I remember going to see investors and distinctly one of our state pension funds in the meeting telling them about one of the write downs and I just remember that awful feeling leaving that meeting going back to the airport and being like wow I cannot let this person down. This is not good. From Morgan Stanley. This is hard lessons where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out of consensus calls. One that was on the money and one that wasn't. Today on the show, John Gray, president and chief operating officer of Blackstone with Dan Simoitz, co-president of Morgan Stanley. John stepped into his current role in 2018, and since then, Blackstone's assets under management have nearly tripled to over $1.2 trillion.
It's so so good to have you here. It's fantastic. You know, I'd say 30 years ago, our industry was so private, frankly, so small. I think it's a little inspiring what you're doing around marketing for financial services, but you know, when we led the Blackstone IPO, you're 88 billion of AUM. Now you're over a trillion. The organization is bigger and more complex. You've built both a world-class client service organization, but at the core of it is just incredible investment discipline and performance. And so, John, we're going to talk about two out of consensus investment decisions. Set the scene for one of the winners.
Always better to talk about the winners, although you learn more from the losers. Right around 2007, we bought Hilton Hotels. I led that investment. It was a $26 billion investment and I was excited because this was obviously an iconic company that owned some incredible real estate like the Waldorf, had a time share business, and then had this unbelievable management franchise business Hilton and Hampton Inn and Double Tree, Conrad, Hilton Gardens, all of that. And it was at a time when the market was pretty frothy because it was before the financial crisis. You remember people were borrowing a lot to buy homes. They were borrowing a lot in leverage lending in the corporate world. They were borrowing a lot in commercial real estate. Prices were elevated. And I thought we had found something in an operating business with some real estate inside that we could buy at a reasonable price. Now we paid a big premium, 40% over the stock market at the time, and we bought the business for $26 billion. We borrowed $20 billion. It was a different era.
Well, at the time there was so much leverage in the system. It was
But you had never borrowed $20 billion before.
No. Well, except that we had bought EOP. We had bought the largest office business and that was a $39 billion deal. And we had been on this run buying public companies because at the time I was running real estate and we were able to buy the businesses on the screen much more cheaply than we could when we were bidding for individual properties. And so we started scaling way up. But in this case we took a business with some volatility, hotels, and put a lot of leverage on it. And we took money from our private equity business and our real estate private equity business, $5.6 or $6 billion of equity, the largest investment we'd ever made at the time as a firm. And we bet on this and we closed the deal in the fall of '07. Terrible timing. And by all accounts, I should not be sitting here with you, Dan. And they should have carried me out. And it looked that way because if you recall, the financial markets really tightened up and the real economy goes down. And this business Hilton loses 20% of its revenue and 40% of its cash flow, and we've leveraged it up a bunch. We write down the investment by 71%. So you actually took the action to write it down. We took the action to write it down because it was clearly very impaired. And I remember going to see investors and I distinctly remember one of our state pension funds in the meeting telling him about one of the write downs and the investor was almost physically ill, which is understandable because he had a very large investment with us. And I just remember that awful feeling leaving that meeting going back to the airport and being like, 'Wow, I cannot let this person down. This is not good.' And I think fortunately maybe because of my core optimism but also my belief in the underlying business I didn't lose faith. We also had an amazing management team led by Chris Nassetta who's still the CEO of Hilton. I'm still the chairman 18 years later. It's pretty amazing.
Yes. We got through this. Now how did we do it? We ended up putting in an extra $800 million to help delever the company and get some additional term on the debt. The management team did an amazing job. They kept growing the business particularly outside the United States. And then ultimately the world started coming back. People started traveling again. The business was performing. We went public a few years later. You guys were involved in that as well. We ended up splitting into three companies: a time share business, an owned real estate business, and a management franchise business. We sold some individual assets. And then we sold our stock, and we ended up making $14 billion, the most profitable real estate private equity deal of all time. And the movie should not have been written. It should have looked completely different. And so, it makes you think a lot. What are my takeaways as an investor? And I would say the biggest ones are one, you got to stay calm,
stay positive. What you got to never give up.
That's what I say every Monday on our BXTV. It's what I say to my daughters. But the most important thing on Hilton was that what I learned as an investor was maybe I spend too much time thinking about whether I should pay $99 or $101 and so forth. And maybe what matters more is sort of the neighborhood I'm investing in, the underlying tailwinds in this case, global travel, the quality of the business, in that case a capital light, fast growing franchise management business, as well as the quality of the management team. And if you can get those things right, even if you made a really poorly timed investment and paid a big premium, it can still turn out okay. And so when I think about today, we're investing into digital and energy infrastructure or in India or in life sciences or areas where we have really high conviction. That to me comes from this experience which was why did this turn out well? It should not have turned out well. And so the lesson of let's try to find the right neighborhoods to deploy capital has really stuck with me. It's interesting because we're such great partners, our two firms, partly because in the last 15 years, we got intensely dedicated on just helping clients allocate capital, but we needed to be bigger and a little different. So, we bought Smith Barney, bought E-Trade, bought Eaton Vance, all these acquisitions, but they're all around a neighborhood we loved.
having a partner. So in your case, you had Chris, but presuming you also had your own team, how important is that, especially when it's really dark. How important was that
on a deal like Hilton? Super important. I would say having business colleagues who still believe in you. First of all, you guys have done an amazing job because also you've got a great culture and you have all these capabilities both serving individual investors and obviously as an investment and commercial bank providing capital. And that ability to show up as a partner even in the bad times, having people who still say yeah we've got to find the way out through this thicket, that's really important. And I would add a personal element to this: having a wife and children and people you can go home to who still believe in you even when the world doesn't. That matters. And I'll just give you a sense of how dark it felt. In early '09, the company had an employee who had taken some documents from a competitor. The company had found out, sent him back. Nevertheless, there was a federal investigation. There was a big article in the Wall Street Journal. And I was talking with Chris Nassetta, and I called him, and it was probably March of '09. We'd written the investment way down. We have this investigation in the headlines. And I said, 'Chris, the good news is it cannot possibly get any worse.' But the fact that I had him, I had my family, I had colleagues, and ultimately that this was a terrific business, that what we faced was cyclical, not secular in nature. That made a huge difference.
So now it's one of the greatest private equity deals of all time, but in the darkest days it was hard. What's the one big hard lesson coming out of Hilton?
Well, I think the hard lesson was you don't want to put that much leverage even on a great business because the key is you've got to be able to get to the other side. When you own a great business, great piece of real estate or infrastructure, ultimately it'll compound or grow. And the problem is people get stopped out in the trading world. It's margin debt. It could be leveraged lending in corporate world or real estate debt. And if you have too much, put so much pressure, you may be forced to sell, dilute your ownership at exactly the wrong moment. So the good lesson was focus on great businesses, great neighborhoods, and stay calm. But the hard lesson is don't put yourself in such a precarious position that if the weather outside gets tough, you're at risk of losing things.
So, this one worked out perfectly in the end.
