Q2 2024 Earnings: Cohen & Steers and Blackstone Navigate Market Shifts

Earnings call: Cohen & Steers navigates market shifts in Q2 2024 By Investing.com

Cohen & Steers Inc. (CNS) reported a slight decline in earnings per share and revenue for the second quarter of 2024, citing underperformance in equity-oriented asset classes and a modest decrease in assets under management. The investment management firm announced leadership changes, growth initiatives including the launch of the Future of Energy Fund, and plans to introduce active ETFs, despite facing a challenging closed-end fund market due to high interest rates. Cohen & Steers' Q2 2024 earnings call highlighted the company's resilience in the face of a challenging market. With a strategic focus on real estate and infrastructure, the firm is positioning itself to capitalize on market rotations and the increasing global energy demand. Despite the headwinds in the closed-end fund market, Cohen & Steers is advancing with new products and leadership to navigate the evolving financial landscape. Cohen & Steers Inc. (CNS) has demonstrated notable market activity and financial metrics in recent times. As per the latest data from InvestingPro, the company's market capitalization stands at a solid $4.15 billion. This reflects the firm's substantial presence in the investment management sector, despite the reported slight dip in earnings per share and revenue for Q2 2024. InvestingPro Tips indicate that CNS has been trading at a high earnings multiple, with a P/E ratio of 32.07 and an adjusted P/E ratio for the last twelve months as of Q2 2024 at 33.23. This suggests that investors may be expecting higher earnings growth in the future, aligning with the company's strategic initiatives and market opportunities in energy and infrastructure investments. Additionally, CNS has maintained dividend payments for 21 consecutive years, showcasing a commitment to shareholder returns. The dividend yield as of the latest data stands at 2.88%, coupled with a dividend growth of 3.51% over the last twelve months as of Q2 2024. The company's share price performance has also been strong, with a one-month price total return of 15.89% and a one-year price total return of 28.95%. This robust performance is indicative of investor confidence in Cohen & Steers' strategic direction and market positioning. For readers seeking deeper insights and additional analysis, InvestingPro offers numerous tips on CNS, which can be found at https://www.investing.com/pro/CNS. By using the coupon code PRONEWS24, readers can receive up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, gaining access to valuable information that can guide investment decisions. Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers' Second Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded Thursday, July 18, 2024. I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead. Brian Heller: Thank you, and welcome to the Cohen & Steers' Second Quarter 2024 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Matt Stadler, our Executive Vice President; and until late June, Chief Financial Officer; Raja Dakkuri, our new Chief Financial Officer; and Jon Cheigh, our Chief Investment Officer. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K and our other SEC filings. We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles. Our presentation also includes non-GAAP financial measures referred to as-adjusted financial measures, that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com. With that, I'll turn the call over to Matt. Matthew Stadler: Thank you, Brian. Good morning, everyone. Thanks for joining today. Before we begin the call, I'd like to welcome Raja Dakkuri, our new CFO, who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward. As in previous quarters, my remarks will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 17 and 18 of the earnings release and on Slides 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year's quarter and $0.70 sequentially. Revenue was $122 million in the quarter compared with $120.3 million in the prior year's quarter and $122.9 million sequentially. The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter. Operating income was $42.5 million in the quarter compared with $43.8 million in the prior year's quarter and $43.7 million sequentially. And our operating margin decreased slightly to 34.9% from 35.5% last quarter. Total expenses were essentially flat when compared with the first quarter as an increase in G&A was partially offset by a decrease in compensation and benefits. The increase in G&A was primarily due to higher recruitment costs as well as an increase in professional fees. And the decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%. Our effective tax rate was 25.4% for the second quarter, consistent with our prior guidance. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in US treasuries and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $325.1 million at quarter end compared with $233.1 million last quarter. The second quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April. And we have not drawn on our $100 million revolving credit facility. Assets under management were $80.7 billion at June 30th, a decrease of $526 million or about 1% from March 31st. The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million. Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the second half of the year. With respect to compensation and benefits, we maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that all things being equal, we would expect the compensation to revenue ratio to remain at 40.5%. We still expect G&A to increase 5% to 7% for the year from the $55 million we recorded in 2023. As a reminder, 2023 G&A included an adjustment to reduce accrued costs associated with the implementation of our trade order management system. Excluding that adjustment, we would expect G&A to increase 3% to 5% year-over-year. The majority of the increase is related to investments in technology as well as costs associated with the relocation of our London and Tokyo offices. And finally, we expect our effective tax rate will remain at 25.4%. Now I'd like to turn it over to our Chief Investment Officer, Jon Cheigh, who will discuss our investment performance. Jon Cheigh: Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts, which we believe favor our asset classes. Last, I'd like to discuss rising global energy demand and how we are taking advantage of this trend within our investment portfolios and how this should drive investor interest into our strategies. Turning to our performance scorecard. For the second quarter, 96% of our total AUM outperformed its benchmark, maintaining our exceptional performance from the previous quarter. On a one-year basis, 98% of our AUM outperformed its benchmark, while our three, five and 10-year outperformance now stands at 96%, 97% and 99% respectively. From a competitive perspective, 94% of our open-end fund AUM is rated four or five star by Morningstar, which is up modestly from 93% last quarter. Our AUM weighted alpha over the last year has been 270 plus basis points, an acceleration versus our longer-term numbers. Put simply, our short and long-term performance are compelling and we keep getting better. Transitioning to investment market conditions. On one hand, the second quarter was more of the same. Global Equity saw a gain of 2.6% and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025. Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small and mid-cap stocks. Our equity-oriented asset classes all continued to lag cap-weighted indices with US and global REITs and global listed infrastructure all modestly negative for the quarter. Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance, overall, performance differences versus equities are stark. For example, over the last five years, US REITs have underperformed US equities by 1,160 basis points annualized and global listed infrastructure has underperformed global equities by 820 basis points annualized. The trailing absolute returns of our asset classes have been disappointing. But there are three key factors that make us very positive about the forward prospects for these asset classes in our business. First, the majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset classes. Earnings growth differences have been a small part of the performance difference relative to just changes in valuation. Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or in some cases, more attractive relative to history. Second, while valuation is a wonderful long-term signal, we know that value may not matter in the short run. Fortunately, in our view, the inflation report of last Thursday will likely go down as a so-called all clear sign that growth in inflation have slowed and that we are entering a rate-cutting cycle. This shift will alter market leadership and we already see this with our asset classes outperforming. US REITs, as one example, have outperformed the S&P 500 by 680 basis points over the last five trading days. Third, while we believe attractive valuations, coupled with a market shift or sufficient preconditions for return outperformance. In our view, the under ownership and money sitting on the sidelines represent a significant available opportunity for our asset classes. According to one major sell-side survey, investors are the most underweight real estate they have been since January of 2009, which was the middle of the global financial crisis. We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns. Given the attractive valuation of our asset classes and their lagged trailing performance, we believe our strategies are a natural opportunity for fresh capital to take advantage of a market rotation into relative value and yield. Not to be ignored, private real estate as measured by the preliminary results for the NCREIF ODCE index had modest declines for the quarter of negative 0.5%. This is the seventh quarter in a row of declines which is consistent with the lead lag relationship with listed real estate, which bottomed in Q3 2023. We continue to believe that other funds and investment teams are focused on playing defense on their last cycle private portfolios and redemptions. However, we are focused on taking advantage of repriced real estate and improving debt cost of capital versus 9 to 12 months ago. Creating attractive cash yields to equity investors relative to long-term history. The last topic I want to discuss is global power, the impact on energy markets and how we have been capitalizing on our forward view on this trend. Most of you have likely seen the many recent headlines on this topic. But simply, the world needs more energy. Power demand in the United States has been flat for nearly two decades, but that is beginning to change, and energy efficiency can no longer offset rising power needs. Perhaps the most topical driver of higher electricity demand is data centers with particular focus on AI, which requires substantial computing power, storage capacity and cooling technologies. But it's not just data centers driving higher demand, onshoring of energy-intensive activities like precision manufacturing as well as shifts related to the energy transition will play a significant role in power demand growth over time. Increasing adoption of electric appliances coupled with the growing number of electric vehicles on the road will further expand electricity needs. The title of our recent white paper says it best. This is about changing the narrative from energy transition, energy addition. We see significant investment opportunities for existing and new investors here. First, we launched the Future of Energy Fund in March of this year. Thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040. Last year, we diverge from consensus in proposing that even though the global economy is becoming more energy efficient, these gains will not be enough to offset rising energy demands resulting from global population and economic growth. Rising electricity demand from data centers have only since made this a more mainstream conversation. We believe that traditional and alternative energy will both play meaningful roles in responding to the world's power demands. The Future of Energy Fund is well positioned as we believe that both traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management. Our client-facing teams have been excited to deliver this strategy to potential investors and the feedback has been quite positive in both wealth and institutional markets. The second opportunity we see is that nearly half of our infrastructure portfolios will benefit or seek incremental investment opportunities from this acceleration in power demand growth. This will include companies that own and operate power generation, those that build, operate and maintain our electric grid and midstream energy for the pipeline companies that supply power generators. At the same time, the power demand story is part of a wider backdrop that we think is favorable for listed infrastructure. The need to invest tens of trillions of dollars in the world's infrastructure, where power demand is just one driver can provide a tailwind for years to come. Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise multiple. The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focuses on three major sectors agribusiness, metals and mining and energy. We believe that the world has underinvested in natural resources discovery over the last 10 years and that this will create an era of scarcity over the next decade with a track record since inception more than 10 years ago, about performing by more than 200 basis points and 400 plus basis points over the last five years. We believe natural resources will be an exciting area for absolute returns and will remain right for very active management. With that final comment, let me turn the call over to Joe. Thank you. Joseph Harvey: Thank you, Jon, and good morning. Today, I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future. Our asset classes lagged the stock market in the second quarter. In terms of flows, some of our clients continue to react to broader challenges they are facing related to funding obligations and portfolio reallocation as the regime change in markets continues to play out. As to factors we can control such as investment performance, client education on our asset classes and resource allocation, we are performing well and continue to innovate and invest for the future. I remain optimistic about our positioning. For most of the second quarter, the macroeconomic environment was dominated by the higher for longer expectation for interest rates. The 10-year treasury yield averaged 4.44%. However, after quarter end, we finally saw inflation continuing to ease. The focus has now turned back to the potential for rate cuts later this year with yields on the 10-year treasury declining. If our flow patterns since 2017 are any indication, the onset of this easing cycle, combined with our strong investment performance, could portend a shift in our flows. That is from outflows to the longer-term trend of organic growth. This perspective is supported by our flows over this current interest rate cycle, up until the first Fed rate hike in the second quarter of 2022, which took Fed funds from 25 to 50 basis points. We had experienced 11 straight quarters of net inflows, averaging $2.15 billion per quarter. Since then, as rates increased to 5.5%, we had nine straight quarters of outflows, averaging $745 million per quarter. If the yield curve normalizes at a higher level with less monetary policy extremes, it is possible that our flows and the relative attractiveness of our asset classes could be less influenced by rates and more by our performance. Our relative investment performance has been strong for a long time and continued in the second quarter. As a result, we have had good success at taking share from our competitors as well as competing for new mandates. Our weighted average excess return over the past year was 273 basis points compared with 309 basis points last quarter. The three-year excess return was 195 basis points. So recent performance has trended higher. This performance helps us maintain our fee rates, which overall are 58 basis points compared with 57 basis points the same quarter last year. Over the past several years, many of our traditional asset manager peers have experienced fee rate compression. Asset owners continue to face challenges balancing portfolios amidst a changing and dynamic market environment. These challenges range from inflationary pressures on funding obligations to building more efficient return risk profiles, considering the more attractive menu of fixed income opportunities and the liquidity constraints from private allocations and associated capital commitments. Looking at firm-wide flows. We had net outflows of $345 million in the second quarter compared with $2 billion in the first quarter. By strategy, preferred securities had outflows of $366 million and Global Real Estate had outflows of $127 million, which were offset by inflows of $152 million into US real estate. The majority of the outflows were from subadvisory and Japan subadvisory segments. Institutional advisory had $73 million of net inflows. Subadvisory ex-Japan had $134 million in outflows. Both segments were active with fundings and redemptions. Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios. Categorizing our client redemptions in advisory the past several years. 33% was from rebalancing and raising cash, 35% was from eliminating our strategy from the strategic allocation, 17% was profit taking and 15% was to fund a private allocation. Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change. We still believe that many investor types are underallocated to our asset classes based on the fundamental merits of risk and return. Japan subadvisory had outflows of $185 million compared with $312 million of outflows in the first quarter. Last quarter, I characterized the environment in Japan as an investing Renaissance. Yet so far, equities have dominated the flows versus interest rate-sensitive asset classes, while Japanese investors are also showing a wariness about the strength of the US dollar and an aversion to yield oriented funds. Reforms to the country's retirement program called NISA are resulting in modest, but steady inflows, yet passive has seen in greater inflows than active strategies to date. Our one unfunded pipeline was $1 billion compared with $1 billion last quarter and a three-year average of $1.17 billion. Tracking the change from last quarter, $181 million funded from five accounts, and there were newly awarded mandates from six clients totaling $300 million. The majority of the pipeline is in global and US real estate. Offsetting the pipeline will be $558 million of expected redemptions, mostly in global real estate strategies across three accounts, two of which are eliminations from the clients' strategic allocation and one of which is with an OCIO provider who lost a client relationship. I thought it would be helpful to share a recent new real estate mandate we've been funding for an Asian institution. The plan is $200 billion in size, and they have $10 billion allocated to real estate. Of that, we have allocated $300 million to REITs which represents just 15 basis points of their overall plan. We believe that this is representative of many investors under allocations to listed REITs and the growth potential for this asset class. We believe we are well positioned to capitalize on the opportunity in our listed real asset classes while we continue to invest in new opportunities and innovate for the future. While the macro headwinds have been difficult since mid-2022, when the Fed began normalizing interest rates, we believe we are close to a turn toward easing. In fact, markets are pricing in six rate cuts starting this fall and into next year. Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle. Our core strategies, REITs and preferreds should be aided by the rate cycle. Also, our multi-strategy real asset portfolio, in my view, is very underallocated to as investors are underweight inflation-sensitive instruments in a world where inflation will be more persistent. As Jon discussed, listed infrastructure should get more attention as a lower beta real asset with secular themes due to underinvestment and plays on artificial intelligence through power and data centers. We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia. Other growth initiatives include the Future of Energy open-end fund, scaling our offshore CCAP funds now that we've hit $1 billion in size, launching active ETFs and capitalizing on the Japan Renaissance considering our 20-year presence in that market. Our nontraded REIT -- CNS REIT is gaining momentum. Recall that we have seed capital to deploy and CNS REIT made its first real property acquisition this past January. We have been opportunistic waiting for prices to adjust downward to reflect the change in the cost of capital. We have several other properties under contract and have gained momentum assembling the portfolio. As a vehicle with fresh capital to invest, CNS REIT is not contending with performance headwinds tied to NAV market downs of legacy real estate assets. While it has been a relatively short time period, our initial performance has been positive, driven primarily by two factors. First is our focus on open-air shopping centers, which have very strong fundamentals and are mispriced in our view. Second is our focus on using listed REITs as an alpha driver to complement the private portfolio. As Jon discussed earlier, our listed real estate performance has been outstanding this year, further contributing to CNS REIT's momentum. Other milestones include going live on the Schwab alternative investment platform, which is the most used platform for registered investment advisers who are our initial target allocators for CNS REITs. As Matt mentioned, Cohen & Steers raised $68.5 million in a registered offering that was conducted in conjunction with our company being added to the S&P 600 Small Cap Index. This new capital has made our balance sheet even stronger. We would envision using a portion of the capital to seed new investment vehicles potentially active ETFs. Meantime, with attractive yields on short-term treasuries, we are able to invest this additional capital on a neutral basis to current earnings. We had two key leadership additions in the quarter. First is Raja Dakkuri as CFO, succeeding Matt Stadler, who is retiring. Raja was a named Executive Officer and Chief Risk Officer at Valley National Bank where he joined through Valley's acquisition of Bank Leumi, where Raja was CFO. He is tasked with taking a strong finance department and lifting it to the next level. Further integrating with the heads of our teams to strategically measure and manage the business. Second, Dan Noonan has joined as Head of Wealth Distribution. Dan had been Head of Enterprise Wealth and the Private Capital Group at Nuveen. And before that, he was with PIMCO. Dan, in addition to running our core wealth business in the US will be focusing on shifting and adding resources to the registered investment adviser market and multifamily office segments, contributing or distributing our nontraded REITs and launching active ETFs. With the transition to Raja as CFO nearly complete, we are turning to celebrating Matt Stadler's retirement and contributions to Cohen & Steers. This was Matt's 77th and final earnings call. For over 19 years, Matt made contributions to numerous account as CFO and as an Executive Committee member. His greatest leadership was felt in running a tight financial ship, focusing on critical business factors, asking the hard, but necessary questions and believing passionately in our business. Please join me in saying farewell to Matt. I know he'll be cheering for us. Thank you, Matt. We wish you well in retirement. At this point, I'll turn the call back to the operator, Julianne, to facilitate Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open. John Dunn: Hi and congratulations, Matt. Maybe just a little more on the wealth management channel for US REITs and preferreds. Are you starting to see those conversations shift? And then also the 15% of redemptions from private markets? Thanks for delineating that. Can you update us on the push and pull of demand for public versus private in the wealth management channel. Matthew Stadler: Sure. Let me start and maybe Jon can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts, we had some very strong months early in the quarter and that included both inflows into REITs as well as preferreds. In the second quarter as the expectations got pushed out, we then saw some redemptions in preferreds. However, we've continued to see inflows into our open-end refunds. Now most of the flows have come from our what we call our institutional version of our core real estate strategy. And so driving those flows have been some important large RIAs, which is a market that we've been targeting. And they've been averaging into this process of REIT starting to signal a new return cycle. So I would expect that, again to the extent that you can have an expectation for flows, they are impossible to predict. But if you go back to my comments about what we've seen over the long-term, if we're entering an easing cycle, I think, that's positive for both of those strategies in the wealth channel. As it relates to the our institutional advisory clients redeeming to fund private investments, taking a step back, the bigger picture is private allocations have been going up in portfolios for some time and that's being turbocharged recently with the love fest with private credit. So as we -- as these asset owners navigate the regime change, they've made commitments to private investments. And so it's -- the money's got to come from somewhere. And they can't get it from private because realizations aren't happening. Fixed income is gaining more share in portfolios. So it's got to come from listed allocation and that's been equities and in some cases are listed asset classes. As it relates to the real estate return cycle, we think that the price correction that we've been looking for in the private markets is about two-thirds of the way complete. And but it's highly variable depending on the property sector. As I mentioned, we've been putting some money to work in the shopping center sector, which hadn't had the cyclical top off that other sectors like apartments or industrial had as interest rates went to new lows and cap rates went to new lows. But we've started to put money to work and we feel that with the signaling that's happened from the REIT market, that's a good indicator of those bottoming process. And if as both Jon and I talked about, we're into a rate cutting cycle that will start to help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks that they have in their portfolios. John Dunn: Got it. And then on Japan, could you talk about how NISA actually could be end up being a significant tailwind down the road? And then maybe a little more on this idea of Japan going into renaissance and how you plan to take advantage of that across maybe multiple channel -- distribution channels? Matthew Stadler: Well, the renaissance stems from the very positive investing related trends that have been happening in Japan, including reflation starting in Japan and getting out of a deflationary environment, improved corporate governance, Warren Buffett blessing the market and global allocators wanting to find a different home rather than China. And so money has been going into Japan. And as I mentioned so far, it's been going into equities, which is not inconsistent with what we've seen here with the leadership of some of the growth related technology companies. So but I think more importantly, if it, if this -- and the regulators have been putting a focus on the investing markets and trying to improve the quality of the investment vehicles that are there and educating investors. So if that as a whole is favorable for investing, we think we'll get our share of portfolio allocations. And our partners, Daiwa, are optimistic about this and they wanted to market our strategies more and we've committed to giving them more sales resources. So it's early days, but we're -- I think a transition in this renaissance context will take some time and we're -- we've been there for 20 years and we think we should get our fair share of that activity. John Dunn: Thank you. Operator: [Operator Instructions] Our next question comes from Adam Beatty from UBS. Please go ahead. Your line is open. Adam Beatty: Hi. Good morning, and congrats to Matt. Fittingly perhaps, I'd like to kick it off with a question about sources and uses of capital. You did have the recent offering. Joe mentioned maybe seeding some funds. So just wondering how else you might deploy that capital and maybe whether or not M&A might be on the table just given some of the valuations around? Also, your stock has done very well. So I was wondering how you might think about maybe issuing some more shares to take advantage of that and then having maybe some dry powder for future initiatives? Thank you. Joseph Harvey: Yes. Let me start and maybe Matt can add. So, yeah, our stock has done very well and that can be linked to this inflection point on interest rates and a shift as Jon talked about and market leadership for the small cap and value. And so we've seen a nice rally in the stock. As it relates to raising capital, our balance sheet is very strong. We've got plenty of capital. What we did earlier in the year was opportunistic. And with the context being -- our business has become a little bit more capital intensive with the private real estate business, which requires more co-investment than a listed security vehicle would require. And those commitments include $125 million for our non-traded REIT and $50 million for our opportunistic traditional private equity vehicle. So with that as a context and then thinking about launching active ETFs in light of the markets bouncing around, we just thought it would be a good insurance policy to be opportunistic and take advantage of the inclusion trade, which where the stock went up 10% overnight and show up the balance sheet. And right now it's as strong as it's ever been and -- but as it relates to uses of capital, they're going to be primarily organic. And at this time, we don't have any acquisitions in mind as you know. We've been more of an organic growth oriented firm. And right now we have plenty of that opportunity with our private real estate business and with active ETFs. Adam Beatty: Got it. Thank you. Yes and point taken on the private coinvest. Just shifting over a little bit to maybe real estate subsectors, Jon talked a lot about energy, obviously, and then Joe mentioned open air shopping centers. On the -- and data centers as well. I'm just wondering about, in the context of a potential regime change here, any concern about growth areas like data centers, maybe being a little bit less robust? And then broadly, how you're thinking about allocating to different real estate subsectors? Thanks. Jon Cheigh: Sure. I mean, obviously, there's been big performance dispersions in the listed market over the last 12 months for a lot of different reasons. I think to your point, really it's just going to be the fundamental drivers in the data center business, which has driven wholesale rents up meaningfully. It's going to continue to drive wholesale rents up meaningfully over the next few years, mainly because there's a lot of demand and there's an absence of supply because frankly there's just difficulty in sourcing power, which is the necessary ingredient, of course, for data center. So I'm not sure there's going to be a big shift as it relates to some of the fundamental trends that we're seeing. But, of course, there's going to be differences as it relates to the listed market in terms of sector dispersion and things like that. So we've moved our portfolios over time to capitalize on big dispersions and returns, for example, between the tower sector which was a darling, if you will, for many years, but frankly it's been a big laggard over the last few years. So tower REITs for us, we see as a very big opportunity and data centers also continue to be a very big opportunity. So I think there's certainly shifts like that. But most of the dynamic changes that I was referring to more relate to some of the multiple compression and expansion that's happened within the different parts of the market. Large cap has beaten small really across all GICS categories. And the REIT market, when you look at it, has basically had very comparable earnings growth. It's lagged a little bit versus the S& P over the last five years. And that's been surprising to people because I think the USA today view is real estate is bad. It must be an earnings story, but that's fundamentally not true. And so a lot of our conversations have been about office is a very small part of our portfolios in areas like data centers, healthcare and towers are much bigger parts of the REIT market, much bigger parts of really what's driving earnings growth. And as you expect, there's a lot of tailwinds still in those areas. Adam Beatty: That's great. Appreciate the detail. That's all I had today. Thank you. Operator: Our next question comes from Mac Sykes from Gabelli. Please go ahead. Your line is open. Macrae Sykes: I just want to reiterate, thank you to Matt and the team there. I mean, he's been a great support to me and as well as Industry Insight. And I would note that's been many years over the course of my coverage of the firm. So thank you, Matt, and best wishes. I had two questions, I just I'll ask them together. On the active ETFs, are there any specific product areas that you're targeting REITs versus preferreds etcetera? And then on the closed end fund side, I know you're a pretty big provider there and we have this purging IPO coming up. I was wondering if that catalyst there is changing your opinion on opportunities in closed-end funds? Thank you. Matthew Stadler: Sure. As we launch active ETFs, it will happen in several phases. And the product positioning question is a really complicated one in light of all the incumbent relationships that we and all of our peers have. But we will lead with our strength, with core strategies and it will include REITs and preferreds, and one other area that Jon talked about today, which we just feel very -- very strongly about investment wise. So that's how we'll start. We'll start not slow, but medium. And then as the market evolves and it's evolving rapidly, we'll see how the different technology evolves. You know that many firms have filed a lawsuit with the SEC to try to get ETF share classes of open end funds. But so this is going to play out over a long period of time, but we will lead with our strength. As it relates to closed end funds, there hasn't been a traditional closed end fund in a while and the reason is interest rates have been so high. One feature of the majority of new issue closed end funds is to have a leverage component to it. And with the cost of debt right now, it's hard to create a positive spread on your portfolio relative to the cost of your borrowing. So that is still a pretty big headwind. What Bill Ackman and Pershing are trying to do is very different -- they're very different and it's very different than the traditional closed end fund market, but it's going to play to his market position and investing style, which isn't an income oriented investment strategy that you'll typically find in closed end funds. And that has been a differentiating factor as it relates to how closed end funds trade in the aftermarket. Macrae Sykes: Great. Thank you. Matthew Stadler: So we would love for that market to open up, but I don't see it happening until we get some more relief on the interest rate front. Operator: We have no further questions. I would like to turn the call back over to Joe Harvey for closing remarks. Joseph Harvey: Well, thank you, Julianne, and thanks everybody for taking time to listen to us today. We look forward to reporting to you next quarter. Have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Cohen & Steers, Inc. (CNS) Q2 2024 Earnings Call Transcript

Brian Heller - Senior Vice President and Corporate Counsel Matthew Stadler - Executive Vice President Jon Cheigh - Chief Investment Officer Joseph Harvey - Chief Executive Officer and President Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers' Second Quarter 2024 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded Thursday, July 18, 2024. I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead. Brian Heller Thank you, and welcome to the Cohen & Steers' Second Quarter 2024 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Matt Stadler, our Executive Vice President; and until late June, Chief Financial Officer; Raja Dakkuri, our new Chief Financial Officer; and Jon Cheigh, our Chief Investment Officer. I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K and our other SEC filings. We assume no duty to update any forward-looking statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles. Our presentation also includes non-GAAP financial measures referred to as-adjusted financial measures, that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation as well as links to our SEC filings are available in the Investor Relations section of our website at www.cohenandsteers.com. Thank you, Brian. Good morning, everyone. Thanks for joining today. Before we begin the call, I'd like to welcome Raja Dakkuri, our new CFO, who joined us on June 24th. Raja will be reviewing the financial results on our earnings calls going forward. As in previous quarters, my remarks will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 17 and 18 of the earnings release and on Slides 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.68 per share compared with $0.70 in the prior year's quarter and $0.70 sequentially. Revenue was $122 million in the quarter compared with $120.3 million in the prior year's quarter and $122.9 million sequentially. The decrease in revenue from the first quarter was primarily due to lower average assets under management. Our effective fee rate was 58 basis points in the second quarter, consistent with our rate in the first quarter. Operating income was $42.5 million in the quarter compared with $43.8 million in the prior year's quarter and $43.7 million sequentially. And our operating margin decreased slightly to 34.9% from 35.5% last quarter. Total expenses were essentially flat when compared with the first quarter as an increase in G&A was partially offset by a decrease in compensation and benefits. The increase in G&A was primarily due to higher recruitment costs as well as an increase in professional fees. And the decrease in compensation and benefits was in line with the sequential decline in revenue as the compensation to revenue ratio for the second quarter remained at 40.5%. Our effective tax rate was 25.4% for the second quarter, consistent with our prior guidance. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments in US treasuries and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $325.1 million at quarter end compared with $233.1 million last quarter. The second quarter amount included net proceeds of $68.5 million from our recently completed registered stock offering, which closed in April. And we have not drawn on our $100 million revolving credit facility. Assets under management were $80.7 billion at June 30th, a decrease of $526 million or about 1% from March 31st. The decrease was due to net outflows of $345 million and distributions of $673 million, partially offset by market appreciation of $492 million. Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the second half of the year. With respect to compensation and benefits, we maintain a disciplined and measured approach to both the acquisition of new talent for strategic initiatives and replacement hires so that all things being equal, we would expect the compensation to revenue ratio to remain at 40.5%. We still expect G&A to increase 5% to 7% for the year from the $55 million we recorded in 2023. As a reminder, 2023 G&A included an adjustment to reduce accrued costs associated with the implementation of our trade order management system. Excluding that adjustment, we would expect G&A to increase 3% to 5% year-over-year. The majority of the increase is related to investments in technology as well as costs associated with the relocation of our London and Tokyo offices. And finally, we expect our effective tax rate will remain at 25.4%. Now I'd like to turn it over to our Chief Investment Officer, Jon Cheigh, who will discuss our investment performance. Jon Cheigh Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and then discuss the investment environment for the quarter, including recent market shifts, which we believe favor our asset classes. Last, I'd like to discuss rising global energy demand and how we are taking advantage of this trend within our investment portfolios and how this should drive investor interest into our strategies. Turning to our performance scorecard. For the second quarter, 96% of our total AUM outperformed its benchmark, maintaining our exceptional performance from the previous quarter. On a one-year basis, 98% of our AUM outperformed its benchmark, while our three, five and 10-year outperformance now stands at 96%, 97% and 99% respectively. From a competitive perspective, 94% of our open-end fund AUM is rated four or five star by Morningstar, which is up modestly from 93% last quarter. Our AUM weighted alpha over the last year has been 270 plus basis points, an acceleration versus our longer-term numbers. Put simply, our short and long-term performance are compelling and we keep getting better. Transitioning to investment market conditions. On one hand, the second quarter was more of the same. Global Equity saw a gain of 2.6% and the market fretted daily over the precise timing and amount of interest rate cuts for 2024 and 2025. Equity momentum during the quarter remained highly concentrated in select large-cap growth stocks, leaving behind the majority of the market, including value, small and mid-cap stocks. Our equity-oriented asset classes all continued to lag cap-weighted indices with US and global REITs and global listed infrastructure all modestly negative for the quarter. Taking a step back, over the last five years, while listed REITs and infrastructure have had periods of outperformance, overall, performance differences versus equities are stark. For example, over the last five years, US REITs have underperformed US equities by 1,160 basis points annualized and global listed infrastructure has underperformed global equities by 820 basis points annualized. The trailing absolute returns of our asset classes have been disappointing. But there are three key factors that make us very positive about the forward prospects for these asset classes in our business. First, the majority of the underperformance has resulted in the valuation or multiple expansion of equities versus the multiple contraction seen in our asset classes. Earnings growth differences have been a small part of the performance difference relative to just changes in valuation. Today, by some measures, equity valuations are somewhere in the bottom quintile or decile versus history, while valuations of our asset classes look historically normal or in some cases, more attractive relative to history. Second, while valuation is a wonderful long-term signal, we know that value may not matter in the short run. Fortunately, in our view, the inflation report of last Thursday will likely go down as a so-called all clear sign that growth in inflation have slowed and that we are entering a rate-cutting cycle. This shift will alter market leadership and we already see this with our asset classes outperforming. US REITs, as one example, have outperformed the S&P 500 by 680 basis points over the last five trading days. Third, while we believe attractive valuations, coupled with a market shift or sufficient preconditions for return outperformance. In our view, the under ownership and money sitting on the sidelines represent a significant available opportunity for our asset classes. According to one major sell-side survey, investors are the most underweight real estate they have been since January of 2009, which was the middle of the global financial crisis. We further believe cuts in Fed funds will drive the trillions of dollars currently in money markets to seek higher returns. Given the attractive valuation of our asset classes and their lagged trailing performance, we believe our strategies are a natural opportunity for fresh capital to take advantage of a market rotation into relative value and yield. Not to be ignored, private real estate as measured by the preliminary results for the NCREIF ODCE index had modest declines for the quarter of negative 0.5%. This is the seventh quarter in a row of declines which is consistent with the lead lag relationship with listed real estate, which bottomed in Q3 2023. We continue to believe that other funds and investment teams are focused on playing defense on their last cycle private portfolios and redemptions. However, we are focused on taking advantage of repriced real estate and improving debt cost of capital versus 9 to 12 months ago. Creating attractive cash yields to equity investors relative to long-term history. The last topic I want to discuss is global power, the impact on energy markets and how we have been capitalizing on our forward view on this trend. Most of you have likely seen the many recent headlines on this topic. But simply, the world needs more energy. Power demand in the United States has been flat for nearly two decades, but that is beginning to change, and energy efficiency can no longer offset rising power needs. Perhaps the most topical driver of higher electricity demand is data centers with particular focus on AI, which requires substantial computing power, storage capacity and cooling technologies. But it's not just data centers driving higher demand, onshoring of energy-intensive activities like precision manufacturing as well as shifts related to the energy transition will play a significant role in power demand growth over time. Increasing adoption of electric appliances coupled with the growing number of electric vehicles on the road will further expand electricity needs. The title of our recent white paper says it best. This is about changing the narrative from energy transition, energy addition. We see significant investment opportunities for existing and new investors here. First, we launched the Future of Energy Fund in March of this year. Thesis behind this strategy is that there will be a rise in global energy consumption through at least 2040. Last year, we diverge from consensus in proposing that even though the global economy is becoming more energy efficient, these gains will not be enough to offset rising energy demands resulting from global population and economic growth. Rising electricity demand from data centers have only since made this a more mainstream conversation. We believe that traditional and alternative energy will both play meaningful roles in responding to the world's power demands. The Future of Energy Fund is well positioned as we believe that both traditional and alternative energy creates the ability to generate superior investment outcomes in an area requiring active management. Our client-facing teams have been excited to deliver this strategy to potential investors and the feedback has been quite positive in both wealth and institutional markets. The second opportunity we see is that nearly half of our infrastructure portfolios will benefit or seek incremental investment opportunities from this acceleration in power demand growth. This will include companies that own and operate power generation, those that build, operate and maintain our electric grid and midstream energy for the pipeline companies that supply power generators. At the same time, the power demand story is part of a wider backdrop that we think is favorable for listed infrastructure. The need to invest tens of trillions of dollars in the world's infrastructure, where power demand is just one driver can provide a tailwind for years to come. Meanwhile, listed infrastructure trades at a rare discount to global equities and at a steep markdown to its historical enterprise multiple. The third area where we see power demand as a tailwind is within natural resource equities, which, as a reminder, focuses on three major sectors agribusiness, metals and mining and energy. We believe that the world has underinvested in natural resources discovery over the last 10 years and that this will create an era of scarcity over the next decade with a track record since inception more than 10 years ago, about performing by more than 200 basis points and 400 plus basis points over the last five years. We believe natural resources will be an exciting area for absolute returns and will remain right for very active management. With that final comment, let me turn the call over to Joe. Thank you. Joseph Harvey Thank you, Jon, and good morning. Today, I will review our second quarter key business metrics and trends, then discuss our current positioning and growth initiatives for the future. Our asset classes lagged the stock market in the second quarter. In terms of flows, some of our clients continue to react to broader challenges they are facing related to funding obligations and portfolio reallocation as the regime change in markets continues to play out. As to factors we can control such as investment performance, client education on our asset classes and resource allocation, we are performing well and continue to innovate and invest for the future. I remain optimistic about our positioning. For most of the second quarter, the macroeconomic environment was dominated by the higher for longer expectation for interest rates. The 10-year treasury yield averaged 4.44%. However, after quarter end, we finally saw inflation continuing to ease. The focus has now turned back to the potential for rate cuts later this year with yields on the 10-year treasury declining. If our flow patterns since 2017 are any indication, the onset of this easing cycle, combined with our strong investment performance, could portend a shift in our flows. That is from outflows to the longer-term trend of organic growth. This perspective is supported by our flows over this current interest rate cycle, up until the first Fed rate hike in the second quarter of 2022, which took Fed funds from 25 to 50 basis points. We had experienced 11 straight quarters of net inflows, averaging $2.15 billion per quarter. Since then, as rates increased to 5.5%, we had nine straight quarters of outflows, averaging $745 million per quarter. If the yield curve normalizes at a higher level with less monetary policy extremes, it is possible that our flows and the relative attractiveness of our asset classes could be less influenced by rates and more by our performance. Our relative investment performance has been strong for a long time and continued in the second quarter. As a result, we have had good success at taking share from our competitors as well as competing for new mandates. Our weighted average excess return over the past year was 273 basis points compared with 309 basis points last quarter. The three-year excess return was 195 basis points. So recent performance has trended higher. This performance helps us maintain our fee rates, which overall are 58 basis points compared with 57 basis points the same quarter last year. Over the past several years, many of our traditional asset manager peers have experienced fee rate compression. Asset owners continue to face challenges balancing portfolios amidst a changing and dynamic market environment. These challenges range from inflationary pressures on funding obligations to building more efficient return risk profiles, considering the more attractive menu of fixed income opportunities and the liquidity constraints from private allocations and associated capital commitments. Looking at firm-wide flows. We had net outflows of $345 million in the second quarter compared with $2 billion in the first quarter. By strategy, preferred securities had outflows of $366 million and Global Real Estate had outflows of $127 million, which were offset by inflows of $152 million into US real estate. The majority of the outflows were from subadvisory and Japan subadvisory segments. Institutional advisory had $73 million of net inflows. Subadvisory ex-Japan had $134 million in outflows. Both segments were active with fundings and redemptions. Now that the macro regime is normalizing, there have been a lot of adjustments to client portfolios. Categorizing our client redemptions in advisory the past several years. 33% was from rebalancing and raising cash, 35% was from eliminating our strategy from the strategic allocation, 17% was profit taking and 15% was to fund a private allocation. Many of these portfolio shifts are cyclical or aimed at capturing perceived opportunities that have emerged during the regime change. We still believe that many investor types are underallocated to our asset classes based on the fundamental merits of risk and return. Japan subadvisory had outflows of $185 million compared with $312 million of outflows in the first quarter. Last quarter, I characterized the environment in Japan as an investing Renaissance. Yet so far, equities have dominated the flows versus interest rate-sensitive asset classes, while Japanese investors are also showing a wariness about the strength of the US dollar and an aversion to yield oriented funds. Reforms to the country's retirement program called NISA are resulting in modest, but steady inflows, yet passive has seen in greater inflows than active strategies to date. Our one unfunded pipeline was $1 billion compared with $1 billion last quarter and a three-year average of $1.17 billion. Tracking the change from last quarter, $181 million funded from five accounts, and there were newly awarded mandates from six clients totaling $300 million. The majority of the pipeline is in global and US real estate. Offsetting the pipeline will be $558 million of expected redemptions, mostly in global real estate strategies across three accounts, two of which are eliminations from the clients' strategic allocation and one of which is with an OCIO provider who lost a client relationship. I thought it would be helpful to share a recent new real estate mandate we've been funding for an Asian institution. The plan is $200 billion in size, and they have $10 billion allocated to real estate. Of that, we have allocated $300 million to REITs which represents just 15 basis points of their overall plan. We believe that this is representative of many investors under allocations to listed REITs and the growth potential for this asset class. We believe we are well positioned to capitalize on the opportunity in our listed real asset classes while we continue to invest in new opportunities and innovate for the future. While the macro headwinds have been difficult since mid-2022, when the Fed began normalizing interest rates, we believe we are close to a turn toward easing. In fact, markets are pricing in six rate cuts starting this fall and into next year. Our number one priority is to continue our excellent investment performance and advise clients how to allocate to our asset classes over the next phase of this cycle. Our core strategies, REITs and preferreds should be aided by the rate cycle. Also, our multi-strategy real asset portfolio, in my view, is very underallocated to as investors are underweight inflation-sensitive instruments in a world where inflation will be more persistent. As Jon discussed, listed infrastructure should get more attention as a lower beta real asset with secular themes due to underinvestment and plays on artificial intelligence through power and data centers. We have also planned for greater adoption of listed real estate and infrastructure allocations in Asia. Other growth initiatives include the Future of Energy open-end fund, scaling our offshore CCAP funds now that we've hit $1 billion in size, launching active ETFs and capitalizing on the Japan Renaissance considering our 20-year presence in that market. Our nontraded REIT -- CNS REIT is gaining momentum. Recall that we have seed capital to deploy and CNS REIT made its first real property acquisition this past January. We have been opportunistic waiting for prices to adjust downward to reflect the change in the cost of capital. We have several other properties under contract and have gained momentum assembling the portfolio. As a vehicle with fresh capital to invest, CNS REIT is not contending with performance headwinds tied to NAV market downs of legacy real estate assets. While it has been a relatively short time period, our initial performance has been positive, driven primarily by two factors. First is our focus on open-air shopping centers, which have very strong fundamentals and are mispriced in our view. Second is our focus on using listed REITs as an alpha driver to complement the private portfolio. As Jon discussed earlier, our listed real estate performance has been outstanding this year, further contributing to CNS REIT's momentum. Other milestones include going live on the Schwab alternative investment platform, which is the most used platform for registered investment advisers who are our initial target allocators for CNS REITs. As Matt mentioned, Cohen & Steers raised $68.5 million in a registered offering that was conducted in conjunction with our company being added to the S&P 600 Small Cap Index. This new capital has made our balance sheet even stronger. We would envision using a portion of the capital to seed new investment vehicles potentially active ETFs. Meantime, with attractive yields on short-term treasuries, we are able to invest this additional capital on a neutral basis to current earnings. We had two key leadership additions in the quarter. First is Raja Dakkuri as CFO, succeeding Matt Stadler, who is retiring. Raja was a named Executive Officer and Chief Risk Officer at Valley National Bank where he joined through Valley's acquisition of Bank Leumi, where Raja was CFO. He is tasked with taking a strong finance department and lifting it to the next level. Further integrating with the heads of our teams to strategically measure and manage the business. Second, Dan Noonan has joined as Head of Wealth Distribution. Dan had been Head of Enterprise Wealth and the Private Capital Group at Nuveen. And before that, he was with PIMCO. Dan, in addition to running our core wealth business in the US will be focusing on shifting and adding resources to the registered investment adviser market and multifamily office segments, contributing or distributing our nontraded REITs and launching active ETFs. With the transition to Raja as CFO nearly complete, we are turning to celebrating Matt Stadler's retirement and contributions to Cohen & Steers. This was Matt's 77th and final earnings call. For over 19 years, Matt made contributions to numerous account as CFO and as an Executive Committee member. His greatest leadership was felt in running a tight financial ship, focusing on critical business factors, asking the hard, but necessary questions and believing passionately in our business. Please join me in saying farewell to Matt. I know he'll be cheering for us. Thank you, Matt. We wish you well in retirement. At this point, I'll turn the call back to the operator, Julianne, to facilitate Q&A. Thank you. [Operator Instructions] Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open. John Dunn Hi and congratulations, Matt. Maybe just a little more on the wealth management channel for US REITs and preferreds. Are you starting to see those conversations shift? And then also the 15% of redemptions from private markets? Thanks for delineating that. Can you update us on the push and pull of demand for public versus private in the wealth management channel. Matthew Stadler Sure. Let me start and maybe Jon can add some things here. Just in terms of the wealth flows this year, if you recall in the first quarter when there was anticipation about rate cuts, we had some very strong months early in the quarter and that included both inflows into REITs as well as preferreds. In the second quarter as the expectations got pushed out, we then saw some redemptions in preferreds. However, we've continued to see inflows into our open-end refunds. Now most of the flows have come from our what we call our institutional version of our core real estate strategy. And so driving those flows have been some important large RIAs, which is a market that we've been targeting. And they've been averaging into this process of REIT starting to signal a new return cycle. So I would expect that, again to the extent that you can have an expectation for flows, they are impossible to predict. But if you go back to my comments about what we've seen over the long-term, if we're entering an easing cycle, I think, that's positive for both of those strategies in the wealth channel. As it relates to the our institutional advisory clients redeeming to fund private investments, taking a step back, the bigger picture is private allocations have been going up in portfolios for some time and that's being turbocharged recently with the love fest with private credit. So as we -- as these asset owners navigate the regime change, they've made commitments to private investments. And so it's -- the money's got to come from somewhere. And they can't get it from private because realizations aren't happening. Fixed income is gaining more share in portfolios. So it's got to come from listed allocation and that's been equities and in some cases are listed asset classes. As it relates to the real estate return cycle, we think that the price correction that we've been looking for in the private markets is about two-thirds of the way complete. And but it's highly variable depending on the property sector. As I mentioned, we've been putting some money to work in the shopping center sector, which hadn't had the cyclical top off that other sectors like apartments or industrial had as interest rates went to new lows and cap rates went to new lows. But we've started to put money to work and we feel that with the signaling that's happened from the REIT market, that's a good indicator of those bottoming process. And if as both Jon and I talked about, we're into a rate cutting cycle that will start to help on the cost of capital for real estate, but there still needs to be adjustments in seller expectations and the marks that they have in their portfolios. John Dunn Got it. And then on Japan, could you talk about how NISA actually could be end up being a significant tailwind down the road? And then maybe a little more on this idea of Japan going into renaissance and how you plan to take advantage of that across maybe multiple channel -- distribution channels? Matthew Stadler Well, the renaissance stems from the very positive investing related trends that have been happening in Japan, including reflation starting in Japan and getting out of a deflationary environment, improved corporate governance, Warren Buffett blessing the market and global allocators wanting to find a different home rather than China. And so money has been going into Japan. And as I mentioned so far, it's been going into equities, which is not inconsistent with what we've seen here with the leadership of some of the growth related technology companies. So but I think more importantly, if it, if this -- and the regulators have been putting a focus on the investing markets and trying to improve the quality of the investment vehicles that are there and educating investors. So if that as a whole is favorable for investing, we think we'll get our share of portfolio allocations. And our partners, Daiwa, are optimistic about this and they wanted to market our strategies more and we've committed to giving them more sales resources. So it's early days, but we're -- I think a transition in this renaissance context will take some time and we're -- we've been there for 20 years and we think we should get our fair share of that activity. [Operator Instructions] Our next question comes from Adam Beatty from UBS. Please go ahead. Your line is open. Adam Beatty Hi. Good morning, and congrats to Matt. Fittingly perhaps, I'd like to kick it off with a question about sources and uses of capital. You did have the recent offering. Joe mentioned maybe seeding some funds. So just wondering how else you might deploy that capital and maybe whether or not M&A might be on the table just given some of the valuations around? Also, your stock has done very well. So I was wondering how you might think about maybe issuing some more shares to take advantage of that and then having maybe some dry powder for future initiatives? Thank you. Joseph Harvey Yes. Let me start and maybe Matt can add. So, yeah, our stock has done very well and that can be linked to this inflection point on interest rates and a shift as Jon talked about and market leadership for the small cap and value. And so we've seen a nice rally in the stock. As it relates to raising capital, our balance sheet is very strong. We've got plenty of capital. What we did earlier in the year was opportunistic. And with the context being -- our business has become a little bit more capital intensive with the private real estate business, which requires more co-investment than a listed security vehicle would require. And those commitments include $125 million for our non-traded REIT and $50 million for our opportunistic traditional private equity vehicle. So with that as a context and then thinking about launching active ETFs in light of the markets bouncing around, we just thought it would be a good insurance policy to be opportunistic and take advantage of the inclusion trade, which where the stock went up 10% overnight and show up the balance sheet. And right now it's as strong as it's ever been and -- but as it relates to uses of capital, they're going to be primarily organic. And at this time, we don't have any acquisitions in mind as you know. We've been more of an organic growth oriented firm. And right now we have plenty of that opportunity with our private real estate business and with active ETFs. Adam Beatty Got it. Thank you. Yes and point taken on the private coinvest. Just shifting over a little bit to maybe real estate subsectors, Jon talked a lot about energy, obviously, and then Joe mentioned open air shopping centers. On the -- and data centers as well. I'm just wondering about, in the context of a potential regime change here, any concern about growth areas like data centers, maybe being a little bit less robust? And then broadly, how you're thinking about allocating to different real estate subsectors? Thanks. Jon Cheigh Sure. I mean, obviously, there's been big performance dispersions in the listed market over the last 12 months for a lot of different reasons. I think to your point, really it's just going to be the fundamental drivers in the data center business, which has driven wholesale rents up meaningfully. It's going to continue to drive wholesale rents up meaningfully over the next few years, mainly because there's a lot of demand and there's an absence of supply because frankly there's just difficulty in sourcing power, which is the necessary ingredient, of course, for data center. So I'm not sure there's going to be a big shift as it relates to some of the fundamental trends that we're seeing. But, of course, there's going to be differences as it relates to the listed market in terms of sector dispersion and things like that. So we've moved our portfolios over time to capitalize on big dispersions and returns, for example, between the tower sector which was a darling, if you will, for many years, but frankly it's been a big laggard over the last few years. So tower REITs for us, we see as a very big opportunity and data centers also continue to be a very big opportunity. So I think there's certainly shifts like that. But most of the dynamic changes that I was referring to more relate to some of the multiple compression and expansion that's happened within the different parts of the market. Large cap has beaten small really across all GICS categories. And the REIT market, when you look at it, has basically had very comparable earnings growth. It's lagged a little bit versus the S& P over the last five years. And that's been surprising to people because I think the USA today view is real estate is bad. It must be an earnings story, but that's fundamentally not true. And so a lot of our conversations have been about office is a very small part of our portfolios in areas like data centers, healthcare and towers are much bigger parts of the REIT market, much bigger parts of really what's driving earnings growth. And as you expect, there's a lot of tailwinds still in those areas. Adam Beatty That's great. Appreciate the detail. That's all I had today. Thank you. Our next question comes from Mac Sykes from Gabelli. Please go ahead. Your line is open. Macrae Sykes I just want to reiterate, thank you to Matt and the team there. I mean, he's been a great support to me and as well as Industry Insight. And I would note that's been many years over the course of my coverage of the firm. So thank you, Matt, and best wishes. I had two questions, I just I'll ask them together. On the active ETFs, are there any specific product areas that you're targeting REITs versus preferreds etcetera? And then on the closed end fund side, I know you're a pretty big provider there and we have this purging IPO coming up. I was wondering if that catalyst there is changing your opinion on opportunities in closed-end funds? Thank you. Matthew Stadler Sure. As we launch active ETFs, it will happen in several phases. And the product positioning question is a really complicated one in light of all the incumbent relationships that we and all of our peers have. But we will lead with our strength, with core strategies and it will include REITs and preferreds, and one other area that Jon talked about today, which we just feel very -- very strongly about investment wise. So that's how we'll start. We'll start not slow, but medium. And then as the market evolves and it's evolving rapidly, we'll see how the different technology evolves. You know that many firms have filed a lawsuit with the SEC to try to get ETF share classes of open end funds. But so this is going to play out over a long period of time, but we will lead with our strength. As it relates to closed end funds, there hasn't been a traditional closed end fund in a while and the reason is interest rates have been so high. One feature of the majority of new issue closed end funds is to have a leverage component to it. And with the cost of debt right now, it's hard to create a positive spread on your portfolio relative to the cost of your borrowing. So that is still a pretty big headwind. What Bill Ackman and Pershing are trying to do is very different -- they're very different and it's very different than the traditional closed end fund market, but it's going to play to his market position and investing style, which isn't an income oriented investment strategy that you'll typically find in closed end funds. And that has been a differentiating factor as it relates to how closed end funds trade in the aftermarket. So we would love for that market to open up, but I don't see it happening until we get some more relief on the interest rate front. We have no further questions. I would like to turn the call back over to Joe Harvey for closing remarks. Joseph Harvey Well, thank you, Julianne, and thanks everybody for taking time to listen to us today. We look forward to reporting to you next quarter. Have a great day. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Earnings call: Blackstone reports net income reaching $948 million By Investing.com

Blackstone Group Inc. (NYSE:BX) reported a solid second quarter in 2024, with GAAP net income reaching $948 million and distributable earnings of $1.3 billion, or $0.96 per share. The company deployed a record $34 billion during the quarter, marking the highest level in two years. With a strategic focus on artificial intelligence infrastructure and a repositioned real estate portfolio, Blackstone is poised for growth. The firm also saw strong momentum in its private wealth business and expects the Federal Reserve to cut interest rates later in the year, a move anticipated to benefit asset values. In summary, Blackstone's second quarter of 2024 demonstrated strong financial performance and strategic positioning. With significant capital deployment, a focus on promising sectors such as AI infrastructure, and a robust private wealth business, the company is optimistic about its future trajectory. Despite challenges in certain real estate segments and the European wealth channel, Blackstone's leadership remains confident in their ability to deliver strong returns and capitalize on long-term trends. Blackstone Group Inc. (BX) has shown a remarkable performance in the second quarter of 2024, and the data from InvestingPro underscores the company's financial strength and growth potential. With a market capitalization of $107.24 billion and robust revenue growth of nearly 130% over the last twelve months as of Q1 2024, Blackstone's strategic investments, particularly in AI infrastructure, are yielding tangible results. The company's P/E ratio stands at 49.08, which, while on the higher end, is supported by an adjusted earnings growth, as indicated by a low PEG ratio of 0.2. This suggests that Blackstone's earnings growth may justify its current earnings multiple. Additionally, an impressive 3-month price total return of 15.99% reflects strong investor confidence in the firm's recent performance and future outlook. InvestingPro Tips for Blackstone highlight that the company is expected to see net income growth this year and is trading near its 52-week high, which aligns with the company's optimistic projections and recent achievements. Moreover, Blackstone has successfully maintained dividend payments for 18 consecutive years, a testament to its financial stability and commitment to shareholder returns. For those interested in deeper analysis and additional insights on Blackstone, there are 11 more InvestingPro Tips available. These tips provide a comprehensive view of the company's financial health and market position. To explore these valuable insights, visit https://www.investing.com/pro/BX and remember to use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Operator: Good day, and welcome to the Blackstone Second Quarter 2024 Investor Call. Today's call is being recorded. At this time all participants are in a listen-only mode. [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: Great. Thank you and good morning and welcome to Blackstone's second quarter conference call. Joining today are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; and Michael Chae, Chief Financial Officer. Earlier this morning we issued a press release and slide presentation which are available on our website. We expect to file our 10-Q report in a few weeks. I'd like to remind you that today's call may include forward-looking statements which are uncertain and may differ from actual results materially. We do not undertake any duty to update these statements. For 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. So quickly on results, we reported GAAP net income for the quarter of $948 million. Distributable earnings were $1.3 billion or $0.96 per common share and we declared a dividend of $0.82, which will be paid to holders of record as of July 29th. With that, I'll turn the call over to Steve. Steve Schwarzman: Good morning and thank you for joining our call. On our last several earnings calls, we spent a good deal of time talking about how we saw inflation, compared to many other market participants. We took a strong view that we were seeing different outcomes with inflation moderating more quickly, in part because of our unique position in the real-estate area and our understanding of the shelter component of the Consumer Price Index. As a result of our convictions, we decided to adopt a more aggressive approach to new investments. I'm pleased to report that in the second quarter we deployed $34 billion, the highest level in two years, and nearly $90 billion in the last three quarters since the 10-year treasury yield peaked. With inflation continuing to recede, we expect the Fed to begin cutting interest rates later this year. This should be very positive for Blackstone's asset values and provide the foundation for a significant realization cycle over time. As the largest alternatives firm in the world, with nearly $1.1 trillion of AUM, the real-time data collected across our global portfolio provides insights that help us decide in which areas to concentrate our investments. This data also alerts us to major paradigm shifts, which is essential for any top-performing asset manager. Our firm has demonstrated this foresight repeatedly since our founding, including the decision to extend our private equity business into real estate in 1991 when values collapsed following the savings and loan crisis, by significantly expanding our credit platform in 2008 in advance of the extraordinary investment opportunities that arose from the global financial crisis. Being the first investment alternatives firm, to start and develop a dedicated private wealth business in 2011 and introducing the first large-scale perpetual product for that channel in 2017 and our decision later the same year to create a perpetual infrastructure strategy for institutional investors, which now anchors an overall infrastructure platform across Blackstone of over $100 billion. This demonstrated ability to be in the right place at the right time continues on an accelerated basis today. This includes our investments and innovation in all types of private credit, where we're one of the world's largest managers; in global logistics as the largest private owner of warehouses in the world; in the energy transition field, where we own the largest private renewables developer in the United States. In India, where we believe Blackstone is the largest alternatives investor in what has become the fastest growing major economy, and of course in data centers, where we own the fastest growing platform in the world. I'd like to take a moment to discuss what Blackstone is doing today in Artificial Intelligence, specifically in data centers, which is an essential part of that breakthrough area. AI is widely acknowledged as having the potential to be one of the greatest drivers of transformation in a generation. I have personally been active in this field since 2015. I believe the consequences of AI are as profound as what occurred in 1880 when Thomas Edison patented the electric light bulb. While it took years to develop commercially viable products, the subsequent build out of the electric grid over the following decades has parallels to the creation of data centers today to power the AI revolution. Current expectations are that there will be approximately $1 trillion of capital expenditures in the United States over the next five years to build and facilitate new data centers, with another $1 trillion of capital expenditures outside the United States. The need to provide power for these data centers is a major contributor to an expected 40% increase in electricity demand in the United States over the next decade compared to minimal growth in the last decade. We believe these explosive trends will lead to unprecedented investment opportunities for our firm. Blackstone is positioning itself to be the largest financial investor in AI infrastructure in the world as a result of our platform, capital and expertise. Our portfolio today consists of $55 billion of data centers, including facilities under construction, along with over $70 billion in prospective pipeline development. Our largest data center portfolio company, QTS, has grown lease capacity 7x since we took it private in 2021. Through QTS and our other holdings, we have a robust ongoing dialogue with the world's largest data center customers. We're also providing equity and debt capital to other AI-related companies. For example, in the second quarter, we committed to provide AI-focused cloud service provider, CoreWeave, with $4.5 billion of a $7.5 billion financing package, the largest debt financing in our history, and we're now focusing on addressing the sector's power needs in many differentiated ways. With large-scale platforms in infrastructure, real-estate, private credit and renewable energy, we are extremely well positioned to be the partner of choice in this rapidly growing area. In another important area where Blackstone, once again, has been in the right place at the right time, is real-estate. During the global financial crisis, most competitors were forced out of business or delivered mediocre results. In fact, sometimes losing money for their customers, where Blackstone, for our investors, ultimately doubled their money. How did we do it? We owned the right assets in the right sectors with the right capital structures, enabling us to emerge from the crisis as the clear market leader. As a result, institutional limited partners and subsequently individual investors allocated significant capital to Blackstone real-estate in contrast to most other real estate managers. With that capital, we repositioned our portfolio over time by selling US office buildings and instead bought warehouses, rental housing, and eventually data centers. These three sectors comprised approximately 75% of our global real-estate equity portfolio today compared to 2% in 2007. This repositioning drove the outperformance and extraordinary growth of our real-estate business over the last decade and a half. Real-estate markets, of course, are cyclical, and over the past 2.5 years, the increase in interest rates and borrowing costs has created a more challenging environment. Even through this period, Blackstone real estate has delivered differentiated performance. BREIT for example, has generated a cumulative return of 10% net in its largest share class since the beginning of 2022 and 10% plus net returns annually since inception 7.5 years ago, more than double the return of the public-REIT market. Nearly 90% of BREIT's portfolio is in warehouse, rental housing, and data centers, with data centers alone contributing almost 500 basis points to returns in the last 12 months. The performance BREIT has achieved is the key reason it is 3x larger today than the next five largest non-traded REIT's combined. Now the cost of capital has begun to decline, which would be further helped by Fed cuts later this year. We believe creating the basis for a new cycle of increasing values in real estate. At the same time, new construction for most types of real-estate is declining dramatically down 40% to 70% year-over-year, depending on the asset class. Looking forward, we are confident the outcomes experienced by our investors in this cycle will further reinforce our leadership position and will result in higher allocations to Blackstone from both institutional and private wealth channels in the future. Real-estate is one of the largest asset classes in the world, and having the largest business when the cycle is turning should be very advantageous for our shareholders. Blackstone is the reference firm in the alternatives industry, and for nearly four decades, we've been an essential partner to our investors helping them navigate a dynamic world. The Blackstone brand engenders deep trust with our clients, allowing us to innovate and build leading businesses across asset classes. We now have 75 individual investment strategies, and we are working on many more currently. Our near-term plans include launching several new products in the private wealth channel, the global expansion of our infrastructure platform, further deepening our penetration of the private credit and insurance markets, and expanding our business in Asia. Our firm is as innovative today as at any point in our history. Innovation in finance done correctly is essential to create the virtuous cycle of satisfied investors who provide more and more capital for future growth. I have great confidence that we are firmly on this path. And with that, I'd like to turn it over to Jon. Jon Gray: Thank you, Steve, and good morning everyone. In January, we highlighted three powerful dynamics emerging in our business. First, that investment activity was picking up meaningfully across the firm. Second, that commercial real-estate values were bottoming; and third, that our momentum in private wealth was accelerating. Since then, each of these dynamics has progressed in a very positive way, starting with investment activity. We deployed $34 billion in the second quarter, up 73% year-over-year, and committed an additional $19 billion to pending deals. Activity was broad-based across the firm. BXCI, our credit and insurance business, had one of its busiest quarters ever with $21 billion invested or committed, including in global direct lending, along with infrastructure and asset-based credit. In private equity, new commitments included two take-privates in Japan, a music royalties business in the UK, and a fast-growing insurance broker in India. Back in the US, we bought Tropical Smoothie, a franchisor of fast casual cafes. This acquisition launched the investment period for our corporate private equity flagship, for which we've raised more than $20 billion to-date. In real-estate as I said, we made the call in January that values were bottoming and the pillars of recovery were coming into place. What did we do with our conviction? We deployed nearly $15 billion in the first six months of the year in real-estate, approximately 2.5x the same period last year. Since January, Green Street's index of private real-estate values has had six consecutive months of flat or increasing values for the first time in over two years. In our own portfolio, we're now seeing more bidders show up to sales processes for single assets driving price improvement. Overall, the cost of capital has declined significantly, with borrowing spreads and base rates moving lower, while the availability of debt capital has increased significantly. At the same time, new construction starts are falling sharply and are at or near 10-year lows in the U.S. for both warehouses and apartment buildings, our two largest areas of concentration. For a market driven by supply and demand, this is very positive for long-term values. Nevertheless, the office sector remains under substantial pressure, with more troubled assets likely to emerge. For Blackstone, as we've discussed, we have minimal exposure to traditional U.S. office in our expansive equity portfolio. Exposure is higher in our public mortgage REIT, creating some challenges, although its focus on senior loans has been an important factor in navigating the sector's dislocation. With the vast majority of our global real-estate portfolio concentrated in logistics, rental housing and data centers, Blackstone is in a very differentiated position. Moving to our private wealth business, where our momentum has been accelerating. We raised $7.5 billion in the channel overall in the second quarter. In the perpetual vehicles, we raised over $6 billion in the second quarter, and nearly $13 billion in the first half of the year, already exceeding what we raised from individuals in all of 2023. BCRED led the way with $3.4 billion raised in the quarter, the highest level in two years. BXPE raised $1.6 billion in the quarter, reaching $4.3 billion in its first six months. And BREIT is seeing encouraging signs on the new sales front, raising $900 million in Q2, the best quarter in over a year. The vehicle has delivered six straight months of positive performance, and has fulfilled 100% of repurchase requests every month since February. Requests in June were down 85% from the peak last year, down 50% from May, and have declined further month-to-date in July. As we've been saying for some time, we believe flows in the wealth channel ultimately follow performance. We built the leading platform in our industry with over $240 billion and three large-scale perpetual vehicles. We have more in development, including two we plan to bring to market by early next year. First, an infrastructure vehicle that will provide investors access to the full breadth of the firm's strategies in this area, including equity, secondaries and credit. And second, a vehicle that will invest across our expansive credit platform. Our commitment to the $85 trillion private wealth market is stronger than ever. Multiple other areas of the firm are showing strong momentum today. Our credit and insurance business is thriving in an environment of higher interest rates and accelerating demand for both investment-grade and non-investment-grade strategies. Our performance has been outstanding, with minimal defaults of less than 40 basis points over the last 12 months in our non-investment-grade portfolio. Our scale allows us to focus on larger investments, where competitive dynamics are more favorable, and where the quality of borrowers and sponsors is higher. In our nearly $120 billion global direct lending business, our emphasis on senior secured positions with average loan-to-values of 44% provides significant equity cushion subordinate to our loans. We're the sole or lead lender in approximately 80% of our U.S. portfolio, helping us to drive document negotiations and control the dialogue with borrowers if any challenges arise. We believe our scale, careful sector and asset selection, and deep experience will differentiate us in a world of greater performance dispersion in credit. In our investment-grade focused credit business, our goal is to deliver higher yields to clients, primarily insurers, by migrating a portion of their liquid portfolios to private credit. We place or originated $24 billion of A-rated credits on average in the first half of 2024, up nearly 70% year-over-year, which generated approximately 185 basis points of excess spread versus comparably rated liquid credits. Our insurance AUM grew 21% year-over-year to $211 billion, driven by strong client interest in our asset-light open architecture model. We have four large strategic relationships and 15 SMAs today, and we expect our business to grow significantly from here. Moving to infrastructure, our total platform across the firm now exceeds $100 billion, as Steve noted, including our perpetual BIP strategy, infrastructure secondaries, and other infrastructure equity and credit investments. We built this platform from the ground up to become one of the largest in the world. BIP specifically reached the $50 billion milestone, including July fundraising, up 21% from year end 2023. Performance has been exceptional. With the commingled BIP strategy generating 16% net returns annually since inception, beating the public infrastructure index by nearly 1,100 basis points per year. We are well positioned to address the massive funding needs for our infrastructure projects globally, including digital and energy infrastructure. Just last week, we agreed to invest nearly $1 billion in a portfolio of solar and wind projects in the U.S. alongside NextEra, the largest public renewables developer in the country. A final comment on our drawdown fund business, where there are a number of initiatives we're quite excited about. We've launched or expect to launch fundraising in the next few quarters for the new vintages of multiple strategies. These include the successors to our $5 billion Life Sciences Fund, $9 billion private credit opportunistic strategy, $22 billion private equity secondaries fund, and $6 billion private equity Asia fund. All have strong track records, and we expect the new vintages to be at least as large as, and in most cases, hopefully larger than the current funds. While the fundraising environment has been challenging, we're seeing more receptivity from LPs today as markets improve. Importantly, when we meet with our clients around the world, what we consistently hear is that they are holding or increasing their allocations to alternatives and to Blackstone. In closing, our firm is emerging from this multiyear period of higher cost of capital, even stronger than before, and we're sticking with our model of being a third-party asset manager, relying on our track record, our people, and the power of our brand to grow. With that, I will turn things over to our very capable CFO, Mr. Chae. Michael Chae: Thanks, Jon, and good morning everyone. The firm delivered steady financial results in the second quarter, with positive momentum in fundraising and deployment as you've heard today. I will first review results, and we'll then discuss investment performance and the outlook. Starting with results, the firm's expansive range of growth engines continues to power AUM to new record levels. Total AUM increased 7% year-over-year to $1.1 trillion, with inflows of $39 billion in the quarter and $151 billion over the last 12 months. Fee-earning inflows were also $151 billion for the LTM period, including $53 billion in the second quarter, the highest level in two and a half years, lifting fee-earning AUM by 11% to $809 billion. We activated the investment periods for our corporate private equity and PE energy transition flagships in the second quarter, which along with BXPE and Private Wealth, were in fee holidays as of quarter end, representing $27 billion of fee AUM in aggregate. Notwithstanding the temporary impact from these fee holidays, management fees increased 5% year-over-year to a record $1.8 billion in the second quarter. Notably, Q2 represented the 58th consecutive quarter of year-over-year growth in base management fees at the firm. Fee-related earnings, the comparison of FRE to prior periods was impacted by a decline in fee-related performance revenues in the real estate segment, including from BREIT, as its positive year-to-date appreciation came in modestly below the required hurdle. These revenues carry favorable margins, and their decline impacted the firm's FRE margin in the second quarter. These factors are partly offset by the steadily growing contribution from our direct lending business, with fee-related performance revenues in the credit and insurance segment rising 24% year-over-year to $168 million. Distributable earnings were $1.3 billion in the second quarter or $0.96 per share, up 3% year-over-year. DE was underpinned by the firm's steady baseline of fee-related earnings, with Q2 representing the 11th consecutive quarter of FRE over $1 billion. Net realizations were $308 million in the second quarter, up year-over-year, but still reflective of a backdrop that is not yet robust as it relates to scale dispositions. That said, we executed the sales of a number of public and private holdings in the second quarter, concentrated in our Asia private equity business, including a leading healthcare services company in Korea, the IPO and subsequent sale of stock of one of the largest housing finance platforms in India, and the sale of stock of an India-based technology company. Moving to investment performance, our funds generated healthy overall appreciation in the second quarter, led by strength in infrastructure, private credit and life sciences. Infrastructure reported 6.3% appreciation in the quarter, and 22% over the last 12 months, with broad gains across digital transportation and energy infrastructure. Our data center platform was again the single largest driver of appreciation in our real estate and infrastructure businesses, and for the firm overall in the second quarter. In credit, we reported another outstanding quarter against a continuing positive backdrop of private debt market fundamentals. The private credit strategies generated a gross return of 4.2% in the quarter and 18% for the LTM period. The default rate across our 2000-plus non-investment grade credits was less than 40 basis points over the last 12 months, as Jon noted, with no new defaults in private credit in the second quarter. Our multi-asset investing platform, BXMA reported a 2.1% gross return for the absolute return composite, the 17th consecutive quarter of positive performance, and 12% for the last 12 months. BXMA has done an extraordinary job delivering resilient all-weather returns over the past several years through volatile equity markets and the longest and deepest drawdown in bonds on record. Since the start of 2021, the absolute return composite, net of fees, is a cumulative 27% or nearly double the traditional 60/40 portfolio. The corporate PE funds appreciated 2% in the second quarter and 11% for the LTM period. Our operating companies overall reported stable mid-single digit year-over-year revenue growth, along with continued margin strength. In real estate, values were stable overall in the quarter, supported by strength in data centers and global logistics. This was offset by declines in our office portfolio, including Life Sciences Office and certain other factors. One final highlight on investment performance. Our dedicated Life Sciences business delivered a standout second quarter. The funds appreciated 11.9% and a remarkable 33% for the LTM period after achieving positive milestones for multiple treatments under development, including for stroke prevention, cardiovascular disease and rare forms of epilepsy in children. The growth and performance of this business is yet another example of the firm's ability over many years to innovate and translate megatrends into large-scale businesses for the benefit of our investors. Turning to the outlook, we're putting in place the foundation for a favorable step-up in earnings power over time. First, in terms of net realizations. We expect a near-term lag between improving markets and a pickup in these revenues as we stated previously. In the meantime, the firm's underlying performance revenue potential has continued to build, with performance revenue eligible AUM in the ground reaching a record $531 billion at quarter-end. Meanwhile, net accrued performance revenue on the balance sheet, the firm's store value, grew sequentially to $6.2 billion or $5.08 per share. As markets heal and liquidity improves, we are well positioned for a significant acceleration in net realizations over time. In terms of FRE, we anticipate a material step up in FRE in the fourth quarter, with multiple drivers of note. First, with respect to management fee holidays, the corporate PE and energy transition flagships will exit their respective fee holidays in the coming months and will generate full management fees in Q4. BXPE exited its fee holiday this month. Second, in terms of fee-related performance revenues, Q4 includes a scheduled crystallization for the commingled BIP infrastructure strategy with respect to three years of significant accrued gains, as well as BXP's first crystallization event with respect to full year 2024 gains. Looking forward to 2025, we will see the full year benefit of the flagship vehicles that were activated in 2024. We also expect to raise multiple other flagships throughout the course of 2025, including Life Sciences, private equity secondaries, private equity Asia, and other major strategies. In addition, we expect the continued expansion of our platform of perpetual strategies, which has grown by 2.5x in the past three years. And importantly, our credit insurance business is on a strong positive trajectory, with segment FRE increasing nearly 30% year-over-year in the second quarter. The dual engines of performance and innovation at Blackstone continue to drive the firm forward. In closing, the firm is exceptionally well positioned against today's evolving backdrop, with powerful structural tailwinds and multiple engines of growth. Our long-term capital provides the flexibility and firepower to invest, and the patience to sell assets when the time is right. We are very optimistic about the future of Blackstone. With that, we thank you for joining the call. I would like to open it up now for questions. Operator: Thank you. [Operator Instructions] We'll go first to Craig Siegenthaler with Bank of America (NYSE:BAC). Craig Siegenthaler: Good morning, everyone. So, my question is on investing. It was nice to see the sharp pick up in both deployments and commitments in the quarter. And with the credit piece more steady, we wanted to get your perspective on the two equity businesses, real estate and private equity. So, do you think we'll likely see further progress in the second half, or is a $24 billion deployment and $19 billion commitment run rates driven by upticks in P [ph] in real estate, really a good run rate going forward, just given the stronger activity levels that you already achieved this quarter? Jon Gray: So Craig, it's a good question. I think it's hard to put an exact number, but there are some, I think, very positive signs. The fact that we have $19 billion committed at the end of the quarter is a good forward indicator of a lot of activity. I would say that just the volume of what we're seeing across our business, our equity strategies, is picking up. We did this last quarter, our first growth deal in a while, buying an ERP software business in Israel. We're seeing good activity in our secondaries business, that has clearly picked up year-on-year. I think double the activity over last year's level. Infrastructure quite busy. Real estate a little more episodic, but we are definitely leaning in as we've talked about, and then private equity, broad based global. We bought a couple of companies in Japan. We bought an insurance brokerage in India. We bought some software and online platforms in Europe. We bought a fast food business here in the United States. And I would say by virtue, and I said it last quarter, sort of my briefcase indicator continues to be getting full and indicates that there should be increasing solid levels of transaction activity. So I think the fact that we're seeing rates coming down, the market's being more conducive, more people are thinking about selling assets. I think as the IPO market reopens, we should see more. It's hard to say it's a straight line, but the overall trend lines on investing are positive. Operator: Thank you. We'll go next to Alex Blostein with Goldman Sachs (NYSE:GS). Alex Blostein: Hey, good morning, everybody. Hey Jon, so maybe just building on your point around deployment activity picking up, I was hoping we could go in on what that could mean for real estate fundraising. Obviously, it's been an area of somewhat of a challenge, but as deployment ramps, and you guys are making nice progress on BREP X, I believe, and other areas as well. So what areas do you think will be the soonest to come back when it comes to real estate fundraising and your broader outlook there over the next 12 to 18 months? Jon Gray: Well, obviously the sentiment for investors on real estate has been pretty negative given what's happened in much of their portfolios. We have been an outlier. We've raised over $8 billion for our latest opportunistic European fund. We've raised now a little over $5 billion for our latest real estate debt fund. You know, I think they are going to be a little more cautious going into open-ended funds until they see more of a pickup. I think it is an area that's probably a little more muted for a period of time, just because of investor caution, but we've seen this before. If you went back to the financial crisis, people wait for the numbers to get better, to feel better about a sector, and then they start to jump in. I will say the tenor of the conversations around real estate have improved. I think people are recognizing that prices have reset and that it's an interesting time to get back in. And I think one of the really important things, and Steve pointed this out in his remarks, is the differentiation of our performance. The fact that we're three-quarters allocated to logistics, rental housing and data centers, which looks very different than other investors. And I think like the financial crisis, it may take a bit of time, but when people see the dispersion in performance and how we've done, I think we'll see significant capital moving in our direction. So the path of travel here I think for us is good, but in real estate I think it'll take a little bit of time just because of the experience investors have had in the sector. Michael Chae: And I'd just add, Alex. This is Michael. In terms of the breadth drawdown area, obviously, I think our timing was fortuitous in terms of being able to raise those funds over the last two or three years and now being in a really amazing position with $60 billion of dry powder. And so we're in a good position where subject to finishing the Europe drawdown fundraise where we have a lot of dry powder to invest from those opportunistic vehicles. Glenn Schorr: Curious if we can get a little update on the bank partnerships and asset-backed finance. There was another deal announced today outside of you guys. But there's been a tremendous amount of news flow in that space and the asset-backed opportunity might be multiples larger than what we've seen in middle market lending. So I wonder if you could help frame the opportunity and remind us what you have on the ground already. Jon Gray: Well, I think it is a big area of opportunity, because I think you can offer clients higher returns in investment-grade private credit, particularly in the asset-backed sector, because you are able to take out a lot of the distribution costs in an ABS transaction and so we've seen a tremendous amount of interest in this area. In fact, we talk about 15 SMAs with insurance companies away from the big four strategic partnerships and virtually all of those have some piece of asset-backed finance. It could be fund finance, it could be transportation, digital; it could be green energy, it could be residential. We're just seeing a tremendous amount of interest in this area. We've been building up the number of platforms. We have partnerships, flow agreements with banks. We've been making some smaller strategic investments from our partners as you know. We have a balance sheet light approach to this. But I think that market is something like a $5 trillion market, and the penetration remains very low and we have seen a big pickup in terms of our volumes in this area and I would expect you'll see more. I would also point out that the build-out of the AI infrastructure which Steve's dwelled on, and I think is really important, much of that will be in asset-backed finance. And so if you think about financing data centers and financing the power that's going to support that, it will be ABF. And the fact that we have an enormous equity business that invests in scale in both of these areas and have a lot of expertise, makes credit investors and insurance companies particularly want to allocate more capital. So it feels to us like a very big market, early days in terms of penetration, and because these are long-duration assets, I think the holders really appreciate additional spread, and the dialogue in this area is as good as anywhere at the firm today. Crispin Love: Thanks. Good morning, everyone. I appreciate you taking my question. Just a big picture question on the election, just with the U.S. election rapidly approaching. Can you speak to what you expect to be the biggest impacts due prior to the election, and then how that could impact near-term deployment and realizations? And then how you would also expect the differences between former President Trump or President Biden or perhaps another Democrat occupying the White House to impact Blackstone and the environment over the intermediate term and beyond, and how that could change your activity, just depending on what we see in November? Jon Gray: You know, I think on the pre-election side, I think investors, frankly, are more focused on what's happening with the economy and in particular with inflation. I know there will be a lot of press coverage of course, rightfully on how the Democrats, Republicans are doing, how things look. But I think if we get good prints on inflation that gives the Fed more air cover to cut rates, that will be more determinative of how markets perform. So I think that is really the key thing to keep your eye on, even though there will be a lot of press focus on the election itself. I think post-election, you could see some very different policies. I would just back up and say look, we've operated in blue environments and red and purple environments, and the constant for us is delivering great returns for our customers and that's what we focus on. And we focus on a lot of these long-term trends that we've talked about, what's happening in digitalization, what's happening in power, in life sciences, the growth of the alternatives business, private credit. We think those are the long-term determinants of value. That being said, what happens here, there will be differences. There'll be differences in the regulatory front. Certainly if you had a Republican administration in areas like antitrust, you would see a different posture I would believe. On energy, you could see, obviously, a different approach on hydrocarbons versus renewables, and you have to factor that into investing. And you could see a very different policy in terms of tariffs broadening out and maybe being certainly higher, and you have to think about that in terms of manufacturing businesses. So the good news is, I think we have a pretty good sense of what that may look like, and we're really focused on the long-term in some of these big sectors where we think there are huge opportunities. And regardless of which side wins, I think those things will be really the critical item in terms of driving higher returns. Brian Bedell: All right, great, thanks. Good morning, folks. Maybe a question for Michael on FRE margin. Obviously, as you're scaling or I should say, as you are building the base management fees with the funds coming off holiday and new funds coming into market in '25 and obviously on the deployment on the credit side. As you think about '25 from an FRE margin perspective, I know Michael you've said you certainly want to scale the FRE margin over time. But should we be set up for a step-up in the FRE margin in '25, excluding the impact of whatever happens with fee-related performance fees? And then if you could just remind us of what the - what do you think the comp ratio overall on FRE per is maybe that depends by product. But I have a few questions in there, but basically FRE margin ex-FRE per is the base question. Michael Chae: Sure. Hey Brian. Look, I think the underlying sort of trajectory and the baseline for margins, certainly ex-FRE per, is one of stability in the near term, and we think operating leverage over the long term. I think you note correctly the two sort of key variables in the near term, fee holidays and that level of sensitivity to fee-related performance revenues on fee holidays, corporate private equity energy transition, both activated in this quarter, as I mentioned. We'll have some other funds that'll be in holiday proportions in the second half. So we'll come through that in the latter part of the year and into next year. Then second, that level of sensitivity to fee-related performance revenues. So core plus fee-related performance revenues do carry higher incremental margins generally as do direct lending incentive fees. On the other side for infrastructure, Q4 represents its first large crystallization. As we've been building and scaling out that business, it carries with it a modestly lower effective margin at this stage of its development. But of course, it's been performing extraordinarily well, and that's very positive for FRE on an absolute dollar basis. So overall, in the near term, we'd expect full year margins to be sort of in a reasonable range relative to last year, where it falls within that function of the factors I mentioned that you cited. Then longer term, that sort of picture of stability and over time of operating leverage. So, I think you framed the picture right. I think you alluded to the right couple of variables, and both the near term and into 2025. Obviously, on a long-term basis we're very comfortable and optimistic about it. Jon Gray: Thanks, Brian. Operator: Thank you. We'll go next to Ken Worthington with JPMorgan (NYSE:JPM). Ken Worthington: Hi. Good morning. Thanks for taking the question. In terms of the secondary business, there's been an overwhelmingly positive course of commentary from the industry at large. Two things, maybe can you talk about deployment opportunities and the competitiveness of private equity secondaries these days? And then your secondary returns in your investment performance table has trailed private equity and other asset classes in recent years, I think in '23 up 2.5%, and in '24 up 3% to-date. As you go into flagship secondary fundraising, what anchors your confidence in being able to raise more money in the next vintage, and are returns a factor here? Jon Gray: So a couple of things on the secondaries business. One, I would say is that if you just look at what's happening in alternatives, the growth in alternatives, which has been a double-digit grower now for a long period of time, what we've seen is the need for liquidity as an asset class grows. So that's why secondaries business continues to grow, and our business, which we started with 10 years ago at $10 billion has grown eightfold. So there's a need for liquidity. Even today, if you look at the volume of secondaries that trade, it's 1% to 2% of the underlying NAV in funds, which is very low for most asset classes in terms of liquidity. So there is, as alternatives grow, the fact that this sector, there's not enough liquidity today in the sector, and the sector is growing. It creates a secular opportunity. Also, as you know, in the institutional market what we've seen is a bunch of clients are over their targets, and that's creating a deployment opportunity. So I think we as the largest player in the space feel very good. When you comment on returns, if you look at those overall, they've been remarkably strong. Yes, in recent quarters not as strong, but since inception, mid-teens or higher returns, latest funds, high-teens net returns. So when we think about going back out to raise our next flagship fund, our confidence level is extremely high. Our last vintage, I think, was $22 billion for our private equity secondaries business. The team there, Verdun Perry has done an incredible job. Our expectation is we would raise something larger. So it feels like a segment that is well-positioned, that there is a bit of structural inefficiency that's allowed you to generate attractive returns. Clients are beginning to really recognize that the risk return is favorable, and we think it can continue to be a real growth driver here at Blackstone. Steve Schwarzman: Just to add onto and reinforce Jon's point. First of all, on the long-term track record, as Jon said, you can see in the investment record, 14% across the business. And in the two most recent sort of invested funds, 24% and 21% net. I would say in the last year or so, the return versus private equity, first of all there is as you know, a lag on the reporting of the secondary business relative to the underlying GPs. Moreover, I'd say the nature of the secondaries business is portfolios that tend to have more mature investments. So I think in terms of the cyclical rebound in returns, that will also lag and be more muted to some degree than the overall market, and what you'll see in our own private equity business. There's also a variable around the sort of the level of deal flow, a year ago and the benefit that comes from buying those funds at a discount to the fund returns in the short term. But long-term overall, it is an outstanding track record. Dan Fannon: Thanks. Good morning. Jon, I was hoping you could expand a bit more on the fundamentals you're seeing in real-estate, which is obviously fueling some of the confidence around your accelerating deployment. I think you mentioned more buyers out in the market, but hoping to get a little more context around the broader real-estate environment. Jon Gray: So what we said on real-estate, and you guys know, because we've been certainly talking about it for some time, is there are a couple of, I'd say very positive signs that are emerging in the overall real-estate picture. Office, as we've said, is more challenged. Vacancy rates in office today are sort of mid-20s, and it's going to take a while to work through that. In the other sectors, the fundamentals are better. If you think about apartments and logistics in the U.S. 5%, 6% vacancy. Demand has softened a bit, but pretty steady I'd say in both of those areas. Very positively supply has come down 50%-ish in multifamily starts, 75% from the peaks in warehouse starts, so that's very good long term. But the near-term thing that has really impacted price and transaction volume has been cost and availability of capital. So, if you went back to the fall, the tenor was 80 basis points higher than it is today. Spreads were probably 100 or more basis points wider, and the CMBS market was basically closed. That's changed pretty significantly, and the result of that is, in those sectors where we have our greatest exposure, which would be logistics and rental housing, we see 2x, 3x more bidders showing up to buy assets. So I think that is clearly a positive. We have said we don't see some sort of rocket ship V-shaped recovery here. But we definitely have seen, if you look at the Green Street Property Report, six quarters, as I noted, where things have been flat and rising, and the sentiment's improving. So you've got a better cost of capital environment. You've got decent fundamentals, in that sense, the groundwork. And if you went back to the financial crisis of course, we started deploying in the summer of '09. There were still plenty of negative headlines from troubled deals for the next couple of years, and it was a great deployment period for us. There's some similarities we're seeing today. The sentiment, we think, will stay negative because there still will be some troubled assets to work through the system. But on the ground prices have cleared, and some of these headwinds have gone away, and that creates a favorable environment, and what we're doing now is seed planting for the future. So these huge public to privates we've done in the U.S., the big push in European logistics, we think this will pay real dividends for our investors over time. Benjamin Budish: Hi. Good morning, and thanks for taking the question. I wanted to ask maybe a specific one on BPP. If you could give an update on sort of what's happening there with the redemption queue, and then it sounds like based on your optimism around, real-estate performance and inflows potentially picking up over the near to medium term, how should we think about the sort of inflows and outflows of that fund evolving over the next, say, six to 12 months? Thank you. Jon Gray: Yeah. In our Core+ institutional business, we've seen a little bit of a pickup. It's still single digit in terms of the redemption queue across our BPP product line. I think, as you know in this, different than what we have in our individual investor vehicle, that it's based on new capital coming in, in terms of providing liquidity over time, and the institutional investors have a recognition that it takes time in a period of like this to get liquidity. As I said earlier on fundraising, my expectation would be open-ended funds will take some time before investors feel a little more confident. We're starting to see some interest, particularly folks thinking about could they buy in at a little bit of a discount and so forth. But I think it's a question of working our way through the cycle. Again here, I think we've done a very nice job on how we've set these portfolios up for success over time in terms of the portfolio positioning. But I would say my expectations on inflows here would be a little bit muted over the near term. But as fundamentals, certainly as real-estate starts to deliver more positive performance, we can see the shift and that's exactly what happened. If you went back to the post-financial crisis period, interestingly what you see in that case is people want to get deployed and then they pull their redemptions from the queue. So in many cases, they get in the queue thinking about, well maybe I want liquidity. Then when the world turns, they pull that back. So, I think that could happen over time as well, and it is obviously a tie here to what happens in the cycle. Brennan Hawken: Good morning. Thanks for taking my questions. So, was curious, given the tightening of redemption limits that we saw at SREIT during the quarter, can you speak to the impact that you saw in the wealth market on the back of that? I mean, totally appreciate that BREIT is dramatically better positioned and you all actually allowed for more redemptions when above the limit and a clear sign of strength. So it's not really about BREIT specifically, but more about what SREIT, that impact that had on that market and maybe risk appetites. Thanks. Jon Gray: As you noted, there was a short-term impact in May in BREIT specifically as investors got nervous. We were able to assure investors that we managed the liquidity in a very differentiated way, and then we saw in June redemption specifically in BREIT come down pretty sharply 50% from May levels. As I noted in my remarks, month-to-date so far, they've come down additionally. We have not seen a dramatic change or frankly much of a change in terms of sentiment or what's happening in the private wealth channel. I think in real estate specifically, investors are still waiting and seeing here a bit, although we pointed out in the quarter, we had our best inflows in BREIT in a year. BCRED had its best quarter in two years in fundraising and BXPE has continued to raise significant money, and that has been a very successful launch in the first six months. Ultimately, this is about performance. That's what matters. That's what drives things. It's the same story as our institutional business. We are relentless in focusing on where we invest capital, how we manage the assets and how we deliver returns. If you look at BREIT since inception, remarkable double-digit net returns over 7.5 years, more than double the public REIT index. You look at the double-digit net returns in BCRED, the strong start for BXPE, this is what ultimately matters to our underlying clients, and this is what we've got to do. I think, frankly, getting through this downturn period and people seeing the semi-liquid structure work, I think will give additional confidence. So, as long as we continue to execute, I think that's the key in this private wealth channel. I feel good about our ability to do that. So our confidence in the channel remains extremely high. Bill Katz: Okay, thank you very much. Maybe to pick up on the retail discussion, you were obviously very early and very prescient in terms of building the platform. However, the last number of years has been a very big pickup of focus and new players into that. So, I was wondering, as you look ahead, how you sort of see the evolution of the wealth management opportunity, certainly a big denominator. But how do you think the competition shakes out and how are the conversations with the financial advisors and intermediaries playing out in terms of how they are allocating to the bigger brands? Thank you. Jon Gray: Thanks, Bill. It's definitely an area of large-scale opportunity, and everybody in the industry is recognizing this now. I think credit to our firm to get into this well before other people, to focus on financial advisors and their underlying clients, to build out now a 300-plus person global team led by Joan Solotar that's focused on serving individual investors and also innovating, creating these perpetual products that brought costs down very significantly from what had existed historically in non-traded REITs, non-traded BDCs, and really innovating to create things that would work from a cost structure, tax standpoint, liquidity standpoint. So I think we will see more competitors move into the space. The advantage we have is our brand. I touched on it at the end of my remarks, but I think that is perhaps the most powerful asset of our firm along with our people. Investors know us, trust us, because we've done such a great job investing capital for four decades. The relationship and reservoir of goodwill we have with individual investors in in the products, in the results we've delivered in BREIT and BCRED, and in the drawdown funds that we have sold into the channel have built up a lot of positive feelings. So I think others will show, but we're continuing to innovate here. We talked about in the remarks, new products in infrastructure and multi-asset credit. I think the one advantage I'd say in this market versus the institutional market, there you can have thousands and thousands of individual private equity firms or real-estate firms, credit firms. I think when you get to private wealth, the brands are going to matter, the scale, the ability to service. I think it'll be a smaller number of players in that segment. It'll grow over time, but it requires something different. We have a pretty meaningful first mover advantage, $240 billion of total assets. We are absolutely committed to delivering great performance and great service to the underlying customer. So, we recognize it's going to be more competitive. Others will try to do things in the marketplace. We respect them, but we really like our first mover position in this very large and growing market. Bill Katz: Thanks Jon. Operator: Thank you. We'll go ahead to Patrick Davitt with Autonomous Research. Patrick Davitt: Hey. Good morning, everyone. Most of mine have been asked. I guess, the gross to net flow GAAP in AUM was fairly dramatic for a low realization quarter. So to what extent is that a result of the assets moving between strategies and/or funds? And if so, could you give the volume of that rotation that was included in gross flows, if any? Then taking a step back, is this a trend we should expect more of on a go-forward basis, or do you think 2Q was uniquely large? Thanks. Michael Chae: Yeah, I think Patrick, there has been over time a bit more of that dynamic that involves to some degree the open-ended funds and the nature of how those work. There have been some shifts in terms of allocation of capital between businesses that cross segments. Also, we had in the second quarter that the move from a reporting standpoint, a couple of businesses between credit and BXMA. So that's been - the nature of the business involves more of that, but it's not - I think it's not going to be dramatically different over time. Patrick Davitt: Thank you. Operator: Thank you. We'll take our last question from the line of Arnaud Giblat with BNP. Arnaud Giblat: Good morning. A quick question on the wealth channel. I'm just wondering if you could share with us why you think the European semi liquid products lag so much versus the U.S. products? And do you think that a refresh of the rules with the new ELTIF 2.0 rules are likely to offer material opportunity to grow in the European wealth channel? Jon Gray: So we love Europe. I'll be there next week, but it is harder on the regulatory front. If you look at the European Union, you have a completely different set of rules for private wealth products, almost by country, and some of the rules, I do believe, need to be updated. The definitions of who can invest, the term professional investor, which is technical. There are a lot of limitations by country, and the structures you can use are very different. So you have to attack Italy different than Switzerland and Spain or Germany. We built up a lot of capabilities. We're having some success today with our European direct lending platform, although it's still small. I think European investors ultimately will want the same thing as U.S. investors. They tend to be a little more risk averse as you know, but I think their desire for strong returns in a product that's designed and works for them will be high. We're a persistent bunch. We're going to stick at it in Europe. We do want to work with the regulators to try to make this a little bit more of a user-friendly environment. The distributors, the big financial institutions recognize this as well. So I think it's a long-term process. I think it can change. We've seen some changes in places like Japan that were conducive to selling some of these private wealth products. I think we will over time hopefully see changes in Europe, because I think the products make a lot of sense for customers. So, we'll stick at it, and it's probably going to take some time. Operator: Thank you. That will conclude our question-and-answer session. At this time I'd like to turn the call back over to Weston Tucker for any additional or closing remarks. Weston Tucker: Thank you everyone for joining us today, and look forward to following up after the call. Have a great day.

EQT AB (publ) (EQBBF) Q2 2024 Earnings Call Transcript

EQT AB (publ) (OTCPK:EQBBF) Q2 2024 Results Conference Call July 18, 2024 2:30 AM ET Company Participants Olof Svensson - Head of Shareholder Relations Christian Sinding - Chief Executive Officer and Managing Partner Gustav Segerberg - Head of Business Development Kim Henriksson - Chief Financial Officer Conference Call Participants Hubert Lam - Bank of America Magnus Andersson - ABGSC Arnaud Giblat - BNP Paribas Ermin Keric - Carnegie Angeliki Bairaktari - JPMorgan Jacob Hesslevik - SEB Haley Tam - UBS Nicholas Herman - Citi Bruce Hamilton - Morgan Stanley Isobel Hettrick - Autonomous Research Oliver Carruthers - Goldman Sachs Olof Svensson Good morning, everyone, and welcome to the Presentation of EQT's Half Year Report 2024. For today's call, as always, if you've registered ahead of the call, you should have received an e-mail with your personal pin code to participate in the Q&A. Next slide, please. Let me start by summarizing the key highlights for the first half of the year. We concluded the fundraising of EQT X at hard cap, EQT Future and the Asia mid-market growth fund at close to more than twice its target fund size. Across strategies, we had inflows of approximately €7 billion and our fee-paying AUM is now €133 billion. We expect active fundraising efforts for Infrastructure VI to materially conclude this year and for the fund to reach its €20 billion target fund size upon final close. We continue to invest at a strong pace with €12 billion of investments announced in the first half of the year. When it comes to realizations, activity levels are higher than volumes may suggest at €4 billion. Valuations across the key funds were up approximately 5% in the first half, and the EQT key funds all continued to perform on or above plan. EQT revenues grew 7% compared to the first half of last year, paced by higher management fees. Carried interest was lower at €40 million, partly due to the relatively low volumes of completed realizations. And with that, I'll hand over to Christian. Next slide, please. Christian Sinding Thank you, Olof, and good morning, everyone. Overall, we see an improving market backdrop. Inflation is coming down. We're on a path to lower interest rates and important elections in Europe and Asia are behind us. Yet geopolitical uncertainties continue, not least with the U.S. elections. Now having said that, EQT is built to invest and create value over cycles and to drive long-term performance across times of volatility. We celebrated our 30th anniversary this year, and our flagship funds have always delivered at least 2x returns and always paid care. However, it's about more than driving value creation now. In today's market, perhaps more than ever, liquidity is key for our clients. And as you probably know, realization volumes across private markets were a decade lows in 2023. And back in 2021, buyout and exit volumes were around $1 trillion each. But in recent years, the ratio of client distributions to contributions has been actually less than 0.7. Therefore, we're driving best practices and exits across the firm. For example, across -- after the combination with BPA, we implemented their exit and liquidity committee all across EQT. Here, we systematically review exit priorities and drive liquidity, whether through M&A, IPOs, private IPOs, recaps, continuation vehicles, fund-to-fund transfers, et cetera and thus ensuring a thoughtful approach to client liquidity and solutions. In the first half, we had more than 10 exit processes completed. Some of these were smaller exits as we optimize the portfolios. Others such as Idealista are significant liquidity events for our clients. And through our recent IPOs, Galderma and Waystar, we create also a significant optionality for future sell-downs and liquidity. And those 2 are actually 2 of the largest IPOs in the world this year, one in Europe and one in the U.S. If you look at EQT's invested capital, it's actually relatively young with only about 10% of companies held for longer than 5 years versus approximately 25% for the overall market. As such, it could take some time before part of our portfolio is ripe for exits. But even so, we have a large number of realization processes underway and in preparation. Activity levels are very high and as you've probably also seen from the reporting by the bulge bracket I banks, pitch volumes at their houses were up 3x from last year. Of course, market conditions will need to be conducive for all these exits to materialize. From a competitive perspective, we have top quartile DPI, which means cash returns to our investors in our relevant key funds. And this follows a systematic approach that we've been running since well before the pandemic to drive exits and liquidity. Also, we have a robust long-term financing structures in place across the portfolio. So we can afford to be patient if markets aren't right. Finally, we also believe that our -- the underlying value creation of our companies will become more evident now that we're hopefully entering into a period of more stable multiples in the market. Next slide, please. In terms of clients, we see a long-term trend where commitments are concentrated to scaled players like EQT. And we continue to improve our client services. Fund reporting time lines have been reduced from 57 days in 2022 to 25 days in 2024. We've launched a liquidity forecasting tool for investors where we believe we're actually the first in the private markets to do so. And we launched a pilot of our AI-powered assistant for due diligence to also simplify the client experience as a couple of examples. Furthermore, we launched EQT ThinQ, an online publication for our shareholders and stakeholders to drill deeper into current topics together with different experts across our network internally and externally. And we've also expanded the EQT [Academy] across to our clients. Although we expect liquidity to remain constrained for our clients for a while, we are selectively launching new strategies. This includes the successful mid-market growth fund in Asia, building on our strength in that region, and it's positioned very nicely to complement our Asia flagship Fund IX, which will soon start fundraising. The health care growth strategy complementing our leading health care franchise has also been launched, and we're preparing for the transition infrastructure strategy, building on our track record and energy transition and to go after the huge opportunity to decarbonize the world, as we talked about at our Capital Markets Day. EQT Nexus, our semiliquid private wealth product has been active for about a year now. And we've launched EQRT, which is focused on the U.S. real estate market just recently. And we have a number of new initiatives ongoing, which you'll hear more about from Gustav. To win in the private wealth channel, we're building out the teams, strengthening our brand and engaging with distributors all across the world. Over the long term, private wealth products have huge potential. Therefore, we're spending more to ensure that we have all the capabilities needed to win. We also continue to build on the EQT platform for the long term. In May, we opened our new Warsaw office as a tech hub to drive efficiencies across the group. And we opened a new office in Bengaluru, India that's going to host junior investment advisory professionals working alongside EQT's global investment teams as well as with Motherbrain. Next slide, please. Now the recent PI ranking is a testament to our relative strength with EQT being top 3 globally in terms of private equity fundraising for the third year running. Our value creation approach has been sharpened during our first 30 years. But as we continue on our path of outgrowing the private markets, we need to evolve, we need to stay ahead of the curve. We need to stay paranoid. And therefore, we say at EQT, everything can always be improved everywhere at all times. This is our moniker. And the next slide, please. So what are we doing? Well, first, we're sharpening our PE model of the future. This involves doubling down on our main competitive advantage, talent. And so we can be the choice for management teams and boards and be the best coach for all of them. It's about sharpening our sector playbooks to get repeatable models for driving value creation in each sector. And second, it's a push to stay at the forefront of future proofing, particularly now in artificial intelligence and sustainability. Of course, we've been working with them for a very long time and will continue ensuring that we remain leaders in these key areas for all companies in our portfolio and across the world. As you know, we started Motherbrain artificial intelligence unit back in 2015 then focused on deal sourcing. Today, AI and Motherbrain are becoming really ubiquitous in our business and AI is really being integrated into the strategy plans of all of our portfolio companies, and there's a lot of work ongoing around that. We recently gathered our tech CEOs and chairpersons for reflections on the future of AI, and it's clear that both generative and specialist AI is coming faster and having a bigger impact than even people think today. Just like AI sustainability is integrated into the investment decisions and into the strategy of our companies, simply because doing good is good business. We believe that by improving operational sustainability and growing sustainable revenues will help reduce risk in our companies and also improve their future outlook and thus improving our exit options and liquidity valuations. As proof, 65 of our portfolio companies now have validated science-based targets, their path on net 0 validated by the Science-based Targets Institute. And according to research by BCG, this is 3x the number of any other owner in the world. Third, since going public, we've completed several acquisitions and integrations and combinations. This has helped propel our platform in terms of scale, the strategies we offer clients and insights we gain from global teams. We expect the private markets industry to continue to consolidate, and we will continue to actively drive that consolidation, be it in terms of complementary teams, strategies or capabilities like solutions. And with that, I hand over to Gustav. Gustav Segerberg Great. Thank you, Christian. Next slide, please. Thank you. So we think, as Christian mentioned, that the private wealth space offers significant growth opportunities for the global private markets. No doubt, this will be a segment where competition is and will continue to be high. However, we believe that EQT has some unique angles to offer. Our products invest into the underlying EQT funds or make direct investments leveraging our own deal expertise. Hence, we're not relying on other managers, which means competitive fee structures, top quartile performance across the investment strategies and strong liquidity management with high visibility on drawdowns and distributions and as Chris mentioned, short fund reporting time lines. Furthermore, we can use the EQT AB balance sheet strategically to make seed investment, allowing us to launch new private wealth products that are starting off in value-creation mode. We are now 1 year into the launch of EQT Nexus and where we've really seen the power and the strength of the seed portfolio in the investment performance of the fund. In the past quarter, we have continued to add distributors in existing and new countries and we now have around 15 significant engaged distributors for the fund. Looking out 12 months in time, we expect to at least double that number including entry into 10 to 15 new countries. NAV for EQT Nexus is currently around €700 million. Furthermore, we're preparing for additional products and are aiming to launch 3 new products in the coming 12 months, either catering for specific regions and/or specific investment strategies. With this ongoing product development, we have a continuous need to strengthen the private wealth platform. This involves hiring talent, both within sales and marketing, product management and product development capabilities across U.S., Europe and Asia. It also involves increasing brand awareness through client engagement and brand campaigns as well as educating distributors and advisers on the EQT offering. Next slide, please. So moving on to fundraising. During the period, EQT X reached its hard cap with almost €22 billion of fee-generating AUM, which was a 40% increase from EQT IX. The EQT Future fund closed with total fee-generating commitments to the strategy, which includes fee-generating co-investment totaling €3.6 billion. During the late spring, BPEA EQT mid-market growth closed at more than double its target size, raising $1.6 billion in total fund commitments. As a reminder, EQT Future and BPEA EQT mid-market growth, both charge fees on invested capital and are currently about 50% and 25% invested, respectively. Fundraising continued for EQT Infrastructure VI with €16.2 billion of fee-generating commitments, up more than €1 billion during the quarter. We expect active fundraising efforts to materially conclude during '24, and the fund is expected to reach its target fund size upon final close. As of today, BPEA VIII is 65% to 17% invested and our Asia strategies are performing at its highest level. We expect to formally launch the BPEA IX fundraising by mid-August and that the new fund will be activated during the first half of 2025. Over the past year, we have seen some signs of improvement in the fundraising environment. The denominator effect has abated. We have seen a recent increase in risk appetite for co-investments. However, having said that, fundraising time lines continue to be extended and in order for the fundraising market to further improve, we need realizations to pick up materially across private markets. We continue to expect fund cycles of 3 to 3.5 years for our flagship funds, which strikes the balance between investing well-diversified portfolio and having time to realize investments in earlier funds to provide liquidity to clients. As a reminder, BPEA VIII has been activated for 2 years and 10 months, EQT X for 2 years and EQT Infrastructure VI for 1 year and 7 months. With that, let me hand over to Olof to cover investment and realization activity in some more detail. Next slide, please. Olof Svensson Thank you, Gustav. EQT's investment activity continued at a strong pace with €12 billion of announced investments in the first half of the year. Notably, we announced 3 public to privates in Europe across infrastructure and private equity. The investment pace has been particularly strong in BPEA VIII, as Gustav just mentioned, which is now 65% to 70% invested, up from 45% at the start of the year. And in Infrastructure VI, which announced new investments of more than €5 billion across teams such as data centers, renewable energy and cold chain logistics. We had €4 billion of announced realizations in the first half of the year, whilst absolute volumes are on par with H1 '23, activity levels are quite high. We have a number of companies being ready for exit over the coming next 12 months. Looking across the market, there are signs of global deal activity picking up from low levels. The M&A market is seeing encouraging signs, corporates are increasingly active, supported by liquidity and stronger public market valuations. The IPO market is still in recovery mode, but certainly stronger than it was a year ago, with strong demand for must-have assets. And with €1 trillion of dry powder across buyout funds, sponsor activity should pick up, we think, with financing readily available and at lower financing costs. However, exit processes still mean navigating choppy waters, we think. Bid-ask spreads have not fully converged yet. And we sometimes ask if we think there is a maturity wall, which will trigger more deal activity in private markets. Let me share some thoughts on this on the next page. Next slide, please. EQT's Capital Markets team is working continuously to manage portfolio company financings. Looking at the overall market, current maturity profiles mean that around 30% of total debt is maturing over the next 2.5 years. Across the EQT portfolio, we have about 7% of the outstanding debt maturing over this time period and more than 3/4 of our portfolio debt matures in 2028 and beyond. Credit markets have been strong in recent quarters. We see healthy financing appetite across banks, capital markets and private credit, and we've seen a meaningful tightening in new issue yields. We've also worked actively to improve terms across financings, reducing interest rate expenses while further improving covenants. Over the past 12 months, we have executed more than 20 maturity extensions across the portfolio. And with that, I'll hand over to Kim. Next slide, please. Kim Henriksson Good morning, everyone, and thank you, Olof. Now let's have a look at fund valuations. On average, value creation in all key funds amounted to approximately 5% during the period. Looking across the portfolio, revenue growth rates have remained stable and earnings growth has further improved. The key EQT Infrastructure funds and more recent vintages across both private capital businesses saw the strongest performance. The Infrastructure funds continue to see strong tailwinds from our focus themes. For example, the digitalization trend and AI propelled demand for data centers and the energy transition continues to offer opportunities. Some of our Infrastructure funds are up 10% year-to-date. The Asia funds are also seeing strong performance, driven primarily by strong operating performance, most noticeably in the tech services sector. In all of the latest key fund vintages, underlying value creation is strong. But remember that as we continue to make new investments, which are added at 1x gross mark, it takes time before the funds show the underlying returns. Turning to EQT VII and EQT VIII specifically. We have had several quarters where gross MOICs have not increased, and there are a few reasons for this. In some cases, lower reference multiples have been applied in the valuations and the listed assets in the portfolio have on average traded down. We've seen certain pockets of underperformance. For example, one of the portfolio companies has been significantly impacted by strikes in the industry in which it operates and we've taken measures to strengthen the balance sheet in another company, which has not been performing according to the acquisition case. There are, however, no systematic challenges. The financing is robust across the portfolios and the vast majority of the companies are performing in line with our underwriting cases. Both of these funds continue to perform above plan, which means we expect both to deliver a gross MOIC of more than 2.5x. Looking at realizations to date, the funds have so far delivered gross marks of 3x or above. On a general note, keep in mind that private valuations tend to be more resilient compared to public markets and moving more slowly both when markets are up and when markets are down. Next slide, please. Moving on to the financials. And during the period, management fees increased due to closed out commitments in several funds, noticeably EQT X and Infra VI and carried interest is lower than in the comparison period due to lower volumes of closed realizations and no material sell down yet in the recent IPOs. Margins increased slightly through operational efficiency and scaling effects. We are enhancing cross collaboration across our global investment teams, and we are working systematically to optimize the central platform. In the mid- to long term, we expect fee-related EBITDA margins to reach the 55% to 65% EBITDA margin target range that we have stated. In the near term, however, we continue to hire for future growth and to build our private wealth platform by, for example, growing our brand and marketing capabilities. The scaling effect needs to be looked at over a fund cycle rather than a quarter so as we raise the next generation of flagship funds, the effects will be seen. Next slide, please. As previously mentioned, as of January 1, we've changed the formal accounting policy for recognizing carried interest moving from IFRS 15 to IFRS 9 to further increase the transparency here. This means that the reported IFRS figures for carry in our financial statements will be based on mark-to-market fund valuations. This metric is a good representation of the direct impact of fund valuation changes. We will continue to report adjusted revenues. There's been no changes to the basis of this number. But to remind you, we apply a valuation buffer of between 30% and 50% on the unrealized part of our fund. And when the fund enters carry mode after the discounts are applied, we recognize carry in the financial statements. This is typically when we reached a MOIC of 1.7 to 1.8x and made a few exits. And this recognition method provides visibility on the expected midterm cash flows. We will, of course, also continue to disclose a cash carried interest, which is the realized actual carried interest. Over the fund lifetime, the 3 methods recognize the same amount of carried interest, as you can see in this illustrative graph on the page. Next slide, please. And as mentioned, carried interest and investment income for the period is lower than the corresponding period last year, primarily due to the muted exit environment. But performance is the foundation of our success and as our key funds continue to perform on and above plan, we have a very high conviction that we eventually will deliver significant carry as markets become more supportive. And as you heard, we have a high level of exit activity plan and ongoing. Short term, we are, however, still humble to the fact that carry might take a while to realize. Consequently, our prognosis regarding the performance of key funds is important in terms of our confidence in delivering long-term carry. Also, let me remind you that the general mechanics of carry recognition is through the so-called whole fund waterfall, whereby carry's earned only after all contributed capital for all investments is returned to the investors. Next slide, please. We saw a slight increase in the number of FTEs during the period, primarily to strengthen the platform to support certain strategic initiatives, such as private wealth and branding. We have signed more new hires in the first half of 2024, who are yet to start. And that growth is expected to continue in targeted areas, such as within capital raising and private wealth. The growth will typically be in higher-cost jurisdictions and higher cost functions. Medium term, we will continue to strengthen our investment organization globally and further accelerate the build-out of our capital raising and central platform to accommodate for our private wealth efforts. Next slide, please. Our balance sheet is robust and a key enabler for future growth. We have a prudent approach to leverage with an average net debt to fee-related EBITDA below 1x during the period. In July, we extended our €1.5 billion revolving credit facility, and the facility will have a new 5-year maturity on largely the same terms as the current RCF and the facility remains undrawn. Let me also remind you that June and December are generally the low point in our cash balance as we get cash flow management fees upfront in July and January. As mentioned during our Capital Markets Day, we aim to maintain a solid investment-grade credit rating. And we are now, in addition to our current A- rating from Fitch been assigned and A- rating from S&P, underscoring our operational strength and robust financial position. The additional rating also provides further access to capital markets should that be needed for future business development or M&A. With that, I hand over to Chris for some concluding remarks. Next slide, please. Christian Sinding Thanks, Kim. So overall, the fundraising market continues to be a bit challenging, and we think that will materially improve only once client programs have a better cash flow profile from realizations and drawdowns but there's a huge push on that across EQT and the industry, as you know. The successful fundraising we completed in the first half, I think, are a testament to the strength of our platform and our global client relationships particularly EQT X was fantastic. And we're excited to soon launch our flagship fund in Asia, Asia 9 with the great opportunities we see across that entire region. If you reflect on the industry we're in, we believe that managers with a repeatable model for value creation, a systematic approach to realizations, a best-in-class platform to engage with clients will continue to gain share and an ability also to receive large amounts of capital and invest those wisely. Therefore, we continue to selectively launch new strategies as well. And we're, of course, spending a lot of time and effort to build out our capabilities around private wealth, which we believe is -- remains a huge opportunity for the long term, but still very early days. Internally, we remain laser focused on exits and performance. That is a key message that you should bring with you. And behind that, we want to remain at the forefront of AI and digitalization and sustainability. We believe that having the future capabilities that companies need to win for the long term is key, so we continue to build that out. And if you look behind that, like I said, more than half of actually of our portfolio by capital now has verified science-based targets. So we're starting to prove that we're improving our companies in those spaces. Finally, we are continuing to improve all the time around exits and liquidity, our playbook there to become the best we can be at both private market and public market solutions and we're challenging ourselves really to take our value creation model, how we create value in our companies and our buildings really to the next level. And that's what's going to continue to drive superb performance together with thematic strong deal selection over time. And performance is, of course, ultimately what matters to our clients, to EQT and of course, also there to other stakeholders and to the shareholders. So with that, I thank you for listening to the broadcast, and we open up for Q&A. Question-and-Answer Session Operator [Operator Instructions] We will now take the first question coming from the line of Hubert Lam from Bank of America. Hubert Lam I've got 3 of them. Firstly, if I look at the investments, they're growing at a much faster pace than your exits. Does this mean you expect a big pickup in realizations near term just to keep up the pace with investments and the fundraising that is expected to come up as investments grow? That's the first question. The second question is on the costs. How should we think about the cost for the rest of the year? Is -- would you look at H1 as a good proxy for the cost in H2? Or do you expect H2 to grow above the H1 cost number? And also related to that, how should we think about FTE in the second half -- And FTE growth in the second half? And lastly, about Nexus. I saw that only Nexus NAV only grew marginally by I think about €100 million quarter-on-quarter. Is there a reason why the growth there has been a bit slower? And also around the new EQRT. How should we think about the potential size for that fund? Christian Sinding I'll take the first one, Kim, and then Gustav. So we see an incredible amount of investment opportunities across the world, actually, across the sectors we're investing in. We're pretty unique in the fact that we have a global -- we really have a global and a local approach. We're local with locals in every single country we're investing in, and we invest thematically then behind that. So we're generating a lot of deal flow, both from the sectors and subsectors, but also from geographies. And those opportunities are quite attractive. And we believe with all the dry powder that we have, that deploying capital today started already, as you might remember, beginning of last year to start to accelerate our deployment rate is the right thing for the long term. Of course, on realizations, like we -- I think we mentioned in the call, we have a large number of exit processes ongoing and in preparation. We've done quite a few here in the first half and expect to do more as the next 6 to 12 months pass. That's, of course, dependent on markets, but there is a huge amount of activity out there. Kim Henriksson And on costs, so we are a growing operation. So you should expect also costs to be somewhat higher in H2 than they are in H1. In addition, I think we did mention that we were making sure that we are well prepared for the private wealth growth by hiring people, both on the sales and marketing side and on the more administrative side around it. We are investing in our brand, et cetera. So there will be some more costs in H2 and forward from there. And the same also goes for headcount. And as was mentioned, we have some visibility on that already because there is a number of people who have already signed but not yet started. So you should expect the head count growth also to be somewhat higher. Gustav Segerberg And I can cover Nexus. So you should see that number as a net number. i.e., that we're still taking out some of the seed capital that EQT AB put in initially. So the gross number is a little bit higher, but we're talking about around €40 million, €50 million per month, so to speak. So and we're expecting that number to go up as we're onboarding new distributors. Hubert Lam And for the real estate fund that you have, just -- size for that? Gustav Segerberg And for EQRT, it's still early days. You should not expect it to, let's say, be a material part of flows here during the rest of '24. So it's -- of course, as you -- most of you probably know, the market for [indiscernible] at the moment is quite tough. And that, of course, also includes when you're starting the initiative. Christian Sinding And maybe just a final comment around private wealth. We have a number of additional products in the works that we're planning to launch over the coming 6 to 12 months, both in North America and in the rest of the world. Operator We will now take the next question from the line of Magnus Andersson from ABGSC. Magnus Andersson A few questions. First of all, on valuations there, you say the underlying allocation is around 5% of the portfolio. And we see the multiple low invested capital up in the 3 latest flagship infrastructure strategies. Just wondering if you could tell us, is it a broad-based earnings growth across the portfolio that has driven this? Or is it a few holdings or certain segments? That's the first one, how broad-based the valuation was? Kim Henriksson Should we take them one by one? Do you want to -- okay, I can comment on that. Yes, it is a broad-based valuation uptick as was mentioned, there are -- in a large portfolio, we have 300 or so in total companies. There's always going to be some companies that stand out positively or negatively. But the earnings growth, the revenue growth and thus the valuation -- the value creation has been broad-based. Magnus Andersson Okay. And then just on the fundraising of Infra VI. You reiterate that it will be materially done in 2024 that you expect to reach the target at final close. Is it reasonable to expect the final close then in mid-'25 or so? Gustav Segerberg Yes. I would say that, as we said, materially done by '24, which means that we might -- or we expect to tap into '25 for some clients, but it will -- that it will be concluded by Q1. Magnus Andersson Okay. And finally, just on a detailed note, the carried interest in the first half year of '24, which funds would that derive from? Kim Henriksson Well, it was obviously a fairly small number. So you shouldn't draw too many conclusions of it. It was primarily from BPEA VII and EQT VII. Magnus Andersson BPEA VII, EQT VII, fine. And when you look into the second half of '24, first half '25, from which fronts do you think the expected lion's share of exits and carry realization? Kim Henriksson There's a chart in the back of the pack there that shows which -- all of our funds and which funds are in carry mode and which funds are close to carry mode. So you need to have a look at that and get a sense for it and follow our press releases on exits. Operator We will now take the next question from the line of Arnaud Giblat from BNP Paribas. Arnaud Giblat I've got 3 questions, please. In the press release, you talked about your impact fund being launched soon. Could you talk about what size you'd be targeting? My second question is again on valuations. If you could zoom in on EQT VII and VIII obviously, the unrealized MOICs have come down despite that being new investments. So can you talk a bit about the moving parts there in terms of EBITDA growth in the underlying portfolio companies against valuation multiples and particularly in EQT VIII, I'm wondering if the Galderma IPO had any impact on valuation. I mean, the shares are up 50% since or 40%, 50% since IPO? And my third question is, if I can follow up on wealth. You talked about on a previous question about launching an American product soon. Could you give a bit more detail there? Have you got the wirehouses signed up to distribute this? Christian Sinding Great. Thanks for that and very good questions. On the first one, I guess, you're referring to our Infrastructure transition fund, which will invest in the transition of the economy from fossil to decarbonize across the energy space and transportation space, which we think is a -- it's a multi-trillion dollar opportunity and need for that transition. That's exciting. We've done quite a few investments there already. That fund, when we typically launch first-time funds, the typical range is somewhere between €1.5 billion and €5 billion. as a target. We haven't set the target yet, but this would clearly be at the upper end of the range. Kim Henriksson And on valuations, I believe we're already in the script here, went into some of the details around VII and VIII about why the MOICs are broadly flat. Now the MOIC is also a measure that doesn't really show small changes in the underlying performance. I'd say that keep in mind that there's say, in total, between 15 and 20 companies in each fund. So there's going to be -- this is the blended effect of a lot of -- of a lot of things that take place, including multiples and performance in the underlying companies. But as mentioned, we see no systematic issues on the performance side. On the contrary, growth in revenue is really good and growth in EBITDA is even better. So we are very comfortable with longer-term trends there and that we will reach the 2.5x MOIC in both of these funds eventually. Gustav Segerberg And on the last question around wealth, as Chris mentioned, we're working on a number of initiatives, including 2 initiatives in the U.S., one targeting private equity and one targeting infrastructure, and they are about 6 to 12 months more towards 12 months away. And the -- when we will launch them, we expect to have strong distribution partners to team up with, which would then also include the wirehouse or some of the wirehouses. Operator We will now take the next question from the line of Ermin Keric from Carnegie. Ermin Keric Maybe if we could just start on your AUM development from here. If you could give us any indication. I mean, is it reasonable to expect your AUM to be somewhat flattish here until you get BPEA IX activated with, I suppose, Infra VI contributing on the positive side, but then you're doing exits at the same time? Gustav Segerberg Is it -- do you want to take... Kim Henriksson Yes. They want a more full answer. No, no, but it's correct. Those are -- they are working in opposite directions, then there, obviously, it's then a question of whether these exits do take place or not. And as mentioned, BPEA IX is expected to be activated during the first half of next year. So that's the timing. Ermin Keric Got it. That's helpful. Then talking about carry, I mean, if I'm quite right, you've started to provide your clients with some liquidity forecasting. Is there anything you could share given that it would help us quite a bit on how to think about the carry as well? And also just -- I mean you're talking about if markets are conducive that you have quite an active pipeline coming up, would you say that they are conducive currently, you just need to wrap up the preparations or is it still anything missing for you to feel comfortable with launching additional exit process? Kim Henriksson Well, I can take the carry -- listen, the carry forecasting is not carry, but liquidity forecasting is done fund by fund for the clients that are invested in that fund, that's a sure that we provide to our clients, and it's not real conducive to have it to a broader audience. It will involve sort of how much they have in terms of drawdowns, how much do they have in terms of distributions, costs, et cetera, so it's not something that we can share more broadly. There was another part... Olof Svensson There was a question on exit activity and how we look at that, and I can add some color on that question. So I mean, if you look back a year ago, I mean, we were saying and even 6 months ago, we were saying that we still see uncertainties in the market and that are so significant that we don't think it's worth putting management team's time and effort into exit processes that may not materialize. I would say that, that macro picture has changed. And now we're in an environment where as Chris alluded to, probably on a path to lower interest rates, we see less political risk, albeit there is still some significant political aspects for the second half of the year. But and the financing markets have much improved. We think that new financings are probably 200 basis points tighter today than they were, say, a year ago. So all these factors drive our confidence in initiating exit processes. And at the same time, we have several companies that are performing well that we think are in good shape for exits. As you've seen, we have done some very, very significant IPOs this year, but those have primarily raised primary capital, but we have created optionality across the portfolio to drive exits. But we, of course, continue to be very humble to market conditions. And with a portfolio, as Kim was alluding to, that is performing strongly. We have very long-term financing structures. We are also under no pressure to exit these assets if we don't think that the valuation levels and the market conditions are conducive for it. So as you think about us ramping up exit activity, I think you should think about it as in terms of possible windows that we have for the second half of the year and for things to continue to ramp up into 2025 with this macro picture that we are outlining materializes. Operator We will now take the next question from the line of Angeliki Bairaktari from JPMorgan. Angeliki Bairaktari Just, first of all, for the avoidance of doubt with regards to Galderma, I know that the exit -- the IPO was primary. But just want us to understand in terms of the adjusted carry that you have recognized in the first half, there is no contribution whatsoever from the markup of Galderma from the pulp between where it's currently trading relative to the IPO price and also relative to where it was in your books. So would we need to see some exits from you in order to crystallize that gain? And if you were to crystallize that, would that may crystallize from the 100% of what you own in Galderma or you have to crystallize as you exit only on what you exit effectively? That's my first question. Then second question, are you seeing any pressures from LPs not being able to finance their existing commitments, their existing capital calls due to lack of distributions? And third question, with regards to the Idealista exit, can you give us some color with regards to the exit multiple for that investment? Christian Sinding Thanks, Angeliki. In terms of details on separate companies, we typically don't provide that, and Kim will answer in a second, how to look at the different carry questions that you have. We're very satisfied with our Idealista multiple. We're super happy about Galderma's listing and Waystar's listing overall. And of course, those 2 will help create future liquidity potential. Very, very little was sold as public information in secondary shares in those 2 companies. So the future will -- as we sell down, that will create direct liquidity for our investors and our funds and also co-investors, which we have in both of those. When it comes to your question on LPs, no, there's no problem like that whatsoever. This is just a cyclical element in the industry that drawdowns are exceeding distributions for a period of time, we believe that's going to change because of all the exit activity that's ongoing at EQT and in the market. That will take a little bit of time, but then we'll be through that adjustment period and kind of back to normal. Kim Henriksson And if I may comment on the carry mechanics briefly. I think that, first of all, you should think of carry recognition as a whole fund. So it's not specific to any specific company that -- so you have to look at the realization or the value creation in the whole fund. So Galderma per se does not directly have a carry contribution. That's one observation. Second observation is that all of the companies are -- including Galderma is mark-to-market each quarter. And in the Galderma's case, it will now be mark-to-market at the IPO -- or not the IPO, the listed share price as it has a listed share price and then we will apply a buffer to the -- again, the whole fund valuation to -- before we realize carry from that fund from an accounting point of view. Angeliki Bairaktari So just to confirm, even though there is actually a market price today for the Galderma shares, right, which is different from having a private investment, and even of the recent market price, you still apply a haircut of 30% to 50% on the entire fund valuation. There is no unwinding of that discount just because that particular stake that you have is quoted. Kim Henriksson That's correct. . Operator We will now take the next question from the line of Jacob Hesslevik from SEB. Jacob Hesslevik My first question is on fundraising. You say you aim to raise BPEA IX, EQT XI and Infra VII within the next 2 to 24 months. Where do you see most of the flows coming from? Is it mainly a recurring customer who are aiming to push into any new geography and client type. And second, will you agree with me that we should soon be facing a positive denominator effect given how strong public market has been which could result in large inflows from maybe American investors? Christian Sinding Very good questions. Yes, the denominator effect is effectively over, no pun intended there. So the remaining challenge with some LPs, some clients is this cash flow question that we've talked about. And we believe that's going to change, like I said, over the coming 6 to 12 months. Or something like that. So we do expect the next cycle here to come -- to be more normalized. And therefore, if you look at the timing of our -- of the next wave of flagships, and you're right, all 3 flagships are in that time zone with the first one being BPEA IX being launched in mid-August. We think is a reasonably good time. Having said that, right now, the fundraising market is still in that situation where cash flows are somewhat limited so my guess is that the fundraisings will take some time in the same way that we've seen in the last couple of years. But we're performing well. We have great relationships and I think that we're going to be very well prepared for those launches. Olof, do you want to talk a little bit about some of the stats around investors in the funds? Olof Svensson Yes, sure. So I mean, if you look at our flagship fundraisings, you will typically as you now see a very high rate of returning customers, so to speak. And if you look at the EQT term, for example, you will have had the investors in EQT IX effectively subscribing to capital -- to the same amount of capital that they subscribe to also in EQT X. And then we have additional clients on top that are coming in. And I think if you look forward, you see a slight difference in the fundraising environment across regions. As you know, over the past year or 2, we've seen the most challenges in North America and in particular, with pension funds in North America. And one of the reasons there's been the denominator effect, as you say, they have very mature private equity investment programs where they're already at target allocations and not all of these are still increasing their allocations to private markets. You have a different picture across Asia, where many of our clients are meaningfully increasing their commitments to private markets, and we've seen increasing ticket sizes in our latest fundraisings. Similarly, in the Middle East, you see a strong interest in our fundraisings as we launch the next fund for Asia. We think we have quite an interesting dynamic to where this is a relatively young market from a private equity point of view where many clients are still interested in increasing their allocations to private equity at DACH region, for example, and Europe, I would put somewhere in between, and it depends a bit on the type of client that we have, but we, of course, have some very, very strong relationships across Europe that are participating across our funds. Operator We will now take the next question from the line of Haley Tam from UBS. Haley Tam Could I ask 3 questions, please? One on valuation, the second on the refinancing activity and the third just on the FRE margin. With valuation, just to confirm something, the multiple on invested capital that you report for the various funds, I understand it includes the mark-to-market value and then you listed assets. Is it at that date to the 30th of June price, there's no lag or anything like that? And just to confirm as well, to talk about Galderma that, that is a 180-day lockup expiry for you to make sure that's correct. With the refinancing question, you did mention you've done a lot of refinancing in the period. And I just wondered, is there any quantification you could give us on average in terms of maybe a funding cost benefit in having done so? And then the third and final question on the FRE margin, 55% to 56% to help you get there with the next generation of flagship funds. Obviously, those are quite large scale. And I think you just said the fundraising might still take some time. How should we think about that statement? Is it something sort of towards the beginning of the activation cycle or the middle where we might think about that 55% to 56%? Kim Henriksson If I may take the first one to start with. The mark-to-market as of 31st -- 30th of June, is at that specific date, both for listed companies and for the companies that are completely private that we value based on multiples or DCF or whatever valuation methodology we use. So that's at that particular date. I don't know the lockup period for Galderma, maybe someone else on the call knows, but that's probably something that can be checked somewhere else. Do you want to comment on refinancing or... Christian Sinding I think it's 180 days, but it's obviously public information. So... Olof Svensson On the refinancings, we've had more than 65 debt actions across the portfolio over the past 12 months, 22 of those have been maturity extensions, and we've had about 30 repricing or refinancings. I'd say the refinances that we do now probably have, on average, 150 basis points tighter cost than it would have been, say, a year ago. And through these debt actions, we have some very, very significant interest rate savings, I would say, without putting a number to it. Kim Henriksson And then on the FRE margin, maybe just to reiterate that this is a long-term financial target of ours to reach that range. So it's not something where we're going to put an exact date on when it's going to happen. We are not far off. But as we've said before, there are factors such as the fundraising cycle, which impacted. There are factors such as us growing our private wealth and branding efforts that impacted in the short term and the medium term. So I can't give you more specificity than that. Christian Sinding And maybe one final comment on the financing side, our financings are -- the maturities have been pushed to 2027 or beyond, which is significantly better than the market. So we have very robust financing structures in addition to the benefits that Olof was talking about. Operator We will now take the next question from the line of Nicholas Herman from Citi. Nicholas Herman I also have 3, please. Firstly, on compensation costs. I guess FX was slightly helpful for you, but it still looks like that on a per head basis, comp inflation is tracking high single digit to 10% year-on-year. Just curious, is there anything lumpy in there? Or is that a good run rate? Secondly, on fund cycles, I know that's a topic we talked about at length in the past. You've guided in the past of BPEA IX be activated mid-'25 and then EQT XI and Infra VII following broadly 6-month intervals. But equally, you've been deploying pretty rapidly, I guess, particularly Infra VI. Now I appreciate the deployment is lumpy, but in the context of super healthy pipelines, but does that mean that Infra VI will be fully or close to fully invested by the time those vintages are activated rather than, let's say, the 70% to 80% commitment levels that you've done in the past? And then finally, on exit pipelines. So good to hear that you are kind of cautious optimistic around that. But I'm just curious, when you look at your exit pipeline and the tracks that you're running, how does the mix broadly split across IPOs, be it public or private, strategic or sponsor acquirers? Kim Henriksson I'll take the comp one to start with. Keep in mind that our compensation or personnel cost line is -- constitute sort of the fixed element of salaries, et cetera. And then about half of it is actually variable. And that variable cost is, of course, something that may deviate quite a lot from the 10% you just mentioned, it can go up and it can go down. So I wouldn't like to be too specific on that. That's going to be dependent on our performance. And secondly, I reiterate that when we are now hiring, even if it's a fairly small proportion of our installed base of employees, so to speak, we are hiring in more expensive regions and more expensive people. There are sign-on bonuses, et cetera. So I'd say that, that also impacts the cost base somewhat. Gustav Segerberg And number two, you're right that on BPEA IX, we said mid-'25 and then let's say, EQT X following 6 months and Infra VII another 6 months, so to speak. And I would say -- what we've seen now with BPEA IX is that we're -- it's being invested a bit quicker. So what we're seeing now is first half of '25. But I would then also take, let's say, the remaining EQT XI and Infra VII, that they will also then be in what we've talked about 3 to 3.5 year cycles. So for EQT XI, that would then imply the H2 of '25, so to speak, in order to be both in 3 to 3.5 years and similar for Infra VII then to be in the first half of '26, so to speak. And then we're talking about activation period and not when fundraising will start. But when we'll actually activate the fund, which is, of course, the key point from when the fee is starting to be generated. Nicholas Herman That's helpful. I guess my question was more around thinking about the commitment levels of the existing vintages. So if I look at, let's say, the last 9 months, I think you've deployed around -- on Infra VI around 35% of the fund, which I guess if you annualize that, that would be more like a 50% run rate. Obviously, I appreciate that the deployment is lumpy. But does that kind of mean that on that basis, you would be kind of that fund in Infra VI example would be fully invested by the time that then Infra VII comes around? And maybe I guess some are similar is point only EQT X? Kim Henriksson I would say we're not planning to do it anything differently that we've done from the past. As you say, it's lumpy. There's been a lot of activity in Infra VI which, of course, given what I'm saying, you should probably expect that activity level to be a little bit lower in the coming 6 to 12 months in order not to get to the next fundraising too quickly, so to speak. Christian Sinding If I may complement that. We manage that process pretty closely as well. There are fund technicalities like where we can recycle capital. We do, of course, significant co-invests as we move on some deals, we had one deal in Italy that ended up not going through. So you're right about the lumpiness. So I think it's probably better to follow the guidance that Gustav is giving than to try to extrapolate based on a period and then annualize that. Nicholas Herman And then finally on the exit kind of mix? Olof Svensson I could take that. I mean if you look historically, and as I think you know, approximately 20% of our exits in private equity has been through the public markets and IPOs. And in infrastructure, we have done one significant IPO, but typically less IPO activity in infrastructure and even less so in real estate. If we look ahead, as you know, we typically run several tracks at the same time and who, what we end up doing, depends on the company and who's the most suitable buyer? And what's the most suitable ownership of that company that typically ends up having the most competitive price. As we have larger assets, some of those tend to be more suitable for the public markets, and we think that the larger and more liquid assets are the types of assets that the public markets cater to very well. So if you look ahead, we do have a mix of private equity tracks. We will have significant appetite from strategics going forward, we continue to expect and the IPO market will continue to be probably a relatively similar share of our exit pipeline over the years. And then as Christian alluded to as well. We are, of course, thinking both systematically and also creatively around exit solutions and for each and every exit, there might be nuances compared to the traditional exit methods that we deploy. Operator We will now take the next question from the line of Bruce Hamilton from Morgan Stanley. Bruce Hamilton Firstly, I just wanted to take a bit more on the sort of private market or the private client sort of opportunity, which we agree is significant. I guess I mean, Nexus is growing quite gradually, as I think you've always indicated was the case. So is the real acceleration going to come when you launch U.S. products, private equity or infra. I guess Blackstone is obviously built quite quickly it's PE product. And what's most important to watch for? Is it signing up the distributors? Or is it the brand awareness? And just so -- just trying to understand slightly better that the pace may be looking out over the next sort of couple of years on that. Second question, on the fundraising -- so to clarify, it sounds like you're saying deployment pace will mean a 3- to 6-month pull forward likely across the Asia flagship PE and infra strategies. I just wondered, given that obviously realizations and cash flows for LPs are important. How does that feed into that? Is that going to be a constraint, particularly on the infra side? Or is that okay? And then finally, linked to that, I know DPI, you've talked about being very important, and that's been strong in your PE franchise, but is it equally strong in infra? Or is that, again, a bit of a constraint on how quickly you can fundraise going forward? Gustav Segerberg Yes. Maybe I'll start with one and then I would say probably all of the things that you mentioned in your question is part of the answer, so to speak. One, U.S. is by far the largest private wealth market, mostly developed. So it's, of course, critical to be there to have real scale. Some of our competitors have been in the space for longer and hence have more buildup teams, relationship, et cetera. And that's why we have reiterated that for us, this is a long-term game. We're building our capabilities in it. We think that over time, also the European/Asia products can have significant scale but that it will take some time. And of course, critical to that over time is going to be performance in the funds and being able to build, let's say, a global brand to the private wealth space. So I would say it's a little bit of all of the things that you mentioned. On the second question on fundraising. I think we feel very comfortable with the indications that we're giving and that we will be able to execute this on the 3- to 3.5-year cycle, That, of course, implies that we continuously need to deliver liquidity to our clients, both on the private equity side, but also on the infra side. And that's what we're expecting to do as well before the launch of Infra VII. Christian Sinding And on your DPI question, we're top quartile and DPI both in private equity in Europe and the U.S. and private equity in Asia and also in infra. Operator We will now take the next question from the line of Isobel Hettrick from Autonomous Research. Isobel Hettrick I have 3, please. So first, you've talked about in recent months on progress on private market IPOs. So just wondering if you can give us some color around where you are developing these and then my final 2 questions are a bit more guidance related. So on the tax rate, it seemed quite low around 15% on the adjusted P&L, given global minimum. So if you could just give us some guidance about how we should be thinking about this for full year '24 and then going forward. And then you've flown to net interest income rather than expense for the period. So can you just explain the dynamics there, please? And if we should expect this to be recurring into future periods? Christian Sinding I guess I'll take the first one there. And Kim, the others. When it comes to the private IPOs, and I think as Olof also mentioned, we're -- when we run our exit processes, we evaluate different opportunities for realization. And in some companies, particularly the bigger ones or ones where we really are, I would say, and ones where we really believe there's a strong future that we are a great owner of the company that the management Board want to continue, and we see significant value creation, we will evaluate a private IPO. We have a couple of transactions ongoing right now where that might end up being the structure. So hopefully, this year will be our first time that we can say that, call it a private IPO and where we really create liquidity in the shares of the company beyond a normal process, a normal recap or a co-investment or a partial sale. So I'd say lots of activity, but it will come in different forms. And I think what's important here is rather that -- there's a lot of innovation going on surrounding solutions, both for LPs and for GPs across the industry, and we are participating in that and building out capabilities around it. Gustav Segerberg And if I may comment then on the more technical questions. On tax rate, the sort of global minimum tax implementation rules are still somewhat in flux and somewhat unclear how they will exactly be implemented in different jurisdictions but we think that would they be implemented as planned, then our tax rate should be a few percentage points higher, so in the 18% to 19% approximately on the same basis calculated as you mentioned going forward. Whether that's going to be already this year or more forward-looking? Let's see on that one. On net interest income, the net financial expense line has -- it's a bit of a mix of things with interest on cash and interest on bonds going out, but also certain financing costs that are depreciated on that line and certain effects that also may hit that line. So it's not very easy to forecast. But if you only look at our real cash interest expense on the bonds, which will be fixed for the foreseeable future. And then on the other hand, you see that our cash interest, we can manage more actively. We should be in a pretty good position to have sort of positive-ish net interest income, excluding these other matters that may also impact it over time. And for example, now when we had the refinancing of the RCF, which I'm very happy with, by the way, of course, that's going to cost us something, not in interest expense, but in transaction costs, and that transaction cost will also hit that line over time. So it's a complicated answer. We can take the rest offline. Operator Thank you. We will now take the last question from the line of Oliver Carruthers from Goldman Sachs. Oliver Carruthers Oliver Carruthers from Goldman Sachs. One final question for me. Sorry, it's a bit of a technical one, but I'm just trying to understand some of the moving parts in the adjusted carry number. So it looks like Fund VIII called and invested about €300 million of capital in the quarter. And it's a fund that's already in carrier recognition mode. So just trying to understand the negative impact this drawdown would have had on your adjusted carry recognition, if any, for that fund? Because you're effectively contributing fresh capital at par and then applying a 30% to 50% discount in the carry recognition. So just any help on that would be great. Kim Henriksson Yes, that's exactly right. So if you contribute new capital to a fund, it will have -- it will come in at 1x gross MOIC. So for the MOIC of the fund, it has a dilutive effect if the fund is at higher than 1. And also when it comes to the carry recognition, that capital will have a 30% to 50% discount when applying it to the carry -- to the carry waterfall, yes. Christian Sinding Thank you, everyone. Appreciate the questions. I appreciate the engagement this morning. I wish everyone a very good summer, and see you in Q3.