Remastering the Universe: Blackstone's $80 Trillion Bet in conversation with Interviewer: Steve Forbes, Chairman & Editor-in-Chief, Forbes and Jonathan Gray, President & COO, Blackstone.
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00:00For our next conversation, Remastering the Universe, Blackstone's 80 Trillion Bet,
00:06please welcome interviewer Steve Forbes, Chairman and Editor-in-Chief, Forbes,
00:12and Jonathan Gray, President and COO, Blackstone.
00:17Well, John, it's good to have you here.
00:19And so we discussed the fast-changing world and how you're taking advantage of it
00:26instead of deploring it.
00:28I have to begin, though, with a question.
00:30Given what happened to you in high school in basketball,
00:34where the junior year you were benched,
00:37even though the team lost 23 out of 24 games,
00:42are you going to buy a team?
00:45Well, first of all, I deserve to be sitting on the bench,
00:48but that was a formative experience for me.
00:50But the short answer is no sports teams.
00:52I love watching sports, but I'm not going to be an owner.
00:55Okay.
00:57So much for the teams thinking they're going to get a payday from you.
01:01Okay.
01:02But you've been a lifetime.
01:06You joined in 1992 out of college.
01:10At the time, I think Blackstone was about $700 million.
01:14You've increased 1,500 times since then, over $1.1 trillion.
01:20And you have 230 companies you own, and you're huge in real estate.
01:25I didn't realize you have $100 billion in Europe of real estate.
01:31You have worldwide 12,000 properties with 1.1 billion square feet.
01:37And you were early in warehouses, which sounds retro,
01:42except you were at the forefront of e-commerce,
01:45the kind of properties you bought,
01:47which also gets to one of the things you do is that you don't always invest directly.
01:53You'll have one remove in terms of e-commerce, critical part of it,
01:59but it doesn't mean you have to plunge in the thing itself to benefit enormously from it.
02:04So the insights that we had on our cover is that, as you pointed out,
02:09there's about $80 trillion held by individuals around the world,
02:13$80 trillion that is not really earning the returns they should.
02:17So even though private equity in the U.S. is overdone now, overseas it is still ripe.
02:26And that's one of the areas of opportunity there where we were about, what, 25, 30 years ago in some of these places.
02:34So I'd like to begin, before we get to the innovative,
02:38really innovative things you're doing in terms of buy-in and build,
02:44to walk us quickly through equity capital in the rest of the world,
02:49not here in the U.S., which is oversaturated, although you're doing very well,
02:54but the rest of the world, virgin territory.
02:57Well, first, it's great to be here. Thanks for having me, Steve.
03:00You guys throw incredible conferences.
03:02I guess I'd start with the idea that when it comes to capital, historically it was in the liquid markets.
03:12And what we saw was people investing, just a small group of people investing in our world.
03:19It was pension funds, some sovereign wealth funds, endowments.
03:25And we didn't really see individual investors, insurance companies, and a bunch of other institutions.
03:31And that's particularly true outside of the United States, to your point.
03:35And I would say what's really developed, and we're on a journey,
03:39and one of the reasons our business has grown so much is because the addressable market has really grown.
03:46We've gone from doing just private equity, real estate private equity, distress credit,
03:52really the highest returning strategies, over the last, particularly 10, 15 years after interest rates fell,
03:59into a bunch of other longer duration strategies.
04:02So core plus real estate, infrastructure, performing credit, both investment-grade and non-investment-grade.
04:09And that's opened up a whole new world.
04:12And particularly when it comes to individual investors, they're saying, hey, why don't I get what the institutions get?
04:20Why are pension funds 35% allocated to privates or alternatives and I'm not?
04:25And to your point, that phenomena exists in the United States for individuals,
04:30but it also does for people around the world who are even earlier on that journey.
04:36And then on the investing side of the business, yes, there's definitely much more capital in the private markets,
04:42you know, committed to the U.S. investing, less so in Europe, and even less so in Asia,
04:47and further, even less in emerging markets.
04:50And so we think we're still in early days of the expansion of alternatives,
04:55and that's what gets us excited, even though we have grown so much.
04:59One of the things, just hitting the U.S. for a sec, is you mentioned liquidity, which meant traditionally in equity,
05:09some would call it on a certain political spectrum, slash and burn, in and out, restructure, cut costs, and that's it.
05:19You've evolved a different approach where you're, sounds paradoxical, but you sacrifice liquidity,
05:27but you get a higher return.
05:30Walk us through that insight, that you do better by being patient.
05:34Yes.
05:35Look, I think there's been an evolution of the model in multiple ways.
05:39One is the traditional private equity business back, think of Richard Gere back in Pretty Woman in the 1980s.
05:47Some of us are old enough to remember, yes.
05:50And you're buying an old industrial business, there's huge cost takeout associated with that,
05:57and you're not thinking really about growing the top line, you're chopping up the business into little pieces.
06:03That really is sort of yesterday's story, because to generate outsized returns today,
06:09first of all, the leverage levels are much lower than they were back then,
06:13and the market has gotten much more sophisticated, particularly the public equity markets,
06:17they want to own growing companies.
06:19And so if you look at what we and a number of our competitors do in areas like life sciences,
06:26or enterprise software, or energy transition, what we did with Hilton Hotels to turn that business around,
06:34we're focusing on accelerating the growth in companies.
06:37Sometimes you might sell a non-core division, you may make a management team change,
06:42but you're really focused on how can I drive this company forward and grow it.
06:47And that's the way, when you look at the great deals of all time, Hilton probably the most.
06:52Well, walk us through that, because you had just completed at the time, this was back in 2007,
06:58an extraordinary deal with Sam Zell, who had a huge empire.
07:01You unloaded most of the properties, except some good ones, before the market crashed.
07:08But you bought Hilton, and for a while it looked like it was a dog, and yet you didn't give it up,
07:14and in fact you invested money in a property that was losing value, at least in terms of value.
07:19So I think Hilton's a good story, because for me it was incredibly formative.
07:24We bought for $26 billion this hotel business.
07:28We closed at the end of October of 2007, we had $20 billion of leverage.
07:35Let's just say it should have been a career-shortening moment.
07:38And pretty soon after we did the deal, of course, the global economy started going down,
07:44cash flows at the company fell by 40%.
07:47We ended up having one of the employees of the company had taken some documents from a competitor,
07:53and so there was a government investigation that was underway.
07:57And I remember talking to Chris Nassetta, the then CEO, still the CEO today,
08:02and I said to him in March of 2009 on a phone call,
08:05the good news, Chris, is it cannot get worse from here.
08:08We're at the bottom.
08:09And we ended up investing $800 million to help deleverage the company.
08:15So you bought the depressed debt.
08:17We bought some of the debt, but what we really did was, you know, re-energize the company and grow it.
08:23Take Hilton Garden in and Hampton in, and bring that around the world,
08:28move into emerging markets, bring a bunch of the brands to Europe, accelerate growth in the U.S.
08:33The hotel cycle turned.
08:35And what was so formative about that experience for me is, besides teaching you that you've got to sort of stay calm
08:42and keep your wits about you, but what it basically said is,
08:46you should focus on the neighborhood where you invest capital and the quality of the business.
08:51And too often we'd been just, you know, cash flow and model-oriented.
08:56And what it led me to believe is, we focus a lot on whether we pay 98 or 100 or 102,
09:02but if we buy something that's really great, in this case, in the global travel space,
09:08with amazing brands, with an asset-light franchising model, and you have the right management team,
09:14you can weather almost any storm.
09:16And that's led me and us, I think, to be much more thematic to some of these areas, like you mentioned,
09:21global logistics, which is a huge derivative play on e-commerce.
09:25You know, having a belief, let's say, that India is going to be a long-term winner.
09:29Lean into some of these things. You have real excitement.
09:32So oftentimes, as you know, it's the things that go wrong or you get into trouble where you tend to learn more,
09:37and that was certainly the case with Hilton.
09:39That's an interesting, though, management story in the sense that that's a cultural change.
09:44You have something that hits.
09:46Instead of figuring out how do we get out of it quickly and with minimum loss,
09:50you actually, in effect, double down on it.
09:53Yeah, and you often—
09:55How did you persuade yourself inside to make this kind of change?
10:00I think in that case, you learn from experience,
10:03and ultimately we had great experience owning this business, and it led to this more thematic approach.
10:09But also tying to your earlier question about longer hold periods, is as we've evolved the business,
10:15we still run our drawdown funds, which we do mostly for big institutions, very successfully,
10:21but we also develop these perpetual vehicles, long duration, where you hold assets,
10:27and it can be with companies, it can be with infrastructure, it can be with real estate,
10:31and that does give you more of a family-type ownership view of owning something for a long period of time.
10:36And if you fundamentally believe that what we can do is identify good assets in good sectors,
10:42put terrific management teams in place, and then figure out where to allocate capital and optimize the business,
10:48you should be able to do that on not only short-term holds or intermediate, but also long-term hold.
10:53So those tools apply, the ability to intervene and help companies can be done in a lot of different ways,
10:59and that does speak to the evolution of this alternative space.
11:02Again, it used to be much more, let's break things apart, short hold.
11:07Now it's how can we grow things, build things, and in many cases hold for a longer period of time.
11:12So you're credited with what you call perpetuals.
11:16To find perpetuals, you've sort of given some...
11:19So a perpetual or open-ended vehicle is basically the idea you put capital in.
11:26You buy assets, could be credit, could be real estate, infrastructure, companies,
11:32and rather than saying I'm going to buy the contract, sell the business after five years, return the capital,
11:39I'm instead going to invest and hold and get the benefit of compounding.
11:43A bit like a family, when it owns a really good business, it holds that business and allows the benefit of compounding,
11:49which is super powerful, as you know, and when you look on your Forbes 400 list,
11:54so often it's individuals who built businesses and then allowed that power of compounding.
11:59And that's what these perpetuals are.
12:02Tied to them is an idea that there's liquidity, but we call it semi-liquidity.
12:08If you think about a stock or bond, you can get liquidity generally every day.
12:13If you think about our drawdown funds, it's 10, 12 years before we promise to get you the money back.
12:20In these vehicles, we say we're going to give you your money back on a monthly or quarterly basis,
12:24but we're going to have a limitation on how much liquidity we provide
12:28because we don't want to be a foreseller of assets and hurt the people who didn't choose.
12:32So I think these structures have really resonated, but the most important thing,
12:37and it ties everything at our business and the industry, is we have to deliver for the underlying customers.
12:43If we don't deliver premium returns, then you should just buy liquid securities.
12:47You shouldn't invest with us.
12:49And so that's at the core of everything we do.
12:52So in terms of you talk about companies and liquidity, one of your insights was,
12:58why would a life insurance company be so interested in liquidity when they have 30-year obligations?
13:04Walk us through how you've now provided bonds, in effect, for companies like life insurers
13:12that yield 150 basis points more than the bonds that you would normally buy in a public market.
13:19Well, if you think about credit, interestingly, to create a liquid security,
13:26there's a lot of cost involved with that.
13:28It's almost like a farmer getting his product to the market and selling it to a bunch of people along the way.
13:33If you're doing asset-backed financing for rail cars or you're doing fund financing,
13:39a whole range of financings, if a bank originates, and banks are a critical part of the system,
13:45and the whole market's not going to move to private credit,
13:48but the bank's going to get paid fees for originating.
13:52They're going to bring in rating agencies.
13:55They'll do a securitization.
13:56There are costs associated with that.
13:58It's going to be marketed and sold broadly,
14:00and a bunch of the excess spread from the borrower to what ultimately makes it to the investor in those bonds
14:08is going to go to people along the way.
14:11So our pitch to our insurance company clients is,
14:14why don't you allow us to do what you've done traditionally maybe in commercial mortgages
14:18but in a broader range of credit assets,
14:21and we'll bring you up directly to that borrower who needs loan for his new pipeline project
14:28or new data center that's being built.
14:30You have given up the QSIP.
14:32It's no longer a bond, but you're capturing 150, 175 basis points of excess return,
14:39and since this is a seven-year security and your liabilities on average are seven years, 20 years, 30 years,
14:46you can make that trade,
14:48and you're beginning to see that in the insurance industry just like we talked in private wealth.
14:52You're beginning to see the migration into alternatives from a very low base.
14:57You're beginning to see the same thing in insurance,
15:00and again, that opens up a new market,
15:02but the irony is you think of us as the high-returning asset class,
15:06and yet we have amongst the lowest cost of capital today.
15:10Again, a seeming paradox, you being supposedly a high-risk business,
15:17your rating is better than the A rating, the AA.
15:24Imagine an equity fund that has a very high rating and doing A and AA lending,
15:31which seems preposterous.
15:33Yes, but if you think about if you have a credit business
15:36and you'd specialize in riskier credits, right?
15:41If you're an expert in junk bonds, could you not move into investment grade?
15:47Similarly, if you also have expertise in different asset classes like infrastructure,
15:52which needs an enormous amount of capital today,
15:55if you know that on the equity side, shouldn't that make you a better credit investor?
16:01What we're really doing is bringing the benefit of private capital
16:06to all different underlying borrowers,
16:09being a full-service capital solution provider,
16:11and if you think about it from the borrower's standpoint,
16:14oftentimes financial institutions will say the price is what the market brings you,
16:19so you don't necessarily know what the price of the borrowing is.
16:22In this case with us, we'll say,
16:25since we're in the storage business for our insurance companies,
16:28the price is $225 over.
16:30And so I think this is a powerful change.
16:33And then from a health of the financial system,
16:36because we're generally doing this as an investment manager on an unleveraged basis
16:41or lowly leveraged basis as it relates to non-investment grade credit
16:45or on behalf of our insurance companies who have long-duration liabilities,
16:49I think it's also strengthening the financial system at the same time.
16:53Well, in a way, the whole rise of what they call junk bonds
16:56opened up debt to companies that normally wouldn't get it.
17:00You've created a revolution here,
17:02and that gets to what you might call private credit or non-bank credit.
17:06Banks, this is me talking, not him,
17:11I think the regulations are almost designed to make banks
17:14conduits to buy government bonds instead of lending.
17:17But you're now in the lending business in a major way.
17:21Banks may complain about it, but your companies change.
17:25You're a non-bank bank and provide loans.
17:28Plus, he has $200 billion, just to let you know, of a war chest.
17:34So if you need a project, he's the guy to go to.
17:37But seriously, on non-bank credit, this is a nascent market, it would seem,
17:43that's going to be where equity funding was 30 years ago.
17:47It's going to take over the world.
17:48I don't know if it will take over the world,
17:50but I think it will give more access to capital to consumers and businesses.
17:54So today we're managing over $400 billion in our credit business.
17:59And you said we're a non-bank bank.
18:01Interestingly, we don't take any deposits,
18:03and we're just an investment manager.
18:05So one of the challenges for banks, of course,
18:08is their business model involves being levered 12 to 14 times,
18:12and the fundamental mismatch of short-term deposits and long-term assets.
18:17Now, as I keep saying, we have to have banks.
18:19We've got to have the vital role they play.
18:22But to complement that role with private capital,
18:25and in many cases we're partnering now with banks,
18:28where if you think about it, they may make a long-duration loan.
18:31Think about First Republic failing,
18:33not because there were any problems in their loan book,
18:36their super-prime mortgage book.
18:38It was because of the mismatch of duration.
18:40So if we can help place those loans in long-term hands,
18:44again, that's better for the system,
18:46but it does speak to the broadening of things we do.
18:49So in terms of liquidity,
18:53a lot of entities today suddenly find they have assets,
18:56they suddenly need cash, like endowments did 15 years ago
19:00when suddenly they found that these investments weren't very liquid.
19:03You're in the market to buy those assets.
19:05We're in the market to buy things.
19:07I think one of the great areas today to deploy capital
19:10are spaces where people need liquidity.
19:12So we have a secondaries business that buys interest in funds.
19:17We've got hybrid capital tactical opportunities.
19:20So you're almost a lender of last resort,
19:22and you're not even a central bank.
19:24Yeah, but you can be a high-octane lender.
19:28You can be an investment-grade lender.
19:30You can be a control equity.
19:31You can be a minority equity.
19:33What we're trying to do is take the insights we see around the globe
19:37and share that in our different lines of business,
19:40and that's really the connective tissue.
19:43And going to just hit real estate, commercial,
19:49we all know what happened to the commercial market.
19:52You did things differently, but let me ask you a broad question.
19:56Commercial real estate is the worst over like Hilton was in 2009,
20:01or are things more bad news to come?
20:04Is this a time to start looking at the rubble
20:06and saying there may be some gems here?
20:08I would say both.
20:10Yes, the worst of the storm has definitely passed in commercial real estate,
20:16but the wreckage still takes time to work its way through the system.
20:20And this is the moment when you want to be deploying capital,
20:23sort of jumping back into the pool.
20:26If you go back to 2009 after the financial crisis,
20:30you wanted to invest then,
20:33but there were bad stories about commercial real estate deals
20:36from 2005 to 2007 running through the system for the next three years.
20:40And as investors, you're trying to separate what happened in the past,
20:45the wreckage, with the future.
20:47So if you think about it this way,
20:50what happened in commercial real estate the last few years?
20:52Office buildings badly hurt by COVID and a sharp reduction in demand,
20:56and interest rates went up pretty dramatically,
20:59which hit yields, cap rates, multiples came down.
21:03Both of those things have happened.
21:04If you go out to sell an apartment complex or an office complex,
21:07it reflects the new world today.
21:11What that means is you want to invest,
21:14and you see us doing some very large things,
21:16buying distressed loans, privatizing rental housing companies,
21:20buying a bunch of logistics in Europe.
21:23What you will still see is loans that were made in an earlier period,
21:28a bank taking a write-down, that bank may getting hit,
21:32or an open-ended fund writing down an asset to the current market price.
21:35And then the press will say real estate's still declining.
21:38Again, think about it like the storm and the wreckage.
21:42The wreckage takes a long time to work its way through the system.
21:45The storm has passed.
21:47What we're seeing today is base rates have started to come down.
21:51The tenures come down.
21:53The Fed's going to start cutting rates here soon,
21:55given what's happening in inflation.
21:57Spreads in commercial real estate borrowing have tightened.
22:01The CMBS market's reopened.
22:03And you're not building much because cost of capital is high,
22:07and people are nervous about real estate.
22:09All of that starts to build the foundation for the recovery.
22:12And so this is where you say you want to invest before that all-clear sign.
22:17One of the things you do with your 230 companies is try to coax them into AI.
22:25Yes.
22:26Well, look, AI, which I'm sure has been a topic here
22:30in a lot of the different panels,
22:32is fascinating because of the scale at which it's going to impact our lives,
22:36our businesses.
22:37I'd say what we've tried to do is multiple things.
22:39One is play AI.
22:42You talked about not necessarily doing it directly but derivatively.
22:46And so if you think about AI, the physical manifestation is the data center.
22:52So we own across our portfolio companies,
22:56either existing or under construction, $50 billion,
22:59and we have another $50 billion of data centers in various stages of development.
23:04This is driven by the demand from the major tech companies.
23:07And so that's one way to play this.
23:11Obviously, there are other businesses that are benefiting, contractors.
23:15We did a big $7.5 billion loan for a data center cloud company.
23:20We're trying to find all these derivative plays.
23:23And then at our portfolio companies, we've been using predictive AI,
23:27which is basically numbers in, numbers out for a long time.
23:31We have a large data scientist team with 50-plus people
23:34who help companies think about pricing and staffing and so forth.
23:38And I think we, like everybody else, are trying to figure out how to use generative AI,
23:43to how to use the images, the sounds.
23:47And so we own a company, Ancestry.com, the family history business.
23:51Imagine typing in your name and not just seeing a two-dimensional thing
23:55but some sort of movie-created sound in all sorts of the newspapers of that day,
24:01and the whole thing pulled together quickly.
24:04Think about the tools for software and other media businesses.
24:07So I would say for us, like everybody, we're moving quickly to try to figure it out,
24:12but there's a long way to go.
24:14The predictive stuff was much easier.
24:17We're trying to make the use case across our companies with generative AI.
24:22We're running out of time, so I want to do a quick tour of the world.
24:26You are making a huge investment in India.
24:30You know the raps about it, too bureaucratic infrastructure sucked,
24:34and the recent elections where the far left made huge gains.
24:38In the next three years, you're in effect doubling down your investment in India.
24:41Quickly walk us through why you think this is a fantastic opportunity.
24:45I just think the country is in a very early stage of its growth.
24:49Its GDP per capita is a fifth of China.
24:52It has a very pro-growth government who may not have as big a margin,
24:56but will still be running this country for the next five years.
24:59They've done a bunch of things to build new infrastructure,
25:02both physical infrastructure and improve their capital markets infrastructure.
25:06They've loosened up all sorts of rules to allow foreign ownership.
25:10We've had incredible success in both real estate and private equity,
25:14playing the rise of the consumer there.
25:17Their export economy is growing, both of services and goods.
25:21The pivot, as companies look to diversify where they manufacture,
25:25India is a winner in that.
25:27You've got 400 million people who speak English.
25:30I think it's a very interesting place.
25:32Obviously, you have to know what you're doing there.
25:35Closing, we'll cover the world, but quickly hit Japan,
25:39which on paper, they have national debt twice our own.
25:43They're still suppressing interest rates.
25:45Ten years yield, what, 1%, yet you're making big bets in Japan.
25:49Yeah, I was just in Japan a week ago.
25:51What I'd say about Japan is, again there,
25:54the government has really focused on getting that economy
25:58sort of a rebirth of dynamism,
26:00pushing companies to think about return on equity,
26:03getting inflation to come back,
26:05which is hard to believe here is something you would do,
26:08has really been beneficial,
26:09because if you think about living in a deflationary world,
26:12you have no incentive really to take risks.
26:14You get a positive real return
26:16leaving your money under your pillow,
26:18thereby getting inflation.
26:19You're getting individuals to go from being savers to investors.
26:23Companies now have to pay higher wages.
26:25They have to think about being investors and being dynamic.
26:28So I think Japan is in a good place.
26:31It's got some long-term demographic challenges,
26:34but it's beginning to sell off businesses,
26:36things we did 30, 40 years ago, which creates opportunity,
26:40and there's an openness to private capital.
26:42So, yes, there's a big world out there.
26:45In closing on Japan, the number's amazing.
26:48They have $13 trillion of assets,
26:51including $5 trillion in cash
26:54and almost non-yielding assets, prime opportunity.
26:58Well, John, thank you very much,
27:00and you've got a great future.
27:02Thank you. Thanks, everybody.