Ken Caplan at the 2024 Prime Quadrant Conference | Moderated by Alex Da Costa

Welcome everyone. Ken, thank you so much for coming. That didn't really manage expectations very well with that buildup, but thank you for having me. It's awesome. We had such a great conversation over dinner last night, and I realized that we could sit here and talk for literally hours, so we're going to have to move quickly through. But first, let's start. Let's learn a little bit about you and your background. Your father, I think your grandfathers, were home builders in small-town New Jersey, where you still live. Yes, real estate is kind of in your blood, I guess to some extent, but what attracted you to move into that as a career?

Sure. First, let me just say thank you to Alex and Prime Quadrant. You've been great partners and obviously great to be here today. You've got quite an impressive lineup. Despite that buildup that I just got, when I was with my family, I have two boys, one in college. We're all together this weekend, and we were talking about the week ahead. When I told him I was coming to Toronto, he said, 'You're going to Toronto? I'm speaking at this conference. What's it about? Investing.' Then I said, 'Oh, I know how to get interest.' As you said, I live in suburban New Jersey. It's New York Giants territory. My entire family, including myself, are Giants fans. I said, 'Oh, Eli Manning is speaking at this conference.' All of a sudden, I went up a few notches in credibility in the family for like two seconds, until my son in the same breath said, 'Well, what are you going to talk about?' I said, 'Well, they want to hear what we're doing as well, so hopefully I can provide a little bit of insight into Blackstone and what we're thinking.'

LT is awesome. We work together for many years. That's what happens when you have a firm for 27 years. On the way out, he said to me, 'Ken is the quiet force behind Blackstone.' I don't know about that, but anyway. My background: I did grow up in suburban New Jersey, quite boring. I live in the same town, Short Hills, that I grew up in. My dad was a local home builder, as was his. He was third generation. I still feel a little guilty breaking that chain. But I grew up around it. When you're a local home builder and you grew up in that family, you know their floor plans all over the house. I thought it was normal weekends getting in the station wagon and going to job sites, climbing through half-built buildings, working summers, framing houses, masonry work, even architecture school for a summer. That definitely planted a bit of a real estate seed in my head. I didn't really think I was predestined to do that, but that certainly has evolved. It's been awesome to have, until this year, the entirety of my career fully planted in real estate. But it's more than the real estate side. The way my father loved what he did and had great pride in what he did, even though he was third generation as a home builder, he didn't get any business handed to him. He was around the same environment that I was growing up, but he was very proud of that. He built this business on his own. Homebuilders do not necessarily have the best reputations, but he built in the neighborhood that we lived in, as did his father and his grandfather, who came over to the United States with nothing, like a lot of immigrants did. He was really proud. Nothing made him happier than opening up the paper on the weekend and seeing someone list a house as a 'Kaplan-built house.' That pride in what he did, the love of what he did, his reputation, no business got handed to him except the name, and so how important that was. He was all in. He brought work home. There was no real division. He was a great father and there for all the games, but he was also all in in work. As much as the real estate got planted, I think that whole mindset of work, that you can be there for your family and be all in in work and love what you do and really be passionate and do a great job and be very proud, I think that is a lot of the reason why I do what I do and I've been at Blackstone so long. It aligns with how we approach our jobs and really trying to be the best at what we do, really proud of how we do things at Blackstone.

It is a long time. At some point, you feel like you're kind of part of the wallpaper, but it's been amazing. When I started, the firm was obviously a lot smaller. Some things have changed obviously, over a trillion dollars of AUM, very different from when we had a couple billion dollars of AUM when I started. But the core of who we are in terms of work harder, care more, our reason to exist is delivering the best returns possible for our investors, whether it's the couple of strategies that we had in 1997 when I started or the 60-plus strategies that we have today. John Gray and Steve Schwarzman would say we're like the restaurant business: you're only as good as the last meal that you serve. So you got to keep delivering great experiences and great food for your customers or your guests. At Blackstone, that means working really hard, working harder, caring more, also working as a team. It is a team sport at Blackstone, accomplishing things together that no one person could accomplish on their own, being part of something that's kind of larger. Also being very adaptable. Our business has not just grown in one vertical; it's grown in both scale and scope of what we do. We're nearly 5,000 people today, but we still view ourselves as a startup in a lot of ways. We still see the opportunities ahead of us as being actually larger today than they've ever been. But in order to do that, you really have to be able to evolve, innovate, be better, and really have that mindset of no complacency. In our business, you can't be complacent. What worked for our business or in the world as an investor 10 years ago is probably not going to work today, and what you're doing today is probably not going to be working 10 years from now. So how can we continue to innovate, continue to stay ahead? You really have to be up for that and excited by that. I personally love learning, love meeting new people, love trying to figure out new opportunities where there might be changes happening. One of the things that is really exciting about the current environment is there's just so much change happening, and at Blackstone we just have so much data to see that change happening and see it earlier. That really guides how we invest.

Sure. As large as we are, and I apologize, some of you might know us better than others, but as large as we are, we are highly thematic investors. That's something we've learned over many, many years. If you go back to when I started and a bit of a history on Blackstone, really up until the financial crisis, we were an opportunistic investor. We were mainly in two areas: private equity, initially we had a small advisory business as well that we ended up spinning out, now a separate company called PJT, but we were in a private equity business. Then in 1991, we started investing in real estate. In both, it was opportunistic: buy the empty office building, lease it up, sell it; buy the undermanaged hotel, fix it up, improve operations, and sell it. Similar things with companies in the private equity space. Close-ended funds, higher targeted returns. That was really what we did. We evolved in terms of small individual assets, portfolios. In terms of innovation at the time, it was seeing that public companies were trading below net asset value, so finding some public companies that we could buy in the real estate space, financing it with real estate debt. That was an evolution as we got larger in those verticals. Post-GFC, we got more significantly into the credit business. We bought this company GSO, but initially that was also more of a distressed or opportunistic credit business. As interest rates came down post-GFC, and as we looked at this infrastructure that we had built up in 2008, 2010, post-financial crisis, lower rate environment, we had built these capabilities in the US and expanded into Europe and Asia on the opportunistic side. We saw that we had the opportunity to expand what we did not just in this opportunistic capital but also into core and core-plus capital, initially for the same institutional investors and now more recently in terms of insurance capital and individual investors. Designing strategies that really were the same type of thematics, same process, same commitment to excellence and doing the best job we can, but for a wider group of investors, leveraging all that we had built, all the lessons that we learned, all the processes that we've continued to evolve. That's opened up lots of new opportunities for us. In real estate, we have institutional core-plus funds and also areas like infrastructure where there are more core, core-plus type assets which really weren't as much of a fit for the old opportunistic business but now is a real great fit and a super exciting area to be in. Infrastructure, which we have a direct infrastructure fund, a secondaries infrastructure fund, which I know not a lot of your clients are invested in, has done great. One of the nice things about Blackstone today, and a big reason for my role, again I'm Co-CIO, and a little bit of my history of the 27 years is real estate for that time. In the US, I ran our Europe business for a few years. They created a new role as CIO of real estate when we were really trying to connect all the information we're getting around the world in real estate to make sure we're capturing all the benefits of what we're seeing in terms of trends. I co-headed real estate for six years, and then this year became Co-CIO, first time we've had a CIO at the firm level also. It's the same thing: connecting the dots, seeing the trends. One of the reasons we are so excited about infrastructure and private credit and private equity and real estate is these mega trends where we're investing today really transcend the businesses. We'll talk, I'm sure, about AI and what we're doing in the data center space. That's in real estate, that's in infrastructure, that's in our credit business, and then their derivative investments in our private equity business as well. Being able to see that in one area and then connect the dots across the different businesses and say, 'What might we be seeing that others aren't seeing?' and then invest into that is really important. If you look at how our investing has evolved over time, you can see how important that is to have that feedback loop connection. When I talked earlier about what our business was in real estate, it was literally hotels and office buildings. Office buildings, which are not in vogue today, pre-GFC were over 60% of our global real estate portfolio. I can tell you that if US office buildings were over 60% of our global real estate portfolio today, we might not be part of this conference, or at least it would be a very different discussion. But US office buildings are today less than 2% of Blackstone's global real estate portfolio. We've really been de-emphasizing US office buildings. We did something similar in shopping centers. We have not built or bought a traditional US shopping mall in well over a dozen years. Why? Well, post-GFC, we started to see some warehouses very attractively priced. When we bought those warehouses, the GFC was a classic real estate crash: a lot of lending in 2007, a lot of development, a crash in the economy, lots of vacancy, lots of distress. We were buying a lot of things really inexpensively. One of those things was warehouses. At the time, warehouses were maybe 1% of our portfolio, almost nothing. But what we quickly saw is the new supply basically stopped, and the demand for those properties was much stronger than we had anticipated. So we looked closer into that. What's happening? Well, Amazon and other e-commerce tenants were starting to lease space and really changing the whole utility and attractiveness of this asset class. From 2010 until today, logistics have gone from less than a percent of our portfolio to over 40% of our global real estate portfolio. That started in the US. I was actually in Europe at the time, and the way our business is connected, I said, 'Okay, that seems exciting. We didn't think it was so exciting here in Europe. Maybe there's the same backdrop.' Yes, there is. 'Okay, let's do the same thing in Europe. Let's do the same thing in Asia. Let's do the same thing in Canada.' We privatized a company, Pure Industrial, which has been a fantastic success for our real estate business. Let's lean into that and into what other opportunities might exist. Same thing with rental housing as the shortage of housing, same thing happening today in the data center space. So you see a bit of that evolution. John Gray gets a lot of credit for really connecting all of that real estate business, and now really focused on connecting the entire firm.

We spend a lot of time on this. One of our advantages today, which was not the case when I started, is given the size that we are at today, we get a lot of data. As the largest private equity investor, the largest commercial real estate owner, one of the largest private credit providers, we have almost 13,000 real estate properties, we have 230 or so portfolio companies with thousands of borrowers, and we get data coming in from all of that. It really informs views on both the macro side and within geographies and sectors. That is a really important feedback loop that, as I mentioned on logistics or rental housing or data centers, really feeds into what we're investing in.

If you want to start on a high level on the macro side, things that we'll look at is across our portfolio companies, what's happening. If you want to look on the expense side, what's happening in input costs. We have a view on inflation. What we've been seeing actually for five quarters now, for over a year, non-labor input costs are running at less than 1% in our portfolio companies. That tells you something about what's happening with inflation. What's happening with the two big holdouts on inflation in the US, and I think a bit here as well in Canada, have been shelter and labor. What do we see in labor? We've seen wages continue to tick down in our portfolio companies as well. They've just ticked below 4% for the first time in a while. We also survey our CEOs and say, 'What's your outlook going forward?' They're now saying going forward next year, they expect it to be even lower, at 3.5%. So we've seen these input costs low, we've seen the wage growth coming down. Every time the US inflation numbers come out, we dissect all the different components. The biggest driver of inflation, which has all come down meaningfully, but what had been and continues to be the biggest holdout is now shelter. Shelter is pretty known now to come in on a lag the way they measure it in US inflation. We have, I think, better data than anyone on what's really happening in terms of shelter costs. While it's coming in around 5% in the official numbers, we know that it's less than 2% in the real numbers. That would tell you, and you can look at these analyses that lag the shelter number and a trend to where inflation is going, that between the input costs and the wage trends and the shelter cost, can give you a view on where you see inflation going. At the beginning of the year, we saw these trends starting to happen. If you want to go back to real estate as an example, where there was so much negative sentiment for the last couple of years on real estate, mainly because you had interest rates going up, a lot of press on how difficult office buildings are, which is really challenging, commodity office is really hard, but that put a really negative sentiment on real estate. When we saw a separation between what's happening in office and what's happening in other areas, which are much healthier, and we started to have this confidence of inflation coming down, not necessarily betting on timing but a direction of travel of rate cuts coming, at the beginning of this year we said we see real estate values bottoming and we think it's time to invest. We didn't just say it, we did it. Our year-to-date real estate investing this year is two and a half times what it was last year. It's not just real estate. Our private equity and credit deployment has been, I think, a record this year at Blackstone. Actually, last quarter was our highest quarter of deployment in over two years in the firm. That's what we saw. It gave us confidence to invest. We don't just sprinkle it around. We're not an index fund. We're highly thematic, and in the areas where we had that confidence and conviction, combined with what we're seeing on the macro level, gave us the confidence to invest. We see that on the sector level also. Every week, I'm getting a dashboard that shows our apartments and the new lease rents versus the expiring rents on a renewal, on a new lease, what's happening with occupancy, what's happening in each market. When we're seeing an opportunity to buy another apartment building in Atlanta, like we did this week, we're looking at all the things around it: what are all the trends, what are all the population trends and employment trends? That gives us a lot of confidence in terms of investing. Then the ultimate is when we see these very big trends like what's happening with AI and data centers and demand, it says, 'Okay, this is something really big, really structurally shifting. How can we get ahead of this and use our advantages and our scale and our expertise and our relationships to really lean in ahead of the market and deliver across the firm?'

Just to put it in context a little bit, I mentioned how we shifted from office buildings to logistics. It's not just logistics. We still invest across a lot of different sectors, but the three biggest themes at Blackstone real estate right now are logistics, rental housing which includes apartments, single-family rentals, student housing, we're the largest student housing owner in the US and in the UK, and affordable housing. If you take logistics, rental housing, and data centers, that's 75% of our global real estate portfolio. So again, really focused in these areas because this is where we see the opportunity. I mentioned on logistics with e-commerce, rental housing which is just a shortage of housing. What we've been seeing more recently is, unlike the GFC, a typical real estate cycle where you had all this exuberance, lots of overbuilding, really elevated vacancy levels across the board in a lot of sectors, in this last cycle you would have normally seen that start to take off when COVID shut everything down, and then you saw it take off a little bit when rising interest rates and inflation made everything more expensive to build. That window on things we're getting built a couple years ago is now delivering. One of the reasons we like the rental housing space, and it's different from the condo market, we don't really do for-sale, and I know there's a lot of condos and high-rise condos that have gotten built here in Toronto, that's a different beast than the rental space. In the rental space, you're seeing deliveries now that are elevated and that have softened the market. That's partly why you're seeing rents which had been growing very strongly in the US now backed to almost zero, very low levels. Same thing here in Canada, the rental growth has really stopped and been even negative in some areas. But when you're looking at what's happening today, it's a bit backward-looking in real estate. One of the nice things about real estate is you can't just print the buildings. You have to build the buildings. You have to get them entitled, financed, and built. What's delivering today was actually started a couple of years ago, and what's starting today is going to be delivered a couple years from now. One of the things that we really like about the apartment space, the rental housing space, and actually it's broader across a lot of the real estate sectors, is that the vacancy levels are still around mid-single digits, 4 or 5%. The supply which is elevated, demand is keeping up with. The new starts today, which again are going to be the deliveries two years from now, are down 40 or 50%. 40% in the US, I think it's around 50% here. So if you say, 'Okay, I don't have this excess vacancy to work off, the demand's keeping up mostly with current supply, that demand seems like it's going to continue, particularly since even though affordability is a concern, the affordability to rent is much better than to own. We look at cost to rent versus cost to own, and because home prices have gone up so much, because mortgage rates are higher, it's pretty record affordability of renting versus owning. It really doesn't pencil to build apartments today, and because of that, you're seeing the supply come way down. So you can say, 'Okay, we're in a bit of an equilibrium today. A couple years from now, you're going to see half as many apartments delivered as you're seeing today.' That's obviously a very positive place to be from a supply-demand dynamic. It's the same thing on the logistics side. Then you asked about Sun Belt. We do continue to see Texas and Florida getting the strongest population growth in the US, and those places, population growth and job growth and economic growth drives demand for apartments. So we're still positive on those areas. But broadly, with the shortage of housing and particularly the relative affordability and more people renting, whether it's more affluent or later in life or even younger renters staying in place, we see this as an area that's exciting to be in.

Private credit has definitely grown quite a bit. $2 trillion sounds like a lot of capital, but when you think about what's happening in private credit, we do see a real structural shift happening. Whether you look at M&A activity or financing the real economy, or now not just non-investment grade but investment grade direct lending, or as John Gray says, the farm-to-table model, we just see a big shift in opportunity. $2 trillion again sounds like a lot, but we see it as a $25 to $30 trillion market, so we see it as actually early stages. We still see, because I sit on the credit investment committees now as well, when I see the type of credits that we're approving and the loans that we're making, they still seem very attractive. We're in the 40% loan-to-value range. We've delivered, and when you look at relative what we're delivering in the private markets versus liquid, I think on average for B credit it's been 700 basis points of incremental spread, which is very attractive. You can look at the returns that BX has delivered, you can look at the yield that it's delivering. So I still think it's a really attractive place to be. We still feel like the opportunity is great. But just like in real estate, you want to focus. One of the lessons learned over the years has been really focus on the best neighborhoods. We learned that through the GFC. We bought Hilton at the absolute worst moment in time. It was a great investment, great company, great neighborhood, great leadership. So in credit, it's the same thing. Where there might be hazards is if you compromise, go to smaller companies that might not be as strong, go into higher-yielding opportunities in tougher sectors. We've been really focused on larger companies, which we have the ability to do given our scale. The average EBITDA for our borrowers in BX is $200-plus million. The average in the market is $80 million. That's proven to be more resilient. And focus on sectors that we view as better neighborhoods: tech and software services, business services, healthcare and healthcare services, insurance companies. That's where the majority of the capital is being lent in that business. So stick to quality, stick to where you have advantage, with us scale and better companies, better sectors. We still see it as a really exciting, great place to be.

Okay. I talked a bit about my dad earlier. That certainly planted a lot of inspiration. I feel very, very lucky, and I think maybe it's part of the reason why I've been able to be at the same company for 27 years. I do find that I can get inspiration just about everywhere or anywhere. I certainly get it a lot from my family. I wouldn't be at the same firm for 27 years if I didn't get it a lot from the people I work with. John Gray, Steve Schwarzman have been incredibly inspirational to me. But it's not just the two of them. I go to work and the people that I work with are just, this is going to sound arrogant, but are awesome. I love the people that I work with. I genuinely get inspired by them. But I also, part of the reason I love this job is because we do keep evolving, we do find new things. We're not going to talk about it, but AI and data centers and digital infrastructure and what that means for power investing, this is so exciting. You meet these people that start these companies, and it is so inspiring. Then you say, 'Oh my God, this is a whole other world of opportunity that I didn't really know about.' To learn about that, to see what they built and what they've done, and to then be part of that, I feel I'm very lucky. I've found this ability to still have a bit of awe and wonder. I also know I'm not going to keep you because we got a big guy coming up next, but these professional athletes are incredibly inspiring. Eli Manning, the guy is a true hero and legend, not just because he won two Super Bowls in 16 seasons, but the guy showed up, what is it, 200-plus games in a row that he started? That takes commitment, the dedication, the will to win, the desire to win. When I see these teams perform at these highest levels, it is incredibly inspiring. So I don't know, I find it everywhere. To me, that's what makes life exciting and interesting, one of the things.

Yeah, excellent. Thank you again to Prime Quadrant. All right, thanks.