Blackstone Inc

NYSE:BX

Earnings Call Analysis

Blackstone Q4 Flourishes with Record AUM

Blackstone's fourth quarter marked their highest distributable earnings in six quarters at $1.4 billion, or $1.11 per common share, with a declared dividend of $0.94. A volatile year for markets saw steady fee-related earnings of $4.3 billion and total distributable earnings of $5.1 billion. The firm's resiliency in unfavorable markets contributed to a prudent sale strategy and a stronghold over asset performance. 2023 was a year marked by milestones including exceeding $1 trillion in assets under management and joining the S&P 500 index. Blackstone's various strategies, especially in private equity and credit, outperformed traditional asset classes and indices, showcasing the firm's competitive advantage and rich proprietary data set. With nearly $200 billion in dry powder, Blackstone is poised for strategic investments, anticipating 2023 to be an inflection point for growth.

Navigating Market Turbulence with Foresight and Resilience

As we review the latest earnings call from Blackstone, we uncover a narrative of resilience amidst turbulence. The firm has maneuvered through an unpredictable financial environment marked by volatile markets and economic uncertainty. Despite these challenges, Blackstone not only persisted but achieved a significant milestone by recording its highest distributable earnings in six quarters, amounting to $1.4 billion or $1.11 per common share, and declared a dividend of $0.94 per share.

Strategic Focus Bearing Fruit in a Volatile Landscape

The year 2023 has been a testament to Blackstone's strategic acumen, as the company generated $4.3 billion in steady fee-related earnings, stabilizing the foundation for distributable earnings of $5.1 billion throughout the year. Amidst an adverse environment, particularly in real estate, the firm's diversified strengths in credit, infrastructure, corporate private equity, and life sciences led to overall fund appreciation, reinforcing Blackstone's formidable market position and highlighting its adaptability.

Outperforming the Market with Alternative Investment Strategies

Blackstone's alternative investment strategies have bucked the trend of muted returns across traditional asset classes, with key sectors such as corporate private equity, real estate equity strategies, and infrastructure dramatically outperforming public indices. Solid internal growth and highly successful credit strategies have substantially added to Blackstone's performance metrics. These results affirm the firm's ability to deliver consistent, long-term value even in the face of challenging market conditions.

A Strategic Vision for Post-Pandemic Recovery

Looking forward, Blackstone believes in the potential for a real estate recovery on the horizon, supported by the bottoming out of real estate values and a more favorable interest rate environment expected in 2024. The firm stands ready with $65 billion of dry powder allocated for investment in a rejuvenating market. This optimism is underwritten by robust credit strategy performance and corporate private equity growth, providing evidence of Blackstone's embedded resilience and foresight.

Sustained Growth Leads to Record Management Fees and Financials

Despite a decline in fee-related performance revenues, growth in management fees and margin expansion led to a remarkable year-over-year increase, showcasing Blackstone's ability to scale and its impact on firm financials. The direct lending business played a key role in this success, recording a 51% increase in revenues. These trends culminated in distributable earnings of $5.1 billion for the year, emphasizing the firm's solid financial standing going into the next quarter.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Blackstone Fourth Quarter and Full Year 2023 Investor Call. Today's conference is being recorded. [Operator Instructions]

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

[Weston Tucker, executive]

Great. Thank you, and good morning, and welcome to Blackstone's Fourth 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-K report later next month.

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 a 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 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 audio cast is copyrighted material of Blackstone and may not be duplicated without consent.

Quickly on results. We reported GAAP net income for the quarter of $109 million. Distributable earnings were $1.4 billion or $1.11 per common share, and we declared a dividend of $0.94, which will be paid to holders of record as of February 5.

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

[Stephen Schwarzman, executive]

Good morning, and thank you for joining our call. Blackstone reported strong results for the fourth quarter of 2023, including our highest distributable earnings in 6 quarters, which capped a volatile year for global markets.

Most major equity indices rebounded from significant declines in 2022, but with wide intrayear swings driven by historic movements in treasury yields, economic uncertainty and geopolitical instability. Against this backdrop, Blackstone generated steady fee-related earnings of $4.3 billion for the year, underpinning healthy distributable earnings of $5.1 billion.

Performance revenues were down as expected in the context of limited realizations as we choose to sell less in unfavorable markets. We've designed the firm to provide resiliency in times of stress and capture the upside as markets recover.

In the fourth quarter, as bond yields declined, markets rallied. We executed several realizations driving strong sequential growth in DE to $1.4 billion. 2023 is also a year of important milestones for Blackstone. We were the first alternative manager to surpass $1 trillion of assets under management.

We were also the first in our sector to be added to the S&P 500 Index, positioning our stock to be even more widely owned. We are pleased that BX shares ranked in the top 20 best performing out of the 500 stocks in the S&P 500 Index last year.

Blackstone is now the 55th largest U.S. public company by market cap, exceeding the market value of all other asset managers. And in December, we released our sixth annual holiday video which has received over 8 million views, which may not say something about our limited acting skills, but it certainly says something about the Blackstone brand.

Our funds appreciated overall in 2023, highlighted by strength in credit, infrastructure, corporate private equity and life sciences, even as we weathered a difficult environment for real estate.

Stepping back, over the last 2 years, the campaign by central banks to control inflation has resulted in muted returns for most traditional asset classes. The S&P 500 returned only 3% over 2 years, while the media and U.S. stock actually declined 9%, and the REIT index was down 14%. The traditional 60-40 portfolio lost value, down 3%.

In contrast, Blackstone's flagship strategies generated positive appreciation over this period and meaningfully outperformed the relevant public indices. For example, our corporate private equity funds appreciated 12% over the past 2 years compared to the S&P, up 3%. That's outperformance of 9%. Our real estate equity strategies appreciated 1% to 6% compared to negative 14% for public REITs. So that's a dramatic outperformance.

In credit, our private credit strategies appreciated 25% gross while the high-yield index was up only 2%. [ AM ] generated a 13% gross return for the BPS Composite over the past 2 years, a remarkable achievement in liquid markets and well ahead of the hedge fund index. It actually was down 1%. That's our performance of 12%.

And finally, our infrastructure business appreciated 33% over the past 2 years compared to only a 7% return for the S&P Infrastructure Index. That's an outperformance of 26%. This outstanding performance is one of the reasons we've been able to build this platform from 0 6 years ago to over $40 billion today.

Overall, the ability to outperform market indices over long periods of time is why the alternatives asset class and Blackstone in particular, continue to have significant momentum. Our limited partners have benefited from the exceptional balance of the firm and the careful way we've positioned their capital in a volatile world.

One of the key advantages that comes from our leading scale is having more, better and richer private data which informs how we invest. And Jon referred to this on television today.

Our portfolio consists of over 230 companies. More than 12,000 real estate assets and one of the largest credit businesses in the world. We marshal real-time data across these holdings to develop macro insights that we then share across all of our businesses, allowing the firm to adapt quickly to changing conditions.

We believe our access to information exceeds that of our competitors, and it positions the firm very well as we move towards a world driven by artificial intelligence, an area on which we are already very focused. This process of aggregating data and information helps us identify trends early and often, leads us to differentiated views on what's happening around the world.

In early '21, for example, it led us to the conclusion that inflation would be higher and more pervasive than the consensus expectation, and we've positioned the firm accordingly. We then started speaking publicly that inflation was moderating as early as October 2022 and with increasing frequency in 2023.

Data from our portfolio companies showed that input cost inflation was rapidly declining. We persisted in this view even when the 10-year treasury yield spiked to a 16-year high of 5% in October. As we all know, the 10 years subsequently declined over 100 basis points into year-end. The opposite of what many market participants believed would happen.

Our access to information is an enduring competitive advantage here at Blackstone, and this advantage grows as we grow larger. As we move into 2024, we note that the rise in investor confidence around the shift from a restrictive monetary policy to one that is more accommodating.

We now believe CPI is running below the Fed's 2% target after adjusting the reported numbers for shelter costs, which lagged what we've observed on the ground as one of the largest investors in this area. At the same time, the U.S. economy has remained quite strong. Unemployment is nearly unchanged since the start of the Fed's tightening cycle. Most consumer segments are healthy, but the balance sheets are strong and credit fundamentals remain solid.

In our own portfolio, our companies are showing strong top line performance overall as well as earnings growth as cost pressures have eased. We see a resilient economy albeit one that is decelerating. What we're seeing is consistent with the soft planning.

Overall, with the cost of capital moving lower, market confidence returning, we believe we're entering a supportive environment for our business. While changing market conditions take time to fully translate to our financial results, the fourth quarter reflected an acceleration in key forward indicators, including both fundraising and deployment. We're planting seeds and expanding invested capital in the ground. And with nearly $200 billion of dry powder, our purchasing power for investments, exceeds almost any other company in the world. I believe that we'll look back at 2023 as the cyclical bottom for our firm.

Looking forward, Blackstone is exceptionally well positioned to navigate the road ahead. Our investors can count on the dedication of our people and the enduring nature of our culture, characterized by excellence, achievement, teamwork, hard work and the highest standards of ethics and integrity. Our employees embody these values. And they approach their work every day with the passion for what they do and an unwavering commitment to serving our clients. We've created an environment in the firm that is defined by meritocracy, and a quality of opportunity. We do not discriminate against anyone based on race, ethnic background, religious beliefs, gender or sexual orientation. We are proud of these values. Our people want to create and build their careers at Blackstone, and there is a huge demand to work at the firm.

We had 62,000 unique applicants for 169 positions in the latest analyst class, reflecting an acceptance rate of 0.27% to 1%, a dramatic change from when we started the firm 38 years ago, when frankly, anyone wanted to join us. This provides the foundation for the next generation of remarkable talent and will drive our growth for the foreseeable future.

Blackstone is an extraordinary place. and our prospects are very strong. I am highly enthusiastic about what we will accomplish for our shareholders in 2024.

And with that, I'll throw the ball over to Jon?

[Jonathan Gray, executive]

I'm happy to catch it. Thank you, Steve, and good morning, everyone. I'm proud of how we've navigated the challenging markets of the past few years by focusing on the right sectors. We believe we're now heading into a better environment, as Steve noted, with inflation and cost of capital headwinds moderating.

This backdrop is leading to the emergence of 3 powerful dynamics across our business. First, we believe that real estate values are bottoming. Second, our momentum in the private wealth channel is building. And third, investment activity has picked up meaningfully across the firm, which is a key element of creating future value.

I'll discuss each of these dynamics in more detail. First, as I said, we believe values in commercial real estate are bottoming. This doesn't mean there won't be more troubled real estate investments to come in the market, particularly in the office sector, which were set up during a period when borrowing costs were much lower nor does it mean we won't see a slowing in fundamentals in certain sectors with excess near-term supply.

What it does mean is that the cost of capital appears to have peaked as borrowing spreads have begun to tighten and the Fed is no longer raising rates, but likely cutting them in 2024. Also importantly, new construction starts have started to move down sharply in commercial real estate, which is quite positive for long-term values. While it will take time, we can see the pillars of a real estate recovery coming into place. We are, of course, not waiting for the all-clear sign and believe the best investments are made during times of uncertainty.

We announced 3 major real estate transactions in the past 2 months, the $3.5 billion take-private of Tricon Residential, a partnership with Digital Realty to develop $7 billion of data centers and a joint venture with the FDIC to acquire a 20% stake in a $17 billion first mortgage portfolio from the former Signature Bank.

We think this is just the start, as Blackstone Real Estate has $65 billion of dry powder to invest into this dislocated market. Meanwhile, in our existing portfolio, we've absorbed the increase in interest rates and cash flows are growing or stable in most areas. We continue to see robust fundamentals in logistics, student housing and data centers which together comprise the majority of our real estate equity portfolio.

That said, in Q4, the value of our funds declined by 4% to 4.5%, primarily relating to 2 factors. First, the single largest driver was the decline in the unrealized value of our interest rate hedges as treasury yields fell. We put these structures in place to fix our financing costs ahead of the rise in interest rates, and they have generated significant value.

Second, in our life sciences office and U.S. multifamily holdings, near-term performance has decelerated as new supply works its way through the system. The residual effect of construction undertaken in a low rate environment. The good news is that new supply in these sectors and for virtually all other types of real estate is declining materially, as I mentioned.

We believe that with our exceptional portfolio positioning in large-scale dry powder, our real estate business will emerge from this cycle even stronger than before. Outside of real estate, our other businesses are demonstrating resiliency and fundamental strength.

Our credit and insurance teams had a remarkable year in 2023, with gross returns of 16.4% in the private credit strategies and 13% in liquid credit. These are extraordinary results for a performing credit business. The default rate across our nearly 2,000 noninvestment-grade credits is only 30 basis points over the last 12 months.

And in our investment-grade focused business, we placed or originated $30 billion of a quality credits on average in 2023 for our major insurance clients. which generated 190 basis points of excess spread compared to comparably rated liquid credits.

In corporate private equity, our operating company's overall reported healthy revenue growth in the fourth quarter of 7% year-over-year, along with margin strength. On the inflation front, wage growth continued to moderate and for the first time in 2.5 years, the majority of our surveyed companies are not finding it challenging to hire workers.

And finally, for BAAM, since the start of 2021, when we brought in Joe Dowling to lead the business, the BPS Composite has been up every quarter, outperforming the 60-40 portfolio by approximately 1,200 basis points.

Moving to the second key dynamic emerging in our business, our momentum in private wealth. Blackstone has been serving this channel with a dedicated organization for 13 years, and we are the clear market leader with nearly $240 billion of AUM.

We built enormous trust with our investors by delivering outstanding long-term performance, including 11% net returns annually from BREIT's largest share class and 10% for BCRED. We raised nearly $5 billion in the channel in Q4, including $3.6 billion for our perpetual vehicles. Subscriptions for perpetuals accelerated to $2.7 billion on January 2, reflecting the best month of fundraising from individual investors since June 2022.

BCRED had its best month since May 2022, raising $1.1 billion in January, and our new private equity vehicle, BXPE, raised $1.3 billion in January, which we believe is the largest ever first close of its kind. BXPE will leverage the firm's full breadth of investment capabilities in private equity, including buyout, secondaries, tactical opportunities, life sciences growth and other opportunistic strategies.

At the same time, BREIT has weathered the storm in real estate markets and December repurchase requests were down over 50% from Q3 and down 80% from last January's peak. If current trends continue, we expect to be out of proration this quarter.

BREIT's semi-liquid structure has worked as design since launching the vehicle 7 years ago, by providing liquidity while protecting performance. In 6 of those years, redeeming investors were fulfilled immediately. Over the past year, it took a little over 4 months on average to be substantially redeemed.

We believe investors experience of receiving double the public REIT market over the past 7 years with this semi-liquid structure is proof of concept. We continue to be optimistic about our prospects in the vast and underpenetrated private wealth channel, given our performance, the investment we've made in distribution and our highly differentiated brand.

In addition to private wealth, we also have very strong momentum in the insurance channel. Our AUM grew 20% year-over-year to $192 billion and we have clear line of sight to $250 billion over the next several years with existing clients alone. We expect to benefit from multiple engines of growth as these clients execute pension risk transfers, additional annuity sales, new insurance block deals and separate accounts for sector-specific lending.

Turning to the third key dynamic the firm's investment activity is accelerating. Following a choppy year, we deployed $31 billion in the fourth quarter, up 2.5x from Q3 and committed $15 billion to pending transactions. We continue to emphasize key thematic areas, including digital infrastructure, enterprise software and energy transition.

In private equity, we're privatizing 2 leading digital marketplaces, including Adevinta in Europe and Rover, my family's favorite in the pet space. We also committed to acquire an energy services software firm in the U.S. and an online payments business in Japan.

In credit, borrower demand is multiples of supply today, and deployment in our credit, insurance and real estate credit businesses more than tripled in Q4 compared to the third quarter to $21 billion. And we've also been providing creatively structured capital solutions in tac-ops, secondaries and BAAM. As Steve highlighted, we're planting seeds for future realizations at a favorable moment.

In closing, we're optimistic on the path ahead with multiple powerful dynamics unfolding in our business. Their recovery will not be a straight line, but as always, our brand and track record will continue to drive us forward. and our shareholders stand to benefit from the firm's substantial embedded earnings power over time.

And with that, I will turn things over to Michael Chae.

[Michael Chae, executive]

Thanks, John, and good morning, everyone. The firm delivered resilient performance in 2023. And as we move forward beyond what we believe was a cyclical trough for key business lines, we are well positioned.

I'll first review financial results and then we'll discuss the key elements of the forward outlook. Starting with results. Total AUM increased 7% year-over-year to new record levels, led by robust strength in credit and insurance. Total inflows reached nearly $150 billion for the full year, the third best in our history despite the challenging fundraising environment, highlighting the firm's expansive breadth of strategies.

Fee earning AUM increased 6% year-over-year, while base management fees rose 7% to a record $6.5 billion. Q4 represented the 56th consecutive quarter of year-over-year growth in base management fees at the firm.

Fee related earnings were $4.3 billion for the year or $3.58 per share, stable with the prior year, underpinned by the growth in management fees, along with continued margin expansion, notwithstanding a decline in fee-related performance revenues.

FRE margin expanded 75 basis points to 57.8% for the full year, the highest level ever. Fee-related performance revenues were $859 million for the year, with a lower contribution from real estate, partly offset by a 51% year-over-year increase in these revenues from our direct lending business as it continues to grow in scale and impact to the firm's financials. Distributable earnings were $5.1 billion in 2023 or $3.95 per common share.

While FRE was a balance to earnings throughout the year, the shape of the year was driven by our sales activity. Net realizations were muted in the first 3 quarters as we remained highly selective amid the volatile backdrop for broader markets and asset values.

In the fourth quarter, we took advantage of more favorable conditions to execute the sales of public stock across multiple holdings, along with a number of other realizations.

In addition, BAAM crystallizes incentive fees for most of its open-ended strategies annually in Q4, and the segment's performance revenues increased 43% year-over-year, commensurate with its strong overall 2023 investment performance.

In total, net realizations for the firm were $425 million in the fourth quarter, up 16% year-over-year and up 64% sequentially from Q3. The growth in net realizations lifted total distributed earnings to $1.4 billion in the fourth quarter, the highest level in 6 quarters, as Steve highlighted, or $1.11 per common share.

Moving to the outlook. The firm is moving forward with strong underlying momentum across multiple drivers of growth. First, in our drawdown fund business, we've raised over 80% of our $150 billion target for the most recent vintage of flagships, but less than half was earning management fees as of year-end. We expect this to increase to the substantial majority earning management fees by the latter part of 2024.

We recently launched the investment period for our European real estate vehicle. And over the coming quarters, we expect to activate our flagships in corporate private equity, PE energy transition, growth equity, infrastructure secondaries and by early next year, GP stakes in life sciences. These funds will earn fees following their respective fee holidays.

We expect to activate our corporate private equity flagship in the near term, which has raised $18 billion to date towards a target of at least $20 billion followed by a 4-month fee holiday.

At the same time, we are moving towards the next vintage of fundraising for multiple strategies, including the near-term launch of fundraising for our fifth private credit opportunistic strategy, targeting $10 billion.

Second, our perpetual capital platform has continued to expand today comprising 44% of the firm's fee-earning AUM. Key drivers of recent growth include BCRED and our infrastructure platform, which grew fee-earning AUM by 26% and 21% in 2023, respectively.

The co-mingled VIP infrastructure vehicle has achieved 15% net returns annually since inception, and its next scheduled crystallization of fee-related performance revenues will occur in the fourth quarter of this year with respect to 3 years of gains.

Third, in the insurance channel, AUM has reached $192 billion, up 20% year-over-year, as Jon noted, driven principally by our 4 major clients, and we anticipate substantial inflows from them going forward underpinning strong growth in fee revenues and FRE in this channel.

Finally, with respect to realizations, we are positioned for an eventual acceleration in realizations in the context of more supportive markets, although it will take time to build the pipeline. Performance revenue eligible AUM in the ground is $505 billion, up 12% over the past 2 years despite volatile markets and up over 70% in 3 years.

We hold a large-scale, high-quality portfolio, which is well diversified across asset classes, regions and vintages. And net accrued performance revenue on the balance sheet stands at $5.8 billion.

The firm's embedded performance-related earnings power is significant. As always, our long-term capital affords us the patience to optimize our exits over time as markets heal in order to maximize value for our investors.

In closing, history has shown that Blackstone has always emerged from cycles even stronger. Our business has been built on this throughout nearly 4 decades. We are now in the process of emerging from a significant cycle and we are confident that history will repeat itself again because of the power of our brand, our platform, our people and our culture.

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

[Operator]

[Operator Instructions] We'll go first to Craig Siegenthaler with Bank of America.

[Craig Siegenthaler, analyst]

My question is on investing. Steve, I think I first heard your bullish commentary at Davos last week, but Jon really supported it today in the prepared comments with the CMBS market reopening, cost of capital falling, spreads are tighter. So the backdrop does seem to be a lot better with them when you last hosted a call, and that's in October. And also, your deployment to new commitments were up nicely, too. So what is your outlook for deployments broadly in 2024 versus the $74 billion last year? It sounds like it could be a double.

[Jonathan Gray, executive]

Craig, I love the question. I would say putting numbers on this is very hard, given the nature of the business. What we can say is lots of good things are coming into place, right? We've got the Fed moving from tightening to lowering rates. You've got debt market spreads starting to come down a bit. You've got an equity market that has rallied. I think we're going to see the IPO market pickup and then M&A volume is picking up as well.

There are lots of companies out there who would like to sell things, private equity firms, in particular. There are folks in real estate who've been frozen here for a couple of years. So putting numbers on it is hard, but we would expect deal activity to pick up. It sometimes, of course, takes time to do these things.

So a bunch of the deals you saw in private equity we've been working on for some time. But the path of travel here is sort of up and to the right in terms of deal activity, putting an exact number, I think, is just tough.

[Operator]

We'll take our next question from Crispin Love with Piper Sandler.

[Crispin Love, analyst]

Can you just give us your views on the apartment sector right now. You made a pretty good sized deal in the space last week. So I'm curious on your views on that deal and just apartments in general as we head into 2024, and how that stack breaks against the other sectors you're most active in, in real estate. And if you could see additional activity in that space.

[Jonathan Gray, executive]

So a couple of things here. The transaction we announced last week included an apartment component, but that was mostly in Canadian apartments. The vast majority of the company is focused on single-family for rent. That space because of the shortage of single-family homes has been much stronger.

In the multifamily space, as we've noted here, what we've seen is a surge of new supply that was put in place during the low rate period when values had moved up a lot. And that's going to take probably 12 months, maybe a little longer to work through.

Right now, rents have moved down to a level where they're pretty flat. In some cases, modestly negative. And as I said, that will take some time. The good news is multifamily construction is now down about 1/3. And so once you sort of work through this, we should be in a much better place, and the overall backdrop is one of a housing shortage in the United States.

So single-family stronger near-term, multifamily definitely a little bit weaker, but an overall constructive housing environment in terms of our investment activity, it's possible you could see us invest into the weakness in multifamily because we've got a long-term constructive view even if there are some near-term headwinds.

[Operator]

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

[Michael Cyprys, analyst]

I wanted to ask about the commercial real estate lending platform that you have from BXMT the BREDS and the institutional SMAs. I was hoping you could talk a bit about how you're broadening out the platform and the capabilities? And how big of an opportunity set do you see given certain end market pressures as well as certain constraints facing U.S. banks and other existing CRE investors.

[Jonathan Gray, executive]

Well, we definitely think it's a good time to be a commercial mortgage real estate lender because the sentiment is so poor. And to your point, Michael, capital has pulled back, banks are trying to reduce exposure.

Our business today, I think, is a little over $70 billion in that space. And the nice thing about the capital we have is it really runs the gamut. We have our BREDS funds, which are more high yield in nature. We're raising the fifth vintage of that.

We do transitional mortgages and Blackstone Mortgage Trust. Then we have our insurance clients who want to do more stabilized real estate. And then we also have for the insurance clients and other clients, what we do in the CMBS market around liquid securities and real estate debt. And we think this is a sector that has really lagged. If you look at spreads, they're pretty wide by historic standards, loan to values have fallen. It's the natural thing that happens after a downturn.

And so I think this is an area that can continue to grow at a pretty good clip just because I think you can earn very attractive returns relative to the risk. And just like on the equity side, this is an area we're going to be leaning into as we move into this year.

[Operator]

We'll go next to Finian O'Shea with Wells Fargo Securities.

[Finian O'Shea, analyst]

Michael, I appreciate your color on the flagship and management fees. Can you touch on if there's perhaps more of a headwind to come in terms of step downs or otherwise as you go through the flagship holiday periods or if it should be more of a smooth journey from here given, of course, stable to improving deployment over the course of this year.

[Michael Chae, executive]

Sure, Finian. Yes, as we outlined this year as opposed to last year, where I think in the second half of the year, there was more of a sort of an absence of significant flagships lighting for Europe being an exceptional late in the year.

But there will be a series of activity we anticipate throughout the year. I mentioned sort of the multiple funds that fit in that category. Almost all of them, as you alluded to, have a 3- or 4-month fee holiday. So we'll be sort of seeing that unfold in the course of the next few quarters. And you will see all else equal because of the fee holiday, some marginal pressure on that. But I think when we look at the overall growth rate and how that will layer in, we see an embedded upward ramp on management fees, although it will accelerate later in the year as opposed to earlier.

[Operator]

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

[Alexander Blostein, analyst]

Another one on real estate and maybe zoning in on core real estate for a second. And obviously, lower interest rates should be really helpful to maybe reigniting some of the investor demand for that part of the market.

But how are you thinking about both institutional and retail appetite for core real estate from here, whether it's BPP or BREIT? And what is sort of the level of interest rates we need to see where those products become compelling again from an investor allocation perspective?

[Jonathan Gray, executive]

So Alex, I don't know if it's necessarily exactly a certain level. I think it's about momentum. As you know, after investors have taken losses, even if they're modest losses there tends to be caution real estate because of the lag on when challenges materialize, we'll have a number of negative headlines coming out over the course of the year.

And so what happens is, I think investors tend to take their time in terms of pivoting back to the space. That's certainly what happened in the early '90s. That's what happened in '08, '09. And so there's caution. So you don't see huge sort of surge of capital flowing in on a dime.

What happens is as a recovery, first, you get this sort of bottoming effect, then you start to get some growth in values and then the consensus starts to change. What happens in this period of time is you tend to get, I think, the greatest opportunities for investing because you can see the light at the end of the tunnel, but capital hasn't flown into the space.

And then over time, as results get better, there's limited new supply, rates have come back down then people start to go back in because they feel like it's safe to do.

So I think the short answer is that will take a bit of time on both the institutional and the individual investor side, but it's tied to performance. And it will take multiple quarters of strong performance where people say, "Hey, I'm comfortable doing this." In the meantime, we should be looking to take advantage of this lack of confidence in the marketplace.

[Operator]

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

[Brian Bedell, analyst]

Great. Maybe a question for Michael and maybe Jon as well. But just, Michael, the -- in talking about the pace of the activations of the funds. Just wanted to get your sense of the confidence of growing the fee-related revenue, not including fee-related performance fees, just the base revenue, they had a double-digit pace in 2024.

And it sounds like that pace will -- for calendar '25, would actually accelerate based on the timing of the activations throughout the year? And then if you can also comment on your view on FRE margin for '24, excluding the impact of fee-related performance you said, I know that, that can create noise, but just maybe confidence in scaling the business to have a margin expansion in '24.

[Michael Chae, executive]

Sure, Brian. Two parts to that question. On the first one on the sort of trajectory of management fee growth for '24 and '25. The short answer is we feel good about it. We can't -- we don't have the crystal ball necessarily in terms of like quarter-to-quarter.

But structurally, we have that embedded ramp. As I mentioned, it will accelerate throughout the year given the series of funds that were light, and we see good strength in the latter half of the year and also in 2025, as you point out.

We're focused on dry down funds. That's an important engine in the business. Obviously, among other key positive factors is insurance where we've sort of had a lot of visibility and articulated it since we really scaled -- started scaling this business a couple of years ago about built in, in many cases, contractual inflows from our 4 large partners and other insurance clients, which -- and we are pursuing the sort of the industry overall, I think, with a lot of optimism in the credit insurance area. So there are, I think, multiple engines, not just the new drawdowns firing there, although, again, I think it will accelerate through the course of the year into '25.

On margins, obviously, we're in a sort of more challenging macro environment. We feel good about our execution on margins in 2023. And what I would say about the outlook is that it's early in the year. And as always, we'd encourage you to look on a full year basis, not sort of measure it quarter-to-quarter. But with that said, at the outset of the year again, I would reinforce the message of margin stability as a general guidepost.

[Operator]

We'll go next to Brennan Hawken with UBS.

[Brennan Hawken, analyst]

You sort of touched on this a little bit with the margin stability point. But one thing I'm just curious about mechanically. So full year 2023 FRE revenue, down almost 3%, yet comp ratio up over 200 basis points, FRE comp ratio. So how is it possible to generate positive comp ratio leverage when revenues are down. Does that just suggest that FRE margin might compress when revenues grow? Or just we should think about FRE margins stable? Just maybe help me understand those mechanics.

[Michael Chae, executive]

Yes, I wouldn't -- Brennan, I would actually just think about it in the real world, our ability sort of collectively to manage our cost structure, which we feel very good about. There is, I think, structurally a robust underlying long-term margin position of the firm that we've demonstrated with sort of operating leverage built into our model.

At the same time, we believe that we take a disciplined approach to cost management and have a fair degree of control over our cost structure. And as part of that, of course, we do take into account the financial performance of each business in terms of management compensation in a given year.

And I think you also saw a noncomp operating costs -- operating expenses and you also saw the rate of growth in 2023 significantly lower from the prior couple of years. So that's really how we think about it. We're not sort of takers of the environment, we actively manage our business.

[Operator]

We'll go next to Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

I wanted to dig into the outlook for real estate carry. It was clearly depressed in 2023. And Jonathan, you mentioned the bottoming of real estate valuations. How long do you expect it could take for real estate carry to get back to more normalized levels?

Is this something you see could possibly bounce back later in '24? Is this sort of more obviously a 2025 sort of event? Or do you expect it could take longer into to '26 or '27? And then when real estate carry does bounce back to this sort of normal level, what does the macro picture look like at that point?

[Jonathan Gray, executive]

Okay. Well, it's always hard to have a crystal ball where things are going to develop. But clearly, when you're going through a cycle like this, as we've talked about, it takes a bit of time. And even the sales process in real estate, where you don't have a lot of liquid public securities, you take off the shelf and sell that lends itself to time.

So yes, I wouldn't expect a big surge in realizations in real estate in the first half of the year. We would expect, as we look out over time, it will pick up. It's possible you could do larger transactions with some public companies to get things done.

Certainly, our confidence as you get to the back half of the year and into '25, you feel better about that. And so I guess what I would say is this is a transitional year in terms of realizations in real estate. I would generally keep expectations on the lower side. I would feel a lot better as I look out over time.

And the macro environment for that is a lower rate environment where we're back to modest growth or we're at modest growth, and we have limited new supply and people are investing again in this asset class because it's delivering favorable results.

So I do think on real estate realizations you need a little bit of patience. I say that, of course, and then something will happen, but that would be our base case assumption. The good news is we feel terrific about where we've deployed the capital. The huge exposure we have in some of the very best sectors.

The majority of our real estate portfolio on the equity side is in logistics, student housing and data centers, all sectors where we're seeing high single-digit rates of growth even in this environment. So when the environment gets better, we think we'll have the kinds of things the market wants. And we'll do it when we think values are appropriate.

We want to maximize returns for our customers because, as you know, performance is the most important thing. And we think as we come out of this cycle, just like we did out of the last real estate cycle, we're going to emerge stronger. Other competitors, we don't believe will have the same kind of returns and will help us even further grow our market share. So we want to do this in the right way, and it may take a bit of time, but we feel very confident about the ultimate outcome.

[Operator]

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

[Patrick Davitt, analyst]

Despite the recovery in markets and confidence, there are still a lot of observers out there, including senior executives at some of your competitors that seem pretty cautious on the view that this is going to be a much better private equity realizations here, some even saying that PE marks still need a negative reset.

You hinted at that in the prepared remarks, but could you expand on where you stand on that debate? And do you have any broader thoughts on why there appears to be such a wide disparity in the PE outlook amongst your peers?

[Jonathan Gray, executive]

Well, I guess I'd start with the facts. Last year, we were actually up year-on-year in private equity realizations and generated strong realizations from that sector, which I think says something about our portfolio where we positioned it and also the march there.

So I think our optimism comes from where we're positioned, some of the sectors in terms of digital migration, what's happening in energy transition, life sciences, a bunch of businesses and sectors that have done quite well. The fact that we had greater than 7% revenue growth in our portfolio in the fourth quarter. We saw margin expansion as cost came down.

I'd say we overall feel pretty good about our portfolio. And I think it's a combination, as we've talked about, of good underlying economic growth, the right sectors and now a more favorable sort of capital markets environment with inflation and rates coming down.

So that leads us to have some confidence here. Things can change as we saw last year quickly in March of last year with the bank crisis in the late summer with rates moving up. But as we sit today, we feel good.

And so I think in terms of what you own, where you carry it, that leads you to your relative level of confidence, I believe. And so we still feel pretty good about the outlook in private equity.

[Operator]

We'll go next to Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

My question is on BXP, and I was hoping to -- maybe talk about the addressable market for this product. I believe you typically have exclusive distribution relationships at the start. So wondering when you think this will be broadly available and how that potentially could scale.

[Jonathan Gray, executive]

Well, I'd start with the backdrop on individual investors. We've talked about it on these calls in the past, but there's about $80 trillion of wealth globally, folks who have more than $1 million of investable assets. We estimate that, that's about 1% allocated to alternatives versus, call it, 29%, 30% with our institutional clients. We think that has a lot of room to grow.

We've shown success obviously in strong performance with our private real estate vehicle, our private credit vehicle, and we think the natural evolution here is a private equity vehicle. The strategy is broad-based as we talked about on the call, not just traditional corporate private equity, but tactical opportunities, secondaries, growth, life sciences really plays to our strength of this broad platform that we have.

And so as we look forward here, we think individual investors will respond. And of course, it's a function of how we deliver over time. Initially, we had a very strong start with that $1.3 billion first close, which reflects the relationships we've built up over time.

I think an interesting fact and that was pointed out yesterday, is 85% of the financial advisers who allocated to BXP in that first close had already allocated to BREIT and even a higher percentage had allocated to BCRED, showing cumulatively between BREIT and BCRED, showing that our customers feel tremendous loyalty to us.

So the fact that we have these deep long relationships we've developed confidence we've delivered performance. I think that makes us uniquely positioned in the retail space. And we think creating access to private equity in a semi-liquid format will be more attractive. There will still be investors in the individual investor space who will invest with us and draw down funds.

But of course, you don't get all that capital back for 12-plus years, and it's got a little bit of a different structure. It lends itself to a smaller investor universe. We think there's going to be a lot of receptivity to this product.

We're going to have to do like we did with BREIT and BCRED, which is delivered for the customers. As we do that, we think this product can grow to scale. We're today at $60 billion of equity in BREIT, roughly $30 billion in BCRED, $60 billion of gross assets. And we think this product has the opportunity to grow as well, but we've got to deliver for the customers, get out there, engage and do it over time.

[Operator]

We'll go next to Ben Budish with Barclays.

[Benjamin Budish, analyst]

I wanted to ask on the insurance inflows. I guess, first for the quarter, your inflows really picked up quite a bit versus Q3, and I think came in nicely ahead of where you had initially at least kind of indicated last quarter, you were looking for the year. So was there any sort of pull forward? Does that sort of change the outlook for 2024?

And then just thinking tactically, you indicated you'd get to the $250 million over the next several years. Can you be any more specific, what does several mean? How should we think -- is this $15 billion, $20 billion over the next, like 3, 4 years? How should we be thinking about that just as we're kind of fine-tuning our models?

[Michael Chae, executive]

Ben, it's Michael, I think overall, there's really good momentum sort of embedded in our insurance and credit business. And then just in terms of -- in real time, the interest inflows we're seeing.

To answer your first question, we don't -- the sort of drivers of the inflows, I don't think involve sort of a pulling forward from 2025. It was a balanced attack across credit insurance between our insurance clients direct lending, which we highlighted in the 8-K, $7.5 billion, not just from BCRED, but also from institutional clients, our CLO platform, our ABS platform and so on. So I'd say a very diversified sort of balanced attack, if you will.

I think in terms of the inflows, we see in the insurance area specifically, I think earlier in 2023, we talked about sort of a general range target of $25 billion to $30 billion of inflows from the 4 major partners. We actually came in a bit above the high end of that range. And this year, I'd just say as a starting point, I'm certainly ending point, but the starting point, we see baseline expected inflows from those 4 clients in that range or better.

[Jonathan Gray, executive]

I would just add, given our model, which is in the open architecture, the opportunity to do SMAs with other individual insurance clients, not necessarily these 4 large strategics, we think that opportunity is significant.

And of course, we're out there looking for other strategic partners. And our plan, as you know, is to run a capital-light insurance business managing money and doing it for a wide variety of clients. Given the performance, what we've been able to deliver in terms of credit quality, and yield premium, we think will attract more insurance companies.

So this is an area we believe of real momentum, and we think we have multiple engines of growth, and we're going to be added and having these 4 anchor clients is very helpful.

[Operator]

We'll go next to Mike Brown with KBW.

[Michael Brown, analyst]

Great. I wanted to just ask on the fee rates in the real estate and the credit business. We noticed that they declined in the fourth quarter and understanding that's an output and can be noisy quarter-over-quarter. Do you view this as maybe the right jumping off point into 2024?

And can you just help us think about maybe the blending of the fee rates on a go-forward basis as we think about the push and pull of kind of the lower fee rate insurance AUM contrasted with the higher fee, high net worth AUM inflows.

[Michael Chae, executive]

Sure, Mike. Look, I think overall, if you look at our -- across the firm, sort of the math of our average -- our average management fee rate across the whole firm, it's been, I think, remarkably stable over multiple years.

If you look at more recently in the last quarter at the specific segments you mentioned, in credit insurance, if you just do the math, I think it was down like a basis point. So I think it is quite stable, even though the growth, the trend is an attractive and I think high margin growth in our insurance area that does come at a lower sort of weighted average management fee.

And so I think to the extent there's been aggregate dilution at the margin or lowering at the margin over the last few years. It's been -- a lot of that is the insurance flows. And obviously, we'll take that. And if you look sort of excluding the Insurance Solutions business, the fee rates have been really, really stable.

In real estate, I think quarter-over-quarter, there was the effect of the signature debt portfolio coming in, which is at $17 billion actually fee earning AUM. That's obviously exciting transaction.

We do earn different tiers of fees across most of those assets. We earn fees from the BREDS equity we're putting in. We earn a different fee on our co-invest capital and then an overall fee on the asset portfolio, which is at a lower rate, which is how that works with these sort of large-scale debt asset portfolio. So that had -- that is the largest explainer, I think, of a little bit of lowering of the management fee between quarter-over-quarter.

[Operator]

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

[Steven Chubak, analyst]

So I wanted to ask a question on election game theory. And I recognize, Jon, that you don't have a crystal ball, you already covered that. But just given the likelihood of a Trump-Biden rematch, potential changes in protectionist policies, energy transition, infra, what have you.

You alluded to accelerating deployment across the platform, but do you see any risk of an activity air pocket until we get improved election clarity. And how does it inform your own approach just to managing the portfolio and your dry powder across the different strategies?

[Jonathan Gray, executive]

Well, I think there'll be obviously intense focus on the election, but I think it will not deter transaction activity, particularly if inflation keeps coming down, and the Fed starts cutting interest rates. I think that will be more dispositive.

There are sectors which may be more or less affected depending on which party wins here, although it's very possible that one party wins in terms of the presidency and another party might win in terms of the house and so forth. And so you end up with divided government and policy changes overall are more moderate.

I think the most important thing to remember from our firm standpoint is we take a long-term approach when we're investing capital, and we try not to get caught up in just the news of the day.

And if you look at our firm over the nearly 40 years since Steve founded it here, we've been in governments where we've had blue, red, purple and we've delivered for our customers in those environments and since 2007, delivered for our shareholders, we don't expect that to be any different.

But I'd say transaction activity is going to be more tied to the Fed's activity than the election. And for us, it's taking this long-term approach, but also keeping an eye on are there areas that are more sensitive politically. But overall, if we think it's a good time to deploy capital, we're not going to let the election prospects dissuade us.

[Operator]

We'll take our next question from Bill Katz with TD Cowen.

[William Katz, analyst]

So maybe circling back to the credit platform for a while. So I appreciate that you have a multi-vectored opportunity set there, but there's been some building debate in the market around the outlook for direct lending in light of the fact that perhaps the issues around the banking system are starting to stabilize as a result of that sort of pickup in the syndicated loan market.

How do you sort of think it plays through in terms of direct lending opportunity in terms of both unit growth as well as spreads? Certainly, appreciate you have a very big fund in the market, but just your broader thought process and how it plays out from a competitive and a return perspective.

[Jonathan Gray, executive]

Thanks, Bill. I think on the direct lending front, specifically, there is more capital coming into the market today. As you said, the banks are coming back, although their appetite for bridging things for long periods of time, I still think is a little more limited. There are other players coming into the direct lending space.

The good news going back to the earlier conversation is we're seeing a pickup in transaction activity. And so although the supply of capital may be picking up here, I think the demand for that capital will grow.

I'd also say for us, specifically with $100-plus billion in the space, our ability to write very large checks is a very significant competitive advantage. So the fact that we can commit to a multibillion-dollar transaction on our own across our various private vehicles, our BDCs, that is really helpful.

And structurally, I think direct lending's competitive advantage is our ability to give borrowers certainty. From the bank standpoint, of course, they've got to have some flex because they want to distribute that paper. They don't want to take losses we, because we're in the storage business, can offer that borrower certainty.

And so particularly, on new originations, we think that is an area that will continue to be strong for direct lending. We think the pickup in deal activity will be helpful here, and we think our scale will certainly be helpful.

So yes, I think the environment does get a little more competitive. The good news is the credit quality of what's being originated still feels very good. I mean the average loan to value last year for us in our direct lending was only 40%, a fraction of what it was, let's say, 15 years ago.

And you look across our portfolio in direct lending and defaults are almost nonexistent, which is quite remarkable. So the platform seems to be in good shape. There may be more capital coming to the space, but I think there'll be more deal flow as well. And so that's a positive.

[Operator]

Our final question will come from the line of Arnaud Giblat with BNP.

[Arnaud Giblat, analyst]

I was wondering if you could discuss the outlook for performance fee-related revenues at BREIT and BPP in 2024, given what you said on high levels of competition in multi-times and what that does to rent growth? And also given the potential for falling rates in the U.S., how should we think about the potential for lower cap rates and valuations versus the movement in hedges?

[Jonathan Gray, executive]

Well, I would say this. I go back to the big picture here, which we talked about, which is we do think we're seeing a bottoming in values, but we don't think this is some sort of V-shaped recovery.

And so for us, we've said we think it's a very good time for deployment. Putting your finger on exactly what values will move to is hard to do. But certainly, rates coming down, new supply coming down are helpful for the sector.

I would say this, I would expect this year will certainly be better would be my expectation from a valuation standpoint relative to '23. But making predictions on exactly where it lands, I think that's tough to do this early in the year. But there are some good fundamental things happening on the ground.

[Operator]

That will conclude our question-and-answer session. I'd like to turn the call back over to Weston Tucker for any additional or closing remarks.

[Weston Tucker, executive]

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