Michael Chae Reflects on First 18 Months as CFO
The following remarks were originally delivered at the 2017 Credit Suisse Financial Services Conference as part as a fireside chat discussion on-stage, and have been edited for clarity.
Michael, what have you found to be the biggest surprise and opportunity since becoming CFO?
It’s been a year and a half since I took on the role, following a couple decades-long career at Blackstone, and it’s been a pretty fascinating and actually enjoyable 18 or so months for me. I’d say, internally there haven’t been a lot of surprises – and in terms of the substance of the role, I had the benefit of having seen a lot and being pretty deeply involved in most aspects of the firm and its businesses, geographies, functions, et cetera. But in terms of the external environment, I don’t know if you’d call them surprises, but there’s never been a dull moment in the past 18 months.
I started on August 6, 2015. Just a couple of weeks later markets swooned, fueled by China fears. Early in the first quarter of 2016, we all remember, maybe we cringe in remembering, how the overall equity market pulled back, the energy price correction, credit spreads widening dramatically, in that January-February time period. Second quarter looked like we are having a relatively boring quarter and then in the last phase of June we had Brexit, and then of course, we had the U.S. political surprise, the election in November of 2016. So it has a really been a pretty interesting time, always something new and different to react to and understand.
But being in the role during those different events really gave me an up-close appreciation for how resilient the firm is and our model is in the face of all that and moreover, how we’re able to be opportunistic in environments like that and find opportunity.
So go back through those events that I mentioned. What happened in August of 2015, and its effect on the markets overall affected how the REIT market traded in the fall of 2015 – that, I think, created the conditions for our Real Estate business to do a couple of really big deals, taking private BioMed, taking private Strategic Hotels, that was like $15 billion in aggregate and within the subsequent 12, 14 months, we substantially exited our Strategic Hotels deal in a quick period of time, and the BioMed deal is going really well. We’ve sold a good chunk of the assets, and we really like the position we’re in.
Take then for example, the first quarter pull back in the energy markets. We had done very little in the prior year in terms of new upstream investments. We had sold a fair amount. Oil comes down to $30 or so, lots of turmoil and distress and that really set the stage for in the last 12 months our doing, I think, eight upstream oil and gas deals, about $3 billion of equity in our Private Equity area, and then more in our Credit area. So, again, a lot of opportunity there, and we set up a number of these deals and priced them in the first and second quarter at a time of great distress, and closed them later in the year. The prices per acre that we own those at and other valuation metrics look really good in relation to trades that happened only months later. And then you take Brexit – we bought assets in our real estate business out of a UK-listed open ended fund that was under tremendous pressure. We purchased them literally in the 7 to 10 days after Brexit.
I just use those as examples of what I’ve seen in that time period and the opportunities that were created.
I’d say, in terms of kind of the big picture opportunity – there’s tremendous and deep opportunity in the alternative asset market. There is a $35-or-so trillion global pension market, something like over $10 billion of U.S. retail assets that we consider long-term addressable for us. In a world of low rates, and where long-term return targets for institutional investors, are somewhere in the mid-single digits, alternatives continue to be an essential part of their portfolios, to have any hope of meeting their long-term liability obligations of 6%, 7%, 8%.
Against that, we’re in a very privileged position, I think. We have 30 years of performance and with our record, our relationships with our investors, and our model and our platform, we are in a position where when we have good ideas, new ideas, new initiatives for funds or businesses, investors will back those initiatives and fund our new businesses. And so that’s a terrific place to be in. And we see a long, long runway of growth that can come out of it.