Blackstone Inc. (BX) Q3 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Blackstone Third Quarter 2014 Investor Call. My name is Lisa and I will be your operator for today. At this time all participants are listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Ms. Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. Please proceed ma'am.

Thanks Lisa. Good morning, everyone. Welcome to Blackstone's third quarter 2014 conference call. So I'm joined today by Steve Schwarzman, Chairman and CEO; Tony James; President and Chief Operating Officer; Laurence Tosi, CFO and Weston Tucker, Head of IR. Earlier this morning we issued our press release and slide presentation illustrating our results which are available on the Web site. We expect to file the 10-Q in the next few weeks. So I'd like to remind you that the call may include forward-looking statements, which are uncertain and outside of the firm's control. And actual results may differ materially. After a discussion of some of the risks, please see the Risk Factor section of our 10-K. We don't undertake any duty to update forward-looking statements. We will refer to non-GAAP measures on the call and you could find the reconciliations in our press release. I'd also like to remind you that nothing on this call constitutes and offer to sell or solicitation of an offer to purchase an interest in any of our funds. The audiocast is copyrighted and can't be duplicated, reproduced or rebroadcast without consent. So quick recap of our results. We reported record third quarter economic net income or ENI of $0.66 that's up from $0.56 in last year's third quarter and it was driven by both higher performance and management fees. Distributable earnings of $672 million or $0.53 per common unit were also a third quarter and more than doubled last year's third quarter and of that amount we will be paying a distribution of $0.44 per unit to shareholders of record as of October 27. And with that, I will turn it over to Steve Schwarzman.

Good morning and thank you for joining our call or maybe not such a good morning depending upon what you own in the markets today. Blackstone, however, has had a terrific quarter, which was a record third quarter for ENI, cash earnings and assets under management, in fact every major area, investment performance, capital raising, investment activity levels, realization, the firm is producing record or near record results. Our investment performance continues to significantly outperform the public markets. Over the past 12 months, we have created $35 billion in total appreciation across our firm, staggering number. Even in the third quarter, most of our funds delivered returns that were multiples of their comparable market indices. Our real estate funds were up 6% for the quarter, 28% for the past year. And our private equity fund were up 4% overall for the quarter, 28% for the prior year. Our credit to drawdown funds as Tony indicated earlier were up between 8% and 15% gross for the quarter. The stock market barely went up. And 30% to 34% for the year, altogether this is really stunning performance. This performance along with strong demand for our alternative products continues to drive significant capital inflows to the firms. Again, it's a positive secular backdrop of limited partner investors allocating more to alternatives, which I think we told you in prior calls was going to happen. And also reducing the number of managers, they do business with which we also indicated we thought would happen. Blackstone is, I believe best positioned firm to capturing grow market share and that's occurring. We are doing this in all of our business. As our global investing platforms have become more diversified, we continually have new funds in the market and our capital inflows are no longer the step…

Okay. Thank you, Steve. And thank you everyone for joining the call. The one way takeaway we want to leave investors with today is that while market movements are by their very nature temporary, the momentum of Blackstone's performance is not. In the third quarter, the S&P saw volatility and a peak trough value differential 5.3% similar to the volatility you have seen in the fourth quarter to-date. It still ended up largely flat on low growth and earnings for the next companies. Against this rather lackluster backdrop, Blackstone produced record third quarter in year-to-date earnings while posting above market fund performance in almost all of our investing businesses. The key to Blackstone lies not in short term public market fluctuations but in longer term trends like the availability of credit, the mispricing of liquidity, bank downsizing, regional capital constraints, supply and demand imbalances, strategic opportunities, lack of new construction, asset price devaluation and operating under performance. These are operating in risk drivers that make up Blackstone's expertise not public market metrics. The 30% returns across private equity real estate and credit funds over the last 12 months reflects strong underlying portfolio company and asset performances Steve outlined. These are some of the best fundamentals in operating performances we have seen across these asset classes. Similarly, BAAM outperforms most in difficult markets while also maintaining 1/3rd of the volatile to the S&P which is why that business is seeing both record inflows of $12 billion over the last 12 months while outpacing the broader market in returns year-to-date. More than anyone, our fund investors understand and appreciate the long cycle benefits of investing with Blackstone. Over the last year, we had record organic inflows of $55 billion. But perhaps most interesting is that 65% of that amount or almost $36…

(Operator Instructions) Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed.

Hey, thanks. Good morning. First on BCP VII, I'm just wondering did any of the recent market weakness has any driver in terms of the timing, starting to raise that fund here in the fourth quarter just given improving asset best valuation broadly here?

No, no. This is Steve. I would say absolutely not for that. We have kind of a strong investment rate and when it's time to raise funds typically as you know get around 75%, invested, you go out to market we are approaching that. And so there is nothing other than normal course in that. One of the interesting things, trend what's going on as opposed to several years ago was the largest as funds are becoming much more popular if you will but they had been. So that's a good sign for that fund raising. That's across the board, so that's a phenomenon not just involving Blackstone.

Target funds and alternatives also, alternatives in general are growing as part of LP's portfolio.

Thank you.

Your next question comes from the line of Bill Katz of Citi. Please proceed.

Okay. Thanks very much for taking the question. Just two unrelated questions. The first question I have is, Steve you mentioned remarks that your flexibility to exit and selection, specifically on private equity deals and sort of finding some good underlining rate of return both levered and unlevered. I guess the question that I think affected the growth and your stock in some degrees, how you are thinking about funding availability given the fact that credit spreads have backed up a little and some banks have been highlighting, the risking is in the lever loan market, is there anything about just little financing growth from here?

My own sense is, Tony gave his view, its – things cycle a bit right in terms of the availability of credit. We haven't been seeing that this is a problem and we may have a somewhat viewing its credit portfolio or the types of transactions we were doing. In our model, private equity availability of capital is most important. Criteria deposit of money goes up and down a little bit it doesn't affect the return too much quite surprisingly. So at the momentum, we haven't really experienced what you are describing.

Bill, I will add two things. First of all, as I said many times before but I just want to remind the audience here. Hot credit markets tend to be difficult market for us to earn high returns on new investments. So we don't – if the credit market is cooled off, private equity we would welcome this. Secondly, we have been shying away from maximizing leverage in private equity for some time just feeling there is just too much credit available that leveraging the company is too heavily. I think Steve mentioned we look at what real driver of our investing is unlevered returns and they have to get to the levels. And then we used credit markets to enhance that and magnify it. But, they have gone overboard, so a lot of what we have been doing specifically investment in investing in private equity have been growth investments. And I mentioned on the press called energy investments where we are actually going on and finding hydrocarbons or building generation facility so on and so forth which are not particularly credit market dependent and not also equity market or any else dependent. So we don't – we are not worried, I guess.

I think one other thing is Blackstone taking this group is, in most years the largest generator of fees to the financial community in the world. And so if there is credit allocated, we tend to be well-positioned to get that credit and also from memory, I don't know that throughout our whole country real estate, private equity and other types of vesting that we have ever loss money or any bank in the firms history. And this type of positioning in terms of protecting the banking system we borrow money as well as being historically from the top fee payers in the world really positioned this very well. And Tony said he is not concerned about – in effect the difficulty of our money – when times are tough borrowing generally prices go down. And then there is a cycle where credit improves and if you can buy things when those prices go down. You always get wonderful vintage returns just logical. So we don't look at any of this as a problem in a way it's a competitive advantage for the firm.

Thank you for the perspective. My second question unrelated, you mentioned in your press release you are having some good success in sort of European retail funds, can you talk a little bit about how you see that opportunity over next several years. I think you maybe if you can answer in a prism of either product opportunity or incremental distribution relationships?

Okay, LT…

I think though you are referring to the comment in the BAAM portion where we were talking about the usage funds that we released in Europe.

Correct.

Yes. So it's two things at play. First is, BAAM has been hard at work for several years at different ways that they can create customized or tailored versions of their products and risk exposures for the retail audience. The launch of our first ever usage fund in Europe is an extension of that so on a macro basis we are talking about addressing retail with retail tailored products within BAAM and more recently on putting out the usage structure. There are other funds at Blackstone in other businesses that are more liquid that will benefit from a usage type structure that we can then offer to that European retail base and that's some of the beauty of having technology or the learning if you will fund by fund, we can pass that on to the other funds as we offer. So it's another way of accessing that market. The usage structures are very popular and dominate the high net worth channels in Europe and the ability of BAAM frankly over a couple of years to tailor to that audience is really great growth opportunity.

Okay. Thank you.

Your next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed. Michael Kim - Sandler O'Neill Hey, guys. Good morning. So my question as to do with sort of the out size growth that you talked about coming from newer strategies that you brought to market over the last few years. Just wondering how you are thinking about sort of product development broadly speaking these days going forward. And then related to that as these new strategies continue to season, what's the dynamic between sort of letting incremental revenues fall to the bottom line versus continuing to reinvest in the business as that cycle sort of plays for you?

Well, just in terms of developing new products, we actually have a very good procedure. Here we have once a year strategic planning sessions for each of our four major businesses we represent. And at that meeting each group brings in two to three new ideas, ways that we can serve them best and its better generate high returns which tends to be in effect package as a new product. And then we debate among management committee members group, as to which one as best upside for our investors and how executable that is and depending upon the ease of introduction we either do one of them in the years. And so when there is something really good to do or if it’s really something terrific two of them will do two of them as long as we have the human capital to execute. And it's a wonderful way to run the business because it gives younger people developing talents, the opportunity with supervision to run these new businesses. So we have a steady stream of platform, 10 years some of us like inventing going through a number, it's a system. And in terms of the second part of your question, we don't want for financial resources to prosecute growth strategies at the firm, other words there is something terrific to do, we will do it. Because as you know, markets are somewhat fragile, there is a moment for different strategies and our job is to hit that moment where we can generate really outsized returns to our clients and our investors. So we don't hesitate to spend whatever it takes standup any new product if it’s really terrific. So it's simple way we do things.

Michael, let me just say in general. We have never had more new products than we have now. And the new products we have, have never had bigger – has more opportunity to be huge. So more run way ahead of them. We are talking about regarding something that's niche and that is what it is. We are talking about things which could be huge even in the scheme of Blackstone. So I think we got the richest, biggest, longest term strongest new products that we have ever had. Yes, there is a lag. And we lose money for the first few years in new product typically and use that investment to flow through the P&L. So then the future has to come. Michael Kim - Sandler O'Neill Great. That's helpful. Thanks for taking my question.

Your next question comes from the line of Glenn Schorr of ISI. Please proceed.

Hi. Thanks very much. Two quickies. One is, fourth quarter is always or historically has been a very good performance peak quarter for you all and performance over the last 12 months has been excellent as you pointed out. How much does the volatility that we have seen in that forward dent what should have been really good expectations for performance fees, if any color around how we should think about that fourth quarter would be great.

Glenn, its LT. Couple of things. You are correct. I mean typically the fourth quarter for us, we will just talk about locked in fee growth and deal activity tends to be busy as there is some seasonality to our business. We tend to be about 28% to 30% of a full year fee related activities during the fourth quarter that's been true for several years. By helping these short time market fluctuations, will then that with respect to performance fees and the performance quarter-to-date, we saw some volatility in the third quarter, it turned out to be a great quarter. We will just have to wait and see.

No problem. Another answerable one. Curious on, how you think about the potential of a buyback in the context of great growth, great performance, you have been vocal enough that you think the stock is cheap, so do I. Yet, you are going to manage the fact that – there is my ask, is the share count each quarter has been up a little bit year-on-year nothing serial, but just pops the mind.

Pops to our mind too. And we actually think that including the stock is pretty good but as far as the industry but we haven't made any decisions.

I think our liquidity equals pretty close to the liquidity of the whole rest of the industry. So in that sense, it’s pretty close to that. So we think if we have the liquidity, I think our evaluations would surprise you. But, I often turn out to be right is sort of really like what we are thinking.

I think Glenn, you are raising a good point. The free float now is about $15 billion or so and over the time we expect the whole sector free float will move up into more mature territory. So I think it's just following the path of other financial services sub-sectors when they were born and became more mature like you saw with the full brokerage industry. But as Steve mentioned, relative to the rest of the group I think our – if you look at our average daily trading volumes, it equals more than pretty much everyone else combined. There seems to be a good liquidity.

All right. Thanks very much.

Your next question comes from the line of Patrick Davitt with Autonomous. Please proceed.

Hi. Good morning. Thanks for taking my question. Want to focus a little bit on energy exposure and oil in particularly. And how do you think or how we should think about $80 oil or even lower flowing through private marks or if you can think that much of an issue. And secondarily, does the collapse in oil price change your view on that niche is kind of a major growth engine for your business?

I don't think we think the lower oil price will have a very big impact on our marks. There is some companies we still own that are depend on oil almost particularly Cosmos trades publicly on stock market. So you will know what that marks see what happens to the stock price. With respect to a lot our private oil oriented asset, most of them have been sold frankly and lately we have been mostly buying gas, figuring gas was near or low ebb and oil was pretty high. That view has been pretty accurate. So I'm not – and then in general lower energy cost and lower feedstock costs go in for a lot of our companies actually – it’s helpful for margins. And so, how all that plays through on balance, I'm not even sure it’s negative at all. But, I think, I say I'm not sure. And dislocation in energy business, we think this is a temporary dislocation for oil price. We think that our long-term view of oil price is really hasn't changed. Our long-term view of energy price was below most of the price levels in the last two years. And it's probably a bit above today's spot price. But, we review that periodically, our investments that we have been made in energy will be quite successful and oil prices even stay at those levels.

Great. Thanks.

Your next question comes from the line of Robert Lee with KBW. Please proceed.

Thank you. And good morning. You maybe update us on a so many fund raisers sometimes it’s tracked, where things stand maybe with – I guess with BREP and kind of how you are thinking about that? And also curious on BCP VII and maybe also with the next BREP fund, are you seeing any change in or change in kind of the typical LP demand, maybe around the demands for co-invest? Is it backing off at all? Is that kind of getting more pressure to co-invest opportunities as part of the commitment? Just some color on that would be helpful.

Okay. So BREP VIII will be – Steve is going to chime in a minute. BREP VIII looks like it will sort of early next year some time most likely. BCP probably late this year most likely. And yes, there is a lot more interest on part of LPs for co-invest.

What I would say is that most every fund, and not aware of any just trying to be – not criticized by my general counsel. But, every fund that we've offered over the last several years has like been significantly over subscribed. So when you ask a question of what do we think can happen to BREP VIII or where we typically in real estate have been a signature, sort of investor, were people like to put money that's been the empirical reality giving us huge multiples of what other people have raised. We don't know anything in the environment that is going to change that we can't guarantee that. But that's what we would expect happens. In private equity as we are going into market, we had a very successful fund 6 so far and we have a lot of activity and we will see how that goes. Yes. There is more of a demand for co-invest meant. But it is interesting that we are being regularly approached for very large capital allocations by some of the largest investors in the world. We are way beyond what we've ever experienced and sort of as part of a package they would like to see sort of in some cases more investments. What we find is a fact that when we offer co-investments to people who ask for it they don't often take. I don't quite understand that. But, they are trying to balance their own portfolios and they got their own reasons for not wanting to do something to give point in time, given the demands on their overall payments to beneficiaries or whatever. And so in a way we think this is something that make sense from their perspective, it certainly makes sense from ours. And these discussions net-net the evolving growth appears to be very, very good one for a firm like ourselves. So it's a not an issue that unexpected. And in any case, you know in the olden days like four years ago when we needed more money for an individual transaction because of size, we would call another firm, a competitor of ours and team up and make investments. It works really nicely to have our own number of partners put up that money makes them happy. Gives us more control, more of a deal, less share control because typically we are in charge of that investment. So it's an interesting phenomenon, but it works very well.

Great. Maybe one other just quick question for LT, this is kind of almost a modeling question. But, looking at the taxes that jumped up in the second quarter anything specific driving that?

Sure, Rob. So there is really two factors at play. The more material factors, so what you are referring to is our tax rate typically runs around 2.5% to 3%, it jumped to about 9% this quarter. So that 6 percentage point difference, a large part of that's related to the fact that a very good, in fact record realization quarter in GSO. Those realizations are on the mess funds and the rescue funds which are typically ordinary income funds so there is a higher tax rate associated with them, that's number one. And number two, the pre-IPO funds in real estate which would be BREP IV and BREP V also had strong realizations and those two actually run through a ordinary income vehicle. So I would say it's a short-term spike in large regard related to those two phenomenon, related to the realizations in those funds. The second to a lesser extent impact on it is that much of the equity that we grant vest in the first half of the year which lowers the tax rate as that gets deducted for tax reason. So Rob, with respect to modeling, I think I continue to keep it to what it's been historically and I would view this as a one time event.

Great. Thanks for taking my question.

Sure.

Your next question comes from the line of Devin Ryan with JMP Securities. Please proceed.

Yes. Good morning. Just want to follow-up I guess more on the strong realizations in real estates just to make sure I understand. So BREP IV and BREP V, I know you guys had mentioned earlier in the year that we will be seeing a pick-up in realization activity. So just trying to get some additional perspective there around how strong kind of now we've had two really good quarters in realizations. And just get a sense of some perspective of, this kind of a sustainable type of trend, I know it will be lumpy, but are we now kind of at a more elevated potential level moving forward for the foreseeable future?

Yes. As regard to BREP, we think what you have seen is sustainable and can even grow from here.

Okay. All right. Great. Good to hear. And then, just secondly, with respect to $13 billion of gross flows, is there any way to break down how much you came in from existing healthy relationships maybe how much of those flows being generated from your new relationships that you guys have made?

It's LT. About 80% of those flows are coming from existing LPs. I did highlight in speech that there is some new pockets of LPs as well that are contributing materially and one of the existing aspects of this is, that we are also putting now a wider range of funds in front of the same LP. So the cross-selling continues to gain momentum in all those the new pockets, the cross-selling we all view as sustainable trend.

Great. Appreciate the color guys.

Your next question comes from the line of Mike Carrier with Bank of America. Please proceed.

Right. Thanks a lot. Steve, you mentioned upfront, some of the color portfolio companies and how they are performing, just curious if you can give some perspective on maybe the European part of the business, it can be neither a real estate or private equity. But, what are the trends there maybe in some of the sectors and if the growth outlook does bigger step down, how is that relative to what your expectations are in making some of the investments? And for the portfolio companies like what their options try to hit those returns meaning driving strong revenues, looking at expenses again, just what are the variables that they will reconsider the growth is slowing?

I would say in the European area, our biggest exposures is in real estate very conservative view towards Europe, just another word choice you should have to that which is on optimistic. So when we buy something and again, very large amount of different types of assets simply because there is an imbalance with way more sellers than buyers puts pressure on price. So we can create investments very good, yield and then leverage them and get very satisfactory returns with no growth in individual market, simply because of the illiquidity out. We also – when we buy something we try not to be passive buyers of anything and we usually have some improvement plan of what could be done even if a market is flat. If an asset has not been maximized, our job as John Gray would say, initially, no, it's buyer fixed, sell it. And overall economic model is that we are not optimistic about economic growth in Europe. And so, were consequently not disappointed when that growth is not there. It's all part of that plan. In terms of purchases of U.S. assets and what we were talking about and Tony mentioned it in his remarks earlier, our investments in funds six have formed very well, very well. And we are supposed to be selling securities on these calls, so I guess I won't total you how well it's doing. It's like really good. And so we have been – were surprised on the upside. That was complicated in effect four years ago after the financial crisis, slow coming out of the shoots both real estate then the U.S. And private equity in the U.S. doing better than our expectation. That's all good. So that's sort of how we see the two geographic areas that I think you asked about.

Yes. That's helpful. And then LT just real quick. Just given the volatility in the markets right now, would BCP V just how much of a buffer do we have if it got back close to the hurdle. And then on the transaction piece in the quarter was pretty high, just wanted to get any color on the outlook there?

Sure. So for BCP V at the end of the quarter, it was about halfway through the catch up and you need if you were to reverse the carry that we have accrued year-to-date, you need about 10% decline in equity value to reverse it. Just give you an idea of magnitude, it's been accumulating over some time. With respect to transaction fees, the up tick in the quarter had to do with an interesting transaction really in real estate, we will see in that the line by line related to what is effectively a disposition fee that they got on the syndication of a deal, so wasn't just their own sale which was quite material and that across the up tick. Other than that it was relatively flat quarter-over-quarter for transaction fees for the firm as a whole.

Okay. Thanks a lot.

Your next question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Great, thanks. Steve, I'm just trying to figure out the impact that the denominated effects maybe have on the allocations to the firm across asset capacity. If markets are more volatile and outlooks change around rates and can global growth and public markets trade lower. Do you think going forward that that could play a role in the percentage that investors might allocate to alternatives? Thanks.

That's a good question, Marc. Obviously, if these funds shrink down 75% and they have no money of any type and the world completely desperate, yes, that will have an impact on everybody who is in the business even, Goldman Sachs. A great firm. In a normal operating environment, since we are actually selling out everything that we've offered, we have a built-in buffer in terms of that shrinkage. There is also something very material going on and that's the fact not only are about half of large institution investors increasing their exposure to alternatives. They are really shrinking the number of people, the number of firms they give money to. So what's happening with that phenomenon, it's quite widespread. It's hurting capital to the high performing firms like ourselves who can also handle a significant amount of money. So if you have roughly half of the investor base increasing in our class, let's just say that markets are down 5% to 10%, given the fact that there will be a significant shrinkage of money managers that will be allocated to and the fact that we constantly over the last x number of years have been limited by investors as to how much money we can take, not what they will give us every time as limited us and we have blown over the caps. So we have a lot of safety if you will built into that. If markets give way to the point that there is catastrophe, then what happens people just freeze. But I don't think that's a part of the cycle the U.S. economy is doing quite nicely. I think we've got an overreaction going on because it's health concerns, foreign-policy all these stuff come together they are just scaring people, in a way you can't blame them, closes the sense that we're sort of out of control and that's being reflected in the market. But that's not I don't think sustainable.

Let me couple of comments. First of all, from five or six years ago public markets were up 70% or something, its huge. It's way more than these people have been able to allocate to alternatives. Secondly, they are not becoming disinvested in alternatives, for several years they have been getting back way more capital than they are actually been able to put out, which is causing to run faster and faster try to get up investors. Thirdly, some of the markets like treasuries who are actually appreciating in here, let's not forget that. In a few days in the public market when year-to-date, maybe, it's off the peak 5% or 6% in the last few weeks. But boy, it's still pretty – at a pretty high level by any – by most standards. And then finally, where the big new flows coming are not so much some of these traditional pension funds with after allocation and denominator ratios, lot of that money is coming from staff and wealth fund and foreign investors and what not. That are widely under-invested in alternatives where they are just beginning to move money into that. And so there are a lot of trends here that overwhelm a few work weeks in the stock market.

Right. And we are perceived by non-US investors as the U.S.-based firm, even though we operate globally, we are U.S.-based. Right now, the U.S. is number one development market economy that non-U.S. people, as a rule, want to be invested in. They are very open about that. So our positioning is quite good.

Okay. Great, thanks.

Your next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed.

Hi. Great. Thanks for taking my question. To follow-on the line of fund raising and maybe in a different way, I think Steve and Tony you mentioned the pace of deployment or the opportunity for deployment could potentially improve with the dislocation in the market, few questions on that. Maybe first how quickly do you think that could improve given what we are seeing the markets, and if you could comment on the U.S. versus non-U.S.? And then does that give you capacity as you mentioned if you are oversubscribed in a lot of funds, typically does that do you feel that gives you capacity to basically raise or to basically narrow that gap between oversubscription and what you actually raise?

Let me comment on the deployment. I don't – first of all, I think we are all getting a bit really focused on – overly focused on a few days in stock – public stock market. Our business isn't really a public markets business, I think don't move that quickly. It's a long-term business. As Steve said, we buy assets, the value doesn't come so much from the purchase or the exit multiple. It's a value we create in the assets which decouples the investment performance from economies and markets. And that the fundamental picture frankly notwithstanding a few bad days, the market hasn't changed very much. In terms of the deployment level, recognized too that the deployment levels are already extremely high. So do I think that they will go a lot higher from what they have been, no, I don't. Do I think that they will be able to have maybe some juicer opportunities and some things that are little easier to find, we have been working hard to find – we have been finding and be able to sustain our deployment, I do think that. So I don't – I'm not sure I can – quite I don't – I would say the both – that's the same for the U.S. as well as the non-U.S. I don't think the pictures are different. Things are already pretty troubled in Europe and there was credit issues, Asia, so I don't think that hasn't really changed here obviously. And then in the U.S., in terms of the – particularly in real estate, rents are still going up. Occupancies are still going up with the stronger economy. There is still an ability, you have a stabilized building of high-core real estate, there is still plenty of ability to finance it. But I think we still be able to sell assets and I think the amount of distress in the U.S. is still going to be low as we were lagging the amount of building we should have had for the last six to seven years. So I don't know that changes much on the real estate side and on the private equity side as I said we have been focused more on that we have been doing a lot of public and privates anyway. I think we got ways to go frankly before those get to be very attractive side, not a big change from my perspective.

This is supplementing one of the areas that Tony didn't touch on. We will pick up in the GSO area. They have been waiting patiently for something bad to happen because they got tons of money and credit spreads were so high that there wasn't enough juice that they require. But what's happening, as a result of lack of liquidity in certain types of market and fear is that outflows from junk of things of that type is that you are going to have some marvelous opportunity and that is actionable in the short-term. But the certain types of extensions of credit to longer term borrowers of those markets are reduced or closed for certain types of lower rated, long-term debt, well, that's like a fees for the GSO group. I mean just sort of that's like a perfect storm in their type of business. And we were talking yesterday to one of the senior people there, Tony have been meeting with the group and they said gees, there is some individual situation, the bonds went down six points yesterday. This is like a screaming a buy. And those are opportunities because they are very liquid, we can take advantage of things like that. Fear, I mean, what do they say, one man's – Shakespeare – one man's tragedy is another man's comedy. And so I think we will be able to deploy significant resources they are in response. In terms of what Tony was talking about, you don't have those instant changes in the M&A markets that is just to buy companies or buy real estates, sometimes it really helps to get a deal done when you are in the midst of something and we have to blow out and somebody is little reluctant and you are willing to close and close to where we were. And they say, oh, my goodness, I've had enough. You get an occasionally accident like that. But, it doesn't like change the flow of things. But, to the extent that has a buyer, we close virtually every transaction we ever announced in the 29 years. It makes us a much better buyer in an uncertain world because the seller knows we will have – we will find the way to get that deal done and somebody else might. And so that's good for us, from a competitive standpoint.

Great. That's really helpful. And maybe just one quick follow-up, I know you guys talked about the realization mix between strategic sales and – strategic buyers and private sales versus the IPO market, so just maybe, if the IPO market does shut down for any reason, it's going to get worse. Do you see that shift changing much more towards the M&A side from an exit perspective or do you think you might end up just being more patient and keep waiting for that rebound?

First of all, the M&A side closes down periodically, it's not an odd outcome, when it's going on, when it's rolling people tend to think it happens all the time, it always have. And so we have lived through a loss and we switch our realizations whether they are certain recaps, whether they are individual sales, we do look sort of like restaurant what special day here and you can order what they are serving, but you can't order what's not on the menu. So if for some reasons, the stock out of the IPOs for sale, then we just move with what we are doing or we keep compounding these companies which I have said in the prepared remarks going really well. And so then we pop out periodically and we make it work then. And you see much larger realizations at that time. But, this isn't a world that shuts down.

So let me make the couple of comments. First of all, when your EBITDA of the company is growing at 10%, they aren't weighted on the weighted basis and your leverage. So in other words, a lot of the capital structure is debt not equity, the accretion to equity just by waiting very substantial. And so we are paid the way, our LPs are paid the way. We make more money by waiting because carries grow in value. So understand that waiting is not at all a bad thing for us, realize the public likes the first a $0.01 today, $0.02 tomorrow. But, what we get richer by waiting. And our investors will get richer by waiting. Secondly, IPOs are not exit events. IPOs are the most vital part of the equity market, but we have something like 40% of our private equity portfolio is already public, we can sell those shares at values that are consistent with our marks and our carries and all that. We can sell those shares anytime we want. We are not – we can do block trades, we can do secondary. It's not – that's not the end of the whip. The IPO is in whip. But, the irony about that is we don't sell any IPOs generally speaking. We have an awful a lot of real estate public securities in our real estate business as well, just tens of billions of dollars across the firm. So that is still eminently executable into the public markets if we want to, but then I come back to my first point is the value accretion is so high that we kind of like making more money and that's what we get paid to do for LPs and for our public investors as well. But fundamentally to your question, of course, if equity market shut down completely and if equity market gets hammered then the percentage of our liquidations from equity markets will go down and as Steve said, we had years when its been all strategic or recaps of other things or tertiary buyouts what not and no equity, and that's fine. We are not a one trick pony here.

Great. That's pretty helpful. Thanks so much.

And our final question comes from the line of Bulent Ozcan with Royal Bank of Canada. Please proceed.

Hi. I got a question regarding the credit business, in your credit business participate also financing to your own LBOs and your product portfolio companies, are there certain restrictions that will prohibit you from basically providing finance?

So our credit business it varies but credit business is not one business, it's multiple business, it's in some of our buy business. But in general, our credit business can provide financing to our private equity as long as at least half of the credit is provided by third parties on the same terms.

Okay. For liquidation, it shouldn't be an issue with -- there is no liquidity in the market that you will be able to finance your own deals and find?

Our credit guys will only do that if that's the best available return for the risk at that moment of time. I don't want you to over state that actually.

Okay. I understood. And my second question would be other business segment -- credit business, it seems like the H1 strategies didn't -- not a strong quarter but you've seen very strong quarter out of the mezzanine funds and the rest of the annual funds. Would you just give some perspective on what is driving the performance not comparing 3Q to 2Q?

Okay. So I actually think that hedge funds have performed very well frankly. Remember this is – and I think with the back ups and the volatility of the market lately, their performance is going to particularly shine. The hedge funds tend to underperform when there is very low volatility in big bull markets, its very hard for a fund that's managing risk down and hedging to keep up with the indices. So our investors couldn't be happier with the hedge fund performance. And they are even happier now with that investment then they were before the recent market volatility and back up. And as regards to the performance of the credit funds, they had a – they have had a confluence of few factors. First of all, the faults have been near zero, they made great selections of the credits. Secondly, they tend to – when they make those things they tend to get equity kicker and things like that which have appreciated a lot. Thirdly, as credit markets rally two things happen, number one obviously, the interest rate that you put on in a higher interest rate environment there is capital appreciation because it's a debt instrument. But then to a lot of issues, sometimes refinance you and pay you out – pay you call premiums and things like that which accrues to the benefit of the – our investors obviously. And then finally, just operating performance, the underlying company has been really good. And again, as I was mentioning before with response to last question, when you have a leverage capital structure and you are operating funds, the underlying company is good. The equity appreciates a lot. The equity kickers appreciate a lot and the lowest tranche of the capital stack in terms of the credit instruments pick up credit quality very fast and therefore appreciate.

Then maybe just a final question, since I'm the last one before we go, I was wondering about your credit business and the reason of you are contemplating about spinning off your investor business given that the valuation increased significantly inside the standalone company. Can we see this with other business segments such as credit, it seems like the market has got so higher multiple on the credit businesses versus private equity and…

I know the question. And the answer is no, absolutely not. I hope that's clear. Absolutely not. There is a lot of synergies for this business. We do a lot – there is a lot of magic that makes this firm go. It's a core part of the business and you certainly won't see that spun-off.

Thank you very much.

Great. Thanks everybody. And we look forward to following up with Q&A after the call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a good day.