Mar 17, 2015

Annual Chairman's Letter 2014: The Art of the Long View

“Blackstone has always been managed with a perspective of achieving successful growth over the long-term … Our management has consistently sought to focus on the best outcomes for our businesses and investments over a period of years rather than on the short-term impact.”

Blackstone Prospectus, June 2007

At Blackstone, we take the long view. It is vital to who we are and how we deliver market-leading performance. This long-term perspective is so ingrained in our culture that we singled it out in our initial public offering prospectus. Today, nearly 30 years since the founding of the firm, we still run the firm in the same way. That means thinking about the implications of every decision – from investments to growth initiatives, risk management to team building – in terms of years and decades rather than just months or quarters.  We build to last.

We raise capital from the world’s leading investors and patiently deploy that capital in investments that we believe can safely generate the highest returns across market and economic cycles. In doing so, we have delivered exceptional investment returns for our Limited Partners for decades and enjoyed industry leading growth in assets under management, earnings and distributions to public unit holders.

A Portfolio of World-Class Businesses

Blackstone’s investors benefit from our portfolio of outstanding asset management businesses.  Each is a leader in its asset class and contributes to our strong investment performance. Overall, our returns materially beat global markets. Our Private Equity funds appreciated 21.6% for the year, while our Real Estate funds were up 20.9%. Our credit drawdown funds had gross returns of 15% to 25%. And our Hedge Fund Solutions business had a 7% gross return, with only one-third of the volatility of public stock markets.1

Practicing the art of the long view has enabled us to outperform across the broad spectrum of alternative asset classes for three decades. We are sharply focused on delivering excellent investment performance, being responsible stewards of our investors’ capital, managing risk, seeking out new opportunities, and innovating. This approach has distanced Blackstone from competitors that cannot match our scale, depth of talent or record.

In October 2014, we announced plans to spin off our financial advisory, restructuring and reorganization advisory and fund placement businesses. Our advisory practices have been an important part of the Blackstone family for almost 30 years, and they had one of their best years ever in 2014. Yet given the ever-increasing scale of our investing businesses, significant further growth of our advisory units will be constrained by actual or perceived conflicts. By combining our advisory practices with PJT Partners, we are freeing both our advisory and investing businesses to pursue separate paths to growth. We expect the spin-off to be completed in 2015.

Record Performance Driven by a Long-Term Perspective

Our disciplined approach set the stage for a terrific year for our fund investors and unit holders in 2014. Realizations, earnings and distributions all reached record levels.

Blackstone was the most profitable public asset manager in the world for the second year in a row. Economic Net Income (ENI) rose 24% from a year ago to $4.3 billion, and Distributable Earnings (DE) rose 64% to $3.1 billion.2 Both ENI and DE have compounded at double-digit annual rates since our public offering in 2007. Our distribution for 2014 was $2.12 per common unit, a 58% increase over last year.

Assets under management, new investments, distributions to LPs and capital raised all surged to new highs. Strong inflows and investment appreciation propelled total AUM to $290 billion. Our AUM has compounded at 16% since we went public – growing every year even through the global financial crisis.

A record $26 billion of capital was deployed in 2014 and, reflecting our geographic expansion, 47% of that capital was deployed outside North America.

We take great pride in the fact that our LPs have entrusted us with their capital, and we strive every day to retain that trust. 2014 was no exception. Capital raised for the full year totaled $57 billion, as much as the next four alternative asset managers combined. Today, we have one of the industry’s largest pools of dry powder, allowing us to move quickly and decisively to take advantage of investment opportunities around the world on a large scale. The dollars we deploy today are the seeds for future earnings. This year, we are in the process of raising new flagship Private Equity, Tactical Opportunities and Real Estate funds and we see exciting opportunities for deploying capital across our various asset classes and regions of the world.

Our investments in the energy sector offer one example. While the industry is now under duress, energy has been a significant and highly successful sector for us for some time. We are methodical and differentiated: we do not make investments that depend on above mid-cycle commodity prices. Instead, we look to invest in mispriced assets where we can create value through active improvements. And we protect on the downside with conservative capital structures, forward sales and off-take agreements. We are well-positioned to take advantage of the current distress in the industry and have approximately $9 billion of available capital to invest across our energy private equity and credit funds.

Propelled by Innovation

Part of taking the long view is being willing to invest capital – both financial and human – in ventures that take time to pay off.  Blackstone is a true innovation machine, continually seeking out promising new asset classes, markets and regions. Each of our business platforms is charged with identifying new opportunities, developing sound strategies to build scale and market leadership, and deploying their best people to guide the success of new programs. This also provides a great career path for our exceptionally talented younger professionals.

Reflecting our focus on innovation, approximately 50% of total AUM has come from products that were launched after our IPO. Successful new platforms include our Tactical Opportunities business, core-plus Real Estate strategy and Strategic Partners secondary business.  We also developed a registered product platform in our Hedge Fund Solutions group. This is part of our major initiative to serve high net worth retail investors.  Blackstone is moving aggressively to tackle this vast opportunity, raising $11 billion from retail channels in 2014 alone. 

Sharing Our Success

I am proud of how the firm consistently applies its financial and human capital to pressing economic and social needs. In 2014, we sought to provide job opportunities for veterans. In connection with The White House’s “Joining Forces” initiative, Blackstone and our portfolio companies have committed to hiring 50,000 American veterans, and we have hired more than 20,000 since making that pledge. Through the Blackstone Charitable Foundation’s Entrepreneurship Initiative, we serve as a catalytic funder in targeted regions globally, supporting programs and partnerships that provide resources to entrepreneurs and high-growth, job-creating businesses. The Foundation’s signature program, Blackstone LaunchPad, provides mentors and coaches who work with aspiring student entrepreneurs. Our network includes some 350,000 students across 15 campuses in the United States.

Sustaining a Strong Culture

No firm can grow at our rate and deliver outstanding investment results over nearly three decades without an extraordinary culture. Blackstone’s culture is defined by extremely talented individuals who have a passion for excellence, enormous energy and responsiveness and a real sense of purpose and integrity. We have never lost our small firm sensibility, where people know each other, share knowledge and have the freedom to innovate.  Maintaining this culture over the long term is our enduring competitive advantage.  By growing steadily and continuously innovating, we’ve engrained in the institution a means of capturing knowledge, evaluating risk and making decisions.

It is a privilege for me to share our success with our employees, investors and unit holders. And while I could not be more pleased with the firm’s extraordinary results to date, I am most excited about what the future holds.

 

Sincerely,

Stephen A. Schwarzman

Chairman, Chief Executive Officer and Co-Founder

 

 Click here to view this letter as a PDF. 

 

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Our credit drawdown funds had net returns of 12% to 19%. Our Hedge Fund Solutions business had a 6% net return.

Total GAAP Net Income Attributable to The Blackstone Group L.P. was $1.6 billion in 2014. For a full reconciliation of GAAP to Non-GAAP measures, please see Blackstone’s Form 10-K for the year ended December 31, 2014