Blackstone Inc. (BX) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to day 2 of our financial services conference. If any of you don't know me, I'm Ben Budish, I cover the U.S. brokers, asset managers and exchanges. And for this next fireside chat, really delighted to have Michael Chae, CFO of Blackstone. Michael, thank you ran.

Great to be here. Nice to see everyone. it's hard to see everyone .

All right. Maybe to kick it off, a macro question. Can you talk a bit about your current view of the world? What are you seeing in your portfolio? -- at least the environment shaking out over the next 6 to 12 months? And with the Fed decision tomorrow, what are your thoughts on will play out?

Well, I'd first say we're obviously in the midst of a corporate earnings boom, I would say. And there's lots of attention, of course, on stock prices, but maybe not enough on the underlying context, which is this extraordinary earnings environment that we've been in. I think the second quarter saw like the fastest S&P earnings growth in 5 years, and I think 2026 right now is projected to be the best S&P earnings growth here in like 25 years if you exclude sort of the bounce back years after the GFC and COVID. The massive investment in digital energy infrastructure that's taking place is, of course, historically powerful engine, which we're obviously experiencing. That's now -- we see that now diffusing into the -- further into the economy. And despite the scale of the AI build-out, these investments so far remain less than 1% of GDP, that's well below prior investment cycles starting with railroads all the way through the dot-com era, which I think were more like in the 2% to 5% of GDP range. And then -- and we really see this in our companies, underpinning the earnings momentum is really robust margin momentum. And that's while companies are mostly just scratching the surface on AI-driven productivity gains at scale and so the S&P EBITDA margins have expanded about 500 basis points in the last 4 years to the mid-20s or so in our own portfolio. We've seen margins expand around 700 basis points on average over that same time period up to the sort of high 30s. So it is -- while it's a little bit uneven, we see it as a pretty very strong environment for companies to grow and make profits. You asked about the Fed. I'd say in terms of the Fed and path of rates, the market certainly seems to have made up its mind as to what's going to happen tomorrow. In terms of the actual data that we see and focus on, the reality is core CPI, excluding Steris at 2% year-over-year, 2.0% through August, and real-time market rent growth measures are also in the 2% area. And labor markets are in pretty good balance, which we certainly see in our portfolio. So in a vacuum based purely on data -- on the data, it's not clear a hike is absolutely called for but we're not in a vacuum. And in the context of the criteria laid out at Jackson Hole and given the intensity of sort of market expectations that have built up, it does feel likely that will have some form to me of a dovishike, whether those words are used or not or conveyed with the desired effect, I think, importantly, if keeping the longer end of the curve in check which drives cost of capital in the real economy importantly. So I do have a high regard for Charman Warsh and we'll see what happens on [indiscernible]

So with that in mind, what does this mean for the transaction environment? So maybe talk a bit about the near-term outlook for deployment and realizations. You guys have been particularly upbeat on the IPO opportunity. What are your thoughts on the sponsor back M&A activity, which has been a lot more sluggish?

Well, I'd start with the overarching notion that to us, it's never been more important to have scale of capital and breadth of platform on deployment, there's lots to do an extraordinary opportunity if you're in the right places. So you have these enormous markets globally that are actually short of cap to capital required to support their growth. And that's where Blackstone, in our view, has a distinct advantage. We're a strategic capital provider at a huge scale across a wide array of strategies. And so specifically, obviously, in AI and related infrastructure areas in power and electrification, but also life sciences, liquidity solutions for the private markets themselves, including especially secondaries, private investment grade credit, including corporate solutions, and from a regional perspective, Asia, particularly for us in India and Japan, 70% of our largest investments over the last 12 months have been in the areas I just named. And so if you're active in these areas, it's a great time for deployment, and it's probably a sharp contrast to maybe a traditional mono line manager built around a narrower set of focus areas. And then on realizations, which is sort of the other side of the same coin, again, I'd say maybe for the typical traditional private equity firm, regular way exits have been more constrained. You're seeing that in the overall sponsor volumes, as you mentioned, which have recovered more gradually than the broader M&A market. But the areas we've emphasized have, I think, positioned us more favorably. So I'd say 2 dimensions. One, IPOs. We've completed 9 IPOs in the last year and 5 since May. Larger-scale, high-quality companies or what the IPO markets want, and that has favored our portfolio construction. And that's, in turn, led to more and more of our carry receivable. That's public and liquid. So about 1/3 of our corporate private equity net accrued performance receivable NAP is publicly traded. And as we continue to sell more seeds with 6 IPOs currently on file globally, that's going to create more public market cap and continue to grow what I would call our liquid NAPR and then I'd also highlight our energy private equity business has been exceptionally productive in investing in the power and electrical equipment area and generated a really remarkable performance doubling its napper over the last year to over $1 billion. So I'd just step back and say the key question on selling assets is really are you exposed to the places the world wants. And fortunately, we think we've leaned into many of the right. Overall, I think it's a constructive environment for our firm. We think we're positioned well with the intersection of mega trends, and that creates a great flywheel in terms of transaction activities we've learned throughout the history of our business.

So maybe kind of building on what we've talked about so far. Blackstone has delivered some very strong fundraising results over the last 12 months. Looking ahead, how are you thinking about the overall environment for capital formation, where do you see the most significant opportunities for growth across the platform?

So again, the balance in breath are firm continues to drive our fundraising and our fundraising success we've had over the last 12 months, over $260 billion of inflows, that's 24% growth over the prior LTM period is the best 12-month period for us in nearly 4 years and really robust demand across the client -- across our client channels. So we call them 3 is institutional, insurance and individuals. I'll take them quickly 1 by 1 in the institutional business. It's vibrant. Our second quarter inflows were up nearly 50% year-over-year. And I'd just say simply put, there is strong demand for high-performing strategies, multiple drawdown funds of ours hit hard caps this year with more to come. Our infrastructure business is experiencing explosive growth. Platform AUM there is up 40% year-over-year to $90 billion as of the second quarter. BXMA, I think we'll talk more about it is a growth engine. In July, we saw the best month of fundraising in BXMA history. So that's institutions in insurance. We think our multi-client model continues to resonate. We're the largest noncaptive alternative insurance platform with $290 billion of AUM. That's up nearly 4x over the last 5 years. It's supported at its core by 40 clients in what we call our dedicated solutions area. That's a number of clients that's doubled over the past 2 years. And just stepping back, insurance companies continue to turn to private markets as the destination for excess spread in an environment where competition in the annuity business and spreads in liquid markets are near historic types. And we think in that context, we're a partner of choice. The vast majority of our growth to date has been U.S. centric. And so we think we're just scratching the surface in terms of the international opportunity, and you've seen in the last year or 2 what we've done with Nippon Life and also with LNG and the U.K. And then finally, in individuals or private wealth, the secular growth opportunity remains as attractive as ever. And we think we've continued to extend our leadership position in that channel our AUM, there is $324 billion. That's up nearly 2.5x in the last 5 years. Our flagships, we have flagships across 5 major asset classes real estate, private equity, infrastructure, credit and hedge funds. And these strategies are importantly really foundational for a really important part of our next phase of growth, which is particularly around multi-asset products and the retirement channel, which represents a whole new dimension and where we think we're uniquely positioned. So we can dig in even more into that later. But I'd just say across those 3 areas, it all just speaks, I think, to the breadth of our platform. We're not dependent on any single product or any single channel. And if most industry experts estimate this channel is going to grow at continue to grow double-digit growth for the next decade and beyond, we, of course, see Blackstone is really well positioned in that context.

So maybe putting those pieces together, what does it mean in terms of the broader financial picture for Blackstone, near-term 2027, I think you previously cited double-digit management fee growth. Maybe you can unpack some of that a little bit more?

Yes. So as we've said, we think the multiyear financial picture remains 1 of real strength, and we do see a robust 2027 from an earnings standpoint. As we talked about on our earnings call in July, we expect, as you said, a return to double-digit growth in base management fees in 2027 with the key building blocks of that, including, as I talked about on that call, the full year benefit of multiple new drawdown funds in the private equity segment, continued expansion of our perpetual platform, especially our infrastructure fund, our flagship private wealth vehicles like BXP and very positive momentum in BX MA alongside that from an earnings standpoint, and increasingly diversified and scaling for base fee-related performance revenues, a widening surface area across the firm for generating transaction fees and a quite constructive outlook, I think, for net realizations, as I referenced earlier. So -- and then I'd add an important overlay here is what I would call the monetization of what we've been doing in building in the AI ecosystem. So I know you all may feel like Steve, John and I have been talking at you every quarter about our AI deployment. But you'll, I believe, increasingly see the through line of that to earnings because deployment leads to performance and performance to performance fees and also management fee growth. And so for example, in our institutional infrastructure strategy, we'll next see a large scheduled crystallization in the fourth quarter of 2027 in the context of outstanding performance, and that's been powered and significant part by our investments in digital infrastructure, data centers and power so that NAP in the second quarter was over $900 million. You can see that in the earnings release, sort of halfway through the 3-year period. You're seeing very significant value in our energy private equity portfolio, as I mentioned. Again, our app there, just our energy fund, AP private equity has doubled year-over-year. BXP is a very powerful engine. Our NAV there is already $27 billion and growing in less than 3 years. with exposure to generational AI companies being an important part of the performance and quarterly incentive fee opportunity there. B REIT, it's back in growth mode. And there almost 30% of the portfolio is data centers, meaningful exposure in most of our recent vintages of our institutional real estate funds and also in tech ops to this space. And then we continue to plant seeds like our BX DC REIT. So again, a through line between what we've been building and doing here and earnings power over time. So putting it all together, we see a strong picture of financial performance in the years ahead.

Great. Well, you mentioned AI continues to be 1 of the biggest investment themes we'll be hearing at the conference. And you guys -- as you've been talking about have been very active across that ecosystem, including some recently announced partnerships, including with Nvidia. How are you thinking about the most attractive opportunities along the AI value chain? And where do you see the biggest opportunity from here?

So what I'd start by saying is that the firm and investment business that we've developed over 4 decades, we think turned out to be built for this generational opportunity in terms of our scale, our breadth of strategies across asset classes and across the capital structure, up and down the capital structure, the long duration nature of our capital base, our deep relationships and reach with the largest corporate enterprises. And importantly, the integration of intellectual capital across our platform. But as I go through, which I will, this pretty extraordinary footprint of our activities across this ecosystem. I think it's really important to underscore that the True North is bringing the same focus of risk-adjusted returns on risk-adjusted returns to this ecosystem of investment as we have for the past 40-plus years, everywhere else. So just as I kind of walk through the buckets and AI infrastructure with data centers, where we're the largest owner and developer of data centers around the world. We're investing based on committed typically 15- to 20-year leases with the most creditworthy tenants in the world with built-in escalators at attractive unlevered and levered yields on cost. And those that generates compelling cash-on-cash returns even before you get to terminal values and to platform values. And in the context of some of the development constraints that are -- you're seeing that are being sort of externally imposed that which you can build has that much more scarcity value. In Power, we've been building a portfolio of companies over many years at attractive valuations based on an original pre-AI thesis around secular electrification and the need for grid modernization over the long term. And that's a thesis which obviously was subsequently turbocharged by the mega trend of the extraordinary demand from AI for power. We took what we learned in the AI infrastructure side and have been making discrete, I would say, sensibly sized that's with real right tail optionality in the frontier AI companies themselves, and that's turned out to have had exceptional upside and a very positive impact on the performance in a number of vehicles with our presence and positioning in this part of the investment ecosys been growing accordingly. In credit, we've been delivering large-scale financing against critical assets and contractual cash flows, generating excess spread with structural protection and very favorable counterparty risk in partnership with some of the most important and creditworthy companies in the world. So we've been helping Pioneer, I think, the development of compute as a financeable asset class. And then finally, just being in a unique position to develop new platforms in partnership with the players in this area that will be critical to the overall development in market. So partnering with Google to create Crux and Neo cloud for TPUs launching OD with Anthropic in July as a service company to accelerate enterprise AI adoption for our portfolio companies and outside of our portfolio. And creating very large-scale financing platforms with Broadcom and NVIDIA to support the next phase of BAI build-out. So our activities in AI. I know that was a long answer, our multifaceted, they're at scale. They're done with a very long view, and they turn on a consistent assessment of risk versus reward. And all in all, we think we've positioned ourselves as the best positioned private investor in the world to lean into this opportunity.

Okay. Great. So -- we heard a lot of detail about Blackstone's AI investment strategy. Maybe talk a bit about how you're utilizing AI within Blackstone. So where are you seeing the most promising use cases across the firm throughout the portfolio? And what impact is it having on efficiency and value creation?