Welcome to the Blackstone First Quarter 2017 Investor Call. My name is Derek and I'll be your operator for today. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I would now 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 first quarter conference call. I'm joined today by Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; Michael Chae, our Chief Financial Officer; and Joan Solotar, Head of 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'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. And for a discussion of some of the risks that could affect results, please see the Risk Factor section of our 10-K. We'll also refer to non-GAAP measures on this call and you'll find reconciliations in the press release on 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 $1 billion for the quarter which is up sharply from the prior year comparable period. Economic net income or ENI per unit was $0.82 which is more than 2.5x the prior quarter -- prior year quarter, due to greater appreciation across the funds as well as strong growth and fee related earnings. Distributable earnings per unit was $1.02 for the quarter or about triple the prior-year period. We declared a distribution of $0.87 per common unit be paid to holders of record as of May 1. One final note for me, I will be hosting our fifth BX Investor Day on June 8 in New York. If you haven't already received a save-the-day e-mail, please follow up with me after the call. The full event will be webcast live with a replay available on the Blackstone website. And with that, I'll now turn the call over to Steve

Good morning and thank you for joining our call. Blackstone posted excellent results in the first quarter, as Weston mentioned, our second best quarter ever for distributable earnings at $1.02 per unit, just a few pennies shy of our all-time record in early 2017. Realizations reached nearly $17 billion in the quarter, our best ever. And although we were selling a lot, we're also investing a lot in almost $12 billion invested across the drawdown funds, our second best quarter ever, adding to our foundation's future value. In fact, just in the past week, we committed an additional $2 billion in new deals in private equity and that's just in one week. ENI, as Weston mentioned, grossed $0.82 per unit with broad-based strong fund returns, waiting to our highest overall fund appreciation in several years. The corporate private equity funds appreciated nearly 7% in the quarter, while the real estate opportunity funds were up nearly 6% on a growing base of invested assets. Over the past year, these funds appreciated 15% while our credit funds rose over 25%, [indiscernible]. Our liquid hedge fund deposit rose 12% on a growth basis with much less volatility in the market, making it an industry outperformer as well. These types of returns are helping our limited partners dramatically exceed their targets on their allocations to Blackstone. As a result, they keep rewarding us with more of their capital to manage, pretty logical. Despite our high level of realizations in the quarter, our fee earning AUM rose 15% year-to-year to $280 billion, another firm record with a strong positive growth in every business, as Tony mentioned earlier. Total AUM rose 7% to $368 billion, also another record which, I guess, starts to sound a little boring. While this is clearly a strong set of results…

Thanks, Steve and good morning, everyone. Our first quarter results represent a terrific start to 2017 with record or near record quarters for most of our metrics, as Steve mentioned. Total revenue doubled year-over-year to $1.9 billion while economic net income rose over 2.5 fold to $986 million, both reaching their highest level in two years. Fee related earnings rose 18% to $291 million, helped by the first full quarter of management fees for our $19 billion BCP VII fund. Distributable earnings more than tripled to $1.2 billion or $1.02 per unit. On last quarter's call, we pointed to at least $0.60 per unit in DE from sales that were either already closed or resigned and we closed over the subsequent months. We delivered on this and more. Indeed, all of these previously discussed pending transactions closed in the first quarter on or ahead of schedule, including the Hilton stake sale, the transaction involving Change Healthcare and the sales of Optive, Tactara and our Japan residential portfolio. Subsequently, in the quarter, we were able to opportunistically sell down additional public stock positions which, together, drove the distributable earnings from realizations up to $0.82 per unit. Combined with growing FRE, the result was our second best quarter for distributable earnings and the dividend. From a capital metrics perspective, first quarter results demonstrated continued robust momentum in each of the major drivers, realizations, deployment, investment performance and AUM growth. Further to that, the consistency of the momentum across each of our business lines highlights the firm's unique diversity and leadership position. First, with respect to realizations. We generated $16.6 billion in the first quarter, a firm record. The majority of that amount came from our BREP and BCP funds at an average multiple of original invested capital of 2.6x. The realizations in…

[Operator Instructions]. Our first question will be from the line of Patrick Davitt, Autonomous.

A few of you have been quite vocal about the idea of, obviously, getting more retail access to alternative and particularly, in retirement plans, the 401(k) plans. So 2 questions around that. First, now that we're a few more months into the new administration, are you encouraged by what you're seeing kind of below the radar occurring on that front? I guess relative to where we were last year, do you feel like the opportunity to get more alternative with these kind of clients is growing? And two, what needs to happen now and what do you think the timeline is to get there?

Well, I guess, I'll tackle this one. It's Tony. I think, first of all, you start with a need. We have a looming huge retirement issue in America, I think everyone knows that. I've talked about that numerous times. And one of the reasons we have it is that the savings that people do put away don't earn enough. And you can't -- people are squeezed on the cost side, student loans, healthcare costs, childcare cost and other things, they can't save 10% or 20% of their income. If they're going to -- they have to be able to build a good retirement nest egg by saving a few percent of their income. And in order to connect those dots, that money has to earn at higher compounding rates than the typical 401(k) earns of 2% to 4% after fees. The only answer to that, particularly with markets where they are, is to move out of purely liquid markets into alternatives. So I think eventually, both parties are going to realize that they're going to decimate their elderly population financially if they don't allow this to happen. And it doesn't -- it's not a fix that takes overnight, so we have to get ahead of it. So I think the need -- I think that need is becoming more and more clear and the answer is becoming more and more clear to both parties. I think the changes in the Department of Labor and whatnot open up opportunities for us, we think, but we've got a long way to go before its actioned.

Your next question will be from the line of Craig Siegenthaler, Crédit Suisse.

So I know you can't raise 5 COOs every quarter and it's nice to see some large investments scheduled for 2Q, but I wanted to see if the lower fund-raising levels were partly driven by the more challenging backdrop on the investing side.

I don't think so at all. I think first of all, if you look at our slate of products, it's actually, despite of that, we had a good first quarter which I consider to be an excellent first quarter, $14 billion, by the way. It's back end loaded for this year just because the timing of the fundraisers, number one. Number two, remember, these things are lumpy. And when you have your big -- your really big funds, your private equity fund, your real estate fund, those things, out of the market, you're just going to see lower levels. And when you're in the market and they have a closing, you're going to see bigger levels. I think it's a real mistake to try to plot this on some quarterly basis. We think there's tons of good opportunities out there and we're finding them as indicated by what Steve and Mike were talking about our investment rate.

And I'd just add, Craig, it's Michael, it just so happens in the subsequent next few quarters, there is a great pipeline of a number of drawdown funds, maybe not the flagship BCP fund. But whether it's Tac Opps; SP real assets; importantly, cap solutions, 3 from GSO; the second Asia fund for real estate and others that are going to unfold in the coming months and quarters.

And just my final one here. Any update on the infrastructure business just in terms of plans for fundraising?

Well, we talked about that earlier this morning in the press call. We're laying the groundwork for that, talking to some anchor investors. And putting together our team and some things like that. Again, this is a -- it'll take a while to roll this out. We're not a bit -- the beauty of our business, frankly, is people can't plunge into it, but -- and once we're there, we've got a really sustainable position. But it does take a while to build new capabilities.

You're next question will be from the line of Glenn Schorr, Evercore.

So we've got this, I forget, 1 year, 1.5 years ago, when there was talk about CalPERS and some other big LPs insourcing or reducing their exposure on the hedge fund side and I think Blackstone was net beneficiary of consolidation of providers. There's renewed conversation, except this time in private equity, but the same kind of thing, high fees paid, maybe some insourcing, maybe some consolidation providers. I think you're going to be a beneficiary again, but I'm curious to get your thoughts on, is this a trend? Is this a type of conversation with your largest LPs and what you see the outcome being?

Okay. Well, let me start by saying that when LPs need our returns and if you look at the CalPERS announcement, you'll see that the single highest performing asset class in CalPERS is private equity. And let's not lose sight of the fact that we deliver enhanced returns to LPs, number one. And Number two, they never need them more than they do today. The same reasons that I just talked about for the 401(k)s. And so, in general, what we're seeing is more and more LPs putting a higher percentage of their assets into alternatives, private equity included, fee discussion notwithstanding. So when we look at the picture, we're seeing the opposite of what you're talking about. We're seeing more people giving us more money. And actually, I would say, in general, there's no pressure on fee structures. And a point of fact, we're actually making some enhancements to the fee structures from our perspectives.

Enhancements?

There was also a survey I forgot to bring with me, so I'm a little derelict on this but it was done by Preqin [ph] and I don't know if anybody in the room has that. But basically, we're saying there's a huge buy-in and satisfaction with private equity returns on behalf of investors. And so I look at that and that kind of objective assessment, I think it was like 84% of investors. We're very happy with their returns at about half of investors, something like that, we'll get you the numbers, are keeping their allocation as a percentage the same and the other half are increasing. So assuming that they've done an accurate survey that gives you a sense of what's going on.

And Glenn, I do want to come -- part of your question related to consolidation. We're seeing LPs increasingly wanting to consolidate their providers. And there's a few factors there. Number one, the administrative cost of this asset class is not like a mutual fund with their drawdown notices, their return capital and so on and so forth, that needs to be reinvest. So these pension funds that have hundreds, literally hundreds of providers, it has its administrative cost for them. Number two, they figured out that if they have lots and lots and lots of providers, essentially, they get reversion to the [indiscernible] and instead of getting superior performance of top quartile managers, they have average performance. And number three, they just want to -- they want to get other things, noneconomic things, from their managers which could be training their people, could be systems, could be insight in the markets, educational things, so on and so forth. And so we're seeing definitely a trend towards the big providers, the big LPs wanting to consolidate capital with the big managers like us, most particularly us, actually. I don't know that anyone else has actually seen this across asset classes. So not just in -- yes, they want to be bigger in private equity but they also want to be bigger in real estate, Tactical Opportunities, strategic partners and so on, GSO. So that consolidation is one of the tailwinds that we're enjoying and have been enjoying.

You're next question will be from the line of Bill Katz, Citigroup.

Apologize if I was doing this math a little quickly. Steve, I appreciate your comments about if you were to sort of yield and assimilate to the S&P, you'd be a $100 stock. So if I just assume a 3-year return, I get like a 49% compound annual growth rate for that investment. And so I'm wondering, as you do your own math and you think about the business, I know you said you'd rather reinvest that back into the business than to repurchase. But with the sort of glaring upside that you see in the stock versus where it's trading today, how are you thinking at all maybe altering your allocation of capital between sort of reinvesting back into the business versus other uses of return back to investors?

That's something we always look at. And we're starting -- planning to start a number of new businesses. And we have unpredictable needs for capital for growth. And the higher those needs are, in a way, I guess, the happier we're. And so if we get into an area where a limited partner asked us to pioneer something and needs a certain amount of money to put up as good faith money, you always want to have money to do that. The returns, I guess, we -- as we discussed in the past, can run up as high as 30% for doing that. But even more than 30% on just one situation, it grows the scale of the firm, it grows the number of things we can do for a limited partner. And that's got a knock-on effect that's very substantial. And so we tend to be cautious with sort of our use of money because that's sort of the greatest return for shareholders in the long term and just sort of generally cautious financially because we have a high payout for the stock. Plus, we do get presented with acquisition opportunities constantly. And the idea of not having enough money on hand to take advantage of these unique opportunities, as manager, I look at it and say, it's always great to have the firepower to do whatever comes your way that's truly compelling. And so it's a bit of a dilemma when you have a stock at the level you don't like. And you're trying to plan for accelerated growth of the business for the future and at least, at the moment, we sort of come out reserving for those opportunities because there -- once you start these types of businesses, they grow from little acorns to really giant sized trees and that's the best way to create value.

The other thing, Bill, is frankly, I understand your 49% IRR point. We think the value is there, but we don't have confidence enough in you guys to figure that out because you have disappointed us consistently.

Okay. Mike, there is a quick clarification, you mentioned that your expect FRE to be up low double digits this year. Actually, we annualized your first quarter that guidance was seemed to be a little bit late. Is that based on sort of the old way you were disclosing FRE or now pro forma for the add-back of stock-based comp?

No, Bill, it's really a single big driver which is, this quarter, the comparisons were full quarter of BCP VII versus a quarter when we didn't have a full quarter of that. And so that's really the -- that's the big driver of the current quarter. But obviously, we still expect for the rest of the year and for the full year, pretty healthy growth. And so I think low teens is a good way to sort of point -- good thing to point to and we obviously hope we do better than that as well.

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

Just one of the aspects of your business has been innovation, core+, long-dated PE, what could make sense next time in Blackstone's evolution? It seems like infrastructure could be one, but what other product adjacencies or geographic regions to make sense in terms of Blackstone's evolution?

Well, we're obviously -- have talked about the infrastructure initiative, so that's one. Let me say to that we've been thinking now for a couple of years about the fact that we don't want to be the ultimate old economy company. And there's a lot of interesting things going on in the world. Our tech investing has been very successful. Within Tac Opps, we've been doing some very successful growth equity investing. And so we've got a -- what I think is an extremely exciting concept which I'm not going to elaborate on. But that's in the whole growth venture area, let's just leave it at that. We've added some expertise to our board in that area, with one of the leader being venture capitalist and other things that we just tapped into some of our experience. So that would be an obvious one. I'm really interested in -- as countries nationalize and pull back, I'm interested in the whole development finance area and there might be something there. And we've got -- and we've talked historically, we've also talked about the fact that one of the areas we're not in is commodities. And we -- I don't see us becoming a commodities trading house, but I -- we've found the right entry point and business model that has sustainable competitive advantages. Again, we're all about not just filling out our matrix, but whatever we do, doing better than anyone else and having a mode around it so that they cannot imitate what we do and they cannot earn the same returns. So -- but we do have opportunities to do that, we're just patient about them.

And as you think about M&A for your business. What in your view, could be compelling, Steve, you mentioned that you want to kind of be in a position to be able to do something compelling and said, it came to you, but what was that -- what could that look like? What is compelling in your mind?

Well, I love you but telling you exactly what we're going to be focused on and so forth, so our competitors can catch up with us is not something that we do with enthusiasm. So I'm going to pass on that, not to be disagreeable, but just to protect you in the long term, for us being able to do these types of things.

Fair enough. Maybe I'll just ask another one then in that case. Just in terms of the payout ratio, just given the time you get a lot of investment opportunities for your business on the horizon. In what situation could we see the payout ratio of adjusted to reflect a greater flexibility that you may need?

We have no plans to do so, Mike.

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

Maybe one here on the retail industry, it's been one area in the market that is seeing some stress for obvious reasons. So just curious how you're thinking about your exposure to the sector, may be directly and then indirectly through areas like real estate or other second derivatives. And then whether you're actually seeing any opportunities in that sector, just being created as a result of the stress?

Okay. Well, yes, so we're -- we think retail, in general, has headwinds. So it's not like we're piling into that. And I will say though, within real estate, we've been a big beneficiary because of the last mile logistics that e-commerce companies require and that's been global. It's been nice days of Europe, China, Japan, et cetera. So that has been a key thrust for us there and the whole logic core business which the world is aware of, has benefited from that. With respect to other retail, there are going to be winners and losers within the retail sectors. So there's still -- people still go to grocery stores and they still have -- need local markets. And so we've again been a beneficiary in real estate of grocery -- in the grocery-anchored mall area or local malls but would stay away, frankly, from the regional malls. So we're trying to be smart about that. When we look at retailing though, a lot of the companies were looking at it and say, on the corporate side are hybrid bricks and mortar and e-commerce companies. And very often, those things work very well together and we're seeing some interesting opportunities. And then, I have a particular bias because I'm Lead Director of Costco and I think that company is an amazing company. And I think, I'm not sure I'd want to be a general retail anywhere between Amazon on one hand and Costco on the other, but there are ways to win in bricks and mortar, still.

And then just add to what Tony said, within our real estate business, U.S. retail is a very small portion of our overall portfolio, it's something like 5% or 6% of our overall global portfolio. So the exposure is quite limited. And where we're exposed, as Tony said, the emphasis is on grocery-anchored shopping centers and kind of A locations and actually nowhere exposure in the U.S. doing in closed malls which as you know are the more fashion-heavy department store anchored locations that are facing headwinds.

Just a quick follow-up here, clearly, great quarter with realization, having the outlook all sounds pretty constructive there. But when you think about kind of the opportunities from here, how would you frame kind of the equity markets relative to maybe M&A exits to strategic acquirers. Is there the better area in terms of what the market construct looks like right now? And then also, with benign credit markets, it seems that dividend recaps are starting to pick up a little bit. So I'm just curious that maybe you're seeing a better opportunity to do some of those just to accelerate some capital return off of the private portfolio?

Okay, well, on the -- let's start with the recaps first. On the recaps, the credit market is benign, it's for sure, but it's been benign for quite a while. And I don't see it accelerating, I think it continued to be part of the mix. The -- maybe you're not seeing as much as you might expect given the credit markets though because equity markets are also very, very receptive to IPOs and blocks, the secondaries. And we have, getting to your first part of your question, a good strategic market. So for the exit site, it's all 3 channels of exit are open for business and are welcoming to harvesting value. And yes, so with strategic partners, sure, there's plenty of them out there. I think one of the things that's happened with the election of President Trump is there's a little bit more of a forward leaning attitude on the part of corporate buyers. And I would say, that's pretty much across the board. And it's not just U.S., its international buyers as well. And we got a question earlier on China and obviously, what China is doing with the currency will affect that. But so far, we're still seeing China corporates buying, successfully completing strategic acquisitions.

The next question will be from the line of Chris Schutley, William Blair.

Regarding the $7 billion of deployments in private equity in the quarter, I know you mentioned a little bit of that was energy, so maybe EBITDA multiples aren't the right way of looking at it. But can you maybe just talk a bit about a few of the investments that you made in the quarter? And what gives you the confidence in the ultimate -- the current return profile, given where we're in the cycle?

Well, okay. So a lot of it was energy. I mean, maybe Michael will give the exact percentage. But as you point out, not only is that not EBITDA multiple driven. But we frankly feel that energy prices of low 50s today, call it, will be higher out some time in the next 5 to 7 years. So that we do have a -- we're making a sector back on that, that will face higher prices. The energy deals we're doing today will earn decent returns if prices stay flat. We'll get our money back even if prices drop. But to earn juicy returns and I'm talking well in the 20s, our price deck has to be generally on point. I'm not talking about the exact timing, but at some point out there. So we think that's a very -- that mix is a very nice risk-reward ratio. And what we're buying are not necessarily complete companies when we buy them. We usually end up with a highly, highly competent management team and then we find the assets to go with that management team and create by putting those 2 things together, create a great company. And so a lot of the value is created by marrying those 2 things. They don't exist, preexist, we're not just going and buying energy companies, generally. So that's on the energy side. On the other side of private equity, we're continuing to do consolidations, I mentioned before. And those things you have, you've got a very good management team, you got a industry -- you got a position, industry-leading platform and then you can add things onto it at very attractive EBITDA multiples. So we might pay for some of those consolidation opportunities, 8x or 9x EBITDA. But after the synergies and the…

And I might add, you mentioned, at this point in the cycle and interestingly if you look at our biggest corporate deals that we either closed or announced in the last 4 months. Whether it's team TeamHealth, as Tony talked about in the healthcare sector, SESAC which is a music rights management company. The [indiscernible] learning deal we just announced in the training area. Basically, driven by noncyclical factors, great long term organic growth and we think pretty impervious to the cycle. So that's another way we address those concerns.

Yes and that's the economic cycle, Michael, was talking about. But if you're talking about the valuation cycle, again, I want to come back to a point I made earlier to the press, we don't buy big baskets of securities. We're not really affected by the S&P index on where that's trading. We're really looking for really individual situations that are either private assets, not affected by the markets, not complete companies, broken situations where we can bring our management to fix them and so on and so forth. So we try to divorce ourselves from overall value on what we buy. And if you disaggregate our returns, over 80% of them are driven by things we do to the company, value we create. And obviously, that's not reflected in the value that we pay because it doesn't exist until we own it. So obviously, overall valuations mean what we have -- when they're high it means we've got to kiss a lot of frogs to find a few. So that the yield of what we work on goes down, because a lot of companies don't have that attribute. But if we're good and we're disciplined and we put enough resources at it, we still find a few diamonds in the rough.

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

Maybe first question, just on ,like, the sustainability, the returns. Tony, I think you mentioned on the other call, the EBITDA trends you were picking up into the high single-digit. And I think relative to that few quarters, we've definitely seen some improvement there. Just wanted to get a sense, is it very broad-based across kind of the investment or is it more kind of be a nuance to very specific. Just given what we're seeing on the economy and policy, changes, delays, it just seems like there's a lot of uncertainty out there. So I just wanted to get some color on that in sustainability of the returns.

Yes, well, generally speaking, it's broad-based. I mean, those are averaged numbers. But there isn't -- it's not like the average is dragged up by a couple of rocket ships and the rest is sort of bumping along. So I would say, quite broad-based. And the others uncertainty out there, but for businesses you acted before, it was kind of oppression, I don't want to overstate this. And now there's kind of life and light and optimism that things could be better. So that's leaving them to lean forward and do a little bit more and it's being reflected. But also, beyond that, I don't want to put too much credit to the election. The economy is continuing to get better and it just -- and our companies, many of them are big enough to be global. Europe is definitely on the rebound. And I'd say this, China has come through sort of the wobbles that people worried about very well. Modi has got a new mandate and India is feeling good. And so it's a global business and it's global -- Brazil, it feels like it's kind of certainly in a business attitude down there, they found bottom and they're more optimistic with the change of the presidency. So in general, global business, it's continuing to get better and that's what you're seeing.

Okay, that's helpful. And then maybe, Michael, maybe just on taxes and like the potential reform. It seems like you got plenty of time to try to ponder what kind of plays out. But just given that you've had a little bit more time, there's been a little bit more new details and new different plans. Just wanted to get any update on whether do you guys think there's some potential in converting the corporate structure or obviously, too early and what you said even in the prior conversations still stand?

Yes, Michael, I think the prior conversation still stands, maybe with more so in terms of timing and outcomes on taxes. We're watching it as you are. And so we'll take that into account as it plays out.

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

A question for, of course, you guys are around core+ real estate. Michael, sounded like you guys, obviously, anticipate cash incentive fees to start to contribute this year, later on this year. Any sense given kind of current returns in the business, what that should be? And I guess, as more funds go through, kind of clip that maturity. What -- how should we think about that progressing into 2018, '19?

Yes, we're feeling good about it and the math around it is pretty analyzable, given the structure. And so in terms of sort of the first occurrence of cash performance fees for BPP, as you know, it works off of sort of 3 anniversaries when capital first came in. That first tranche will be in the second half of this year. And for the full year, I'm not going to give specific guidance, but it's a meaningful number and it will be the more meaningful 2018. And frankly and when we talk about core+, we now think about both BPP and BREIT which will also be a material contributor over time. So I think one, sort of very simple way to think about this is over time, for certainly, the BPP complex, once you're kind of up and running on these 3-year anniversaries, kind of water falling on cash incentive fees, very rough math is about 1% of AUM in the BPP program translates into a very healthy DE stream. So it's about $100 million of DE for a $10 billion AUM slug of core+, for example. So you can sort of extrapolate those numbers, it will be very powerful over time. And we'll probably talk about -- more about that on Investor Day.

The next question will be from the line of Brian Bedell, Deutsche Bank.

Most of my questions have been answered, but maybe a couple of more. Just on the hedge fund solutions business at BAAM. The flows did improve on a net basis this first quarter. Maybe just some context on what's been going on in the hedge fund industry, in terms of the redemptions on the overall pie, the size of the pie of the industry. Do you see yourself as a result of what's been happening, gaining share and are you seeing any pressure on fees in the hedge fund space?

Well, we're clearly gaining share as we have been really, consistently for the -- ever since the meltdown. And that's undiminished. And I would say, the enthusiasm for our product is actually growing. And one of the nice things as people, some of the prior questions related while the world feels uncertain, the more uncertain the world is, the better for BAAM. It's a way to get essentially, the equity returns or close to it. Although historically, we've actually done better, with much less volatility and risk than the overall market. So they do well and when people get a little more concerned. So if you feel it's -- value is your [indiscernible] it's a good thing for BAAM. And so clearly, picking up share and I think our investors are -- continue to be very positive. Was there a second part of your question, maybe I...

Are you seeing any pressure on fees, whatsoever, given what's going on in the industry? On -- just on the hedge fund side, you already answered the private equity side.

Well, not on our fees per se, but we're using our -- the importance of us has probably as the biggest customer out there for hedge funds, to make sure that our LPs get as low aggregate fee -- fees as possible on their investments. That is to say, we're getting concessions from managers which can really underwrite most of our fees.

So, Brian, it's Michael. Over 70% of our capital in BAAM, we have with the underlying manager, either a fee deal or a customized strategy. And so as Tony said, that is a big part of our value add-in, so we're creating value for our customers. I'd say also, just in terms of the structure of the business, you can sort of break it apart. In our core BPS platform, the classic fund to funds business, over the last few years, there's been some dilution on management fees, very gradual, slight. And part of that is because the average account size has grown which is a good thing for us. And also clients have sought to weight fees a little bit more towards performance based fees in a lower return environment historically. Although it's important to say, one big chunk of our core BPS business are commingled variant which is about $20 billion. Fees there have been very, very sticky. And then other parts of our business like the new retail platform or in the mutual funds, obviously, our stakes business, those are good things from a fees standpoint in terms of the mix and you'll see more of that over time as those 2 areas grow more.

And just a question for Steve, obviously, since we -- with the new administration, you're coming into the New Year, you're definitely very bullish on knowing economic growth prospects which you would seem to continue to see but also on tax reform and regulatory changes. Has your view changed on that at all since the last earnings call, given we have seen sort of a slower progress from the administration on that?

Well, there's obviously been sort of a setback in terms of the healthcare. There's a bit of a driver in terms of monies available that could be put to tax reform. And so that's created a slowdown which I think you saw, as Steve mentioned, made a comment that was publicly reported on that. So it feels like from wherever you were 3 months ago, there will be a delay on some of this. On the other hand, in the regulatory area, things to me here to be proceeding, it sort of -- with a lot of enthusiasm. I -- there is a lot of very productive work being done in infrastructure or in terms of how to debottleneck the system which now has great difficulty building things. It's hard to believe that both Germany and Canada can permit projects within a 2-year window and our average is somewhere around 10 years, sometimes longer. And there's all kinds of things that are going to facilitate that and there's a lot of work being done on that. And there's still a great appetite for bringing cash, if you will, from a broad -- back stage for a variety of purposes. So what I'd say is, there's a lot of stuff is linked which is why there's optimism in the corporate community, there's some stuff that's sufficiently complex like healthcare that it's clearly a difficult type of thing to resolve. And I think things will just be slower and that's a reasonable expectation.

It is based on things, things will get done this year in that regards, just to -- just maybe a little bit slowly?

Well, that's a separate thing. There's so many things I just mentioned that where they go in an envelope, I don't think that's hard to just give a judgment. But I think the trust of where things are going remains on track whether you get exactly the type of cuddle and healthcare -- excuse me, on -- when taxes that people are expecting, that's one of those imponderables, as you look at how the political system adjust to different elements that would be I think necessary to create super low rates, depends what the political resistance is that your judgment on that is at least as good as mine.

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

I'm just curious, you seem -- you guys are benefiting strategic partners from kind of the expansion and growth in the secondaries business. I'm just curious, is that having any knock-on effect in terms of demand, primary demand in terms of more LPs willing to commit more capital, given that the secondary markets developing in different private investment areas?

Well, the simple answer is yes. A lot of the secondaries, the sellers of secondaries are LPs that are interested in consolidating their GP mix to fewer core providers. Selling a lot of the -- selling off a lot of the old funds what GPs are not going to re-up with and then having more money to concentrate on the fewer managers so that they really want to be with going forward. And we've been a beneficiary of that on both ends, both the -- purchasing the secondaries and then we've got more than our fair share of the new money as they consolidate on the bigger, higher performing managers. So that's one thing. Secondly, they also -- if you look at the return profile over time of a private equity fund or a real estate fund or an infrastructure fund, we have in SP and strategic partners we have dedicated strategies around each of those things which is part of the driver of the growth, by the way. You'll see us, it's -- you'll see that once the fund gets mature, once it gets long and etude, the compounding rate of entries goes down. And so it's higher in the early years when a lot of value is created and then it goes down to something lower over time. And so a lot of LPs, what they want to do is, once it's mature, it's lower risk but it's low return, take that money and reinvest it in the higher return earlier lifecycle funds. And so again, we benefit really on both sides of that. So it's been a helpful trend for the industry, I think and for us, in particular.

And just maybe the follow up. I mean, obviously, you talked at length about, I guess, I'll call the listing of the regulatory cloud, maybe in the U.S. But as you look around the world, is there any place where you have any concerns, there's some kind of regulatory change, whether it's the ECB talking about leverage the loan limits or whatnot, is there any -- when you look outside the U.S., is there any place that gets you to pause?

No that's -- it's an interesting question. I've had meetings in the last 2 days with sort of 30 senior regulators from around world. And I was quite surprised at those meetings. And they came in to see me for a different reason, it wasn't tough actually, I guess, it was 3 of them, from Blackstone [indiscernible] more to talk about the system. And they're always saying that they think U.S. is tight. That we've overregulated, that our standards are beyond the Basel requirements and that's taken a -- sort of a -- that had an impact of slowing down growth in the United States and it's starting to affect their countries as well because some of the kind of regulatory enforcement and Justice Department impact has scared people around the world. And so I was really surprised and what they were saying is, we'd like you people to change so we could run our world as like a sort of in an easier, more normalized kind of way. And so it didn't sound to me as a group and I can't speak to what the ECB is doing because sometimes, the UN is up doing some things that we find a little unusual. But overall, I think there is a sense that we've tightened this thing up awfully tight and that we're are consistent with what the new administration is talking about. They just want to know how loose you're going to make it, but you're sort of in the right direction. And I was really surprised, you would think that when your regulators come in and talk to you, they're talking about -- you're not adequately not Blackstone, but your country. It needs more, we're going to do more or whatever and [indiscernible] today, this morning before this meeting and it's all in the same pile.

And I'd make 2 other notes on the regulatory front. First of all, we're watching how Brexit unfolds because we obviously have a big operation based in London. We do business around the continent. What the regulatory impacts of how that unravels and it's something that may affect some of our business and probably the more regulation, the more separate regulation probably adds a little bit of cost, nothing significant to Blackstone but overall, we're still watching that carefully. We're well set up actually with our operation in Luxembourg, I think to accommodate whatever happens but nonetheless, it is out there. The other thing that we're watching, of course, is China, what it does to currency controls because the Chinese have been active buyers, not just for Blackstone but for a number of assets. And that's been -- we've been a beneficiary of that as have others. And so that's another area that we're watching closely.

Your final question will be from the line over Gerry O'Hara, Jefferies.

Earlier, you mentioned the investment on [indiscernible] we might be able to get just a little bit of context around what you find attractive, particularly on the U.S. oil and gas industry, whether that's been kind of impacted at all by the new administration. And then just related, if you could remind us, after several active quarters in that area, what the total exposure to energy is currently in the portfolio?

I'll let Michael and the guys talk about the energy exposure I think it falls in both data and equity. And -- but the simple answer to question is, no, we didn't -- we're not -- our energy investing has not been significantly impacted by the change of an administration, no. We just felt -- it's really been impacted by where energy prices are, where they've been and where we think they're going. And by the frankly, capital squeeze that allowed the tradition participants in the industry are suffering. And when they suffer capital squeeze, they have to sell assets or raise money on less attractive -- for them, less attractive terms, we interpret that as being higher returns. So it's not really driven by the Trump administration. Michael, do have an energy exposure number you want to give out?

Yes, I mean, the cost of the firm, Gerry, it's -- on our total assets, it's something in the 10% area of the total firm. For our private equity and GSO businesses, it's always been a more significant number, it's probably about double that in the 19% to 20% area.

And at this time, we're showing no further questions in queue. I would like to turn it back to Mr. Weston Tucker for any closing remark.

Thanks, Derek and thanks everybody for joining us today.

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