Blackstone Inc. (BX) Earnings Call Transcript & Summary

All right. Good morning everyone. Welcome to one of our last sessions of the day. I'm Ben Budish, Barclays analyst covering the U.S. brokers asset managers and exchanges. And for this final chat delighted to have with us from Blackstone, Michael Chae, CFO. Mike, thanks so much.

Ben, nice to be here. Thanks. Nice to see everyone.

Maybe just to kick it off, can you talk about your current view of the world? What are you seeing from a macro perspective? How do you see the environment shaking out over the next 6 to 12 months?

Sure. Well, as we often sort of talk about, we first like to look within and assessing what we think is going on. And so we focus on the pretty unique and rich data and insights we have from our portfolio. We have 250 or so companies in which we -- of large equity stakes. We've got 13,000-plus individual real estate assets around the world. We have a very big borrower portfolio and several thousand sort of credits in the credit portfolio. So what we've been seeing and we've talked about this, is both inflation and the economy cooling. We've been sort of seeing, I guess, calling it out for well over a year, I guess, well ahead of what recently has become more consensus and maybe even sort of rather obvious now. I'd start with on the inflation side. If you just take what was put out this morning in terms of the CPI print, we sort of take the data and then look at it a bit of our own way. I think what was put out was 2.5%. That obviously has a pretty significant shelter component, which we believe lags and is pretty noisy. So we take that like we did this morning. Look at it ex-shelter, ex-shelter is 1.1%. And then we actually overlay more of a real-time non-lagging market rent driven metric on that. And when you put that in there, it's about 1.7% versus the 2.5%. So -- and that shelter component lagged on the way up, which caused us to maybe see inflation more decisively earlier than some, and it's lagged on the way down. So that's -- so we look at that and we say we're basically at target. I think we think the Fed increasingly also looks through the shelter component of that. We also see from our own inputs, labor markets have been softening. We take us -- we do a survey of our portfolio company's CEOs every quarter. And back in June, that survey basically said they saw wage inflation going from sort of 4% levels to around 3% in the subsequent 12 months. So that was pretty meaningful. And more importantly, like when you survey them, they saw and are seeing in terms of hiring the easiest hiring conditions in 3 years. And again, that's consistent with what you saw later in the summer around the jobs numbers. So -- and in terms of the overall economy in parallel, a cooling but still resilience. And so in our portfolio, globally, we saw resilient but decelerating revenue growth in sort of the mid-single digits, but with quite resilient margins. I think that's been striking in this cycle, very resilient margins and productivity gains, near 0 input cost inflation and so forth. And then pockets of weakness in terms of the lower-end consumer discretionary enterprise spending, including in software bookings and so forth. So that's sort of the picture we've been seeing. We don't have a crystal ball about where this goes, but we are cautiously optimistic about a soft landing. Obviously, labor is the key and also our own inputs our -- when we -- our CEOs in June, basically only about 14% of them when surveyed saw a recession in the next 12 months on the labor market side. Right now, you're basically seeing flat private sector job growth, both in the economy overall and that's -- in our portfolio that's consistent. And we're getting there with sort of neither a lot of hiring nor a lot of layoffs. And that's what a soft landing looks like, but time will tell. So soft landings are hard to land. They're pretty rare in history. But where we sit today, it looks pretty encouraging. That obviously then leads to the rate question where markets like second by second are discounting, whether it's 25 or 50 and what the pace is from there, we'll see. For us, in some ways, where the fair value of the 10-year settles over time is even more important to us as investors. And at the current kind of mid-3s level, mid- to high 3s area, that's a pretty constructive context for the capital markets and for our business.

Got it. Well, that's a good segue into Blackstone's business. So with that view in mind, what does this all mean for the transaction environment, both in terms of your ability to invest and to realize and monetize investments that have been made?

Yes. I think in short, it should mean good things over time. I would say, in general, we're seeing signs of the return of animal spirits in the transactional market. And that if these trends hold, I think that could, in particular, lead to a pretty robust 2025 in terms of activity levels. Every cycle is different. But we've sort of seen the general movie before. We're coming out of a cost to capital shock a historic one. And now the capital is dropping. Base rates falling, tighter spreads, the bid-ask between sellers and buyers is narrowing and capital availability, including credit, is expanding dramatically. So that leads to the sort of virtuous circle and flywheel in our business, restarting. It starts with deployment which, in turn, over time, leads to an acceleration realizations and capital return to our LPs, and that fuels fundraising over time. So that's a good thing to get going. And we see very significant pent-up demand and activity levels. Basically, whether it's the IPO market or the M&A market at large, that has basically been suppressed for a historically long time, 2, 2.5 years. We're now working and we're heading towards 3 years of a quite suppressed IPO market, which is pretty historical. So while in the moment -- and maybe you heard this from some of the investment banks, participants in the last day or 2. While in a moment, it feels like we're in a bit of a holding pattern that, that's persisting, whether it's because of temporal electoral -- election uncertainty or just waiting for the Fed to follow through on rates. Again, I think assuming a soft landing scenario that I talked about, if that hangs in there, I think we could definitely see the log jam truly breaking in 2025, not being a very big year. On the deployment side, in the meantime, we've been very active. We invested, deployed or committed over $50 billion in the second quarter, $90 billion over the sort of 3-quarter period, very similar are seeing kind of high conviction themes across the firm. And you saw last week, we announced a $16 billion deal around AirTrunk, the largest data center player in Asia, maybe I'll talk more about that in a second. So look, we've got $181 billion in dry powder, we see things, the flywheel starting and so that bodes well for us at this point in the cycle. On the realization side, that should benefit over time from this improving transaction environment. I think we're definitely like a coiled spring in this area. However, as we said in the last earnings call, the backdrop is not yet robust as it relates to scale dispositions again, as we said in July, we expect a near-term lag between markets improving and pickup and realizations. That's a typical at this point in the cycle, pretty calm about that and this remains our expectation for the third quarter. But at the same time, we see 2025 as potentially much more robust. So -- and then I'd actually say separately on this topic, we recognize that revenue from realizations is sort of inherently tricky to forecast on a short-term basis. And so I did want to share that in sort of another step for us to make our financials even easier to follow. We do plan to introduce this quarter a regular intra-quarter update on realizations -- realization activity. We'll post that the first one later this month with respect to Q3 and then going forward on a regular basis late in the quarter. We've been hearing and listening to investors and research analysts that this would be helpful and welcome, and so we want to be responsive to that.

Well, being the lazy analyst that I am, I'm very much appreciative. So that'll make our jobs a little easier.

We aim to please.

So maybe a kind of high-level question about Blackstone. So you're the largest alternative asset manager in the world. So at $1 trillion of AUM, how do you think about growth at scale? And how are your traditional institutional LPs thinking about their private markets allocations?

Well, there's long been this question about whether scale is the enemy or the friend of growth and performance. And we would say, with conviction -- real conviction that scale is decidedly our friend, and we think that's being demonstrated more and more, that it creates really huge advantages for us, the benefit performance and ultimately growth. So I think a really ongoing but recent powerful illustration of that is what we're doing today in digital and in AI infrastructure. We believe we're the largest financial investor in AI infrastructure globally. And it really reflects -- we'll talk more about the -- what I would say, the new world we're in as a capital provider -- a capital solutions provider in transformational areas in a really massive global scale. So last week, as I mentioned, we announced the $16 billion acquisition of AirTrunk. It's the largest data center operator in Asia Pacific. It's a large investment the firm has ever made in the region or committed to in the region. And now we have the largest and fastest-growing data center platforms in the U.S. with QTS in Asia with AirTrunk and a very large business in Europe. And I'd say the advantages of our scale really and our brand really manifest in a few ways. First, just having a pool of capital across the firm of the scale needed to move with speed and certainty to execute an opportunity like this really sort of the best of Blackstone, having -- second, having the breadth and depth of intellectual capital, massive troves of in-house data in order to assess opportunities with better data, more insights, move more decisively, more conviction and so forth. And then third, importantly, I think being viewed as a trusted partner and capital solutions provider on massive scale to the world's biggest and most important companies that actually need capital partners, which maybe wasn't the view historically. And so turning to someone a firm and people they know and trust at senior levels for private capital market solutions is really a big asset. And so what that results in this example in the data center area, $100 billion plus opportunity for the firm to be sort of a critical infrastructure provider to the AI revolution and the most important participants in that. So that's just a bit of a live example. I'd just say on the -- in terms of growth, a dimension in different ways. First, for private markets overall, and you all know this, it still is early days. It's basically private markets today are probably 5% the size of traditional stock and bond market globally. And so they're -- we operate in markets with enormous potential, whether it's the markets where we fundraise or the markets where we invest. On the fundraising side, the 3 pillars are traditional institutions, insurance, individuals, private wealth. On the private wealth side, we've talked about this all the time in $85 trillion market still sort of single-digit penetration in insurance, a $40 trillion market. Insurance participants are in the early days of really transforming how they think about asset management and the role of alternatives in that. And then traditional institutions, you asked about allocations. Broadly, this is a more mature area writ large and in some cases, in some asset classes and some institutions more fully allocated perhaps temporarily as they look for more capital to be returned. But they're still in aggregate growing allocations overall, sort of on a global basis, and particularly in areas like private credit, many, many institutions, traditional institutions are just getting organized around how to allocate to this area. So -- and then in the areas where we invest to the big, big market opportunities, whether it's in infrastructure globally, private credit, which we talked about energy transition, the life sciences revolution and our platform in that, the secondary markets for alternatives broadly, Asia, regionally, specifically for us, really India and Japan. So the list goes on and on, there's a massive need for private capital globally and where we think we're really, really well positioned to keep innovating and growing in this area. So that's sort of the framework.

Great. Maybe just on the fundraising side, can you talk about kind of the near-term pipeline, we're kind of towards the end of this $150 billion, 18 flagship fund. But what's context what you would be kind of keeping an eye out for?

So really, I think, exciting multiple near-term engines of growth. As you mentioned, let's take the drawdown area. As you mentioned, we are finishing up several key fundraisers, our real estate -- our European real estate fund, real estate debt, our private equity flagship, private equity energy transition growth area, infrastructure secondaries. So those are being wrapped up over the coming couple of few quarters. And in 2025 in general, you'll see the full year financial benefit after fee holidays and so forth from those fundraises. And then staying in drawdowns, we're coming into a new cycle of strategies, drawdown strategies and really, really compelling sectors in markets where we've had extraordinary performance. So in Asia private equity in secondaries, our flagship private equity secondaries vehicle in like-for-life sciences area in our opportunistic credit area. So we're really, really excited about the early days of fundraising in areas that had performed really, really well and where there's a lot of secular demand. In the insurance area, we've been growing AUM there 20% plus. We have a $211 billion kind of firm-wide platform. There's significant embedded contractual growth in many cases from our 4 largest clients and then we also have 15 SMAs which we manage and aim to grow in number and size. And then in our perpetual strategies, on the institutional side, there's infrastructure, which has tremendous momentum and tailwinds started that 6 years ago, it's $50 billion today in our dedicated equity area. And then in private wealth, really good momentum in terms of flows. We have our 3 anchor strategies in real estate, in credit and also private equity now. And then we are innovating and plan to introduce more products over time. And so in infrastructure and in a multi-asset credit area by, I think, early next year, you'll see new products from us in that area. So it's really, I think, for us, favorable multiyear picture of growth, and we're excited about it.

Great. Switching gears a little bit. I want to ask you about the broader theme of bank competition, bank retrenchment. Last year, the story was around retrenchment. This year, it's more around competition or at least the narrower being discussed by investors. So how do you see the competitive landscape on the credit side as bank lending has opened back up? And how are you scaling origination to address what it looks like a very large opportunity?

So first, just stepping back as I think everyone knows and believes it's a really big and growing pie in terms of this market, this opportunity. Huge runways as the private credit market grows. Private credit AUM globally, it's about 2%, we think of the overall global corporate debt market. And if you look at it from the perspective of the investor in credit, they're really now just, I think, beginning to apply to sort of and understand the liquidity performance trade-off that they understand well on the equity side of their portfolio on the credit side. So when you look at like the traditional 60-40 or 70-30 portfolio between equity and fixed income, the equity -- most of the action in our industry has been around penetrating the equity portion. The fixed income portion is sort of barely penetrated. And so that's a big opportunity ahead. I think in terms of competition, first, in terms of with banks, it's not a zero-sum game in a growing market. We can coexist and partner -- and while the broadly syndicated market, take that has been recovering this year, if you just look at some of the stats last year, I think 90% of sponsor-backed LBOs were financial private credit. You then saw this year more of a recovery revival in the broadly syndicated loan market. Well, I think if you look year-to-date, for new LBOs, private credits accounted for like 87% of the market. So basically consistent with last year. More of the bank action to be fair, it's been around refinancings. But if you look just fundamentally and structurally the role of private credit even in a recovering kind of bank market, it's robust. And I think that's for a good reason. The structural advantages of the private credit model sort of the partnership model, kind of the long-term buy and hold, hold to maturity, sort of storage, not moving model, that's a very compelling thing for borrowers. I think in terms of competition within private credit, while there are more entrants in capital, generally, I think it's important to highlight that there is and will be increasing differentiation within it. There is alpha in private credit -- it's not a commodity. And so I think you're seeing and we'll increasingly see performance dispersion underneath that scale to us really matters and having really large expansive capabilities and direct origination in private credit -- investment credit is critical. We're 1 of the 2 largest alternative managers in credit. We have $420 billion when you include our real estate credit business across the firm allows us to do larger transactions, obviously, gives us better information. And so if you take the U.S. direct lending market as an example, I'm going to talk about 3x, 4x and 5x. If you take our non-traded REIT as an example, or the average size of our borrowers, measured by, say, EBITDA is about 3x that of the overall market, 3x larger. Those larger companies, if you look at industry stats, have grown in the last year 4x faster than smaller companies. And if you look at default rates over the last 5 years, those smaller credits default at a rate -- have defaulted at a rate about 5x higher than bigger companies. They're smaller and more fragile, more exposed from a margin standpoint and so forth. So that -- if you just take the direct lending area is where we're focused, and that leads to, we believe, differentiated performance you can actually see it if you line up the BDC market and just look at the published nonaccrual rates, there's really big dispersion already, and we like where we sit in that. And that, we think, will increase over time and LPs will recognize that. On the origination side, we have a really big platform, as I mentioned, across that $420 billion AUM credit business. It's a combination of internal capabilities. Contractual forward flow relationships with partners, including banks and ownership of select platforms. And so that platform is sort of cranking. It will keep growing. And we feel really good with our ambition, as we said a year or 2 ago to grow just our credit business to $1 trillion of assets over time.

Got it. Maybe that's a good segue into insurance. I just kind of under the same umbrella at Blackstone. So can you talk a bit about your insurance model? And you've got a number of strategic partnerships. How does the pipeline look for additional partners there?

Well, we're -- again, to put it in perspective, we're the largest, I would call it, non-captive manager of alternative assets for insurance clients at $211 billion as of the end of the second quarter. And if you talk about our model, by non-captive, I mean we are not an insurance company. We do not consolidate the insurance company balance sheet and all its liabilities, like the rest of our business, we're a third-party asset manager with a multiclient model, a model that's built to serve multiple clients. We're not -- that's because we're not competing in the insurance business with our clients. We're managing assets at an arm's length and basically simply by generating excess spread for them, helping them grow faster. And so that then in turn allows you to service and serve multiple clients. So if you look in the first half of the year for our insurance clients, we originated or placed $24 billion. And across that generated -- across our clients generated about 185 basis points of excess spread for them versus sort of comparably rated liquids. So the model is really working and serving our clients and the growth is following. We're also -- as part of our model, we're not in the spread earnings business with all the ups and downs that come with that, which with that model sort of getting even more focus around that as rates continue to move. So we like our model. We think it's a winning model and it's leading to, I think, significant growth with our 4 sort of most significant clients or big 4, we call them, 15 additional SMAs alongside that and a very interesting pipeline of clients following on that.

Got it. So maybe moving on to real estate. Can you talk a bit about where we are in the cycle? How does it impact your existing portfolio, the opportunity for new investments, thoughts on the impact of potentially lower rates in the future, where are we there?

So I think in terms of where we are as we see it, the cyclical recovery in real estate is clearly underway. And the animal spirits, I referred to those before, are really -- we are seeing them stirring in the real estate market. We think there's no better position firm in the world to take advantage of that recovery. We've had obviously 2 difficult years in -- or had 2 difficult years prior to this year in a rate-sensitive sector because of those historic rate increases. In January, on our earnings call, we said 2 things. We said real estate values, we thought were bottoming and that we would invest more. What's happened since then, values went up and we invested a lot. So first, I think on the value side, after 2 years of declines before this year, property prices stabilized and were either stable or higher sequentially every month since then. If you look at like the Green Street private market index. On the public market side, you've seen this recovery. I think the REIT market is up 12% year-to-date. So the cyclical recovery in asset values in our view, is clearly underway. It's driven in no small part by debt being available lower cost, available in greater quantities, higher LTVs. So we see that momentum. On the second point on investing. We've deployed or committed year-to-date over $20 billion in our real estate business. It's nearly sort of 3x the deployment rate of the prior year. We're leaning into the same secular themes that we really favor. And so again, we clearly see the animal spirit sort of stirring in the real estate market. In terms of our existing portfolio, what I'd say is sector selection in real estate was the ball game over the last decade. I don't know if this is the entire ball game, but it was maybe close to it. And our portfolio construction at extraordinary scale is really some of the best work I've never seen our firm do in the 27 years I've been at the firm. And so while there's still clearly aftershocks and sectors like office today, our portfolio, and we've talked about this is over 75% in logistics, rental housing, data centers, that was less than 2%. In 2007, BREIT, by the way, has 90% concentration in those 3 sectors. And within those really good sectors with really good fundamentals, you also see them benefiting from supply dynamics. And so in logistics and multifamily starts at or near their lowest levels in nearly 10 years, that will start working through performance over time. And then if you just see like the spot market, the acquisition market, buyers for assets, both kind of granular and larger ones, that level of activity, those bid levels, and we're always in the market across our vast portfolio have really stepped up with material price improvement alongside that. So look, we've been through many cycles in real estate. And we do view this as sort of that couple few year period coming out of cycles where we've really sowed the seeds to drive long-term performance on which we've built our business.

Great. Maybe pivoting to infrastructure firm when you talked about infrastructure as a kind of key investing theme at scale. Your perpetual strategy, BIP recently crossed the $50 billion milestone. So from a fundraising we're asking about a more specific fund, but do you see this continuing to scale as it is and then just as we're kind of tactically thinking about our models, can you kind of remind us what the FRPR process is for 2024 and beyond? And how should we kind of calibrate expectations for that one?

Infrastructure is, as I mentioned, as you know, a global market of incredible importance and attractive growth. I think alternative investing within infrastructure was less than $10 billion 20 years ago, and now it's over $1 trillion. We've been investing in infrastructure as a firm over 20 years initially in our opportunistic drawdown funds. Our dedicated infrastructure strategy anchors and overall Blackstone platform across the firm in infrastructure, both equity and debt, which exceeds $100 billion. So we're really proud of what we built in our equity area which I mentioned for -- which in 6 years has grown to $50 billion basically from the ground up. We have a really, I think, amazing portfolio concentrated in 3 broad sectors digital infrastructure, energy transition and transportation globally. So within that, we have, as I mentioned, the largest U.S. data center platform, the largest Asia data center platform now. The largest private renewables developer in the U.S., the largest toll road operator in Europe, the largest port operator in the U.S. So these are really big scale assets and the performance has been really good, 16% net since inception. I think in terms of just where we go from here, I mentioned this maybe in publicly before, I sort of analogize to the real estate playbook that we've executed for the last 2, 3 decades where -- and they both live within this real asset rubric infrastructure real estate. But in terms of growing the business across multiple dimensions, between asset classes, equity and debt, geography, the U.S., Europe, Asia, the risk/return spectrum within that between core, core plus opportunistic. And then channels, including private wealth, where I referenced the introduction of a product there and infrastructure. So it's just a really exciting playbook. We have amazing leadership in that area, and we have very big ambitions on fee-related performance revenues, we do, as you, I think, know, have a significant scheduled crystallization in the fourth quarter that will crystallize the substantial majority of what you saw in the second quarter in our net accrued performance revenue sort of table in our earnings report. It was nearly just around $500 billion -- $500 million, excuse me then. So the vast majority of that will crystallize in the fourth quarter and then crystallize and then another significant crystallization 3 years hence. But then in the meantime, starting in the middle of next year, as this open-ended fund sort of has layered in over time, new investors, you'll see in most quarters, initially smaller but recurring and growing stream in between large-scale realizations in the meantime. So yes, the fourth quarter will be a big event for a well-performing vehicle.

Got it. Maybe a couple of final questions, sort of more internal looking at Blackstone. So you always talk about how important people and culture are to the company's success. So how do you think about attracting high-quality talent, making sure they stay as the firm continues to move past the trillion-dollar milestone?

Yes. So we take -- and I haven't been there a while. We take a very long-term view and always have to building the firm. Our goal, as I've said before, is not just to be a really good asset manager, but to be one of the best companies in the world. I'm one of the best employers in the world. Steve Schwarzman has led us every step of the way. And what I'd say is what he has always focused on and therefore, our firm has embodied that is building an enduring institution with a focus on quality and excellence in everything we do. If I had to really describe what it's like on the inside, that's what it's like. That's what it's like in everything we do, big things, little things around making investments around how we treat our clients, how we treat our people, how we treat counterparties and so forth. So it just pervades everything we do. For our people, what all this has meant, I think, is the combination of that growthfulness, and I think a very meritocratic and well-managed firm has led to opportunity. And so I'd like to say our basic bargain with our people is it doesn't matter if you've been there 27 years or 27 weeks that if you come in and do a good job, you will have an open-ended uncapped career opportunity that's under your control because of that growthfulness in meritocracy. And I think that bargain has held up pretty well, and it's our commitment to continue that. And then I'd just say broadly, our culture and what's distinctive about I think, is really that it's a culture of both performance and innovation. And so it's -- as you all know, I think it's pretty unusual for a good investor, it'd also be a good business builder. It's even harder, I think, for -- to institutionalize that to have a firm of business that's like good investing and also good at innovating and growing and harder still to basically sustain that over time. And so we're going to keep working at it, but I think that's what has been a north star for us culturally.

Got it. Maybe just one final question. Again, kind of thinking internally at Blackstone. So how involved are you in overseeing technology investments? How do you think about implementing new technologies like AI to kind of perform the business? What are the opportunities like there?

Yes. our Chief Technology Officer, John Stecker, who's terrific. He used to be at Barclays, is your CTO. Reports into the function is under me, broadly speaking. It's an amazing group people. But I'd just step back and say, like a couple of things. One, I think when you think about data and AI and so forth, we'll talk private markets and scale. I think private markets are advantaged. And I think the rise of these technologies will reinforce advantages of investors in private markets. I'm sorry to say that's a lot of investor public markets. But I think when you think about investing in public markets where you're more limited around the 4 corners of publicly available data, which will be more commoditized, more quickly processed and so forth versus investing in a private market platform importantly, at a firm of our scale, where you benefit from the insights and learnings from an integration of the data that you possess around your private portfolio's performance, longitudinally across businesses and so forth. If you get that right, we think that's a big advantage over time. I think from just how we think about our technology strategy and AI specifically, we do think about it first at the level of how do we make our firm more productive operationally, both our middle and back office but also sort of our investment process. Second, how do we harness that data better for our revenue generation for both our investing, making better investment decisions, I should say, and also, importantly, helping our portfolio companies. So we have a team of 50-plus people in sort of data science. We just hired a former Head of Walmart's applied AI area. And so we're really focusing on with our portfolio companies focusing on where there may be disruption and then focus on where there may be opportunities. So that's obviously an enormous thing. And then alongside that, just looking at the investment opportunities that may come out of it itself. And so I talked about data centers and AI infrastructure. And so for us, there are ways to play it, there are not ways to play at the very early stages of sort of native AI companies is probably for a different domain of investors. But for us, we see an enormous opportunity around using our scale platform to be, as I mentioned before, like a really significant capital solution provider to the most important players in the transformational time. So we're really excited about. It's all the work in progress, but we feel like we're remarkably well-positioned to take advantage of the opportunities that arise.

All right. We're just about out of time there. But Michael, thank you so much. What a pleasure to have you, and I really appreciate it.

Thanks.