For all the success the firm's had, there's still a sense of nervousness, concern, and a relentlessness that there's never a feeling here like we're on top of the mountain. We're always talking about what we're not doing right, how we can do better for customers. And I think the sign of a business that keeps pushing is one that feels that sense of basic insecurity. Yes, we've had a lot of success, but what are we doing tomorrow? I tend not to like to reflect a lot on the success of the past and I love to think about what are the challenges today and how are we going to get through them.
Prominent CEOs, leading economists, iconic investors, insights from the experts. The Walker webcast with Willie Walker. See who's next.
Welcome to a very special Walker webcast. Today marks the fifth anniversary of the Walker webcast and for the fifth anniversary episode, I reached out to John Gray and with deep, deep thanks to John for taking an hour to join me today. I'm thrilled to have the president and chief operating officer of Blackstone joining me. John, it is fantastic to have you with me and I, as I just said, I'm deeply appreciative you've taken the time.
Well, Willie, it's great to be with you and your audience. I've gotten a lot of texts about me doing this, so I know I've got some friends out there watching and I know you pulled together a heck of a show over time. So, congrats on everything you've done here.
Well, I'm only trying to get the same number of LinkedIn viewers you have from all of your running videos that you put out so consistently and so creatively. John, on one of those videos, actually, I heard you were asked by one of your Blackstone colleagues to name your three favorite songs. And you said, gosh, finding my three favorite songs, that's going to be a tough one. But the first one that came to mind to you was Eye of the Tiger. And so I thought I'd pull the lyrics from Eye of the Tiger to just start this off because the first stanza of it goes: rising up back on the street, did my time, took my chances. You've clearly taken your chances. Went the distance, now I'm back on my feet, just a man and his will to survive. As all of us know, you've done more than just survive. But in the next paragraph it says: don't lose your grip on the dreams of the past. So, I want to start here. You grew up in Chicago. Take me to John Gray's dream of what he wanted to accomplish back in the 1970s or 1980s as you were figuring out what was going on in high school and where you might go to college. What was the dream for John Gray back then?
It was definitely not to be sitting here today, Willie. I'm a long way from home. I think the dream back then, like a lot of kids, certainly young boys at the time, was to be a professional athlete. I was a huge Chicago Bears, Chicago Bulls, Chicago Cubs fan. You know, we would watch every sport, play every sport. I ended up focusing more on basketball than anything else in high school. But that was really my passion. The hard part was that I developed later than other kids and I ended up spending most of my high school basketball career sitting on the bench which was a huge disappointment and so my dreams of I think being a professional athlete were dashed pretty early on. And I would say, you know, academically it wasn't a huge focus but I was always, I'd say, intellectually curious. I loved reading the newspaper. And then I got a little later in high school, I got a little more serious. And I think for me the key sort of pivot point was I ended up getting accepted at the University of Pennsylvania and I left my Midwest roots and my incredible family and went to school in Philadelphia and I found myself surrounded by a bunch of these highly motivated kids from the Northeast. And that's really when things changed and I became, I would say, a little more focused. But childhood playing sports would have been the passion.
So you said that you were a late developer. My mother used to call me a late bloomer. But I did hear you tell a story about getting your driver's license and getting to the drive-in window and having the person say, 'Please pull around, ma'am.' Which you and I share a very similar experience along those lines. Other people don't understand, Willie, how formative that is in terms of your character. It creates some drive.
Oh, I fully, fully, fully concur with you on that one.
So John, just staying on your childhood for a moment, your father had an auto parts manufacturing business, which by coincidence was called Blackstone. I'm just curious at any time has your dad turned to you and said, 'How come you didn't come to my Blackstone and make it worth $200 billion?'
Yeah. So, it's funny. It's one of the great coincidences of my life that our family had this business on the west side of Chicago that built automotive parts, evolved, did some office furniture as well over time through metal fabrication. And what happened, unfortunately, my grandfather had the business, passed it on to my dad, but manufacturing automotive parts on the west side of Chicago is not necessarily the most competitive thing and the business got into a lot of financial trouble in the late 70s, early 80s. My dad really tried to make it work, but it ultimately didn't. So, the business left the family. The one thing I will say that ultimately made me quite happy is just before my grandfather passed in 1992, I told him I was going to work at Blackstone. And he loved that. It was a different Blackstone. It was in New York, but it was the same name. But no, it was very ironic that that was the family business. A very different business, but this Blackstone of course has turned out okay too.
So you said you got to Penn and that sort of opened your eyes a little bit as it relates to both academics and being around a bunch of really driven, highly talented students and colleagues. You tell the story that during going to your first summer job as your mom was dropping you off for it and you're all dressed in your tie, her one piece of advice to you was keep your desk clean. I'm just curious, if I walked into your office at Blackstone today, do you still have a clean desk?
I would say not as clean as my mom was hoping. But no, but I've gotten better as I've gotten older. I think as I was younger it was very messy. But look, my parents, my mother, my father, both of my stepparents have all been incredibly supportive and my mom interestingly was an entrepreneur, had a catering company which was pretty unique. If you go back now, you know, 40 plus years ago and so she pushed me as did my father. But on the desk neatness, I'd say okay.
You clearly, the technology's helped because we're doing it all on these.
No, no doubt. No doubt about that.
You talked for a moment about your love of sports and the Bulls and the Bears. There's a picture of you and your now wife, then girlfriend Mindy at your Wharton graduation and you've got a Sony Walkman earpiece in your ear with the string hanging down. This was long before we had wireless AirPods. And you were actually listening to the 1992 Bulls Knicks playoff game in your ear during your Wharton graduation. I actually went back to check whether the Bulls won that year, which as you very well know, they did. Do you remember what Michael Jordan averaged per game during that NBA Finals? I would think you probably know pretty close.
I don't know, but I would guess it's probably 30 plus, 36 points a game.
Wow. 36. I was like, 'Wow, that's quite something.' But I mean, what a great gift to you. I mean, a lot of yours and my friends' kids have grown up in Boston over the last, you know, two decades and they've had the great benefit of watching the Patriots and the other Boston teams. But when you were growing up in Chicago, having the Bulls there was just an incredible gift. Six championships in that gap in the middle. Michael played minor league baseball, which was not perfect for the Bulls, but he was the greatest basketball player of all time. The guy was amazing and so fun to watch. I'm assuming you've met him.
I have, but I wouldn't say I have a particular relationship. It's been in larger groups. And like anybody, you get so nervous when you're around Michael Jordan. You're truly in the presence of greatness.
Yeah. Well, one of the things I was going to ask you a little later on, but I'll jump to it now. I was doing an interview with Barry Sternlicht and Bob Faith at a conference a couple years ago and I asked Barry and Bob just sort of, you know, they've both had great careers and been able to do and see a lot of different things and I asked them both just tell the audience sort of something unique that you've had the opportunity to engage in. And I can't remember exactly what it was that Barry said, but Bob Faith, and this is in front of hundreds of people in this conference, he goes, 'You know, Willie, you may not like me telling this story, but one of your competitor firms actually took me to meet Warren Buffett, and I thought that was a really fun life experience.' And I'm sitting here and saying, 'Of all the things Bob could have brought up, he talked about the fact that BCadia took him to meet Warren Buffett and that was a great experience.' And I sort of was pulling the knife out of my back after he said that on a big stage. But that's fun that you've met Michael Jordan. So John, let's jump to joining Blackstone in 1992. I guess the first thing about it was it was a very small firm back there. There were 75 employees, a fund of 750 million, and it was really focused on doing buyouts. How did you end up leaving Wharton and going to Blackstone in the first place?
So, I'll back the tape up just a little bit. So, at Penn, I ended up actually getting a dual degree. So, I was an English major and I was also in Wharton with a finance concentration. That turned out to be a very good decision because my senior year I met a young woman in romantic poetry class and I ended up marrying that woman. We've been together ever since, my wife Mindy. And a few weeks after that, I was just interviewing on campus, and I got a job working at Blackstone, and the firm had maybe 70ish people at the time. We managed just $750 million. We did M&A advisory work and we did private equity, but back then it was called the LBO business. And I was excited about Blackstone. One, because this was sort of a new interesting area, LBOs, and two, there were a lot of political luminaries at the time at Blackstone. Pete Peterson, one of our co-founders, who was former Secretary of Commerce, Roger Altman was here, David Stockman, Steve Schwarzmann had run M&A at Lehman Brothers. It was a very high-profile firm, but small. And I didn't know that much, frankly. I was just interviewing for jobs and it seemed like a super interesting place to go. I also had a woman I was friends with whose boyfriend worked here, David Blitzer, who still works here. And that was a connection also. And so I would say it was more luck. And I've described in my life luck being a core competency. Getting to Blackstone, I think, was good luck. I'd done really well in school. I got this job, but I really had no idea at that time what it meant and I had no idea where the future was going.
So over 23 years, Blackstone has gone from being that firm with one fund and 75 employees to now having 1.1 trillion in assets, a market cap of over 200 billion back in November which made it larger than Morgan Stanley, Goldman Sachs, Citigroup, or BlackRock. And I guess the question I'd have on that is over that 23-year period of time, John, there...
33, Willie, 33. You know, 33. You're making me young, would you imagine? I wish he was just 23.
He's exactly right. Over that 33-year period, was there a moment where you weren't sure that Blackstone would survive? Number one. And number two, was there a moment when all of a sudden because of a fund you'd raised, a deal you'd done, a team you'd brought on, that you realized that Blackstone was not only going to be a very successful firm, but was going to be the firm in your industry?
So, I'd say there are a couple things that I would point to. I mean clearly the scariest moment in this firm's history and I think most investment firms' history of the last couple decades was the financial crisis because you know we were engaged in private equity. We obviously moved into real estate. We had a private credit business. We invested in hedge funds and the business had steadily grown from the time I joined it until we hit the financial crisis. And really just before the financial crisis, as you know, in real estate in particular, we really started to supersize our business. We went from buying individual assets or portfolios to buying large public companies, Equity Office for $39 billion, Hilton Hotels for $26 billion. And then the storm really almost of the century comes along and you're obviously dealing with massive liquidity challenges, operational challenges. You're taking huge markdowns and it does feel like at that moment, oh my gosh, where is this gonna go, but I think there was a sort of basic resilience at this firm. I think we had made a lot of really good decisions about how we financed things, how we had sold stuff down, how we derisked our portfolios, and it was really true across the firm. The fact that we had a lot of dry powder. We didn't panic. We took the opportunity when prices fell even though we were dealing with our own challenges to deploy capital. There was an element here of sort of stay calm and carry on. And I think the learnings from that and that sort of near-death experience were so important. And by the way, when I look back at the concentrated bets and the amount of leverage, there were definitely some risks that I personally shouldn't have advocated for, but we managed to get through it because we owned some amazing businesses. We had the right management teams in place. We made some really good decisions and in many of those, most of those cases, we ended up generating enormous profits. So, I would say clearly the financial crisis was the thing that really shook our real estate business at the time and the firm overall in terms of when we realized we were getting to some sort of liftoff velocity that was different in real estate coming out of the crisis because so many of our competitors didn't survive or were badly hurt. It was clear at that moment that we had an opportunity to do something different to expand more geographically to move more into debt to move into core plus real estate and continue to operate at a unique scale. So I would say that in real estate and then I would say more broadly for the firm really over the last, I don't know, five, six years as we've expanded the business and continue to do what we've done traditionally in private equity and real estate private equity and opportunistic credit but really move into some of these other areas like infrastructure continuing in core plus real estate in credit, performing credit both investment grade, non-investment grade and expanding with insurance companies and really moving into private wealth that it became I think more and more apparent that we had a brand that was differentiated. We delivered for customers and that the potential addressable market was much larger than people thought of this sort of private equity alternatives world that there was a much bigger universe of customers and a much larger place we could deploy capital and that's something I think that has changed our mindset but I would say this for all the success the firm's had there's still a sense of nervousness, concern, and a relentlessness that there's never a feeling here like we're on top of the mountain, we've made it, we're in a different spot. If you sat in our boardrooms and you listen to us talk about it or you heard Steve Schwarzmann talk about the business, we're always talking about what we're not doing right, how we can do better for customers, how we can deliver better returns, what innovations. And I think the sign of a business that keeps pushing is one that feels that sense of basic insecurity. Yes, we've had a lot of success. We can look back and pat ourselves on the back, but what are we doing tomorrow? How are we going to deliver? How are we going to be better than our competitors? How are we going to build a business that serves our customers? So, I tend not to like to reflect a lot on the success of the past and I love to think about what are the challenges today and how are we going to get through them.
So, two things on that as it relates to the most challenging time and then the opportunity. I've heard you say a number of times that one of the great lessons you've learned is to maintain equanimity through difficult times. And I just heard you there of the GFC and some of the deals and clearly the Hilton deal, which was a $26 billion buyout with $6 billion of equity and $20 billion of debt was quite the LBO to be done in July of 2007, right before the world changed so dramatically with the GFC. But when you say maintain equanimity during difficult times, it sounds great. It makes all the sense in the world, but as you and I both know, it's exceedingly difficult to do that when times are tough. What is it about the DNA of Blackstone? What was it as it relates to the partnership that you and Steve had that you and the other partners had that actually allowed you all to maintain that equanimity and the conviction in your bets? I mean, on the Hilton deal specifically, you all had to turn around and put I think it was another $850 million into Hilton after having done the original buyout to push out some debt and restructure the balance sheet, which obviously was what gave it the lifeline to be able to get through. But that's not a minor, you know, I'm sure there were a lot of people around the table that said, 'Hey, John, are we putting $850 million of good equity after bad equity of a $6 billion equity check?' So, what is that somewhat intangible, if you will, that allows for the equanimity at Blackstone in tough times?
I don't know. I think it's the drive, Willie. I mean, Steve himself just has this unbelievable will to win. I try to, I think I share some of that as well. We want to be successful. And when you have that kind of drive, you realize that you're going to be in difficult situations and you have to find a way to get through them. And I also think there's sort of a fundamental optimism. You know, I say every week, we do our Blackstone TV and I'm in this room every week on Mondays and I say something I said to my kids growing up. Stay calm, stay positive, never give up. And I think those watchwords are very simple, but I say that every week to everybody at the firm because it's what I believe. And when you're in the investment business, I think part of this is you just know this. I mean, look at the events of the last six weeks. Look at how much volatility, how much the M&A market slowed down, stocks have traded off. People are very nervous. If you sort of go from pillar to post every time something doesn't go right, either within broader markets or an individual investment or business you own, you're never going to get through it. So, you have to be realistic in the assessment of things because sometimes you made a bad judgment. The management team may need to change or the investment you made was flawed in some way. But if you have this basic idea that you're not passive, that you can take action, you can improve things, you can figure out how to put more capital in or improve the operations or pivot in some way, that you're an active agent of change and you believe fundamentally you're going to find a way to get to a better outcome. If that's core within you, and that's sort of been inculcated in the whole firm, then I think you just approach these things with a degree of positivity that gives you a chance to get to the other side. And I agree with you, when it's really going bad, it's hard. It's easy to say it on this call. It's easy. But when you really make a bad decision, you make a terrible investment or you feel some, it really hurts or there's a terrible news article or there's something that's gone awry, it's hard. But I do think if you constantly remind yourself, hey, look, I'm at a great place. We still have time. We can figure this out. I've got access to capital on a personal basis. I've got a great family. You know, I've got a solid base. I'm just going to work harder than anybody else. I'm gonna figure out how to get to the other side. If you bring that to every problem you face, your chance of success goes up. It doesn't always mean you'll get a great outcome, but as I said, your success rate goes much higher.
So, let's go to the other one, which is opportunities and jumping after opportunities. I remember distinctly, it was probably 2012. And I was at Sam Zell's conference out in Chicago, the Marshall Bennett Classic, and your colleague, John Schreiber, stood up and talked about single family rental, and you all had moved quickly into the SFR space. You'd bought 50,000 single family homes before anyone else had sort of blinked. And John stands up to talk about SFR. And everyone in the room starts throwing darts at him. And I mean, everybody, including Sam. Sam, I'll never forget, sat there and said, you know, who's ever taken a rental car and taken it to a wash to get it washed. He's like, 'No one's going to take care of these homes. It's going to be a complete, you know what, as far as managing the assets and this is just a whole new asset class. Who would ever do it?' And I remember turning to David Nethercutt who ran EQR at the time, and I said to Nethercutt, 'You ever looked at this?' He said, 'Man, I have a hard enough time managing one asset with 350 units in it in one collocated place. I can't imagine managing 350 or 3,500 homes spread across a diverse geography.' Yet, Blackstone had the insight and the conviction to move into that space before anybody else and really make a whole new industry in the SFR space. Talk about the decision to go do that. In other words, like everyone's sort of theoretically thought about it, but I've heard you talk about not looking in the rearview mirror. You had to literally rip the rearview mirror off your car at that point to go and have conviction to go buy 50,000 single family homes before anyone else had gotten through the fact that we've just gone through a massive single family housing crisis.
Yeah. You know, it's interesting. I think part of this actually ties back a little bit to the Hilton experience where we had this near-death experience even by then in '12 where we're beginning to see things had definitely turned and I was coming to the conclusion more and more that you know we want to be high conviction investors that what matters ultimately is not page 58 of the memo but really the big mega theme are we investing in a good neighborhood. And in the case of single family housing, you have to remember from 1945 until 2009, single family homes had gone up every year. Maybe they went down a little bit in California in 1991. And Alan Greenspan said basically it was the safest asset class in the world. And here we saw, you know, close to a 30% national decline in home prices, which nobody could have imagined before that. I think what we try to do in this case was to say look, this is a massive asset class. The demand for housing has not fundamentally changed. We had begun since 2009 to see a very sharp decline in new supply which means demand we think will grow with population and employment growth and the economy was starting to grow again. Supply was greatly constrained and you were able to buy hard assets, single family homes at significant discounts to replacement costs. And something I hadn't realized was there were something like 14 million homes that were already being rented, single family homes, but it was all done on a mom and pop basis. So the business existed and just never been done at scale. And the idea we had was, you know, we're not going to buy debt. We don't want to foreclose anybody in their homes, but obviously lots of financial institutions and servicers had foreclosed and were selling homes. And we had a business plan where we were going to go to the agencies and large banks and buy huge swath of homes and build a company. Well, that was a great plan except we never did any of that because the banks, no one sold the homes that way, particularly because of the legal nature of the process. They were all onesie, twosie. We found some great partners, some entrepreneurs from the UK, the Gould brothers, and we said, 'What if we went out and just started buying these individual homes, built a company, and tried to give the tenants better services, do a concentrated in a handful of markets so that we could deliver better services and spend a bunch of capital to upgrade the homes, something that never been done because it was individual investors.' And we just said, 'Look, home prices should recover and there's going to be a shortage.' And we ended up building Invitation Homes, ultimately took it public. Sold our shares. It was a successful investment. And I'm actually quite proud about the business because, you know, what I think is essential here is often times families can't afford to own homes in neighborhoods or they have a choice of renting from somebody who doesn't run the home professionally. In this case, by building a professional business, we could provide affordability to families who want to be in those neighborhoods and do it at a higher standard of care. And that's how we got into it. It turned out to be successful. To your point, it was as simple as, it's funny, back to my parents, I was driving around with my dad in suburban Chicago, and this was over Thanksgiving back before we really started. And I had a bunch of the homes we were looking at, and I told him, 'Guess how much for the home?' And he would say, you drive around and you'd say 300,000. I'd say, 'No, Dad, you can buy that for 180,000.' And it was just, it was a simple insight like, 'These homes seem to be at attractive prices. We can deploy capital at scale on behalf of our pension fund investors and we can build a company that delivers great service.' And yes, there were a lot of skeptics, including Sam, who I loved, made a big difference on this. He ultimately acknowledged that he was wrong on this, something Sam was willing to do and it worked out well. But to me it became this idea of find something that's high conviction and as opposed to buying a thousand homes go all in and in that case buy 50,000.
So, let me stick on commercial real estate for a moment. Because the two other, if you will, big, if you will, conviction areas you all have right now, and I know you've done a lot of investing in Europe, you've done investing in India. You were very big into the infrastructure behind the dotcom revolution and did exceedingly well on industrial. But right now it appears that there are two major areas that you're continuing to focus on and put capital towards. Multifamily being one and data centers being the other. On the multifamily side of things, I was looking at some data earlier today John and you know in 2021 Blackstone, BREIT put $100 million a day for the entire 365. Obviously, it's an average over that time. You weren't doing a deal every single day, but on average, $100 million of capital per day into the multifamily market in 2021. And as I mentioned to you previously, Walker and Dunlop is in the process of selling its first multifamily property in three years. So, we went from that torrid pace of investing to a very quiet period. And now you all are back and you did a very significant investment of the take private of AIR Communities. I think it was last June that you all did. And I think one of the things that I found to be interesting was your comments of saying, look, we're not trying to time the market perfectly, but we have long-term conviction in the multifamily space. And I've also heard you talking about, you know, the storm has clearly passed. There's some wreckage that was caused by the storm that's going to take time to clean up, but we're not too concerned about the wreckage. This is sort of back to taking the rearview mirror off the car. We're not too concerned about the wreckage. We're much more focused on the fact that the storm is passed, that supply is going to be down, and that long-term fundamentals of multifamily are very solid. Still feeling that way about the multifamily industry before we turn to data centers?
Sure. Yes. I mean, look, back to these very simple supply demand factors. New building of multifamily is down two-thirds from the peak of 2022. The US population continues to grow. There's some obsolescence in housing and we've been underbuilding housing now really since the financial crisis unfortunately. And when you have that kind of dynamic, invariably you're going to see rental growth that I think will be above inflationary rental growth. You know, once we absorb some of the supply that's still coming through the system back from that '22 period. So, I think as an investor, the hard part to your rearview mirror comment, Willie, the hard part is you've got to not look backwards, but think about the fact that no one's building today means that there's going to be a shortage in the future. Therefore, there'll be rental growth that's outsized. So, I want to put my chips in that area. The other thing that's happened, of course, is real estate's gone through a pretty tough cost of capital shock, right? Base rates went up from basically zero on the short end to five and a half. Spreads gapped out very wide and we've now begun to see a reversal of that. So borrowing costs in real estate, you know, on a three-year swap versus the wides of '23 for deals are down 35-40%. So cost of capital's coming down. Supply picture is pretty darn good. And what you want to do is now buy hard assets at discounts of physical replacement costs, which is what you can do. And so you've seen us across our real estate platform really ramp up our investing in multifamily and logistics. We've actually done an office deal, which is, and you'll see us do more in that area. It's not a complex business in real estate and you're at that moment like after the...
You know, the late 80s, early 90s downturn where it made a lot of sense to deploy capital. The same thing after the financial crisis. The next few years will be similar, but most investors are still licking their wounds from the past. Their real estate's underperformed. Their committees want to look in a different direction. And that's when the time of maximum opportunity tends to exist, but there tends to be minimal interest. And so, it's in a moment like this where back to this sort of stay calm, little bit of a contrarian view that we have at Blackstone, you try to take advantage of a moment like this.
