Blackstone Inc. (BX) Q2 2019 Earnings Report, Transcript and Summary

A very good day, and welcome to the Blackstone Second Quarter 2019 Investor Call. [Operator Instructions]. I would also like to advise all parties this conference is being recorded. And now I would like to hand over to your host for today, Weston Tucker. Please go ahead, sir.

Great. Thanks, Mark. And good morning, and welcome to Blackstone's Second Quarter Conference Call. Joining today's call are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; Tony James, Executive Vice Chairman; Michael Chae, Chief Financial Officer; and Joan Solotar, Head of Private Wealth Solutions. Earlier this morning, we issued a press release and slide presentation which are available on our website.We expect to file our 10-Q report next month. I'd 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'll also refer to non-GAAP measures, and you'll find reconciliations in the press release on the Shareholders page of our website. Also note, that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any Blackstone fund. This audio cast 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 $647 million for the quarter. Distributable earnings were $709 million or $0.57 per common share, and we declared a dividend of $0.48 to be paid to holders of record as of July 29.With that, I'll turn the call over to Steve.

Good morning, and thank you for joining our call. The past few months have been a remarkable period for Blackstone, characterized by transformation and continued momentum. First from a business perspective. We continue to extend our leading investment platforms into new areas allowing us to offer our Limited Partners a broader array of products and solve more of their issues, and second in terms of transformation of our company, it became a Corporation on July 1.This marked one of the most significant decisions in Blackstone's 34 year history, and a key milestone in the evolution and institutionalization of the firm. As the largest firm, and the only one with leading businesses across the full alternative spectrum, we've established a truly unique position in our sector, which is in fact the best part of the massive $150 trillion plus global money-management industry.Alternatives have historically generated better returns than traditional investments, net of all fees combined with high safety of principal. This is a powerful value proposition and is why our segment of the market continues to experience rapid secular growth and increasing allocations to the top managers along with more attractive economics than any other part of the industry. Blackstone's ongoing transformation and the extension of our capabilities perfectly position us to benefit from these trends.When we started the firm in 1985, and in the early years, we offered only opportunistic private equity and real estate. Over time, we've expanded into complementary new areas. In many cases, moving down the risk return spectrum and opening up a broader addressable market in terms of capital raising and investment opportunities. Today, we offer our LPs over 50 distinct strategies and the entrepreneurial drive of our people, means we're constantly developing more.Our global franchise has never been stronger, and we have the confidence of both institutional and retail investors around the world. Our LPs entrusted us with $45 billion of inflows in the quarter, that's unprecedented. $45 billion of inflows in the quarter, and an extraordinary $151 billion over the past 12 months, an unprecedented amount for our sector, driving the firm up 24% in terms of AUM year-over-year to $545 billion. Every one of our businesses is growing. We also continue to successfully launch and scale new ones, which quickly become global leaders in their own right.Our infrastructure fund has grown to $14 billion, only a 1.5 years after we began fundraising. Thanks to the support of over 80 investors, making it one of the 3 largest infrastructure funds in the world. This is a remarkable achievement and speaks to the trust that global investors have in our firm. In addition to our ongoing business evolution, we've completed our corporate conversion and the market response, as you know, has been quite positive, which Michael will discuss further.As I stated last quarter, if we continue to grow as the reference institution in our industry and meaningfully expand our potential investment base through conversion, it's reasonable to assume we should close the valuation GAAP between our firm and other top companies. While successfully measured over the long term, it appears we are in the early stages of that rerating process. We are grateful that more public investors are viewing Blackstone as the enduring institution that we are, something our LPs have recognized for decades.One of the additional benefits of conversion is that we're now eligible for several of the market indices, which we expect to be added over the coming months. We think it makes sense for Blackstone to be widely ownable by all active and index managers. With the market cap of $54 billion, we are one of the 120 largest public companies in the United States. Our firm ranks in the top quartile in all key categories, including long-term revenue and earnings growth, profit margins and dividend yields. Blackstone is truly one of the leading public companies of the world. A high growth company in a giant market and this is becoming increasingly recognized.Thank you for joining the call today, and now I'll turn things over to Jon.

Thank you, Steve, and good morning, everyone. We can't emphasize enough the power of the Blackstone brand built by decades of strong performance. This leads to a deep reservoir of investor goodwill in the extraordinary growth that Steve described. And with the interest rates remaining low around the world, desire for our products is greater than ever. We reported capital inflows of just over $100 billion in both 2017 and 2018, and will achieve significantly more in 2019. This ultimately drives growth in earnings.Our fee-related earnings remained firmly on the path we outlined at our Investor Day while accrued performance revenue on the balance sheet is at its highest level in four years. With virtually no need to retain capital, we have the ability to make substantial payouts to our shareholders through dividends and share buybacks, which totaled nearly $900 million in the second quarter. We've largely completed the fundraising for our 4 flagship funds: Corporate private equity, global and European real estate and PE secondaries, which are now expected to reach $67 billion collectively. We've closed on $63 billion or 94% of these commitments, including $8.4 billion in the first close of our European real estate fund during the quarter.We had a final close as well for our secondaries fund, which reached $11 billion, and we've launched the investment periods for both secondaries and global real estate with the other 2 flagship funds to follow in the coming quarters. In addition to these strategies, we continue to expand how we serve our customers, transforming the firm as Steve put it with much greater breadth of product offerings.One of the most significant trends in our business is the growth in perpetual capital, up 43% year-over-year to $92 billion of AUM across 13 funds. Perpetual capital drives greater predictability of our earnings given the permanent nature of the assets as well as the fact that we receive performance revenues on a recurring basis without asset sales. Our real estate core+ platform is now $39 billion, up 24% year-over-year across four perpetual capital vehicles. These include our nontraded REIT, BREIT, which has grown to $8 billion in just over 2 years and raised $2 billion in the second quarter alone. BREIT is one of the firm's most exciting growth areas and illustrates the power of bringing Blackstone quality products to the retail channel.In fact, we expect 2019 to be a record year for retail fundraising at over $25 billion, 60% of which will come from bespoke products specifically designed for retail investors such as BREIT, our daily liquidity hedge fund and BAAM and our credit BDC. Other areas of the firm are seeing tremendous growth as well. Our secondaries business is up 50% year-over-year to $33 billion of AUM.In credit, we've successfully rebuilt the U.S. direct lending business that we sold last year. And it soon will exceed $12 billion of purchasing power. We also raised $4.5 billion for our new distressed energy fund in credit, one of the largest in the market for this strategy. And in our dedicated insurance solutions area, we added $5 billion of new mandates in the quarter, bringing total AUM from insurance clients to $58 billion. Of course, the firm's differentiated ability to raise capital always ties back to investment performance. Our long-term performance has been extraordinary, including 15% net returns annually in both our corporate and real estate private equity businesses for 30 years. Michael will discuss the key elements of our second quarter returns.Turning to investing. As with fundraising, our global scale puts us in a unique position to deploy. Last month, we agreed to acquire GLP's U.S. logistics portfolio for $19 billion, which represents the largest ever private real-estate transaction. We know this sector extremely well, having bought nearly 1 billion square feet of warehouses in the past decade. And with multiple pools of capital, with different mandates, in this case, our BREP opportunistic funds and BREIT, we were uniquely positioned to speak for the entire portfolio as a single cash buyer.We also agreed to privatize Merlin for GBP 6 billion, the second largest themed attractions business in the world behind Disney. We owned this company previously and very successfully in our BCP funds. We're now acquiring it in our core PE fund, targeting a longer-term hold. As with core+ and real estate, having a long-term vehicle was a critical differentiator, allowing us to team up with a high-quality strategic investor with a similar time horizon. Overall, our diversification into longer-term strategies, along with other pools of capital, gives us greater flexibility and power to invest and create value for our LPs.Despite the challenging investment environment, we deployed a record $56 billion over the past 12 months, including $18 billion in the second quarter alone and committed another $8 billion to pending deals. The firm is truly firing on all cylinders with terrific forward momentum.For shareholders, we've been striving to make our business easier to understand and own by simplifying our financial metrics, keeping our share count flat and converting to a Corporation. We remain totally focused on delivering outstanding results for all of our stakeholders.With that, I will turn things over to Michael.

Thanks, Jon, and good morning, everyone. I'll begin my remarks with details, as Steve mentioned, on our investor outreach around the conversion. I'll then review second quarter results and the outlook. Following our announcement in April, we embarked on an extensive roadshow over several weeks with a goal of introducing or reintroducing our firm to investors around the world. The schedule was exceptionally high-quality, and included over 100 institutions, more than half of which were new to the alternative sector and Blackstone and/or were materially restricted previously in owning P2Ps. These are investors with significant investment capacity with each, on average, managing over $100 billion of equity AUM.Reception and feedback were exceedingly positive. Investors clearly view Blackstone as the distinctive leader in a very attractive growth sector, and while our stock has reacted positively since our announcement, as Steve discussed, the majority of these investors couldn't own it directly until July 1. Further to that, we've now become eligible for several market indices, namely S&P Total Market, MSCI and CRSP. And we expect to be added to these in the fall.All of this taken together, we believe there is ample support for a continuation of our recent momentum. Moving to a discussion of our second quarter results, which were highlighted by continued robust inflows and progress toward our FRE targets as well as substantial capital return to our shareholders.Total AUM rose 24% year-over-year to a record $545 billion through the combination of $151 billion of gross inflows and $20 billion of market appreciation despite $38 billion of realizations in that time period. The earning AUM grew 16% year-over-year to $388 billion, and was up 10% sequentially from the first quarter with the launch of the investment period for our ninth global real estate fund.Management fee revenue in the second quarter increased 17% year-over-year to $844 million, also a record for the firm. Fee related earnings rose 24% to $422 million. For the last 12 months, FRE increased to $1.6 billion or $1.31 per share, up 15% year-over-year and our forward momentum is strong. Distributable earnings were $709 million for the quarter or $0.57 per share, up slightly year-over-year, driven by the strong growth in FRE.Net realizations declined moderately from the prior year, but rose sharply from the first quarter, which as we discussed on the last call, was impacted by the market turbulence late in 2018. Realizations in the second quarter of 2019 saw a healthy recovery totaling $10.6 billion, including a mix of public and private sales. For example, in private equity, we completed the sale of the Cloverleaf Cold Storage business at a nearly 3x multiple of invested capital after a little more than one year of ownership.And in real estate, we sold 2 blocks of Invitation Home shares, another highly successful and large investment for the firm, and still remain the largest shareholder. Turning to investment performance, which is reflective of positive underlying fundamentals, although certain strategies were affected by discrete factors. In real estate, the BREP opportunistic funds had another strong quarter appreciating 4.4% driven by strong performance in the private holdings as well as significant gains in the public holdings. In private equity, the corporate PE funds appreciated 0.7% in the quarter with steady underlying performance overall, partly offset by declines in certain upstream energy positions and 1 large public holding.In our secondaries area, it's worth noting that the reporting timeline of the underlying investments, which are interest in other private equity funds result in valuations that are on a 2-quarter lag. As such the decline in SP second quarter returns are reflective of the market turbulence that occurred in the calendar fourth quarter of 2018, and therefore, we'd expect a resumption of positive performance in the third quarter. In credit, the performing credit funds delivered a strong 3.7% gross return in the quarter while the distressed cluster declined 2.1%, driven entirely by decreases in certain upstream energy positions. Finally, in hedge fund solutions, BAAM's composite rose 2.0% gross and 5.4% year-to-date with only of 1/5 the volatility of the S&P delivering well on BAAM's strategy.Overall fund appreciation drove $349 million of net accrued performance revenues in the quarter, lifting the balance sheet receivable to over $4 billion, up 5% quarter-over-quarter. Fund appreciation, combined with our sustained record investment pace, drove performance revenue AUM in the ground to a record $227 billion, up 15% year-over-year.Moving to the FRE outlook. We continue the march toward our previously outlined targets of greater than $1.70 per share in 2020 and $2 per share thereafter. As time passes, the variables impacting this view continue to narrow and our degree of confidence becomes greater. In terms of key variables, with respect to our 4 flagship funds, the dollars are essentially raised as Jon discussed. And with respect to the timing of these funds coming online, we've now launched the investment period for 2 of the funds, including PE secondaries, which is currently earning full fees and global real estate, which, as I mentioned, is now in its fee holiday and will earn full fees in October. The remaining two funds, corporate private equity and European real estate, will be lit up over the coming quarters depending on the deployment pace and the predecessor funds and are then subject to four month fee holidays.I'll close my remarks today with an update on our share repurchase strategy. We repurchased 7 million shares in the open market during the quarter, bringing us to 24.5 million since launching the current program. We've achieved our target of 0 dilution despite the firm's continued robust growth and expansion. Today, we're renewing the program and increasing the remaining authorization from approximately $100 million to $1 billion, reflective of the firm's considerable financial strength and position.Alongside our attractive dividend policy, we think this action further enhances what is already a compelling value proposition. Indeed, over the past three years, we've returned over $9 billion to our shareholders through dividends and repurchases. In the context of continuing to deliver attractive total return to shareholders, as we move into the back half of 2019, multiple catalysts are unfolding. First, the ongoing catalyst of conversion; and second, the catalyst of FRE accelerating higher with a material stepup in 2020 coming into greater focus.The firm's momentum is significant, and the outlook is very bright. With that, we thank you for joining the call, and would like to open it up now for questions.

[Operator Instructions]. Your first question comes from the line of Alex Blostein, Goldman Sachs.

Michael, first question for you around the FRE dynamic in the quarter and the forward outlook, obviously fundraising dynamics are super strong. The FRE margin in the quarter, looks like it was around 49%, that's in the higher end, I think, so maybe just spend a couple of minutes on how you guys are thinking on the trajectory of the margin going forward? What are some sort of the puts and takes? And whether the strong kind of fundraising momentum may ultimately result in a higher run rate FRE margin than what you previously thought?

Sure, Alex. Thank you. First as we've said before and you know, it's a -- we think it's more instructed to look at margins over the year-to-date or annual periods as there is variability from quarter-to-quarter and into a year. So on that basis, I'd look at the first half margins, which were about 47%, which are up about 100 basis points, just over 100 basis points versus full year 2018, which we're at about 46%. So we expect some drag in the third quarter from a full quarter of BREP VIII's fee holiday from a margin standpoint along with other puts and takes and there are many. But overall, for the second half of the year, we expect margins to resemble the first half, and that sort of margin expansion for the full year implied by that is in line with sort of that longer-term sort of trajectory that we've talked a lot about. And in terms of the drivers of that, there are a number of sort of micro factors but broadly speaking, it's a function of businesses including [indiscernible] scaling and our focusing on optimizing and management comp and cost structure is part of that and across the firm. And you can see that especially in the PE segment margins, which enjoyed a very good growth and that's -- the drivers of that are SP, the infrastructure funds, our capital markets business, a number of factors where the management fee revenue was growing and we're seeing flow through. But again, I would point you to kind of the year-to-date period compared to the full year of last year and think about that as sort of the full year trajectory we're on.

Next question comes from the line of Craig Siegenthaler, Crédit Suisse.

I wanted to get your updated thoughts on the prospect of moving a very small amount of the voting rights into the flow, which will qualify for the Russell 1000 Index next June, which as you know has a pretty large following among the list.

Our plan is to stick with the structure that's worked for us for 30-plus years, both for our Limited Partners and for the last 12 years, for our public shareholders. We think it's the right long-term governance structure for the company and to maximize long-term value. We do think we have seen with MSCI and others in openness to companies that have dual share classes. And if you look at the performance of these companies over time, they've actually outperformed, and we are hopeful that some of these other indices will evaluate that and move to including us in the indices. We're one of the, if not the largest, market cap company out there, that's not in some of these indices. So we're going to stick with our governance strategy and work, hopefully, to convince these indices and make sense to include us.

Next question comes from the line of Michael Cyprys, Morgan Stanley.

Just curious how you're thinking about the potential for tokenization of private assets. If one could use distributed ledger technology to tokenize and divide up private assets, particularly real estate, what sort of impact could that have on the asset class? What sort of hurdles do you see that need to be overcome before any sort of widespread adoption? And can you talk about how you're experimenting with this today?

Yes, I think when you get to things like tokenization, what you need are assets that are very similar and don't have -- and have the ability to be more commoditized. When you look at larger scale assets, particularly in real estate, what you see is, it's very difficult to turn those into some sort of computer ledger thing because the assets are so different in their nature. We've seen this with some of the online venues that try to buy and sell real estate. As you get up and scale, it gets harder and harder. I think in industries like housing, where it's easier to do it, I think you could see some real penetration over time. I think in more bespoke commercial real estate assets that's tough and it gets even more complicated if you think about companies in private equity. So we don't really see that as a factor in the near term.

Next question comes from the line of Glenn Schorr, Evercore ISI.

Two quickies on performance. One is, not used to seeing a negative number and particular in up market, in Strategic Partners, just curious if there was anything unique there in the quarter? And then maybe just an overall comment on performance. Your numbers are really good, obviously long-term really good relative to public indices, but curious where you think LP expectations are relative to the opportunities in the market? Obviously, you're raising a ton of money, so that might be the answer but...

So I would just say, Michael mentioned it on SP, what you're really looking at is a time lag because you're getting the reports from the underlying managers from Q4, what you're seeing is those results. The Q1 results, which one would expect would be much stronger, will show up in Q3. So I think SP is a unique factor. In terms of the rest of the performance, when we look at the portfolio companies in terms of revenue and EBITDA growth, what we saw in the quarter was very similar to what we've seen in the last couple of quarters. We did have, I would say a couple of isolated factors around our upstream companies, one large public in our private equity area as well. And so I wouldn't want to read too much into it. And when LPs, think about this, they tend not to look at our performance over a quarter. They're looking at our performance within that fund over years and our performance obviously over decades. So in some of these areas, I view this a little bit more of a blip and I wouldn't read too much into it.

Okay. If I could squeeze one in on infrastructure. I know it's early days, you'd have raised a bunch of money, but it's hard to find deployment opportunities. I'm curious on your thoughts on just overall opportunities out there to deploy? And then just more timing.

Yes. I would say on infrastructure, obviously, the decline in interest rates, a bit like real estate in the U.S., has made it more challenging to deploy capital so that's a fair question. I think the good news for us is we're operating at a very large scale, and we have the ability to intervene in assets. And so we've done a couple of big deals in the port space, in the midstream space really out of the box. We have a couple of other large opportunities we're looking at. It is a competitive space. But just like everything we're doing today, GLP and Merlin are examples, by playing where the air is thinner, which is really the strength of our infrastructure business, we've got a better competitive dynamic.

Next question comes from the line of Bill Katz, Citi.

All right just coming back to capital management for a moment. I was sort of wondering know that you are a C Corp and just given the type of investors you're meeting with, is there any refinement in your dividend policy and I'm sort of curious if you were to potentially think about shifting to an FRE payout with the year-end top off to maybe make it a more durable dividend policy?

Bill, it's Michael. I think we remain committed to our capital policy. We think it's worked well. We made a simple change in the structure that we think has had and will have great benefits in terms of making us easier to own. As we did our roadshow and as we continue to talk to investors, I would not say we heard an undue focus one way or another and there were different views around our policy. But overall, I think broad support for how we manage the business and including that. So we're committed to it.

Next question comes from the line of Robert Lee, KBW.

I've got really a question kind of on the realization outlook and your really kind of more intermediate, longer term. So clearly, a lot of capital in the ground and then if I recall at the Investor Day, you kind of put out a number that at that point cap on the ground you thought could ultimately generate $10 billion of realizations or performance fees. But can you maybe give us a sense of how your capital on the ground is kind of tracking versus prior period funds? I mean is this performance kind of in line with what you've historically had at this stage of different funds life cycle? Is it running better than that? I mean, just some kind of frame work would be helpful.

I would say, if you look at the numbers I think our deployment pace is in line with historic levels. It's possible during periods of dislocation we deploy capital after that post crisis faster. There were periods during the crisis where things slowed down. It feels to us and you can look in our -- in the report that shows the deployment of each of these funds, we're generally sort of on pace and performance wise, you can see the net returns across the funds in line with what we've done historically. So what you're seeing now is just a larger volume of capital deployed. And obviously, Steve touched on against a broader array of asset classes. And so areas where you're seeing -- where the targeted returns are lower. But in the traditional higher octane drawdown funds, I would say in line with historic pace.

Next question comes from the line of Michael Carrier, Bank of America Merrill Lynch.

All right. The fundraising and FRE growth, that's been great. Realizations have been a bit more muted for you guys in the industry. You mentioned the growing incentive AUM, the net accrued, so it seems like the opportunity is meaningful going forward. I just wanted to get your view on the outlook. Has anything changed in terms of the exit channels? Or has it been more just about the market volatility that we've seen over the past few quarters? It has just been may be delaying some of the activity?

The market, we obviously had the market dislocation in Q4 which slowed things down. A lot of this, as you know, it is more episodic, a little lumpier because of you waiting for a particular company or asset to mature. And so it's hard to pinpoint when something's going to happen. I would say market conditions generally for exit are fine. It's really more about, is it the right time for our companies? We have this sort of buy-it, fix-it, sell-it model and sometimes you're a midstream in that process. So these things happen, when they do happen, you can see, obviously, meaningful increases in DE as a result. I think the best indicator is the net accrued carry on the balance sheet, which is now at a level, a 4-year high and that's a very good forward indicator. We can't tell you which quarter it will happen, but it should happen over time given the size sort of that's accrued in that storehouse of value.

Next question comes from the line of Ken Worthington, JPMorgan.

Really thinking about the outlook for growth in the insurance business. With the interest rates having risen in recent years but falling over the last 8 months or so, how might the change in the interest rate outlook impact your ability to grow insurance through acquisition and consolidation either directly or via FGL as we look at, say, over the next year? And if acquisition seem less likely, can you help better frame the strategy for organic growth in the insurance business?

Yes, Kenn. It's Tony James. I'll take that one. I would say the decline in rates is encoraging encouraging insurance companies to sell back books because they're looking at their ability to reinvest the proceeds and meet the liabilities and it's challenged. So that's an opportunity for us that we think will cause considerable increases in the amount of assets insurance for sale. For us, we're looking at a robust pipeline of acquisitions right now both within F&G and away from F&G. So I'm quite optimistic that the conditions are favorable for our business.

Okay. Great. And then on the organic side?

Well on the organics -- well, I'm not going to talk about F&G here but that's still a public company, but suffice to say that we are quite pleased with what's happening at F&G on the organic side. Organic growth has increased. They have the capability to do more organic growth and also to do some acquisitions. And as you know, they've got a rating upgrade, which increases their appeal as a counterparty on both fronts.

The next question comes from the line of Patrick Davitt, Autonomous.

It looks like the core+ performance fee which you included fearing that's came in weaker again, down quite a bit year-over-year. Could you update us on how to think about that volatility and maybe how to think about it becoming more a consistent generator of fees in that line?

Patrick, not really volatility and there's great momentum there. It's really an entry year pacing. As you know, the realized performance revenues typically come in BPP on an anniversary of prior investment, it's generally over a 3-year time period. And so we have real line of sight on when during the year those will crystallize. And then more broadly, BREIT, or nontraded REIT, which as Jon mentioned, is a terrific platform with great growth. That is a -- it's $8 billion today versus about $3 billion a year ago. Those incentive fees crystallize in the fourth quarter. So you combine those two factors and I think the second half of the year and the fourth quarter in particular, you'll see that's the sort of waiting within the year of when the crystallization occurs. So I would not look at any given quarter in the year-over-year comparison.

Next question comes from the line of Gerald O'Hara, Jefferies.

Jon, I think you talked a little bit about sort of the successful rebuild of the direct lending platform and the [indiscernible] a $12 billion of purchasing power, perhaps you could give a little bit more color there just as to where you see the sizing of that platform kind of going and perhaps the pacing or timing of that growth, if possible?

Thanks, Gerald. We made a big strategic decision a little over a year ago to exit our partnership. Not many firms would voluntarily choose to give up $20 billion of AUM and have confidence they could rebuild it. But we really wanted to control our own destiny in this space. As you pointed out, we've had a lot of success raising money. First with SMAs with some large institutional investors and now increasingly in this BDC. I think the potential here for greater scale is significant. We've now raised a large amount of money. It's going to take a couple of years to deploy that money. But as we do that, we will continually raise money and this does have the potential like a BREIT to grow to be a very large scale business. And GSO is somewhat unique in its ability to deploy capital with a number of folks out there originating loans and the number of relationships we have. So I think we're in early stage of that rebuild. I think deployment now is key as we continue to accelerate in that area, you'll see more fundraising and this should grow to be quite big.

Next question comes from the line of Devin Ryan, JMP Securities.

Question on retail fundraising. Obviously, you've had great momentum in BREIT. And so I guess there just trying to think about capacity or any constraints from a size perspective, and then just a possible, more broadly, what other products are going to be important to the growth beyond the $25 billion in 2019?

Well, I think very importantly we've been focused on building out bespoke structure that are open ended and where we have a lot of capacity. So even in the quarter, where we raised almost $7 billion, more than 70% of that was from retail bespoke structures and frankly although, obviously, we had a great overall firm raise for the private equity fund, we did not take a lot of that capacity. So I wouldn't think of it is as, oh, they raised a lot of flagship funds, it's kind of done. I think more importantly, the concentration in portfolios on the retail side is de minimus. You still are well below 5% in both a credited and across qualified purchasers who are continuing to grow globally. So it still feels like very early innings to us. And if you think just even last year versus this year, last year where we raised around $15 billion, this year we'll be somewhere in the neighborhood of $25 billion. I think they're -- it's very early innings.

I would just add that this is really where the power of the brand matters. Raising retail capital, the recognition among financial advisors and their customers of Blackstone, both here in the U.S. and around the world, gives us an edge that's hard to match. And so we think, as Joan pointed out early days, if you look at individual investors, even very wealthy individual investors, they have low single-digit percentage exposure to alternatives. They're facing the same challenges as institutions and insurance companies and they want more of what we offer and by doing what Joan's team has done which is create products that work specifically for retail customers, you build tremendous momentum and BREIT's leading the charge. We're obviously working on some other ideas that over time, hopefully, can have similar success.

I just want to add one thing which I emphasized in prior quarters. We're really running this like a business rather than a sales organization. So also emphasizing that we've invested quite a lot in education and technology and lots of folks in the fields, investor services, data analytics. Something that we can leverage across a lot of products that makes us unique and really has created a wide moat.

Next question comes from the line of Brian Bedell, Deutsche Bank.

Just a two-part question. Just one, if you could just detail the amount of principal investment income attributed to treasury sales in the quarter and just talk about your strategy there in terms of filling treasuries that are on your balance sheet. And then secondly getting back to the FRE build, it looks like you might have a potential to hit that $2 run rate at some time during 2020, just trying to get a sort of a sense. Obviously, it's hard to predict future fundraising that for funds that are not yet in plan. But Michael maybe, if you could just go over what you have in plan for specific fundraisers in the second half and obviously imagine the fee holiday for BREP VIII in 3Q. So I'm just trying to get a sort of better sense of what could come in that FRE run rate in 4Q as the starting point into 2020?

Sure, Brian. A lot of content in that question. So I think first on the principal investment income, the backdrop, as I said in my remarks, is good realization activity in the quarter which -- and that's reflected there. And we did also realize some gains in our treasury portfolio. We did it principally with the view of the head of conversion, timing it to allow us to maximize the efficiencies of those positions from a tax standpoint as a P2P. So that was sensible for us to do. And if comprised, about half of the principal investment income in the quarter. If you exclude that piece, I'd say the ratio of investment income to performance revenues was basically in line with prior quarters, around 20%.I think on the run rating question, I'll just simply say, we'll refer to what we've been saying pretty constantly since Investor Day and the last couple of quarters the confidence around better than $1.70 next year and $2 thereafter. And the fundraising for the second half of the year, which I think is really slightly different question. Obviously, we are delighted that about 93% of those 4 so-called super-cycle funds are raised, but we still have a lot of action in the second half in other areas whether it's in our BREDS area, the beginning as we talked about our life sciences fund raise, all about really the 2020 events continuing on the European direct lending fund raise, we've had some closes there but we expect to have even more significant closes in the second half. We are underway on our strategy capital fund raise within BAAM. So a number of things across the board including, as always, our perpetual capital fundraisers that are a continuous process.

And then BREP VIII coming into the [indiscernible] AUM in 4Q, is that correct?

It's already in, it went in the second quarter and is on fee holiday but is in...

Yes, I think October, it starts.

For fee generate?

Yes.

Your next question comes from the line of Chris Kotowski, Oppenheimer.

Actually, he just addressed my question.

Next question come from the line of Patrick Davitt, Autonomous.

I have a broader question, I guess, on any update to your views on trade war impact to the portfolio and/or investment trajectory? Not just China, because it feels like it's expanded kind of beyond that at this point?

So we have been seeing globally a slowdown in trade. And I would say a slowdown in the industrial economy and some of the commodities and energy have been hit as well and that's true in the U.S, Europe and China. So I think that's a factor and obviously central banks have been responding by lowering rates or signaling their lowering rates. I think the good news for us is we don't have that many businesses in the global supply chain either retailers or big exporters. So the impact there directly to our portfolio is not quite as significant. The real question is, will it leak more broadly into the economy or into markets? So far, the more dovish tone from central banks has outweighed the slow down from trade. So we are seeing it. But to us, so far, not a really big impact.

Next question comes from the line of Bill Katz. The final question is from Bill from Citi.

So I think you may have answered this indirectly through some of your commentary about some of the portfolio revenue and EBITDA and may be even that last comment. I was sort of wondering if you could step back a little bit and talk about where you think we are in the credit cycle? And how the firm is positioned both to weather or any kind of concern as was potentially accelerating kind of deployment?

Well Bill, I would say I know there's a lot of concern about -- there about credit markets and leverage loans. But when we look at new deals getting done, the amount of equity as a percent of the capital structure has continued to go up. There's been a modest increase in debt-to-EBITDA in the market. But when you look aggregately, we generally think credit conditions have been balanced. We don't see a lot of accesses out there. When you look in the leverage loan market, default rates are near record lows, coverage is as strong as it's been since the financial crisis. So I think the memory of what happened in 2008 and '09 has impacted market participants and regulators. And so we see a fair amount of discipline out there and we are not seeing things -- anything close to what we saw in the precrisis era. And so obviously, if the economy slows down sharply, there would be an impact to credit. But we think overall, the credit markets are healthy and we think the spread you get paid to be a senior lender in leverage loans is pretty good risk return, and we're feeling very good about our CLO portfolio in the outlook in that space. So I'd say we generally have a more positive view on the leverage loan market maybe than the market generally.

Thank you. We have no further questions. I will now turn the call back over to Weston Tucker for closing remarks.

Great. Thanks, everyone for joining us this morning, and please follow up with me with any questions.

Thank you. That concludes the conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of the day.