Tech Talks Business Features Jon Gray, President and COO of Blackstone

Well, I'll start with the overall theory of the case for me and my wife on philanthropy. We grew up never expecting to have the kind of life we have today. I grew up in Chicago, my wife in Philadelphia, and I don't know, 12, 15 years ago, we said, you know, look, we've got to think about how we're going to give back and do it in an organized way. And we really focused on two areas. One was low-income kids in New York City, giving them access to education, opportunity, and health care. We've spent a lot of time on healthcare in particular and on helping kids from underprivileged backgrounds having access to health education and becoming doctors and so forth. And the second thing was the BRCA gene mutation which is something that causes a very high incidence of cancer, particularly in women, breast and ovarian cancer. We lost my wife's sister to a BRCA related cancer and we set up a center at Penn, the Basser Center, and have supported a bunch of other research institutions.

After October 7th, we were deeply concerned about the state of Israel. My wife and I are Jewish. Our families feel a real connection there. And we've been concerned what could we do to help and really have an impact. But then we were thinking about how could we align with what we do here back in the US, again a focus on health care, on research, on access, and they're also helping underprivileged kids get educations. And so we decided, you know what, we could build dormitories, we could help with scholarships, we could do all sorts of things around labs and research as well, do some BRCA research, and we could help kids who otherwise have a hard time getting medical educations. We're doubling the number of Arab-Israeli doctors as well that are going to graduate from there. So it was really a motivation driven by the unthinkable acts of October 7th, but doing something that was around healing, education, and opportunity, and it really tied with what we do back here in the United States.

I've been dating my wife, I've been married 30 years coming up. I've got my anniversary, I got to get that right here in a few weeks. But I have been, I met my wife in, I asked her out on the first date in February of 1992 and it was about three weeks later that I got a job at Blackstone. So I have the most boring biography of anyone you'll meet. And I'm not going to mention when I met my wife because I don't remember and I'm on camera as well. So, let me

Yeah. So I guess it just starts with I grew up in Chicago. I'd never been to the East Coast until I went to college at Penn. I think for me, I did well enough in school, but I was really focused on sports more and I was lucky to get to a school like Penn. And then I got there and I met all these very motivated people. And one of the great things about going to a school like your own experiences, I'm sure, at Georgia Tech, is you find these highly ambitious people and it motivates you. And I decided to get a dual degree. I was an English major and then I got into Wharton in finance. I had to do summer school courses at Northwestern to graduate on time. And that senior year was that formative year where I meet my wife and I get a job at Blackstone.

And I didn't, you know, why did I go to Blackstone? Well, they were doing this thing called the LBO business. Today we call it private equity. They had a bunch of notable people who had been prominent in business and politics. Pete Peterson had been commerce secretary. Steve Schwarzman had run M&A at Lehman Brothers, Roger Alman, David Stockman, a bunch of notable political figures. And I was sort of a political junkie, too. And I had a friend who worked there. And it all sort of came together and I got this job. And when I got to Blackstone, what I found was there basically was this little place that had 70 people. We did M&A advisory work and then we started doing, they were doing private equity deals. And about a year into it, and it was great training because the firm was so small, the real estate market had collapsed and Pete and Steve, the co-founders, said we should go into the real estate business. They found a great guy named John Shriber who happened to be from Chicago and they didn't have any junior people and somebody's like, hey, do you want to do this? And honestly, I was like, well, maybe I don't have to go back to business school if I do this. And I joined this fledgling unit.

And I worked in that for the next 25 years. And we grew that to be the biggest real estate investment business in the world. And then seven and a half years ago, Steve Schwarzman said to me, hey, you know, my predecessor, Tony James, was stepping down. We'd love you to take over the firm running it day-to-day as president and COO. And that's what I've done. And the reason I've stayed at Blackstone the whole time is because I love what I do. I love the people. I love the intellectual challenge of investing because investing is really thinking about where's the world going? How's it going to look like? How can I invest against that? I love that. It's like sports. You get to see if somebody gives you a dollar, does it become two dollars, do you lose the money? I love the quality of the people that I got to work with and I've always, every day that I've been there for 33 years, I feel like I'm learning something new. And I think that whole thing, the nature of the investing business, the intellectual challenge, and then being around great people, and being at a place where you really are trying to win, but do it in the right way, operating with integrity, that has been incredibly special. And so, you know, I just think, and Steve Schwarzman himself just so much drive, so much energy and it's created a really special place and I've felt very blessed to have landed at the right spot and I often say that luck has been a core competency.

I think it is intentional. I think it starts with this idea that you want to be excellent in everything you do. That you're striving to be the best investment firm in the world. And you want to make sure your returns are great, but every element, your accounting, your legal, your technology, you want to be the very best. And it's a little bit like being on a winning team, right? A basketball, football team, whatever it is. There's something about a team that strives for excellence in everything they do. And then I would say it's also a place where we care about people. Now we demand a lot of people. I'm not going to say this is an easy nine-to-five place. This is a place where there are a lot of demands on our employees, but also where we try to recognize people when they do a good job, thank people, try to create a good culture. But related to that is if you're going to attract and retain great people, you want a great culture where people feel good, but you also have to have a real meritocracy where somebody who is super talented can have the opportunity to rise up. And so I think it's the combination of just this idea of we have this strong desire to win, we're trying to create a place where people are nice to one another, and we're trying to recognize real talent. And if you can do that, you can create something really special.

And I also think if you feel like you have a mission, and for us it's delivering great returns, which still the majority of the returns we're delivering are to public pension plans. So nurses and firefighters and teachers and all sorts of people out there that it's really important we do a great job. I don't know, there's just, I think there's an incredible sense of pride and there is this also I'd say that it feels a bit like a small business even though we've grown to be very large where people really care and it runs all the way through the organization. But I do think as much as anything is having a meritocracy where somebody young here could join the firm and feel like, wow, I could have an amazing career, really incredible professional development but also financial success. And it's not, oh, I'm a seventh year this or so forth. I think that's really important to keep driving things. And then the final thing I'd say that I think is super important is because we're a growth-oriented company and we're not a static business, that creates opportunity. So if you think about a static business and you know we're in one line of business and this is what we do, that may be great and you could do really good, but how does somebody move up at our firm? Because we're going into infrastructure, we're going from Europe to Asia, we're moving into a higher returning or a lower returning version of real estate, or secondaries, that's creating lots of opportunity and I think that's been another way we've been able to retain great talent is by continuing to expand. And it creates more runway for people who really want to grow.

Well, I would tell you by definition investing is difficult because by its nature things are going to go wrong. There can be natural disasters, some human being could break the law, you could have just made the wrong call, the technology management team missed something. So many things can go wrong and then you have these systemic shocks which you hit on. And the most notable clearly was the financial crisis. And for me at the time we had bought Hilton for $26 billion. We borrowed $20 billion which was a lot of, in retrospect was probably too much leverage. But I was young. We bought it, we paid a big premium to the public share price and we closed on the transaction at the end of '07 and Lehman Brothers collapsed in a year later, less than a year later, and within six months of that the company's same store revenues were down 20%, the cash flow was down 40% and we had put a lot of leverage. And you probably should have been writing the obit for my career at that moment. Because we had put six billion of equity, which was the most ever in a transaction, and we'd put it into our private equity fund and our real estate funds. And so we went all in in a pretty concentrated way.

I guess, you know, how do you maintain balance? I think for me having an amazing wife and the kids at the time, just sort of having something that's a touchstone that provides balance I think was really helpful. I did fundamentally believe that this was a great business, that it was cyclical what was happening, that travel is something we're all going to do, and that this business model in particular, which was primarily asset light, you were a manager or franchisor. It owned some legacy hotels, but its growth was all from growing Hampton Inn and Hilton Garden Inn and Hilton and DoubleTree and Embassy Suites and all these amazing brands. And that we just needed to make it to the other side. And so you had to stay calm in the face of this. We ended up putting $800 million more to delever the company. We had a lot of very nervous investors. We wrote the investment down by more than 70%. So imagine those meetings with our customers. Those were not fun.

But I did believe and a number of my colleagues did as well that we were going to get through this. And I'll never forget it was in the spring of '09. The company also was getting investigated on a corporate espionage thing. They had hired somebody who'd taken some boxes. Company actually had sent them back. But anyway, and there was a headline story in the Wall Street Journal about that. And I talked to Chris Nassetta, the CEO, who's still the CEO. And I actually, I was at a Hilton Board meeting yesterday in Tyson's Corner. And I said to Chris, you know, the company's in dire financial straits. We've now been, we're about to be indicted or whatever. I said, well, the good news is it cannot get any worse than this. And ultimately, we put in more capital. We got through that legal matter. The business turned cyclically. The management team did just a phenomenal job and we ended up taking the company public. We made $14 billion. It was the most successful private equity or real estate private equity deal of all time.

And the biggest takeaway from this to me though as an investor was even though we overpaid, we had too much leverage, we had bought a great business in a great neighborhood. And maybe therefore we shouldn't obsess so much whether we pay 99 or 101 for a company and what page 58 of the model says but maybe we should focus a lot more on the first paragraph and maybe what matters is today, we'll get to it, you know what's happening in AI and digital infrastructure and energy and power or the rise of India or trying to find some of these amazing neighborhoods with long-term tailwinds. That's what really matters and how can I invest in those good neighborhoods. And that plus trying to maintain the level of equanimity were the most important things. And yes, when you got to COVID and we shut the global economy down and we had a bunch of businesses that had no revenue, you know, you learned from that. The last month, you know, during all the tariff turbulence, you know, remembering this stuff can pass. And I think particularly for those of you who are in the investment world, I think it's very valuable. And I always say to my kids and I now say to our employees every week, stay calm, stay positive, never give up. And that's sort of my motto and watchword. And I think in these difficult moments, I have to remind myself, but I think it's important to do that.

I would bet on New York City. I would bet on New York City. And the reason why I would bet, and by the way, I would bet on the recovery in San Francisco. People, the natural state is to live in these urban centers with super dynamic people from all over the world. There's an ecosystem in these places. There's culture. There's restaurants. They're very hard to replicate. Now, they do go through cycles, and we've seen that. And when the crime rates go too high, the quality of living deteriorates, the taxes are obviously an issue in these places. They can drive people out. And we saw that certainly in the '60s, '70s, '80s. And then shortly after COVID, we had a lot of people during COVID, but then after, who left. But ultimately, I think the economy is going to be driven by knowledge workers. Those knowledge workers like to be in these places. And so as long as the conditions return to sort of their normal state, people will come back.

And as it relates to your daughter's apartment, the fact that no one is, this is free advice, I'm noting it down, believe that as long as no one's building and there's virtually no construction of real estate in New York and yet there are all these people, look at all these talented grads from your university who want to come and work here, then by definition if you buy existing stock it will grow in value over time. And we've also been in a tough few years, both COVID and then the sharp increase in interest rates which have kept values under wraps here. And now with the lack of new supply, I think things can be a lot better.

Well, it's interesting. Everybody's buying downtown. I think the Upper East Side is pretty cheap to be honest. But there you go. So I would say, look, I'll just start since we started on real estate. There is a shortage of housing in most developed markets in the world that's really gotten quite pronounced since the financial crisis. And so I would generally say owning rental housing is a good neighborhood. And it's been hurt the last few years by the sharp rise in rates, cost of capital, that I think will reverse itself. But even more importantly is the supply-demand dynamic. The biggest trend to keep our eyes on is obviously what's happening in technology. And I was talking to the head of AI at one of the big hyperscalers today and the pace of change, how rapidly these large language models are improving is extraordinary and the questions they can answer are just amazing and I think we're at the very, very beginning. It's almost like basic science in a hospital sense, you've developed the basic science. It's still not made its way to the bed, clinical use, but it's coming. And the same thing's going to happen here. And it's going to change obviously coding and customer engagement and creative industries. And we're all going to have these bots. And as a result, what have we done? We become the biggest investor in the world in data centers. You know, we, I think we have something like 80 plus billion that we either own or under construction today. And that is a physical infrastructure today for what's coming in this world. Energy and power. So if you believe these data centers are going to exist and consume lots of power. If you believe they're going to be tons of autonomous vehicles, why are we driving cars when it's already clear that these things have a 98% lower accident rate? It's only a matter of time. And why will we not have robots, not just chat bots, doing lots and lots of things? And what is the one constant in all the things I've described? It's energy and power, which has basically been flat in terms of demand for the last 25 years and now is starting to grow four or five percent a year.

So own utilities, own transmission lines, own generation, renewables, the whole thing. And then equipment providers, you know, electrical equipment, a lot of boring businesses, utility services businesses, own that whole ecosystem. When you find a great neighborhood, you really want to flood the zone. I would say life sciences is another area that I think will be accelerated a ton by technology and therefore the labs that do the trials, the physical buildings, the companies that run the trials, phase three drugs, there'll be all sorts of industries that benefit from this. I mentioned India geographically as a place that I love because of improving capital markets, legal, physical infrastructure, and a highly educated population, very low base you're operating off of. Alternatives, the industry I operate in, we're watching the rise in asset management. It's obviously ETFs and index funds on one end. It reminds me of retail where you have hard discounters, you have Aldi and Costco and Amazon, and then you have luxury goods. And there's a little bit of that if you think about it, the alternative space, where it's not the lowest fees but the net returns have been so strong for such a long period of time. And so that's an industry, and we buy stakes in other managers and secondaries, and then we make loans to private equity firms as well. So I could go on and on, but I would say identifying these big mega themes and then leaning in in a big way to me is the best way to generate returns.

Which sectors in AI? It is so hard. I mean, if you think about these large language models and the competition, it's very hard for somebody who's a lay person like me, like how do you pick? We've generally not engaged in that. That's why I love the infrastructure around it. If you think about this image of the picks and shovels, you don't know who's going into that tunnel in Northern California in 1840, but you know, they're going to need jeans and they're going to need those picks and shovels. So that's one way. And then what we're spending more time on is the AI application companies. Are there companies who can use this technology within an industry? The other thing we're starting to do is really focus on traditional businesses that are rules-based that can apply the technology to make themselves much more efficient. So what do I mean by rules-based? Think about accounting and tax, legal. Think about all the zillions of healthcare and financial services transactions. There are clear rules. You know, the ball comes down, the blue ball should go here, the green ball here, and so forth. Can't a machine do that much faster or in partnership with a human being? And so we recently bought an accounting firm. We've been looking at some of the BPO companies, the outsource companies where that have normally been very heavy human intensive. Can you make them much more efficient? And so I think trying to figure out how you apply this stuff to, in many cases, old-line businesses could be really interesting. But nobody can sit here and say, or I certainly can't, this company's going to win versus that company. I would say OpenAI seems to be in a very special position today because their technology seems to be the best and they built up this consumer brand name and they seem to be moving in a very strong spot. But who knows? And obviously Nvidia as the leader in the GPU space. But we've tried to, I think, not engage as much in figuring that hardcore technology out, more into how can I support it with picks and shovels and where can I use the application in traditional businesses to drive returns.

Yeah, I mean so much of what we do as investors is intuition based. I mean I'd love to say it's purely like this is the math, but you meet a CEO and she or he is incredibly dynamic and it gives you a confidence level. When you're dealing with things like geopolitical, you think about the tariff situation, you know, we obviously had investors who got very concerned and I'm sure people were like, oh, I'm selling everything. The world's coming to an end. And we were counseling people that, hey, this is policy induced. It's not the financial crisis where we have trillions of dollars of extra debt. It's not the COVID crisis where we're all at home in our pajamas. This could change quickly. So, and ultimately the administration wants economic growth. So, let's be a little patient to watch the tariff diplomacy pay out. So, that's an intuition about that. There's a combination of both your numeric sense and your gut sense about things and sometimes you get it wrong. I mean, you know, it's a little bit like being a baseball hitter. Now, you need a higher hit rate than .300 in investing, but you're never going to get it all right all the time. And even Warren Buffett, the greatest, has made plenty of mistakes, and he'd be the first to admit it. So, but you do, I do think, a little bit of an intuition about where things are going, what the quality of the business is, and the neighborhood you're in, and then of course the price you're paying. Because you can buy a great business in a great neighborhood and we saw in 2021 or 2000 you could pay a price that doesn't make any sense.

You can be on LinkedIn. There's no patent. I will tell you the technology is very advanced. I go like this. So the backstory on the running videos is I was doing it, I didn't really want to go on social media and our corporate affairs team really pushed me. And I originally was doing LinkedIn posts that were sort of corporatist and boring. And then I was in Sydney running by the opera house and I was like, this is amazing. So, I'm like, you know what? I'm gonna do a video, the kind of video I would send my daughters. And instead, I made it business-oriented. I said, I love being here. There's a great city. We have incredible people. We have wonderful clients. I'm excited about AI. And I posted it and it went viral. And so, I'm a genius, right? I'm like, oh, that worked. I'm going to do that again. And so you could do it in Japan and you can do it in Bentonville, Arkansas and you can do it in Paris and London and wherever and you know you just have fun when you do it and you try to, you know, I would say there's a business reason for this. It's not just some sort of narcissism, you know, like hey I want everyone to love me. It's basically this idea that if you think about the investing business it's a trust business. We're not selling a product. We're selling the idea that you're going to give us your capital for three years or five years or 10 years or whatever. And you should trust us. And if you show that you're human and it's very hard on TV when you're being interviewed and the questions are very hard and whatever to show a lot of warmth and authenticity. And in a print interview you speak for 45 minutes and they take one controversial statement and that makes it, and I understand that's their business. But what's nice about this is you can show who you are as a person. And I think it's helpful and it's also helpful when you're recruiting because people will come in and say, oh, I'm excited to interview. I've watched your running videos. You seem like a nice sort of dorky person. This would be good. So, it's become fun. At some point, it'll be too much, but for right now, it's working.

Yeah, it's a great question because I agree when there are secular shifts versus cyclical, identifying that's really important. So what do I mean by that? What I mean is if you're going through an economic downturn, a rate shock, or you know we've been through this tariff diplomacy or whatever it is, COVID, a lot of these things are cyclical and we're going to get back to some settled place. When you're dealing with a secular challenge, so today you're the CEO of a landline phone company or a department store chain, the cable industry, things that technology has moved in such a way that you're under enormous pressure there. You've got to, you can't just say, hey, I'm going to wait this out for 30 days and people are going to install more landline phones, right? And so I do think it's very important as you're diagnosing a problem, a crisis with a business, is this cyclical or secular? And so if you go back to my Hilton comment, I saw the downturn in travel. We saw it as cyclical in nature. And that's what gave us the confidence to get through. If a problem is fundamental, is secular in nature, then you've got to figure out how do I cut my losses? What can I do here? Because things are not going to turn your way.

Well, look, I think if you said what are the biggest risks, I'd say obviously the size of our fiscal deficit, which I don't think is an immediate problem because there's so much economic dynamism in this country and desire to invest in it. But I don't think you can run 6-7% deficits as a percent of GDP in perpetuity without there being some significant cost. And by the way, it's not a Democratic comment. It's not a Republican comment. The deficit has continued to grow and accelerating growth under both parties. So I would love to see us get on a better fiscal path. I don't see that as, as I said, some sort of imminent problem, but you just can't do this forever. I think politically, switching gears to Europe, I think holding that thing together, given the demographic challenges, now the immigration challenges, the lack of economic growth and opportunity, they've had an incredible run holding it together despite all the stresses and strains. But I think it's important they reform and get faster growth. And in some ways, the shock of what's happening from this administration may turn out to be beneficial to them to force them to change some of their policies. And so I do believe there are some risks there long term holding that together. And then longer term I guess to this technology, you know what does a world look like when you have bots doing everything and so forth and what are we all going to be doing? I don't think that's tomorrow's problem, but that's something society-wise we're going to have to figure out. I will say on the positive side, I do think a bunch of G7 leaders say we have to resolve the next little bit because I don't think any of them are being an aggressor. And so I think we'll see something come out of the Middle East, Russia, Ukraine, and I'm hopeful that the tensions in the South China Sea come down. So maybe that's my optimistic nature, but I do believe that's the case.