Fabulous. I have something to send my mom. I can guarantee one viewer for sure. Yes. Before we jump into questions, we're at a big moment for you. You just celebrated your 40th anniversary and you were down at the exchange ringing the bell. What was that like?
That was great. You know, you're ringing that bell. It's historic. You feel this sense of progress the firm has made over time. We've been public now since 2007. But it was founded by Pete Peterson and Steve Schwarzman in 1985 and it's been an incredible journey, but it was nice for this day to just reflect on what's been achieved from Pete and Steve, $400,000 in a dream into what has become a very large successful business.
Well, congratulations. So, let's go back to your early years growing up in Highland Park. I'm wondering, were there any signs of a career in investing or finance?
When I went to college, I don't think I had a real inclination towards finance. Maybe bought a few stocks with bar mitzvah money, that sort of thing, but very little. Then what happened was I went to the University of Pennsylvania and I was going to be an English major and I thought I'd want to write for the New York Times. My friends there, many of them were in Wharton and they were very business and markets oriented, and I said, 'Oh, I like that stuff, too.' So I decided to get a dual degree and that was probably the most important decision of my life because I stuck being an English major and my senior year I met a woman in romantic poetry class. A true story who became my wife, and a month later I got a job working for a very small investment and advisory firm called Blackstone, and that was now almost 34 years ago.
So working at Blackstone though, wasn't there a little clue when you were younger?
My grandfather's business, he had an automotive parts business which manufactured on the west side of Chicago called Blackstone Manufacturing Corporation, BMC. Unfortunately, because of the cost of manufacturing in the 70s, there were Japanese and Korean manufacturers who did it much more cheaply. They basically went out of business. But my grandfather passed in the fall of '92, and it was 6 months or so after I got the job. I remember telling him, 'Grandpa, guess what? I'm going to work at Blackstone.' So it felt like it was probably meant to be. It's a very odd coincidence, but I often think about it.
Yeah, that's funny. Very funny. So you started Blackstone. I think you were the first analyst in the real estate department in '92, '93.
Well, interestingly, when I started Blackstone, there was no real estate business. So I started in the M&A and private equity area. What was great for me is I got unbelievable training in M&A and private equity, which would prove invaluable as we ultimately expanded our real estate business to be much more than property investing. About a year into things, the real estate world had collapsed and Pete and Steve had this idea we should go into real estate. This was part of Steve's genius, the idea that we can be more than one thing. If we can build an investment business serving clients, we can do multiple things. One of the partners tapped me on the shoulder and said, 'Hey, do you want to go help out on this for a couple years? We're going to do a little real estate.' I was like, sure. I often describe luck as a core competency for me. That's how I ended up stumbling into the real estate business. I didn't have any background at all.
You went on and made some of the biggest bets in the industry, in particular the investment in Hilton you made, which was right before the GFC.
I can't imagine a worse time to make a real estate investment. But notwithstanding that, it went on to be one of the best investments ever. How did you navigate through such a tough start?
We started as you know doing a few larger portfolios and so forth. Then the dot-com bubble came along and Alan Greenspan, as you recall, cut rates. The commercial mortgage-backed securities market emerged where you could go to banks for financing at scale in real estate, put a bunch of properties together, and access lower-cost debt as opposed to leveraged loans and high yield from the corporate world. What we started doing was buying real estate companies. As rates came down in the early mid-2000s, prices started going up and we said, it's cheaper to buy the whole company on the screen than to buy the individual properties. That was the insight. It crescendoed in '07 when we bought Equity Office Properties, the biggest office company, for $39 billion in a bidding war. We fortunately sold a lot of the properties quickly, otherwise we would not be sitting here together. Six months later, to your point, Lawrence, we bought Hilton Hotels in June of '07 because we saw the company had amazing brands: Hilton, Hilton Garden, Hampton Inns, Waldorf, all that. It also owned amazing real estate including the Waldorf and the Hilton Hawaiian Village and the Park Lane Hilton in London. There was a lot of embedded value and more to do. But our timing was awful. We bought the business for $26 billion, leveraged it with $20 billion of debt. I was much braver when I was younger. By September of '08, the financial crisis had started and we marked the investment down 71%. That was really painful, but I had this fundamental belief that this was a great business and we said we're going to get through it. We're going to put our heads down. The business will continue to expand globally. Ultimately revenue started recovering. We broke it into three public companies over time, sold some assets, and ended up making $14 billion for our investors, more than tripling the capital we put in. That's pretty amazing given where we started. It speaks to the importance of having scale, because to stay through it, you've got to be a scaled player.
I think there's no question that it was a scale high-quality business and the fact that we had resources to back it made a huge difference. It had a really formative impact on me as an investor. It's about the quality of the business we buy, the quality of the management team, and the neighborhood the business sits in. Even if you bought it at the wrong time at a high price, if you have the staying power to get to the other side, you can do really well. Our biggest mistake on Hilton: if we had just held it, we could have done another tripling of our capital. That was really powerful, the lesson of having equanimity getting through this. I say to my kids, and now every week to folks at the firm, stay calm, stay positive, never give up.
So let's spend a couple minutes on the leadership transition here at Blackstone, which I think was not only important at Blackstone, it was important in the industry. What was it like from your perspective to go through that? And importantly, how do you fill some of the biggest shoes in the history of the industry?
We've always thought about the firm as a long-term enduring enterprise. Nothing transactional. It's the way we think about our clients as well. You can make a little more money here, but ultimately we'll do the best if they do the best. It's the same approach. Real credit to Steve Schwarzman, a visionary founder, and to my predecessor Tony James, the former president and COO. They had a clear path. They recognized fairly early on that they were going to give me more responsibility. I went on the management committee of the firm back in 2007. I went on the board in 2011 or 2012, and then we announced this in 2018, but they began signaling to the outside world this was the path of travel. They started bringing me in the last couple years to get involved in sensitive things like compensation and conflicts because they wanted to have me fully trained for the moment.
Obviously, I still had to learn a ton. There were a lot of things about hedge funds, credit markets, and all different industries: pharmaceutical, energy, technology. But in terms of creating a bridge and the easiest path possible to what is a very challenging job, it was amazing. As I said, credit to Steve and Tony.
That's great. That's great. So one of the things we spent a lot of time on is the high net worth channel. You guys were very early, arguably the earliest, in understanding the importance of it. Like your large real estate bets, you made a big bet with the firm's operating budget to put a lot of people in the field. There are hundreds of Blackstone people all over the world. Where do you think we go from here? What does the LP base of Blackstone look like in the next five years?
People talk about wealth as a new phenomenon. We raised our first drawdown capital in wealth 23 years ago. This has been a long path based on a simple premise: institutional customers with a long-term perspective allocate a third or more of their investment assets to alternatives because of the return and diversification benefits. When I look at individuals, particularly affluent individuals, why do they have 1% or less allocated? So why don't we dedicate the resources and ultimately design products with yield, tax efficiency, ease of access instead of drawdowns? And when we go into the market, why don't we change some of the practices? The historic practices gave a bad experience to the customer: charge 12 points upfront, acquisition, disposition, financing fees, and have people with no experience investing doing it. Instead, let's give individual investors an institutional quality experience from both cost and performance standpoints. They'll react the same way as institutional investors: 'That was a good experience, I want more, and I'll try other things on the menu.' It's all built on performance and operating at the highest standards: valuations, conflicts, all that stuff we do for institutional investors has to be ported over exactly to the individual investor. That has made a huge difference. We're at $290 billion, more than a quarter of our assets. I suspect that will grow. The institutional business will also grow. The insurance business, about a quarter, is also growing quickly. But this area has a particularly high rate of growth because the underlying market is so underpenetrated.
So how do your institutional investors feel about this trend, and how do you manage any concerns they might have?
One of the good things is we've been at it a long time, so we can point to that for our institutional investors. The keys for them are: do we continue to perform for the larger investors seeking co-investment? Are we continuing to deliver for them? The good news is we're checking both boxes. This is a new addition but it's a very large universe of alternatives. If you look at public equities, corporate bonds, real estate, and infrastructure, there's $300 trillion of assets. There's just $13 trillion in the private space. Over 90% of companies in the US with more than $100 million in revenues are private. It's a big investable universe. At the end of the day, the key for our institutions is: does Blackstone still care and deliver for us?
You cannot forget that this is a client-driven business. We've got to deliver for all these groups as long as we maintain that high standard. I think it's going to work really well and there are real benefits at scale. There are lots of insights we get from our portfolio as it expands. It's one of the reasons we've been such good thematic investors because we have more data points. I don't view this as a zero-sum game. What's happening is actually quite additive to the institutional investor experience.
