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Speaker 1: Investors these days face a number of real uncertainties about

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Speaker 1: where the economy is going, as well as what the

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Speaker 1: FED is likely to do in response to that. One

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Speaker 1: of the ways to look at what those uncertainties really

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Speaker 1: tell us and what we should do about it is

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Speaker 1: through the lens of alternative investing. And we welcome to

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Speaker 1: somebody who is at one of the biggest, most successful

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Speaker 1: term investment houses that there is. It is Blackstone. He's

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Speaker 1: the chief financial officer there. He is Michael J. So, Michael,

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Speaker 1: welcome to Wall Street. Great to have you.

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Speaker 2: David, it is great to be here. Thanks for having me.

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Speaker 1: So let's start with a macro here if we could,

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Speaker 1: what is the Blackstone view the operating thesis right now

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Speaker 1: about where we are in the economy and where it's headed,

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Speaker 1: on inflation, on whether we're going to have a big

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Speaker 1: downturn or.

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Speaker 2: Not sure well on the macro, which obviously affects everything.

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Speaker 2: We do benefit from having the lens of a really

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Speaker 2: big portfolio of investments. So we have stakes and over

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Speaker 2: two hundred companies that together have over two hundred million

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Speaker 2: of revenues and aggregate, we have a real estate portfolio

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Speaker 2: with over twelve thousand individual assets. We have a very

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Speaker 2: big private credit portfolio, so that's a very sort of

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Speaker 2: rich sample, and i'd start with the good news. So

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Speaker 2: the good news first, I think is we pretty definitively,

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Speaker 2: definitively see inflation trending down. You know, if you look

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Speaker 2: at the inflation prints, the standard metrics, and you adjust

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Speaker 2: for shelter, which sort of lagged on the way up

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Speaker 2: and is now lagging on the way down. If you look,

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Speaker 2: for example, at core CPI, a very important metric X

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Speaker 2: shelter that's running in the mid threes, and if you

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Speaker 2: look at CPI by itself X shelter, it actually hit

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Speaker 2: about two percent last month. So we definitely see the

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Speaker 2: direction of travel being down. Other good news is the

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Speaker 2: performance of the and resilience of the economy and of

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Speaker 2: many companies to date. So in our own portfolio, we

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Speaker 2: talked about this publicly. In the first quarter, our private

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Speaker 2: equity portfolio, companies grew with double digit revenues in the

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Speaker 2: first quarter, with stable resilient margins. We see in our portfolio,

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Speaker 2: you know, clear sign that costs have peaked in the

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Speaker 2: last few quarters, including with respect to wages very importantly.

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Speaker 2: So there's some good news on both those fronts. Now

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Speaker 2: against that, of course, is the challenge of the cost

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Speaker 2: of capital and the availability of capital. And there I

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Speaker 2: think you see the confluence of three really big things. First,

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Speaker 2: obviously the escalation and short rates over the last fourteen

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Speaker 2: months or so five hundred basis points, I think the

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Speaker 2: FED has basically achieved its goal of achieving positive real

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Speaker 2: rates for the first time in this country in many years.

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Speaker 2: And we're going to take the FED at its word

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Speaker 2: and plan for higher, for longer short rates. Second, quantitative tightening,

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Speaker 2: you know, as you and I know, I think a

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Speaker 2: few years ago we sort of couldn't stop talking about QT,

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Speaker 2: and now I think we don't talk about it enough.

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Speaker 2: And so pre COVID the FED balance sheet, as you know,

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Speaker 2: is four trillion or so. It more than doubled in

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Speaker 2: the subsequent couple of years. And now they're embarking on

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Speaker 2: a balance sheet reduction program where they're basically, through runoff

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Speaker 2: of assets, shrinking that balance sheet by about a trillion

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Speaker 2: annual run rate a year. So that's going to have

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Speaker 2: significant effects over time, and we already see some of

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Speaker 2: the impact in certain markets and how they're behaving, like

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Speaker 2: agency mortgages and then third, as a result of the

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Speaker 2: banking challenges, especially the regional banking challenges of earlier in

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Speaker 2: this year, we do think you'll see credit contraction from

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Speaker 2: that over time. So those are three big forces, and

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Speaker 2: I think the result of all that is the FED

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Speaker 2: is basically going to deliver what it intended, which is

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Speaker 2: a slowdown in the economy. And I think you know

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Speaker 2: you should expect to see deceleration in the economy, you know,

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Speaker 2: in the coming months.

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Speaker 1: So take all that together, a complex and nuanced view

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Speaker 1: strengthen the economy at the same time, reductional liquidity, some uncertainty.

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Speaker 1: What does that mean for dealmaking? Because we saw at

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Speaker 1: the end of last year, going to the beginning of

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Speaker 1: this year it almost dried up. I mean, emine really

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Speaker 1: went down a lot. What are you seeing at Blackstone?

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Speaker 2: I think we're seeing the overall M and A cycle

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Speaker 2: playing out probably as we more or less expect it

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Speaker 2: even a year ago, which is you had this really

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Speaker 2: big rate shock again the five hundred zero to five

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Speaker 2: hundred basically in fourteen or fifteen months, and during that

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Speaker 2: time period, M and A activity essentially froze. We are

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Speaker 2: now seeing on the ground some thawing of that freeze,

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Speaker 2: and I think the reasons for that, you know, having

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Speaker 2: seen these cycles before, are you know that seller expectations

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Speaker 2: need to be recalibrated, and that takes time. It generally

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Speaker 2: takes sort of twelve to twenty four months after a

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Speaker 2: market shock or after a cycle bottom, and so I

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Speaker 2: think that process is playing out. And then in this

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Speaker 2: particular circumstance, I think market participants are now, you know,

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Speaker 2: seeing that we're nearing the end of this dramatic rate

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Speaker 2: increased cycle, and therefore feeling like there's a little less uncertainty,

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Speaker 2: a little more certainty, and are readier to transact. And

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Speaker 2: so if you look at our own business, you know,

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Speaker 2: just in this month of June, we've been busy, people,

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Speaker 2: and so in the last couple of weeks, you know,

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Speaker 2: we announced things like a two billion dollar investment in

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Speaker 2: one of the country's fastest growing utilities, and almost billion

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Speaker 2: dollar additional investment in the country's largest private developer, renewables.

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Speaker 2: We're financing in partnership a potential vaccine for pneumonia in

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Speaker 2: the logistics area. Real estate, which we're big fans of,

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Speaker 2: we've been selling and buying. We announced the sale of

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Speaker 2: over three billion dollars of logistics assets to a public

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Speaker 2: company earlier this week, and we also acquired three different

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Speaker 2: portfolios of logistics assets in both the US and Europe.

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Speaker 2: So I think those probably constitute green shoots or potential

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Speaker 2: green shoots. I think you'll be hearing that that term

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Speaker 2: will be more in fashion this summer, I think among

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Speaker 2: Wall Street types, but really for us in terms of

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Speaker 2: our business, our business model is really made for times

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Speaker 2: like this. At its core, you know, we're all about

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Speaker 2: long term, locked up committed capital through fund structures, and

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Speaker 2: what that allows us to be is patient, and it

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Speaker 2: allows us obviously to have capital and time when capital

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Speaker 2: is short. And indeed we have nearly two hundred billion

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Speaker 2: dollars of dry powder to invest opportunistically in the coming

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Speaker 2: time period. And our history has shown that those couple

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Speaker 2: of years coming out of a cycle are some of

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Speaker 2: the best times to invest. So we're excited about what

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Speaker 2: the future will bring.

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Speaker 1: As you see that thaw. And if I can draw

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Speaker 1: the analogy the green shoots coming up through the ice,

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Speaker 1: more or less is the nature of the deals changing.

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Speaker 1: We saw a piece in the Wall Street Journal this week,

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Speaker 1: actually Blackstone has mentioned it. The suggested private equity is

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Speaker 1: doing more smaller deals, maybe because of the uncertainty of

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Speaker 1: the price of financing, even regulatory overhang. Are you Are

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Speaker 1: you seeing smaller deals than you did before?

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Speaker 2: I think, well, we have our own particular perspective. We

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Speaker 2: scale is one of our big advantages in our private

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Speaker 2: allows us to do things others can't do in our

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Speaker 2: private equity business. You know, we've successfully in the last

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Speaker 2: couple of years been able to engineer a couple of

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Speaker 2: really large deals of partnership with Emerson in the climate

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Speaker 2: technologies area. Copeland is named of the business recently a

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Speaker 2: five billion dollar take private of a business called Seavent.

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Speaker 2: So we do think that's one of our edges, and

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Speaker 2: so you can't paint with the broad brush that the

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Speaker 2: deals are getting smaller. I do think that the development

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Speaker 2: of the direct lending market, which there's been a lot

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Speaker 2: of focus on in the private credit area, you know,

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Speaker 2: has in this cycle, and I think secularly allows for

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Speaker 2: deal making to continue, including at relative scale, in a

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Speaker 2: way that maybe five ten years ago is less less doable.

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Speaker 1: As you look at the landscape out there, where are

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Speaker 1: the investment opportunities and how dependent on the assumptions that

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Speaker 1: were done or close to done with the hiking of

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Speaker 1: the rate.

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Speaker 2: Sure, well, it's a multifaceted answer, and we have a

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Speaker 2: broad business and so we have sort of a balanced

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Speaker 2: attack and aren't relying on one single strategy. But I think,

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Speaker 2: for sure, on the credit side, lending money right now

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Speaker 2: in this environment is a very compelling thing to do

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Speaker 2: with very good risk reward, probably some of the best

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Speaker 2: risk reward we've seen in a long time in the

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Speaker 2: credit area. So in things like direct lending, you know,

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Speaker 2: you can generate double digit returns given where base rates

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Speaker 2: are and spreads for being in the very senior most

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Speaker 2: part of the capital structure with a lot of equity

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Speaker 2: beneath you. So that is very attractive. In other forms

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Speaker 2: of private credit, whether it's assetback credit or real estate credit, similarly,

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Speaker 2: it's a very good time to investment a risk award standpoint.

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Speaker 2: So that's one big theme. And then on the equity side,

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Speaker 2: a little bit apropos what I talked about when I

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Speaker 2: went through the deals we're doing, I'd say we're still

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Speaker 2: applying some of our same key themes around sort of

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Speaker 2: the sectors and areas we want to invest in, but

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Speaker 2: now we think we'll do it in a more interesting environment,

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Speaker 2: maybe somewhat more dislocated environment to find value. So that's

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Speaker 2: really how we're approaching it.

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Speaker 1: You mentioned real estate. Obviously, Blackstone has a very substantial

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Speaker 1: presence in real estate. It's been a lot in the news,

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Speaker 1: there's a lot of report of the challenges for commercial

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Speaker 1: real estate. What is your perspective on that. Are we

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Speaker 1: headed toward a real, substantial downturn in real estate?

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Speaker 2: Well, it's interesting, I think you know, when you see

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Speaker 2: the acronym CRE in a newspaper article, you can be

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Speaker 2: sure it's probably going to portray the sector and paint

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Speaker 2: it with a broad brush. And the reality is it's

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Speaker 2: The reality is there's real bifurcation in terms of the

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Speaker 2: dynamics in the sector. In real estate as an industry,

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Speaker 2: it's a big industry. You have one sector, traditional office,

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Speaker 2: especially in the US, that really does a fundamental challenges

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Speaker 2: in vacancy levels of twenty percent plus and so forth.

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Speaker 2: That happens to be a very small portion of more portfolio,

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Speaker 2: less than two percent of our global real estate equity portfolio.

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Speaker 2: And then you have a number of sectors where fortunately

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Speaker 2: we're concentrated through I think some good sector selection decisions

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Speaker 2: like logistics, data centers, a number of areas in rental, housing,

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Speaker 2: life science's office where the fundamentals are really quite good.

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Speaker 2: Vacancies in many of those sectors are at two to

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Speaker 2: five percent, which is almost at or just above the

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Speaker 2: frictional level of vacancy. You know, market rents growing at

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Speaker 2: double digits, and a number of those sectors, so it

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Speaker 2: really matters where you invest in the portfolio construction. I

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Speaker 2: think our firm is created in real estate over the

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Speaker 2: last decade or really you know, some of our some

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Speaker 2: of our finest work. Is a firm.

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Speaker 1: You've got a big company and you're buying and selling

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Speaker 1: all the time, but there have been some recent reports

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Speaker 1: of some selling in the real estate area, particular warehouses.

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Speaker 1: If you look at your portfolio overall, would you say

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Speaker 1: you're a net buyer right now or seller of real

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Speaker 1: estate in total?

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Speaker 2: You know, I went through in my litany of the

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Speaker 2: deals we've done that to your point, the fact that

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Speaker 2: even the last month we sold a big portfolio of

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Speaker 2: logistics and we bought three others. By the way, three

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Speaker 2: billion dollars is in relation to having a portfolio that's

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Speaker 2: you know, one hundred billion dollar plus. So it's our

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Speaker 2: business and given different strategies, with different time horizons and

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Speaker 2: sort of return targets, to be in the business of

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Speaker 2: buying and selling when it makes sense, never forced to

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Speaker 2: do it. But we can be opportunistic again, both on

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Speaker 2: the buying and selling side, and so I wouldn't say

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Speaker 2: we're net buyers or sellers one way.

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Speaker 1: Or the other. Artificial intelligence, particularly generative or large language

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Speaker 1: model are very much in the news these days. Start

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Speaker 1: with Blackstone, what difference might it mean for Blackstone's operations

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Speaker 1: before we get to the investment in AI.

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Speaker 2: Well, it's a really good question. Obviously a lot of focus,

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Speaker 2: and we've been focusing on the potential in this area

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Speaker 2: for a while. I'd first just big picture say that

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Speaker 2: I believe AI will reinforce and further the advantage advantages

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Speaker 2: of private market investing relative to public market investing. Why

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Speaker 2: is that, Well, I think the reason for that is

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Speaker 2: it's actually pretty simple public market investing, which relies obviously

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Speaker 2: on publicly available data. That sort of data will be

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Speaker 2: increasingly and further commoditized in an AI world, And in contrast,

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Speaker 2: the value of proprietary data and insights that you can

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Speaker 2: clean from a really large private market portfolio accumulated over

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Speaker 2: many years across many businesses. The value of that sort

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Speaker 2: of information and data and ability to mind insights from

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Speaker 2: that and have pattern recognition coming out of that, both

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Speaker 2: longitudinally and across your business that will only be further

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Speaker 2: enhanced again relative to public market investing. So I think

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Speaker 2: that is a big picture perspective for us on our business.

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Speaker 2: You mentioned this first operationally, I think for sure over

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Speaker 2: time there'll be efficiency gains in our business processes and

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Speaker 2: our operating processes from leveraging these tools. And then on

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Speaker 2: the investing side, which you were getting at obviously lots

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Speaker 2: of focus. You could say there's a bit of a

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Speaker 2: gold resh mentality right now. We're going to be very

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Speaker 2: careful and thoughtful about how we go about it. But

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Speaker 2: what I'd say is we've already been been able to

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Speaker 2: action what I would call some derivative plays relative to

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Speaker 2: the space that we already know are going to be

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Speaker 2: big winners in the ecosystem. And so specifically, a few

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Speaker 2: years ago, or as an example, we took private business

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Speaker 2: called QTS, one of the largest data center operate in

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Speaker 2: the US, and it was really a direct bet on

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Speaker 2: a couple things on the explosion in the creation of

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Speaker 2: data and the explosion in the demand for computing power.

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Speaker 2: In the last three years, there's been more data created

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Speaker 2: than in prior history, believe it or not, and so

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Speaker 2: that was really our bet. And I think what's happening

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Speaker 2: with generative AI and where it will go from here

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Speaker 2: will only, I think, sort of exponentially accelerate the potential

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Speaker 2: of this. And then I'd say, operationally, we're not new

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Speaker 2: to this. I think because of our scale and resources,

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Speaker 2: I would hope to say foresight, we have been able

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Speaker 2: to invest some time ago at setting up a platform

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Speaker 2: in this area. So specifically, about six years ago, we

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Speaker 2: set up a division in our firm called Blackstone Data

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Speaker 2: Science everything else to have an acronym at Blackstone, so

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Speaker 2: it's known as BXDS. We've grown that team to over

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Speaker 2: fifty data scientists. They're really embedded and integrated in our

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Speaker 2: in what we do in our investment committee process, in

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Speaker 2: our due diligence process, around in new deals, around portfolio

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Speaker 2: company work, depending on the use case. And so we

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Speaker 2: already have this sort of platform in place that we

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Speaker 2: certainly expect to grow and leverage over time as we

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Speaker 2: see how this world plays out.

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Speaker 1: As CFO of Blackstone, you're looking not just at the

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Speaker 1: here and now, this quarter, next quarter, but the longer

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Speaker 1: term and take us into the longer term future for Blackstone.

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Speaker 1: I mean, you're very, very big right now by most measurements.

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Speaker 1: It gets harder to grow at the same rate as

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Speaker 1: you get bigger. What is the path forward for Blackstone

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Speaker 1: to maintain the sort of growth that it's had so far,

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Speaker 1: which is.

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Speaker 2: Remarkable And it's a fair question, But I'd also say

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Speaker 2: that's a question that we've been hearing for years about, Hey,

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Speaker 2: you've gotten to the size you know, you know, where

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Speaker 2: will the growth come from here? And I think we've

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Speaker 2: sort of proven ourselves on that front. But to answer

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Speaker 2: your question, I'd step back and say, our firm is

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Speaker 2: been around for thirty eight years. I've been fortunate enough

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Speaker 2: somehow to be there for twenty six of the thirty

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Speaker 2: eight years. We have a very long term view on

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Speaker 2: building the business. Don't just want to be a very

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Speaker 2: good asset management company. That's in addition to that, we

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Speaker 2: want to build really one of the great companies in

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Speaker 2: the world that is very enduring. That is Steve Schwarzen's vision,

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Speaker 2: and it permeates our culture and everything we do. So

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Speaker 2: I'd say that's the backdrop. And against that backdrop, there

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Speaker 2: are some really profound secular tailwinds that continue to sort

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Speaker 2: of power the future of our business. And it's both

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Speaker 2: with respect to markets that we invest in and also

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Speaker 2: the markets from which we raise money to invest, and

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Speaker 2: so on the former, there's really an amazing long list

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Speaker 2: of addressable market opportunities. I just tick off a few

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Speaker 2: of them globally in private credit globally in the infrastructure area,

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Speaker 2: in energy transition, which will require obviously trillions of dollars

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Speaker 2: of capital, in the alternative business in Asia, which is

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Speaker 2: still earlier in its development. In the second in the

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Speaker 2: developed further development the secondary market for alternatives generally, which

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Speaker 2: is still underdeveloped. In the life sciences revolution, where we

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Speaker 2: have a big business, So there are some really big

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Speaker 2: markets to invest in with a lot of runway that

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Speaker 2: I think we'll create really really big opportunity. And then

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Speaker 2: on the fundraising side, the markets where we raise capital. Structurally,

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Speaker 2: the world's investors are still under allocated to alternatives, and

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Speaker 2: so people focus on sort of traditional institutions, and there's

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Speaker 2: still a lot of runway to go there. But then

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Speaker 2: in other really really big channels like insurance, like individual

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Speaker 2: investors around the world, they are really barely penetrated with

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Speaker 2: respect alternatives, and so there are a lot of tailwinds there,

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Speaker 2: and we think we're the best position firm the world

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Speaker 2: to capture the opportunities. We like to think we're the

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Speaker 2: reference institution that we have the assets of our brand,

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Speaker 2: our reputation, the scale of our platform, and really importantly

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Speaker 2: our culture. So we think we have created a culture

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Speaker 2: that does both performance and innovation well. And if you

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Speaker 2: had to ask me sort of what makes us special,

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Speaker 2: I would say we've been able to combine being very

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Speaker 2: good investigates with being very good business builders and being

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Speaker 2: able to institutionalize that. And that's unusual in the investment business,

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Speaker 2: and that's what's powered our success to date and that's

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Speaker 2: what we think will propel our future. So we're very

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Speaker 2: excited about the long term.

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Speaker 1: Michael, thank you so much for being Willsher. Really great

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Speaker 1: to have you here. That's Michael Jay he's the chief

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Speaker 1: financial officer of Blackstone