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No. of Recommendations: 2
Great post, thanks.

(1) Apparently Leon Black and Steve Schwarzmann have lunch each quarter. Wonder who pays. I have not yet been invited. I assume they are both readers of this board, so I'll let it be known that I am open to an invite.

We know Leon likes to order off of a "Chinese menu" but I don't know what is Steve's preference. **

(2) There are still some huge markets out there. Insurance is a huge market that only APO has taken significant advantage of so far. Credit remains a huge market. Real estate/real assets is a huge market. I am not particularly optimistic, but 401(k)s and IRAs would be a huge market.

High net worth investor and family offices are a juicy target. I think Blackstone is going to do quite fine with rich, richer, and richest personal investors.

(3) APO and BX seemed a little more reserved about C-Corp conversion than previously. My expectation is still that both will convert, but my confidence level on that has gone done. I don't factor conversion (or non-conversion) into my investments on these. Need to be comfortable either way.

Indeed, the bar for C Corp conversion is quite low for ARES and KKR but much higher for other firms given their mix of FRE and capital distribution focus. I'm glad that Leon is acknowledging the true cost of the C Corp conversion. I'm also concerned that corporate income taxes could rises, albeit modestly to 25% or so. Another headwind for the C Corp conversion ship.

Honestly I'm not even sure if I want BX and APO to convert. The real cash tax loss is forever and on-going but the multiple expansion can expand and contract as Mr. Market waxes and wanes.

(4) Leon Black discussed valuation by working from FRE. He mentioned FRE of almost $2, but I use $1.92 for my purposes. At today's prices, the stock is trading at about 14x FRE. Mr. Black said it was trading at 15x FRE and now 12x FRE. Then, incentive fee for free and balance sheet for free.

I believe in the past Leon and the Apollo founders have suggested applying a multiple to the "average expected" incentive fee. Cyclicals should not be valued solely on peak or nadir earnings whether it's cyclical auto manufacturing earnings or oil profits or incentive earnings.

5) I think the capital light model continues to be under-appreciated. Steve S. made a big deal of it at the BX investor day, and I think he is correct to do so. They can pay out over 80% and grow double-digits. You just don't see that a lot. Either a cash-cow or a fast grower. But, a grower that also throws off cash like that is unusual.


Nobody except you and me and the Tiger Global guys care.


** Alt asset manager fanboy bonus points if you get the reference.
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