Welcome to the Blackstone First Quarter 2013 Investor Call. And now, I'd like to turn the call over to Joan Solotar, Senior Managing Director, Head of External Relations and Strategy. Please proceed.

Great. Thanks, Chantilly. Good morning, everyone. Welcome to Blackstone's First Quarter 2013 Conference Call. So today, I'm here with Steve Schwarzman, Chairman and CEO; Tony James, President and Chief Operating Officer; and Laurence Tosi, Chief Financial Officer. Earlier this morning, we issued a press release and a slide presentation illustrating our results, which are also available on our website. We expect to file our 10-Q in a few weeks. So 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. Actual results may differ materially. For a discussion of some of the risks that could affect the firm's results, please see the Risk Factors section of our 10-K report. We do not undertake any duty to update any forward-looking statements, and we will refer to non-GAAP measures on the call. For reconciliations, please refer to our press release. I'd also like to remind you that nothing on this call constitutes an offer to sell or solicits of an offer to purchase any interest in any Blackstone fund, and the audiocast is copyrighted material of Blackstone and may not be duplicated, reproduced or rebroadcast without consent. So a quick recap of our results. We reported economic net income or ENI of $0.55 per unit for the first quarter. That's up from $0.44 in the first quarter of last year. The improvement was largely driven by sharply higher-performance fees from greater appreciation in the underlying portfolio assets really in every one of the businesses. Distributable earnings were $379 million or $0.33 per common unit for the first quarter of 2013, more than double last year's first quarter. And we'll be paying a $0.30 distribution to common of record as of April 29, which reflects the $0.33 in distributable earnings, less $0.03 in retained capital per unit. And then lastly, we're hosting our third Blackstone Investor Day on Friday, May 3, at the Waldorf in New York. We sent out registration e-mails, and many of you have registered. But if you didn't receive one and you'd like to attend, please follow-up with either me or Weston Tucker after the call. And as always, let us know if you have any questions following the call as well. And with that, I'll turn it over to Steve Schwarzman.

And good morning to all of you, and thank you for joining our call. It's been a terrific start to the year. First quarter revenues were up 29% year-over-year, and earnings rose 28%, as all of our investing businesses posted another quarter of great returns and strong inflows. Assets under management grew by 15% to a record $218 billion despite a sharp increase in cash realizations to $6 billion in the first quarter. While many of our businesses are already the largest of their kind in the world, every one reported another quarter of double-digit AUM growth as our limited partner investors entrusted us with greater amounts of capital. One of the defining characteristics of our ability to achieve this continued growth is innovation. We stay attuned to market dislocations and long-term trends that provide scale investment opportunities. We meet investor needs with unique and better solutions and then we have the best people to execute, and this is what we do here at Blackstone. Almost $76 billion of our current AUM of $218 million comes from new products, new strategies and new regions that didn't exist for us at the time of our IPO 6 years ago. These assets contribute meaningfully to our average AUM growth of 28% over the past 20 years. And I don't think there are many businesses in finance that have any kind of record of this type. We have several innovative products, either recently launched or in progress. Two weeks ago, we launched the first actively managed ETF in partnership with State Street Global Advisors, a leading distributor of ETF products, as you know, and a well-established retail distribution channel. The new fund trends under this ticker, SRLN, and is finally called Sirloin. I obviously didn't have anything to do with this name because I don't eat red meat, but hopefully, other people will. This is an exciting new product. And with our investment track record and brand, we believe it has the potential over time to become as large as some of the largest open-end mutual funds focused on bank loans. And the potential on this is really very big. It's hard to know how it will develop, but these types of products often get into the tens of billions of dollars. So we have an aspirational goal, though we have no idea how this will develop. Also, in Credit, our new rescue lending fundraise is progressing very well, and the fund has already surpassed the size of our first fund at $3.3 billion. We fully expect to hit our $5 billion cap by the time of our final close in June. And this is a fund that is not yet investing, so it's not included in our fee-earning AUM but will roll in as we invest over the next few years. Recall, we also hit the cap on our second mezzanine fund last year, so the GSO team here at Blackstone is really doing a terrific job. We raised over $3 billion in our CLO and other customized credit strategy platform, which included pricing 2 new CLOs in the first quarter. If you'll remember, this market was completely dead 2 to 3 years ago and some people questioned whether it would revive. In fact, it's not only alive and well, it's particularly alive and well right now. This also includes great successes we're having with our retail business development company platform, which is raising well over $500 million in equity per quarter. That's per quarter. Gross fee-earning assets in this strategy have now reached $7 billion including leverage. Our Hedge Fund Solutions segment is also broadening distribution channels and diversifying product offerings, driving strong capital inflows and market share gains. BAAM, as we affectionately call our Hedge Fund Solutions area, is the clear leader globally in this space and reported $1.2 billion in gross inflows in the quarter and $900 million on a net basis, excluding another $950 million or almost $1 billion of April inflows. Some of BAAM's new initiatives include expanding our platforms to invest in special situation opportunities and hedge fund stakes, as well as developing hedge fund solutions for individual marketplace. Our Real Estate platform remains very active around the world, and in both our opportunistic and debt strategy businesses. In April, we had a first close on our new debt strategies drawdown fund of $2 billion and are targeting a final close of $3 billion, which is way below the demand for this product. We capped the fund at this amount in order to match it's size with the current market opportunity. Including the April close, our real estate debt strategies platform is now $9 billion in total, up from 0 in 2008. And as I mentioned, we could have made it significantly larger. Also in Real Estate, we launched our first dedicated pool in Asia earlier this year and expect the first close in the second quarter in excess of $1 billion. Lastly, in Real Estate, we continue to generate strong inflows from co-investment in our large deals which earned fees, and we've raised nearly $2 billion in co-investment in the last 2 quarters alone. So if you annualize that, which you actually shouldn't, that $2 billion in the quarter times 4 would be $8 billion, which is almost -- which would be raising more than the largest fund in the world other than our own just through co-investment. One final note on fundraising. Our tactical opportunities business, which is a special situations platform with a broad investment mandate across asset classes, raised an additional $1 billion in the first quarter, bringing its total size to $2.7 billion currently. This product has received strong interest from some of our largest limited partner investors and has the potential to be quite significant over time, which I believe it will be. In aggregate, we raised $8.5 billion in capital in the first quarter. Central to our ability to continue raising this much is our track record of generating attractive returns, and ultimately, better performance than what can be achieved by our investors in other asset classes. Our first quarter performance was consistent with this trend. In Real Estate, our opportunistic investor -- investments rose over 6% or $2.4 billion in total appreciation. In terms of fundamentals, it's more of the same, with ongoing improvement across all subsectors, largely on the back of limited new supply of product and moderate economic growth. Our BREP VII global fund, which started investing in the third quarter of 2011, the largest such fund in the world, has already achieved a net IRR of 32%. Let me just go over that one again. It's the largest fund in the world, so we're not supposed to have good performance according to a lot of theoretical models, which has not turned out to be the case for us, and it's up 32% net of fees. It's really an amazing performance. And all of our global funds, as well as our current European fund, are fully in carry. Real Estate's accrued performance fees, net of compensation, increased to $1.4 billion despite higher realizations which equates to $1.28 a share. Our Private Equity portfolio, not to be left behind, rose 8% in the first quarter, with over $2 billion in equity value appreciation net of the negative impact of foreign exchange. Most of this gain was in our fully invested BCP V fund. The fund, as you know, is below the preferred return hurdle. Now it's by 9% on the total enterprise value basis, which is a good improvement from the 12% gap that we reported. So we're not that far away from getting into carry, although it's hard to predict exactly how that will develop. The fund is now held at 1.3x cost, including realized proceeds. Our portfolio companies are performing well in a tough economic environment, and we're leveraging the strength of the platform and our portfolio operations to create real sustainable value for our companies and our limited partner investors. We also tapped into the strength of the credit markets, which Tony talked about on the earlier call, during the quarter to execute over $20 billion in portfolio company debt financings, driving substantial interest savings across our portfolio overall. And these savings translate into a multiple of value appreciation. As our funds have continued to create value and post strong returns, recent market conditions have increasingly enabled us to convert this value into cash earnings for our investors. I stated in our last call that it was becoming increasingly evident we've reached an inflection point in terms of realizations as long as markets remain constructive. While on a quarterly basis realizations are always lumpy, our first quarter distributable earnings of $379 million were our second-best quarter ever as a public company in about the last 6 years, trailing only the last quarter. This brings our 6 months total to $870 million. Our $6 billion in total realizations in the first quarter is up from just over $2 billion last year. That's 3x. Our Credit business was half of this amount, driven by CLO activity, as well as realizations out of our first mezzanine fund, which generated an inception-to-date return of 19%. If you can make 19% after fees in mezzanine, that's about as good as most people have done in equity returns, if not better. That's a pretty remarkable performance by the GSO group. In Real Estate, we had nearly $1 billion of Real Estate this quarter, double last year's first quarter, generating $72 million in realized performance fees versus $9 million a year before, so that's $72 million up from $9 million. And we remain confident we will see a material pickup in this level later in this year and next year. In Private Equity, we've also been active, generating $140 million in realized carry in the first quarter, up from only $4 million the year before. So if you keep track of this blizzard of numbers, you'll see that Private Equity had much larger realizations in that sense than Real Estate. We completed 10 equity capital market transactions, including nearly $2 billion of secondary share sales. The average multiple of invested capital in these transactions was 2.7x your money. Any way you look at it, when you're selling things at 2.7x investors' money, it compares so massively better than the stock market, that this is why people continue to give us increasingly large amounts of money over time to do what we do. As the M&A environment for corporates has been somewhat restrained over the past few years, we've seen more of a concentration toward public market exits for some of our more mature investments, though I think this will change over time given the enormous liquidity that companies have. In addition to several secondary offerings, at the very end of the first quarter, we completed the successful IPO of Pinnacle Foods. This priced at $20 a share, the top end of the filing range, and has since traded up further. We did not sell down any of our interest in this offerings. We have a few more other IPOs on file, and we expect several others in the coming quarters. So this part of our business is doing quite well. In summary, we're very excited about the prospects we see in each of our businesses. We've launched or are launching a number of new and innovative products in every business line and are broadening our distribution channels. As we continue to attract more capital, our diversity and global presence enable us to identify attractive opportunities to deploy this capital, sowing the seeds for future returns. We've seen sharp increases, very sharp increases in cash realizations recently. And in good markets, we will continue to harvest the value we've created, driving good returns for our public shareholders. Our firm is in terrific shape, both in terms of growth of assets, our capital position, our performance for our investors, the number of new products, our personnel, which is really absolutely terrific, the people here are really excellent what we do and a culture where we have a sense of mission to be the best-performing firm that we can be for our investors. So it's a -- the state of the end of the first quarter is a very positive one, certainly from my perspective. Laurence A. Tosi: Okay, Steve, thanks. Blackstone's first quarter was a record start to the year with $1.3 billion of revenue, up 29% year-over-year on record performance fees and investment income of $739 million, which was up 57% year-over-year. The firm's results reflect not just the impact of a single strong quarter, but also the earnings momentum created by sustained fund performance and growth, which Steve outlined, and the earnings leverage that combination generates. To give you better insight into how we think about the firm's performance and earnings potential, I'll focus my comments on 3 core earnings drivers: Capital formation, value-creation and gain realization. Capital formation. Over the last 12 months, Blackstone's global marketing platform, network of LPs and continued innovation generated $34 billion of inflows. In fact, as Steve outlined, several of our newest and largest fundraisers have resulted in the firm reaching caps or capacity, evidencing the demand for alternatives in general and the power of Blackstone's track record and brand in particular. Consistent robust inflows and value-creation more than offset the $23 billion of capital return to investors over the last year, allowing the firm to grow 15% to a record $218 billion. Further, despite the $17 billion of capital invested or committed across the firm, the global capital formation capabilities of Blackstone were able to maintain the level of available capital or dry powder at $36 billion at the end of the first quarter. Value-creation. The sustained fund performance across all of Blackstone's businesses created $18 billion in value for fund investors over the last 12 months and $7 billion in the first 3 months of this year alone. The value-creation reflected in fund performance can also be seen in a couple of key measures of earnings potential. Total performance fee-earning assets reached a record $88.5 billion across 90 distinct funds currently generating cash performance fees. That total is up from 54% in just the last year -- up 54% in total over the last year. Sustained fund performance also has the direct effect of accelerating accrued performance fee revenue, which reached a total of $604 million for the quarter as the base value of assets upon which we earn performance fees continues to expand. This earnings dynamic also impacts the net performance fee receivable, which reached a record $2.3 billion or $2 per unit at the end of the quarter. Another key indicator of value-creation is the sharp growth in total net value of cash and investments on the balance sheet, which grew over $1.50 in the last year to $5.93 per unit, up 34% year-over-year which further creates value for shareholders. Now on to gain realization. Our gain realization activity over the last year has strengthened materially, which resulted in $929 million in realized cash performance fees paid and $0.92 per unit in total distributions to unitholders over the last 12 months. In the first quarter, the firm executed 40 different transactions that generated another $6 billion in realizations across the 90 funds earning performance fees. These realizations are, of course, the key driver behind the more than doubling of distributable earnings year-over-year to $379 million and represents the strongest first quarter in the firm's history. Over the last 12 months, the cash generating components of earnings, or ENI, which are realized performance fees and fee-related earnings, have grown to 64% of our total earnings, up from 49% in 2011. What is perhaps most interesting about the performance is that as gain realizations and cash payouts to unitholders have strengthened considerably, the value-creation elements of our balanced earnings continue to expand Blackstone's forward earnings potential. As I mentioned last quarter, as Blackstone's earnings have steadily and consistently grown and diversified over time, it afforded us the opportunity to enhance unitholder value by increasing our quarterly base distribution by 20% to $0.12 per unit. We also moved to a current-quarter payout policy and accelerated the timing of that distribution. For the first quarter, our distributable earnings grew to 33% per unit, and we will distribute $0.30 per unit or 3x our last year's payout to our unitholders of record on April 29, a date that comes before some managers even report earnings. In a period where public equity and debt markets are impacted by a sharp increase in risk capital and historically low rates, finding and creating value in the largest markets becomes more difficult. We have consistently invested in Blackstone's capabilities to find opportunities to create value where others cannot. Blackstone's culture of innovation, global reach, unmatched diversity of strategies and trusted brand uniquely position us as the solution provider to the world's largest pools of capital. Our public units give all investors liquid exposure to the fast-growing asset classes we manage, which can find those opportunities, often complex or liquid, to create sustainable value across markets and convert that value into a consistently high cash yield. The first quarter again demonstrated how sustained strong performance across Blackstone's funds can and will drive long-term value and cash earnings for our unitholders. Joan?

Great. So on behalf of everyone at Blackstone, thanks for joining the call, and we're going to take your questions now. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Bill Katz with Citigroup. William R. Katz: Steve, I'm curious if you could flesh out the retail growth opportunity. It seems like you and some of your peers are particularly focused on trying to crack into that particular area, and sort of I think under your discussion of broadening out distribution, so could you talk about, a, what you're strategy is from a distribution perspective; and b, what type of products are you looking at here? And so in that construct, how you're thinking about redemption risk as you build out the business?

Bill, it's Tony. I'll take that one. And I hit this briefly on the press call, but we basically think retail opportunity is big for our industry and for ourselves. It's big for the industry because there's -- the total amount of high net worth assets is bigger than the total amount of institutional assets. Whereas institutions tend to have 10% to 20% of their assets in alternatives, retail tends to 1% to 2%. So that shows you the scale that could be potential. So we're excited about that. We're actually hitting that every single one of our businesses has at least 1 and maybe multiple ways that they're accessing retail investors. And that might be defined by channel or might be defined by form of product. Form of product could be partnerships, sort of special-purpose entities that a distribution arm would set up to distribute LP interest in one of our main funds; or it could be publicly traded vehicles, like the ETF that Steve mentioned; or like BDCs; or like closed-end funds; or like mortgage REITs, all of which we have. So I would say it's across the board, it's across retail channels and it's in multiple forms. William R. Katz: Okay. And just my follow-up question, when you look at the dynamic between cash return and growth of fee-paying AUM, obviously a little bit of a depression on fee-paying AUMs to the extent you're very successful in generating realizations and so forth, how do you think about the ability to grow fee-paying AUM? I think it was about 2% sequentially, a little bit lower than your long-term average. And if your realization cycle picks up, what are the key drivers to that growth going forward?

What happens with AUM, when you raise the fund, you get a bump, and then when you sell things, you take away from the value of those assets. And that kind of sort of wave phenomena is endemic in our business. We have a lot of assets in different parts of our business. So the way you keep the business growing, which is great for the people who work here because everybody gets a chance to be -- have platforms to grow in where they can be important and grow professionally and it has a good result financially, is to expand new products and to move into new geographic areas to the extent that all these things always have to be measured against producing great returns for investors. We just don't do this stuff to manage to some earnings expectation. We do it if we see great opportunities to produce superior returns for our limited partners. And you also grow your business by taking advantage of different channels. And so we've had, for several years here and actually much longer, use of retail distribution that Tony talked about earlier, and that bringing our products to high net worth investors is a logical evolution. The technology has gotten better and better to do that on SEDAR fund side. And these type of investors were typically scared to death in the financial crisis and basically went to cash, which was the exact wrong thing to do just by the by. It's a pattern that gets repeated from time immemorial. But putting money in our types of products yields much higher returns. And I'm asked reasonably often during the year to talk to groups of high-net-worth financial advisors, and I basically say to them, "Why would you invest in the products you normally do if you can make 2x to 3x your money and have happier customers if you put them into our products?" And I think that's not a sophisticated sales pitch, but it actually happens to be one that's pretty compelling. And the people managing these large high-net-worth groups increasingly want to get their customers into these types of products because the customers are better served and because we've got not only great array of products more than anybody else in the world, no one close, but we also have a brand name that people can trust because we're very risk-averse and we tend to be highly diversified in what we do. And so it's a safe -- we're a pair safe hands, but with high performance historically. And so by rolling that distribution channel out over time is another source of growth for us. So part of what we do is follow the opportunities to create products and move around the world in terms of gathering money. And outside of the United States, the Blackstone name is really, really powerful. It's powerful in the United States, too, but I'm saying it's a differentiating item. It's a great name to bring to a market.

Bill, let me answer your question on AUM growth. So we've got this kind of a see-saw cycle a bit, as you've pointed out, which is on the one hand, when you go through big realization, you start shedding AUM. And then at the same time, when you're into your big fundraising, it's lumpy because you get -- particularly if you're doing the mega-funds that are the core funds in real estate, private equity, places like that, you get big step-ups. So it's not totally smooth, and those things don't always correlate. So you'll have flatter periods as you're not raising a big fund, but you are divesting, and then you'll have spurts when the big fund comes in and you're not divesting much. I think when you smooth that out, you can expect us to have high-single digits, low double-digits, long-term AUM growth, at least that's what we expect. And I think actually the structure of our business as it grows is getting smoother in that because we're having more and more funds that are always in the market. And because some of our funds, increasingly a number of them, particularly some of the GSO and credit-related stuff, only come into fee-paying AUM once they start being drawn down. So that's a much steadier kind of thing. It's disconnected from the big raise cycle. So -- but we think, as I say, high-single digits probably is what it averages out over time. But you'll have -- we'll have somewhat softer periods and somewhat sturdier periods, but it should tend towards the smoother.

Your next question comes from the line of Michael Carrier with Bank of America.

You guys gave a decent amount of color just on the realization environment. You've been pretty active, and it's driving your healthy distributable earnings. On the deployment front, I just wanted to get maybe an update -- activity across the industry has slowed a bit, valuations have picked up. I think you guys had mentioned when you look at valuations, whether it's being driven by central bank policy versus fundamentals, so just where you see the opportunities going forward just given the fairly strong move in the markets, which obviously has been positive on the exit front?

Yes, it depends on the business line that we're in. They just have different characteristics. Real Estate is just still basically, by historic standards, smoking, and it has not impacted that as much. And so you can start seeing a little tightening there. It's affected Private Equity the most, with a slow investment rate for the current quarter. But I don't look at life in terms of quarters. I know you do. It's a bit of an artifice. And we look at what happens in a year or 2, and we missed 1 or 2 large situations where we would've ended up just putting $1 billion or more in just one transaction, and then these numbers would've looked different. So that's a bit of a luck at the draw type of thing. You also need to pick your shots as to where you work and developing a product that's more direct where we have a number of deals going on like that as opposed to some of this auction product like Life Technologies, which we lost to a strategic -- is the way you go about doing that, and to the extent that the deal business picks up or that our GSO people have a lot of opportunities there with their drawdown funds. And so a bit of this is a wax and wane kind of phenomena.

So Michael, let me weigh in on that. It seems -- it sounded like you posed your question primarily Private Equity, I mean obviously Real Estate is at some kind of huge level, so there's no shortage of opportunities there. And so let me focus on Private Equity. We're still seeing -- prices are high at the general industrial LBO market, but we try to avoid that unless we have some kind of special sauce anyway. But we've put a lot of money into energy very successfully, continue to see a lot of interesting investments there. We've put a lot of money into sort of -- and private companies are companies that can't access public markets, whether debt or equity, has been a really good place for us, both our Credit business and our Private Equity business. So private capital -- private credit has gotten historically higher returns in relation to public credit. And similarly, on the equity side, small companies that can't access public markets need growth capital, want to consolidate their industry, still a lot of interesting things there, but they're smaller companies for the most part. And then there are still some industries which are capital-constrained from the financial crisis, and those have not healed yet. Some of the markets have not opened up for them yet. There's various regulatory-driven capital needs that are kind of distorting supply and demand and creating anomalies which we've been focusing on. And of course, Europe is not a hot market, and there are some interesting things there depending on where you look. So when we look around the world, we're still seeing plenty of interesting things to look at. We're being disciplined. We've put out -- well, actually, we've put out -- in the last 12 months, we think we've put out $4.4 billion in Private Equity. That's probably not a higher than sustainable investment pace for us. So we don't feel that constrained by a lack of opportunities at all.

Okay, that's helpful color. Just as a follow-up, on BCP V, so you guys have made some good improvement particularly this quarter just in closing that gap. But when I look at 2014, your estimates and stuff, there's a pretty wide range out there. So I just want to make sure that we look at this correctly. So if I just take like the last -- take 3 quarters since the market has rebounded, it looks like the markets have been up in that timeframe from 15% to 20%. And then if I look at the kind of the equity or the fair value improvement in your performance or in that gap, it's gone from like 36% to 22%, and then that enterprise value has gone from like 13% to 9%. And so when you guys report performance, I'm just -- we always look at that fair value metric, which is at like that 22%. But I know you guys look at that enterprise value metric, which is at 9%. I'm just trying to like tie the 2 or what we should be focused on when we look at the performance of the fund. Laurence A. Tosi: Michael, it's LT. They're actually -- as you just did the math, they're actually the same numbers. We prefer to show the total enterprise value number because that's more akin to what's happening in general markets when you look at the S&P or other indicators. But you can, as just as you did, calculate it on a levered basis where you're taking advantage of the leverage. And then it's a bigger number to reach, but you have the advantage of the leverage so that the total enterprise value has to go up by less. So it's just a matter of presentation. We thought it was simpler for more investors to show it on a total enterprise basis, but we give enough numbers so you can also calculate what it is on an equity basis.

Your next question comes from the line of Robert Lee with KBW.

First one is, I guess since it seems like every financial that's reasonably successful or very successful has a target on it, is there any -- I'm just curious, is there anything besides the ever-present carried interest in the recent budget proposals or regulatory proposals out there that weren't -- that you're taking extra closer to look at or could be problematic if enacted?

That's a good question. We always spend a lot of time worrying about risks here. And if you look at our initial prospectus or you look at whatever we produce by way of documents that we file on a regular basis, there's always a list of these kinds of risks.

And I don't know that any of us think there's anything on the horizon other than Washington-type issues that really should impact the business in any significant way given the momentum that it's had longer term. There's a trend to defined contribution as opposed to defined benefit plans, which on a very long-term basis, may have some impact. But to the extent that we pivot to going individual investors and more sovereign wealth funds, we can ameliorate that. We always have the risk of our own performance, which firm-wide has been really terrific. And that's something that we're always laser-like focused on. But in terms of external types of things, we've a little bit of investors sometimes wanting to go direct on certain types of deals. That's a relatively small impact to our business, and we've grown right through that. We find new ways to partner with these types of investors on certain types of things. And so I think it's -- it really is more government-oriented things and passing things in Washington, we're all finding out now, it's pretty difficult to do. And without making too much of a political statement, it's hard to imagine when 90% of Americans are in favor of some types of background checks, and we can't even sort of get a vote on it. So even though Washington things could have some interest in terms of potential negative things that people mentioned almost in passing like getting rid of interest deductibility, which is just on the list of something that came up a few weeks ago, that a lot of these things that make some headlines, I think, are quite unlikely in the context of the world we're living in today to really be effective. But that's the area that I think from an overall point of view that we worry about the most. Just doing our business and making excellent returns for our customers. That's something we're pretty focused and it's part of the firm's culture, and we don't knowingly do anything that is straying from achieving that objective. So I'd say on balance, from a risk perspective, it certainly appears from being thoughtful about it that we're in a relatively low threat level to the firm in any way, except for these types of Washington-oriented issues, and most of those we can find a way to grow through, frankly.

Actually, Robert, I'd say to the contrary, we actually think that these -- that the markets where, I think, Goldman Sachs published a report where they projected returns for the next 5 or 10 years recently. And they projected the stock market returns of like 5.5% and credit intensive say high-yield in the 3s and investment-grade and government bonds. Government bonds, 0, actually investment-grade close to 0. If you think of our traditional investor that's got to earn 7.5% to 8% to make his beneficiary to make his payment to stay solvent with beneficiaries, and the equity returns are 5.5% and the credit returns are best depending on the credit spectrum are 2%, and they've got traditionally people have 60% of 1, or 40% -- 60% towards equities, 40% towards debt, you're talking about a portfolio in 3.5% if that's all you're doing. It's a killer, and it's going to be huge societal burden and/or -- because the taxpayers got to pay it or you're going to push -- or you're just have an insolvent pension plans then. I don't know how society deals with that in any painless way. The only painless way, truthfully, is to earn more on the portfolio. And the only way to do that is to move your money to alternatives because there you can have pretty consistent, uncorrelated returns that are way above on a good alternatives portfolio. You have tons of confidence of being way above your liquid market alternatives. And so we see it the other way. We see that the trends are inexorable. It doesn't matter about whether private equity is popular or this or that. They have no choice. There's no better answer for society than these institutions moving substantially more capital into alternatives.

If you just look at, for example, we've got 1,600 basis points long-term performance in real estate over the stock market, I mean, how can you not allocate more, as Tony's talking about, to that asset class? We're in 900 to 1,000 over in private equity, so why would you not do that in increasing size? Our credit business is -- has earned major multiples over those areas, and all of them are way above the actuarial rates. And so this isn't like a theory. This is reality. And so there is nowhere to go to solve the problems other than the kinds of things that are horrible types of alternatives for society. So we think our business is really extremely well positioned for the future.

Maybe just following up to that, I mean, one of your peers has talked about them believing, I guess, a couple of years down the road and 2, 3, 4 that -- it's inevitable that they'll find a way to put more alternative products into defined contribution, plans and whatnot. Do you guys assume -- I know if you do share that confidence, I mean, do you see that as being a realistic potential for the foreseeable future?

Absolutely. And if you look at like Australia, you'll see a lot of alternatives already in the equivalent of defined contribution plans. And we've developed specific products right now that are going into defined contribution plans daily marks, daily liquidity that sort of stuff. So absolutely we'll see that and we're already there.

Your next question comes from the line of Roger Freeman with Barclays. Roger A. Freeman: I just wanted to just take up on this last point, and kind of carry this out. If you've moved, I guess, how much capacity do you think there is to generate these consistently high returns? If you look at how you generate the returns, right, improving the businesses that you buy, some of its financial, capital structure-related, if you move the kind of money that would have to move into sort of private equity and similar assessments to solve the pension issue, does that change the dynamic? Laurence A. Tosi: No, I don't think so. We haven't seen it. We haven't seen any diminution of the returns as our business is scaled. And remember, as we grow, we're not just growing the same 3 funds over and over and over again. We have a lot of new products, we have a -- and let's take private equity, for example. When private equity initially started 20 years ago, you focused on small because you couldn't finance big, mundane industrial companies that were slow-growing in the United States. You'd never do a tech company, you'd never do growth equity, you'd never do a large deal, you'd never do a deal in Europe, Asia or Latin America. The scope has widened dramatically and continues to widen. And so we haven't seen any limits to scale, and as I say, it's not just doing the same old thing bigger, it's really expanding the horizons and the number of things you can do well. Roger A. Freeman: Okay. And I guess, the other -- my other question is just be on proprietary data points, always interested in what you're getting out of your many portfolio of companies. There's a lot of talk about more slowdown again. Are you seeing that?

We're seeing, I would say -- let's just talk -- it depends on where in the world, but let's start with the U.S., because I think that's what your primary question is about. We're seeing anemic growth. It is growth, but it's anemic. Europe is flat to down, and Asia is growing but...

There are different areas of strength, of course, the whole housing area. For example, you've seen housing starts are now a little over 1 million, up from sort of at the bottom. I guess it was like 500,000, 600,000. You've got autos that are still doing quite well, about 15.5 million units, which were up from about 8.5 million, 9 million units at the bottom. So these areas have strength, as does the money at least going into the energy complex and that area yields more, of course, in terms of return with the commodity price for oil was $10 higher the way it was sort of 1 month or 2 ago. But that area has really very significant strength as people are working with sort of the shales all over the country. I mean it's a revolution in terms of what's going on there. That's the strength of the economy. I think what Tony was alluding to correctly so is that there, obviously, is some impact that's being felt through the economy from the issue of the reversal of the cuts on withholding. And at year end, those reversals and no one can be sure exactly what's triggering what. You've had huge tax increases on upper-income people. You've had the sequester. And so economists generally said that with those 3 factors, you would have a negative impact on the economy in the 1.5% to 2% growth rate and you'll have some of these other offsetting factors. And so that leads you to a sort of a compromised growth rate. So you don't see the strength all through the economy the way you wish you did. And then confidence levels over the last few months have been down in large part because as you watch what's going on Washington, you really have to shake your head, and how do you maintain confidence in an optimum way when outcomes appear to be pretty suboptimum. And so you put that together and I think you've got a scenario in line with what Tony is talking about, but you get there different ways. And our different businesses are impacted in different ways because of them.

And if you peel back and look at it by consumer, the sequester, the payroll tax, the Affordable Care Act, those things hit the low-end consumer a lot harder. We're seeing the low end of the consumer even stepping back a bit, but the high-end stays pretty strong. And of course, it's also got it's regional overlay, like, for example, in England which is doing very poorly, overall, London's rocking and the rest of the country's suffering. So you see some funny patterns, as Steve said. It's not homogeneous in that way. That's reflective of -- and you weren't asking about our portfolio of companies, I know you're asking about the overall environment. But it's kind of -- you see these pockets of strength, pockets of weakness, but overall, pretty anemic.

Your next question comes from the line of Howard Chen with Crédit Suisse.

Steve, on realizations, you know the meaningful pickup in activity, particularly in private equity. Just given all the value have in the ground of real estate, I was hoping you could talk a bit more about your process of selectively culling, lining up the higher-quality properties and preparing the market for just more active harvesting within real estate specifically?

Well, we've got a very interesting situation in real estate. We own wonderful things that appear to be going up in value a lot. So our timing of putting investments in the ground has been really good. We've been the largest investor in the world, by far, over the last several years globally in real estate. And we do sort of a regular analysis of what what's -- of what we think has sort of reached its improvement potential. I mean, Jon Gray is a -- got a very snappy description of our real estate business, which is buy it, fix it, sell it. And so when we're past the fix it part of the equation, then we look to sell it. It depends where the markets are in terms of availability of capital at that point. If we think capital is going to be rushing into an area then you'd rather wait a little bit because the price will go up. But we've got a lot of things that we're actively contemplating, and I really can't say more than that. We're on the good side of the cycle for sure in terms of realizations in real estate.

Okay, great. And then just my follow-up more broadly on harvesting. As you said, you're beginning to active -- more actively harvest. And yet the pipeline, if you look at your portfolio value, net accrued performance fees, they're refilling faster than you're harvesting. So my thinking is maybe we're all underestimating the magnitude of this harvesting cycle versus prior ones. You've seen a lot of these cycles. Steve and Tony, I'm just curious how you think about that.

I'll answer that one very quickly and Tony can add. I think the issue is really the strength of the economy. If we had an economy that was really moving along, you'd see a lot of stuff being sold very quickly. And so part of it is just responding to that. And when the time is right, there'll be an enormous volume of stuff. Like in every cycle when you get closer to the midpoint of the top of the cycle, there's enormous M&A activity. And it's not because we need realizations, it's the way the system works. And we've had a system that's been beaten up hard by the financial crisis, but part by the governmental response to it and confidence being lower than it would normally be. And at a certain point, that'll burn off and then there'll be a lot more. So I don't know that it changes things in a material way. It's just looking at what's going on in society. And when we have great assets, we want to make -- get a great price when we go to sell them.

So Howard, let me just, I mean, let me paint a picture for you. Imagine that the housing comes alive and the stimulus from the energy and this U.S. economy starts growing not at sort of 2%, but at 4%, which could easily happen out a ways. We get a little inflation, so the nominal grows 6%. Earnings of companies are very strong. The stock market which now has S&P PE of, say, 14, goes back to where it was at about 2020. The dividend yield of the S&P, which is the inverse of that sort of, would go from 2.5 back out -- I'm sorry, from 2-ish back down to about half from where it was before. So you've got a very strong market. You've got corporations with a very low cost of capital sitting on a ton of cash, and they want to go buy a bunch of stuff. And we've got all of these equities or real estate or whatever on leverage. So that, I mean, the math is simple, but if you have a -- if there's a company where 1/4 of the capital structure is equity and 3/4 debt and that value goes up 50%, your equity triples, all right? So I imagine what can happen in the right environment both in terms of the dollar size but also the returns. And we've seen this in the past. I mean, we -- I'm trying to think back, but back in 2000s -- early 2000s, I think it was our BCP III fund was I think $0.30 on the $1 and it ended up being 2.2x at one point. So the swing back and be very, very powerful and both in scale and in returns. So we're keeping our fingers crossed.

And on top of all of that, you have new products and new funds that are first being invested. So if you were only to look at one fund in isolation, what's been said is absolutely true. But now you have areas like energy, Tac Ops. Next year, you'll have hopefully BREP VIII, et cetera. And this is all are new money going in the ground that also contributes to the ENI. [indiscernible] The IPO is a new product.

I'll I'd add one [indiscernible]. In 2005, '06 and '07, we had 1 billion [indiscernible], and all the comments you just heard where we feel like we're more towards the beginning than the end. And the firm back then was at $75 billion in AUM. Now we're at $218 billion. And our performance fee-earning asset base is bigger than the entire size of the firm during those 3 years.

Your next question comes from the line of Patrick Davitt with Autonomous. M. Patrick Davitt: Is there a large incremental operating expense investment associated with raising or bringing in the large Asia real estate fund? Or is it largely using teams already in place from the legacy real estate business? In other words, what can we expect to see a big margin bump when that starts earning fees?

It's entirely, entirely with existing team. We've already been investing in Asia for 5 years. We have a fully built out team, and we don't need any more bodies. M. Patrick Davitt: Great. And then sticking in real estate, to the extent there's an opportunity to sell individual properties, I imagine it's fair to assume that real estate realizations could continue to pick up regardless of what equity market environment is, particularly when you think about the size of pools of capital and the reason for the pool of capital that are forming from sovereigns, in particular, to buy that kind of stuff?

You're absolutely right. And in fact, most our real estate exits will not have anything to do with public markets.

Your next question comes from the line of Dan Fannon with Jefferies.

Tony, I think you mentioned on the media call beginning of an M&A pickup, and I'm just wondering if that's some of you are saying just from the broader market or that's actually coming from conversations at your portfolio companies or within the Real Estate portfolio?

Well, I was referring to the corporate market less the real estate, although there's a robust demand for high-quality properties on real estate side as well that's picked up. But on the corporate side, it's not so much from our conversations as what we see in terms of competition for properties. We see that through our advisory guys, the activity level of their clients has really picked up again. And the number of things they're looking at. So it's more observational than trying to imply that we were going to be selling a bunch of companies near term.

Okay. And then within GSO, it does seem like they're out-marketing a lot of funds right now. Can you highlight some of the strategies and maybe the potential in terms of AUM goals within certain of those buckets?

Wow. Well, I think Steve mentioned, they've got CLOs in the market. They're just working on their distressed lending fund called Capital Solutions. That will hit it's cap shortly. They've got good strategies for retail products like a retail energy credit product for us. They have a product, they have a fund that does a loan, a private loan senior floating rates loan to companies that are small, so they're small business-originated stuff. They have -- help me out, guys.

The ETF, the [indiscernible].

The ETF, we mentioned. They have various SMEs that they're talking about.

And the hedge fund.

The hedge fund is always open and has had great results. So...

They have about 7 different...

6.

Is it 6?

6, yes.

Six different products that are currently available of note to investors. So I don't think we should be projecting for you exactly what each one's going to get. I've got my own assessment and my own fantasy life. So [indiscernible] with each one of those in terms of what they could be. But I think that it's fair to say that GSO will continue to be in a major growth mode.

Your next question comes from the line of Matt Kelly with Morgan Stanley.

I wanted to switch course a little bit to the BAAM business, and just hoping you guys can give little bit of color on the latest trends in your LP dates, who the incremental subscribers are, and particularly is that an area where you can get meaningfully bigger in high-net-worth and retail?

Yes, BAAM gets half of its flows from its existing investors, so we have very happy investors. As you can tell from tracking it, the inflows are way more than the outflows. And in effect, this is a custom-designed business. The days when this was all fund-of-funds business selling a standardized product is like way over. And the people who have stayed in that model have shrunk and this whole industry of the "fund-of-funds" is about half of what it was before the crash, and we've increased our size significantly. And so what we do is, we're designing different types of products. We're putting overlays on the portfolios to enhance performance. We're coming up with new drawdown products. We're hiring more people who are capital committers themselves. And we're evolving this model in a way that works for the largest institutional clients in the world.

And I would say the client base is still largely institutional, but we have some retail products out there. We have a registered investment company that started up last year and -- in one retail system, and it's expanding to other retail systems. So we have working on some fine contribution products in that area, which can be also embedded in insurance and other things like that. But for the most part, it's still institutional money. On -- in the terms of the composition of institutional money, the -- they've gotten more -- it's the U.S. investors account for smaller percentage today. They're still growing, but the faster growth, I guess, a better way to put it, is coming from the international side

And we do all kinds of really sophisticated types of modeling for these large clients and way beyond just efficient frontier-type of stuff. And they increasingly are working closely with us on relying on us to help them with allocations within this type of area and some other types of areas.

Okay, great. And then one follow-up for me, and sorry to beat a dead horse. But on BCP V, again, a good move this quarter, still only 28% of the unrealized investment looks like are public. So how should we think about that going forward with some of the public with the S-1s you have on file? And maybe if you can help us understand maybe where Pinnacle or other investments have been marked prior to taking them public, so we can understand kind magnitude of the -- some of the lift going forward?

Just -- I'll let LT handle that, but just in concept, we were like 9% away from an enterprise value from getting it to carry. On the other hand, the -- we're measuring that against an 8% hurdle that keeps moving against us, and so we need to create value in the companies above that moving 8% target, which actually is a little higher when you add some fees. So one of the ways to think about it is that typically and historically, when you take the numbers LT was discussing, that when we tend to realize investments historically, they've been like 25% to 30% over the mark that we have. So as you analyze the situation, and that's a hard thing to do just based on faith, but historically, that's what it's been. So that's on the equity side, not on the whole enterprise side. So the way I try to think about this is if we continue to improve the company and the markets are hospitable, we should have a built-in pop if the future is like the past, which gets us in a better position to eat up that differential. Laurence A. Tosi: The only thing I'd add to that is -- you're referring to the 28% that's currently public. Of the 3 IPOs or S-1s that are on file that Steve mentioned in his comments, 2 of them are relatively large investments and that would be SeaWorld and Michaels. So you could see a considerable increase in the amount that was public as those convert from our private holdings to public. It could be 10 percentage points or more depending on the final valuation if you have the starting point of 28% as public today.

And your next question comes from the line of Marc Irizarry with Goldman Sachs. Marc S. Irizarry: I just have a question on Tac, Tactical Opportunities. Can you talk little bit about the strategies that you foresee within Tac Ops as a franchise? I guess, how big that could be? And then also how to think about the velocity of money in that fund relative to the rest of the Private Equity franchise?

The Tac Ops is really like a terrific initiative, and I don't say that in a self-congratulatory way. I say it from an opportunity set perspective for us. And it's, I think, among people who do what we do, the only opportunity for investors to buy something that basically tries to get the most interesting things that you'll find in both private equity, real estate, hedge fund area and credit. There's nobody else who does all these things, let alone does each one of them at a worldscale level like we do and has like great results in every one of those areas. And so by combining that opportunity set and being able to look across the firm, we do a number of things. As Tony mentioned during the earlier call, the performance has turned out to be quite good, sort of at the moment and is sort of in the mid-20s, even though we were only shooting for 15. But what's important about it is that when we work with the largest pools of capital in the world on this -- on this fund, there's an enormous amount of interactivity between us and the senior people in those institutions. And what they're doing is they're going to school off of us and learning how we see what's going on within these asset classes, and we have interaction with them every week or 2. And this is like an opportunity for them if they follow what we're doing and if we're correct, which we, more or less, have been over many years, for them to impact their portfolios beyond what Tac Ops does for them and make major impact on the rest of their portfolio. So Tac Ops is way more important than just Tac Ops for those institutions. And what we're finding is that no matter who we sign up for this, they love this because they're keeping up-to-date and learning from us and improving the rest of their business. So the potential for this, I think will continue to size, and I've got my own number, but my General Counsel is probably telling me not to tell you, as he's just like using his hands to tell me to not go there. But it's a product that I think is going to grow. And the consumers' happiness with it is like really high. And word of mouth as well as the strategy is, I think like a really, really compelling winner.

And let me just flesh out, Marc, some of the -- it includes things like real assets, ships, shopping centers in Brazil, some different things that includes nonperforming mortgages. It would include intangible assets, royalties spectrum, mortgage servicing rights, could include small equity investments. So it's got a lot of different interesting components and it's global. It's across all asset classes. It's focused on illiquid assets, and it's trying to take advantage of things that no one else can really play today. Marc S. Irizarry: And the velocity of the money in that strategy versus private equity even by the name tactical, do you think it's maybe a little shorter term, if you will?

Well, so in a typical Private Equity fund, the investment period is 6 years. This investment period is 3. So you would expect the capital raise to be put to work quicker in general. Marc S. Irizarry: Okay, great. And then just want to follow-up on the comment of having, I guess, many more funds in more places as a business and maybe fewer bigger funds as you've had in the past, how -- when you look at your lineup of strategies today, how much investing do you have to do in the overall franchise to sort of build out the places that you want to be in, the strategies you want to invest in and sort of what's the outlook for margins then?

Well, okay, so I don't want to say there's any fewer bigger funds. It's the same number of bigger funds, but there are in addition, a bunch of more focused funds that are hung around that central core. And we basically have in place the vast bulk of the architecture we need for that. That's not to say like, for example, in the last 12 months, private equity put a senior guy in Australia, real estate put a couple of guys in Australia. But in terms of your modeling and whatnot, it's just a continuation of the past. We've always invested ahead of where we need into the future and there's no spurt of costs. If anything, I would say, we're growing some of the products into the capability we have and that should be catch up -- we should -- our products should catch up to our infrastructure and not the other way around.

And our last question comes from the line of Chris Kotowski with Oppenheimer. Christoph M. Kotowski: Yes. I was just to follow-up on the earlier question about the exits. And I'm curious, if you compare the mix of exits today, strategic versus the IPO and then -- I mean, it seems to me, most of their exits these days are these laborious IPO followed by years of selling down in secondaries and obviously it's much quicker and easier if they're strategic exits. And I'm curious, is the mix different than it was in other cycles? So if you go back to the early 90s and 3 or 4 years after that recession, is it typical that the strategics don't get involved until later or are they unusually gun shy here?

So let me just level-set here. We have 4 basic ways that we exit investments. Just for your purposes, we exit investments through IPOs, we exit investments through strategic sales, we exit investments through secondary buyouts and our sales to another private equity firm, and we exit investments through dividend recapitalization. So 4 basic ways of doing that. At any point in time, there's usually one market or another which is up more robust. And there always has been, so there's no typical cycle. So in this cycle, the strategics have been relatively quiet. And so -- and then lately, we've done a lot of dividend recapitalizations and a lot of IPOs. I want to come back to the IPOs in a minute. And then before the cycle, what I -- let's say, before the last 9 months, most of the exits of the industry were in secondary sales to buyout firms. Credit markets got hot before equity did, so you could do dividend recapitalization or you can do just secondary buyouts. That's now more towards dividend recapitalizations as the company has a pretty good growth ahead of it and IPOs, and that will probably morph more towards strategics at some set some. And the pattern of that ebbs and flows as different market segments get relatively more robust or less robust. And I don't think this cycle feels any different fundamentally than before in that way. Now the one thing I want to talk about IPOs is very often, I -- you say it's a laborious process, and this and that, once you get to the IPO, then, I understand what you mean by that. But quite often, you get public and even before you've done your -- some time and not so long after that, a strategic comes and buys it. So the IPO can lead to a strategic exit just as much as it can lead to laborious sell downs, if you will. So -- and then we don't actually mind that laborious sell down process quite so much because usually with the IPO, we price the deals to make it a good experience for the starting investors. We very rarely think we're actually getting full value in an IPO. To the contrary, we usually think we're selling the first piece at a bargain. Even though, that's typically above our mark, it's much less than we aspire to sell at. And so holding that money longer, letting a good company and a -- grow and a good management team do it's thing, you might IPO it at 2x your money and you might aspire to ultimately realize 2.5x, 3x your money if you have to wait a couple of years for that, added 25% to 50% gain and it ain't bad. So we don't mind that, we don't find that laborious. We just think of that as part of the process.

Great. Thanks, everyone. Thanks for joining the call, and again, feel free to follow up with me or Weston after for questions.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.