Blackstone Inc. (BX) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Craig Siegenthaler from Bank of America, and it's my pleasure to introduce Jon Gray. Jon is the President and COO of Blackstone. Jon was instrumental in building Blackstone into the firm it is today and ran their industry-leading Real Estate business from 2005 until 2018. This was a period where the business AUM grew from under $20 billion to now more than $230 billion, so more than 11x. Jon joined Blackstone back in 1992, a few years after it was founded. Some actually refer to Jon as the LeBron James of the real estate industry, given how successful Blackstone was in real estate. Good afternoon, Jon. Thank you for joining us. And hopefully, you're going to have a few more good years left at the top than LeBron who could be retiring in a few.

Craig, it's great to be here. I would just point out that my junior year in high school, I did -- I played basketball through high school. I was sitting on the bench on a 1 and 23 team. So I was no LeBron James, but I do enjoy investing.

Got it. So enough about basketball. Just a quick refresher on Blackstone for everyone. It's the most profitable asset manager in the world. It's the largest alternative asset manager in the world, also with more than $700 billion in assets under management. It will likely generate more than $5 billion in free cash flow this year. And Blackstone has also grown AUM by 9x since its 2007 IPO. The firm is highly diverse with scale across the real estate, private equity, credit and hedge funds, and the firm's growth engines are expanding into 2 younger businesses with very sizable addressable markets, retail and insurance.

Jon, starting with the macro backdrop. Blackstone has a pulse on the economy through its portfolio of companies. Through that lens, how do you think the economy is doing? And what areas are performing best and where do you see the biggest risk of economic growth?

So the good news is on the growth side, we're seeing a pretty strong economy. We commented on this on our third quarter earnings. But every one of our private equity portfolio companies saw revenue growth in the third quarter, something that has not happened before. We have 2,500 borrowers across corporate and real estate, credit. We had no defaults in the quarter. We see strength in software businesses, transportation businesses, industrial businesses, really broad-based strength across the United States and in many parts of the world that are starting to reopen coming out of COVID. I would say that the challenges, of course, and I would add to that, that areas like leisure, hotels, some of those areas are coming back very strongly. So generally, a picture of strength when we think about the economy. The challenges here are, yes, some of the supply chain challenges, some of the urban centers, people are not back in the office. We're not doing this meeting yet in person. But I think the biggest challenge by far is what's happening with inflation. We saw a CPI number today north of 6%. And I think markets and market participants are beginning to realize that this is much more pervasive and likely more persistent than expectations were going back 3 or 6 months. And the reason that's happening, I think, is twofold: one is we really had significant stimulus come through the system. We had money supply up almost 1/3 in 2 years as governments responded to the COVID crisis, which is obviously understandable. But then you overlay on that a number of structural challenges. So if you look, for instance, in the energy markets, investment in the U.S. and hydrocarbons is down by 70% over the last 7 years, a good thing from the planet's perspective, but of course, near term is creating some challenges. Housing-wise, we've built 40% fewer homes over the last decade than we did heading into the financial crisis. In the labor markets, we've got 3 million fewer people looking for work despite 10 million job openings. As a result of COVID, fares, early retirement, less immigration. And so we've got a world where there are some structural imbalances and there's a lot of -- a lot more capital sort of in the system, and what we're seeing is prices move a fair amount. Some of that is transitory but I think some of it's going to stick, and I think we have to get used to a world with higher inflation. And as investors, if we're in a world, at least in the near term, with strong growth but higher inflation, I think you want to be mindful of how much exposure to long-duration fixed income you have, mindful of businesses that have a lot of exposure to rising commodity and labor costs. And you want to try to own businesses and assets that can grow faster, their cash flows than the underlying rates of inflation. I think that's really important. That's what we've been focused on. We've been talking about inflation for some time. I think the rest of the world is now focusing on it a lot more.

Let's move on to retail, the democratization of alternatives. How do you think about growth potential of this business, given the strong momentum you're seeing today combined with the very small retail allocations to alts, really, globally?

So I'd step back and say focus on institutional investors first. If you went back 30 years ago, the alternatives business was obviously a nascent industry. There were very few institutions who had invested. And over the last 30 years, many of them have gone to as high as 25%, and in the case of some endowments as high as 50%. And most of our customers, institutional pension funds, sovereign wealth funds, continue on this journey, keep adding to alternatives. If you switch over to the individual investor market, the retail market, there's estimated about $80 trillion of wealth in that market. And yet, there's probably low single-digit exposure to alternatives. It just hasn't been something people have done. Why? One is the products were generally focused just on drawdown. Think about private equity, real estate private equity. In the U.S., they required qualified purchasers, so it was a very small slice of investors who could participate and those long-duration drawdown funds in the track. It's been an area we've seen capital and continue to see capital but it has a more limited universe. The other thing that existed was people who created products that were more individually focused. Maybe you had a little more liquidity, more yield-oriented, had a 1099 instead of a K-1. Often, they focused on enrichment of the manager. So BDCs charged 2.5 or 3 points, gross 5, 6 points. There were origination costs of 10 points or more when these products were sold. In private REITs, there was focus on acquisition and disposition and financing fees. No one had really come in and said, "Well, what if we charge individual investors what we charge institutions and created a product where we gave them institutional quality investment management as well?" And so for Blackstone, we fortunately started on this journey, I think, a lot earlier than others. It started a decade ago or more when my predecessor in this role, Tony James, decided to build out distribution capabilities in retail really focused initially on the drawdown funds. And then about 5 years ago, we decided to go into the non-traded REIT space with the idea that we could bring Blackstone quality to that market. And that's what we've done. That product has grown now to north of $40 billion of NAV. It's the largest single product at Blackstone today. It's delivered outstanding results, 12.5% returns on modest leverage by real estate standards over that period of time. That's happened because we focused on the right sectors, rental housing and logistics, the 2 strongest sectors in real estate that have certainly weathered COVID the best. And we've delivered for the customers and they're responding. And a year ago, we did the same thing in the private -- the non-traded BDC market, direct lending. When we created BCRED, there was actually an article in the journal today about that online. And that product has excellent momentum for the same reasons. We're delivering for the customers. It's also -- both of these products are very favorable when you think about an inflationary environment because they're short duration, yield-oriented, in the case of BCRED, benefit from rising interest rates; in the case of BREIT, are really targeted to be in sectors that can grow faster, back to my earlier comments. We've opened up in Europe now with a product called BPIF on the real estate side. And as it's Blackstone, we're working on other things. And I guess in my mind, we're early days on this. The most important thing is that we deliver for the customer, that we deliver for the individual investor in the same way we have for institutional investors. And if we do that, I think these markets are very large, and we're in the very early days. And so it's one of the reasons we're quite excited when we think about the firm and the potential.

I have a follow-up on the competitive landscape in retail. I mean, you hit on this a little bit, but BREIT, your private REIT and BCRED, your private BDC are fundraising consistently large sums of AUM in the range of $3 billion to $4 billion a month. However, now we're seeing many replicate these products, given your success. So what moats do you possess around these 2 businesses? And how sustainable is the current fundraising trajectory?

So I think we have a few powerful advantages. There will obviously be more competitors who move into the space who see the opportunities, but I think we have some things that matter. First, we have this first-mover advantage. We've gotten to scale in BREIT. In BCRED, on the equity side, we're already north of $10 billion, I believe, in less than a year. So it's scaling faster than BREIT as we've opened up this market. And it's easier to do things to buy large assets, which we think are less competitive. Pricing-wise, once you get to scale, that's helpful. We have this distribution network under Joan Solotar, our Private Wealth Solutions area, where by the end of the year, we'll be at 200 people globally. We're not just doing this in the U.S., we're doing it around the world. We're doing it with large-scale wirehouses. We're doing it with RIAs. We're doing it with family capital, so that distribution advantage is very helpful. We've got the ability to originate assets in private credit, direct lending and in real estate because of the size of our platforms, that's an advantage. And then I think the most important advantage, and I think it's one of the hard things for investors to fully appreciate is the power of our brand, that this firm can raise capital without utilizing capital because we built up a reservoir of goodwill over 35 years and it's quite substantial. People trust Blackstone to be a steward of capital and that really matters. And the fact that you put Blackstone on the shelf at a major firm, financial advisers who are key partners in this trust Blackstone. They've invested with us often in the past. Their clients know the Blackstone name and that really matters. At the end of the day, do I think in most of these categories, there will be other viable competitors? Yes. But there will likely be a limited number. They won't sell. Let's use another major wirehouse or distributor or use Bank of America Merrill Lynch. They're probably not going to have 9 BDCs on the shelf. They may have 3, and we would hope, given our performance, our scale, our brand that more people will choose Blackstone. To date, in both the BDC market and the private -- or the non-traded REIT market, I think we have about 70% to 80% market share in each of these, roughly. Maybe that goes down, but I would certainly say that the size of the potential market is pretty large. So we like our position, but we understand it's a competitive world. There will be others who show up. I will tell you this, we're not slowing down as a firm. We think we can build something really special here, and we're trying to do that for the clients out there.

Let's move on to product innovation. I think this is somewhat underappreciated, but we view Blackstone's main competitive advantage as the ability to innovate product, its desire to constantly improve, look for first-mover advantages and by creating new products in entire markets. So how has Blackstone been so successful at creating new products, going all the way back to the '90s?

Well, I think Steve Schwarzman gets a lot of credit for always believing that there's more we can do for our customers, that if there's a marketplace, if there's an opportunity, if we get the right talent, we build the right investment process, when we try to build something of scale, then we can deliver for customers. And the model is you sort of build the backbone in the space and then you build adjacencies off of that, which obviously have margin benefits and insights into market benefits that are really important. Using my background in real estate, if you think about it, we started as a U.S. real estate private equity firm that then went to Europe and to Asia. We then went into high-yield debt in the U.S. and Europe, then we had a public mortgage REIT, first mortgages in the U.S., in Europe, liquid real estate debt. We got into Core+ institutionally in the U.S., Europe and Asia, then the private REIT as well in the U.S. and now Europe. And we also have a life science product for institutional investors. And we've continued to build off that backbone. If you look in our secondaries business, same thing in private equity, in real estate, in infrastructure, buying secondary stakes in other fund managers. That's what we do in these other funds. We've also now innovated around a continuation fund. This year, we've done a crossover technology fund, life science yield fund. And it's not just expansions off the backbones, it's also moving into whole new areas. So in the last 3 years, infrastructure, what we think is a very large asset class. We've now built a $14 billion business that we think has enormous potential over time in an open-ended format. We've moved into growth. We started there a couple of years ago. We raised a first time fund of nearly $5 billion, have had terrific success with that business, done deals like Bumble and Oatly. We moved into life sciences by buying a very small manager of life science investing, that in their first funded Blackstone went up more than fivefold in scale. And so it's a sort of thing at this firm where we're constantly looking at where do we have a competitive advantage? Where can we find really talented people? And where we can build a business of scale? And the most important thing is we've got to deliver for the customers. This is not -- I don't think about the business as a distribution business or a marketing business. We're in the business of delivering great returns, being the best investment manager possible. And if we keep doing that, it's one of the reasons I'm so excited about the firm because of the great results we've been able to produce certainly over the last couple of years. But as we keep doing that, it gives investors more confidence that reservoir goodwill grows and then we can innovate even further. And that's the virtuous cycle.

Jon, let's take a step back and shift the conversation to the scale advantages. So Blackstone has significant scale, which creates competitive advantages and deeper moats. How significant are these advantages on the distribution front with institutions and retail platforms which are now consolidating their asset manager relationships? And just given your size, isn't Blackstone best positioned for these consolidations and also the formation of strategic relationships with the largest asset owners?

So I would say that scale is an advantage in almost every element of our business. It's an advantage in deploying capital. In liquid markets, if you want to invest $1 million and I want to invest $1 billion, you have the competitive advantage. In illiquid markets, when a $34 billion Medline transaction comes up, there's a limited number of folks who can write that size check. When we're doing things, we privatized a company, QTS, in the digital infrastructure space for $10 billion between real estate and infrastructure. Again, a large-sized transaction makes it harder to do. We've been doing credit deals recently, particularly in the technology space, where we've been writing checks of $1 billion, $2 billion. Again, the air is thinner up there. So scale when we're deploying capital, scale informationally. If you think about investing really as pattern recognition and connecting dots. If you see more than other people, you're able to connect dots more easily. If you see what's happening in one real estate market around last-mile logistics, you can extrapolate that. Same thing around digital payments and private equity or growth, that's a huge competitive advantage. Our ability to invest in data science, again, because of our scale, we've got a team now that's approaching 40 people, a big advantage for us in deploying capital. And then you touched on, of course, our relationships with our clients, and yes, it makes a difference. The fact that you have this whole range of products and vehicles to offer and you have these broader relationships. I was doing a call last night with a large overseas investor, and we were talking about all these different verticals they've deployed capital. And the fact that they trust Blackstone allows us to start new businesses. It's one of the reasons, back to your question, Craig, about innovation machine. It's the strength of those relationships that allows us to expand the business. And we can move into new areas because of these broad-based relationships. And so I see that as something that will continue. Virtually all of our clients, not all of them but are invested in multiple products, oftentimes in multiple of Blackstone's verticals, and we're going to continue to try to expand that and serve our customers. They obviously prefer to have fewer counterparties. One of the challenges for them in their alternatives area is sometimes they wake up and say, "Oh my gosh, I've got 75 private equity managers and 50 real estate managers and on and on in private credit. I've got hundreds and hundreds of counterparties. It would be nicer to simplify that." So we have found that to be an advantage in our business, and it's allowed us to build broader and deeper relationships across organizations. And again, it's important we deliver when we do that. But that's been the story, and it's been one of the reasons why the growth that you pointed out has been so strong for so long.

Jon, let's pivot into fundraising. 2022 could be a very big year for Blackstone. Given where the commitment levels are on its latest vintage flagship funds and also some of the retail funds we've been talking about. But can you give us an idea of what's coming both from the flagships and also the next generation of some of your newer businesses? And I'm thinking growth equities, life sciences.

So I'd start by saying the nice thing about the business is these perpetual capital areas, some institutional, some retail, some insurance, have gained a lot of momentum. We have 18 of these now with the closing of these recent insurance deals with AIG and Allstate Life. They represented, I believe the last 12 months, 50% of the flows to Blackstone. And this is mostly in Core+ real estate, in infrastructure, in direct lending, in structured credit. And so away from the more episodic business, we've got all those flows. The good news is on the more episodic drawdown funds, we've had really extraordinary performance. Many of our recent vintage funds really go back to the early '90s in terms of performance. Part of that, of course, as we all know, is markets have been very strong and that helps you. But part of it has been our thematic push into these faster-growing sectors, a lot of technology and life sciences, green energy. That's really helped our fund performance. And so when you think about this next wave of funds, they're coming out on the back of really good performance and that's quite important. If you look overall, and we talked about this in the last earnings call, we're crossing the 50% invested point or have already crossed it on a number of major funds. So our global private equity fund, our global real estate private equity fund, our European real estate private equity fund. You mentioned, growth is in that category, our energy equity fund, our energy debt fund and the pace of fundraising will be a function of when we generally get to sort of 70%-plus. But as we do, we'll start to raise capital. And my expectation in almost all these cases is investors will have a positive feeling, given the strong results of the predecessor fund, and we're likely to raise more capital than the past. So when I step back and look at this, what I see is this perpetual engine, which is growing more and more oars in the water. We've talked about sort of a business that used to operate in a narrow channel moving into open waters, now more oars in that water. And then in addition, in the traditional drawdown business, because of strong results and a rapid pace, in many cases, of deployment, as you said, we'll go back out but we expect a pretty good reaction from our customers. The timing of which one comes when will be a function of when we deploy capital. But the outlook, generally, for fundraising, as you'd suspect, is positive.

Jon, I have a follow-up on the last one just in terms of the sustainability of the firm's growth. I know this one is a difficult one to answer because we don't know what the world looks like in 2 or 3 years. But if you look a few years down the road and you kind of look at how your AUM base is scaling, how can Blackstone continue to grow at a double-digit pace, just given a much bigger AUM base at that point?

So I'd say a couple of things about that. Interestingly, the last 12 months, our AUM is up 25%, which was our fastest growth rate in 8 years, which reflects this broadening of our asset base. There was obviously some appreciation in there as well. The other thing I would point to is just the scale of the market. The alternatives business today is about $8 trillion. If you throw in the hedge fund business, it's about $11 trillion total. Liquid stocks and bonds are $250 trillion. There's a small number of large-cap tech companies that almost add up to the whole alternatives business today. Do I think it's very possible and more likely probable that this industry will keep growing at a double-digit rate? And we, as the market leader in the industry with a broad array of products can continue to do it? I do. And the recent history that I pointed to shows higher growth. It's hard to put a straight line on it because of the drawdown funds. But there's just the potential now of institutional investors who are continuing to grow even though they're further allocated to alternatives is quite positive. And then retail investors and insurance investors who are in the very early stages of their pivot to alternatives gives us a very large TAM. And that gives us confidence about the future.

Jon, let's move over to the insurance business, which like retail, is another business with a very large TAM. You've taken a different approach than certain other firms that have used their balance sheet to acquire entire insurance companies. Do you view Blackstone's insurance business as less risky than peers, given that it's more diversified, has a broader client reach, also has a lack of balance sheet exposure?

So we have some outstanding competitors, Craig, as you know, that are run by very smart, very capable people. But they've made a different choice in this space, as you pointed out. What they've decided is in part to become insurance companies to take out, in some cases, $100 billion or $200 billion of liabilities that are generally low cost, call it 3%, then go out and deploy that capital in investment-grade assets, say, earn 4%, have that 100 basis point spread, leverage that 15 or 20x and produce a nice return for investors. I think they'll be able to do that, and I think they'll be successful. For us, we made a different decision. We want to treat insurance generally like we do our other asset classes. We don't want to be in the business of insurance. We want to be in the business of investment management. In doing that, of course, we don't take on the liabilities, as you pointed out. It also gives us the flexibility to have multiple clients. Today, we'll have 3 sizable clients that we're working with, each with different objectives. We have used a bit of capital in 2 of these situations, but to buy minority 9.9% stakes, which provides some good alignment. I think these will be good investments. But we're sticking to our roots as a capital-light investment manager. We're going to stay at that. We think we can continue to grow in insurance, just like we do in other areas with that model, and we like the approach we have to the business.

Great. Let's migrate the conversation now into technology. How does Blackstone use technology to differentiate itself? And on the other side of the coin, how do you protect against disintermediation in your investments?

So technology, I think, is the most important thing to every business today around the world. Every industry is being changed by technology, disintermediated, turned upside down. So we made enormous investments. Internally, our tech organization has more than 300 people. I mentioned data science earlier where we'll have 40 people, which is a powerful tool, I'll come back to that, to run our portfolio operations, overseeing our private equity companies, our tactical opportunities companies, growth companies. We hired a woman, Jen Morgan, this year, who was the co-CEO of SAP, Europe's largest software company. That was not a coincidence. We've been -- we hired Jon Korngold to run our growth business. We have a terrific team in private equity with Martin Brand. We've really oriented our business to having more tech capabilities everywhere. We have an amazing lineup of senior advisers with folks like Frank Slootman from Snowflake. We are trying to build really a flywheel around technology that makes us better at investing and makes our companies better and makes it -- gives them the ability to grow faster. Now the risk that you've raised, which is will alternative firms face some of the things that had happened in liquid markets, where the machines will win ultimately? And as a result, margins will come down and so forth. I don't think it will be quite the same as liquid markets because negotiating a convertible preferred with a founder of a business, these things are much more bespoke than liquid markets are. But I do believe there will be augmented reality. If you can understand a business better because you can see through data science and AI how things are happening in a business and how you should better make decisions, I think you can win. You can win and how -- where you deploy capital and what you do with these companies. In the old days of I have an industrial company, they go look for a bunch of clients. They go through some phone book. Instead, you have a data science team, look at their existing client base, find the 7 factors they have, run that through and say, instead of looking through 5,000 potential customers, here are the 50 you should really focus on. Those are powerful tools. We're doing the same thing in real estate. And so I think we have to -- it's incumbent upon us to make enormous investments. This is where the scale really matters for us. This is where the data we have. If you think about the secondaries business or our syndicated leverage loan business, where we have tons of data points, using that data to become even better at investing capital, I think it's really important. We've gone into systematic credit in the same way. I would say, for us, this isn't optional. It's a must do and a firm like us has to be at the cutting edge to maintain the advantages we've built up over time.

Great. I wanted to hit on the deployment backdrop. We're all seeing public equities consistently making new highs, at least they were. While interest rates are very low, credit spreads are tight. The backdrop doesn't look that great for new investments. However, Blackstone is focused on something different, private assets, directly originating assets and has a broad business across all major asset classes and also outside the U.S., around the world. So how do you view the current investment backdrop, given the acceleration that we've seen in your deployment levels?

So obviously, we're in an environment where prices have moved up a fair amount. It's hard to point to many spots in the world and say assets are distressed or highly inexpensive. You have to be mindful of that. And the question is, how do you respond to that? One of the ways we do is scale. We've been involved this year in 13 public to privates globally. One of it is just the breadth of the platform in all the different countries and sectors we work in. That is super helpful as we think about deployment around the world. I would say the biggest thing we've really focused on, we talk about it a lot publicly, is investing in the right neighborhood. Focusing a little less whether we pay 100 or 96, but is this an area where there are long-term secular tailwinds? And can we invest in that sector either directly, if you think about migration of everything online, in a Bumble or an Ancestry or one derivative off by doing it in something like last-mile logistics, which is actually the largest theme of investment across all of Blackstone, which is a play on e-commerce or investing in digital infrastructure. Same story in life sciences. We invest all the way from sort of beaker to bedside. We invest in life science office buildings. We're the largest private investor in that space. We've invested in life science logistics businesses, companies that run trials for new therapies and then in the life science space itself in Phase III trial drugs. And the same story in green energy, where we're investing in wind and water and solar, battery power, the infrastructure, the charging stations. And we're always trying to find how we can get at this at a better value. I'll give you a couple of examples. We invested in a company called Array Technologies, which is a public company that moves the solar panels to track the sun. It was a stock that had gone out at very high valuations. It had some supply chain challenges. They wanted to raise some capital. We came in and committed $500 million because we really believed in the business. We're able to get into that good neighborhood on what we thought was an attractive time. Similarly, in India, we invested in a company that was an automotive parts company that had a very small electric vehicle parts component, an EV component. We saw huge potential on that. We were able to invest in the business at a more normal multiple. As the company's EV business has really exploded, we've taken it public. It's now re-rated. And so we're really thinking thematically, not all of it's technology-driven. Some of it is travel, global travel, particularly coming out of COVID. Aging populations, rise in the middle class in India or something like alternatives that we play through secondaries and leveraged loans and stakes. So our response to a high-priced market in a market where, as we talked about at the beginning, inflation is likely to be higher, rates are likely to be higher, so we have to buy assets where cash flows are growing. And I would just say if you look specifically at our portfolio in credit, the vast majority of it's floating rate, what we invested in corporate and real estate credit. That's helpful. When we look at our real estate portfolio, we said on the earnings call, about 70% of our assets are in rental housing, logistics and life science office buildings, all businesses with very favorable tailwinds. So we've been thinking about a higher inflationary -- certainly a higher rate environment for some time and I think that helps us. And that's one of the reasons why we've been able to deploy capital, plus back to the earlier commentary. I just was in an investment committee on a large infrastructure deal. Having these long-duration vehicles that have more yield-oriented lower targeted returns has really broadened what we can invest in and that's expanded our ability to deploy capital.

So let's transition into the firm's leadership and succession planning. So Steve Schwarzman and Tony James were extremely important for the creation and success of Blackstone. How do you replace individual talents like this? And how is the model that they and you built sustainable?

So I would say succession for Blackstone has been something that we have focused a ton on, and Steve and Tony deserve enormous credit. We have thought about Blackstone not in any way as a deal shop but as a long-term enduring institution, a leader in the alternative asset management space for many decades to come. And when you take that mindset, it really changes how you think about things like succession. So in my case, it was funny. Tony and I had lunch last week and we were talking about -- he and I talking about this almost a decade ago. Six years before this actually happened, where he was really focused on -- he and Steve on how we can make this transition as seamless as possible. Multiple years before it actually happened, he'd started getting me involved in some of the key compensation, conflict issues, that was really important, being on the Board for a long time, the management committee and also signaling to the market that when this transition happened, it wasn't going to be a big contest, somebody was going to lose and they were going to have to leave. But it was pretty clear to internally and our investors how this would involve. And so when the announcement happened now almost 4 years ago, it was as seamless as possible. Tony had done a great job training me. Tony has stayed on. He's stuck with some of the investment committees and has continued to be helpful in overseeing the business. So that has been done as well as possible. As it relates to Steve, Steve is, as you know, Craig, as passionate as any person you'll meet. Steve wants to win. He wants to build the best firm possible. He wants to make sure we're doing the best job possible for our clients, that we're continuing to innovate in how we deploy capital, how we create new vehicles in every element of our business, really striving for excellence in everything we do. And Steve is fully engaged. He's pushing everybody. He wants us to be out there doing the best job possible. And so they have done and continue to do an amazing job. And I would say beyond me, Steve, Tony, the leadership of the firm is extraordinary. If you look at the people who run different business units, given the scale of those units, they could run other large firms. They continue to choose to be at Blackstone because they love the culture, they love the business units they run. And so we've got a really capable organization. We're in the midst of doing reviews, year-end reviews of our talent, and a big part of that in every business unit is to identify the succession, how the next generation is being trained in the eventuality somebody departs or somebody gets promoted. And so I would say it comes to sort of the core of what we do. We've got to get that right. We've got to make sure people are committing capital to us for 10, 15, 20 years. We've got to make sure that this institution endures, and it's a high focus for us. It has been and will continue to be.

Great, Jon. So let's migrate the discussion now into the defensive qualities of Blackstone. So we always thought the alternative asset management model was more defensive than the markets realized because you have want of AUM, dry powder, management fees on fixed committed capital balances, and also dislocations also provide the firm's attractive investing opportunities with the dry powder. However, the stocks didn't always react that way. So Jon, I wanted to get your thoughts on how defensive is the model. And do you think investors are starting to appreciate that, especially given some of your conversations last year with some of your largest shareholders?

I think there is a realization, as the business has evolved, that there's a real value to the committed capital, either the long-duration committed closed-end funds or the perpetual capital. Our team estimates that the weighted average life of our capital is over 13 years, which is pretty remarkable. And if you look at '08, '09 when people were very skeptical or if you look at 2020, the capital stays, the investors honor their commitments. That's really important. We're not a force seller at the bottom of markets. This is not margin loan land. So we can hold on to assets, that's really important. And when there are dislocations, we can go out as we did back in 2020 and invest in real estate in a meaningful way in the public markets or buying distressed debt at that point or investing in MLPs. We have the ability to move quickly. And so I think it's taken time for investors to recognize the power of the model. I think we've had to show them because we were all born just before the last financial crisis. I think the more we're at this, the more investors realize that there's something special about this business model. And when you look for instance, the one thing people would point out while realizations, if we go through a downturn, those will slow. As you know, that's become a smaller piece of the overall story. But also, if you look at our business over 30 years, it's fascinating in private equity and real estate private equity, we've delivered 2.2x gross multiples of invested capital in our drawdown funds in good times, in bad times. What happens when you have a downturn is you elongate and the return comes down a bit but you'd still achieve the same. And I think as people have seen how we've weathered storms and as we move into some of these lower leveraged, longer duration models, I think the world more fully appreciates the all-weather nature of the business. Yes, there is a realization element that has some cyclicality to it. But the diversity of the business model, the stickiness of the capital and the areas where we're investing now, which are much broader and, in many cases, I said, involve lower leverage, longer duration, all of that points to the strength and durability of this business model. And I think it's one of the reasons why we've been in this re-rating process that I think will continue over time as people get more comfortable with our business model, understand what we do better.

[Operator Instructions] I have a question here, Jon, on earnings transformation. So if -- right now, fee-related earnings are roughly 2/3 your earnings power or your free cash flow, and this was only like 1/3 a couple of years ago. So we're seeing earnings transform into a more highly valued stream for perpetual sources. Can you provide us your view of this earnings transformation, kind of where we are in this? And then also, how do you think this should impact the valuation of the BX stock, given that you value lots of portfolio companies every day?

So it's what we've been talking about over the last 45 minutes, which is we're raising more and more capital in these longer-duration vehicles. We continue to engage in our traditional activities. And as I've said, we've been having outstanding success for our limited partners. But as we move more and more into retail and insurance, at the end of the third quarter, they represented 34% of our assets. That number will go up, obviously, as we close a couple of these insurance deals. And then we have some institutional capital now in infrastructure and particularly Core+ real estate that also is long duration. You're seeing this more recurring nature of our revenue stream. And when you think about technology companies that are SaaS-based, that have recurring fees, they trade at much higher multiples. And as I said, I think this re-rating process is still going on. Today, yes, we trade now at a premium to the market multiple, but if you look at other data points, we have a dividend yield on a trailing basis that's double the stock market. And our earnings growth over the last 10 years has been double the stock market, 20% a year over 10 years. We don't trade like a company that has that kind of earnings power. We don't trade like a company that has a 60% pretax margin, a company that pays out 100% of its earnings, has no net debt as of the third quarter, doesn't have any insurance liabilities and yet is the market leader in a very fast-growing space and has this really powerful brand. So obviously, we've seen a big upward movement in our stock. But we still feel very good about the future, both the long-term trends in the business, the near-term trends in the business, and I think a growing recognition from market participants that there's something special here. And rather than trading at the market or a premium to the market, that it should maybe trade like other very fast-growing companies. And on that basis, that would represent real upside. We'll let the market decide over time when and how they may make that decision. We're going to keep doing our day jobs.

Great. Jon, I have a question here on the Cosmopolitan Hotel exit, your largest single exit ever. Are there other assets in the portfolios today that have this type of realization potential, given your visibility into the portfolio?

So the Cosmo was a great investment. We made, God, 7 years ago, 6 or7 years ago, that worked out extremely well. We did -- what's interesting about that particular investment was we made the right call in Las Vegas. We had a very creative exit using -- separating the propco and the opco. But the key thing was we invested there. We settled a union dispute. We really energized the gaming floor, brought in a bunch of great retail sellers, restaurants, brought in a terrific management team, and it was our classic buy it, fix it, sell it case. Yes, I'd say there are other successful investments embedded in the portfolio. That was the largest single asset sale. We have other portfolios. I think the key thing to look at is the net accrued carry receivable. At the end of the third quarter, Blackstone is at the highest level ever, which reflects the fact that there are significant gains still in the portfolio that exists. I'm not going to point to individual assets, but obviously, there are some sectors in private equity. We said on the call that we've had great gains in IT services and software. We have some big winners in that space. And in real estate, particularly in logistics, I think today, the number is up to $120 billion or $130 billion of logistics assets. We have some very substantial gains embedded in there. Some of that is reflected in that net accrued carry receivable. But as you know, Craig, we tend not to mark these things. There's some level of cushion at times. You don't know exactly where market is. And then when you go to sell, oftentimes you may get a control premium, a higher price and so there could be even more. So I feel pretty good about where the portfolio sits in exit potential over time. Picking timing, of course, is always tricky.

Yes. And I want to pause because it looks like I'm losing the sun here, so hopefully, by the end of the presentation, it's not completely black. But there's a few more here. One on capital return. How does management think about migrating to a fixed dividend in the future?

So we spent a lot of time talking about it in the sense what do we want to be as a company? And the thing we've definitely decided is we want to return excess capital to shareholders. That has been our model. We pay out, today, between dividends and share repurchases, basically the last 3.5 years, 100% and yet we've had this remarkable growth. By the way, the share count is also the same as it was 3.5 years ago. So we maintained share count and we've returned 100% of capital. We like that model. We talk about should we change it? Some investors view more of a fixed dividend and using the excess for repurchases. It's really -- that's really a change of mix as opposed to retention because we don't really use much capital in our business. We don't envision us retaining lots of capital. But different people have different views about should we go with a fixed dividend, and then the access fee or should we do what we're doing. So far, the market, certainly over the last 5 years, seems to like what we're doing. And I think the most important thing is the business, by not utilizing a lot of capital, allows us to return that to shareholders. And that model, I think, is something we'd like to stay with for a long time.

Great. Another one, some of your peers have migrated to a one share, one vote structure. Your models work well so maybe you don't see any need to change this today, but do you expect Blackstone to one day operate under this model?

Well, I would say our plans, certainly for now, is to stick with the model. Having these super voting shares has delivered outstanding performance for our limited partners, which I think is critically important for our employees, and as you pointed out, Craig, for our shareholders as well. Interestingly, we're not the only ones. If you look at the S&P 500, those companies who are grandfathered, if you look at the Nikes and the Googles, the Berkshire Hathaways, interestingly, the companies that have some of these special voting rights have actually materially outperformed the companies with one share, one vote. And so -- and I'm not surprised by that. If you have somebody like Steve Schwarzman who's a major shareholder, a founder, passionate about the success of his company, that's somebody you want to be aligned with. And I would point out at our firm, I think it's about 45% of ownership is insiders. So there's really excellent alignment with the shareholders. And it has worked. I mean, our returns, I think the last 5 years, fourfold the S&P, right? So that being said, we understand and we've gotten in now into all the indices other than the S&P 500. We're the largest market cap company that hasn't made it. We're hopeful that we can over time. And -- but our plan for now is to stick with the structure we've had. It's really worked for us. And as I said, it's worked for all the different stakeholders.

Great. And Jon, one more here on real estate. You guys have been well positioned behind logistics and life science office themes. Are there any emerging themes that you've seen that you started to invest behind?

Well, I would add to that list just the shortage of housing -- to rental housing really around the globe. We think about it in U.S. context but it's been terrific for us in the U.K., on the continent, Japan. And I think rental housing will start to show up in Asia as well. It will probably be more of a development-oriented business. It shouldn't only be for-sale housing in those markets. I think the studio space is a very attractive area. If you go back to our thematic approach, if you believe everything is migrating online, the amount of content we can all consume has gone way up. So there, you see us in private equity investing in Reese Witherspoon's business, in some music royalty businesses, some growth businesses that are doing interesting things around helping TikTok artists get royalty-free music. We did a technology-oriented business in the U.K. around content called Moonbug. So we have a lot of focus in the content area. And the thing I'd say in real estate, a bit like life sciences, is if there's going to be a lot more content created, then you're going to need more office space. We're the largest office owner in Burbank, California. We own a bunch of studios in Hollywood. We're building in London. That would be an area that I think is interesting. I think as you look out, digital infrastructure is increasingly attractive, back to this point. So that would be data centers, fiber-to-the-home, cell towers because all of us are using more bandwidth, more devices. These emerging areas in real estate or real assets, I think, could grow quite a bit. And you really just are trying to look at how are our lives changing and what element of real estate will benefit? On the flip side, as we know, enclosed shopping malls have suffered. The technology has certainly hurt some older office buildings as well. You're really trying to project out, what are the sectors that are going to be winners and how can I benefit from that? Even geographically, you're attracted to places where tech and creative industries are housed. So you think about the West Coast of the U.S., think about Cambridge, Mass, Toronto, Scandinavia, London, Bangalore, Tel Aviv, Shenzhen, I would say wherever sort of technology is guiding the world, those tend to be more interesting places to deploy capital not only in companies but also in real estate.

Great. And it looks like we are out of questions. So Jon, with that, I just wanted to give you a big thanks on behalf of everyone here at Bank of America Merrill Lynch, and we hope to see you next year in person. Thank you very much, Jon.

Craig, thank you. I really appreciate it, and we love Bank of America Merrill Lynch. Be well. Thanks, everybody.