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Speaker 1: Blackstone Ink President John Gray speaks with Bloomberg Shanali bask

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Speaker 1: to discuss the Israel Hamas War, the current state of inflation,

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Speaker 1: and his commitment to the University of Pennsylvania, amongst concerns

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Speaker 1: of anti Semitic speech on campus.

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Speaker 2: We're all deeply affected by what's happening in the Middle East.

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Speaker 2: And as a significant investor in the region, and as

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Speaker 2: a person who's concerned about world events, how do you

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Speaker 2: separate the financial interests versus a human toll being taken there?

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Speaker 3: Well, I would start Chinali by saying, our thoughts are

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Speaker 3: with the people in Israel. What happened a couple weeks

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Speaker 3: ago was just horrific in terms of loss of life

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Speaker 3: and kidnapping. We've got some employees on the ground there.

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Speaker 4: Our thoughts are with them as well, and everyone who

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Speaker 4: has family there. And of course, now as is conflict escalates,

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Speaker 4: we're all concerned about civilians in the region. As you

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Speaker 4: think about it from an investment standpoint, I guess there

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Speaker 4: are a couple implications in the near term. Obviously, it

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Speaker 4: puts them upward. Pressure on oil prices, You've seen that

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Speaker 4: in the marketplace.

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Speaker 3: Hopefully that stays contained. Hopefully this conflict stays very contained.

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Speaker 3: I think the second issue is it just creates greater uncertainty.

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Speaker 3: We now have really two live conflicts, including the situation

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Speaker 3: in Russia and Ukraine. We've got the issues around interest

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Speaker 3: rates as well, and when you think about investing, generally,

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Speaker 3: people want more certainty, they want terra firma, and this

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Speaker 3: adds to that environment. But of course the bigger issue

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Speaker 3: is the human tragedy there, and we're all concerned about that.

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Speaker 2: Now, how are you thinking about the risks so so

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Speaker 2: associated with your work throughout the Middle least, both your

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Speaker 2: investments and the relationship with large investors, including sovereign wealth

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Speaker 2: funds in Saudi Arabia and Qatar.

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Speaker 3: Yeah, I would say for us, we have long term

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Speaker 3: relationships in the region and around the world, people who

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Speaker 3: have been partners of ours for a long time. You know,

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Speaker 3: when you think about stepping back what was happening here,

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Speaker 3: there actually was an attempt to normalize relations. It had

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Speaker 3: happened between Israel and the Emirates a few years ago

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Speaker 3: under the Abraham Accords. They felt like things were getting

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Speaker 3: closer with Saudi Arabia, which would have been a positive,

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Speaker 3: and that very well may have been a catalyst for

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Speaker 3: these terrorist attacks. So I think generally more dialogue, more

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Speaker 3: normalization of relations would have been and certainly would be

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Speaker 3: going forward, much more positive for the region. I think

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Speaker 3: all of us hope that that happens. Certainly now, it's

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Speaker 3: going to be difficult given the current environment. Now.

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Speaker 2: The were has also bought tensions to communities in the

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Speaker 2: United States, and over at UPenn, where you're a large donor,

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Speaker 2: many other donors have been pausing their own donations given

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Speaker 2: concerns around anti Semitic sentiments on campus.

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Speaker 5: Are you considering doing the same.

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Speaker 3: Well, for my wife and me, our focus is really

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Speaker 3: in two areas. At Penn. It's on life saving cancer

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Speaker 3: research at the Bassar Center for BRCA. It's also on

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Speaker 3: helping low income kids here in New York City get

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Speaker 3: access to a world class education. Those are long term

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Speaker 3: missions for us. We're going to stay with that. That

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Speaker 3: being said, I think some of my colleagues in the

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Speaker 3: financial field and more broadly have raised some really legitimate

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Speaker 3: concerns about hate speech masquerading as free speech in the

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Speaker 3: context of anti semitism on college campuses at Pen and

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Speaker 3: other places. And I think individuals when they say things

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Speaker 3: that dehumanize and talk about the destruction of a one

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Speaker 3: set of people. I think it's important that university leaders

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Speaker 3: really stand up. And my hope here is that there'll

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Speaker 3: be some important lessons from what's happened over the last

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Speaker 3: few weeks.

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Speaker 5: Yeah.

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Speaker 2: The most prominent of those concerns being raised by one

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Speaker 2: of your colleagues in the industry, Polo CEO Mark Rowan.

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Speaker 2: He went so far as to call for the removal

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Speaker 2: of the university's president and a Board of trustees chair,

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Speaker 2: Scott Boked.

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Speaker 5: I mean, do you do agree with them?

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Speaker 3: Well, as I said, I think Mark. I think Mark

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Speaker 3: has raised some really important questions and issues for me.

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Speaker 3: The university president, Liz Micguil, I think she's a good person.

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Speaker 3: I don't think she's anti Semitic. I do think she

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Speaker 3: made some mistakes here, some of which she's acknowledged, But

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Speaker 3: the decision about her future lies with the board of

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Speaker 3: trustees at Penn.

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Speaker 5: Yeah, thank you for asking doing my questions. John. You know,

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Speaker 5: there's also beyond the war.

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Speaker 2: This is a very tumultuous economic environment as well. You

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Speaker 2: reported results today over at Blackstone. You're the first of

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Speaker 2: the big private asset managers to do so, and the

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Speaker 2: whole industry is facing a huge slowdown in deals. At

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Speaker 2: what point do these things start to turn around such

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Speaker 2: that profits can be realized at a greater scale.

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Speaker 3: Well, when we look at the quarter FINALI we're actually

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Speaker 3: pretty proud because despite the slowdown in transactions and realizations,

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Speaker 3: our distributable earnings were remarkably steady based on the fee

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Speaker 3: related portion of those earnings and the management fees that

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Speaker 3: underlie that. Also, I think the most important thing is

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Speaker 3: really delivering for our customers. We did that across the

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Speaker 3: board in the quarter, particularly in infrastructure, life science is

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Speaker 3: private credit. But to your question, when the deals come back,

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Speaker 3: I think we need some stability rates. I think the

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Speaker 3: FED is pretty much done here. They've taken long rates

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Speaker 3: of short rates up quite a bit. I think long

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Speaker 3: rates have now moved quite a bit, and so that's

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Speaker 3: going to lead to some tightening here, further tightening. But

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Speaker 3: what investors want, of course, is a bit of stability,

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Speaker 3: and I think ultimately we will find at some point

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Speaker 3: some stability in marketplaces, particularly in treasuries. When that happens,

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Speaker 3: I think you will start to see transactions pick up again.

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Speaker 3: They are at a muted level, but it doesn't stay

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Speaker 3: like that forever. These things are cyclical, and the key

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Speaker 3: with our business model is we're not a four seller

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Speaker 3: of asset, and we have more than two hundred billion

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Speaker 3: of dry powder, so we can invest into the dislocated

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Speaker 3: market and often we do our best work at the

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Speaker 3: times of greatest uncertainty.

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Speaker 2: What does this mean for your approach of credit markets,

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Speaker 2: John A? Private credit has been kind of the biggest

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Speaker 2: story of the year. Of course, you run one of

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Speaker 2: the biggest businesses on Wall Street when it comes to

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Speaker 2: private credit.

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Speaker 5: Are you seeing that opportunity.

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Speaker 2: Expand even further as rates stave all at all?

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Speaker 3: Well, I would say in private credit, the opportunity set

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Speaker 3: is large and it's growing today. Between corporate asset backed

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Speaker 3: real estate credit. We manage over three hundred and seventy

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Speaker 3: billion dollars, so it's a significant part of our firm. Obviously,

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Speaker 3: our customers are very interested in getting access to credit.

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Speaker 3: Why base rates have moved up a lot. Spreads are

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Speaker 3: wide because banks and other participants are more cautious, and

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Speaker 3: so you can earn a lot lending money today and

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Speaker 3: doing it and what we perceive to be very attractive

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Speaker 3: risk return loan to values below forty percent in many

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Speaker 3: cases in direct lending, So you're getting paid equity like

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Speaker 3: returns for taking debt like risks. It's true. Now, I

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Speaker 3: think in corporate credit in more asset back credit in

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Speaker 3: real estate, and so I think we'll continue to see

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Speaker 3: more flows there. And if you look at our numbers

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Speaker 3: in the quarter, more than half of the inflows we

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Speaker 3: had in the quarter were around credit.

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Speaker 2: Well, it's interesting you look at the returns in private credit.

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Speaker 2: You posted four point six percent. In private credit you

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Speaker 2: posted you know, that's almost double what you're getting in

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Speaker 2: corporate private equity for the third quarter. You know, what

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Speaker 2: do normalize returns look like for the next couple of

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Speaker 2: years in private credit? You have some of your industry

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Speaker 2: rivals pitching you know, double digit returns in this environment.

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Speaker 2: Does the current environment demand some caution in seeking those

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Speaker 2: outside returns?

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Speaker 3: Well, I think it depends on what you're doing. If

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Speaker 3: you're obviously non investment grade private credit. I do think

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Speaker 3: double digit returns are reasonable given you have rates at

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Speaker 3: five and a half percent spreads today on direct lending,

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Speaker 3: it call it five point fifty five seventy five over

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Speaker 3: plus you get a couple points up front, and if

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Speaker 3: you want, you can put a bit of leverage on that.

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Speaker 3: If you're talking about more investment grade private credit, then

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Speaker 3: I think the returns or in the single digits, but

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Speaker 3: in the higher single digits, just given where base rates

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Speaker 3: have moved to. I think underlying your question is our

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Speaker 3: investors taking on a lot of risk. And when we

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Speaker 3: look at our portfolio, interestingly, despite all the headlines out there,

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Speaker 3: we've had today in our private credit about half of

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Speaker 3: one percent of our loans that are in default very low,

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Speaker 3: well below the industry averages. And when we look at

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Speaker 3: the picture, in the third quarter, just one of our

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Speaker 3: three thousand borrowers went into default incrementally, so the picture

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Speaker 3: looks good. And the new loans we're making, generally because

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Speaker 3: of the high cost of capital, are at a low

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Speaker 3: loan to value. If you contrasted that back to six

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Speaker 3: oh seven, when lenders were lending seventy five eighty percent,

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Speaker 3: we sold a business in seven extended stay hotels where

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Speaker 3: the borrower borrowed ninety five percent. It's a much safer environment.

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Speaker 3: So we think it's an attractive time to be in

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Speaker 3: the credit space. But I would say, on the other hand,

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Speaker 3: when you look at equity oriented businesses like private equity.

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Speaker 3: There's also opportunity because prices in many cases are being

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Speaker 3: reset and there are businesses and sectors where there's strong

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Speaker 3: underlying growth. So I don't think it's all of just one,

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Speaker 3: all credit or all equity. I think in an investor

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Speaker 3: wants exposure to both.

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Speaker 2: Now, how do you think about the real estate industry

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Speaker 2: right now?

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Speaker 5: As well?

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Speaker 2: You know there are a lot of concerns. We've talked

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Speaker 2: a lot about commercial real estate. We know that Blackstone

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Speaker 2: has really dealt with a lot of the pains in

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Speaker 2: the office sector early before everybody else.

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Speaker 5: Do you still see a.

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Speaker 2: Lot more pain and commercial real estate ahead given a

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Speaker 2: lot of these kind of macro changes, given the concerns

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Speaker 2: about maturity walls.

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Speaker 3: Well, I would start with two potential or two real headwinds.

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Speaker 3: One is in the office sector, as you rightfully pointed out,

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Speaker 3: an area that is a tiny portion of our exposure

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Speaker 3: US office. We definitely moved ahead of the curve in

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Speaker 3: that area and that's been one of our great strengths

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Speaker 3: in real estate over time. There there are some very

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Speaker 3: significant structural headwinds given COVID, given obsolescence. I think that

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Speaker 3: the second issue impacting all of commercial real estate is

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Speaker 3: this rise in cost of capital, and that certainly has

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Speaker 3: an impact in the near term. I think you also, though,

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Speaker 3: have to look a little more broadly. Where you invest

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Speaker 3: really matters. So the majority of our real estate portfolio

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Speaker 3: is in areas like logistics, student housing, data centers, where

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Speaker 3: cash flow growth is much higher and you're in a

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Speaker 3: better position to absorb some of this higher cost of capital.

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Speaker 3: And then I would point out on the longer term,

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Speaker 3: what we're seeing now is new starts decline pretty significantly,

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Speaker 3: anywhere from thirty to seventy percent in the third quarter,

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Speaker 3: and that's going to lay the framework for a longer

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Speaker 3: term recovery and values. But it's fair to say that

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Speaker 3: there are some challenges today in the sector.

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Speaker 5: Yeah.

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Speaker 2: I mean when you look at your results, almost every

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Speaker 2: business is up, some up double digits, but opportunistic real

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Speaker 2: estate is down about four point five percent on the year.

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Speaker 2: What is driving that and when do things start to

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Speaker 2: turn around?

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Speaker 3: What's driving that is what we've talked about here, this

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Speaker 3: higher cost of capital which impacts cap rates, and that

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Speaker 3: runs through the sector. Interestingly, cash flow growth in most

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Speaker 3: of our assets in real estate have continued to be

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Speaker 3: pretty good. Again, that goes back to the focus we've

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Speaker 3: had over time in areas like logistics, better forms of

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Speaker 3: rental housing, the geographies we've invested, the strength we see

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Speaker 3: in data centers. Overall, cash flow growth has been good.

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Speaker 3: The weakness has been on the multiple side, and that's

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Speaker 3: where you see those headwinds.

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Speaker 2: Hey, John, you know the other thing about this too,

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Speaker 2: when you look at the inflation Prince this idea that

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Speaker 2: inflation is still running hot in the United States and

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Speaker 2: really many places around the world.

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Speaker 5: Part of that is housing.

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Speaker 2: Your huge owner of homes in America, when do rents

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Speaker 2: and housing prices start to cool?

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Speaker 3: So I would say on inflation, the FED is really

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Speaker 3: having some real success today. We see it in input

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Speaker 3: costs that our companies, which are pretty flat. We see it.

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Speaker 3: The labor market is cooling. We're seeing wages now below

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Speaker 3: five percent, meaningfully down from a year ago. And to

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Speaker 3: your question on shelter costs, those have come down quite

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Speaker 3: a bit. It's really in the data. The FED uses

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Speaker 3: the Bureau of Labor Statistics, which tend to lag. So

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Speaker 3: that's going to be a force of gravitational pull downward.

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Speaker 3: And so I think that's going to come into the

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Speaker 3: numbers over the next six nine months, and we'll put

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Speaker 3: additional pressure downward on those headline and core CPI numbers.

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Speaker 3: I think that's a positive when we think about inflation,

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Speaker 3: and we'll make it easier here for the ped the

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Speaker 3: FED to really pause.

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Speaker 2: So you've seem a little more optimistic about the direction

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Speaker 2: of inflation than many out there. What does this mean

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Speaker 2: for the direction of interest rates? We've been talking a

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Speaker 2: lot earlier about this idea of a pause or you know,

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Speaker 2: at least stability and rates.

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Speaker 5: How soon do you think that could happen?

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Speaker 3: Well, I would agree that I have a little more

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Speaker 3: optimism about the path of inflation, but I also believe

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Speaker 3: the FED is going to stick at this, So I

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Speaker 3: do think they're going to hold rate higher for longer.

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Speaker 3: The long end has now accepted that, and I think

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Speaker 3: that's going to have the effect of slowing the economy,

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Speaker 3: slowing growth. We look at our companies, they've been very resilient.

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Speaker 3: Revenue growth in the quarter, and our private equity portfolio

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Speaker 3: companies was up high single digits, But when we look

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Speaker 3: at their hiring plans, they're much more muted than they

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Speaker 3: were a year ago. So I think where this leads

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Speaker 3: us to is inflation comes down, but also growth comes down.

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Speaker 3: The cost of eight percent mortgages, eight percent auto loans

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Speaker 3: that can weigh on the economy, and I think that's

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Speaker 3: the environment we have to invest through. Now we've endured

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Speaker 3: an inflation shock, We've now endured an interest rate surge,

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Speaker 3: and I think the next step of this is to

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Speaker 3: endure a slower economic picture. We don't see it like

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Speaker 3: eight oh nine in terms of imbalances, but I think

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Speaker 3: this is coming and for investors getting ready for that

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Speaker 3: I think is important and taking a view of where

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Speaker 3: the environment is. That's what we do as a firm.

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Speaker 3: It's been one of the reasons why I think we've

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Speaker 3: been able to generate outsize returns for a long period

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Speaker 3: of time.

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Speaker 5: Have you ruled out a hard landing.

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Speaker 3: You know, I don't think that's certainly not our central case,

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Speaker 3: given the momentum from the savings consumers built up, given

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Speaker 3: the strength and energy transition a huge area of focus

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Speaker 3: for our firm, given what's happening in AI and digital infrastructure.

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Speaker 3: There are some big parts of the economy where there's

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Speaker 3: a lot of investment and growth. In some ways almost

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Speaker 3: regardless of the level of interest rates, and I think

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Speaker 3: that will provide some more ballast, but nevertheless, we do

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Speaker 3: anticipate a slow down here.

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Speaker 1: That was Blackstoneing president John Gray speaking with Bloomberg's Shanali

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Speaker 1: Basic