Blackstone Inc. (BX) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Blackstone Second Quarter 2017 Investor Call. My name is Derek and I will be your operator for today. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Weston Tucker, Head of Investor Relations. Please proceed.

Great. Thanks, Derek and good morning and welcome to Blackstone’s second quarter conference call. Joining today’s call are Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; Michael Chae, our Chief Financial Officer; and Joan Solotar, Head of our Private Wealth Solutions and External Relations. Earlier this morning, we issued a press release and slide presentation which are available on our website. We expect to file our 10-Q in a few weeks. I would like to remind you that today’s call may include forward-looking statements, which are uncertain and outside of the firm’s control and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-K. We will also refer to certain non-GAAP measures on this call and you will find reconciliations in the press release and the shareholders page of our website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. So a quick recap of our results. We reported GAAP net income of $745 million for the quarter, up sharply from the prior year comparable period. Economic net income, or ENI, per share was $0.59, up 34% from the prior year due to greater appreciation across the funds as well as strong growth in fee-related earnings. Distributable earnings per common share, was $0.63 for the quarter, up 54 % from the prior year. We declared a distribution of $0.54 per common share to be paid to holders of record as of July 31. And with that, I will now turn the call over to Steve.

Thanks a lot, Weston and good morning and thank you for joining our call. Blackstone posted a strong set of results for the second quarter as Weston indicated, with revenue, ENI and distributable earnings, all up sharply from the prior year. This follows a first quarter that you may recall as one of the best ever. Taken together, for the first 6 months of the year, ENI nearly doubled to $1.7 billion, while distributable earnings more than doubled to $2.0 billion. Our pace of realizations remained strong, with nearly $28 billion sold in the first half, our most active 6-month period on record. We are continuing to see the benefits of our sustained large scale capital deployment around the world, a vision focused on value creation in those investments and then being able to choose the right moment to exit. We expect this momentum to continue. With pending realizations, including the historic sale of our European logistics portfolio, which Michael will discuss, we are on track for one of the best years for cash distributions to shareholders in our history. As I have said before, our distribution should not be viewed as one-off special dividends. We have demonstrated an ability to deliver consistently high payouts over time. Over the past 3 years, for example, as Tony mentioned earlier, we have distributed an average of nearly $2.50 per year of value, driven by over $130 billion of realizations. And yet, despite this high level of sales, assets under management continues to increase, up 33% over the past 3 years to a record of $371 billion. Our LPs keep entrusting us with their money, because we are able to deliver differentiated investment solutions and long-term outperformance versus what they can achieve in the traditional areas of money management. We have been doing this for over 30 years, and today offer broader scope of solutions to different types of LPs than ever before in our history from state pensions to sovereign wealth funds to individual investors looking at alternatives for the first time. Last month as Tony also mentioned marked the 10th anniversary of Blackstone’s initial public offering. We have come a long way in the past decade against the backdrop of dramatic change in the broader money management industry. Capital flows have increasingly migrated towards two distinct ends of a barbell. First, the low fee index and other passively managed long-only funds and second, the highly customized differentiated alternative funds. Each of these opposite ends of the spectrum is taking significant share from traditional active management, which is in the middle. Close to $2 trillion, for example, has flowed into passive managers in the past 10 years. Similarly, the alternatives industry has doubled in size in the past decade, as these funds have become more and more critical for limited partners to be able to meet their actuarial targets. Allocations continued to increase as a result and we expect that trend to continue. Blackstone is leading this transformation, with a brand and investors trust, built by a culture of innovation and a long track record of protecting and growing their capital. We used the proceeds from our IPO to fund our expansion into new business areas, some of which today are larger than the entire firm was in 2007. By inventing new fund categories or redefining existing ones, we have created an ever-widening product set to help our LPs solve their issues. The result is a more than fourfold increase in AUM since the IPO, which is close to unprecedented in finance, which has overall been a shrinking category. We have also shown that we can grow AUM without sacrificing returns. We are carefully sizing new funds. So, we don’t dilute performance. That discipline is illustrated in both our recent and historical returns. For example, the corporate private equity and real estate opportunity funds appreciated 15% to 17% in the past year and have beaten the other relevant indices by 79 percentage points per year since inception net of all fees. In other words, we have invested with Blackstone and our high return products. We have made 700 to 900 basis points over what you may have returned in the stock market. Our GSO credit strategies also delivered gross returns of 15% to 17% over the past year. And our liquid funds, as measured by BAAM’s Composite, achieved a gross return of nearly 10%, with only 1/3 the volatility of the broader market. In our newer products areas, we are delivering compelling performance as well, consistent with enhancing our Blackstone brand. Our Tactical Opportunities platform, for example, appreciated 15% in the last 12 months. Our longer-dated core plus real estate strategy was up 10%, consistent with its mandate. These returns are the reason that when we go to market to sell a fund, usually, somebody wants to buy in. We have sold out all our major flagship funds over the past year – several years and are enthusiastic about the opportunities we see ahead. In fact, when I look at the new products we are developing today alongside the recently launched ones that are reaching real scale, to me, this is one of the most exciting time in the firm’s history. Our new infrastructure business, which got a lot of public visibility, is one of several reasons for this excitement. We had carefully considered this business for a number of years. It started as an idea, like many at Blackstone, where we attempt to identify the next paradigm shift in the market or a discontinuity, so we can leverage the firm’s unique capabilities to generate outsized returns. We discuss whether an idea can become an enduring business and whether we have the right people to staff it. We have been making infrastructure investments quite successfully for over a decade in our private equity funds. And now when we see at historic investment opportunity emerging in America, we believe the time is right to launch a dedicated business. We started a dialogue over a year ago with a long-term oriented sovereign fund to become a lead investor. They ultimately chose us because they are highly supportive of the way we do business, our process for sourcing and analyzing investments and our value-add approach. We are staffing this business as we typically do, by moving talented professionals with relevant experience into leadership roles and filling in around them with key hires. It’s a time-tested strategy that works because of our deep bench of talent. And while this business will take several years to fully build out, we have received a commitment of $20 billion from our lead investor which will flow into AUM over time as other capital is raised to match it. In addition to infrastructure, we have several new other initiatives that are progressing well. Our longer-dated core+ real estate business is now up to $17 billion in AUM after only 3 years, achieving inception to date net returns of 12% a year, which is pretty terrific for core+ real estate. Our $5 billion core private equity business closed its second investment last week. We have several other interesting deals in the pipeline. We are excited about the universe of opportunities this new mandate opens up for us. In our private wealth area, we are defining and redefining the channel, bringing solutions to retail investors that have never been available to them before. And this is a huge asset class. We have invested heavily in distribution, technology and product development. And we become the clear global leader in retail alternatives. Approximately 15% of the firm’s total inflows now comes from retail, and we barely begun to scratch the surface on the addressable market. Our private REIT offerings, which we only launched earlier this year, just broke the $1 billion mark. We are bringing the quality and expertise of the real – Blackstone real estate platform to an asset class that has been largely mismanaged and underserved and which is vast in size and potential. And there are other initiatives of equal or even greater potential that, unfortunately, for you, we are not ready to announce here today, as people tend to follow us. At Blackstone, we are an asset management firm, but we are really in the innovation business, and our LPs understand the exceptionally high standard of care that guides the launch of any new Blackstone fund. They know they are getting Blackstone quality, anywhere in the world they invest with us. We built a deep and long-term trust with them, that is why our new ideas typically get funded and reach scale very quickly, becoming a lasting and additive part of the firm. Our new businesses make the rest of the firm stronger and better, and vice versa. It’s a virtuous circle. Reflecting on the past 10 years, since becoming a public company, I take particular and great pride on what the firm has accomplished on behalf of our investors. But I am most excited about what’s in store for the next 10 years and beyond. I look forward to sharing with our shareholders in the future our many hopeful successes. Thank you for joining our call today. Now I will turn things over to our Chief Financial Officer, Michael Chae.

Thanks, Steve, and good morning, everyone. Our results in the second quarter and first half highlight the firm’s continuing momentum with robust growth in all of our key revenue and earnings metrics. Total revenue for the quarter rose 30% year-over-year to $1.5 billion, while economic net income increased 36% to $705 million, driven by strong growth in both management and performance fees. Performance fees and investment income together increased 62% over the prior year. Management fees rose 14% year-over-year, as fee-earning AUM reached a record $282 billion and also reflected the benefit of the onset of full fees in certain of our recently raised flagship funds. Together with very modest fee expense growth, including year-over-year reductions in a non-comp fee expense, this growth help drive fee-related earnings up 33% in the quarter to $311 million. Distributable earnings rose 58% in the quarter to $781 million or $0.63 per unit. Today’s results come on the heels of a first quarter that set firm records or new records for most metrics, with a combined 6-month period total revenue was up 61% to $3.4 billion, ENI up 90% to $1.7 billion and distributable earnings up 126% to $2 billion, nearly at the same level of DE as for all of 2016. Fee-related earnings for the first half were 25% year-over-year to $602 million. On prior calls, we outlined a baseline path of low double-digit organic growth in FRE in 2017. Given the strong trajectory achieved to date, we now expect that growth to be in the mid teens or better. The bottom line is that we are on pace to deliver one of our very best years for DE in 2017, with robust realizations supported by a strong and growing baseline of FRE. The breadth and strength of the firm’s business lines was reflected in our key capital and operating metrics for the period; in realizations, deployments, investment performance and fundraising. I’ll now briefly recap those areas of activity for the quarter. First, with respect to realizations. Following a record first quarter, the pace of realizations remained strong. We generated $11 billion of realizations in the second quarter, with significant sales of both public and private holdings in the BREP and BCP funds, including 17 different secondary public sales. The average multiple of original invested capital for BREP and BCP sales was a healthy 2.4x. Total realizations for the past 12 months rose to $51 billion, our highest for any 12-month period. The biggest news in the quarter with respect to realizations was the announcement in early June of the agreement to sell our European logistics business Logicor to a sovereign wealth fund for €12.25 billion. This transaction is an excellent illustration of our model working at its best. Our team identified a theme, a big idea to play the secular explosion in e-commerce in the real estate context. Leveraging the largest capital base in the industry, which is our competitive advantage, we built a scaled platform of high-quality assets by methodically executing over 50 acquisitions across 17 countries over a period of 5 years. The sale represents not only the largest private exit in BREP’s history, but also the largest private real estate transaction in Europe. We expect a contribution to DE of $0.35 to $0.40 per share when it closes later this year. Second, investment activity. Alongside our aggressive pace of sales, we have been actively reloading with new investments, deploying $8.4 billion in the quarter and $33 billion over the past 12 months, not including $4.6 billion committed to pending deals not yet closed as of quarter end. We deployed $20 billion in the first half of the year, our highest first half deployment to date. While the environment for opportunistic investing, especially in the U.S., has remained challenging, we are finding pockets of value around the world, emphasizing the themes in which we have high conviction. Having a far reach in global platform in each business has allowed us to go where the value is. Indeed, about half of our capital deployed or committed in the second quarter across the firm was outside of the U.S., with Europe notably being our busiest region of activity for real estate and credit, in particular. The diversity of investment mandate provided by our newer business lines has also supported a positive trajectory for deployment despite the environment. For example, taken together, our core+ real estate, core private equity, Tac Opps and strategic partner strategies comprised 27% in the firm’s capital deployed so far this year and about a third over the past 3 years. In the last week, in our core PE strategy, we closed the $2 billion acquisition of Ascend Learning, and in our Tactical Opportunities area, we are seeing arguably the deepest pipeline of interesting opportunities within the firm as reflected in some of the recent transactions announced by Tac Opps. Clearly, the Blackstone innovation machine is creating a level of activity and store value for our shareholders that would otherwise be unavailable in the current environment. With the industry’s largest dry powder capital pool of $90 billion and with over 70% of our asset base locked up for over 9 years on average, we enjoyed the distinctive position of having enormous firepower across a diverse array of strategies around the world that we can deploy patiently against selected areas of opportunity. Third, investment performance, starting with real estate, the opportunity funds appreciated 5.4% in the quarter and 17.1% over the last 12 months, while core+ was up 3% and 10.2% respectively. This appreciation reflects both broad-based strength in our portfolio as well as sales activity. Within the portfolio, we are seeing strong performance in some of the largest investments made in the last several years by real estate, which bodes well for future value creation. And in terms of operating trends, we continue to see solid to strong fundamentals in most sectors and geographies to which we are exposed. The corporate private equity funds appreciated 2.8% in the quarter and 14.6% for the prior 12 months. Underlying fundamentals in our portfolio remain solid across most sectors, with healthy growth in revenue and EBITDA, although commodity price volatility in the energy markets did impact appreciation and the carrying value of certain private energy investments in the quarter. In credit, our distressed funds were also impacted by unrealized marks in certain energy investments, resulting in the modestly negative return of negative 1.2% in the quarter although these funds were still up 15.3% gross for the prior 12 months. Our performing credit funds were up 1.5% in the quarter and 16.6% for the prior 12 months. In hedge fund solutions, the BAAM Composite generated a gross return of 1.3% in the quarter and nearly 10% for the prior 12 months, outperforming the hedge fund index. With 84% of BAAM’s eligible AUM above the high watermark, the segment contributed $30 million of performance fees in the quarter and $88 million year-to-date, driving a 44% increase in first half revenues for the BAAM segment. Finally, on fundraising. Gross inflows were $12.1 billion in the quarter and $57 billion over the last 12 months, with strong consistency across businesses. In the quarter, we saw, among other closes, the final close in the quarter on our fifth European real estate fund, which reached a record €7.8 billion, the first closing on our third GSO distress drawdown fund and an additional closing on core private equity. The overall pace of fundraising in the first half of the year was somewhat slower than 2015 and 2016 as expected given the timing of the raising of several of our largest flagship drawdown funds in those prior years. That said we expect that the second half of the year will produce meaningfully higher inflows. We expect the balance of the year to include significant closes on the third GSO distressed fund, the second dedicated aging real estate fund, the third commingled Tac Opp funds, and the first close on a new Asian corporate private equity vehicle, which we will invest as a sleeve for BCP in a similar fashion as our energy fund sleeve. Steve spoke about our new infrastructure fund for which we expect to first close by early 2018, followed by subsequent closes thereafter. These closures will consist of third-party capital matched by our anchor investor and will flow into both total and fee-earning AUM as they occur. One of the most compelling trends in our fundraising is that more and more of our new strategies utilize quasi-permanent or long duration fund structures, with fees often based on NAV versus original cost, such as with our real estate core+ platform, which will start generating cash incentive fees in the third quarter. Infrastructure is the latest and a quite significant example of a new strategy utilizing that structure and we look forward to building out this platform over time. So, overall, another strong quarter a great first half and a lot to look forward to. Like Steve, I am excited to see what the next 10 years have in store for the firm and our shareholders. With that, we thank you for joining the call and would like to open it up now for questions.

[Operator Instructions] And it looks like our first question will come from the line of Craig Siegenthaler, Credit Suisse.

Thanks. Good morning, everyone.

Good morning, Craig.

So, maybe just starting where you left off, with that new Asia private equity vehicle, this is really a new concept at Blackstone as you have stayed away from the geographic segmented model. What are your thoughts on raising a European constrained fund, especially given the commentary I heard earlier that there is a lot of – better investment opportunities here than versus the U.S.?

Okay. Craig, it’s Tony. We don’t have any plans for European PE fund right now. And I am not sure Michael was saying there is better opportunities in Europe in PE now. I think he was referring more towards real estate and credit than PE.

Got it. Thanks for taking my questions.

Thanks, Craig.

Your next question will be from the line of Patrick Davitt, Autonomous.

Hey, good morning guys. Thanks. On the infrastructure opportunity, do you think you need movement on the legislative front in DC to make the opportunity work at the size you are planning on raising? And within that vein, how are you equipping and/or are equipped to deal with the local red tape of bureaucratic issues of building highways, airports and bridges, etcetera?

That’s – this is Steve. That’s a really good question. And what I would say is that, we think we are going to be able to invest the fund without major new – I am sorry, fighting a cold, if you can believe it in the summer. Tony, why don’t you answer that?

Yes, sure. So, Patrick, we don’t need any changes in Washington to invest these funds, simply put. We think there are some things that the administration could do and would like to do that would really help America address its sorely underinvested infrastructure. And I think that’s in everyone’s interest. As you know, the American infrastructure costs the average family I think we say something like $360 a year in income just from last productivity. So, it’s good for all of America. We are hopeful they can do something. But our investment is not premised on any changes in Washington and that’s not necessary. And you should also know that, yes, new build infrastructure will be a part of the fund, but it will be a minority of the fund. Most of their fund will be more on core+ than in Greenfield stuff. We will also do some core. The beauty of this fund is that it can do the full spectrum of things. It can hold assets a long time and let them appreciate a long time, so you get high multiples of money and it can do things in scale that others can’t, but it’s not just a new build fund.

Thank you.

Your next question will be from the line of Bill Katz, Citigroup.

Okay, thanks. Good morning. I appreciate taking the questions. Just sticking with the infrastructure fund for a moment, could you identify that one active investor is about half of the $40 billion target? Could you give us a sense of how you are doing in terms of LP raise on the other $20 billion? And then Mike, I think you mentioned that this could start to feather into fee-paying AUM in the first quarter of ‘18. Sort of wondering how you think about that pace throughout the year?

Okay. Well, we really aren’t officially launched yet in the third-party fundraising. We expect that to start in the fall. And we expect closing, as Michael said, by the first part of 2018. We will see how it goes, but we are not launched yet, I don’t know. But I don’t think you think that our target is $20 billion out of the box. We are going to start with the target smaller than that. And then as we raise additional money, we will match the balance of the $20 billion over time.

Okay. I think that’s a quick follow-up question on the – you had mentioned, Steve, on your opening remarks that retail is an area of focus. I think I heard about 15% of your sales are now coming from that channel. Could you expand a little bit on where you are seeing success whether it be product or a particular distribution sub-segment?

Maybe Joan wants to do it?

Yes, I will take it. So it’s really, I would say, a three-pronged approach. One is building out within the channels we are already in, in the wirehouse and private banks are going deeper and broader. Adding new product would be the second prong and then new distribution, independent brokered dealer, families, etcetera. So, it’s really across the board and I would say although we are seeing a nice pace of growth, it’s still very early stage. So in independent broker dealer channel, for example, we have just started writing the sales agreements. We have a lot more to go and the product is first hitting. And I think without disclosing specifics on new product, we will have new product that we will be introducing towards the end of this year as well, so very excited about it.

That’s helpful. Thanks so much.

Thanks, Bill.

Your next question will be from the line of Devin Ryan, JMP Securities.

Hi thanks. Good morning. Question here just on CF Corp.’s acquisition of Fidelity & Guaranty Life in the quarter and, obviously, Blackstone’s investor management agreement there. I am just curious how big of an opportunity you see this for the firm over time? Obviously, one of your peers has been benefiting quite a bit from their management agreement as assets have expanded. And so it seems like there is a strategy to grow. Just curious kind of how you are looking at the opportunity for the firm.

Sure. Okay, Devin. Well, as you know, we already have a similar kind of arrangement with a company called Harrington. And so, this is not a new thing for us. We think that, in general, the insurance industry is underinvested in alternatives. And it’s a very big pool of assets and that over time, we will be able to provide services to that industry. And I hope it’s one of the sort of, frankly, many growth avenues we have.

Got it. Okay thanks. And just quick follow-up here. Just on the CLO business. There have been 10 CLOs you have launched over the past year. I think 3 this quarter, so clearly, you have been active there. I am just curious what you are seeing making that backdrop particularly favorable right now. Is it just the spreads and how kind of risk-retention rules changed industry behavior at all or maybe creating some advantages there for you?

Well – yes, I mean, obviously, there is a hunger for yield instruments. And so we can get liabilities at an attractive rate, and we can make the spread. And what squeezes down to the CLO equity is pretty attractive by comparison of investors’ alternatives in this world. And so it’s good for the markets to provide the liquidity they provide. We make a – put a long-term home for these loans, and so – and we are in the business. So we are going to keep doing that as long as these conditions pertain. In terms of risk retention, yes, we have got risk retention now, we are – but we are very comfortable with the retention of these instruments that we have. We like the investment, frankly. It’s a good return on investment. So it hasn’t slowed us down at all. And I think the industry is working around that.

Okay thanks very much.

Your next question will be from the line of Michael Cyprys, Morgan Stanley.

Hi, good morning. Thanks for taking the question. Just wanted to ask about the net accrued performance fee balance. That seems to have been stable here at about $3.3 billion or so, despite some of the strong monetizations that you had over the past 12 months. So as you look forward from here, how are you thinking about the potential for the net accrued performance fee balance to grow? It appears to be somewhat a backdrop for monetization. So does this balance remain stable from here? And what sort of environment do we need to see for this to grow, even if monetizations are similar to current quarter levels?

Hi, Michael. It’s Michael Chae. I guess just to put a frame around that, beneath the surface of over the last couple of years, a stable performance fee receivable balance, obviously, there have been a couple of really good things happening, appreciation and sales. And so – for example, take the last 6 quarters at the end of 2015, the balance was $3.25 billion. Today, it’s $3.29 billion, which is stable to slightly growing. Well, how that happened was $2.4 billion of performance fee income of growth and $2.4 billion of distributions. So we are, like, happy about both those things. That’s our model. So our model is to produce stable to growing – performance fee receivables, there will be ups and downs over time through creating value and returning value. And so we expect to continue to execute against that model.

Got it. Thanks for that. And then just a follow-up question on some of the broader investment themes and megatrends that you have been, sort of, spot on with over the past couple of years, investing against urbanization and e-commerce and last-mile delivery. So I guess, just as you look at over the next 5 to 10 years, what sort of trends are you watching or thinking about that could emerge?

Well, that’s – I must say, that’s getting a lot of attention here. We are increase – what we are increasingly seeing is the ability of new technology to disrupt all kinds of traditional industries where you wouldn’t think what happened. So I would say, the change going forward is much more focused on our part on technology disruption and is a generalization. And what are some of the implications of that. Particularly for industries that people used to think of we are safe from that. So as a generalization, I would say, that’s getting the most attention right now.

Great. Thank you very much.

Your next question will be from the line of Robert Lee, KBW.

Great, thanks. Good morning, everyone. If I think of over the last several years as you have highlighted repeatedly, you – so many more products so many more strategies across the franchise. Can you talk a little bit about how some of the investments or changes you have made or you think you need to make in kind of your delivery pipes, your distribution to effectively – I mean, you have raised huge amounts of capital, but all the new products can often strain an organization’s ability to market them effectively over time. So can you maybe talk a little bit about some of the changes you have made there, is any or changes you think you need to make internally to handle all these new strategies?

Sure, happy to. So we have a fairly complex distribution system. It’s both decentralized and centralized. It’s both product-oriented and regionally oriented. So I am just going to take you through that a little bit. Generally speaking, when we set up a new product group, they tend to be discrete businesses, discrete teams, discrete management, discrete P&L and bonus risk and discrete distribution around their product area. Now that would be true – more true in the big markets, like the United States and Europe, which are mature, and where the LPs are highly specialized. In less mature markets, Asia, the Middle East, for example, Latin America, where the LPs are less specialized, then we have more of a regional coverage model. And so as we grow – as we go through our products, we are, of course, bulking up our regional teams just to handle more. And our products teams naturally bulk up in the mature markets as we add products, because they each have their own – some of their own marketing resources. And then in Joan’s theory, as she was talking about, that’s probably the fastest growth in our distribution. That’s why it’s growing as a percentage of our AUM. And she is doing the biggest build up of all. And, of course, that is a central group that, on a global basis, distributes all – products for all the groups. So in a nutshell, we build distribution, not only along with the new products, we build it ahead of the new products.

Great thank you. Maybe just one follow-up also on kind of the new product front. I mean if I look across whether it’s core+, core PE, infrastructure, the non-traded REIT, I mean, many of your new strategies are in either permanent capital vehicles or maybe some type of evergreen structure with – as an organization, that’s something you are specifically targeting? Is the – or did you think about this in terms of half your asset base being that?

Well, so – I think this is something – yes, we are specifically targeting for a couple of reasons. First of all, for investors, having – if the compounding – the 0 interest rates have pulled down the compounding rates that investors can get. And a way for them to compensate from the loss of high compounding rates is to put money out at a little lower rates of return but longer durations. And ultimately – and if they do that well, they actually get richer at the end of the day than these yo-yo kind of drawdown funds where they get very high compounding rates for short holding periods. So we think it’s an investor’s interest, first and foremost, which is why we are doing it. Beyond that, from our firm, it’s powerful. It’s powerful because it gives a very stable asset base. It gives us an asset base which generally grows with net asset value, not just management fees on the commitment up front. Thirdly, we don’t have to – we – the irony of drawdown funds is you are often obligated to sell your best assets earliest to harvest those gains. We love to hold our winners, so it allows us to do that, but then NAV grows, and we get growing management fees. And it allows us to take our incentive fees more gradually and more smoothly over time. So, all of those things make it good for us. So I think it’s good for our LPs first and foremost, but it’s also good for us. So yes, generally speaking, we see moving the firm towards more and more permanent capital vehicles. And I think you will see them growing as a percentage of AUM. But we have a very large drawdown business and it’s hard to see permanent capital ever being – which is robust and growing also. So it’s hard to see permanent capital ever being more than, you said, half, I don’t see it ever quite getting there, but we will see how it plays out.

Great. Thanks for taking my question.

Your next question will be from line of Alex Blostein, Goldman Sachs.

Hey, good morning everybody. Just a follow-up back to the infrastructure business for a second, what kind of investments do you guys need to make in that business both in terms of hiring new people, bringing new people internally, externally, anything on the non-comp side of the equation? Just trying to get a sense of the incremental margins we could expect from this new business segment from you guys once it’s fully scaled? Thanks.

Yes. Well, we are going to – we have moved half a dozen key people, including the group head from other parts of the firm. We have got couple of three partners in there now that we have moved internally as well as some support people. We are going to be adding without side hires some other partners with expertise, in particular, silos, a world-class operating partner that I think will just knock the people’s socks off and some other things like that. So we are going to be in investment spending mode for a while, certainly for the balance of ‘17 and for – in my opinion for most of ‘18. But we will have to see a little bit how the combination of the new hiring mashed up against the pace of fundraising and the pace of deployment, all that goes into the mix. But I think you should assume that for ‘17 and ‘18, it’s not going to add to our earnings.

Okay, thank you.

Your next question will be from the line of Mike Carrier, Bank of America/Merrill Lynch.

Thanks, guys. Just a question on hedge fund solutions, so I know seasonally in this second quarter, you always have a higher level of redemptions, but it seemed like it ticked up a little bit yet performance has gotten a lot better. There is a lot of different trends in the industry. So just wanted to get your view on what you guys are working with clients in that segment and what’s the outlook when you look at the fundraising opportunity given the improving performance?

Yes, Mike, it’s Michael. Just to put the flows and some context, it’s a great question. First, as you noted, we typically do see seasonally higher redemptions in the second quarter. Second, I think fundamentally it’s important to note that flows and redemptions lag performance. And what you are seeing here is obviously that sort of perfect storm of challenges in the hedge fund industry overall, playing out in the last two, three, four quarters in terms of flows. And that can reverse itself and we expect it to following periods of good performance which we have seen over the last four quarters. And so more specifically and let’s break apart sort of our retail individual investor solutions area and in our traditional institutional area. On the IIS retail area, the lag is sort of naturally shorter given the daily liquidity character of the products. And sure enough in late 2016, first quarter ‘17, we did see elevated redemptions in that area. However, we are also seeing – we saw in the second quarter and we are seeing it kind of in real time that those flows have turned the corner. We have had great performance. That mutual fund was up – BXMIX was up around 8%. Actually, Morningstar, if you look on their website, has just awarded us a 5-star rating. And that segment returned to healthy net inflows in the second quarter and we continue to see strengthening of those flows for sort of the balance of the year. Conversely, in the institutional area, the decision-making and lag effect is a little slower. You have a tough first half. Investment committees of institutions make decisions around year end. Then there is a notice period. So, I think what you saw in the second quarter was sort of actually that playing through in the institutional and our traditional fund of funds area. But look, stepping back, I’d say the outlook is very positive for us in terms of momentum. We noted in the 8-K, we have July 1 inflows that aren’t AUM about $0.5 billion. Retail, I mentioned, has turned the corner. And in that traditional area, we have very significant mandates that we have won that are being tapered and are not yet reflected in AUM in the order of kind of $2 billion plus. And if you look overall at our business, our AUM is still up, 6% year-over-year with that – with very good performance that you noted. And in terms of industry position which has never been better of the top 5 hedge fund allocators, we were the only one with positive growth in 2016. We are number one and we are more than 2x than our next competitor in size. So I would sort of give you that overall picture.

That’s helpful. Thanks a lot.

Your next question will come from the line of Glenn Schorr, Evercore.

Thank you. Just a follow-up on energy, I wonder if you could either quantify or provide any color on its impact in both private equity and GSO. If I am someone that doesn’t think that’s going to repeat, I am just kind of looking for how much of an impact it had in the quarter? And maybe included in that, you could just give a reminder on overall money in the segment, maybe breaking down by bucket and how much dry powder you have dedicated to the sector? Thank you.

Sure, Glenn. In terms of – let’s start with exposure and I think either from you or someone else in the last quarter, we got that question and I answered. It’s about 10% of the firm overall in terms of AUM and it’s about 20% of the private equity in GSO segments in aggregate. And those percentages remain the case. Within that, obviously, we are very diversified by sector, upstream, midstream, power, renewables, and those have very different stories and reactions or non-reactions to commodity price movements. We also have private investments and public investments. So, it’s not a monolith. Things under – within the portfolio behave differently. In terms of what happened in the quarter, the punch line to your question is it was a relatively manageable impact on performance, even in those segments that were affected and a quite modest impact on ENI. So in private equity, on balance, it was actually sort of slightly positive or neutral contributor to ENI in the second quarter. Although relative to the degree of higher positive appreciation in our non-energy portfolio, it did have a slightly dilutive impact on the overall performance and returns. In GSO again, we are modestly more impacted on performance and ENI, but it was not material from an ENI standpoint to the overall scope of the firm. It’s important to note that all of the impacts were unrealized marks, not realized marks in either business and those marks were based not on company issues, but on commodity price fluctuation that we reflected appropriately. So, we feel good about the portfolio. We feel, in general, in terms of the cost basis, the breakevens, the quality of the assets, private equity in terms of the investments being un-levered or relatively lowly levered, and so forth. But look, that said, we are going to watch this and as commodity price fluctuate or stay at depressed levels, we will watch that carefully.

Glenn, we have got about $7 billion of dry powder in the energy funds, just to answer your last piece of question.

Across both private equity and GSO, but that’s really kind of energy-dedicated dry powder. There is other general pools of capital that are also available.

Excellent. Thank you.

Your next question will be from the line of Gerald O’Hara, Jefferies. Gerald O’Hara: Thanks. Maybe just one on dry powder, well, down modestly quarter-over-quarter for you all. It would be interesting to hear some thoughts on the share abundance as capital being raised across the industry and how it might impact the opportunities you said at current valuations and perhaps impact on future IRRs? Thank you.

Okay. Well, it’s Tony. There is – it’s obviously been a good fundraising cycle and particularly for private equity, there is a lot of capital that’s being raised and has been raised. And in general, there is just a whole lot capital sloshing around the world, looking for returns. And I think we are more impacted frankly by the aggregate in the public markets than the amount of private equity capital. Our business is to find needles in haystacks. That’s what we do. We are not really chasing public market values and we are not really that impacted by them. And our business is once we find the needle, it would have to be an asset into which we can intervene and change the course of EBITDA. So we create our own values so to speak as opposed to being slaves to the public market valuations. If you look at a lot of our investments, particularly in say private equity, you will see a lot of stuff with both no leverage, but they are not companies that trade, they are new build stuff. So in those things, we are getting in essentially at book value. So, our business is to find ways around the big trends and to buck those big trends and to disconnect our investors’ returns from the vasititudes of those megatrends that we can’t control. And we are still able to do that. And the activity – the high level of activity that we have had across our businesses in the first 6 months tells you that we are happy with what we are finding and I don’t see any reduction in IRRs versus what you have seen in the past. Gerald O’Hara: Fair enough. Thank you.

Your next question will come from the line of Brian Bedell, Deutsche Bank.

Alright, great. Thanks. Good morning, guys. Just back on infrastructure, maybe either Tony or Steve if you can talk about – or Michael talk about the dynamic of fundraising and deployment, I guess, when you go into the market to close, are you doing that with the intent of immediately deploying those assets or into investments or is there more of a lag? And I guess maybe just thinking about instead of a multiyear period, are you viewing the deployment pace over a multiyear period or do you see some opportunities that – where you can deploy that faster? And maybe in the context of that, how we can think about the growth fee outlook into 2018, given your infrastructure fund?

Yes. Okay. We are going to be in the deployment business right away. In fact, we are already having incoming opportunities. And we will find – if there’s an interesting deal on a rich-reward basis, we will find a way to do it. We have interested investors, frankly. We have had a lot of conversations. We are short of a fund close where you got to herd a lot of cats we got people that are ready to go now. So we will be able to do deals as they come. We will have, probably, as I mentioned, either later this year or early next year, an official close with a bunch of investors. And we will – but we will be up and running in the business, ready to put money out this year. In terms of – I don’t think it’s going to be the hugest impact of ‘18 because of the invest spending. And we are one of those businesses where you build the infrastructure, you build the team, that takes some of the investment. But once it’s there, this is very powerful.

Great. That’s good color. And then on – just on the – back on the retail question. You mentioned, obviously, a number of – I think, Joan, you went through 3 different distribution initiatives. Have you thought about partnering with traditional asset managers to the extent that they already have pretty vast distribution in lot of these areas and where you would bundle, say, sort of active product with some liquid, sort of juice to it, so to speak. Or is that an area that you don’t really – you don’t want to go into and you would rather just distribute on your own?

I think it’s a good question. I would say to date, we have been able to offer both liquid and illiquid. And actually, if you look at sales to date this year, it’s been heavily tilted towards liquid product and real estate and on the hedge fund side. So I will give you some sense of various pull. So we can weave together products that we have to create multi-asset solutions, and we do that already and we do it with drawdown products. In the Harrington example, we do it with both liquid and illiquid. I would say, we haven’t really heard of demand in the market for us to partner with someone else. And in this realm, if you look at our performance across all of our buckets, all of our strategies, it’s quite strong in every asset category. And – so I think we are quite comfortable with the products that we have now. And I don’t think we are limited in our distribution. So I will just give you also little color on what we have. So we have built out a wholesaling team. We have built out sales desk and full operations across processing, finance, and etcetera. We are building globally. And so I think we have a unique distribution system in retail versus any of our peers that has quite a bit of reach. And then, of course, we leverage already the big institutions, the global investment banks, private banks overseas, independent broker dealers, firms, larger firms, like Schwab’s, etcetera. So I think that’s going to serve us very well.

Brian, let me put some added color on that. Some of our distribution is constructed to actually harness existing distribution system, as Joan mentioned. And – but up against them, an interface flawlessly with them in terms of systems, training and everything else, where we train other people’s brokerage for example. Other aspects of the distribution system that we have, and Joan is building, are direct distribution, where you go direct to the client. Those are more rifle shot. They are not the mass-market, obviously. They tend to be bigger things. We would never really dependent on other people’s distribution for our product in replacement for ours. Because our – we feel we can do this really well, we want people really, really knowledgeable and well trained about our products, especially. Our products are specialty products, that’s kind of the definition of alternatives. And so I think we’re going to depend on our own distribution. However, I do think the big prize out there, that we have talked about in the past calls, is marrying our high – absolute-return, illiquid products with some sort of – it could be active, but probably passive, and packaging those in target date funds are something like the 401(k) market. And I think there are trillions of need for our products, as part of an investment solution. And that I think is a big price, and that is something that we are doing a lot of thinking about. Let me just put it that way.

That’s actually an interesting topic. I mean, just cracking that 401(k) market, obviously, with the liquidity that’s demanded is difficult. But I have often wondered to what extent you can actually get those types of products in that, and what you are saying, essentially, is through the target date vehicle, you may be able to actually sort of wedge into that market. Is that – am I hearing that correctly and is that?

Right.

Something near-term rather than longer term?

We are not – but when you say we may be a little wedge in the market, we would be part of an investment solution in a target date fund. I am not saying that we are going to manage the whole target date fund.

Absolutely, and that’s a huge asset class, obviously from those products.

Yes.

Okay. And then is it a near-term effort rather than a longer-term effort?

Well, it’s a near-term effort and a longer-term payoff.

Okay, thanks very much. Thank you.

Your final question will come from the line of Chris Shutler, William Blair.

Hi, guys. Good morning. On core+ real estate and core private equity, things are up to AUM of $17 billion and $5 billion, respectively. Can you just talk about how deployment opportunities are shaping up in each of those areas? And maybe give us a sense of what – how should we expect an average deployment year to look for both of those? Thanks.

Well, okay, they are different but – so let me generalize across the two. We are seeing an awful lot of interesting deployment opportunities in both. Now by definition, core private equity will be lumpier and more episodic because you are buying fewer bigger assets in the fund. So it’s very hard to do an average, I just – I don’t think it would mean much. You maybe have to assume something for your model, but I will let you work with less than on that. In core+ real estate, there’s a lot of granular assets, and that’s steadier, I would say that you have seen the deployment pace. And I don’t see any reason that, that changes radically. As the way – and by the way, the structure of those two funds is different too. I think you know that, but if you want Weston to take you through how the two work in terms of money raised, money deployed, one’s a drawdown fund, if you will, and one’s an open-ended fund where you get a queue of investors and then take the money as you find the deal, so there’s some differences there. But I will leave that – I will leave you to Weston on that one.

Fair enough. And then just quickly on the Logicor sale of $0.35 to $0.40 that Michael mentioned in DE. I just want to confirm that’s before the 15% hold back.

That’s correct.

Okay, thank you.

And at this time, I am showing no further questions in queue. I would like to turn the conference back over to Mr. Weston Tucker for any closing remarks.

Great, thanks, everyone for joining us today. And please follow up with me after the call if you have any questions.

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect. Have a great day.