Blackstone Inc. (BX) Earnings Call Transcript & Summary

Good afternoon, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it's my pleasure to introduce Michael Chae from Blackstone. Michael is the firm's Chief Financial Officer and a member of its management committee. His responsibility spans across finance, treasury, technology and corporate development. He joined Blackstone back in 1997, and he came up through the investing side of the business in private equity after he eventually ran the international PE business. Good afternoon, Michael. It's great to have you here with us today.

Craig, good afternoon. Nice to see you. Sorry not to see you in the flesh in a warm place, but there's always next year.

Yes, definitely next year.

So just a quick on background. Blackstone is one of the most fascinating names we cover. It's the largest alternative asset manager in the world with more than $600 billion in assets under management. It's also grown AUM by 7x since its 2007 IPO, and the firm is highly diverse with scale across real estate, private equity, credit, hedge funds and even its insurance business. So with that, let's begin. Michael, I thought we could start the fireside today with innovation. I think this is where Blackstone really stands out from the pack when it comes to product innovation and new business building. Why is that? And how do you ensure that the culture of innovation persists into the future?

Thanks, Craig. This is a topic we love to talk about at our firm. And to sort of step back, I would say, and I've talked about this in the past, that there are really, to me, 2 pillars to the success of our firm. It's really quite simple. It's investment performance plus innovation. And I think it's unusual for an investment organization or investment business to be very good at both. We like to think that we are distinctive in being good at both. And the 2 things feed on each other. So -- and that leaves us in a position today where we believe we have the confidence of our clients based on our performance that if we have an excellent new solution for what they need that they'll give us the capital and scale to execute on that strategy. In terms of the parameters we think about, as we think about innovation, new opportunities, it starts by identifying natural extensions to our business lines and our capabilities. We listen to our customers, what do they think they need, what do they need, what do they need a solution for. We match that up where we think we can perform great and win. And then we look for what can really scale. So whatever is worth doing is worth doing with scale and certainly how we think about it. Where we can become a market leader in fairly short order, not over a super long period of time, but in a fairly short order is a threshold question for us. And since 2008, we've developed 11 new businesses, each of which have become market leaders, either the largest in the world globally or 1 of the 2 or 3 largest. So we're really proud of that track record. And if you sort of ask in terms of culture what's behind that track record, look, we do think we're good at this. It's definitely in our DNA as a firm and in our culture. Our firm's leaders across the board are both excellent investors and great business builders. That's really what it takes to run a business at Blackstone. And obviously, it all starts with Steve. To use a current sports acronym, I would say he's sort of the GOAT of building investment businesses, certainly in the alternatives area. And then you look to Jon, our President. And what he did with real estate is extraordinary. And I can assure you that he's bringing that energy and approach and experience across the firm then. So there's that. But then there's also a process and structure around innovation and growth. We're not sort of artists at this. There's a strategic planning process for each business, a new product development process and vetting. Our management committee spends an inordinate amount of time digging into new ideas and new opportunities. I've been in 2 meetings in the last 3 days, basically, on 2 different new ideas that are very exciting. So there is process and structure, but it's not bureaucratic. There's not a lot of bureaucracy at Blackstone. We focus, we push hard and we move thoughtfully but with urgency. And as a result, we think there -- and we know there are many large-scale new initiatives underway today, growth equity, life sciences, infrastructure, bespoke products and retail, such as BREIT, BCRED and the list goes on and on. Those are all very much in flight, and it's still early days and there are many others. So that's sort of a bit of a framing of it. And sort of back to where we started, it's this virtual circle of performance and innovation. If you perform for your investors, they will give you the trust and capital to innovate and extend. And the more you do of one, the more you can do of the other.

Great. Michael, maybe we could dive a little deeper into some of your comments around the perpetual capital products. So how is the business evolving in terms of actual products that you offer investors, including perpetual capital products like core+, like BREIT? And how does this translate for shareholders?

Well, Craig, fundamentally, many, many investors globally want to commit more of their capital to long-term, stable value compounding products, often with the yield orientation. So for our business and for the alternatives business, this is actually a relatively new frontier that's emerged and is emerging. I think there's a very large sort of middle space between, on the one hand, our traditional higher-octane drawdown fund products, then on the other side of the barbell, obviously, traditional public market liquid products. And in the middle, there's really a huge TAM, a huge total addressable market. It's very early days. If you look at the U.S. alone, our core+ real estate product, obviously, has made a success. That's in the context of a $16 trillion commercial real estate market, much of which is in that -- essentially that core+ segment. Infrastructure, an $8 trillion opportunity as a market, private credit $3 trillion, insurance $30 trillion. So these are massive markets for a firm like Blackstone. And it's global, not just in the U.S. And it draws in a big way, not only institutional LPs, draws on not only them, but also retail and insurance, sort of the other legs of the 3-legged stool. And in terms of what it means for shareholders in Blackstone, good things. It's a very big deal, this trend in trajectory. It happens to be very well aligned with FRE growth. It further strengthens what we think is our exceptional financial profile. 3 years ago, we were 1/3 FRE in terms of the mix of our earnings. We're now 2/3 of our total earnings. That should continue to support the structural shift in our earnings quality from the market's perspective. And one would hope commensurately a continued structural evolution in our earnings multiple that I think has been underway most dramatically since our conversion. So we think that's a trajectory that will continue. It's a very, very powerful dynamic for our business.

Well, speaking of the multiple and actually FRE, for that matter, you basically hit your $2 fee-related earnings target from the Investor Day a year early, and this was during a very difficult environment. So can you talk about how you achieved that and then the FRE growth outlook from here?

Sure, Craig. So as you know, we don't like to put out targets. We don't do it that frequently. We know that sometimes disappoints you, but we do rarely do it. When we do it, we're very careful and thoughtful, as we were in the case when we put out $2 at our Investor Day back in September 2018. And again, when we do it, we want to make darn sure that we deliver. And so yes, we achieved that $2 share milestone effectively a year earlier than was broadly expected. And during the time period we did that, as you know, that really highlighted the all-weather durability of our business model and the quality of this earnings stream. Our FRE was up 33% last year in the context of a very volatile environment. So that was something we're very pleased with. In terms of the outlook, I'd simply say that we have great confidence in continued FRE momentum. There are multiple drivers that you're familiar with. It's the scaling of new initiatives and strategies, demand in channels that are very under-allocated to alternatives, especially retail, in terms of BREIT and BCRED and also insurance. There are various recently raised drawdown funds that are coming online with full fees on larger-sized funds on your predecessors. And then, of course, there's continued operating leverage and margin strength. So put together, strong confidence in the future.

So let's move on to fundraising, which kind of goes hand in hand with FRE. Last year, you almost raised $100 billion, and this is the fourth year in a row that you raised roughly $100 billion or even greater. What was impressive last year was you did this despite the pandemic and despite not having any of your larger flagship funds in the market, which I thought was pretty impressive. What are the fundraising drivers as we look forward over the next 1 to 2 years?

So taking a step back, and you, obviously, heard this from us before, there is massive white space in our business. The mega trend in terms of the demand for alternatives across global capital pools is structural, we believe, even in a potentially rising rate environment over time. So those tailwinds, we think, will continue indefinitely. In 2020, we had $95 billion of inflows, which was distinctive given the environment we were in and also not raising our largest flagships in the year. And obviously, a big part of that is our perpetual continuously raised vehicles, that are really, I would say, expanding the baseline foundation of our inflows on an annual basis. So that versus some years ago, that we start sort of on day 1, if you will, with an expectation around fundraising inflows through the year that benefit from those always-on products. We expect continued strong inflows. I mentioned some of the perpetual dynamic generally. We have 5 now real estate core+ vehicles, that includes BREIT. In the credit area, we have this BCRED product. We also have our new DCI business, our insurance segment. So that all fits under the sort of perpetual category and drawdown funds that we're currently raising. We're completing the fundraise of our growth equity funds. Our fourth Tac Opps vintage. That fundraising has just been launched. Our GP Stakes fundraising is continuing our fourth mezzanine funding credit. Our second private equity Asia fund is just underway. So there's a lot going on across that suite of products. And then looking forward a little bit in terms of the near term sort of '21, '22 drawdown pipeline, we expect to be in the market with our next flagship secondaries funds. Our current secondaries fund is about 75% committed. Our third real estate Asia fund. Our current second real estate Asia fund is about -- is over half committed. Our infrastructure funds, and I'll talk more about that maybe a little bit later. And then a number of different credit products. So there -- and many other things in the hopper. So lots going on both around perpetual and drawdown products and lots of good momentum.

So now moving onto insurance, another actual or potential area of [ permanent ] capital. Blackstone recently announced its transaction with Allstate, which would be another large insurance relationship for the firm. Can you talk about your insurance strategy, your capital-light model, which is actually different than many of your peers? And what your plans are to take the insurance business from here?

Well, it's a big area and an exciting one. In terms of the sort of macro backdrop, as I think everybody knows, the environment we're in, the state of insurance company portfolios, the rate environment, make it very hard for insurance companies to deliver the yields that they need, especially as their portfolios roll over. So they are broadly sort of across the industry, rethinking the asset side of the balance sheet and functionally how to best execute on it and what the sort of the asset allocation and asset class exposure they need and capabilities that they require to deliver. What we bring to this, and it's a very fundamental challenge, is simply put our unique origination platform, our unique investment capabilities and scale. And again, at the core of that, our unmatched origination platform. And it's very difficult for insurance companies to replicate that internally or with a sort of series of third-party managers, not in the context of a holistic strategic relationship. Credit, both corporate and real estate credit, are very critical to that. Directly originated products in those areas. Obviously, we have very large capabilities in that area, both in the corporate area and very distinctively in the real estate private credit area. Structured products, another critical area. And then in the core fixed income part of the portfolio, we acquired DCI late last year. We're very excited about it. They are one of the pioneers that offering systematic approaches to investment grade and high yield. We think that's where those markets are going to go over time. The equity markets, obviously, for some time now, have been transformed around strategies like that. And so we think we can deliver best-in-class solutions to these core fixed income areas over time to insurance clients. And alternatives, too, obviously, are part of the equation, but the core proposition really is around this credit origination capability. And so we bring those capabilities to the table. And we think we can deliver on all of this while managing risk comfortably and maintaining or enhancing the ratings of these businesses. I think FG is a case study of this sort of at-work in our hands. We repositioned that portfolio into higher-yielding investments. We've lifted up the yield. We've increased the return on equity meaningfully, while at the same time, actually achieving credit ratings upgrades. And then meanwhile, what's the point of all this? The point is that allowed FG to grow their business and step up the growth of their business for the good of their customers and the business overall. And the stock meaningfully outperformed the industry and their peers during the period of our ownership. And our asset management, strong asset management relationship with them obviously continues. Our strategy is not tied to one approach. We like our sort of capital-light approach, but remain flexible and have a lot of options given our position -- our financial position. Allstate, as you mentioned, is a transaction we're very excited about, a partnership we're very excited about. It brings a significant asset base, long-duration assets, very stable, very predictable, and it lends itself very well to the strategy I just described. And so together, pro forma for Allstate, we have about $100 billion of insurance AUM that we're managing. We mentioned that on the earnings call. We continue to build out our platform to support a much larger business. So we expect a long runway, and we're excited about the long-term opportunities.

And Michael, you also manage about $100 billion of retail AUM now, which is pretty remarkable how quickly that has grown in the last 5 or 6 years. What about Blackstone, its brand, its products, resonates with retail investors? And what products are you finding are the most appealing to retail investors across that segment?

Sure. So there was sort of a nice coincidental symmetry, I guess, in the fourth quarter that we sort of hit $100 billion in both of those areas. Look, we've taken and are taking a very long-term view on what we're building here in retail. Our core tenet is to serve individual investors in the same high-quality ways as institutional investors and deliver a great customer experience. And that involves performance, that involves fees, that involves transparency. We've invested meaningfully in what we call private wealth solutions, or PWS, over the past decade. Education, client education capabilities, we call Blackstone University, client service, product development. We've got a team of over 130 dedicated people just in the PWS area, and they work with, obviously, folks across different businesses and parts of the firm, but that's just the dedicated team. We're in many channels, wire houses, IBD/RIA, family offices, et cetera, across not only North America, but increasingly global. I think over 30,000 financial advisers have transacted with our PWS Group. And in this BX University platform that we launched 10 years ago, we've had over 5,000 financial investors completing that program. BREIT, is it -- when you talk about sort of like, let's bring to light what the market is embracing around our offerings. BREIT is obviously a terrific case in point. The nontraded REIT market historically was a bit checkered, not so investor-friendly, very high fee loads, poor transparency. The market basically almost dried up a number of years ago. We took that and basically transformed it to Blackstone standards. We sort of thought we could reinvent it, if you will. We provided the same competitive fees to these individual investors that our institutional investors enjoy, created, we think, very good transparency reporting and brought to it the power of our Blackstone brand. So -- and most importantly, we've delivered strong performance. So we've delivered a net 9% net annual return since inception with about a 5% cash yield. Our clients enjoy the full power of the Blackstone real estate investment platform and sourcing engine and our ability to find scale assets at attractive prices and yields. So that is a powerful combination. We're now very early days in sort of creating an equivalent sister product in the credit area, what we call BCRED modeled after BREIT. And so just stepping back, overall, individual investor demand for resilient, often income-producing private assets, coupled with our brands, have attractive fees that you can hold for a long time. That is a very powerful combination.

Yes. It sounds like a great combination. Just as a follow-up on retail, what is your current view of the U.S. defined contribution opportunity within retail, especially if illiquid alts or illiquid assets, private assets, can eventually become a sleeve of target date funds, balanced funds, multi-asset funds in that channel?