Jon Gray: Infrastructure is clearly an area with a lot of potential for us. As a reminder, our program is less than six years old at this point, and we’re already at $44 billion. The key, like building everything we do is delivering performance for the customers. Sean Klimczak and the team have delivered 15% net returns since inception in an open ended vehicle, which is different than many of the other players in the space. We think that is a very powerful model because it allows us to partner with other long term holders and it matches the duration of the capital to long duration infrastructure. We positioned the business in three big areas; transportation infrastructure, coming out of COVID; energy and energy transition, obviously, a very important area today for a whole host of reasons; and then digital infrastructure, which Michael pointed out, has been the biggest driver of value both in real estate and in infrastructure and across the firm in this most recent quarter.
So we think we’ve done a really exceptional job deploying the capital. We have a lot of clients who are quite pleased. I think the base business can grow. And I think there are opportunities geographically to expand this. Our current fund is focused primarily on the US but we’ve done a number of large things in Europe. And I think there’s opportunities in infrastructure in both Europe and Asia over time, and it’s an area that we have real strength. I would add to the mix, infrastructure credit, something we’re doing as well. And interestingly, when you think about what we’re doing for insurance clients, what we have in infrastructure and things like digital infrastructure, green energy, it’s very helpful for investment grade debt as well given our insights and relationships.
So this is an area where we’re still seeing investors showing a lot of enthusiasm. I think it will continue to be a growth area on the back of what we built. I think we can create other products. And we see this growing to be, I think, as we’ve talked about in previous calls, a triple digit AUM business.
Michael Chae: And Jon, I’d just add on, and I think you might agree that, I think if you step back, Mike, you could analogize it’s sort of the multi decade growth path of real estate, that business overall with respect to another area of relapse that’s infrastructure, and that is geographic/regional expansion, expansion up and down the risk return spectrum, cross asset classes between equity and debt and also serving different customer channels, whether it’s retail insurance or institutional. So that’s another way to dimension it.
Operator: We’ll go next to Craig Siegenthaler with Bank of America.
Craig Siegenthaler: My question is on real estate. So with deployments picking up with both the Tricon and Apartment Income take privates, and John, I heard your comments earlier this morning, but it sounds like the Blackstone house view is that the work from home and interest rate hit are now baked into cap rates. So given all this, can you comment on where we are in the investing cycle, be it dry powder at BREP, BPP and BREIT? And I also wanted your perspective on returns now that BREIT is back above its [prep] putting 2Q in a better position for [FRPR]?
Jon Gray: As we’ve talked about and you noted, there have been two big headwinds here. One in the office sector, specifically in the US where we have very little exposure, the impact of remote work and also capital needs in older office buildings. The second thing has just been the movement upward in interest rates and the rise in spreads that happened. And both of those, I believe, peaked back in October and that has really worked its way through the market. Interestingly, of course, there’ll still be plenty of challenging headlines from assets that were financed in a different environment as they work their way through the system, and that’s sort of — it’s almost as if something happened to a ship at sea and then it comes ashore.
We saw this after the financial crisis where real estate values bottomed in that summer of ’09 but you had negative headlines in real estate for the next three years. We spent a lot of that time, of course, deploying capital into that dislocated period where people were still cautious. What gives us confidence as we look forward here is one is this reduction in cost of capital. We’ve obviously seen spreads tighten a fair amount, probably 125 basis points in CMBS in the first quarter and through the end of the fourth quarter last year. We also saw CMBS issuance go up fivefold versus the first quarter of 2023. So that — and the fact that the Fed at some point here will be bringing rates down, and that’s important as well. The other thing I’d add is on the supply front.
We’ve seen in logistics an 80% decline in new starts. We’ve seen in multifamily a 50% decline in peak starts — from peak starts as well. And so that starts to lay the groundwork. In terms of timing, I would think about this period of time is a time of seed planting that you want to be investing into this dislocation because there’s a lot of uncertainty, there maybe [fore sellers], there maybe public companies trading at discounts. And then over time, as things start to normalize, you start to accelerate on the realization. But first, I think it’s the deployment period then the realization period as you move out similar to that post GFC period, that’s certainly the way we’re playing it. And in terms of capital, we obviously have a very large $30 billion global fund.
We said we’ve raised over 7.5 in Europe, we have most of our $8-plus billion Asia fund still uninvested. So a lot of opportunistic capital to deploy. So we’re forward leaning as it relates to deployment, even though we recognize there’s still going to be a lot of assets from the previous period working their way through the system.
Operator: We’ll go next to Alex Blostein with Goldman Sachs.
