Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Blackstone President and COEO John Gray says that despite market volatility,
Speaker 2: there is a pent up desire to engage in transactions
Speaker 2: and IPOs across the market. Gray spoke with Bloomberg Shanali
Speaker 2: Basseg at Bloomberg invest in New York on Tuesday.
Speaker 1: Being here, John, thank you for being here. Tariffs. I mean,
Speaker 1: I don't know how you start anywhere else on a
Speaker 1: day like today, because the big question is, when you
Speaker 1: own so many businesses, when you have so many types
Speaker 1: of debt and equity tied to companies around the world,
Speaker 1: how do you think about the way this is evolving.
Speaker 3: So I'd start with us. The good news is we.
Speaker 4: Don't own a lot of businesses that export physical goods
Speaker 4: in the United States at scale, so that's helpful for us.
Speaker 4: But of course, as you point out, we're big investors
Speaker 4: and lenders to lots of companies and markets impact us.
Speaker 3: And what I'd say is we try to take.
Speaker 4: A little bit of a longer term perspective that there
Speaker 4: is tariff diplomacy going on, and that what is happening
Speaker 4: now could change depending on what market participants, what government
Speaker 4: officials do and you've got to take that longer term
Speaker 4: approach and hope or maybe expect at some point that
Speaker 4: they'll get to outcomes.
Speaker 3: Markets will calm and actually, in.
Speaker 4: A moment like this, you look around and say, are
Speaker 4: there good businesses that are now on sale? We can
Speaker 4: deploy capital into this volatility. So I would just say
Speaker 4: to investors be a little bit patient here. Let this
Speaker 4: tariff diplomacy play out a bit.
Speaker 1: So as you look across the universe and try to
Speaker 1: find things on sale, what are you finding?
Speaker 4: Well, I don't know if you know, it's so short
Speaker 4: term right now what's happened. But in terms of the
Speaker 4: areas we find most interesting, we love to be thematic
Speaker 4: in what we do think about sectors where there are
Speaker 4: long term tailwinds that are quite compelling. So digital infrastructure
Speaker 4: has been a huge theme for US data centers. We've
Speaker 4: been the leading investor in the world in that area.
Speaker 4: There's obviously been concerned given deep seek, but we continue
Speaker 4: to see big demand throughout that whole sort of value chain.
Speaker 4: We love power and energy. We think we're moving to
Speaker 4: a world of very heavy electrification. It's because of data centers, reindustrialization, robotics,
Speaker 4: ultimately We invest in generation transmission utility services. We like
Speaker 4: franchise businesses that are capital likee we bought in the
Speaker 4: last year Jersey Mics. We bought Tropical Smoothie. We bought
Speaker 4: a small coffee chain called seven Brew. We love the
Speaker 4: alternative space stakes and other managers, secondaries, lending to private
Speaker 4: equity firms. And geographically, I would say also India is
Speaker 4: a really interesting place for us where we've leaned in
Speaker 4: where we think there's a long runway.
Speaker 3: The last one I.
Speaker 4: Just threw out is a cyclical recovery and commercial real estate,
Speaker 4: which we're big believers.
Speaker 3: In it and have been deployed capital.
Speaker 1: So big picture as well, people are talking about a
Speaker 1: return of the deal environment. People are talking about the
Speaker 1: return of an IPO environment. In the IPO space in particular,
Speaker 1: it's been almost stunning how slow it's been this year.
Speaker 1: Isn't it a big problem if this doesn't come back
Speaker 1: sometime soon. There are a lot of companies out there
Speaker 1: that have been holding assets for a long time.
Speaker 3: Yeah.
Speaker 4: The IPO market and the M and A market, as
Speaker 4: you know, Shanali, are pretty cyclical, and we've been through
Speaker 4: a rough period of time. Right we saw the costs
Speaker 4: of capital go up globally. As rates went up a bunch,
Speaker 4: as central banks tighten to fight inflation, we saw spreads
Speaker 4: go up a bunch.
Speaker 3: Market participants became cautious.
Speaker 4: We had a regular platory environment that was not that
Speaker 4: friendly towards M and A activity, particularly from strategics, and
Speaker 4: I think we're beginning to see a lot of that change.
Speaker 4: We've seen credit spreads tighten a bunch, both investment grade
Speaker 4: and not investment grade. The stock market, even with this
Speaker 4: recent tradeoff, I think, is up about fifty percent from
Speaker 4: two years ago levels. You know, I think there's a
Speaker 4: pent up desire to do transactions and IPOs. When you
Speaker 4: have a stock market trading well, it's like a magnet.
Speaker 4: It starts to pull companies in as well. We've got
Speaker 4: a number of businesses that we're looking to take public
Speaker 4: this year. I think there's a receptivity to IPOs, but
Speaker 4: volatility like this week can slow things in the near term.
Speaker 4: But if you said, look, twenty four was an increase
Speaker 4: both in IPOs and m and A over twenty three,
Speaker 4: I think you'll see the same thing in twenty five.
Speaker 3: And there's sort of a mean reversion in terms of
Speaker 3: activity levels.
Speaker 4: IPOs or M and A is a percent of the
Speaker 4: public markets value and we're below that, and there's just
Speaker 4: a lot of pent up demand looking for liquidity.
Speaker 3: I think it will come. I think high quality.
Speaker 4: Businesses want to be owned in the public markets. And
Speaker 4: this week it may not feel as good, but I
Speaker 4: think when we finish the year, it'll be a better
Speaker 4: year in terms of activity.
Speaker 1: End of the year's a long way away still, John,
Speaker 1: I was just saying cumulatively, but yes, but to that end,
Speaker 1: you know, if we think about what happened this week,
Speaker 1: you know, if you looked behind the green room, a
Speaker 1: lot of people, one by one are looking at their phones,
Speaker 1: looking at the stock prices of their own firms and others.
Speaker 1: And it's been pretty ugly. Yesterday was the worst day
Speaker 1: for the S and P this year. We've erased everything
Speaker 1: that we've seen the market gain since the election. Do
Speaker 1: you think that risk appetite could be significantly stunted in
Speaker 1: the near term?
Speaker 4: In the near term, certainly, when you have these moments,
Speaker 4: investors tend to step back. Market participants say, well, do
Speaker 4: we want to make that big commitment today?
Speaker 3: Is the world more uncertain?
Speaker 4: But we've seen these periods of time, and again I
Speaker 4: like to look at the bigger picture and what we
Speaker 4: see out there is still a decent economy. Right in
Speaker 4: the fourth quarter, our private equity companies grew seven percent
Speaker 4: in terms of revenues. We sell very low default rates
Speaker 4: amongst our private equity firms that we lend to today,
Speaker 4: non investment grade lending. Our CEOs, when we ask them
Speaker 4: at the end of the year, do they see a
Speaker 4: recession zero percent in the US, said yes over the
Speaker 4: next twelve months.
Speaker 3: And we see inflation continuing to moderate.
Speaker 4: So shelter costs, the biggest component of CPI, is running
Speaker 4: well below the government's four and a half percent data,
Speaker 4: which tends to lag. Input costs are still pretty flat.
Speaker 4: And when we look at our companies and ask them
Speaker 4: is it hard to hire, they say it's the easiest
Speaker 4: that's been in a few years. And so that combination
Speaker 4: of a healthy economy, some weakness certainly on the consumer side,
Speaker 4: but overall pretty good in the US, and inflation that
Speaker 4: is moderating. Maybe the pace of disinflation isn't as fast.
Speaker 3: As it was a year ago.
Speaker 4: That should give the Fed some room to bring rates down.
Speaker 3: They'll do it very gradually. That's a pretty good backdrop,
Speaker 3: So that gives.
Speaker 4: Me more confidence again why I think we'll see this
Speaker 4: pickup in activity.
Speaker 1: There might be a silver lining to your point on
Speaker 1: the FED potentially cutting interest rates gradually. Every morning, the
Speaker 1: first thing I do is look at the tenure yields.
Speaker 1: We are down to four point one percent, which feels
Speaker 1: pretty stunning given we were flirting with five percent not
Speaker 1: too long ago, or five percent was a dangerous level
Speaker 1: that investors were talking about in January, potentially hitting your
Speaker 1: big investor in real estate. What does that mean for
Speaker 1: the pressure that might be eased across the real estate industry,
Speaker 1: particularly the hardest hit parts.
Speaker 4: Well, I'd start with sort of the bigger picture on
Speaker 4: real estate, which is we've been through a tough period
Speaker 4: of time. Right the sharp upward movement and rates hit,
Speaker 4: real estate values hit multiples, cap rates went up in
Speaker 4: real estate spreads, borrowing costs went up a bunch, and
Speaker 4: in the office sector in particular because of remote work,
Speaker 4: we saw a sharp decline in demand and so that
Speaker 4: created a very tough period for valuations. I think we're
Speaker 4: on the other side of that. You and I have
Speaker 4: talked about that over time and you know, the.
Speaker 3: Question is should I be an investor in real estate?
Speaker 4: And what I'd say is, you know, whenever you have
Speaker 4: a sharp decline in value and then people stop building
Speaker 4: new real estate. We've seen two thirds decline and apartment
Speaker 4: building and warehouse building, then it's generally a good time
Speaker 4: to invest. And the real question is the pace of
Speaker 4: the recovery and value. If it comes purely from cash
Speaker 4: flow growth, it may take a little more time. If
Speaker 4: rates fall as they have, then you may see an
Speaker 4: acceleration in multiples and it'll happen more quickly.
Speaker 3: But the path of travel in real estate is upwards.
Speaker 3: So we've been leaning in quite a bit.
Speaker 4: We privatize a number of large companies last year. Clearly
Speaker 4: real estate is a sector that's going to benefit from
Speaker 4: a lower cost of capital.
Speaker 3: But even if it.
Speaker 4: Goes back up the ten year, I still think the
Speaker 4: path is very positive, just given the lack of new
Speaker 4: building in the space, which creates the ground really to
Speaker 4: have positive cash flow growth going forward.
Speaker 1: I'm going to give you what I think might be
Speaker 1: a tough question for you in the world of real estate,
Speaker 1: which is your favorite child data centers or offices At
Speaker 1: the moment in terms of the near term ability to
Speaker 1: put money to work.
Speaker 3: It's an interesting question.
Speaker 4: I think from a value standpoint today, offices are pretty
Speaker 4: compelling in a place like New York City or San Francisco,
Speaker 4: because in New York you have financial services firms who
Speaker 4: are growing rapidly.
Speaker 3: You don't have any new building.
Speaker 4: In San Francisco, the values fell very hard in some
Speaker 4: cases seventy five percent, and AI and technology innovation really
Speaker 4: housed in San Francisco.
Speaker 3: And so I think in.
Speaker 4: Some of these markets now, given the sharp decline and
Speaker 4: value and the lack of new supply, office buildings become interesting.
Speaker 3: You definitely want to buy more modern buildings.
Speaker 4: But I still like the data centers too. They're what's
Speaker 4: attractive is this need for compute power.
Speaker 3: I reference Deep Seek. But obviously the cost.
Speaker 4: Of compute has come down pretty dramatically, and we think
Speaker 4: the usage is going to go up. There may need
Speaker 4: to be a little less training, and it may be
Speaker 4: more inference, but our lives are migrating online, and I
Speaker 4: think these data centers are a critical part.
Speaker 3: Of that infrastructure. So I'd say I like both of
Speaker 3: these children.
Speaker 1: So on data centers in particular, the estimates are staggering.
Speaker 1: But they're not only staggering, they're all over the place.
Speaker 1: You've seen estimates from a need for a trillion dollars
Speaker 1: or three trillion dollars globally to build data centers. You've
Speaker 1: seen estimates higher than ten trillion dollars. Both things can't
Speaker 1: be true.
Speaker 3: Well, I think it's a question of what you're measuring.
Speaker 4: If it's just the physical data centers, it's probably on
Speaker 4: the lower end. But if you're talking about the GPUs
Speaker 4: that go in those data centers or the power that
Speaker 4: needs to go, then those numbers get really large, and
Speaker 4: then I'd be at the higher end.
Speaker 3: And it's a global phenomenon. I mean, if you think.
Speaker 4: About where the world's going, I think our lives are
Speaker 4: going to be so impacted by this technology. What we do,
Speaker 4: how companies function, coding, customer engagement, even things like translation.
Speaker 4: Today now you don't even need translation anymore because the
Speaker 4: machines can do at real time. I think margins and
Speaker 4: companies are going to expand dramatically.
Speaker 3: I think we're going to use these.
Speaker 4: Bots to help us do so many things in our lives,
Speaker 4: and so ultimately, I think the infrastructure spend against this
Speaker 4: will be quite significant. I'm not a student enough or
Speaker 4: knowledgeable enough to know exactly what the number is, but
Speaker 4: it feels like it's going.
Speaker 3: To be very big.
Speaker 1: You know, one investor that we're speaking to tomorrow has
Speaker 1: this theory where AI is going to be so productive
Speaker 1: that they're betting on leisure and entertainment because they believe
Speaker 1: the work week is going to be shorter. Do you
Speaker 1: see that happening? And I think it matters because of
Speaker 1: the implications it would then have across the real estate
Speaker 1: sector and offices and all of the above.
Speaker 3: You know, it's hard to say.
Speaker 4: Historically, there's been a lot of prediction technology eliminates the
Speaker 4: need for work. What it's done is eliminated, some needs,
Speaker 4: expanded others.
Speaker 3: I think there'll be some of that.
Speaker 4: I think there's a potential as you get further and
Speaker 4: further out that maybe.
Speaker 3: The aggregate work hours go down.
Speaker 4: The good news to your point is the real world
Speaker 4: still exists, and so people are gonna do physical things
Speaker 4: as well, and interestingly, infrastructure, which has been a great.
Speaker 3: Area for US physical real estate, some of the.
Speaker 4: Entertainment, amusement parks, water parks, those things are gonna stick.
Speaker 4: You're not gonna do those virtually, I don't believe so
Speaker 4: in the near term. I still see this technology in
Speaker 4: many ways. It's eliminating certain jobs, but it's creating others.
Speaker 4: And you know, we own a business ancestry dot com,
Speaker 4: and you think about what that.
Speaker 3: Experience could be like where it starts to create.
Speaker 4: Movies and captures the music and the newspapers, and therefore
Speaker 4: what it's creating to the end user experience is different,
Speaker 4: and it's going to require some human interaction as well.
Speaker 3: Obviously other functions may not.
Speaker 4: So I think as investors, again back to the beginning,
Speaker 4: what's going to happen with tariffs this week?
Speaker 3: I don't know. Will the FED cut two times or
Speaker 3: three times? I don't know. But this technology and the
Speaker 3: way it's going to.
Speaker 4: Change our lives, I think that's profound, and thinking about
Speaker 4: these kind of big trends, that's what I'd focus on
Speaker 4: as an investor.
Speaker 1: I want to ask you about a part of your
Speaker 1: business that I don't think that people ask you about enough.
Speaker 1: It's the business of hedge funds. We just heard from
Speaker 1: Don Fitzpatrick on the big picture here in terms of
Speaker 1: where the industry is going and how the multastrats are
Speaker 1: getting so big, but you seem to be finding a
Speaker 1: lot of opportunity elsewhere.
Speaker 3: Yeah, it's interesting.
Speaker 4: So our hedge fund business is primarily focused on absolute returns.
Speaker 4: The division is called BXMA for US. It manages a
Speaker 4: little more than eighty billion dollars of the capital. Joe Dowling,
Speaker 4: who ran the Brown Endowment and was a hedge fund
Speaker 4: manager himself, runs the business. And what we're really focused
Speaker 4: on there is cutting off the downside for our investors
Speaker 4: and having things that are not correlated with stocks and bonds,
Speaker 4: because our investors already have a lot of that, doing
Speaker 4: it in a liquid way and still delivering an attractive
Speaker 4: absolute return.
Speaker 3: And we managed to do that.
Speaker 4: So since Joe joined us four years ago, we haven't
Speaker 4: had a down quarter. We've outperformed sixty forty by fifteen
Speaker 4: hundred basis points. Last year we were up twelve percent
Speaker 4: net and we're doing it in this very uncorrelated way.
Speaker 4: And I think as cost of capital comes down, as
Speaker 4: base rates come down, I think investors will look for
Speaker 4: things like this as an area. I think historically in
Speaker 4: the old long short equity days, people were looking for
Speaker 4: hedge funds to outperform equities and have downside protection. I
Speaker 4: think the business has evolved and if you can have
Speaker 4: this piece of your portfolio's ballast, it makes a lot
Speaker 4: of sense. A number of the biggest endowments have as
Speaker 4: much as twenty percent in absolute returns. So this is
Speaker 4: an area we really like, and like everything in our
Speaker 4: business if we deliver good returns, if we deliver for
Speaker 4: our customers to attract capital, and.
Speaker 3: That's the key.
Speaker 1: But are you willing to fight against the notion then
Speaker 1: that it's a multistrat or nothing in this environment.
Speaker 4: Well, I think the multishrets have done a great job.
Speaker 3: I mean, if you look at Ken.
Speaker 4: And Izzy and the businesses they built and the performance,
Speaker 4: you can't argue with that.
Speaker 3: But it's a big world and we can do.
Speaker 4: Things a little bit differently. Our approach is different. We
Speaker 4: think we can offer something attractive to clients and if
Speaker 4: we do that, we think we'll find capital. And it
Speaker 4: can be across quant and macro and long short equity
Speaker 4: and credit. And if you can deliver investors a basket
Speaker 4: of that uncorrelated with an attractive absolute return, I think
Speaker 4: that's something that you do quite well.
Speaker 1: So we have spent a lot of this time thinking
Speaker 1: about investment opportunities that exist in today's environment. If you
Speaker 1: can name probably the biggest shift heading into the next
Speaker 1: couple of years that you're trying to capitalize on, what
Speaker 1: exactly is it?
Speaker 4: So in our business, I'd say it's a couple of things. First,
Speaker 4: it's the movement to private credit, which is essentially bringing
Speaker 4: investors directly up to borrowers. It could be non investment
Speaker 4: grade direct lending or investment grade in many cases insurance
Speaker 4: companies doing things like consumer loans and infrastructure loans and
Speaker 4: energy loans, fun finance, and in that process of bringing
Speaker 4: them sort of farm to table, you can generate higher returns.
Speaker 4: And we're seeing, you know, where's in the equity bucket
Speaker 4: of most investors. Private assets became a very large piece
Speaker 4: credit main was pretty much all liquid other than distressed
Speaker 4: and opportunistic, and this feels to us like a secular.
Speaker 3: Change with a lot of runway.
Speaker 4: The other area I would point to would be the
Speaker 4: individual investor. There we have grown to two hundred and
Speaker 4: sixty billion dollars for individual investors, and again, institutions who
Speaker 4: are are more allocated to privates. Even wealthy individuals are
Speaker 4: only about one percent.
Speaker 3: And so the advent of these.
Speaker 4: Perpetual products across real estate and private equity and infrastructure
Speaker 4: and credit, and doing it in structures that have a
Speaker 4: little more liquidity but are still semi liquid, don't have
Speaker 4: the draw down features. These sort of products, if we
Speaker 4: can deliver out performance, I think will continue to be
Speaker 4: very attractive.
Speaker 3: They've grown quite a bit. I think they'll continue to grow.
Speaker 4: But again in both of these areas, I'd come back
Speaker 4: to our true north. We've got to deliver for the customers.
Speaker 4: If we do that, I think we'll continue to see
Speaker 4: major investors take a larger portion of their portfolio and
Speaker 4: move it into private assets, and at Blackstone we should
Speaker 4: benefit from that.
Speaker 2: That was Blackstone President and COO John Gray speaking with
Speaker 2: Bloomberg Shanali Bask at Bloomberg invest in New York