Blackstone Inc

NYSE:BX

Earnings Call Analysis

Blackstone Navigates Tough Market, Stands to Grow

Amidst market volatility and rising interest rates, Blackstone reported a stable net income of $921 million and distributable earnings of $1.2 billion. Despite difficult conditions, including declining equity indices, their diversified portfolio largely outperformed market indices. They slowed down the selling of assets due to the unfavorable environment for realizations but maintain a strong underlying earnings power. Blackstone anticipates its BXCI real estate credit to grow AUM from $370 billion to $1 trillion in the next decade, reflecting the firm's strength and positive sector dynamics. Notably, high interest rates are reducing real estate construction starts by 30% to 70%, suggesting a more favorable long-term outlook for existing properties. With over $200 billion in dry powder, Blackstone is well-prepared to utilize future growth opportunities in the alternatives sector.

Resilient Revenue Growth and Strong Margin Performance

The company's operating entities have demonstrated resilience with high single-digit revenue growth in the third quarter, especially noteworthy due to strong margin performance as cost pressures started to diminish. A significant point for investors is the increase in base rates which has yielded positive outcomes for clients, giving them the ability to originate senior loans at appealing yields and low loan to value ratios. The company also boasts about its low default rates and the outperformance of its BAAM's 14th consecutive quarter compared to a standard benchmark.

Impressive Expansion in Total Assets Under Management

The company has achieved a milestone by increasing Total AUM by 6% year-over-year, now exceeding the $1 trillion mark. This inflow of assets is attributed to the demand for private credit solutions and the success of credit, insurance, and real estate credit businesses which account for more than half of total inflows. Furthermore, the firm's infrastructure platform has rapidly grown to $40 billion in just five years, with future projections envisioning it becoming a $100 billion business, leveraging global needs for infrastructure and energy transition investments.

Fee-Generating AUM and Management Fee Uplift

The company's earning AUM increased by 4%, reaching a record $735 billion, prompting a 6% rise in base management fees to $1.6 billion. Fee-related earnings remained robust, largely unaffected by market forces such as activity-based fee declines, showcasing a stable earning capacity over the last 55 consecutive quarters. Investors should note the importance of perpetual vehicles and funds in contributing to consistent fee-related performance revenues.

Strategic Realizations and Outlook for Fund Structures

The company has been prudent with its asset realizations, exhibiting a preference for quality over quantity in the present market. Despite fewer realizations, there has been a distinct focus on the stability of fee-related earnings, evidencing an eighth consecutive quarter with over $1 billion in such earnings. The company is poised for potential acceleration in realization activity when market conditions are more favorable, underscored by the growth of performance revenue eligible AUM to a record $505 billion.

Anticipating Long-term Double-Digit Fee-Related Earnings Growth

Despite not providing granular guidance for 2024, the company's long-term perspective is optimistic, anticipating sustained double-digit growth in fee-related earnings (FRE). Key growth drivers include the imminent activation of additional drawdown funds and continued expansion of the perpetual strategies platform, promising a bolstered top line growth notable in the insurance area with AUM up by 18% year-over-year.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the Blackstone Third Quarter 2023 Investor Call. Today's call is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Weston Tucker, Head of Shareholder Relations. Please go ahead.

[Weston Tucker, executive]

Thank you, Katie, and good morning, and welcome to Blackstone's third 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. 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 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.

On results, we reported GAAP net income for the quarter of $921 million. Distributable earnings were $1.2 billion or $0.94 per common share. And we declared a dividend of $0.80, which will be paid to holders of record as of October 30.

With that, I'll turn the call over to Steve.

[Stephen Schwarzman, executive]

Good morning, and thank you for joining our call.

Before we begin, I wanted to take a moment to acknowledge the recent events in Israel. We were shocked by the horrific terrorist attacks that occurred, which are an affront to our shared human values. And we are deeply saddened by the violence and tragic loss of life unfolding in the region. Our thoughts are with the people of Israel, our colleagues there and all of those enduring pain and hardship throughout the region.

Turning to our results. The third quarter of 2023 was a volatile period for global markets, including a dramatic increase in bond yields. Most major equity indices have declined and the median U.S. stock is negative on a year-to-year basis. Higher interest rates, along with the confluence of other factors, including economic uncertainty, geopolitical turbulence, high fiscal deficits, political dysfunction and labor unrest have adversely impacted investor sentiment. Today's environment is an extremely challenging one for investors to navigate.

Against this backdrop, Blackstone generated distributable earnings of $1.2 billion in the third quarter, which were stable with the second quarter. The environment today is less favorable for realizations, so we've chosen to sell less. But the firm's underlying earnings power continues to build, and we remain focused on executing the operating plans for our companies and driving the long-term value of our holdings.

Our limited partners continued to benefit from the favorable positioning of our portfolio with resilient fundamentals in the sectors where we've focused, which Jon will discuss further. The result is that nearly all of our flagship strategies outperformed market indices in the third quarter, as they have for nearly 40 years.

The firm's global scale gives us deep insights into what's happening in the real economy, which inform how we position the firm and construct our portfolios amid changing conditions. We've been saying consistently that we believe the Fed will keep rates higher for longer, and we didn't share the previous consensus view that they would cut rates by the end of this year.

What we are seeing in the data: an economy that's strong today, but decelerating. We also see that significant progress is being made on inflation, perhaps more so than other market participants, based on the movement in bond yields recently. In our portfolio, we estimate input costs were largely flat year-over-year, wage growth is moderating and job openings are declining.

Though it will take time, we believe the collective weight of central bank actions will bring about the intended effect of cooling the economy, leading to the conditions for a more accommodative Fed stance and an eventual easing of the cost of capital.

Meanwhile, Blackstone's unique diversity and breadth with over 70 distinct investment strategies position us extremely well to navigate any environment. The balance of our firm allows us to pivot to where we see the greatest opportunities at a given point in the cycle. For example, our credit businesses are thriving today in the context of very favorable operating environment, given higher base rates, along with challenges to traditional lenders.

Investment performance has been outstanding, including 14.4% appreciation over the last 12 months in our private credit strategies and 4.6% just in the third quarter. Unsurprisingly, client demand in this area is accelerating across all channels: institutional, insurance and individuals.

In keeping pace with this evolving opportunity, we recently announced the integration of our corporate credit, asset-backed finance and insurance groups into a single new unit, BXCI. We expect this integration will create a more seamless experience for clients and borrowers, allowing us to offer a one-stop solution across corporate and asset-based private credit, including both investment grade and non-investment grade.

We believe these changes will further accelerate growth and that BXCI, real estate credit, collectively, could grow AUM from approximately $370 billion today to $1 trillion within the next 10 years given the powerful secular tailwinds and strength of our platform.

In addition to credit and insurance, we are seeing compelling near-term dynamics in several other areas where Blackstone has established leading businesses, such as infrastructure, notably, including digital infrastructure; energy transition and life sciences. The private wealth channel also remains a tremendous long-term opportunity for the firm. Jon will discuss the positive developments in these areas in more detail.

Overall, limited partners continued to move away from the traditional 60-40 liquid portfolio. And despite market headwinds, they are allocating more capital to the best alternative managers across more asset classes.

Blackstone is extremely well positioned to capture future opportunities for growth in the alternatives area, which remains early in its long-term development. We are the reference institution among global LPs, a position that has been continually reinforced across market cycles of nearly 40 years. We have led the industry's evolution, and I expect we will continue to lead it in the future.

Last month, we were gratified that S&P Dow Jones chose Blackstone as the first major alternative manager to be included in the S&P 500, the largest benchmark index and the last one where Blackstone was not yet a part of following our conversion to a corporation in 2019. This milestone is a further reflection of the firm's leadership position in our industry and the broader market, as well as our progression as a valuable and widely owned public company.

Most importantly, we've continued to generate exceptional long-term results for both our fund investors and our shareholders. This is our mission, it's what drives us forward as a firm. While the market environment will undoubtedly present challenges, we'll also provide opportunities we are well positioned to capitalize upon with over $200 billion of dry powder. These are the times that best highlight the distinctiveness of our firm and the enduring nature of our culture. Everyone at Blackstone is completely focused on delivering for all of our stakeholders.

And with that, I'll turn it over to Jon.

[Jonathan Gray, executive]

Thank you, Steve, and good morning, everyone. The investment performance we've consistently produced over decades has created a huge reservoir of goodwill with our customers, allowing us to grow even in difficult periods. Meanwhile, our platform expansion provides multiple ways to win for them across market cycles. And as Steve noted, virtually all customer channels are increasing their allocations to alternatives over time, many in a material way. These key pillars give me great confidence in the future of Blackstone.

Starting with investment performance. Our funds generated positive appreciation overall in the third quarter compared to declines in nearly all major market indices with significant strength in private credit, infrastructure and Life Sciences. Against a backdrop where the cost of capital has risen considerably, it is critical to own high-quality businesses with secular tailwinds or assets that benefit from higher rates like floating rate credit.

In real estate, Blackstone is in an extremely differentiated position. The majority of the equity portfolio is in logistics, data centers and student housing, which continue to benefit from robust fundamentals. Our data center business, QTS, held in BREIT, BPP and our infrastructure vehicle was the single largest source of appreciation at the firm, driven by explosive growth in data creation that is being accelerated by the AI revolution. Since privatizing the company 2 years ago, lease capacity has grown sixfold with the development pipeline pre-leased to major tech companies. And we are evaluating additional deployment opportunities in the space.

In logistics, the firm's largest exposure overall, trends remained favorable with re-leasing spreads in our U.S. warehouses of over 60% in recent months, and similarly, strong dynamics in many of our other major logistics markets globally. At the same time, market rents continued to move higher.

In certain other areas of the portfolio, including our U.S. apartment buildings, we're seeing moderation in growth. But cash flows are stable or increasing across the vast majority of our real estate holdings. That said, higher interest rates are impacting valuation multiples in the sector. This is also having the effect of meaningfully reducing the new supply pipeline, which is favorable for values longer term.

Construction starts are falling sharply for virtually all types of real estate, including year-over-year declines of 30% to 70% for U.S. apartment buildings, warehouses and hotels. And in a dislocated market, having $66 billion of dry powder in real estate is a significant advantage.

In corporate private equity, our operating companies reported resilient, high single-digit revenue growth in the third quarter with strong margin performance as cost pressures continued to abate.

In credit, the increase in base rates has been very positive for our clients. Today, we can originate high-quality senior loans with all-in yields of over 12% at sub-40% loan-to-value ratios. Meanwhile, our existing portfolio is stable and default rates remain historically low at under 50 basis points for our noninvestment-grade holdings. In our investment-grade credit portfolio, in 2023, we've delivered 140 basis points of excess spread to our major insurance clients while materially improving credit quality.

And finally, BAAM had its 14th consecutive quarter of positive performance for the BPS Composite. Since the start of 2021, BAAM has achieved a 17% cumulative composite net return compared to a 2% decline in the 60-40 portfolio, equating to exceptional outperformance in liquid markets.

The strength of our returns and the breadth of our firm allow us to continue raising significant capital in a very difficult fundraising environment. Total inflows were $25 billion in the third quarter and $139 billion over the past 12 months. The greatest demand today is for private credit solutions, as Steve discussed. And our credit, insurance and real estate credit businesses comprised over 50% of total inflows again in the third quarter.

In the insurance channel, our major clients allocated $5 billion to us in the quarter bringing AUM to $178 billion with a promising pipeline of additional prospects.

We also finished raising our energy transition private credit fund, BGREEN, with the strategy reaching $7.5 billion, the largest of its kind in the world. And in the individual channel, BCRED, raised $2.5 billion in the third quarter, up 36% from Q2 on the back of strong performance.

Outside of credit, other major fund closings in the third quarter included our European real estate flagship, which has raised over EUR 4 billion to date. Over half of our investment activity in real estate this year has been in Europe given greater dislocation and pressure on sellers in the region.

We also raised $1.2 billion in tactical opportunities, $1.1 billion for secondaries vehicles and an additional $500 million for our corporate private equity flagship.

We previously highlighted several other growth avenues with favorable momentum. We've been innovating and planting seeds in these areas, which have now blossomed into major businesses at Blackstone. Our infrastructure platform has grown to $40 billion in only 5 years, including 28% growth in the last 12 months. Performance has been extraordinary with 17% net returns annually since inception for our BIP vehicle. Given the immense funding needs for infrastructure projects globally and outperformance, we believe this could be a $100 billion business over time.

Key areas of focus include digital infrastructure, such as QTS, along with the energy transition. BIP's largest investment in Q3 was a wind and solar portfolio from AEP, which is part of a broader renewable asset strategy. Other significant investments by the firm recently in energy transition include additional capital in the nation's largest private renewables developer and a stake in a major U.S. utility to support its transition to green energy.

And in credit, we committed $600 million in Q3 to a platform we're building to provide preferred equity financing to leading renewable companies.

With BIP and our dedicated credit and private equity energy transition vehicles, we are extremely well positioned to benefit from the massive tailwinds in this rapidly growing sector.

In Life Sciences, our BXLS business had a terrific quarter and is experiencing strong momentum. Our funds appreciated 11.7% with notable positive developments for several life-saving medications and technologies, including an anticoagulant drug to help prevent strokes, a treatment for hypertension and a next-generation implantable defibrillator. We're also being -- actively deploying capital most recently to help fund a leading biotech firm focused on treatments for rare diseases. We plan to start raising our next Life Sciences flagship vehicle early next year.

Finally, in Private Wealth, we raised $3.3 billion in our perpetual vehicles in the third quarter, led by BCRED.

For BREIT, while sales remained muted due to the environment at $724 million, repurchase requests have declined materially, down nearly 30% from Q2 and nearly 60% from the January peak. BREIT's largest share class has delivered 12% net return since inception, approximately 7 years ago, nearly 4x the public REIT index. Meanwhile, all investors [ who ] have been submitting repurchase requests during the proration period have been substantially redeemed in 6 months or less. BREIT's semi-liquid vehicle has worked exactly as intended by providing liquidity for investors in a deliberate and thoughtful way while protecting performance.

Blackstone has established the largest private wealth alternatives platform in the world. Now in addition to our perpetual strategies in real estate and credit, we're extending our leading franchise to include private equity with the launch of a new perpetual vehicle, BXPE. This diversified vehicle will leverage the firm's unique breadth of investment capabilities across the PE spectrum, including buyout, secondaries, tactical opportunities, life sciences and other opportunistic strategies. We are working with several distributors and expect inflows to start early next year. We're excited to add this new vehicle to our product lineup and remain optimistic about our long-term growth trajectory in this vast and underpenetrated channel.

In closing, despite the market's near-term challenges, we remain focused on delivering for our investors over the long term. We are executing our asset-light, brand-heavy strategy with minimal net debt and no insurance liabilities. And we have powerful momentum across a multitude of growth channels of enormous size.

With that, I will turn things over to Michael.

[Michael Chae, executive]

Thanks, Jon, and good morning, everyone. The headline for the firm's financial performance in the third quarter is stability amid a challenging external operating environment. Despite executing fewer sales in less favorable markets, we are generating a consistent and attractive baseline of earnings and dividends for shareholders. Meanwhile, we continued to expand the foundation of the firm's earnings power across multiple drivers of growth.

Starting with results. As Steve and Jon highlighted, the firm's extraordinary breadth has supported continued growth in AUM despite the broader market declines. Total AUM increased 6% year-over-year, moving beyond the $1 trillion milestone, led by 10% growth in the credit insurance segment. Fee-earning AUM rose 4% to a record $735 billion, driving base management fees up 6% to $1.6 billion, reflecting the 55th consecutive quarter of year-over-year base management fee growth at Blackstone.

Fee-related earnings were $1.1 billion in the third quarter or $0.92 per share, largely stable with Q2 underpinned by steady top line performance along with the firm's strong market position. The year-over-year comparison was affected by a decline in transaction fees, which are activity-based, as well as lower fee-related performance revenues.

Notwithstanding these headwinds, the firm generated $275 million of fee-related performance revenues in the third quarter across multiple perpetual vehicles in real estate and credit, notably reflecting the growing contribution from BCRED along with a material year-over-year increase from the BPP platform.

Distributable earnings were $1.2 million in the third quarter or $0.94 per share, again, stable with Q2.

On a year-over-year basis, net realizations declined given the market backdrop. However, we did execute the sales of public stock in the London Stock Exchange Group and our stake in an India-based software company, along with certain other holdings in private equity.

Realizations also included a significant sale in BREIT, which, as a reminder, does not earn performance revenues based on individual asset sales but on NAV subject to a hurdle. The sale was of a self-storage company for $2.2 billion, one of the largest-ever transactions in the sector, which generated a profit of over $600 million and a gross multiple of invested capital of 1.8x in less than 3 years. BREIT's asset sales since the beginning of last year when interest rates began moving materially higher have occurred at an average premium to their prior carrying value of 4%.

Overall, we've been highly selective in terms of realizations, and activity is likely to remain muted in the near term given the environment. But the firm's FRE continues to provide real balance to earnings, and Q3 represented the eighth consecutive quarter of FRE over $1 billion.

Meanwhile, our long-term fund structures let us focus on building value in the portfolio while we wait for market conditions to improve.

Performance revenue eligible AUM in the ground increased in the third quarter to a record $505 billion and has nearly doubled in the past 3 years. Net accrued performance revenue on the balance sheet, the firm's store value, stands at $6.4 billion or $5.29 per share. We hold an expansive portfolio of exceptional quality and embedded value, including $16 billion of public stock in our private equity and real estate drawdown funds. When markets ultimately become more receptive, we are well positioned for an acceleration in realization activity as well.

Moving to the outlook. We remain highly confident in the multiyear expansion of the firm's earning power and FRE with several embedded growth drivers. First, in our drawdown fund business, we've raised nearly 80% of our $150 billion target, but less than half was earning management fees at quarter end. We launched the investment period for the new European real estate flagship in September, which will earn management fees after an effective 4-month fee holiday for first closers. Over the next several quarters, subject to deployment, we expect to activate the new flagships for private equity, private equity energy transition, growth equity and infrastructure secondaries, followed by the respective fee holidays.

Second, our platform of perpetual strategies has continued to expand, including BCRED, which generates fee-related performance revenues quarterly based on investment [ detail ] and our BIP infrastructure vehicle with its next crystallization scheduled to occur in the fourth quarter of 2024 with respect to 3 years of gains.

Third, in the insurance area, AUM has reached $178 billion, as Jon noted, up 18% year-over-year, driven by robust inflows from our major clients from whom we anticipate substantial, largely contractual inflows in the years ahead.

In closing, the firm's all-weather business model provides resiliency and staying power in difficult markets. Meanwhile, our underlying earnings power continues to build and we have greater investment firepower than ever before. With multiple growth engines driving us forward, we are well positioned for the future.

With that, we thank you for joining the call. I would like to open it up now for questions.

[Operator]

[Operator Instructions] We'll go first to Glenn Schorr with Evercore ISI.

[Glenn Schorr, analyst]

I'll try to simplify this because you just went through some of the building blocks for '24 and beyond. But it feels like there has to be a little bit of reset down just because in this environment, performance fees can only be so much. So maybe my key question is if you've had good strong double-digit FRE growth in the past, can we see double-digit FRE growth in '24 given the building blocks that you just ran through?

And maybe a side bar to that is, can real estate and private equity work in a higher-for-longer rate backdrop, which we seem to be in?

[Michael Chae, executive]

So Glenn, thank you for the question. It's Michael. I think on the first one -- I think Jon will handle the second. Obviously, at this point, especially for 2024, we're not going to give granular guidance. I would say there are a number of key drivers that certainly inform our view over the long term of sustained double-digit FRE growth.

In the [ nearer ] term, I think it's really important the point that I spent time on in my remarks, which is the idea that management fee revenues, which were stable quarter-over-quarter, really have an underlying ramp that based on activation of a number of these funds that will be a tailwind for our top line growth.

And so as I said, $150 billion flagship fundraising cycle, as we've talked about, nearly 80% raised and less than half, about 45%, earning management fees as of the end of the quarter. We expect that percentage to move up to a substantial majority of that total amount in the coming quarters by sort of the middle of next year. So that is a built-in thing.

And the reason why, if we step back again, why that ramp has been somewhat slower than maybe it was expected a couple of years ago is because of market conditions and deployment because basically a lower deployment environment in the context of these markets, the investment periods last, all else equal, longer for the predecessor funds and the launch of the new funds are delayed. So the money is substantially there from a fundraising standpoint. From a management fee earnings standpoint, it will come on as these funds launch, after fee holidays as is the case with the European fund.

I think on fee-related performance revenues, if you step back, I highlighted the credit fee-related performance revenues. If you look in the segment financials, those were up in the credit segment, 31% in the third quarter, 57% in the 9 months year-to-date. So there's real expansion going on there. And as you know, that earns incentive fees every quarter on the NAV base based on investment income, which is a very steady growing source of fees.

And then BREIT, we think, is a portfolio well positioned. And in BPP, we have a scheduled crystallization in the fourth quarter. We have a meaningful amount next year. And then we have a very significant, as I mentioned, scheduled crystallization on infrastructure in the fourth quarter of next year. That is a fund that's appreciated 17% net historically, and we'll have another 5 quarters of gains built into whatever the ultimate incentive fees late next year.

So I would just give that as a framing for the underlying earnings power that we certainly see is very much intact long term. And in the near term, near term and in next year, there's a significant, I think, underlying momentum.

[Jonathan Gray, executive]

I'll just add, Glenn, to your question on can the firm operate in real estate and private equity, maybe more broadly, in a higher-rate environment. And I would just point to, over decades, this firm has delivered for customers in higher rate environments and lower rate environments. And the reason is what we do at our core is what creates the incremental return. So if you buy a business or asset, you improve the management, you allocate capital in the right way, you can generate higher returns even if borrowing costs are higher. And so we have a lot of confidence that we can do that.

The other thing I would point out is when you get to an environment of higher rates, as we're seeing on the screen, asset prices can come down. So your entry point in, in a higher rate environment allows you to set up transactions better. Over time, as rates come back down, maybe you then see some more multiple expansions. So there's more opportunities for deployment.

And I would also add that at a moment like this, dislocation comes about. And so when you're sitting on $201 billion of dry powder, there can be situations where people need to raise capital in a hurry, need to sell something quickly. And again, that's advantageous for our model. Because if you think about what we do, we're not forced sellers of assets on the one side and yet we have the ability to move very quickly when there is dislocation to take advantage of an opportunity.

And then more broadly, a bunch of our capital solutions business related to private credit, certainly; tactical opportunities, which I think will be super helpful and people deleveraging their portfolios; our secondaries business, which provides liquidity as well, they're well positioned in this environment.

So the environment changes, we move from low rates to high rates. But it doesn't mean the basic business of delivering better returns has gone away, and the clients' desire for this continues to be extremely high.

[Operator]

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

[Michael Cyprys, analyst]

I was hoping you might be able to elaborate on the deployment and realization environment activity. It seemed like activity levels were starting to pick up in August, but then slowed a bit in September as yields went higher. So what will it take for the green shoots that we were seeing just a couple of months ago to convert to sustained capital markets activity?

And if current levels of rates persist for the next year or 2, what sort of impact might that have broadly on activity levels, perhaps in for sales and real estate? But also what sort of impact might higher rate have on the broader system and the potential for credit losses?

[Jonathan Gray, executive]

Okay. Mike, there's a lot embedded there. Let me go -- on transaction activity, it's not a surprise when you see in the third quarter and now in the fourth quarter long rates moving as rapidly as they are that market participants pause and you see a suppressing of transaction volume. And we've seen this in the past in moments of market volatility and instability. And so until you get some settling out of that, I think it will mute the transaction activity on all sides.

I think the positives here are the Fed, I believe, is pretty close to done. We believe that based on the progress they're making against inflation. Also the long end, I think, will start to do a fair amount of work for them as it drives up mortgage rates, as it drives up consumer loans like auto loans. And so I think getting stability in the rate environment, starting with the Fed on the short end and some settling here on the long end, will be important.

What's important to remember, of course, is there is cyclicality to the transaction environment, but there's ultimately underlying demand for people to buy and sell businesses. It could be a company that needs to sell a division. It could be a family. It could be somebody who needs to refinance because of a maturity. And you look back over the long history of the firm, again, over 4 decades, there are periods, certainly after the financial crisis, where things were slow. Very slow for a few weeks, of course, during COVID.

You can go back to other periods of time. But eventually, it comes back because people need to transact. So it's hard to put a date on this. But I would say as a predicate for transaction activity to pick up, you want to see a little bit of settling of rates. If we get that, I do think you will. Our pipelines in our various businesses actually are reasonable today. We've got some transactions we're doing, it's certainly not an elevated level. But I do think we need a little settling in the environment.

And so I would say we have extremely high long-term confidence that there will be plenty of opportunities to deploy the capital we've raised. It's very hard to put your finger on exactly when that's going to happen.

You also asked about the, I guess, the financial system and so forth. Whenever you have sharp movements, that does create some additional risk. So far, we haven't seen anything out there, but there are incremental risk given the sharp movement we've seen in rates. I think that the Fed and the fiscal authorities did a good job in March handling that banking issue. It's hard to predict where the next spot may be. The good news is the underlying U.S. economy has shown remarkable resilience. That's provided some ballast.

And then I would say the financial system overall is so much less leveraged than what we experienced in the '06, '07 period. Consumers don't have nearly the same kind of leverage they did in housing. Businesses are so much less leveraged.

So there's always a risk that something. There could be some bump out there, but the system just as healthier as we go into this more dislocated time in the market.

[Operator]

We'll take our next question from Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

Jon, I'd love to get your perspective on the impact that higher interest rate environment is going to have on investment performance and portfolio marks, especially into year-end in real estate and private equity as kind of higher discount rates get reflected. Or maybe the flip coin, some of the higher rates already reflected in your assumptions.

So just trying to get a better sense of like is there another sort of leg down based on the 10-year having done what it's done or the worst on the markets is largely behind you guys?

[Jonathan Gray, executive]

Well, Alex, obviously, things are fluid. The 10-year has moved a fair amount in the last month or so. But we -- the good thing about our businesses' background has been how we positioned the portfolios. We said here in the remarks that our private equity portfolio had 8% revenue growth and margin expansion in the quarter, which was obviously quite positive. In real estate, our positioning majority of our portfolio that we own in logistics and student housing and data centers has made a big difference for us. Faster growth allows you to absorb a higher rate environment, but no one is immune.

It's hard to predict where things are going to sit a couple of months from now, what's going to happen over time. Higher rates do have an impact across valuations, but obviously, there's an interplay with cash flow. So I certainly don't want to get in the business of predicting what it's going to be, but this is a headwind out there in markets and you're seeing it on the screen right now.

[Operator]

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

[Craig Siegenthaler, analyst]

If we take the last [indiscernible] and we look a little bit further out, most economists are expecting the U.S. economy to weaken next year and most bond investors are forecasting rising defaults broadly. So I wanted your perspective on how you think this will impact private asset returns, especially in private credit and real estate. And could this lead to more investing opportunities next year [indiscernible]

[Jonathan Gray, executive]

Well, I think it's reasonable to assume if you have elevated levels of rate and you have the economy slow down that, that puts more pressure. And I think most market forecasters are anticipating higher default rates in various sectors.

I would say that we're starting off a very low default rate today. I mean in our private credit portfolio, less than half of 1%. In our BCRED vehicle, I think we have just 1 asset that's on nonaccrual. So we certainly are starting off in a very good spot.

Overall, if you talk to the banks, you guys are closer to that, I think default rates are fairly low. They're starting to pick up a little bit in subprime.

But I think it is reasonable to assume there's going to be more pressure in real estate, certainly. In some of the most challenged asset classes, I think we'll see higher default rates. The cost of capital and less availability will have an impact. And having this large pool of capital, that huge amounts of dry powder really in almost every part of the firm should help us a lot. And one of my partners, Kathleen McCarthy, said this is when we do our best work.

And I think that's a good description that when there's high uncertainty, people need capital in a hurry. And you're willing to take a longer-term view on asset values and normalization, you can step in, in these times and make attractive investments. So yes, when we think about what makes us enthusiastic, having this large pool of capital with some more pressure out there, that should create opportunities. But overall, we would go into this environment with the financial system and default rates pretty healthy at this point.

[Michael Chae, executive]

And Craig, it's Michael. I'd just add to that, that -- and this is particularly focused on our private credit, noninvestment-grade portfolio, that we're talking about quite low loans-to-value against a very healthy portfolio today, quite performing portfolio today.

So as you know, in our direct lending area, the average loan-to-value of this portfolio that we've built over the last few years, around 40%. So when you just -- and the underlying companies in quite good position, supported by very supportive financial sponsors in many cases.

And so when you think about even a rising default rate from a very low starting point, as Jon mentioned, against anything resembling sort of historical recovery values on a theoretical basis and then you combine that with sort of the total return available right now in the private credit area, with those portfolios, I think that performance can absorb what may come from our point of view.

[Operator]

We'll take our next question from Finian O'Shea with Wells Fargo Securities.

[Finian O'Shea, analyst]

A question on retail. Can you talk about the potential for BXPE, given it's formatted as a private offering? Can it be distributed as broadly as, say, BREIT and BCRED? Or is it meant for different market channels?

[Jonathan Gray, executive]

So I'm not sure how much we could talk about the subscription of these individual vehicles, but BXPE is structured a little bit differently, which means the universe is a little more limited, but I would say is still very large. We think the response to this, a more accessible private equity vehicle that offers private equity secondaries, tactical opportunities, growth, life sciences, opportunistic investments, we think this is going to be very attractive.

So the short answer is, yes, a little bit of a different structure. But I think the bigger answer is we think the TAM for this is quite large and we think this can scale up quite a bit.

[Operator]

We'll go next to Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

Would love an update on the secondary business. Returns here over the last 12 months have trailed just about all other asset classes at Blackstone with the exception of real estate. So maybe, first, what's weighing on returns there? And as we think about the deployment opportunities, is it still really LP-driven? Or are we starting to see -- I'm sorry, still GP-driven? Or are we starting to see more LP activity picking up as well?

[Jonathan Gray, executive]

Well, I'd start by saying we love our secondaries business. Vern Perry and the team do a terrific job. Structurally, what's happening in that market is alternatives continue to grow, and therefore, there's a need for liquidity. And there's a very limited number of players who are invested in, say, 4,000 funds. And so it leads to this favorable discount and premium you get in terms of return for providing liquidity. Having a $20-plus billion fund is obviously well timed. We have additional funds in infrastructure and real estate beyond private equity, but we think we're super well positioned.

The markdowns or the low growth in this space reflects what's happening in underlying private equity portfolios. But if you look at returns across our various funds, they remain incredibly strong. And there is a lag, of course, where you're looking at funds that are 6 or 9 months older. So if there were better quarters more recently in private equity, you'll pick those up later. It's not the same real time you're seeing, let's say, in our direct private equity or real estate activities.

In terms of transaction activity, I would say the pipeline is starting to build. It will be more LP-driven because distributions have slowed, and in many cases, there's a denominator effect and they're thinking about ways to open up capacity to commit to new funds and we think that will lead to more transaction activity. I would say we've been patient because we think it's possible that discounts could widen again and that would be a better timing in terms of entry point.

So it's a business we like a lot. We think the environment should be favorable here just given the relatively limited amount of capital against what we think is a scale opportunity. And so we think that business will pick up in activity over time. it may take a little bit as sort of sellers readjust their expectations.

[Operator]

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

[Brian Bedell, analyst]

Maybe just similar to the deployment outlook question, maybe flipping that around -- that you answered earlier, flipping that around to fundraising in terms of this environment where sounds like, obviously, activity across the board is freezing up a little bit as people watch rates. But how do you see that impacting the fundraising outlook? And if you maybe can contrast a few different segments where it might be slower near term versus areas where it could be stronger. And I guess, certainly in terms of LP's decision-making versus retail would play into that.

[Jonathan Gray, executive]

So Brian, I think the biggest backdrop to keep in mind is the vast majority of our clients continue to increase their allocation to alternatives across institutional, insurance and individual investors. And despite the environment, we still see a lot of interest. I've been all around the world in the last 6 weeks meeting with major clients and I can't point to one of those meetings where somebody said, hey, I want to reduce my exposure. Now there are some who were saying, I'm more cautious on real estate or I'm more cautious on growth equity or private equity. But there's obviously a lot of enthusiasm for private credit. Some investors are just starting to move into the infrastructure space or the secondaries space. So I think that's the key backdrop.

In terms of different channels here, I would say the institutional or pension fund channel is where the allocations are higher. And in some cases, there is a denominator effect. And so fundraising is a little -- is certainly tougher, we've talked about that over the previous quarters. It had certainly gotten better since the lows of March. We'll see given the current environment what happens.

But I feel pretty good about our relationships and our ability to fundraise even in a difficult period. I would point out European real estate. Given Europe and real estate, the fact that we raised EUR 3-plus billion in the quarter says something powerful about Blackstone. And the fact that we had $25 billion of inflows in this quarter and $139 billion over the last year, again, says something powerful. So I think the institutional channel is a little more constrained in this environment, but their desire for alternatives remains very high.

I would say as you move towards insurance companies, they're in early days of not moving as we know to the higher-returning alternatives, but to private investment-grade credit. That is what the opportunity is. It's about providing them higher returns with the same or lower risk, which is what we've been doing for our major insurance clients and for some of the SMAs. We believe we're still in the early stages of that. We think that business can continue to grow significantly with our existing clients and some additional conversations we're having.

And then I would say in the individual investor channel, we've talked about this as well, there's $80-plus trillion in that market of individuals around the world with more than $1 million of investable assets. We think they're allocated in the low single-digit percentages to alternatives today. You've seen, obviously, the strength in what we built up with BREIT over time, the strength in BCRED certainly today, we talked a little bit about BXPE. I think there are opportunities around the world. And I think some investors will do drawdown funds. I think many more will do these semi-liquid products. And as long as we produce outperformance and have structures that work for them, I think the opportunity remains very significant.

And so our long-term confidence in the private wealth channel is significant. The fact that we have nearly 1/4 of our firm's assets, they are much, much larger than anyone else; an enormous amount of relationships with financial advisers around the globe and underlying customers; 300-plus people on the ground, we just elevated a new head of our Asia region, we think there's a lot of opportunity here. Markets go up and down, but the long-term opportunity for individuals coming to alternatives remains quite significant.

[Brian Bedell, analyst]

And so the growth in that effort, you think, can sort of cut into the -- any kind of reticence on the retail side in the sort of near to intermediate term and continue to propel that channel forward in the sort of intermediate term?

[Jonathan Gray, executive]

It's always hard to say what the market is going to do. When there's more volatility, people become a little more cautious. But we're not living or building our business week to week or month to month, we're building it for decades. It is an enduring institution, where we're building a brand, where we're so incredibly focused on performance. I know everybody looks at the quarter and says, oh, realization is down. You missed earnings by this amount or the flows were this. What we're focused on is we deliver performance because when we sit with the customers, that's what they look at.

They may be more hesitant in a more volatile market, but their desire to allocate capital to Blackstone actually goes up when we outperform. And when they get confidence again, they come back to us if they're institutions, insurance companies or individual investors. So that's what gives us a lot of confidence about the future. Projecting what's going to happen in the next month or 2, that's, of course, very challenging.

[Operator]

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

[Steven Chubak, analyst]

So I wanted to start off with a question on the fundraising outlook for BCRED. I mean as you noted, Jon, the flow trends have remained robust. But the nontraded BDC market has grown increasingly crowded, it's going to get even more saturated given a growing number of funds in registration. So while you have a head start on a lot of your peers in the space, was hoping to your thoughts on the growth outlook for BCRED as well as any potential sources of pressure, such as fees, as the markets become increasingly saturated here.

[Jonathan Gray, executive]

So I'd say a couple of things. I think it's hard to overstate the power of the Blackstone brand and what that means to financial advisers and individual customers. This is not a decision. When somebody thinks about putting $50,000 in a nontraded BDC, that's a significant decision. And the Blackstone brand means a lot.

Also, the performance we've delivered here, I think approaching now 10% since inception in this product; the current yields, 10-plus north. Actually, the vehicle is earning 200 basis points higher than that. The default rate because, I believe, we've done a great job focusing on larger companies in the right sectors, default rate remains extremely low.

For us, delivering for customers, the strength of the brand, the performance, the relationship with financial advisers matters. And I would point out, unlike the institutional business where there can be thousands of players, if you think about our large distribution partners, I think they're unlikely to put very significant numbers of players on their platforms in these different areas. So if you think about in credit or in real estate or in private equity, I think there'll be a handful of players. I think we'll have a slot in each of those and we have these really deep long-term relationships and we're delivering for the customer.

So yes, the market is getting more competitive. There are other entrants, but we think we have some things here that are very differentiated. And I think we've done a particularly good job in BCRED, where we've deployed the capital, I think we're going to do quite well. Even as the environment gets more difficult because we focused on big companies at much lower loan-to-values on average 43% in origination, we think that will make a real difference. And when we outperform and you do that against our brand, that tends to be a powerful combination.

[Operator]

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

[Patrick Davitt, analyst]

I have another question on wealth. There's obviously been a lot of reporting on your efforts to more successfully penetrate the European wealth channel, and within that theme, chatter of a lot of new products coming to market. So could you update us on what is currently in the market, how traction is evolving on those and then what the pipeline looks like for things coming online in the coming quarters?

[Jonathan Gray, executive]

So I would say on Europe, it is definitely a harder market to penetrate. Certainly, the U.S. is the largest market and the most open to alternatives. Asia would be next: Hong Kong, Singapore, increasingly Japan.

Europe has several challenges. One is just regulatory. Virtually every country has slightly different rules, and many of the rules make it a little more challenging there. The second thing is investors there have not had a lot of exposure to alternatives. There tends to be, particularly on the continent, more aversion to anything that's perceived as risky or even though, we would point out, the returns we've generated, the risk we've taken have been very favorable over time.

So it's a little bit of a -- it's really a tougher terrain. We have a couple of small products today in credit and real estate, but right now, it's not a meaningful piece of what we do. We are a persistent group. We do want to try to build scale products in Europe. We've got a number of people on the ground, but it's going to be a little bit tougher sledding.

But I think over time, there should be opportunity because the same outperformance relative to liquid markets, this basic idea of trading liquidity for higher returns, make sense. I think it should happen in Europe, but it's certainly slower today.

[Operator]

We'll go next to Brennan Hawken with UBS.

[Brennan Hawken, analyst]

So you clearly built a leading capability in real estate, and incredibly impressive. Curious to hear your view about maybe what narrows the bid-ask spread in that market. And we heard from Goldman actually earlier this week that they've got a portfolio of $15 billion CRE and they're looking to sell a significant chunk of that and they've marked it down 15% across the board to do that. The office position is down 50%, right, but I know you're underexposed to office. So sort of 15% probably more relevant.

So while -- and we're hearing other banks that are coming to market, too. So while they're not all forced sellers, they have different motivations than profit maximizing. So what do you think the implications of these transactions are going to be on the market? And is it going to lead to downward pressure on marks?

[Jonathan Gray, executive]

Well, I think transaction volume has been slow for the reason we've talked about. Obviously, the move in cost of capital has certainly slowed things down. I don't know, given the size of the real estate market that if any individual transactions are enough to move the market. In fact, I don't know the specifics of Goldman, but I think that's a bunch of different companies and portfolios so it's not one large trade.

I think the market will ultimately clear based on where buyers and sellers are willing to transact. And you'll see that now, I'm sure, over the coming months as things start to settle in and if we stay here at this higher rate environment.

I think it's very hard to predict exactly what happens. But ultimately, there will be real estate to buy and real estate to sell. And with our $66 billion of dry powder, I think we're going to be in a really unique position. I mean we raised this $30-plus billion global fund, I think we've invested less than 5% of that fund today. We have the vast majority of our Asia fund uninvested. And our Europe fund we're just raising, so by definition, it's uninvested.

So we think we're well positioned in this environment, particularly if banks pull back and their liquidity shortfalls. We're also raising capital for our real estate debt business. So we think it will be a favorable environment, and like everybody, we'll be watching what happens on the transaction side.

[Operator]

We'll go next to Ben Budish with Barclays.

[Benjamin Budish, analyst]

I wanted to ask about BREIT. I know you don't often comment on the performance of very specific funds, but just since it's also public and investors are following this quite closely, it looked like there was some kind of nice momentum in performance coming into September. Maybe if you could kind of parse out what sort of changed in the month. Was it cap rate assumption revisions? Was it a slowdown in operating performance?

And is there any color you can share perhaps on the performance of the hedge and how that either impacted September or how you would expect it to sort of benefit the fund over the next couple of months based on the current outlook?

[Jonathan Gray, executive]

So what I would say on BREIT is you really hit on it. In September, the tailwinds in the business were twofold. As you've heard from us, I think, we did a very good job hedging out the balance sheet for long duration. That's proven to be very beneficial to the shareholders of BREIT.

The second thing is we have a quite sizable position. I think it's now 8% of the portfolio in data centers. Again, that turned out to be a really, really great decision for our shareholders and has benefited us and there was very significant appreciation, which we talked about in the remarks.

On the headwind side, yes, we, of course, raised cap rate assumptions in the portfolio in light of the higher movement in the 10-year treasury yield. And so those were the forces that you saw reflected in the valuations in the month and the quarter.

[Operator]

We'll go next to Mike Brown with KBW.

[Michael Brown, analyst]

Okay. Great. Just wanted to touch base on the insurance channel here. You said that you had $5 billion of inflows in the quarter. Can you just touch on what were the key contributions there and then maybe expectations for next quarter?

And then if you could just touch on Resolution Life specifically, was that part of the $5 billion inflows this quarter? And how can that partnership progress here over the coming quarters?

[Jonathan Gray, executive]

So for clarity, I think we had $5 billion from the big 4 accounts in insurance, $7 billion overall because we have some SMAs with other major insurers, but not for nearly as large pieces of their portfolio.

I'm not sure I'm going to go into any of the individual clients where the money is coming from and so forth. But obviously, some of the clients are issuing fixed annuities, which is a fast-growing area. That would be, namely, there, I guess I'd point out, Corebridge and Fidelity & Guaranty and we're helping them with that by deploying capital on their behalf and generating attractive yields.

I think Resolution as a platform has a lot of opportunity around legacy books, closed books, buying those from insurers who are trying to reallocate their portfolios. And as part of the recapitalization we did with them, we put a significant amount of capital from our LP community into the company that gives them some firepower to grow.

And then I would just add, we're having other discussions. Investors are seeing what we're doing, taking up credit quality. I think if you look at the numbers in the quarter, on average, our clients had BBB portfolios. This year, we've originated, on average, single A credit quality fixed income, and the spreads have been 140 basis points higher over comparable liquid BBBs.

So higher credit quality and still higher spreads. And so this is something that our existing clients are happy about, our SMA clients are happy about and it's leading to more discussions. I still think we're in early days. It's hard to predict the timing of these, but this is becoming something that I think is increasingly important for major insurers to have more of these private credit origination capabilities. And they're excited about being partners with us, particularly because we're not an insurance company, we're not directly competing with that.

[Operator]

We'll take our last question from Arnaud Giblat with BNP.

[Arnaud Giblat, analyst]

I just had a follow-up question on BXPE. I'm wondering how much capacity you're warehousing there? Is there an opportunity, I think, to scale up this product rapidly if demand is there? How do you manage that? Is that perhaps by having a large proportion that you can allocate to your secondaries to absorb any rapid uptakes?

[Michael Chae, executive]

Arnaud, it's Michael. On the first part about warehousing, we have, as we often do when we help support the launch of a product like this, we have, I'd say, a relatively modest amount in the grand scheme of our balance sheet in warehouse for the support of the launch of this in the coming months, we expect that will grow somewhat as we approach that point. And then once we're up and running, the needs from a warehousing standpoint will be much more modest. Jon, if you want to comment on sort of the asset allocation?

[Jonathan Gray, executive]

Well, I think we will have a mix of things. Secondaries will certainly be part of the mix. I think we'll do a bunch of opportunistic things in this environment. I think we'll do large-scale private equities; middle market private equity; as I said, Life Sciences growth. One of the unique things about Blackstone is the scale of our private equity platform, it's not just one area. And when you think about the individual investor channel and money coming in on a monthly basis, having a very broad platform is important. So we're going to take advantage of our platform as we deploy capital.

And the key thing is we design this product is to deliver strong returns to the customers because that's how we build something of scale over time. So if we do a very good job deploying into this dislocated environment, build a track record, then we do believe the scale opportunity is significant.

[Operator]

With no additional questions in queue at this time, I'd like to turn the call back over to Mr. Weston Tucker for any additional or closing remarks.

[Weston Tucker, executive]

Great. Thanks, everyone, for joining us today and look forward to following up after the call if you have any questions. Thanks very much.