#79 - Jon Gray: Leadership, Scaling Blackstone, Market Trends

Well, my upbringing, I grew up in suburban Chicago. I actually had never been to the east coast of the United States until I went to college. I mostly played sports. But I grew late, so I sat on the bench more than I would like to say. I did well enough in school though to get to the University of Pennsylvania in Philadelphia and that was really important for me because there I met a bunch of young people who were highly motivated, particularly from the east coast, and it excited me. I enjoyed school. I ended up getting a dual degree. I was an English major and then I was also a Wharton in finance. And my senior year in college in romantic poetry class I met a young woman and that has turned out quite well. In fact, next week we'll be celebrating our 30th wedding anniversary. So that was 33 and a half years ago that I met Mindy. And about a month after that, I was dropping resumes for jobs and I got a job working at a very small investment and advisory firm at 345 Park Avenue, which is where I sit today as we do this Zoom call. So I joined Blackstone straight out of school. So my life was pretty set early on. I'd like to say I have the most boring biography of anybody you'll meet, having met my wife and gotten my job senior year in college. But it's been incredible. And in terms of my leadership journey, I don't think I was somebody who naturally came to leadership. I was probably a bit intimidated, I certainly wasn't comfortable public speaking, but I think just over the years, my ambition to succeed, my drive constantly put me in positions where I had to do these things. And what I learned in leadership is if you're willing to go all in, if you have a clear vision of what you want to do, if you treat people in a good way, people are willing to follow and work with you. So I would say my leadership style has evolved from doing, and maybe only as I've gotten older and more mature, manage more and more people, I think you become a little more of a student of the game. But I would say it wasn't something that I was born with. It was an acquired skill and it came from being at this for a long period of time, and to this point now I actually enjoy it and I get a sense of the power of being able to lead an organization and to do things, and it's one of the fun parts of my job.

Yeah, there were definitely a few. When I started, I was in our M&A and private equity business for the first year, which was unbelievable training, because I got to learn a lot about the LBO business and discounted cash flows, looking at companies, public markets, things. And then the real estate business had collapsed and our visionary founders Steve Schwarzman and Pete Peterson decided to go into that business and they found a great guy in Chicago named John Shriber and there were no junior people on this and one of my colleagues here said, hey, you should try this. So I often say that luck has been a core competency and in that case it definitely was. So we started on this journey of building a real estate business in the early 90s when prices were very cheap, things were quite distressed, and we got to ride that up through much of the 90s. Then there was a bit of a downturn after the dot-com bubble, then there was obviously post-9/11. And then as the Fed lowered rates, it created a new environment where real estate pricing started moving up a lot and the commercial mortgage-backed securities markets evolved. And we had this insight, I guess I had this insight that rather than competing for individual real estate assets which were starting to become very pricey, what if we went and bought big public companies? And we went out and ultimately bought a whole series of public companies, most notably Equity Office Properties for $39 billion and Hilton Hotels for $26 billion. And that was obviously that whole experience was very important. And then, of course, probably the most formative for all of us who were investors was the financial crisis. Watching everything you'd invested in, watching markets collapse, debt markets shut down, the economy slowed dramatically. And fortunately, we'd made a bunch of good decisions prior to that. We were able to ride out that storm. And the decision at the time when I was running the real estate business to expand rather than pull back, go out and grow our business more globally, move into debt, move into different forms of core plus real estate, and acquire a bunch of talent at a time when a lot of companies were laying people off, that turned out to be a very good decision. And we made some big pushes into logistics and single family homes and so forth. And we fought to protect some of our old investments, notably Hilton and Equity Office. And that was very formative.

And then related to that, I would say what I learned was this idea of trying to find really good neighborhoods. The investments that did well through that crisis were ones that had long-term tailwinds. And so that became very informative later in my career, certainly in this job. And then the other big thing I would just point to was when I got this job now seven and a half years ago and had the opportunity to help oversee day-to-day, working closely with Steve Schwarzman, the firm, and all these different businesses we have in private equity and credit and infrastructure and hedge fund solutions and life sciences and secondaries. It was an incredible opportunity, but it also was very daunting. And yet, I would say for me, the intellectual challenge of it, being able to see even more of the world, more investment opportunities, to really understand what's happening with technology and life sciences, that's been incredible as well. So every step on the journey, you learn. I will say, and you know this Alex, you tend to learn more when things go badly because you really study that as an investor or as a manager. But I would just say I've enjoyed it, but it can be hard as you know. I mean, when COVID was a learning experience certainly when you shut down the global economy, you have a bunch of businesses that no longer have revenue. The sharp upward movement in rates the last few years was another challenge. And you're constantly learning about how can I be a better investor, how can I manage through crisis, and how can I ultimately deliver for our customers.

Well, you know, the answer always in hindsight looks a lot clearer. But when we started buying single family homes after the crisis and the prices had fallen, I'll never forget I was driving around with my father in suburban Chicago and we were going around and seeing the prices you could buy homes, and I think we were both shocked at how much they had come down, 30, 40% from where they had been. So sometimes a light bulb goes off. Sometimes you go to a place, you know, you're in India, you see what's happening, you see the rise of physical infrastructure, capital markets, legal infrastructure, you see the talented people and say, hey, I think this is really going to take off, this is a neighborhood I like. To your point about doing it out of cycle, that is hard, because the natural tendency is to say this is the thing that's delivered me great results the last five years, so I'm going to do more and more of that. And this gets to the importance of diversification, but also recognizing some of these things have cycles. So if something has performed incredibly well for five years, it will tend to draw in more capital, which sometimes can drive down the excess returns. And those things that are unloved, nobody's paying attention to, you can buy them at a better price. So you obviously wanted to be a tech investor after the dot-com bubble. You could have bought some of the greatest companies in the world at incredibly cheap prices. But it just seems really hard.

And I think as an investor, you do need to separate the cyclical from the secular. So if you think about the secular, what's a buggy whip business? Is it landline phone companies or department stores or legacy cable businesses that are facing long-term secular decline? Their values may come down but there's not some pop. There are other things that are obviously more cyclical in nature. Commercial real estate is a great example of that, and therefore after the prices decline, ironically, that's the best time to invest. So I would say it does take the courage of your convictions and it takes having been through this a few times to recognize that most of the best opportunities happen when the prices come down the most. The risk is the greatest in 2000, in 2007, and 2021 when no one perceives risks. Today, when they're reading all the headlines and they're worried about tariffs and geopolitical things and so forth, actually you're generally paying better prices for assets and so you're more inclined to lean in. But I think if you want to be someone who delivers outsized returns over time, you have to sort of put that into your DNA.

You know, the challenges I'll start there. Obviously when you get larger, you have to become much more intentional in how you communicate and you can become siloed, you could potentially become bureaucratic, you could become just a bunch of little fiefdoms in different asset classes and geographies around the world. And I would say the firm has done a remarkable job of fighting that. There's such a desire to do extremely well in everything we do, particularly delivering for our customers in terms of returns, that we realize we're best if we stay connected. If we share the information and data we're seeing across our portfolio companies, it could be insights on trends, could be what's happening with inflation. But we still run the business like a small firm and we stay in regular contact with one another. So I would say we've done a remarkable job of maintaining that spirit of ownership and fierce dedication to being successful. And the other things that have stayed constant over the period of time are a relentless focus on delivering returns for the customers because that's what it's all about. Always operating with integrity because as you know, we're in the trust business. Nothing else really matters. We've got to make sure we honor our clients' trust. We work at the highest standard in everything we do. We have this constant focus on being an entrepreneurial place because one of the challenges when you get bigger is you start to lean towards process and less towards creativity. And you can't have all creativity, but it's this idea of you've got to create this amazing energy with talented people looking for the new idea. What's AI going to change? What's going to happen to energy? What's a new geography? And then you have this control structure around it. And I think we have done a very good job of balancing that and continuing to innovate in terms of where we invest and also who our customers are. This expansion beyond institutions to insurance companies to individual investors. At the core of everything though, we have maintained the culture. I sit here every Monday doing this Blackstone TV along with Vic Sonnie, who's our chief administrative officer, Steve Schwarzman. We talk about what we're seeing in the world. We talk about what are the trends, what the firm's doing, how we're giving back, and then we actually have a photo contest where this last week was graduations and proms because we want to keep the place connected.

And so it's definitely grown. I would say it's more challenging in some cases to operate. There's a lot of focus on what we do. So there are press and political considerations you have to take into account, which is another dimension in investing. But at its core, the business has stayed the same. We have to do a great job for our clients. We have to have great and rigorous process and we have to stay unbelievably connected in what we do. And I think everyone who comes here is amazed that despite what you think of this huge $180 billion market cap company, it's still run a little bit like a small business because we really care. We really want to do an amazing job. One of the advantages of scale that's probably less talked about is you become a magnet for talent and people want to work at Blackstone. They want to learn from all the insights that you have, and that gives you the opportunity to be adaptable and innovative. But it sounds like you have to be very intentional in taking that opportunity and catalyzing and taking advantage of it.

I agree with that completely. I mean, it is a great point. When I joined Blackstone, you have to go to the meetings and tell people who the firm was, right? And now everybody wants to come here. Obviously, I know lots of people who have children and they want jobs and this sort of thing. And it tells you that we've created something special here. Obviously, we have a great process around it. We have to have this place run as a meritocracy. So we've got to have the best people. But then once they get here, you've got to make sure they still feel like the place is a meritocracy that they can benefit. And then to your point, we've got to find ways to share the information either using technology or in our various meetings we host every week so that we're sharing the insights we have. Because even if you have a lot of great talented people, if you don't have great process, great systems, you can lose the benefit. And so to me, it's all that intellectual capital that's shared so that if we know an industry in private equity, somebody can help us evaluate a credit investment, obviously subject to legal limitations, company names, all sorts of things. But there's a lot of value in terms of the insights and what we see. And so yes, I think one of our great advantages of scale is just having more data and more insights globally and then being able to connect dots to say, hey, I see this trend that's happening in the United States, it's beginning in Europe, it hasn't even started in Asia. How can we capitalize on that?

Well, I would say the diversification was definitely a decision. Steve Schwarzman gets credit for very early on, well before others, I think in the alternative business, saw that there was a benefit to serving clients in a multitude of ways. I think how it's developed, the fact that they've all gotten to roughly the same size, I'd say is more coincidental. And sometimes there's an ebb and flow. Today, credit is growing more quickly than say real estate. Different parts of private equity. Infrastructure is in a very fast growth mode right now. But these things change based on cycles and so forth. And I think one of the strengths of the firm is by not riding just one horse. And by the way, not just riding one geography. We had our 25th anniversary in Europe a couple weeks ago. Having multiple places, all different sectors, we think it makes us a better firm. And when I look today at one of our great advantages in credit, it's that we have so much insight coming from our equity business. We have so many great relationships with financial institutions. And so we're trying to use the power of scale to see the world more clearly and to capture more opportunities. And definitely doing it at size for us has certainly been helpful. But the fact that the three biggest units are all basically the same size, I would say is a nice coincidence.

So I will break it down one step further. It's a little over half probably. 55% is from what I think of our traditional client base which has been pension funds, sovereign wealth funds, endowments. Today, about a quarter of our assets comes from the private wealth area, from individual investors, and that has obviously grown a lot. And about $240 billion, 20% plus, is insurance clients, which is a newer area, most of it focused on investment grade private credit where we're originating credit on their behalf instead of liquid fixed income and they get a premium. I would say all three segments continue to grow. The rate of growth is higher for the individual investors and the insurance companies because they're earlier in their journeys. So if you think about our institutional clients, our pension funds, they're already a third or higher allocated to private assets because it's been their best performing asset class. And almost all of them are staying at that level. They'll grow, but obviously there's some limitation because they need a certain amount of liquid assets. When you look over at individual investors, the folks you serve, they're on average probably low single digits, maybe at a firm like yours it's higher, but on average low single digits allocated. So there's still plenty of opportunity for that to grow. And the insurance companies I would say have moved a fair amount over time in real estate and commercial real estate lending on the private side, but in all sorts of asset-based finance, could be fund finance, infrastructure, energy, consumer finance. This is a whole new area for them. So that's growing very quickly. So all three of our main engines are growing, but those last two, the individual and the insurance company, are growing faster just because they've come to this later. But what's encouraging to me is virtually all of our clients are happy with alternatives and want at the very least the same or in most cases want more. And that's why when I think about a great neighborhood, I definitely think the business we're in is a great neighborhood: alternatives.

Well, look, we've been at this now for more than 15 years. It started with our drawdown funds. We built out a whole team, as you know, to service the individual investor. We created these semi-liquid vehicles. It started with BREIT and then BCRED. We've gone on in private equity and infrastructure, multi-asset credit, all these areas. The basic idea has been: can you create something that works for individual investors? So do it in a perpetual structure instead of drawdown, provide semi-liquidity, not the same as what you can get in the stock or bond market, but much shorter duration than what you get in a 12-year drawdown fund. In some cases, there's greater tax efficiency. They're just easier to access. I think what we've shown over time is we can produce a premium to liquid markets, and as a result, I think these types of structures for us and other firms will continue to grow. I think the next stop on this journey is we'll begin to see different modules. We've announced a collaboration around liquid assets with Vanguard and Wellington where we're putting together active equities, passive equities, liquid fixed income, so certain investors can in one-stop shopping get privates along with those with best-in-class managers. I think we'll see more of that. I think you'll see a firm like ours sell or put together more of our products in one place as an offering to make it easier for customers.

I think there will likely at some point be the introduction of private assets into defined contribution plans. Today, as you know, if you work in a state pension plan, you may still have defined benefits and private assets, but most private employers only have 401ks, which historically have not allowed private assets. And as a result, most of the population outside of the wealthiest have not had access to the performance that privates have delivered over time. I think you could see that as another frontier that emerges. So to us, it still feels like it's a ways to go. And like anything, it's got to be performance-driven. I mean, it's no different why we've seen the rise of ETFs and index because of the performance. It's why the alternative industry has grown. If we're able to give premium returns, I think the business will grow. And certainly on the individual investor side, it feels like early days.

Well, I think it's the most important thing, Alex. It's funny, everybody worries about what are the tariffs, will the Fed cut next month, whatever. The big thing is AI. If you went back in time and you said what happened after they introduced the railroad or the automobile or the internet, you saw a step function increase in productivity and growth. And in my mind, we're absolutely on the cusp of something like that. I think it will change so many businesses when you add super intelligence and almost no incremental cost other than energy. And so for us as a firm, this is the question we've been talking about. We have an operating committee offsite and we're talking all the time, and the topics are: what do we do as it relates to investing? What do we do with our portfolio companies? And what do we do at the firm level to make sure we're thinking about AI and its impact? So to your question, on the investing side, we've done a lot on what we call the picks and shovels. So we've become the biggest investor in data centers in the world, which has turned out to be a very prescient decision by us and has created a lot of value for us in our real estate and infrastructure areas. We've made enormous investments in the energy and power space. We just announced the privatization of a public utility in the southwest of the US. We're investing in all sorts of electrical equipment manufacturers, utility services, because if you think about the data centers, you think about autonomous vehicles, you think about the robots, they're all going to use electricity. And so these are big trends being driven by AI.

We're also spending a lot of time talking about both on new investments and in our existing portfolio companies. How can you AI-enable businesses? How can you take companies that have rules-based systems and introduce AI to improve productivity? How can you make customer engagement better if you have call centers and things? How can you use these tools on content creation, coding at our companies? And at Blackstone, it's becoming much more augmented reality, basically utilizing AI. I would just say we're thinking about both the positive impact. When we survey our CEOs, 85% say it's going to be a positive. I'm not sure it's going to be a positive for 85% of the companies, but we want our companies thinking about how we can adopt this technology and make the businesses better. We just hired Rodney Zmo, who ran AI at McKinsey. That gives you a sense of our mindset of the importance of what's coming.

And it won't change everything. The apartments, the theme parks, they'll still be going to Jersey Mike's will still be the same experience. But almost every business will be significantly impacted. We recently bought an accounting firm. I think there's enormous opportunity. That's a great example of a rules-based business where there could be enormous efficiency gains that come. So I think as investors, it should give you a lot of positive feeling that there's going to be opportunity for earnings to grow, the economy to grow, margins to grow, and that'll be a positive for share prices over time. But not every company is going to be a winner. I would not advise your child to grow up to go into the translation business, let's say. This technology is going to change a lot, and we have to, if we're going to outperform for our customers, we have to figure out how to utilize the technology. I mean, we're doing all sorts of stuff, scraping the data we get at Blackstone. We're doing summaries of the board packages, looking for words that are being used. We're trying to find this information, share it. Back to your point earlier about the benefits of scale, we can afford to invest in a team of 60 folks in data science and AI to help make our company and our portfolio companies better. And I would just say to me, this is the most important thing.