunderstanding about the alternatives business model, whether it was, as I mentioned, ENI, is to many people sort of an example or the volatility of our business, the perceived volatility of our business, question marks around could these businesses institutionalize, and so forth, the sustainability of growth. And I think what's unfolded since then is really a true validation of the, first, the macro megatrend in terms of demand for alternatives. You are a great, I think, spokesman for that or analyst of that, but also an equally strong validation of Blackstone's leadership position in the face of that opportunity set and in the time since then sort of that so-called flywheel effect of performance, innovation around new products, expansion of the platform, all sort of feeding on itself. So I think the market, from a perception standpoint, now recognizes all this, which is gratifying over that 6-year period increasingly, but I think it's still early days, which is good news for investors. In terms of sort of how I allocate my time, a more boring topic, I would just say there's -- it's sort of a movable feast. There's an extraordinary breadth to the role because there's extraordinary breadth of this firm. Starting with maybe sort of the day-to-day and the key technical areas of the job, I think I've got the best team in the business across tax and treasury and accounting and corporate development, FP&A, technology. And in terms of that day-to-day aspect of running of operations and helping run the firm, I'm really focused on how we run the firm with sort of a unified focus on both cost and controls and both efficiency and effectiveness. That's sort of my lodestar as an operator, if you will. Second, I'd say, a true north for me day to day is basically trying to understand everything that's going on at the firm and across our businesses that I need to know in order to manage risk, understand deeply what's going on. So I can understand it, so I can explain it, both internally and externally, see -- to be able to see around corners as to where we're going and to be able to plan the business in the short, medium and long term. And I -- and we have a wide variety of mechanisms and vantage points from which I can do that, both formal and informal weekly meetings with basically all our businesses. I chair our Valuation Committee. I chair something called our Enterprise Risk Committee, sit on many of our Investment Committees around the firm. And in general, I'd say, the whole firm knows that I and Jon Gray, among others, basically have sort of a license and a desire to see everything and dig in and ask questions and figure out what to do. So to some, that may sound sort of mind-numbing or overwhelming, but to us, given the nature of our firm, it's incredibly stimulating and interesting. But look, I think, finally, all that leads to where, like probably a lot of folks, I really like spending my time which is focused on the strategic direction of the firm, the corporate development aspects, the commercial strategy of the firm. And the compass there, of course, is where can we really move the dial on driving value creation at the firm. And so that is, again, sort of a key focus. And when I was in the private equity area, I had the fortune to sort of lead investments in companies, hire some great CEOs, work with them closely on Boards, people like Dave Calhoun and Brian Cornell, in a former life, and Chris Nassetta. And so, for them, I saw and learned a lot around sort of the focus of both strategy, operations and also leadership, sort of that holy trinity, if you will, of being a good executive. So I try to keep an eye on all 3 of those things.

Great. Maybe we could shift gears a little bit and talk about your existing portfolio. In the first quarter, Blackstone put up some very strong portfolio marks. Can we dig into maybe what's working well in the portfolio today? What sort of revenue EBITDA, rent growth trends are you seeing? And how do you expect this environment here to pan out in terms of impacting your portfolio in the business?

Sure. Well, look, with respect to our portfolio, the picture is a very good one. It's in really good shape. I would say, overall. That's the result of good sector selection, good asset selection over time. And also, the backdrop of rising markets is also obviously a support. As we said on the first quarter earnings call, really exceptional strong performance over the last 12 months across our businesses. Corporate private equity, tech ops, basically both up 50% over that time period; private credit, up almost 40%; our real estate BAM funds, up nearly 20%. And really, across the firm, we're above pre-COVID levels in terms of value and in most cases, by a lot. So -- and I mentioned sector selection, and we talk a lot about sort of investing in good neighborhoods. There's a lot of strength as demonstrated in our -- as we talked about in our real estate area, 80% or so of the portfolio invested in resilient and really vibrant areas, logistics, life science office; in the office, multifamily, really strong and getting stronger in multifamily area, if you look at rent collections across the portfolio, basically at sort of pre-COVID levels of collection. Our last fully invested private equity funds, as I think I mentioned before, about half invested in technology businesses that are really -- have really great tailwinds. And what I'd say versus a few quarters ago, with respect to that minority of the portfolio that was more challenged and exposed initially in the crisis, most of that is really starting to rebound, I'd say, pretty nicely. So energy, obviously, you've seen most of the dislocation behind it, a lot of strength, not just on commodity prices, but you're also starting to see more consolidation in the sector. Location-based businesses, whether it's live entertainment, lodging, we're also seeing real strength and momentum in the sort of in the present tense and also in terms of forward bookings. So in terms of overall trends, our revenue and EBITDA trends in our private equity portfolio are some of the best we've ever seen since we started measuring it. In the first quarter, we saw the third consecutive quarter in our U.S. private equity portfolio of double-digit EBITDA growth, so a number of different data points and metrics reflecting that strength. And looking ahead, we expect growth to accelerate, in general, as we truly emerge from this. And so I'd say that with the caveat, as with most folks, in terms of their perspectives on the specter of inflation and watching that carefully, I think we think the picture in the near term is very bright.

And against that backdrop there, I guess, where are you finding the most compelling and interesting opportunities to put your $140 billion of -- $148 billion, excuse me, of dry powder to work? And what themes stand out is most compelling? And where are you avoiding?

Well, look, we're seeing a very interesting opportunity set right now, and people have probably been reading about a fair amount of activity even in the last couple of weeks, and we're very excited about that activity. And I'd say, just stepping back, more than ever, our platform as a firm is really an exceptional advantage. We have global scale and breadth across our strategies. There's so much surface area to invest. We see almost everything. We try to see everything. And moreover, we have a pool of capital somewhere at the firm, somewhere around the world, almost always, to provide a capital solution and make an investment, which, 20 years ago, 25 years ago, when I started at the firm, we were a much more narrow business. And in terms of scale, you might say scale is our niche. The ability to stand up for very large deals is a distinctive thing that allows us to do very interesting transactions. Scale allows you to really own and invest in great high-quality assets and businesses that have greater surface area for improvement and for maximizing their strategic potential, for using them as a platform. And investing in scale in larger deals, yes, that also gives you the ability to operate in a more rarefied air competitively, if you will, where sometimes, there's more of an opportunity for bilateral deals and less efficiently priced deals. So in private equity, half our deals in recent years have been over $1 billion equity checks. Just last week, we obviously announced Medline, the largest LBO in about a decade. We also, that week, announced a transaction around a very large data center REIT. So those are -- operating at scale is, and with all that sort of strategic surface area, is a very, very distinctive thing. I also think we have a brand and reputation for fair dealing that allows us to -- whether it's working with the Thomson family in Refinitiv or the Mills family in Medline, the sort of Lego founders in Merlin, we're -- we have a solutions provider, partner, sort of service mindset beneath those, and that leads to, I think, better investments. And then, finally, we've got increasingly perpetual capital, long-dated strategies, and that really -- if one opportunity doesn't fit one risk return profile, it can fit another. And so that versus 5, 6 years ago hugely expands the opportunity set for us. And in terms of areas we like, we stick to high-conviction thematic approaches. And we can express that across different strategies, both directly and on sort of a derivative basis. So you take sort of digitization, the migration from the physical world to online. We can express that theme directly in investments like Bumble and Ancestry.com or derivatively, by being the largest owner of logistics around the world, or investing in digital infrastructure, data centers, et cetera. In life sciences, we can express that directly in our life sciences' $4.5 billion fund, or derivatively through investing in precision medicine businesses that run drug trials, Cryoport, which transport drugs and handles logistics; BioMed; life sciences offices, et cetera; so -- and then, finally, I'd say, in terms of thematics, secular themes that we've liked for a while but that were cyclically interrupted by COVID. And so global travel is a good example of that and deals like Extended Stay, Signature aviation, Bourne Leisure in the U.K., a number of infrastructure investments we've recently announced, I think those are all expressions of that.

Great. Maybe shifting gears a little bit, over to retail, high net worth. I think one of the more unique things about Blackstone is that the retail distribution platform that you've built out supports a lot of the products that you've also been building out in the channel. Can you talk about how you've built out this distribution team and how your approach differs from some of your peers?

Sure. We're really proud of what we've done in this area, Mike. I think, as you know, the mega theme here is the democratization of alternatives and access to alternatives. And that's a very big deal. It's an enormous opportunity. Individual investors control half the wealth in the world. And yet alternatives are less than 5% penetrated among individual investors as opposed to a quarter or so among traditional institutions. Blackstone, we've been at this for a long time. We've been building this out for more than a decade. We think we're differentiated in a number of key ways. First, our brand, it's, I think, is strong in the retail channel, if not stronger, than it is in the institutional channel, if not more distinctive than it is in the institutional channel. We made an early investment in what we call Private Wealth Solutions or PWS. We feel like we've built a market-leading platform over that sort of decade. And really, the goal, which we should never lose sight of, is to offer individuals a similar excellent experience that we've been offering to institutional investors for 35 years or so. So we've got a global team of about 150 people focused on product development, on marketing, on investor services and support. We focus on and pursue many sub-channels, whether it's wirehouses or the independent broker-dealer channel or the registered investment adviser channel, the private banking channel. The key thing for us is a robust education program that we think is a differentiator. We have something called Blackstone University, BXU, where we deliver sort of our content, if you will, education, product education, et cetera, intellectual capital. We share those to financial advisers and brokers around the world. I think we've had something like 5,000 financial advisers attend these sessions. Over 30,000 advisers have transacted with us. So there's a lot of time and effort put into this. And by the way, Zoom has only -- and technology has only, I think, enhanced our ability to do things like that. But I think, most importantly, it really begins and ends with you have to have great products and great products generally, but also great products bespoke to the individual investor set. So we started with drawdown funds mainly sold through the wirehouses. We expanded to other asset classes and later bespoke retail products like BREIT. And we created a great experience for investors, which has had a powerful impact. And we think there's still a vast runway to go and to both penetrate further in the U.S. And then, I think, it's quite early days in Europe and Asia for us in this space.

You mentioned BREIT. You've had a lot of success with that product. That's your nontraded REIT designed for retail. But you also have introduced a BREIT 2.0-type product to invest in private credit that's called BCRED. So can you talk about the opportunity set that you see across both of those products and why they resonate with investors and whether you see any sort of constraints on your growth?

Well, this is -- we like to talk about this area, and it's a really, really big deal and consequential for the firm, both commercially and also financially. And stepping back in terms of the marketplace, historically, I would say, the market has been sort of barbelled, on the one hand, in our world, illiquid, higher risk return, higher octane, if you will, more episodic drawdown products, mostly accessible to institutions as a focus or ultra-high net worth investors through wirehouses; and on the other side, sort of liquid stocks and bonds for sort of mass investing. And we're creating scale opportunities, what I would call sort of a middle corridor of sort of more semi-liquid products, where there's enormous appetite for investing in stable assets with -- for the long term, with mid- to high single-digit yield characteristics and high single-digit to low double-digit total return characteristics. There's tremendous appetite for these type products among individual investors as there should be. And we, in fact, between BREIT and BCRED, in the most recent months, have been raising about $3 billion per month in the retail channel for those products. And I'll come back in a second to what that sort of means financially. But talking about BREIT and then BCRED, on BREIT, we identified the opportunity sort of 4 years ago to bring Core+ capabilities to the retail market. Historically, this area of nontraded REITs have been a very challenged product category, not investor-friendly, high sort of 10-point fee loads, minimal transparency. And we saw an opportunity off our real estate, our sort of unmatched real estate investment platform, to transform the market and create a Blackstone-quality product in the space for individual investors. And I think we've delivered a great experience to our investors. We're approaching a 10% net annual inception-to-date return with a 5% cash yield. And the portfolio is really, really well-invested, very high-quality private real estate assets. The vast, vast majority, around 90% of the portfolio, are logistics, multifamily, triple net lease-type assets. So it's really a wonderful product, and you're seeing the demand as a result. On BCRED or 2.0 or whatever you just called it, we are, in fact, taking the BREIT model and applying it to private credit. So consider it a nontraded BDC-type product for individuals managed by the same Blackstone credit investment team. We're delivering our sort of whole credit platform to individual investors. The focus is on unitranche, senior secured loans in the direct lending context, which almost all have quite low loan-to-value characteristics in very high-quality companies with high-quality equity owners and sponsors, with very large equity cushions from those owners and investors beneath the debt. So quite safe and quite attractive characteristics. And we think, in terms of the fees, I should mention that, similar to the BREIT story, roughly half the sort of typical public BDC and exactly in line with BREIT, 1.25% management fee, 12.5% incentive fee. And so we see tremendous opportunity. And the larger context on the growth opportunity is the increasing sort of penetration of private credit, direct lending credit, into the leveraged finance market, which is over a $3 trillion market. So we're very excited about this, and it's very early days. We're, in fact, still in the fee holiday on BCRED, which will end as of July. So I can't emphasize enough the power of what we're doing here, both in terms of delivering compelling investment solutions for our clients. And for our BX shareholders, what it means is, if you think about the math, I mentioned, and this is no sort of a representation that this will happen every month, but in the last couple of months, $3 billion a month of inflows between the 2 strategies. If you sort of do the math of $3 billion a month, if you annualized that, $36 billion per year of new inflows, we charge -- if you think about it from a revenue standpoint, we make something like 2.5 percentage points on that capital, that will, in fact, accrete over time on an NAV basis but just take $36 billion of initial cost. So 2.5% comes from 1.25% management fee, a 10% -- 12.5%-type incentive fee on 10%-type total returns. Put a 50% rough margin on that, and you have $900 million of revenue generated by that on an annual basis or call it, $450 million to $500 million of FRE. So that is a very powerful quantitative story, and it just sort of brings to life what we're talking about with just these 2 products, but then with this overall product effort.

Some compelling numbers there. And then just shifting...

Did you think that was -- yes...

I did. I did. Another area of focus of yours is insurance, where you're taking a dual approach and serving both third-party insurance companies and also more strategic relationships, too. Can you talk about how that competitive approach and backdrop today is evolving? And how does Blackstone maintain a capital-light approach to insurance while peers are shifting to more of a balance sheet-intensive approach?

Sure. Look, this is a space we're very excited about. Pro forma for our pending Allstate transaction, which should close later in the year, we manage around $100 billion of insurance AUM. It's a major growth initiative for the firm. And we think we have differentiated capabilities and a differentiated platform. We have tremendous origination capabilities across asset classes, especially in corporate credit; also in real estate credit, where I think we're clearly distinctive; also in the structured product area. And these are the key product sets that are critical to insurance companies. And really, this origination capability is sort of what it's all about to allow insurance companies to get the returns on their assets that they need relative to sort of a prior day of just simply investing in liquid securities and fixed income. We demonstrated, I think, our capabilities within our long-standing partnership with FG, where we nearly doubled their ROE. And while seeing an upgrade in their credit rating, it's been a very rewarding -- mutually rewarding and positive relationship. We're now also excited about the Allstate partnership, which will launch formally later this year. In terms of competitors and sort of different approaches, we have worthy competitors. There's room for everybody. They've generally chosen to take a more balance sheet-heavy approach than we have, which involves consolidating the insurance company itself and its balance sheet and all of the assets and liabilities. We choose to stay with our capital-light approach and our capital-light model that served us well as a firm throughout our history. We're a firm that basically -- as on our balance sheet relative to $649 billion of AUM, about a -- we've invested about $1.5 billion of firm capital behind those investments. So we like that model. We like that sort of return on capital profile. With Allstate, that's an example of where we're taking less than 10% ownership position. Now we're doing that in the context of a more typical GP-LP structure. So there -- that -- even though it's capital-light, it still allows for control but not consolidation at a corporate level. So we think that works quite well, and we think there will be other capital-light, maybe even sort of 9.9%-type opportunities and arrangements, but stop short of becoming an insurance company. So a long runway to go and we think a very interesting opportunity set over time.

Great. I'm afraid we're almost out of time, about 2 minutes left. So last question here on the margin. Can't let us get away without a question on the FRE margin here. It's been a big story at Blackstone just in terms of the margin expansion that you guys have already put up. It's in the mid-50s today, up about 600 basis points year-on-year. How should we think about the margin expansion opportunity from here? And how may a normalized G&A environment weigh on the margin?

Well, you mentioned our sort of margin levels. We do think that reflects really kind of the underlying operating leverage and favorable margin structure of our business and cost structure characteristics of our business. I think among the largest companies -- we actually track these things. Among the largest 100 public companies, I understand we're #2 in terms of pretax margin, sandwiched between Visa and Mastercard, in case you're wondering. And look, I think, our margin structure is the output of our business model. We're highly focused on profitable growth at scale, on managing our expenses, on leveraging our cost base. That's led to historic FRE margin expansion of about 100 basis points a year. I would sort of put out, I guess, that rule of thumb from time to time. And right now, what continues to unfold is the -- driving that dynamic is the continued expansion of existing strategies, and you get sort of the impact and the benefit of businesses like real estate, Core+, sort of in fuller bloom after an investment period. You had more recently established businesses that are scaling and beginning to contribute to profitability nicely like BX growth in our life sciences business and infrastructure. And you also have the accelerating benefit of perpetual capital, which really, overall, does have a transformational impact on earnings power. And meanwhile, alongside that, we are continually investing in future growth and in the next round of initiatives. So you're seeing that margin strength notwithstanding that we're in, at the same time, in investment mode from a growth standpoint as we almost always are. So look, we have been well above that long-term trend recently that I mentioned, the kind of 100 basis points a year. On the first quarter earnings call, I provided a little bit of context. I think I said that the LTM margin as of the first quarter was around 54%, and that was a reasonable reflection of the run rate for the full year and I would still sort of stand by that. So -- but really, the point is scale business, lots of operating leverage and significant top line growth, and that formula leads to healthy margins.

Great. Well, I'm afraid we're out of time. We'll have to leave it there. Michael, thank you so much for joining us today. I appreciate the insights.

Thanks, Mike, and thanks, everyone, for joining us.