Hey, hey. This is John O'Brien and this is the Money and Wealth podcast on iHeart Radio, Black Effect Network. I want to thank you all for helping to make this podcast a top podcast in North America and around the world for business and entrepreneurship. I am here today, as you know, I normally do my podcast solo. So, if I have a guest, they're pretty special. I've had Michael Milken on. I've had a bunch of heroes that I really respect on. This is one of them. This is a new friend, but a friend you meet with a friend from the very first time. An acquaintance remains an acquaintance for a lifetime. You're never quite comfortable with an acquaintance. Joe and I hit it off almost instantly. The first time I met him, he thought I was a costing him. We were at a conference and he didn't know who the heck I was. Like, no, we don't do private equity in the streets.
That's not what he said. He was moving and he was gracious. He had places to go. He stopped and we talked and we met through a mutual friend and actually Michael Milken.
And we got together and instantly hit it off and I really do consider him a friend. He's a great human being which is my most important credential today. I don't deal with jerks. It's nice when somebody has influence and power. They're also decent. They also care. And Joe has a feel from the streets to the sweets. And he just so happens to be the head of private equity at one of the biggest firms in the world, Blackstone, the offices with which we are in today. I want you while you're listening to this podcast, but not while you're driving, to do a little research on Blackstone. You think you know who they are, but they are multifaceted and probably bigger and more substantial than you consider them to be. Joe, the first thing I want to break down in this podcast, private equity. That's the big we've got to not presume and assume that people know all these fancy terms. People are ashamed to acknowledge that they don't know what the Wall Street Journal say. They have no idea what FDIC means, SEC, all these phrases that we throw around. EBITDA, all this stuff. People have not a clue, but they're ashamed to acknowledge it. So, oftentimes people will say in underserved communities of all races, 'We hate rich people.' I respond, 'No, you don't. You hate rich people until you become rich. What you hate is a game system. What you hate is a system that no matter how hard you work, you can't seem to get ahead.' And so there's been this disconnect in my opinion between hustle and aspiration. And the difference between a hustler and a businessman or business woman to me is paperwork.
Yeah, there's a disconnect between that aspirational achievement and the achievement that people who seem to have made it have figured out the language.
And what I want to do in sessions like this, in addition to introducing you as a human being and talk about things that are mutually of interest like human development and what you're doing here around that one of our initial conversations, I want to unpack private equity itself in a way that people feel comfortable with it and feel that this is a ladder that actually touches the ground near them and they can get on it one day and be successful themselves. Now, Joe, I think you from a personal story, I think you come out of Washington.
Well, Sacramento, but you had an education.
Yeah. So, I'm sorry I jumped ahead. My apologies, but you grew up in Sacramento.
Yeah, which I think no one would assume.
So tell us a little about that, and then you went to London and you built a business there. But let's step back for a minute. Tell us a little bit about Sacramento and why that was an important touchstone for you.
Yeah. Well, Sacramento is like any suburban community across America. It's definitely not LA or New York even though it's in California, right? Neither of my parents graduated from college. My dad was an entrepreneur. He moved when he was 19 from Cleveland, Ohio to Southern California. He was a bodybuilder in the early 1950s and this was before Arnold Schwarzenegger and all that.
Slow that down. Did you guys hear that? Okay. He's the head of private equity, the whole firm globally for Blackstone. And neither of his parents graduated from college. So, we're breaking a lot of eggs here and a lot of presumptions.
My dad was an entrepreneur. He moved when he was 19 from Cleveland, Ohio to Southern California. He was a bodybuilder in the early 1950s and this was before Arnold Schwarzenegger and all that. And he needed a job so he opened a gym. He was a fitness enthusiast. He loved weightlifting and bodybuilding. Kept care of himself. He wasn't really focused on the business necessarily. He wanted to do something that he loved where he could make a living and provide for his family and that's exactly what he did. And my mom worked in one of my dad's gyms and they got married, they had me. I grew up in a family that valued being healthy, valued education, but my parents didn't have that language. Like, they didn't know where I applied to college. They weren't saying, 'Hey, Joe, the SAT is coming up, go take the SAT prep course.' They were not saying that.
Wasn't their language, by the way, my family either.
But they made sure that I went to the best schools I could. I went to an all boys Jesuit high school in Sacramento. Got a great education, understood the importance of college, certainly wanted to go to college. I wanted a profession. I didn't want to work in the gyms for my dad maybe much to his chagrin. But I wanted to have a profession and that's probably why I went east and didn't stay west. It was not common in the 1980s to go from a suburban high school in Sacramento to the east coast for college. But I wanted to see what that was about and pursue a profession and I got into Georgetown, which itself is a funny story. We probably don't have enough time to go through that. But I sort of sight unseen. I'd never seen the school before I applied. First time I went was the early decision weekend in February after you got in. You go see the school and I said, 'Yep, this checks all the boxes. Beautiful old Gothic style building. East Coast.' Well, I did meet my wife there. So at least that wasn't far off. And so that's where I went. They had an undergraduate business school which I thought was interesting because my dad was a business person and I was really interested in politics and political science and of course Georgetown's great for that sitting in the nation's capital and so that's why I went there. So that was the origin story.
So it wasn't obvious that you were going to go into finance.
I didn't even know what that was. I mean to me like a stock broker was finance. And that's all I knew about it really till my junior year in college.
So the first thing that I need you guys to understand is half of this is just showing up. Like showing up and believing in yourself and you don't have to have all the right credentials or all the right family environment or support. But you have to believe in yourself and you have to believe there's a place for you and you got to show up and you know no one washes rental cars. You got to own your own story. And so the first thing that you gained from your parents was some confidence and some self-esteem.
So confidence from your dad.
Yeah. My dad always he was an optimist. And he believed fundamentally in the American dream like you can if you can think it, you can be it.
He'd always say you're limited only by your own imagination and aspiration.
Yes, and you can achieve whatever you put your mind to.
And he firmly believed that and he had far more confidence in me than I had in me as a 17, 18 year old. Including like where I get into college and everything else. He's like, 'No, all these schools will be.' I'm like, 'Not really, Dad. I'm not sure it's going to work that way.' And he was wrong about that. But he was right about if you can dream it, you can achieve it. And I always used to think like somebody's got to do these jobs.
Why not me? I mean, maybe I'll get there and I'll realize I'm not good enough. I'm not smart enough. But at least let's try it.
Try it. That's right. And see if we can survive. See if we can play at that level.
And mom, does she give you a measure of self-esteem?
Oh, yeah. I know my mom is... I will say if my mom was born into different family circumstances... My dad, Joe Senior, sadly he's not with us. He died in 2013. My mom is very much with us. She's 86 and the picture of health. She lives in Oregon. Hi mom. She was born... I don't know if anybody's read The Grapes of Wrath. Great book by John Steinbeck about the dust bowl that literally didn't rain for like a year and a half or two years and all the farms couldn't grow stuff so everybody was migrating west. This was in the 30s and 40s and she ended up being raised in the central valley of California where there wasn't a drought and you could grow stuff and her father was a farmer.
So that's how you got to Sacramento.
Yeah, that's how you got to Sacramento. Rainbows after storms. And I'll tell you, had my mom been born in different circumstances to a different family, I think she'd be president of the United States. I mean she is one talented human being.
That's brilliant. I love everybody should love their mother like that. Joe and I, my story is very similar. I grew up in a working-class family. Mom and dad didn't go to college. South Central Los Angeles. My dad owned a business. Never left the local community. I had big dreams. I was in South Central LA. I went east to Washington DC. President Reagan recognized me. President George H.W. Bush recognized me for my talent. Jack Kemp, Secretary of HUD, I rest his soul, and Bill Clinton. But I was nosy and I didn't know whether I could succeed, but I knew I was going to try.
I can't guarantee that being positive is going to make you successful, but I absolutely guarantee you being negative is going to make you fail.
Well, you can't even get started unless you believe.
That's right. And my mother gave me self-esteem. Told me she loved me every day of my life.
And my dad owned his own business. So gave me confidence. So it's very similar stories. So, you end up now in Georgetown and you plant your flag in your future. Now, you thought it was initially tied to Washington. How'd you pivot to finance?
Well, why is that even important?
And I ended up majoring in finance and I was good at it. I did well in school and I liked it. Most importantly, I liked it. I worked one summer on Capitol Hill for a senator and I saw what those recent college grads were doing. I said, 'Well, maybe I'd rather pursue this business thing.' So, I really doubled down on that track. Back then it was hard to get internships. Now, if you don't have an internship when you're a sophomore in college, it's hard. Back then, they didn't really do a lot of college internships. And my path to getting an interview at one of these investment banks was to get good grades. So, I'm gonna get good grades. And so, I did that. I had a high GPA. I did as much as I could. I actually worked for a stock broker one summer. I had a job like where I was getting paid working at a clothing store. And I did everything I could to position myself well to get an interview. And I did. I interviewed at three or four firms senior year on campus. And I got a job at Morgan Stanley, which I would have worked anywhere. And I was surprised. Actually it was a friend who's no longer with us, very sadly died of brain cancer. But he actually was interviewed early by Morgan Stanley and they said, 'Hey, is there anybody else at Georgetown who maybe has got an offer somewhere else that we should talk to?' He's like, 'You should talk to my friend Joe.' We actually weren't that close, but we had a lot of mutual respect for each other. And they called me up over my Christmas break and said, 'Hey, would you come in?' And I did. And they gave me a job. And that was the beginning of my career. So, thanks to JP Bella. And that's why I ended up there.
So, first lesson, well, second lesson. First one was you can come from any place and do anything. You have to show up and believe in yourself. But here's another lesson for you. That environment matters and we all live in relationship capital. So, I want you to be successful because I need for you to do for somebody else what this gentleman did for Joe and what somebody did for me. Which is to vouch for them. If you hang around nine broke people, you'll be the 10th. And the opposite is also true. There are brilliant people in the world. Joe and I will tell you there's a lot of people who are pretty mediocre who succeeded pretty spectacularly because they have the right relationship capital. Just real talk. Like why do you go to a major university? That's a club. They're going to hook each other up for the rest of their lives. And by the way, the whole life is filled with clubs, private clubs, tennis clubs, social clubs. And what I want you to be part of is an aspirational club. And so Joe just sort of unpacked some of that without even knowing. And again that also we share that. Joe did internships and I joined committees for Mayor Tom Bradley in LA because that's where power brokers would come to give back and I could never meet these people if I went to their office. Their gatekeepers would never let me pass the front desk. But there I'm sitting right next to him in the boardroom very much like this and we build a relationship and rapport and at some point they're like, 'Oh, you seem like a nice young man. Let's do something together. Let's have lunch.' Okay, let me get into the meat. Because Joe has limited time. I want to get into the meat of this. He went to London, built a business. Was that at Blackstone?
Let's get into the meat of what private equity is. At some point here I want to really get into and I think it's connected to your early story of internship and people sponsoring you, this thing you're doing that really inspires and nurtures human capital to give them a seat at the table. But let's first unpack for people who are curious, they're nosy, no one's ever explained it to them. What is private equity?
Yeah, and it's hard to really understand it because it's not part of the public discourse. We own companies that are private. At its simplest, we raise money from large pension plans and institutions. So the California state teachers for example are a big investor with us. This is the pension plan for the many hundreds of thousands if not millions of retirees and current employees who are teachers in the state of California. They give us some of their money. We invest it in buying companies.
So Main Street and Wall Street are already connected. Okay, good.
So, we're not a bunch of wealthy people's money. This is retirement savings of almost 40 million workers across the country in the world. We manage money on behalf of other nations for their social security, like Canada, the government of Singapore. We manage money for other states, state of Washington, Oregon. So we take that retiree money. It's a sacred obligation to be responsible and ethical with this money to do a certain thing which is to buy, in our case, control of companies. Help make them, give them the capital they need to grow, help make them better, and then ultimately sell them, take them public, sell them to another strategic buyer, we call them another company.
I keep telling you the whole purpose of building a company is to sell it, right?
Well, in what we do, we don't have the money forever and they expect a return. They give us a dollar, they want a couple dollars back. And that's what we're in the business of doing. We have a long time to do it, five years, six years, but we don't own these businesses forever.
And again, in this example, the return is going not back to fat cats or bigwigs, as people would say. That's going to average everyday people and their retirement accounts, the pension funds, the public. That's right. Municipalities, etc. By the way, how big is Blackstone asset wise?
We have $1.2 trillion of assets which is a lot.
Let that simmer very slowly.
In what I do, we manage about $400 billion of equity investments in companies big and small, which is almost as big as Singapore itself as a GDP.
Yeah. Singapore's $500 billion and change. So $400 billion is a lot of powder.
Yes, that money is invested on behalf of these pension plans and social security funds. If we do a good job, meaning if we make a return greater than 8% across most of the funds, then we get to keep a percentage of the profits, which varies, but somewhere between 10 and 20% depending on the fund and the vehicle and the strategy. 10 to 20% of the total return above an 8%.
So we're not talking about the folks making 80% of the money is some crazy thing. It's 8% right? 8, 10, 12% which you'd love if you got a 15% return. And so you take a company that is doing reasonably well. You'll tell me what the size of the company is and you buck it up. You give it some capital and some management expertise is my guess as well.
Yeah. And then you prepare it maybe for an exit, like going public or some other strategic transformation.
Exactly. But going public is the audience would know, listed on NASDAQ or listed on New York Stock Exchange and so on, is a more traditional example of a company that's been nurtured enough.
Well, let me give you two types of things we do. And I'll use real life examples. When I was a young partner, probably 2005 in London, because I started at Blackstone in 98. Back then, we didn't have a trillion dollars of assets. We had about 10 billion maybe. Which sounds like a lot of money, but not in this space. And we had maybe 150 employees. Today, we're 1.2 trillion and almost 5,000 employees across a bunch of different businesses all over the world.
So you're one of the top five companies in the world that does this.
I think we're the largest alternative asset manager and I think arguably we're also the largest manager of private equity assets.
The largest manager of private equity. That's ballin, by the way. You can translate.
And there's some great guys doing it. KKR and CVC in Europe and others. Great.
By the way, whenever you're really successful, you always give everybody else credit. 'Oh yeah, this person's that person.' When you got the power, you don't need to use it.
So, when I was a young partner in London in 2005, we found this little company. It's called Merlin, and it owned some aquariums, the London Dungeon, which is just kind of funny. It's still in existence. You go to London, you got to go there. Kind of a historical tour thing. And a great young CEO who said there are all these theme parks and visitor attractions across Europe owned by people who shouldn't own them long term. A publishing company owned Madame Tussauds and the largest theme parks in the UK and Germany. Lego owned four theme parks called Legoland.
Yeah, Lego's great. And actually Merlin owns Legoland. That's part of the story. So we said let's back this young entrepreneur. Let's back this company which was pretty small, had maybe $15 million of annual cash flow, which is small for a business we're considering. And he said I think if I had the right partner I could operate these things better that are not in the hands of real operators of visitor attractions. If you back me, go buy these things and we'll make a big company. I said this sounds like a great idea. And he was great and we backed him. The first thing we did was buy from Lego the Legoland theme parks. Now there's 10 plus other things. Lego has been a partner now. They took back 30% stake.
