Earnings Call Transcript - BX Q1 2024

Weston Tucker, Head of Shareholder Relations

Thanks, Katie, and good morning, and welcome to Blackstone's first 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 and slide presentation, which are available on our website. 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 may differ from actual results materially. We do not undertake any duty to update these statements. For discussion of some of the factors that could affect results, please see the risk factors section of our 10-K. We'll also refer to certain 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 consent. So on results quickly, we reported GAAP net income for the quarter of $1.6 billion, distributable earnings were $1.3 billion or $0.98 per common share and we declared a dividend of $0.83, which will be paid to holders of record as of April 29th. With that, I'll turn the call over to Steve.

Steve Schwarzman, Chairman and CEO

Good morning, and thank you for joining our call. Blackstone reported strong results for the first quarter of 2024, including healthy distributable earnings of $1.3 billion as Weston mentioned, underpinned by the highest fee related earnings in six quarters. On our January earnings call, following a volatile multi-year period for global markets, we noted an improving external environment and shared our view that 2023 would be the cyclical bottom for our firm. While changing market conditions take time to translate to financial results, including realizations and performance revenues, we are seeing positive momentum across many key forward indicators at our firm. Inflows were $34 billion in the first quarter and $87 billion over the past two quarters. We invested $25 billion in quarter one and $56 billion in the past two quarters with a strengthening pipeline of new commitments. We’re planting the seeds of future value and what we believe is a favorable time for deployment. At the same time, our fundraising in the Private Wealth channel meaningfully accelerated in the first quarter. Sales for our perpetual life vehicles increased more than 80% from the fourth quarter to $6.6 billion. We've stated before that short term movements in stock and bond markets impact capital flows in this channel. But ultimately, flows follow performance as well as innovation as we're seeing now. We've delivered 10.5% net returns annually for BREIT's largest share class over more than seven years and 10% for BCRED over three plus years. And we continue to successfully launch new strategies, including our private equity vehicle, BXPE, in the first quarter. With $241 billion of AUM in Private Wealth at Blackstone, we have the leading platform in our industry by far. We've established a significant first mover advantage with the number one market share for each of our major seasonal products, along with a high percentage of repeat business across strategies. Blackstone is built on long term investment performance. We've achieved 15% net returns annually in corporate private equity and infrastructure since inception, 14% in opportunistic real estate and secondaries, 12% in tactical opportunities and 10% in credit. In the first quarter, our funds reported steady appreciation overall, highlighted by strength in infrastructure, credit and our multi-asset investing platform, BXMA. Our portfolio is in excellent shape, and our limited partners continue to benefit and we've positioned their capital, emphasizing new neighborhoods, such as digital infrastructure, logistics and energy transition. The firm's thematic approach to deployment is informed by the real-time data and insights we gather from our global portfolio, which helps us to identify trends early and build conviction around our ideas. Blackstone is the largest and most diversified firm in the alternatives area with over $1 trillion of assets under management and we believe our knowledge advantage consequently is a unique asset in our industry. For example, digital infrastructure, one of the firm's highest conviction investment themes today, is a powerful example of this knowledge advantage at work. Just as we recognized the rise of e-commerce nearly 15 years ago and started buying warehouses, we anticipated a paradigm shift around demand for data centers, driven by growth in content creation, cloud adoption and now, the revolution underway in artificial intelligence. Others now know that AI requires exponentially more computing power and capacity than was previously imagined. On a personal basis, in less than two weeks, I am participating in the dedication ceremony for the Schwarzman College of Computing at MIT, which will be heavily focused on this area. What has Blackstone done with our conviction? We identified QTS, the fifth largest US data center REIT as a well-positioned but poorly trading public company with tremendous long-term potential. Our BREIT, BIP Infrastructure and BPP perpetual strategies acquired the company for $10 billion in 2021, and its lease capacity has already grown sixfold in less than three years. Today, QTS is the largest data center company in North America. We are building a variety of other center platforms around the world as well. In total, Blackstone vehicles now own $50 billion of data centers globally, including facilities under construction. And there is an additional $50 billion in prospective future development pipeline. Blackstone is highly differentiated in our ability to conceptualize the new business area and transform it into a $100 billion potential opportunity. We are also actively investing in other companies in AI related areas. We're buying as well as financing several firms that design, build and service data centers. We recently financed a cloud infrastructure business supporting AI development. And now we've transitioned to addressing the sector's growing power needs, leveraging our sizable energy infrastructure platform, which includes the largest private renewables developer in North America. There are several other powerful megatrends that we expect to drive the firm forward, both in terms of where we invest and where we raise capital. The most compelling of these today include the secular rise of private credit, where we have one of the world's largest platforms; infrastructure, energy transition, life sciences and the expansion of alternatives globally and particularly in Asia. In each of these areas, we've established leading platforms with tremendous momentum. Looking forward in 2024, the market environment will remain complex. The economy is stronger than expected but is starting to slow a bit. In terms of inflation, despite the recent US CPI readings, we are seeing a decelerating wage growth and minimal input cost increases across many of our companies. In real estate, we see shelter costs moderating, contrary to government data. We believe inflation will trend lower this year, although the pace of decline has slowed recently. Geopolitical turbulence, including wars in the Middle East and Ukraine, adds further uncertainty to the business environment. And 2024 is a major election year as we all know with nearly half of the world's population going to the polls, which injects unpredictability around the future of important policies that impact the global economy. Blackstone is well positioned against this evolving backdrop. Our portfolio is concentrated in compelling sectors and we have the industry's largest dry powder balance of nearly $200 billion to take advantage of opportunities. Our long-term capital provides the flexibility and firepower to invest while affording us the patience to sell assets when the time is right. The firm itself could not be in a stronger position with minimal net debt and no insurance liabilities, allowing us to distribute $4.7 billion to shareholders over the past 12 months through dividends and share repurchases. And we are in the early days of penetrating markets of enormous size and potential. With that, I'll turn it over to John.

Jon Gray, President and COO

Thank you, Steve, and good morning, everyone. We are pleased with the firm's performance in the first quarter and the momentum building across our business. This momentum is underpinned by three key developments; first, the transaction environment has strengthened; secondly, in private credit, demand from both investors and borrowers is expanding; and third, our private wealth business is reaccelerating. I'll discuss each of these areas in more detail, starting with the transaction environment. The market backdrop has become more supportive. The 10-year treasury yield is still down from its October peak despite the recent run-up. Borrowing spreads have tightened significantly and the availability of debt capital has increased significantly. We're also seeing M&A activity and the IPO market restarting. As we've stated before, the recovery will not be a straight line but we're not waiting for the all-clear sign to invest. We deployed $25 billion in the first quarter and committed an additional $15 million to pending deals, including subsequent to quarter end. We were most active in our credit and insurance area, which I'll discuss further in a moment. In real estate, we shared our view in January that commercial real estate values were bottoming, providing the foundation for an increase in transaction activity. This has coincided with several major investments by Blackstone. Just last week, we announced a $10 billion take-private of a high-quality rental housing platform, Air Communities, which follows our announcement in January to privatize Tricon Residential. Rental housing remains a major investment theme for us given the structural shortage in this space. The US is building roughly the same number of homes today as in 1960 despite having almost twice the population. We are also quite focused on European real estate where we've now raised $7.6 billion for our new flagship vehicle as of quarter end. In private equity, we closed the acquisition of Rover in the first quarter, a leading digital marketplace in the pet space, along with an online payments business in Japan and a healthcare platform in India. The economy in India, which I visited two weeks ago, remains incredibly strong. We're fortunate to have what we believe is the largest private equity and real estate platform in that country. Back home, our dedicated life science business announced a $750 million collaboration with Moderna to support the development of mRNA vaccines for influenza. And our growth equity fund invested in 7 Brew, an innovative quick-service coffee franchisor. As Steve highlighted, we are planting the seeds of future realizations. Turning to the second key development, our expansion in private equity credit. There is powerful innovation underway in the traditional model of providing credit to borrowers. Our corporate, insurance and real estate debt businesses comprise over 60% of the firm’s total inflows in the first quarter and nearly 60% of deployment. We continue to see strong interest in non-investment grade strategies, such as opportunistic, direct lending and high-yield real estate lending. We're also now seeing a dramatic increase in demand from our clients for all forms of investment grade private credit, including infrastructure, particularly in energy transition and digital infrastructure, residential real estate, commercial and consumer finance, fund finance and other types of asset-based credit. In our investment-grade focused business, we believe there is a massive opportunity to deliver higher returns to clients with lower risk by moving a portion of their liquid IG portfolios to private markets. Alternatives have taken meaningful share of public equity portfolios over the past 30 years but little on the fixed income side. In the insurance channel, this migration has been underway and we've created a capital-light, open architecture model that can serve a multitude of limited partners. Worth noting we crossed the $200 billion AUM milestone in insurance this quarter, up 20% year-over-year. In addition to our four largest clients, we now have FMA relationships with 14 insurers, which continue to grow in number and size. We placed or originated $14 billion of A-rated credits on average for them in the first quarter, up 71% year-over-year and nearly $50 billion since the start of 2023. These credits generated approximately 200 basis points of excess spread over comparably rated liquid credits. In addition to insurance clients, pension funds and other LPs see the value we're creating in private credit, and there's been a strong response to our product offerings. With nearly $420 billion in BXCI and real estate credit, we're extremely well positioned to directly originate high-quality assets on behalf of a much larger universe of investors. We've also established numerous origination relationships as well as bank partnerships, most recently with Barclays and KeyBank in areas like consumer credit card receivables, fund finance, home improvement and infrastructure credit, and we plan to add more. These arrangements are a win-win. They create more flow for our investors who want to hold these investments, these assets long term, and they help our partners better serve their customers. We expect our credit and insurance platforms to grow significantly from here. Moving to the third key development, the reaccelerating trends in our private wealth business. In January, we noted our momentum building as market volatility receded. And with the launch of BXPE, we now offer three large-scale perpetual vehicles, providing individual investors access to even more of the scale and breadth of Blackstone. Our sales in the wealth channel were a robust $8 billion in the first quarter, including $6.6 billion for the perpetual strategies, as Steve noted. Subscriptions for the perpetuals increased 83% from Q4 and marked the best quarter of fundraising from individuals in nearly two years. BCRED led the way, raising $2.9 billion. BXPE has received a very strong investor reception, raising $2.7 billion in its debut quarter, and we plan to expand to more distributors over the coming months. Over 90% of advisers that have transacted with BXPE have previously done so with BREIT or BCRED, illustrating the affinity for our products and the power of the Blackstone brand in this channel. At the same time, BREIT has successfully navigated a challenging two-year period for real estate markets. Its semi-liquid structure has worked as designed by providing liquidity while protecting performance. BREIT has delivered double the return of the public REIT index since inception over seven years. This outperformance continued with strong results in Q1, underpinned by outstanding portfolio positioning that includes growth in its data center exposure. Repurchase requests in BREIT have fallen 85% from the peak to the lowest level in nearly two years and the vehicle is no longer in proration. We're now seeing encouraging signs in terms of new sales while repurchase requests are continuing their decline in April as well. We are confident in the recovery of BREIT flows over time given performance. When looking at the $80 trillion private wealth landscape overall, allocations remain extremely low, and we expect a long runway of growth ahead. In closing, the firm is exceptionally well positioned, supported by both cyclical and secular tailwinds, that's why we believe the future is very bright for Blackstone. With that, I'll turn things over to Michael Chae.

Michael Chae, CFO

Thanks, Jon, and good morning, everyone. The firm delivered strong results in the first quarter, highlighted by the reacceleration of fee related earnings. I'll first review financial results and will then discuss investment performance and the forward outlook. Starting with results. Fee related earnings increased 12% year-over-year to $1.2 billion or $0.95 per share, the highest level in six quarters and the third-best quarter in firm history, powered by double-digit growth in fee revenues, coupled with the firm's robust margin position. With respect to revenues, the firm's expansive breadth of strategies lifted management fees to a record $1.7 billion. Notably, Q1 reflected the 57th consecutive quarter of year-over-year growth of base management fees at Blackstone. Fee related performance revenues doubled year-over-year to $296 million generated by multiple perpetual capital vehicles in credit and real estate, including a steadily growing contribution from our direct lending business, scheduled crystallization in our European BPP logistics strategy and BREIT. The setup for these high-quality revenues is favorable in 2024 and beyond, which I'll discuss further in a moment. With respect to margins, the FRE margin was 57.9% in the first quarter, in line with full-year 2023. Distributable earnings were $1.3 billion in the first quarter or $0.98 per common share, stable year-over-year and underpinned by the growth in FRE. Net realizations remain muted at $293 million. And going forward, we expect a lag between improving markets and a step-up in net realizations. In the meantime, the firm's strong underlying FRE generation has supported a consistent and attractive baseline of earnings with Q1 representing the 10th consecutive quarter of FRE over $1 billion. We did execute a number of sales in the quarter, including a stake in one of the largest cell tower platforms, public stock of the London Stock Exchange Group and the sales of certain other public and private holdings. We also closed or announced several dispositions in our real estate and infrastructure perpetual vehicles, which as a reminder, do not earn performance revenues based on individual asset sales but on NAV appreciation. These included a trophy retail asset in Milan for EUR1.3 billion, representing the largest real estate single asset sale ever in Italy, portfolio of warehouses in Southern California and a prime office building in Seoul. Each of these sales generated a substantial profit individually and in aggregate, a gross multiple of invested capital of approximately 2 times. These dispositions exemplify the significant quality and embedded value within the firm's investment portfolio. Turning to investment performance. Our funds generated healthy overall appreciation in the first quarter, as Steve noted. Infrastructure led the way with 4.8% appreciation in the quarter and 19% over the last 12 months with broad gains across digital, transportation and energy infrastructure. The QTS data center business was the single largest driver of appreciation for BIP, BREIT and BPP US and for the firm overall in Q1. The comingled BIP vehicle has generated 15% net returns annually since inception, powering continued robust growth with platform AUM increasing 22% year-over-year to $44 billion. The corporate PE funds appreciated 3.4% in the quarter and 13% for the LTM period. Our operating companies overall reported healthy, albeit decelerating, revenue growth along with margin strength. In credit, we reported another outstanding quarter in the context of strong fundamentals and debt marks generally and tightening spreads with a gross return for the private credit strategies of 4.1% and 17% for the LTM period. The default rate across our nearly 2,000 non-investment grade credits is less than 40 basis points over the last 12 months with zero new defaults in our private credit business in Q1. Our multi-asset investing platform, BXMA, reported a 4.6% gross return for the absolute return of composite and 12% for the last 12 months, the best quarterly performance in over three years and the 16th quarter in a row of positive returns. Since the start of 2021, the composite has delivered nearly double the return of the 60-40 portfolio net of fees, a remarkable result in liquid markets. Finally, in real estate, the Core+ funds appreciated 1.2% in the first quarter, while the BREP opportunistic funds appreciated 0.3%. These returns include the negative impact of currency translation for our non-US holdings related to the stronger US dollar, equating to a 20 and 60 basis points impact on each strategy respectively. As Jon noted, we see a recovery underway in commercial real estate, and in our portfolio cash flows are growing or stable in most areas. Overall, strong returns lifted net accrued performance revenue on the balance sheet, affirming store value sequentially to $6.1 billion or $5 per share. Meanwhile, performance revenue eligible AUM in the ground increased to a record $515 billion. The resiliency and strength of the firm's investment performance over many years and across cycles powers the Blackstone innovation machine and provides the foundation of future growth. Moving to the outlook, where several embedded drivers support a favorable multiyear picture of growth. First, the firm has raised approximately $80 billion that is not yet earning management fees and new drawdown fund vintages that haven't yet turned on along with certain other funds. These will commence when investment periods are activated or capital is deployed depending on the strategy. We plan to activate our corporate private equity flagship this quarter, which has raised over $19 billion to date, followed by an effective four months of fee holiday. We expect to activate several other drawdown funds over the balance of the year followed by respective fee holidays. Second, our platform perpetual strategies has continued to expand, now comprising 45% of the firm's fee-earning AUM. As a reminder, our private wealth perpetual vehicles, including BREIT and BCRED, generate fee-related performance revenues quarterly as will BXPE starting in Q4 of this year. Our institutional strategies, BPP and real estate and BIP and infrastructure, generate these revenues on multiyear schedules with a sizable crystallization for the comingled BIP vehicle scheduled to occur in Q4 of this year with respect to three years of accrued gains. Third, our investment-grade focused credit business is on a strong positive trajectory, as Jon highlighted, and we expect $25 billion to $30 billion of inflows again this year from our four major insurance clients. In closing, the firm is moving forward in a position of significant strength. Our momentum is accelerating in key growth channels and our underlying earnings power emerging from this period of hibernation continues to build. We have great confidence in the outlook for the firm. With that, we thank you for joining the call. I would like to open it up now for questions.

Operator, Operator

We'll go first to Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst

I wanted to dig in on infrastructure, the platform continues to build, I heard $44 billion AUM, strong returns, 15% net. Maybe you could just update us on the platform build-out, the initiatives here that can help accelerate growth. It seems like there's a tremendous market opportunity out there. Just curious what you see as the gating item on seeing this business multiples of the size, maybe talk about some of the steps you're taking around expanding your origination funnel and infrastructure and as well as expanding the vehicles for capital raising across the return spectrum and customer sets globally?

Jon Gray, President and COO

Infrastructure is clearly an area with a lot of potential for us. As a reminder, our program is less than six years old at this point, and we're already at $44 billion. The key, like building everything we do is delivering performance for the customers. Sean Klimczak and the team have delivered 15% net returns since inception in an open-ended vehicle, which is different than many of the other players in the space. We think that is a very powerful model because it allows us to partner with other long-term holders and it matches the duration of the capital to long-duration infrastructure. We positioned the business in three big areas; transportation infrastructure, coming out of COVID; energy and energy transition, obviously, a very important area today for a whole host of reasons; and then digital infrastructure, which Michael pointed out, has been the biggest driver of value both in real estate and in infrastructure and across the firm in this most recent quarter. So we think we've done a really exceptional job deploying the capital. We have a lot of clients who are quite pleased. I think the base business can grow. And I think there are opportunities geographically to expand this. Our current fund is focused primarily on the US but we've done a number of large things in Europe. And I think there's opportunities in infrastructure in both Europe and Asia over time, and it's an area that we have real strength. I would add to the mix, infrastructure credit, something we're doing as well. And interestingly, when you think about what we're doing for insurance clients, what we have in infrastructure and things like digital infrastructure, green energy, it’s very helpful for investment-grade debt as well given our insights and relationships. So this is an area where we're still seeing investors showing a lot of enthusiasm. I think it will continue to be a growth area on the back of what we built. I think we can create other products. And we see this growing to be, I think, as we've talked about in previous calls, a triple-digit AUM business.

Michael Chae, CFO

And Jon, I'd just add on, and I think you might agree that, I think if you step back, Mike, you could analogize it’s sort of the multi-decade growth path of real estate, that business overall with respect to another area of relapse that's infrastructure, and that is geographic/regional expansion, expansion up and down the risk-return spectrum, cross asset classes between equity and debt and also serving different customer channels, whether it's retail insurance or institutional. So that's another way to dimension it.

Operator, Operator

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

Craig Siegenthaler, Analyst

My question is on real estate. With deployments increasing in both the Tricon and Apartment Income take privates, and considering your comments earlier this morning, it appears that Blackstone’s perspective is that the impact of work from home and interest rates is now reflected in cap rates. Given this, could you share your thoughts on our position in the investment cycle regarding dry powder at BREP, BPP, and BREIT? Additionally, I would appreciate your views on returns now that BREIT is back above its prep, improving the outlook for the second quarter.

Jon Gray, President and COO

As we discussed earlier, there are two significant challenges we're facing. The first relates to the office sector in the US, where we have minimal involvement, affected by remote work trends and the capital requirements of older office buildings. The second is the increase in interest rates and the widening spreads that occurred. I believe both of these factors peaked around October and have since worked their way through the market. There will inevitably be ongoing negative headlines regarding assets financed under different conditions as they continue to progress. It's reminiscent of what happened to a ship at sea before it reaches shore. Following the financial crisis, real estate values hit a low in the summer of '09, but there were negative reports about real estate for the following three years. During that time, we invested capital into that dislocated market when sentiment was still cautious. Looking ahead, we are confident due to the reduced cost of capital. We have observed a significant tightening in spreads, approximately 125 basis points in CMBS during the first quarter and through late last year. Additionally, CMBS issuance increased fivefold compared to the first quarter of 2023. Importantly, we expect the Federal Reserve to eventually lower interest rates. On the supply side, we’ve seen an 80% reduction in new logistics projects and a 50% decline in peak starts for multifamily housing, which helps establish a better foundation. In terms of timing, I view this period as one for planting seeds where investing during this dislocation is crucial due to uncertainty and potential forced sellers. As conditions normalize, we can expect an acceleration in returns. Initially, we are focused on deployment, followed by realization, similar to the period after the global financial crisis, which is how we approach it. Furthermore, we have a substantial global fund of $30 billion. We have raised over $7.5 billion in Europe, and most of our $8-plus billion Asia fund remains uninvested, providing plenty of capital for opportunistic investments. We are proactively looking to deploy, even though we acknowledge that many assets from the previous environment are still working through the system.

Operator, Operator

We'll go next to Alex Blostein with Goldman Sachs.

Alex Blostein, Analyst

My question is around BXPE. Really strong momentum out of the gate, obviously, $2.7 billion that you guys highlighted this quarter and over the last couple of months. What's the vision for this product, I guess, in terms of both capacity and maybe the appropriate size for the strategy as well as the pace at which you feel comfortable taking in inflows? And I don't want to draw too much parallel with BREIT, obviously, very different product, very different customer base. But thinking of that one, I think, peaking at north of $70 billion, how are you thinking about the size and opportunity for BXPE?

Jon Gray, President and COO

Well, I think it's a great question, Alex. One of the things we did when we designed BXPE was to make the platform as broad as possible so that we could scale the product and we could be flexible on behalf of investors in terms of where we deployed it. So control large-scale private equity is part of it; US, Europe, Asia is part of it; Tactical Opportunities, more hybrid equity, part of it; life sciences growth, part of it; secondaries, infrastructure, some opportunistic credit. It's a very broad platform and it enables us to deploy a lot. One of the advantages of Blackstone is just our scale and the amount of deal flow we see across all these different areas. And particularly our connectivity with many other sponsors in the private equity space through our secondaries, our credit business, our GP stakes business, we can be great partners to those folks. Obviously, we can manufacture a lot of transactions ourselves. So we think the potential scale here is quite large. You pointed out BREIT scale, we're over $30 billion of equity, nearly $60 billion of assets in BCRED. We think this can grow a lot. The key is we have to deliver strong performance to the underlying customers. We have to be disciplined in how we deploy capital and thoughtful. I think we've been doing that. I think we'll continue to do that. And that's what gives us a lot of confidence, which is investors want exposure to private equity, individual investors want a little bit of a different structure, and that's why I think BXPE is so attractive. So I think as we come out of this period over the last two years where there's been a lot of caution and negativity, as market sentiment improves, as we show the strong performance from our other individual investor products, I think there's a potential here of pretty good size. Again, we've got to do a good job deploying capital but I've got a lot of confidence, particularly given the breadth of the platform. So the short answer is I think this can grow to be much larger than it is today.

Operator, Operator

We'll go next to Dan Fannon with Jefferies.

Dan Fannon, Analyst

Michael, last quarter, the message for this year on margins was stability. The first quarter was flat with last year. As you think about the momentum in the business that you highlighted and the prospects for growth and growth in AUM, how are you thinking about margins as you think about the rest of the year?

Michael Chae, CFO

I believe my message remains clear. To begin with, the results for the first quarter are quite stable and consistent, aligning well with both the same quarter last year and our overall expectations for 2023. As always, we advise looking at the full year rather than focusing on individual quarters. Based on that perspective, we want to emphasize margin stability as an important point. Furthermore, consistent with our long-term outlook, we see operational leverage embedded in our business model. We actively manage our cost structure, and we remain confident in our ability to maintain a strong margin position that we can expand and leverage over time. To reiterate, margin stability is the key takeaway, and we are optimistic about our capacity to grow that over the long term.

Operator, Operator

We'll go next to Glenn Schorr with Evercore ISI.

Glenn Schorr, Analyst

I got a question to peel back the onion a little bit on this commentary on bank partnership. So when we watch you do something like Barclays where you've taken a credit card book and give to your insurance clients, that makes sense to us, that's like a cash transaction, it's tangible. So we read a little more about the rising of synthetic risk transfer trends. And I'm just curious, that's something that's obviously harder for us to follow. It gives us shivers. It reminds us about 16 years ago. Curious of your thoughts on how much SRT is going on in the industry, how much you do, and maybe you can talk about what type of partnerships you envision going forward?

Jon Gray, President and COO

We are very active in synthetic risk transfers and believe we are the market leader in collaborating with our bank partners. These transactions provide capital relief, as they involve sharing in or taking first loss positions. We have been working with various highly creditworthy banks. Our strength in asset ownership and corporate and real estate credit gives us an advantage. The most active area for us has been subscription lines, which, as you may know, have seen virtually no defaults in the last 30 to 40 years, making it a favored area. In terms of investment grade or non-investment grade, we have focused on revolvers, which historically have had lower loss ratios. We examine these portfolios carefully to assess the credits we are engaging with. This is done not as Blackstone but on behalf of our investors in different vehicles and funds. We have been operating in this space for several years, and I believe our capability to analyze the underlying credit rather than just relying on macro predictions is our competitive advantage. This approach allows us to scale efficiently with the banks. It creates a win-win situation; it alleviates some of the Basel pressure and balance sheet issues for the banks, while we generate favorable returns. Overall, I think this is beneficial for the entire system, and our team is very skilled in executing these transactions responsibly.

Operator, Operator

We'll go next to Crispin Love with Piper Sandler.

Crispin Love, Analyst

So in recent weeks, there's definitely been a shift in the rate outlook as we're likely in a higher for longer scenario, which is very different than just three months ago. So can you just talk a little bit about how that might impact your outlook for investment activity and putting dry powder to work going forward and then just how it might shift the areas where you're most excited about deploying capital?

Jon Gray, President and COO

Well, I do think it extends the investment window a bit for our $191 billion of dry powder. I think as people were getting closer to anticipating rate cuts, you saw big rallies in both equity and debt markets and that can make it a little bit tougher to deploy capital. In some ways, it's helpful for financings but it also can drive prices up. From our perspective, because we're buying assets so often for longer periods of time, the fact that a rate cut may happen 90 days or 180 days later is not really a long-term negative and if anything, allows us to get into some assets at more favorable pricing. So the way I would think about it is it extends out to deployment period. It may slow some of the realizations and push them out a bit as well. But when we think about delivering value for our customers, we see it as a positive. Obviously, for businesses like our credit business, which is mostly floating rate, it enhances returns for our underlying customers. I do think it's important to note that unlike October and the end of the summer when rates moved and spreads really gapped out, we haven't seen that accompanying change. So markets seem to be in a much healthier spot. But I do think it probably prolongs the investment window here. And as we keep saying, we're not going to wait for the all-clear sign. You saw a big ramp-up. We had $25 billion of deployment in the quarter. And I think in terms of commitments and then as of quarter end plus beyond the quarter end, we have another $15 billion that's committed. So you're seeing us move. We did our first deal in growth in quite some time. Real estate, we've talked about, we’ve obviously accelerated there. In our secondaries business, the pipeline of deals we're looking at is about 2x where it was 90 days ago. So we're seeing a pickup in activity. It won't be everywhere. But I do think it creates more of a chance for us to deploy capital at prices we find attractive.

Operator, Operator

We'll go next to Brian Bedell with Deutsche Bank.

Brian Bedell, Analyst

Maybe just to add on to that question on that pace of deployment in two specific areas, real estate and credit. Just going back to the comment you just made, Jon, about extending the period. But does that make you sort of more excited about potential opportunities given that’s extension of the period that could depress prices in real estate? And with massive dry powder, especially in real estate, could that bring that level of deployment back up to sort of prior year levels in the mid to high $40 billion ranges? And then just secondarily in private credit, a little different dynamic with less dry powder but more fundraising. So I guess, same question there or do you think you can get up to sort of similar types of record levels in the mid to high $40 billions in like on, say, for 2024 for deployment?

Jon Gray, President and COO

Brian, it's challenging to quantify things, so I'll speak in general terms. I believe that when interest rates rise, the public markets tend to react more significantly than the private markets. For real estate, this can create greater opportunities for scalable deployment as some stocks rise, especially if the debt market remains stable. This disconnect can create opportunities. We've observed an increase in real estate activity in Europe, partly due to distress, and despite negative sentiment, the fundamentals in our targeted sectors are quite strong. In Europe, I anticipate that rates will decline faster than in the US, which is beneficial. In short, this should facilitate real estate deployment. Regarding private credit, we have considerable momentum, particularly in the investment-grade and asset-backed sectors, where we are currently most active. The demand for capital in digital and energy infrastructure is substantial, driven by the need for power connected to digital infrastructure and the electrification of vehicles and reshoring efforts. This demand for capital will likely persist regardless of the interest rate environment. On the direct lending side, we've noticed some tightening of spreads. A decrease in rates will encourage deal activity, and I believe we'll see an uptick at that point. Overall, our pipeline for credit, both in investment-grade and non-investment-grade sectors, has been accelerating. While it's difficult to predict the precise outcomes, we are optimistic about the momentum and deployment. I also gauge activity by how many investment memos I bring home over weekends, and that number has definitely been increasing, which is a positive sign. While it's hard to predict the exact manifestation of this trend, it appears that this year will be more active for deployment compared to last year.

Operator, Operator

We'll go next to Ken Worthington with JPMorgan.

Ken Worthington, Analyst

Looking into BPP, net accrued performance revenue, $73 million. I assume, down on this quarter's crystallizations. But IRRs are down to 6%, which I think is below the hurdle rate there. I know BPP is a collection of front-end investments, like BioMed and Mileway. What needs to happen here for returns to recover and accrued performance fees to build into what I think are big crystallizations anticipated for next year?

Jon Gray, President and COO

You are correct, Ken. There are various vehicles with different hurdle rates and performance levels, some higher and some lower. We believe that real estate has reached a lower point recently. Fortunately, it is a cyclical business. When new supply stops and capital costs decrease, we can expect a recovery. Historically, after downturns like those in the early '90s, the early 2000s, and the global financial crisis, we’ve seen this pattern. The advantage is that these are long-term investments, and we will retain this capital for an extended period. Eventually, we will encounter other opportunities when key crystallization events arise. We believe we are well-positioned in attractive sectors and regions, particularly with significant exposure to logistics in Europe and high-quality data centers in our investment vehicles. Overall, the combination of the quality of our assets and an improving sentiment in the sector should lead to regular unrealized performance fees. It is simply a matter of time. A significant portion of our earnings is currently dormant, yet we are still generating $0.98, despite incentive fees being lower than their long-term potential and realizations in our opportunistic and private equity funds falling short. There is considerable embedded upside within the firm, and while we can’t predict an exact timeline due to the recovery pace, we are optimistic that commercial real estate will recover in time and that the necessary foundation is already being established.

Operator, Operator

We'll go next to Ben Budish with Barclays.

Ben Budish, Analyst

I wanted to follow up on Dan's earlier question about the margins. I have a couple of housekeeping items for Michael. Regarding the fee-related performance compensation ratio, it seems to have been a bit lower in the quarter than we anticipated, and it appears to be somewhat volatile over the past year compared to the 40% range we usually expect. Can you provide any insights on that? Additionally, the stock-based compensation increased slightly this quarter, and I’m curious about how we should view that trend for the remainder of the year.

Michael Chae, CFO

I believe there is variability in the margins related to fee-related performance revenues over time. However, it's crucial to consider fee revenues and compensation collectively on a business-by-business basis. This approach allows us to manage these factors thoughtfully over time. Therefore, you can expect to see variability in BREP margins in the long run, with some aligning more closely with the overall firm margin. In the short term, fluctuations will occur as we manage everything holistically for the benefit of the firm and shareholders. Regarding equity-based compensation, there is a seasonal aspect in the first quarter that affects this line item, along with other factors. If we examine the growth trajectory, Q1 saw a year-over-year increase of about 19%. This growth is lower than the overall 2023 growth rate of 23%, which itself was about half of the growth rate for 2022. Consequently, we anticipate this trend will gradually decrease over time due to stable grant levels, and we view that as a positive development.

Operator, Operator

We'll go next to Steve Chubak with Wolfe Research.

Steve Chubak, Analyst

So it was encouraging to hear the positive commentary on private credit deployment despite the reopening of public or syndicated markets. But given the increased competition for deals, you know that credit spreads are tightening, high levels of credit dry powder. Curious if you're seeing any tangible signs or evidence of credit underwriting standards potentially growing more lax and how that could dampen the pace of deployment across the credit platform?

Jon Gray, President and COO

It’s a good question. And obviously, at very high multiples. Today, in the first quarter on our direct lending, the average loan to value was 44%. And now part of that, of course, is driven by the fact that interest costs to have coverage given the high base rates, there's only so much debt you can bear. So we're definitely not seeing reckless levels in any way in terms of what we've seen in terms of loan to value. Spreads have come down but on direct lending today are probably 500 over, still pretty good by historic standards. Interestingly, liquid markets have tightened far further. So if you look at investment-grade or high yield, we've seen much more movement there. So we still see this as a sector where the risk-return for lending money is quite favorable. If you're earning 500 over a base rate today, that's 5.5 plus upfront fees, you're earning 11.5% on an unleveraged basis if you put a little leverage better than that. So the risk-return to us still feels compelling. Some sponsors are taking risk for the common equity, not the capital structure. So overall, we have not seen signs of excess. And there's pretty good discipline in the market and that gives us a lot of confidence.

Michael Chae, CFO

Jon, I want to add to that. To clarify Jon's point about 44% loan-to-values, this indicates that since these are primarily sponsored transactions with new equity being invested, 56% of the capital structure in a new deal is provided by cash equity from high-quality sponsors, which is subordinate to this debt. This adds another layer to our risk-reward assessment. Regarding default rates, as I mentioned earlier, we experienced less than 40 basis points for our business in the first quarter. We are showcasing strong performance, especially considering that a couple of years ago there were concerns about default rates for companies like ours. There is a clear distinction in performance based on borrower selection and individual private credit players. We are currently operating at a significantly lower rate than the overall market default rate, which is stabilizing. Therefore, we feel very confident, especially as we lead in deploying capital in private credit.

Operator, Operator

We'll go next to Brennan Hawken with UBS.

Brennan Hawken, Analyst

Just two on real estate, one housekeeping and one sort of more forward-looking. Could you touch on the impact of the rate hedge in BREIT in the first quarter and April to date? And then more on the forward-looking side, appreciate the comments on supply and real estate. But given that rates have actually started to back up and sure long rates are a little off the peak but not by much. What drives the confidence in real estate bottoming, wouldn't we need the cap rates to move up as much as base rates or close to as much as base rates have moved up in order to draw that demand into the market?

Michael Chae, CFO

Brennan, first, just on the data question in terms of the impact of the swaps, it was about 1 point out of the 1.8% net performance for BREIT.

Jon Gray, President and COO

And then on cost of capital, certainly a rising 10-year, not helpful, but I think it's important to put it into context. As you noted, it's lower than it was in October but also debt capital being so important. So if you went back to October, it was extremely difficult to borrow money. Spreads were much wider and banks were very reluctant to lend in the space. In the first quarter, as I noted, we've seen a fivefold increase in CMBS issuance. So the fact that debt capital is more available and the cost is meaningfully lower because of the spread not as much the base rates, that's a helpful sign. So it is more positive than it was six months ago. Backing up 10-year treasury, as I noted, not helpful. But the fact that overall, it does feel to us at some point here the Fed is going to bring rates down, there will be some downward pressure, that should be helpful. But the cost of capital overall coming down is helpful. And that's why we're seeing, even today, despite the backup in rates more folks showing up to buy assets than certainly we saw six months ago.

Operator, Operator

We'll go next to Bill Katz with TD Cowen.

Bill Katz, Analyst

Just coming back to the opportunity in global wealth management. I was wondering if you could talk a little bit about where you're seeing the volume coming from, to the extent you get that kind of granularity from the distributors? And then secondly, just given the tremendous focus on many of your peers into the space, also wondering how you sort of see the competitive environment unfolding as we look ahead?

Jon Gray, President and COO

We see demand as quite broad-based. There's significant strength in the US with our largest distribution partners. We've been building these relationships with financial advisers and their clients for a long time. The strong performance of our drawdown funds and products like BREIT and BCRED has generated goodwill that we can leverage. I’d say demand is broad-based in the US, and we are also experiencing strength overseas. Japan has shown increased openness to our products, and we've achieved success there. Traditionally, markets linked to China, such as Hong Kong and Singapore, are slower currently, but we have seen strength in those areas over time as well. Europe and Canada are emerging markets for us. So, this is a global story; it's primarily US-focused but expanding. Notably, within the US, the penetration of financial advisors is in the early stages, with only a small percentage currently allocating to alternatives. We believe this can grow significantly as clients start recognizing the benefits of alternative investments, trading some liquidity for higher returns. There’s plenty of room for growth, and with over 300 people on Joan Solotar's team, our strong brand, and robust performance, we believe we are well-positioned and differentiated in this market.

Operator, Operator

We'll go next to Brian McKenna with Citizens JMP.

Brian McKenna, Analyst

I believe you've recently hired a senior data exec to leverage AI across your private equity portfolios. So can you talk about your approach to leveraging data and AI across your portfolios and what that might mean for additional value creation over time? And then can you also talk about how you leverage data on the deployment front? I'm assuming a lot of the data you have across the entire platform gives you insight into emerging trends globally. And so how does all of this translate into where you ultimately invest?

Jon Gray, President and COO

So AI is obviously hugely important for our business, for the global economy. I would just frame this by saying, we set up our data science business back in 2015. We've got more than 50 people on that team today. We have focused historically on predictive AI, which is basically numbers in, numbers out. So you could look at a company and you could look at their pricing history and you could do much more sophisticated revenue management than human beings could do, similarly in terms of staffing. And we've been using that as a tool for investing for quite some time now and we'll continue to do this. And we've been pushing it out to some of our portfolio companies. I would point out also that Steve personally with his investments at MIT and Oxford has been a leader thinking about AI. And that has, I think, pushed the firm to try to do more in this space because we had more recognition something profound was happening here. I would say on the generative AI front, it's still very early days in terms of applications. The ability to take language and put that into the machine, produce language or videos, I think it will have a powerful impact, but that's going to take a bit of time. And what I think it will do most is impact customer engagement for many of our companies. I think it will also, on the content side, help in software development and media development. And we're working by hiring data scientists working with our teams, we hired a senior executive recently. But I'd still say on the generative side, it's early days. Now on the investing overall, what we've tried to do is focus on the infrastructure around AI and that is primarily data centers. And by going out there and investing in $50 billion of data centers that we own or have under construction and another $50 billion in development pipeline globally, which Steve talked about that really is the infrastructure. We're also spending a lot of time on power, which is a key necessity to build these data centers. And then we've made a number of investments around cloud companies, contractors building these, the whole ecosystem. So as a firm, we're trying to spend a lot of time. It's early days for us. The biggest impact has been around the infrastructure. But we're working hard to find ways to help our companies be more competitive, and we're certainly trying to make our investment process better. So an area definitely worth focusing on.

Operator, Operator

We'll go next to Patrick Davitt with Autonomous Research.

Patrick Davitt, Analyst

So there's been increasing regulatory focus on the more illiquid stuff, the ABS that you and others are originating for insurance balance sheets and to what extent those should have a higher risk weighting. I know insurance regulators work very slow. But what are you hearing from your 18 big insurance clients on that issue and are you seeing this concern factor into new business conversations with that channel at all?

Jon Gray, President and COO

So I think there's a lot of discussion around these areas. A lot of the focus has been around securitizations or synthetic securitizations, creating different ratings than a direct rating. A lot of the activities, though, that we've been talking about here have been literally doing private assets investment grade, and very similar to what insurance companies have been doing in commercial mortgages and private placement debt for decades. What we're really doing is taking that model of senior, what we believe to be safe debt on average A rated in infrastructure, in all forms of asset-based finance, in residential finance and putting that directly on insurance company balance sheets. And I think regulators and participants see that as generally a good thing because it's generating higher returns. There's a little less liquidity. Although I would point out when you look at things like ABS bonds, there's not a lot of liquidity as it is, but there is a little less liquidity. But the risk profile of the assets is very much in line, if not safer, than what our clients have done historically. So I think there's going to be more scrutiny. As you know, in the insurance space, we made a conscious choice. We're not an insurance company. We really see ourselves more like BlackRock or PIMCO, what they do for liquid assets for insurance companies, we're doing a similar dynamic for insurance companies and private assets. And we think what we're doing is very sound, it saves, it generates, on average, 200 basis points of higher return than comparably rated liquid assets. We think this is a good thing for policyholders. So we think there will be a lot of dialogue with regulators, but the activities we're focused on, we think will be well received over time.

Operator, Operator

With no additional question in the queue, I'd like to turn the call back over to Mr. Tucker for any additional or closing comments.

Weston Tucker, Head of Shareholder Relations

Thanks, everyone, for joining us today and look forward to following up after the call.