Blackstone Inc. (BX) Earnings Call Transcript & Summary

All right. Sorry, everybody, for the tech delays here. It's the pleasures of running the conference virtually in this format these days, but going to continue rolling on here. I'm Jeremy Campbell, I cover the exchanges, brokers and asset managers sector here at Barclays. Continuing with the alternative asset managers under coverage, it's absolutely my pleasure to welcome Michael Chae, the CFO of Blackstone to our Global Financial Services Conference. Welcome, Michael.

Jeremy, good morning.

Now Michael has been with the firm for 23 years, has held a broad range of leadership roles, including Head of International Private Equity and Head of Private Equity for Asia Pac.

I think let's kick it off here, Michael, you've been at Blackstone for 22 years. You've seen it to grow to over $560 billion of AUM and over $60 billion of market cap. I guess in -- from a high level viewpoint here, in your experience, what's so special about Blackstone? And what's driven its success? And how do you think it will keep kind of moving in that direction going forward?

Sure. Well, Jeremy, thanks, and it's great to be with you and with the whole audience virtually, hopefully next year in person. But that question gets at a topic that I never tire of talking about. And so I think in terms of key ingredients behind our success, first, I'd highlight 2 dynamics, one, performance and the other innovation. And I think it's distinctive in the investment business to be a firm that does both well, and I think we've demonstrated over 35 years that we are that. And the combination of being able to do both well really has been the engine of our growth over that time period. And so with respect to performance, we talked about it before, but that's where it all begins and ends. If you look at our private equity and real estate drawdown funds over multiple decades, very consistent performance through cycles, 14% to 15% returns, net of all fees, 2.0 to 2.2x realized multiple invested capital consistently through our history. And with respect to innovation, we've demonstrated a pretty exceptional track record, I think, of leveraging existing capabilities and investment strategies and businesses and being able to leverage them into and expand into natural adjacencies as well as altogether new areas and achieve scale rapidly in them and achieve winning businesses. And so we see it as a virtuous circle, which we've talked about in the past. The performance over 35 years begets and engenders deep investor trust. That, in turn, gives us the power and the backing and the platform to innovate and allows us to scale new business successfully, and as I said, quite rapidly. And so that capability and that track record and that trust is, in our view, a major competitive advantage. And virtually, all the strategies we started over the last decade have become market leaders, #1 in most cases or one of the top few, I think, in all cases. And in terms of sustainability, is that sustainable? Yes, it is, but we don't take it for granted. In fact, we sort of obsess over ensuring that it is. And so in terms of what's behind that view, first, at a sort of big picture level, this is an industry with enormous secular tailwinds, as I think everyone in the audience knows, in which we've built a leading brand and market position over 3.5 decades. Second, as I've said, we've created true scale and huge, what I would call, surface area across our businesses and across the firm that's a real competitive edge. But what hasn't really will sustain us when we talk about sustaining any kind of investment services business is our culture, which we do think is pretty special. And we all sort of have different ways of telling the story and what we see in our culture, but for me, first, it's a very rigorous and honest culture, both intellectual honesty, personal honesty. And it's full of a -- it's an organization full of pretty nice people actually. It's exceptionally well integrated with the culture of lightning fast communications and intellectual capital sharing. And it's a real meritocracy. I mean that's probably the thing I'd put above all else. It doesn't matter whether you joined the firm 23 years ago, like I did, or 23 months ago or 23 days ago, the combination of the underlying growth of the firm and our business over all these years and being, in my view, a true meritocracy, equals and creates unended -- unending and uncapped opportunities for people to advance and have rewarding and really satisfying careers. And I think the proof of that is that this lets us attract and retain great talent. We like talking about the statistic to having 19,000 or so applicants this past year for 93 first year analyst positions, to be ranked the #1 best place to work in our category, I think, 3 years in a row. Those are all, I think, evidence of what I'm talking about. So you can see, I'm just a little bit proud of our firm after all this time. I still feel lucky to work here every day I walk in, and I'm glad to say I did walk in to our office today. And I'm really excited about the future. We think our best years are ahead of us.

And from the audience, we also have a response question for you on the left-hand side bar. I think the one that Michael and Weston and the team would be all interested in would be higher to position to Blackstone stock. So we have overweight, equal weight, underweight or not involved. If you want to register those as we continue the conversation, that be fantastic. And so Michael, I guess just moving on, you were very involved in setting the FRE targets and on a quarterly run rate basis, at least, you're kind of ahead of the schedule and just under like the $2 3-year FRE target you guys targeted back in fall of 2018. So I guess, first things first, as we sit here today, do you see any risk to achieving that goal?

Well, what I'd say is, first of all, I think we tend to think the best way to look at FRE is on an annual or 12-month basis. And on that basis, as of the end of the second quarter, as you know, our LTM FRE was $1.67 per share, which is up 46% since Investor Day. I think on Investor Day, we did sort of talk about and target 50% plus growth in sort of that 2-year time frame. What I'd say is that we're firmly on the path despite everything that's happened in the world, and we're very confident about the trajectory from here.

And so don't worry, Michael, I'm not going to ask you for FRE firm guidance update here. But since you were so involved in help setting the big growth goal, as you look forward over the next several years from this point, do you see similar market dynamics and investor demand for private investment strategies that would continue to support this very robust mid-teens percentage compound annual FRE growth over time?

Yes. Well, look, stepping back with a longer view, our fee-earning AUM and FRE growth has been robust and consistent over many, many years, mid-teens annual growth since our IPO, basically. In terms of that Investor Day road map you referenced, I think we do believe we got the architecture of that road map right and it remains fully in place. All the factors are in place to continue to drive that sort of attractive growth. Secular tailwinds, the ability to drive product and channel expansion, stable pricing and continued operating leverage, those are the things I talked about in September 2018, and those remain very much in place and in force. The numerous strategic initiatives we talked about back then, whether it's core+ real estate, secondaries, infrastructure, life sciences, growth equity, insurance, retail, basically, all have blossomed or continued to blossom since then. Some had already been launched when we met that day. Some were -- we were sort of on the doorstep and some were still ideas we were working on. So we think we have long and compelling runways ahead of us in all those strategies and channels and then some. So we're feeling very good about that. Now at the same time, and this is another really big positive, I'd say in the couple of years since then, with respect to the TAM, or total addressable market, sort of picture, frankly, it's only gotten better and more promising over kind of the short and, I think, long run. Because the challenge to investors globally, as we all know, of finding returns and yield in the face of ultra-low interest rates has only intensified and deepened since then, like profoundly. And that's a profound multitrillion dollar problem for global investors and the largest global pools of capital in the world. And given our position in alternatives and our sort of array of strategies and the performance over time, we think we're the #1 solutions provider to that multitrillion dollar global problem. And that makes the backdrop only more supportive of our industry and our business and makes us only, I think, more well positioned.

Got it. And I guess let's just pivot over to deployment for a second here. I think the team in the past has said that transaction activity has been muted, given the high degree of uncertainty in the market, and that's impacted deployment so far this year. Obviously, we've had a lot of chop with everything going on. Have you seen activity pick up as we kind of return -- at least in the public market has obviously seen a pretty big rally back and the economy starts to return a little bit back toward normal? Or are sellers still kind of remaining cautious and waiting for kind of a healthier backdrop?

Yes. I think -- well, look, I'd say it's been taken off mute and if it was sort of on mute before, maybe a bit of an I propose Zoom term. And pipelines and activities, for sure, have been building. We see that. But I'd say it's still an unfolding process, and there are a number of dynamics at work that cut different ways as it relates to activity levels, healthy capital markets on the one hand, wide dispersion of impact on businesses in the real economy at the same time. And even now perhaps of the looming sort of specter politics, tax planning, et cetera, as well. So it's all, I think, evolving as we sort of speak. And while the capital markets have strengthened, obviously, in a big way, there's still a lot of uncertainty out there, depending on the business and sector. And I'd say the higher level of uncertainty about the impact of COVID on a particular business, the harder it is to cross a trade between buyers and nondistressed sellers. So with that said, yes, we are seeing healthier deal pipelines overall, and we had a pretty busy August and -- July and August, as people may have read about. And I think stepping back, what's really on display, I think, is with respect to our firm, is that enormous surface area of the firm and its capabilities and sort of the range of ways we have to deploy capital across sectors and geographies and asset classes and up and down the risk/return spectrum. And particularly environment -- in environments like this, that diversity of strategies and that flexibility of capital really shows its value. So recent investments of ours, I think, have reflected a very thematic approach, especially as it relates to certain themes or sectors like e-commerce, content creation, digital infrastructure, life sciences and health care for sure, Asia to some degree. And almost always where the opportunity for our capital to bring value add from us and our firm capabilities was significant. So that's, I think, the sort of the backdrop, and I think you are seeing more things to do, but it's still a mixed and evolving picture.

And then, I guess, you've seen this in the public markets with the bifurcation of things that are socially distant, work-from-home, I mean, literally what we're doing right now on Zoom versus some of the impacted industries like restaurants, gyms, et cetera. I know you're a CFO now, but you used to be on the investment team. So maybe if you can kind of give us like The Blackstone thought process of how you approach COVID-impacted industries or balance valuations against maybe even lack of any sort of transparency and visibility around future cash flow streams in some of these impacted industries?

Yes. We're all sorting through that, and there's not one single framework or model for looking at things, and it depends on your strategy. But a few observations. One obvious frame is cyclical versus secular disruption. And so like many of my colleagues, I remember as a senior investor and deal person before, from prior cycles like 2008, how severe cyclical downturns accelerate existing secular trends. You saw that, for example, in '08 in the aftermath and sort of traditional ad-based and media businesses back then. And this time, of course, the acceleration is being seen in a much more dramatic way because the digital transformation fundamentally was already -- that was already underway was far more advanced and disrupted. So with that backdrop, I'd say one way to look at it is sort of maybe 3 buckets of companies and opportunities. The first bucket, businesses or assets with secular growth that may even be accelerating in terms of those trends. Those aren't generally cheap but have remained, as I sort of just referenced, a top priority for us. And with our platform and our reach and our scale and our value-added capital, we have been finding a number of ways to express our key themes in those areas. We've done a few actually convertible preferreds in companies, whether it's in the sort of digital infrastructure area or in the life science logistics area in the last month or so. And even though those are very much on trend with great businesses, they need capital, and we will be able to invest in a sort of structured equity. And just in that time period, I've seen sort of 20% to 50% type appreciation in stock, and that's good for the company and also good for us, obviously. Second, conversely, they're the secularly challenged businesses. And what I'd say is, for us, life is probably too short because what appears to be potentially cheap tends to be a value trap because the pace of change and disruption is just too quick for a long-term investor like us. We can't just sort of get in and out of these things. And then there's a third group, which is, I think, even trickier, which is where there's a secular theme that we believe in and we believed in for a while, probably, but that's been interrupted, for example, certain location-based businesses and where the business probably is currently suffering to some degree. And if we can quantify and capitalize normalized earnings, for businesses like that cheaply enough to give us a margin of safety for the inherent uncertainty of the time to full recovery, that's something we are definitely looking to do, and our teams are spending a lot of time on. So overall, I'd say, maintaining discipline in the face of that is key, and that's what our long-term locked up capital model allows us to do and to be. And on the other side of that, we have enormous firepower, $156 billion of dry powder to execute with speed and certainty and in scale when we see something we like.