Good day and welcome to the Blackstone Second Quarter 2023 Investor Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. I would like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead.

Thank you, Katie, and good morning, and welcome to Blackstone's second quarter conference call. Joining today are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; and Michael Chae, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website, and we expect to file our 10-Q report 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. 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 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 our consent. So on results, we reported GAAP net income for the quarter of $1.2 billion. Distributable earnings were also $1.2 billion or $0.93 per common share, and we declared a dividend of $0.79 per share, which will be paid to holders of record as of July 31. With that, I'll now turn the call over to Steve.

Thank you, Weston, and good morning. Thank you all for joining the call. Blackstone reached a remarkable milestone in the second quarter. We surpassed $1 trillion of assets under management. The first alternative manager to do so, more than three years ahead of the aspirational roadmap we presented at our Investor Day in 2018. This achievement is significant in many ways, including for me personally. I founded Blackstone with my partner, Pete Peterson, in 1985 with $400,000 of startup capital. We sent out 450 personal announcements of our new venture and published a full-page newspaper ad with the expectation that the phone would start ringing off the hook. It was a humbling experience when no one called other than a few people wishing us luck. When we started raising our first private equity fund in 1986 with a $1 billion target, we discovered that giving a $5 million or $10 million commitment was a substantial accomplishment. Fortunately, we hung in there, and we were ultimately successful. Looking at Blackstone today, I feel an immense sense of pride. We've established an unparalleled global platform of leading business lines, offering over 70 distinct investment strategies. We believe our clients view us as the gold standard in alternative asset management. And this milestone reflects the extraordinary level of trust we've built with them over nearly four decades. We've delivered for them in good times and bad, generating $300 billion of aggregate gains with minimal losses. In fact, virtually all of our drawdown funds we've launched in our history have been profitable for our investors. Our performance has helped secure retirees' pensions, fund students' educations, pay health care benefits, and protect and grow the savings of individual investors. We are tremendously proud of the role we've played in driving these outcomes. Our ability to create excess returns over long periods of time in support of these critically important objectives is what distinguishes us as a firm that powers our growth. This milestone is also reflective of Blackstone's distinctive positioning as the leading innovator in our industry. At our founding, we determined that building a great company required us to be in continuous innovation mode, which we have institutionalized as a core competency of the firm. Our original strategic plan was to start in corporate advisory and then quickly move into private equity, followed by a succession of other asset management businesses over time. We only entered a new area when we saw the opportunity to generate great risk-adjusted returns for our customers. We identified a remarkable leader in the new area and created intellectual capital that benefited the rest of the firm. For example, we entered the hedge fund to funds business in 1990, real estate in 1991 when values had collapsed following the savings and loan crisis, and credit in 1998, which we expanded substantially in 2008 ahead of the generational investment opportunities that arose from the global financial crisis. In 2011, we launched a dedicated private wealth business. The following year, we created tactical opportunities. And the year after that, we entered the nascent secondaries market for drawdown funds. In 2017, we launched our infrastructure strategy. In 2018, we started both our insurance solutions management and life sciences businesses. And in 2020, we launched our first growth equity fund. Today, nearly all of these major lines of business are market leaders in their respective asset classes with exceptional long-term performance. There are many advantages that come from our unique scale. With our portfolio of over 230 companies, 12,000 real estate assets and one of the largest lending businesses in the world, we believe that we have more information than just about anyone competing with us. We specialize in the production and analysis of enormous amounts of data, which we review every week in our Monday morning meetings with each of our major product lines. This process done over 35 years helps us identify trends before others and adjust where we invest our clients' capital. This also allows us to maintain a hands-on management style, keeps our professionals fully connected, and supports centralized decision-making. Our focus on data aggregation and analysis also led us to establish our own data science group as early as 2015. We started building a team of exceptional data scientists, which today numbers over 50 people, and we are rapidly and significantly expanding our capabilities in artificial intelligence. We've been using AI to help improve operations and our portfolio companies, as well as with Blackstone itself. We believe that this new generation of AI has the potential to transform companies and industries. And the timeliness and effectiveness of its implementation will be determinative of who the winners and losers will be. Blackstone, fortunately, is in an enviable position in the alternative asset world with an 8-year head start in this field, and we are committed to further expanding our leadership position there as quickly as possible. Our growth, along with our commitment to meritocracy, has also allowed us to attract and retain great talent. Many of the best people in the world want to work here at Blackstone. This year, we had 62,000 unique applicants for 169 first-year analyst positions, equating to a selection rate of less than 0.3 of 1%. Getting an entry-level job at Blackstone is 12 times harder than getting into Harvard. I doubt I'd be able to be hired today. I'm not sure that's a great thing. Our scale has also made the firm even safer. We're an A+ rated manager of third-party capital distributed across hundreds of segregated investment vehicles. We don't depend on deposits for our funding. And the vast majority of our capital is under long-term contracts or perpetual, which we carefully align with the duration of our investments. We don't operate with a cross-collateralized balance sheet like depository institutions. We have virtually no net leverage at the parent company compared to U.S. banks with an average of 12 times leverage, and we have no insurance liabilities. We've always believed in extreme conservatism in managing our capital structure and the structure of our funds. As the largest manager today, Blackstone has led the adoption of alternatives which have revolutionized the field of investment management. When we started in 1985, alternatives were basically limited to private equity, and there were only a few public pension funds and insurance companies who invested in the asset class. Endowments, sovereign wealth funds, and retail investors, for example, had virtually no participation. Over the subsequent four decades, alternatives have grown to $12 trillion of assets. But this is still small compared to the $225 trillion of liquid stocks and bonds. With a minimal share of total investable assets today, we expect alternatives to expand substantially in the future. I believe that Blackstone, given our unique brand and global reach, is the best-positioned firm in the world to capture future opportunities for growth in the alternatives area. The most compelling of these today include private credit and insurance, infrastructure globally, energy transition, life sciences, the development of the alternatives business in Asia, and the private wealth channel, where the democratization of alternatives is in its early stages. Jon will discuss these areas in more detail. Our mission since 1985 is to be the best in the world at what we choose to do. Even as we've grown, we've never strayed from this mission or from the core values that have defined us, including excellence, integrity, aristocracy, teamwork, and dedication to serving our customers. To work at our firm, you must believe in our mission and embody these values. Blackstone is an extraordinary place. Our prospects are accelerating. We never rest on our achievements, and we're always looking ahead, striving to lift the firm to new heights. I strongly believe the best is ahead for Blackstone, investors in our funds, and our shareholders. And with that, turn the call over to Jon.

Thank you, Steve, and good morning, everyone. $1 trillion is a mile marker on a much longer journey, and we are early in our expansion into markets of enormous potential. Of course, it all starts with investment performance. In our drawdown funds, we've delivered 15% net returns annually in corporate private equity and opportunistic real estate for over 30 years. 15% in secondaries, 12% in tactical opportunities, and 10% in credit. And in our perpetual strategies, which remain continuously invested, we've generated 14% net returns in infrastructure, 12% for BREIT's largest share class, and 9% for our institutional core-plus real estate funds. And for our major insurance clients, we produced over 150 basis points of excess spread over the past six quarters compared to investment-grade credit with similar ratings or said another way, without adding incremental risk. There are a number of drivers of our outperformance. But as we've grown, picking the right sectors and markets has become more important than ever. Where you invest matters, and we continue to benefit from our thematic emphasis on winning areas like global logistics, digital infrastructure, and energy transition. In the second quarter, these sectors were among the largest drivers of appreciation in our funds. It's worth noting we're also seeing strong signs of inflation flowing across our portfolio, which we view as extremely positive for the rate environment going forward, along with valuations for companies and our real estate holdings in particular. Michael will discuss our portfolio positioning and Q2 returns in more detail. The strength of our investment performance over decades allows us to raise scale capital even in a very challenging fundraising environment. Total inflows reached $30 billion in the second quarter and $158 billion over the past 12 months, positioning us with record dry powder of nearly $200 billion. The greatest demand today is for private credit solutions and our corporate credit, insurance, and real estate debt businesses comprised over 50% of Q2 inflows. In our drawdown fund area, we raised additional capital for our corporate PE flagship, bringing it to approximately $17 billion, and we expect a total size in the low $20 billion range. We also held an accelerated first close of $1.3 billion for our European real estate flagship and expect another close later this month. Overall, we've raised nearly 75% of our $150 billion target and remain on track to substantially achieve it by early 2024. Stepping back, Steve highlighted a number of areas with particularly attractive long-term dynamics for our business, starting with credit, where there is a structural shift underway in the market. Traditional financing providers are cautious, while at the same time, both LP demand and borrower need for credit solutions are accelerating. Long-term investors, including insurance companies and institutional LPs, hold large portfolios of liquid investment-grade credit assets typically purchased from banks and intermediaries. With our $362 billion platform in credit and real estate credit, we have leading capabilities to directly and efficiently originate high-quality assets on their behalf. We're also partnering with banks and other originators that are facing greater lending constraints but want to continue to serve their customers in areas like home improvement, auto finance, and renewables. We've closed or are having processed five of these partnerships totaling $6 billion and plan to add more. In the $40 trillion insurance channel, we manage $174 billion today. Inflows from this channel were over $7 billion in the second quarter, with more than $4 billion from our largest four clients. We expect a strong pace of inflows from them going forward, including from two of our clients who, on a combined basis, are the second largest sellers of fixed annuities in the US, along with a pipeline of additional prospects. Other areas in our credit business are showing strong momentum as well. Our global direct lending platform is over $100 billion today, and we see attractive expansion opportunities in the U.S., Europe, and Asia. BCRED raised $1.8 billion in the second quarter, up nearly 60% from Q1, and approximately $900 million of monthly subscriptions on July 1, and we expect to complete raising our green energy credit vehicle in a few weeks. Turning to infrastructure, our perpetual BIP strategy is one of our fastest-growing areas, up 25% year-over-year to $37 billion. There will be massive funding needs over the next 15 to 20 years for infrastructure projects globally, notably including digital infrastructure and energy transition, where we are building sizable platforms. First, in digital infrastructure, there is a well-publicized arms race happening in AI, and the major tech companies are expected to invest $1 trillion over the next five years in this area, mostly in data centers. In 2021, we privatized the QTS data center business in BREIT, BIP, and BPP for $10 billion, and it's showing extraordinary momentum with more capacity leased in the last two years than in the previous 17. We expect our investors will benefit significantly from the powerful tailwinds in this rapidly growing sector. In energy transition, decarbonization is projected to require $4.5 trillion of annual investment over the next 25 years, further supported by legislative action globally. This has been one of our busiest areas in BIP, as well as our dedicated energy transition private equity and credit funds. The firm's two largest commitments in the second quarter were a stake in a major utility to support its transition from significant coal-powered generation to 0% in five years and additional growth capital for our portfolio company, Invenergy, the nation's largest private renewables developer. We believe the need for scale capital and expertise in this area will only increase over time. Moving to Life Sciences, major advances in genomics and precision medicine, coupled with a historic shift in the funding model for drug development, have created an unprecedented opportunity. We've established an extensive life sciences ecosystem at Blackstone with substantial capabilities and portfolio holdings across the firm. Our dedicated BX life sciences business has been actively deploying capital in partnership with major biopharmaceutical and med tech companies, most recently to support the development of vaccines for pneumonia. We've also assembled the world's largest private lab office platform in real estate, concentrated in great markets like Cambridge, Massachusetts. Asia represents another significant opportunity for our firm, cutting across both business lines and distribution channels. India is projected to remain one of the fastest-growing major economies in the world, and it's no coincidence. The country is our third largest market for equity investing after the U.S. and U.K. In real estate, we even changed the landscape by working alongside regulators to launch India's first public REITs. Meanwhile, Japan is in the early stages of its trajectory, both in terms of large investors starting to allocate to alternatives as well as deployment opportunities as the market opens to outside capital. Overall, there is substantial runway ahead for our business in Asia. Finally, moving to our private wealth platform. We've established the world's leading alternatives business with approximately $240 billion of AUM. But this is an $80 trillion market with low single-digit allocations to alternatives today. Morgan Stanley's research team recently cited estimates of allocations rising to 10% to 20% over time. This is further substantiated by the discussions we have with the major distributors who tell us they want significantly more exposure to our products. Although we do face some near-term headwinds, BCRED's flows have been accelerating, as I mentioned. And for BREIT, June was the lowest month so far this year in terms of share redemption requests, down nearly 30% from the January peak. Longer term, we remain confident in the reacceleration of growth in this channel, given our portfolio positioning and exceptional performance. In closing, we are highly energized about the firm's prospects. We're focused on the open space in front of us, and we're building simple, scalable, and repeatable businesses to tackle opportunities of tremendous size. I could not have more confidence in Blackstone's future. And with that, I will turn things over to Michael.

Thanks, Jon, and good morning, everyone. In the second quarter, which began amid the bank crisis and related market volatility, the firm delivered steady financial results and resilient fund performance. Starting with results. Our expansive breadth of growth engines lifted AUM to new record levels, as you've heard this morning. Total AUM increased 6% year-over-year to $1 trillion. The earning AUM rose 7% year-over-year to $731 billion, driving management fees up 9% to a record $1.7 billion. Notably, the second quarter marked the 54th consecutive quarter of year-over-year growth in base management fees at Blackstone. Fee-related earnings increased 12% year-over-year to $1.1 billion or $0.94 per share, powered by the growth in management fees, coupled with the firm's robust margin position. FRE rose 10% sequentially from Q1 as fee-related performance revenues nearly doubled quarter-over-quarter to $267 million, even without contribution from BREIT, driven by multiple other perpetual capital vehicles in real estate and credit. As noted previously, we expect these revenues to further accelerate in the second half of this year, concentrated in Q4 with a number of scheduled crystallization events in the BPP platform. Distributable earnings were $1.2 billion in the second quarter or $0.93 per share, which was largely stable with Q1. The year-over-year comparison was affected by a material decline in net realizations from last year's record quarter. As expected, sales activity has remained muted against a slow transaction backdrop generally. However, we did execute the sales of public stock in certain of our private equity holdings, along with the portfolio of U.S. warehouses to Pro Lodges for $3.1 billion at an attractive cap rate of 4%, a positive indication of value for the $175 billion of warehouses we continue to own, which are the firm's largest exposure. Realizations in the quarter also included a BREIT sale of a resort hotel for $800 million, reflecting a 22% premium to its December carrying value and a multiple of invested capital of 2.2 times. These sales illustrate the exceptional quality and embedded value of our portfolio. Stepping back, our model focused on long-term committed capital keeps us from being forced sellers when markets are less favorable. During these periods, as we've seen in past cycles, a portion of our earnings related to realizations is interrupted but ultimately reemerges as markets heal. In the meantime, the firm's underlying earnings power continues to build. Harman's revenue eligible AUM in the ground increased in the second quarter to a record $504 billion and has more than doubled in the past three years. Net accrued performance revenue on the balance sheet firm store value grew sequentially to $6.5 billion or $5.31 per share. In the context of more supportive markets, we are well positioned for an acceleration of realizations over time. Turning to investment performance. Nearly all of our flagship strategies reported positive appreciation in the second quarter. The corporate private equity funds appreciated 3.5%, with our operating companies reporting robust revenue growth of 12% year-over-year, along with expanding margins overall. These trends reflect our favorable sector positioning and focus on high-quality businesses with pricing power, coupled with cost deceleration. In real estate, the core-plus funds appreciated 1.7% in the quarter, while the BREIT opportunistic funds were stable. We are seeing sustained strength in our key sectors in terms of cash flow growth. Half of our owned real estate is in logistics, student housing, and data centers, which have experienced double-digit year-over-year growth in market rents. In our U.S. rental housing holdings overall, fundamentals are stable with cash flows increasing at a high single-digit rate. For BREIT, over 80% of the portfolio is concentrated in these sectors, leading to strong same-store NOI growth of approximately 7.5% in the first half of the year. Looking forward, an environment of lower inflation and lower interest rates should be very favorable for our real estate portfolio overall. In credit, the private and liquid credit strategies appreciated 3.3% and 2.8%, respectively, in the second quarter, reflective of a healthy portfolio generating strong current income. Despite a moderate uptick in broader market default rates, which we do expect to rise further in our non-investment-grade portfolio, defaults remain low at less than 1%. Finally, in BAAM, the BPS gross composite return was 1.9% in Q2, representing the 13th consecutive quarter of positive performance. Over the past several years, BAAM has done an outstanding job protecting investor capital in an environment of significant volatility in liquid markets. Since the start of 2021, the BPS composite net return is up over 14% compared to 1% for the traditional 60-40 portfolio. Overall, the resiliency and strength of the firm's returns over many years is the foundation of the extraordinary growth we've achieved. In closing, the firm continues on a path of an expanding asset base, reaching $1 trillion today, and we believe ultimately well beyond. From the beginning, we've taken a very long-term view towards building an enduring business at Blackstone. Today, as the reference institution in our industry, we have the distinctive assets of our brand and reputation, our scale, and our culture, a culture defined by decades of performance and innovation. This is what has powered our success to date and what we believe will propel our future. With that, we thank you for joining the call. I would like to open it up now for questions.

We'll go first to Craig Siegenthaler with Bank of America.

Good morning Steve, Jon. Thank you for taking my question. And congrats on hitting $1 trillion. It feels like just a few years ago, you were around $70 billion at the IPO. My question is on the expanding opportunity inside the US banking industry. So first, forming partnerships. I heard in the prepared remarks, you have about five now to build that out, two buying and originating assets, and three, maybe supplying capital at some point. So now that we're four months outside of the Silicon Valley Bank failure, can you provide us an update across these three verticals?

Sure, Craig, and thank you for the kind words. What we've seen here now is banks really recognizing that there's a natural partnership between their origination capabilities and some of the long-term capital we manage, particularly for insurance companies. So what we referenced in the prepared remarks was a number of these partnerships that we have formed and have executed or are close to executing. We also have a decent pipeline behind that. And if you think about a bank with those strong customer relationships, if they're making 5-, 7-, 10-year home improvement or equipment finance loans to have a partner like us to take some of those makes a lot of sense. And so we're involved in a number of discussions with banks that want to maintain their relationships with customers, but either shrink their balance sheet or do other things to create capacity. I would also point out with the larger financial institutions, there are things to do with them to provide some balance sheet relief. We've been doing a number of those items with different pools of capital. So I think what's happening is good for the financial system. It's good for the banks, and it's obviously good for our customers, and we expect this will grow significantly over time.

One thing I'd add is it's just not a U.S. phenomenon. This is very much U.S. and European where everybody is feeling the pinch from regulatory pressure. They like to keep their customers. They like to keep producing assets, but they just don't have the balance sheet to hold all of them. So that's a particularly interesting area for us.

So a big picture question for you guys on the credit cycle. If we look across the financial system, credit losses are coming in better than feared, whether it's C&I loans at the banks or in credit and private credit. So some of this perhaps relates to limited debt maturities perhaps but also it seems like the impact of rate hikes is maybe less potent than feared. So just curious your views and outlook here. And if we look at the private credit markets, maybe you can just remind us how much of the rate risk is hedged and for how long? And how do you see this all playing out?

Mike, I think everyone has been caught off guard by how quickly the Fed has raised interest rates and how high they've gone without causing more distress. If you look at the current market, the default rates in leveraged loans are still below the long-term average, currently at 2.7%, while the average is about 3%. During the financial crisis, they spiked to around 13% or 14%. In our portfolio, defaults remain under 1%. This situation seems to be influenced by several factors, including some hedging strategies as companies seek long-term protections, but primarily, it's the solid earnings of businesses. As Michael noted, we're seeing a 12% revenue growth in our portfolio and strong revenue and EBITDA increases among our borrowers. Companies, especially in technology, are looking closely at their cost structures and becoming more profit-focused, which is supporting this growth. As we look ahead, if the economy slows down as we believe it will and rates remain high, it is likely that we will see more defaults. However, I don't anticipate a scenario like in 2008 or 2009 since we aren't facing the same levels of over-leveraging. For example, our non-traded BDC, BCRED, has an average loan-to-value of just 43%, with much of that lending occurring before the recent rate hikes. In contrast, during the 2006-2007 period, leverage levels were over 70%, which adds to why there's a greater cushion and less distress now. Overall, the current situation appears better than many expected, although we foresee tougher conditions ahead, but not nearly as severe as in the last cycle.

Jon, let me just add on that. Mike, it's Michael. Just focusing on our outperformance versus the overall market with respect to default rates, and it has been pronounced. It's important, I think, to highlight sort of our relative position and focus. And our team would call it the three Ss, scale, sector selection and seniority. On scale, we're obviously a large player. We are focused on larger issuers. And we believe, overall, it's already been shown in a high inflation world. Larger companies are more resilient with respect to performance through the cycles. And again, that's been shown, I think, in terms of more options to respond to a rising cost inflation environment recently. Second on sector selection. If you look at our portfolio versus sort of the industry average, our focus in recent years away from cyclicals, some consumer discretionary companies, and certain industrial companies has I think really paid off. And then with respect to seniority, which Jon touched on in additional loan to value, 98% basically of our direct lending portfolio in BCRED is senior secured. And actually, even our peers in the direct lending area are substantially lower than that in some cases, 70%, 75%. And so that is the top of the capital stack, and that is very protected. So I think Jon talked about the overall sort of default rates in the path, and we do expect them to rise for the market overall and for us. But our sort of experience and outperformance on default rates, which has been both historical and current, I think, has some underlying drivers that are important to highlight.

I'm interested in the overall real estate outlook. The 10-year rates have been relatively stable for some time, even as we approach the end of the short-end rate increases. I believe cap rates have also stabilized. Could you provide your perspective on our leverage position and debt service coverage? Additionally, what do you think is the general sales pitch for real estate going forward in this environment for the next few years?

Well, Glenn, I would say that there continues to be pretty significant bifurcation in commercial real estate. So we've talked about it in the past, certain sectors face real underlying fundamental headwinds that would be notably the office space in the United States, which we've talked about is less than 2% of our own portfolio. And there, I still think we have a ways to go in terms of what will be, I think, continued challenges going forward. And there will be more foreclosures and more markdowns coming in portfolios. We continue to see in a number of sectors, particularly our largest sector, logistics, very strong underlying fundamentals where rents are growing globally around double digits. Other areas like student housing with real strength, data centers, which we talked about in the remarks, again, real strength. And then other sectors, I'd say, somewhere in between those top three sectors I mentioned, represent 50% of our global portfolio. And so what I would say is in better sectors where the fundamentals are good, the fact that rates seem to belong and seem to have reached a level and may be heading lower, we'll see. I think they'll stick around here given the short end. And at some point here, 12, 24 months from now, the Fed will start to take the short end down, that's obviously positive. Because to your point, cap rate pressure is very tied to rates. And so if we're at a point in the cycle where the risk of rates going much higher is off the table, that's helpful to real estate. The other helpful pitch in real estate is you're seeing a sharp decline in new supply. So in logistics, for instance, we've seen a decline of new starts around 40%, 50%, depending on markets. Housing supply is down aggregately about 20-plus percent from where it was, and you're seeing it in hotels and other areas. And so if you think about coming out of this over time as investors, if you can invest in sectors where the underlying vacancy rates are low today, there's going to be less building and interest rates are no longer a major threat. If the asset has been marked to sort of the new market, then we think there's significant opportunity. And that, I think, is really the pitch. Today, the area we're most active in is actually European real estate, particularly in logistics because the sentiment around European real estate is so negative. And yet if you look at, for instance, rental growth in U.K. logistics, it's incredibly strong. So I think we're in a moment where everybody is extrapolating what's happening in office buildings becoming incredibly negative about the sector, but that's going to create some real opportunities. And to your point on debt, there will be needs for people to sell and to sell and inject capital because of the higher debt costs that are out there. So I think sector selection really matters as we talk about it, and then these tailwinds around rates leveling off and new supply coming down should be very helpful to the asset class over time.

Great. Maybe you just talked about two of our fastest-growing platform, direct lending, I think you mentioned $100 million. And then also the energy transition platform, if you added all your products together, maybe if you could that I know it can be difficult because obviously, some of the infrastructure and energy products or a blend of transition and core, but I don't know if you can size that. And if you think about over the next three years, I don't know if you can execute a sort of a projection on where the size of those platforms could be in three years, not maybe just confident that they will be a larger share of your overall franchise or not?

On the energy transition front, we are just getting started. We are currently finalizing the $7 billion energy transition credit fund and are actively marketing our energy equity fund, which is expected to exceed $4 billion. Energy transition represents a significant portion of our $37 billion infrastructure business, likely around one-third of that capital, and is one of the fastest-growing segments. Additionally, we have various energy transition investments integrated into our private equity business. While I don't have specific numbers available, we are deploying capital across several areas within energy transition. In the recent quarter, our largest investments were in a Northern Indiana utility where we contributed a few billion dollars to support their energy transition, and we also invested $1 billion in Invenergy, our large-scale renewables developer. Given the rapid growth of the market and increasing investor interest, we believe this segment has significant potential. A couple of years ago, we estimated that we would invest $100 billion over the decade. As you consider Blackstone, this area will require substantial capital, and the good news is that investors are keen for it. It has the potential to be large and scalable, and we anticipate an acceleration in growth. The Inflation Reduction Act has made a significant impact, with $250 billion worth of large-scale renewable projects announced in the last year alone, reflecting the opportunities available to us for growth, as well as generating additional fees and returns for our investors.

Brian, just to add to that with the numbers, Michael. The sort of fair market value of our energy transition portfolio today is over $20 billion, and there's committed capital that shortly is going to be invested and increase that number. And obviously, we have funds pointed at investing in that area in the near term. So that number will grow.

Yes, that's great. Regarding the direct lending side, I understand you mentioned $100 billion and the strong partnerships with banks and pipeline. Are there any capacity constraints that might limit the growth potential of that franchise given the positive trends and the banks' situation?

Well, I think the opportunity in the near term is quite substantial. Private equity firms and other companies require access to the capital that direct lending offers, and it has proven to be particularly valuable for new transactions. As deal volume increases, we anticipate that this area will also grow. Our pipeline for direct lending has more than doubled in the past 90 days, and we don't foresee any reasons for this momentum to slow. Of course, markets can change, but when we look at direct lending as a portion of the overall leverage lending and high-yield market, it seems there is still ample room for growth. Therefore, we believe we are still in the early stages of this transition.

So John, maybe a question on the broader capital markets environment. We've seen some green shoots with a couple of IPOs, a couple of deal announcements. So how are you sort of thinking about capital velocity for Blackstone the next, call it, six to 12 months or so? And importantly, as some of that kind of fly activity resumes, how do you expect that to reaccelerate fundraising? So meaning, are there some strategies that are likely to see more pent-up demand once this capital market cycle sort of resumes versus less? So just curious to kind of get your thoughts and environment/fundraising.

Yes, Alex, you're correct. Everything is interconnected. If you consider our clients and their allocations, it's clearly linked to market conditions. Currently, many clients are exceeding their target allocations. For example, if they have a 13% target for private equity but are at 15% or 16%, a rally in equity markets would free up capital for them to potentially reinvest in private equity. Additionally, when equity markets rise, we often see an increase in IPO and M&A activity, allowing private equity and real estate sponsors to sell assets, which helps reduce their exposure. These factors are connected. We have experienced similar cycles many times before, and we anticipate a rise in activity. The challenge lies in the uncertainty surrounding inflation, which complicates M&A and IPO processes. Recent banking concerns added to the uncertainty, as did the unpredictability regarding how far the Fed will go. However, the current outlook appears somewhat clearer, contributing to increased market enthusiasm. While there remains a possibility of an economic slowdown that could cause the market to retract, we are starting to observe a pickup in activity. A market rally usually boosts confidence in transactions, which ultimately benefits our clients. Currently, there is still some lag in fundraising activities, but a sustained positive market period would significantly enhance our ability to raise capital from both institutional and individual investors.

I want to ask about the retail wealth management channel. Seems like even though redemptions are still elevated on the BCRED side, it looks like subscriptions are relatively healthy and accelerating. So it seems that the channel as such is definitely improving. On the BREIT side, gross subscriptions may be not quite so much. So I just wanted to get your thoughts on you're hearing and seeing from the channel and maybe the outlook for the back half?

Well, you hit it. In BCRED, there's obviously a lot of enthusiasm for private credit today, given the attractive risk-return, the equity-like returns, taking debt-like risk. And so we have seen strong flows there. Q2, I think we said we're up 60% versus the flows in Q1, and that's obviously a positive. In BREIT, there is more negative sentiment obviously around commercial real estate, and there was a lot of focus here. As we said in the remarks, the good news is share redemptions are down nearly 30% from where they were at the beginning of the year. The subscriptions remain muted, but we would expect that continued strong performance. We did have three positive months here in a row, which is obviously helpful. Some of the overall negative sentiment in markets and negative sentiment in commercial real estate that abating will ultimately change that dialogue. When that happens, it's hard to project. I think the key thing, if you think about the product, is that customers have had a really terrific experience inside of BREIT. They've been delivered in the largest share class a 12% net return over 6.5 years, three times the public REIT market. And it's that performance, which ultimately we think will drive people coming back to the product and the structure, the redemption structure, the semi-liquid nature, still allowing people to get capital out. But doing it over time and preserving value, I think, has been really important. So our confidence in BREIT remains really high. When that turns, it's hard to say. But certainly, getting through the redemption backlog over time will be helpful in that regard.

Yesterday, the FCC released its planned draft merger guidelines, which appear to crack down particularly hard on platform and roll-up strategies that private equity firms have used to create some of their best outcomes. So firstly, do you have any initial thoughts on how big of an impact those changes could have on how your investment process works? And secondly, if you can try to frame how much of your historical deal volume has been a result of platform and roll-up strategies?

We believe that what the FTC announced was really just a codification of the way they've been operating the last three years. They have had this more assertive approach towards mergers. And we've been operating in that environment already. For us, we haven't seen it as large of an impact as one might expect because oftentimes, we're not present in a given market. So buying things is not as big of an issue. We have had some strategies where we have done additional acquisitions in roll-up. That hasn't been a huge portion of our activity in corporate private equity. And remember, so many of the things we do, secondaries, real estate, and private credit are not related here. But in corporate private equity on the acquisition side, it hasn't been a major issue. I would say where it's more impactful is when we're looking to exit some of our businesses, and we're talking to strategics. And there, there's a real consideration now about what is the likelihood of something getting through. And so that has had an impact on our thinking on what relative attractiveness of non-strategic players relative to strategic players. So I would say that this has been a reality of the marketplace for some time. We've been navigating through it, and we feel confident we'll continue to navigate through it. The key area of focus is really when we're looking at dispositions potentially to strategic players.

Sorry about that, still on mute. I wanted to ask about your fee-related performance revenues, they kind of surprised in the quarter and it sounds like you're still expecting an acceleration in the back half. Is there any way you could sort of size up a little bit kind of the magnitude, that acceleration? And then just sort of thinking about next year, I know there's often like a 3-year crystallization schedule outside of what we expect from BREIT. So any thoughts on what we should expect from '23 to '24 based on what you're seeing right now?

Sure, Ben, it's Michael. Yes, we've been saying since early in the year that specifically on BPP, fee-related performance revenues, we were scheduled to have 4x more AUM crystallizing this year than last year with the ramp really in the second half of the year. And that's what you're seeing playing out. Just to put some further granularity on that, right now, about 60% of the net accrued performance revenue balance for BPP, which you can see in our quarterly report, represents vehicles with scheduled crystallizations in the second half, and that's substantially weighted towards the fourth quarter. So that should give you some texture around it. That sort of AUM scheduled to crystallize next year for BPP will be lower than this year. But alongside that, our infrastructure fund will see a significant crystallization event next year. And then I'd actually also highlight on fee-related performance revenues, and we don't necessarily talk about a lot or we're not asked about a lot. On BCRED and BXSL, our two credit direct lending perpetual vehicles. They have sort of steadily expanding earnings power, and you can actually see it in the numbers. And then and obviously, both generate quite predictable fees each quarter based on investment income. And in the second quarter, those comprised approximately half of our fee-related performance revenues and taken together, they're up 67% actually year-over-year. So that is a steady sort of embedded, I think, positive thing in our fee-related performance revenue. So as I said in my remarks, there are multiple products at work here that are in a position to generate fee-related performance revenues over time.

So just following up on your comments on Asia. Performance for your first BCP Asia fund has been strong with a net return of 27%. And then it looks like the second fund is off to a strong start as well. So could you talk about what's driving the healthy performance here? And then just in terms of building out your capabilities and scale in the region more broadly, I'm assuming you'll look to do this organically, but would you ever look to strategic M&A to help accelerate growth here?

So the real story for us in Asia has been India. Our team there has really delivered, particularly in private equity at Dixon and the team have delivered amongst our highest returns globally in India. And it's represented, frankly, in real estate and private equity, about half of our Asia activities. And we had different weightings, I think, than others in the region, and that's kind of turned out to be a very good decision. We've been a control-oriented investor in India, which we think is the right strategy. We're also seeing very good opportunities in Japan today. That market is opening up to corporate selling off non-strategic divisions, and we think we'll see more volume there. And frankly, across the region, there is more opportunity. China is a little more challenging, as you know, because of the economic headwinds and some of the geopolitical issues. But in general, Asia can grow to be much larger. We don't really think we have the need to do an acquisition. We have eight-plus, I guess, offices across the region. I was there this quarter. Our momentum in places like Australia, Korea, is really strong, and we think it's a market that is under-penetrated as it relates to alternatives. And ultimately, we hope to have virtually all of our strategies in Asia at scale. So we have a sizable Asia private equity fund, sizable Asia real estate fund, we've got a core-plus real estate fund in Asia, and we're doing more on the credit side in that part of the world. Hopefully, we'll add growth. There are a lot of opportunities there given the scale of the place. Certainly, India, which has been our largest market, I think will continue to be a mainstay for us just given the incredible tailwinds that country has today.

So you're 75% of the way through the $150 billion drawn on raising target, can you just touch on the key funds that will allow you to substantially achieve it by early 2024? And then outside of the drawdown fund, like in the wealth channel, how do you think about the growth opportunity in this channel over the coming years? And are you anticipating launching some new products into that channel, either later this year or next year?

I'll start by discussing our progress toward reaching 75% completion of our target by early next year. We are actively involved in significant funds like BREP Europe, where we recently had our first close and expect that momentum to continue. We are also in the process of completing BCP9 and our fifth real estate debt fund, along with several others. Next year, we plan to fundraise for our successor vehicles in life sciences and our GP Stakes fund. Regarding the financial aspect, while we are focused on reaching 75%, it's important to note that less than half of the $150 billion flagship fundraising is currently generating management fees. This is because fee generation lags behind fundraising due to the timing of fund deployments, and we anticipate that this percentage will increase over the coming quarters into 2024. That provides an overview of our progress.

And then the question was around individual investor, well, new products, yes. We are, I don't know if we're prepared to talk about the latest funds, but we do think there's more opportunity. Doing what we do today at greater scale in a different range of products, I think later this year, we'll launch something new. And one of the areas we've already started small in Europe with some other products. There's a lot of opportunity. Investors are just discovering individual investors just discovering the benefits of alternatives. The semi-liquid structures are new to many investors. And we think this is a long process. Our major competitive advantage is we started this much earlier than other people. We have a very large private wealth organization. Joan Solotar and her team have done a terrific job with many people around the world. We've built up relationships with financial advisers. And then I think the thing that is hard to capture our numbers is the power of the Blackstone brand. We were able to start products. It's no different than us doing insurance on a capital-light basis. Our ability to create new products and for financial advisers and their customers to allocate more to us because of the confidence in the brand is really important. And so the real consideration for us is when we launch a new product, we have to make sure the structure is right and that the returns we generate are sufficient because ultimately, this is a very long-term partnership with the financial advisers and their underlying clients. So what we do has to work, and that's why we're so focused, and we're deliberate in terms of the way we launch new products, but we definitely see more opportunity over time.

Maybe if you could spend a minute on the FRE margin. You've done so 58% through the first half of 2023. How do you think about that through the back half of the year? And if you could give some color around the expense side. You've shown some discipline on the fee-related comp ratio I guess, can you help us think about core expense growth through the rest of the year? Any detail there would be really helpful.

Sure. As we've said pretty consistently, we encourage everyone to look at full year periods, not entry in our quarterly periods with respect to margins. There's puts and takes from quarter to quarter and intra-year. So again, I'd say looking at full year 2023, we would just reiterate our prior comments around margin stability as compared to fiscal '22, the full year. In terms of components, I think you referenced this, recognizing that we reported other operating expense down 2% in Q2, and that we do think that we bring a pretty disciplined approach to managing our costs. There are a couple of caveats on that as you think about the second half. As you know, OpEx is seasonally higher in the second half typically, and also OpEx growth in the first half of the year benefited from the absence of COVID costs in this first half versus the presence of it a year ago. And so we're all happy to say, we're through those now, but the second half OpEx growth rate will not have that benefit. So that's a little bit of texture around it. But around both margin and overall comp ratio, I would just point you to the kind of full year period.

If I could come back to private credit, you talked a lot about the golden moment here. It certainly looks like when we look at the yields and terms. I'm just wondering about deployment, which has been understandably slow. How does this evolve going forward? I suppose it's linked to capital markets healing in which case, perhaps there's a comeback from the delevered loan market and more competition, so the market share shift. I'm just wondering how to think about that.

So it's obviously tied to transaction volume. And as I said, we have begun to see a pickup, which should lead to an acceleration of deployment and credit. These things are tied together. And yes, when people get enthused about credit, the leveraged loan market could and should see more flows. But I do think there is a structural advantage of private credit because if you don't need to distribute that, if you're in the storage business, you can deliver to the borrower, the private equity sponsor price certainty. And that's very hard for a financial institution who is selling it down and obviously wants to manage their risk. I think where it becomes more competitive is on existing loans where somebody starts to look to refinance, and when spreads tighten at some point, that's where the leveraged loan market becomes more competitive or the high-yield market, if people believe that long rates have come down and spreads have come down. But in the new origination business, that's an area where I think direct lenders have a real sustainable advantage. It, I think, becomes more competitive for existing loans when at such time that the existing market tightens a fair amount. That hasn't happened yet. But that could in a better market. But overall, transaction activity, to your point, is obviously tied to originations. And when both those things pick up, we think that's a positive thing.

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Great. Thank you, everyone, for joining us today, and I look forward to following up after the call.