Craig Siegenthaler: Good morning, Steve, Jon, thanks for taking my question. If we take the last question, we look a little bit further out, most economists are expecting the U.S. economy to weaken next year, and most bond investors are forecasting rising defaults broadly. So, I wanted your perspective on how you think this will impact private asset returns, especially in private credit and real estate and could this lead to more investing opportunities next year at Blackstone?
Stephen Schwarzman: Well, I think it’s reasonable to assume if you have elevated levels of rates and you have the economy slowdown that that puts more pressure and I think most market forecasters are anticipating higher default rates in various sectors. I would say that we’re starting off a very low default rates today. I mean, in our private credit portfolio, less than half of 1% in our BCRED vehicle, I think we have just one asset that’s on non-accrual. So we certainly are starting off in a very good spot. Overall if you talk to the banks, you guys are closer to that. I think default rates are fairly low. They’re starting to pick up a little bit in subprime. But I think it is reasonable to assume there’s going to be more pressure in real estate certainly.
In some of the most challenged asset classes, I think we’ll see higher default rates, the cost of capital and less availability will have an impact and having this large pool of capital that huge amounts of dry powder, really in almost every part of the firm should help us a lot. And one of my partners, Kathleen McCarthy, said this is when we do our best work. And I think that’s a good description that when there’s high uncertainty, people need capital in a hurry, and you’re willing to take a longer term view on asset values and normalization, you can step in these times and make attractive investments. So, yes, when we think about what makes us enthusiastic, having this large pool of capital with some more pressure out there, that should create opportunities.
But overall, we would go into this environment with the financial system and default rates pretty healthy at this point.
Michael Chae: Thanks Craig, it’s Michael. I’d just add to that, and this is particularly focused on a private credit, non-investment grade portfolio that we’re talking about, quite low loans to value against a very healthy portfolio today, quite performing portfolio today. So, as you know, in our direct lending area, the average loan-to-value of this portfolio that we’ve built over the last few years, around 40%. So when you just — and the underlying companies in quite good position, supported by very supportive financial sponsors in many cases. And so when you think about even a rising default rate from a very low starting point, as Jon mentioned, against anything resembling sort of historical recovery value on a theoretical basis and then you combine that with sort of the total return available right now in the private credit area, with those portfolios and I think that performance can absorb what may come from our point of view.
Craig Siegenthaler: Thank you, Michael.
Operator: We’ll take our next question from Finian O’Shea with Wells Fargo Securities.
Finian O’Shea: Hi, everyone. Good morning. A question on retail. Can you talk about the potential for BXPE, given it is formatted as a private offering, can it be distributed as broadly as, say, BREIT and BCRED? Or is it meant for different market channels? Thank you.
Stephen Schwarzman: So, I’m not sure how much we could talk about the description of these individual vehicles, but BXPE is structured a little bit differently, which means the universe is a little more limited, but I would say is still very large. We think the response to this a more accessible private equity vehicle that offers private equity secondaries, tactical opportunities, growth, life sciences, opportunistic investments, we think this is going to be very attractive. So the short answer is, yes, a little bit of a different structure, but I think the bigger answer is, we think the TAM for this is quite large and we think this can scale up quite a bit.
Weston Tucker: Thanks, Fin.
Operator: We’ll go next to Ken Worthington with JPMorgan.
Ken Worthington: Hi, good morning. Thanks for taking the question. We’d love an update on the secondary business. Returns here over the last 12 months have trailed just about all other asset classes at Blackstone, with the exception of real estate. So maybe first, what’s weighing on returns there? And as we think about the deployment opportunities, is it still really LP driven or are we starting to see, I’m sorry, still GP driven, are we starting to see more LP activity picking up as well?
Stephen Schwarzman: Well, I’d start by saying we love our secondaries business. Verdun Perry and the team do a terrific job. Structurally, what’s happening in that market is alternatives continue to grow and therefore there’s a need for liquidity and there’s a very limited number of players who are invested in, say, 4,000 funds. And so it leads to this favorable discount and premium you get in terms of return for providing liquidity. Having a $20 billion plus fund is obviously well timed. We have additional funds in infrastructure and real estate beyond private equity, but we think we’re super well positioned. The markdowns or the low growth in this space reflects what’s happening in underlying private equity portfolios. But if you look at the returns across our various funds, they remain incredibly strong.
And there is a lag, of course, where you’re looking at funds that are six or nine months older. So if there were better quarters more recently in private equity, you’ll pick those up later. It’s not the same real time you’re seeing, let’s say, in our direct private equity or real estate activities. In terms of transaction activity, I would say the pipeline is starting to build. It will be more LP driven because distributions have slowed and in many cases there’s a denominator effect, and they’re thinking about ways to open up capacity to commit to new funds, and we think that will lead to more transaction activity. I would say, we’ve been patient, because we think it’s possible the discounts could widen again, and that would be a better timing in terms of entry point.
So it’s a business we like a lot. We think the environment should be favorable here, just given the relatively limited amount of capital against what we think is a scale opportunity. And so we think that business will pick up in activity over time. It may take a little bit as sort of sellers readjust their expectations.
Ken Worthington: Great, thank you very much.
Operator: We’ll go next to Brian Bedell with Deutsche Bank.
Brian Bedell: Great, thanks. Good morning, folks. Thanks for taking my question. Maybe just similar to the deployment outlook question, maybe flipping that around that you answered earlier, flipping that around to fundraising in terms of this environment where sounds like obviously activity across the board is freezing up a little bit as people watch rates. But how do you see that impacting the fundraising outlook? And if you maybe can contrast a few different segments where it might be slower near-term versus areas where it could be stronger, and I guess certainly in terms of LPs decision making versus retail would play into that?
Stephen Schwarzman: So, Brian, I think the biggest backdrop to keep in mind is the vast majority of our clients continue to increase their allocation to alternatives across institutional insurance and individual investors. And despite the environment, we still see a lot of interest. I’ve been all around the world in the last six weeks meeting with major clients, and I can’t point to one of those meetings where somebody said, hey, I want to reduce my exposure. Now, there are some who are saying I’m more cautious on real estate or I’m more cautious on growth equity or private equity, but there’s obviously a lot of enthusiasm for private credit. Some investors are just starting to move into the infrastructure space or the secondary space.
