Jon Gray - President of Blackstone | Podcast | In Good Company | Norges Bank Investment Management

Wow, well done. Great to be here with you, Nicolai. And you're taking off the tie today. I took off the tie because I watched your stuff and I didn't want to be overdressed.

I think we've been successful for a couple of reasons. The main one is we've never forgotten what our mission is, which is delivering for our customers, and that means delivering premium returns. If you invest in private markets instead of liquid markets, we have to deliver a premium. And because we focus intensely on that across all our different business units, it doesn't mean we've always gotten it right, but that focus on returns has been so important to our success over time.

It depends on the risk return strategy. So if you're in things like private equity or real estate private equity, then you need to produce meaningful premiums because you're taking on larger risk, the capital's tied up for a long period of time. You want to produce 500 basis points of excess return, let's say. But if you're talking about investment-grade private credit, then maybe it's 150 or 200 basis points. But you definitely have to produce a premium. The other thing I'd say – instead of putting money in the bank at 3%, you need to deliver 5%. Yes, that's what you need to do. And for higher returning equities, instead of producing 10, maybe you need to produce 15 net to the customers. The other thing I'd say to our success, this is really a credit to Steve Schwarzman, who you know, it's been the push to be entrepreneurial and find new geographies to invest, new products to deliver to customers, new customers. It's a constant sort of energy, restlessness in this place that we can do more, we can serve our customers better. And the combination of delivering great returns and this sort of dynamism – that's what's led to this place today that has over a trillion one of capital and north of a $200 billion market cap. I joined a firm 33 years ago that managed less than a billion dollars here. So it's been a dramatic difference, but again we've never lost sight of what's mattered. And I would add to that, of course, the people. I mean, in the investment business, it's who you've got in the building that makes all the difference.

You know, I would say I think it's a little bit of both. I don't think you can really teach people who are extreme entrepreneurs, somebody like Steve where it's sort of born into his DNA. But if you bring people into a culture and you encourage this, and you say to them, 'Hey, get on that plane, find that new customer, think about a new way of investing capital, a new market,' then it sort of breeds this. It's encouraged. And that's what I feel like's in the water here. There's a desire to not only succeed at what we're doing but thinking about how we can expand it, and as we expanded, it brings more benefit to the original business we started with.

Well, it's in a large market that's growing, as opposed to a little niche market. It's a business that has some moat around it, either a physical moat or something that makes it special, a brand. And as a result, you have higher margins generally. Higher margin businesses say something about a company. It's a business generally with less capital intensity. Sometimes there are highly capital-intensive businesses that are great, but you love businesses that are capital light. You love businesses that have recurring revenues as opposed to having to start over every year. They're not exposed to one client or the government stroke of a pen risk. And there's potential to do things adjacent to the business.

Well, I've been the chairman of Hilton Hotels, you brought it up at the beginning, for 17 years. And it's global travel, an enormous growth business, but it's capital insensitive. The way they do it – the way the business used to be, they used to own the hotels and lease it. Today, what a company like Hilton is, is a management company and a franchisor. So the physical real estate is owned by third-party investors, and they just get paid as a percentage of revenues, maybe a percentage of the bottom line. And that allows them to grow without a lot of capital. Blackstone similarly. And of course, the power of the brand – there's a network effect. Once you become a frequent traveler with Hilton, you're going to stay at a DoubleTree or a Waldorf or a Hampton Inn around the world, and then other owners of hotels are going to build and want to affiliate with the system. And I'd say similarly with Blackstone, it's a capital business, it's based on brand, and it's able to grow into a very fast growing alternatives private capital market. So I like businesses that don't use a lot of capital and have a really great brand, and of course deliver to their customer. In the case of Hilton, or in the case of Blackstone, that's core to what you do.

I suspect if you've been on a board there for 17 years you spent a fair amount of time in Hilton Hotels. I do that. That is absolutely true, but the credit there goes with CEO Chris Nassetta.

Well, I would say this: the rigor of the process has stayed. When I joined this place way back when, we had pre-investment committees and sometimes heads-up memos and rigorous debates in the investment committee. That has stayed, and in some ways has gotten even more fulsome over time, and it's gotten better because we're not just doing one or two things, we get this much broader lens. So I would say the process has saved. What has probably changed is at the beginning we were probably more classic value investors – you could sort of invest in anything, project out a series of cash flows and value this. And I think where we've moved is more to being a little more high conviction: what are the areas of the world that we believe are going to get better? What's a good neighborhood? Physical goods are moving from retail the way we traditionally think about it to online, so let's really lean into global logistics where we become the largest investor in the world. What's happening in AI and cloud migration is leading to enormous demand for data centers, and so let's lean in there. Let's lean into the power that's going to support that. It's the same thing in life sciences – what we're seeing there with genomics and AI and big data precision medicine – so let's own the buildings, let's own the companies that run trials, let's invest in the phase three drugs themselves. So I'd say the basic rigor, the focus on doing tons of due diligence – we just had one this morning on a large public company we're looking at buying in private equity, and the debate sounds remarkably similar. We have more tools at our disposal, more people who can add value, but I'd say what we've become more aware of is trying to buy better businesses in better places.

Double-digit number of investment committees, but I sit across pretty much all the firm's investment committees. I spend my weekends – most people do other things – I spend my weekends reading investment committee memos. That's what I do.

10 to 12 committees.

Most of them, not all of them, meet weekly, at least every two weeks. So it's – if you looked at my calendar, there's a lot of time spent on those. And even sometimes when I'm traveling, I can't join, I will read the memos, I'll send in my comments if I have a very strong view or send my questions. So it's – if you said what do I probably spend the most time on during the week, particularly the weekends, it's just reading these memos. And it can range from a Japanese pharmaceutical company to a European energy company.

We try to limit them. We're getting better at trying to keep them shorter. We try to keep the text up front to sort of three pages or less, and then try to keep the overall memo less than 20 pages. It can be a lot of graphs and charts. I'd say we've come to realize more and more in the investment committee process that it's less about page 58 in the footnote and more about those first couple paragraphs – that neighborhood we're investing in, the quality of the underlying business, and then what are the big factors around technological disintermediation risks, labor costs risks, government regulation. In some ways forcing people to really focus on the big stuff.

Depends on the group. In credit, it'll be a higher volume because you're doing more volume, so those you might do three or four. For private equity or real estate private equity, those might be one, maybe two. But it tends to be a smaller number. And the good news is, remember, in our investment committee, there are the partners generally who are working on the transaction, the senior partners in that group, and a handful of us. And it's not always the same people who are sitting across these. We have a co-CIO function, we have some CIOs within business units, so we're trying to get the best of all worlds.

It depends on the group. It could range from 10 to 25 people. Often times we want the deal teams to speak up. We'll go around in many of these committees and ask the most junior people in the room, 'Hey, what do you think?' because we want them to articulate why they have conviction.

Yeah, the way it would work is we're not the most patient group of people. So often times maybe the young person will start. It's probably the youngest person may not be the one talking; it may be the principal, somebody in their early 30s. But the young people will be sitting there next to him, and often they'll start talking. But the way it tends to work is the memo will have come out and there'll be a series of questions. People are really drilling into: this company looks good overall, but it's been helped by an acquisition, and what we're seeing is the capital intensity, the working capital and the capex are going up. So there've been a flurry of questions. So often times because people will have read the materials, they'll immediately go to the heart of the issue. So hopefully people – and what we try to do is make sure a lot of pleases and thank yous and be appreciative to the group – but there's a really sort of truth-telling exercise. We also have the teams do business quality scorecards on each of the things we're investing in, and sometimes we may push back and say you gave that a green, that really feels like a yellow or red. The scorecard is like a tick list, like if you were a pilot taking off a plane and you have to remember to turn on the fuel and that kind of stuff. I'd say it's a little more of the margin, the capital intensity, the quality of management, what are the weaknesses. And the investment committee's job is generally to find what is not right about this or what should we be concerned about. Is the structure wrong? Is the alignment wrong? Is there something wrong with the business? Or you could come in and say, 'Hey, I think we're being too conservative. This is going to be a more competitive auction. Are we leaning in enough?' And what I love about our firm is there's a really healthy balance between the entrepreneurial spirit of the people identifying opportunities and sectors and the control mechanism of the investment process.

The way I think about it is it's an evolution, as opposed to once every couple months a deal comes up and then you're like this. Typically within the business unit, the people who are the leaders of those businesses will get these early on, or the heads of acquisitions, they'll do screening and they'll kick out a bunch of stuff. And they may make modifications and say, 'Look, we're not willing to do this under this structure, or we have to own 100%, or we can't buy this division.' It may go to a pre-investment committee again with more people than in the group, other senior investors in the group. And generally, when I'm seeing this, it's more towards the end of the process. So there the percentage is higher because you've already – it's like you're going through this quality control process. So when it's getting to me, it's a higher percentage. But remember, it can still be, 'Hey, this doesn't work for us for non-economic reasons. I'm concerned about the legal or press ramifications.' Do you have to have a thumbs up for it to pass? We try to do it in a consensus way. I try to do that rarely because I think you want to have this group sense. Every once in a while there may be something that I'm just like, 'Hey, from my standpoint, what I'm trying to do is signal things that I like or don't like.' Because generally within a fund or strategy, one deal is not going to be determinative of the future. But if it's a type of business that I don't love, then I'm signaling, 'Hey, let's try to do some other stuff.'

I'd say the process is more iterative. If it's a regular way deal in a sector we have high conviction, we've done a lot in this geography or we've done a lot in this particular area of software, we've had a ton of great success in it, the odds are it's going through. And if we're in an auction, we're debating price. What the teams have done really well is when you find something that's off the run and you realize it's got a feature to it that me or other senior investment folks are going to say no, then they'll pre-screen that earlier. So it's not nearly as much like you're up on some chair and you go up and you go this or that. It's a much more iterative process. And again, if you're within a business unit and the deal team's supportive and the senior partners in the business are supportive, my view is unless I've got a really strong reason, I don't think I should be saying no. I can be highlighting things. I view this as a consensus-driven process. And the other nice thing is in a number of these deals we have multiple investment committees. So we just did one this morning and we had a ton of questions, so we just said to them, 'Go back, these four areas you really got to dig in on this, and come back to us and we'll have another meeting.'

Well, it's difficult to get consensus for the best deals. What I would say is in our business, that's particularly hard in early-stage VC because it is much more of a gut thing. So much of what we do – there are cash flows, there are histories, we do have views about what's happening in many most sectors. I found that the deals when I say consensus, the driver of the deal is not – there's somebody who's the champion who really believes in it, and it's their job to convince the people who are skeptical. And we've had people do that. I mean, how did we become the biggest investor in data centers? We had some people who championed a large data center transaction three and a half years ago, and it turned out to be a brilliant decision to do that, and they were able to make the case for this. So I think we as a firm do a good job evaluating risk. We don't always get it right, and it is harder when you're going earlier stages, but it feels to me like most of the time we're getting it right. And what we're trying to do is avoid really big mistakes – something that's structurally flawed or if we think a business just doesn't meet that quality standard.

I think you've got to be both. Because the data tells you something. Certainly you can look at a business and say, over the last 20 years, every year the revenue of this business has grown 4%. That tells you something – sounds more like a long-term infrastructure asset. And you want to look at what's happening under the hood, read the memo and look at the numbers. On the other hand, the past doesn't tell you the future. The past wouldn't tell you that data center demand would go up 20-fold in two and a half years. The past wouldn't tell you that power usage in the United States, which has been flat for 20 years, is all of a sudden going to go up by 4% a year going forward because of electrification. So I think you need to have a quantitative side but then an instinctual side that says, 'This really feels good.' And by the way, the other area where it's really hard to put on a piece of paper is management teams, because if you look in so many industries, there are five players in the industry and one has grown to enormous size, three have treaded water, one went out of business, and they all had the exact same conditions. We've seen the same in the alternatives business. So that is by definition instinctual. So you've got to really try to understand, do we have the right horse? Or it's a great business and you need to change horses, and the potential is a lot greater than you expect.

I do think if you think of investing, boil it down, it is pattern recognition, connecting dots. So our competitive advantage is 230 companies, 13,000 pieces of real estate, so we're getting all this data. So if you can connect that data in a way and then transmit that into investment, then you have an advantage in using your gut.

I'd love to say we have some whopper supercomputer that gives us all the answers. We don't. But I'd say we're getting better and better. So what we're doing now is trying to pull the KPIs, the key performance indicators from lots of businesses, particularly the larger sized ones, the infrastructure, some of the real estate portfolio companies, some of our biggest private equity businesses, that give you data about what's happening in wages, what's happening in inflation. And then you try to share that as broadly as you can, subject to limitations – some things have to be anonymous and so forth across Chinese walls. So capture that data on a regular basis and share it. We do surveys on a quarterly basis of our companies where we'll ask the CEOs what they're seeing in terms of trends, costs, revenues, do they think a recession is coming. In the third quarter we asked, do you see a recession? Only 16% of US CEOs see that. What do they see? They see a pretty good economy. I would say now our European CEOs see a much tougher environment, but our US CEOs, this is even pre-election, saw pretty good environment. They generally see inflation coming down, so for most of them they feel pretty good. There is weakness on the consumer side a little bit – some of that was there was some Covid boom and a lot of price and some of that's reversing – but I'd say most of them see a decent pretty decent business environment and declining inflation, which has been helpful for their margins.

I'd say scale has been our calling card. First, I've got all this information and it allows us to see things in a differentiated way. We certainly saw inflation across our rental housing portfolio, or the biggest ports business in the United States. So definitely the information. It allows us to have resources both at the firm and at our companies, so we can have 50-plus data scientists, we can have people on talent management, we have enormous scale on purchasing, and we can bring those to bear at the companies we buy. But you don't need a trillion dollars to afford that. But definitely helps. Is it more difficult to generate returns? I don't believe so, because in private markets, it's an advantage. The other thing I'd say on that is if you think about a liquid market – something you know a lot about – if you want to buy a million dollars of stock and I want to buy a billion, you've got the advantage because I'm going to move the stock price. It's the exact opposite in private markets. So when AirTrunk, the biggest data center company in Asia, was up for sale that we bought this summer for $16 billion, because we could write the check ourselves, that was a competitive advantage. When we're writing a check for a $3 billion loan and we can do that by ourselves, that's a competitive advantage. Same thing in secondaries, all our different activities. So for us, being able to do big transactions is a competitive advantage; having all the information, all the resources, a competitive advantage. And the other thing I'd say is we've become increasingly sort of a full-service capital solution provider. So if you come to us and say I want senior investment grade debt, we can give you that from our insurance companies. We can do mezz, we can do preferred equity, we can do minority stakes, we can do control – the whole range of things. So it allows us to have much more robust discussions with corporates and other alternative firms. So we're finding scale as an advantage. The risk is that you lose the entrepreneurial spirit, that you end up with a very bureaucratic investment process, people who stop innovating. And we just can't allow that to happen. We've got to make sure people wake up here every day with a ton of energy, ton of dynamism, and that we're rewarding them in a real meritocracy for finding new opportunities, for taking risk, for generating great returns. But if you can harness the scale and keep that drive, to me that's a special sauce.