Good morning, everyone. Thanks for joining us. My name is Patrick Davitt. I'm the US Asset Manager Analyst here at Autonomous. As a reminder, if you want to submit any questions, you do it online through the Pigeonhole website, and I'll try to work those in as they come in or get to them at the end. It's my pleasure to welcome Blackstone President and COO, Jon Gray, for the second year in a row. Thanks for coming, Jon.
Patrick, great to be here.
Yeah.
Thanks for coming out. Yep.
So given your position as one of the largest asset owners in the world, I think it's best to start with a macro discussion. People are worried about sticky inflation, higher for longer, and what that means for risk assets, although the economy continues to be very resilient. So, maybe to start, frame what you're seeing on the ground, how inflation is tracking your own portfolios, and how that looks relative to public data.
You know, I think we feel a little better about the inflation picture than some of the recent data. And we have the benefit of owning 230 companies and 13,000 real estate assets. And when we look across our portfolio, we see a few things. One, in the U.S., rental housing costs are generally running well below the stated data. I think it's 5.5% in the latest CPI. When we look across our manufacturing companies, input costs are still pretty flat. And we've seen wages come down from, call it, 5-ish% a year ago to 4% now.
Now, the pace of disinflation is certainly slower than it was a year ago, but I still think the Fed is having success here, and I do think the path of inflation is downward, even if it's not as quick as it was.
Got it. And kind of in that vein, do you think we are on track to achieve a soft landing, as a lot of other executives have suggested? And then as an extension of that, any signs of contraction or stress in certain pockets of the portfolio?
Well, again, if I go back to the portfolio, when we reported first quarter, we said that in our private equity companies, we saw pretty healthy growth, mid-single digit revenue growth. We have more than 2,000 non-investment grade borrowers in our corporate credit area, and our default rates were still only 36 basis points. So those are pretty healthy signs. What I would say we're seeing is a bit of deceleration. You know, revenue growth decelerating a bit. You've seen it in some of the public companies who've reported recently, some of the consumer-facing companies-
Mm-hmm.
in retail, restaurants, hotels. I just think when you leave short rates at these levels, it's a little bit like taking oxygen out of the room. It slowly has an impact across the economy. And so I think the Fed is having success, as we said earlier, in getting inflation to come down, but the impact of that is, I do think growth will slow. And I do think it will give the Fed an opportunity this year to cut, say, one time. I think, you know, that they are having success here. So I know there's a debate, is the economy, you know, re-accelerating? Is inflation taking off? That wouldn't be our view. I think our view would be inflation are probably a little lower than consensus-
Mm.
and then growth a little lower than consensus. But we're not talking about things falling off a cliff, just a deceleration we're seeing in the economy.
So that's a nice segue to real estate, which is always, probably the first question you get in investor meetings. In January, you shared the view that values were bottoming. So through that lens, perhaps remind us of your mix, what trends, what trends you're seeing now across the portfolio, and if this is all still consistent with those views, that it's bottoming.
Well, maybe I'll start with the macro-
Yeah
... and then I'll come to us on real estate. So if you went back to the financial crisis, in the summer of 2009, asset values bottomed, and for the next three years, you had lots and lots of negative headlines of troubled assets that came through the system. But if you were an investor, you wanted to just start deploying capital then, which we started doing in earnest.
Yep.
I think there are a lot of similarities to what we're seeing right now. So, clearly, there have been two major headwinds in real estate. One has been remote work and a sharp reduction in office demand, tied to that, the capital intensity of the office sector, and so office buildings have been under an enormous amount of pressure. The second has been the increasing cost of capital, right?
Mm.
As the Fed raised rates, as long rates went up, that impacted cap rates or multiples of all real estate assets.
Mm.
But those things have happened. What you're seeing now, and what I think is hard as investors, is you're seeing banks who may have to make announcements because they take loss provisions, or you might see an asset that today has too much leverage relative to its value. It's a little bit like a ship that, you know, got hit by a storm at sea and, you know, a year later comes ashore.
Mm.
The headlines, you know, you know, fire at sea or something, right? So as investors, you want to disaggregate those things. So is there still plenty of bad news in the headlines that will come through the system? Yes. But in the spot market, has the impact of what's happened in the office sector, has the impact of higher rates, is that now reflected in real estate values? Yes.
Mm.
And so what you see us doing is making some very large announcements. We've bought a bunch of senior loans. We did the Signature Bank transaction. We announced yesterday buying $1 billion of loans from a German bank. We've announced two public to privates in the rental housing space, $17 billion of enterprise value since the year started. So we have a clear view, and what gives us confidence, I'd say, is a couple things. One, new supply has now started to come down pretty dramatically. So new construction of warehouse is down 75%. New construction of rental housing is down 40%. Two, the cost of capital has started to come down. We were in a period where we thought the Fed was raising rates.
Mm-hmm.
Now it's a debate when they cut, and we've begun to see spreads tighten a bunch, too. So spreads, commercial real estate borrowings have probably tightened 100 basis points. CMBS activity is up fivefold in the first quarter. And so you're seeing those early signs of recovery. Now, I'm not saying this is some sort of sharp V-shaped recovery-
Mm.
but as you get to this bottoming period, what you wanna do is try to deploy capital into this, and most people are gonna be very cautious 'cause they're gonna keep reading a lot of negative headlines from the past.
Mm-hmm.
Those are gonna continue. As it relates to us, one of the reasons we have outperformed is where we positioned our portfolio. By far, our biggest concentration, 42%-43%, is in logistics, which is the best performing sector.
Mm.
We have very large exposure in rental housing, particularly things like student housing, and in the right geographies. Again, we've outperformed. We have less than 2% U.S. office buildings, very little in the way of enclosed malls. We have big exposure in India, which has been a strong market. And we leaned into data centers, which we did in real estate and infrastructure, which turned out to be a very good decision for us and our investors, particularly in the context of BREIT, which I'm sure we'll get to at some point. So I would say the combination of where we are at the cycle, the fact that we've got $64 billion of dry powder to deploy in real estate, and where we positioned our assets, is gonna lead to very differentiated outcomes.
The market is going to be, I'm sure, for another some period of time, very negative on real estate.
Mm-hmm.
That's just the way these cycles tend to work.
On that point, I sense, at least in my conversations, there's concern that this dislocation and rental growth slowing is spreading to things like multifamily industrial. We've seen some of the large industrial REITs bring guidance down. So is there any concern that maybe, you know, even in your own portfolio, that you can see more negative marks before all of these trends you're talking about really start to work?
Well, I would say-
Yeah
... the good news is, on the ground, what we're seeing is we've definitely seen a slowing, but in the case of rental housing, depending on the asset class, let's use garden apartments, there, there's still modestly positive-
Mm-hmm
- growth. And to me, the key thing on valuation ultimately is what happened to cap rates and cost of capital. We may have a little bit of softness as this supply, you know, bubble works through over the next year or so, but the long-term supply-demand picture is very good. And on warehouses, there has been a slowing of rental growth, but Prologis, who's the biggest public player-
Mm
- in the space, said that their same-store growth was gonna go from 9% to 7%.
Right.
That's still pretty darn good.
Yeah.
So again, there's almost universally negative bias towards real estate. I was with a European CIO of a major European insurance company, who was like, "Hey, I if I never hear real estate, that's too soon again." Right? Those sort of indicators, which happen in a cycle, tend to tell you that the sentiment pendulum's moved one way. Doesn't mean, as I said, that the world's gonna turn on a dime here, but you've seen enough capital move out of the space, and the values adjust in such a way that we think it's an appropriate time to invest capital at scale.
So you mentioned BREIT. I don't think-
Yeah
Everyone would be okay with me letting you get away with not talking about it, but you're probably frustrated with it continuing to be in the headlines. So maybe update us on the flow and redemption trends there, and why you think, you know, the market is kind of missing the real story.
Well, look, we've said the same things about BREIT over and over again-
Yeah
... which is we did a very differentiated job deploying the capital.
Mm.
In that case, we didn't have any, you know, almost any urban exposure. We have virtually no office, no retail. You know, we have large exposure in logistics, we have the largest student housing platform, ACC, which is performing incredibly well. We made this significant push in data centers, and QTS-
Mm
The fastest growing data center business is embedded in here. I think unlike other open-ended managers, we were much quicker to raise cap rates, to lower multiples, to raise discount rates, because we think that's what you do when you run an open-ended fund like this. And what that gave us the ability to do was sell assets above our marks, and we've sold more than $20 billion of properties. We've run the business with significant liquidity. Today, more than $7.5 billion. And we've delivered the most important thing at the end of the day is 10.5% returns for 7.5 years.
Mm-hmm.
And that, to me, is quite remarkable, given the environment we've been in, particularly the last couple years. In terms of, you know, near-term flows or whatever. What I'd say is, there's been some news based on the SREIT dynamic, that creates some increase in redemptions, but nothing like what we experienced-
Yeah
... back in the beginning of 2023.
Yeah, yeah.
I think the key for us is to continue to deliver for the customer, deliver strong performance, have the semi-liquid structure, which has worked so well. And as we come out of this, out the other side, I think our differentiated performance will continue to put BREIT and our whole private wealth platform in a very different spot. So we have a lot of confidence and a lot of pride in what we've done there. And yes, to answer your question, it's frustrating to constantly get the same questions.
Yes. Yeah, we were, you know, we were having the same conversation last year.
Yes. Yes.
All right, let's move to deployment. You've obviously had some big announcements this year. You have a lot of dry powder, but your competitors have a lot of dry powder, and deal volumes are picking up, but still pretty subdued. So we hear a lot about this $600 billion+ of dry powder that needs to be put to work in the next 12+ months. So how close do you think we are to really seeing that kind of hockey stick moment? And how do you differentiate yourself with so much money needing to be put to work?
Well, I'd say a couple of things on deployment. We're definitely seeing more activity out there. We announced last week, we led a $7.5 billion financing of CoreWeave. We put up $4.5 billion. This is a cloud data center business. If you looked at our data in Q1, our deployment was up basically double-
Mm-hmm
... where it was a year before. We saw a big pickup in private credit. I mentioned real estate. We've announced a number of large things in private equity. Our secondaries business has seen a meaningful pickup in activity. I'd say it's pretty broad-based.
Mm-hmm.
You know, if you think about the deal sort of flywheel, right? When debt costs, you know, when people were all worried the Fed was going to keep raising rates, spreads had gapped out wide. There was no IPO market. Stocks were at lower levels. Transaction activity fell-
Mm
... dramatically, 50%-60% from its high of a couple of years ago. We're now seeing a pickup. We're now seeing spreads tighten in leveraged loans, CMBS. We're seeing, you know, the IPO market's a little bit better. Obviously, public equities are doing better. Strategics are more open for doing things, and so we're seeing a pickup activity. And if you think about our bias is to invest before the all-clear sign.
Mm-hmm.
Because as ultimately the Fed lowers rates, people will get more comfortable. Right now, when borrowing costs are higher, you can generally buy private assets at lower prices.
Mm-hmm.
So I think you'll see, in my mind, You know, I think this will continue to pick up. And our advantage in terms of deployment is, we have a lot of different things we do, right? All across private equity, and infrastructure, and growth, and life sciences, and real estate, and secondaries, and all different forms of credit, investment grade, non-investment grade. And so being a full service capital solutions provider in the private markets, gives us a lot of ways to deploy capital, and I would expect, as markets heal, that will continue to pick up.
Digging down a bit more into that, what are the best kind of themes or opportunities you're seeing to put money to work in today?
Well, clearly, in the near term, with base rates elevated, private credit's very attractive. Non-investment grade private credit is producing, you know, double-digit returns for investors making—you know—being a senior lender.
Mm-hmm.
So there's a lot of enthusiasm for clients for that risk-return profile. And I would just say, more broadly, investment-grade private credit also, we can talk about that in the context of insurance. But overall, the risk-return in private credit seems very attractive. The second stop, I would say, is being a capital solutions provider.
Mm.
Because the sharp upward movement in rates, some of the regulatory changes out there, has created opportunities to deploy capital. So, what we do in our tactical opportunities or hybrid capital business, where we can put senior equity in, maybe get some warrants-
Mm
... help us sponsor, de-leverage a company, that's a very attractive area. Secondaries, because a number of our clients are over their targets, in terms of private equity or other asset classes, buying LP interests. Structured risk transfers, we've been the leader in that space, working with banks, again, there, because of the Basel III rule, selling, first loss positions against their subscription financings, for instance. And then I would say real estate's in that capital solution areas, either with banks, could be one area, open-ended funds who need to sell assets. Europe, for us, has been a very attractive area-
Mm
... in real estate. And then I would say on the equity side, there are some big, thematic, good neighborhoods we've talked about, we talked about a year ago, that we continue to lean into. One would be the migration of our lives online. That could be everything from e-commerce played through logistics, enterprise software businesses, online marketplace. We've committed to buy a big company in Europe called Adevinta. And then I would say what's becoming increasingly the biggest theme, which is digital infrastructure. If you think about data centers as the physical manifestation of AI, the capital needs for that are enormous, and we have there, I think we have $50 billion that's we either own or under construction, and another $50 billion under various stages of development, and we could spend a lot of time on that.
I would say that would be one big area. Second big area would be energy transition and the-
Mm-hmm
... sort of power shortage that ties to what's happening to data center demand, also, but to a lesser extent, EVs and some of the reshoring that's happening. Power use in the U.S. for the last 20 years had basically been flat and is now starting to grow at 3%-4%. And so for our infrastructure business, for our energy credit fund, our energy equity fund, that's creating a lot of opportunities with utilities, with services, with software companies, huge area. Life sciences is an area we like, again, because of genomics, big data coming together, everything from investing in the phase III drugs, the services-
Mm.
The real estate. I'd say geographically, India, we've been the biggest private equity and real estate investor in that country for a long time now. Most other folks had different geographic focus in Asia. I think that's gonna prove to be a meaningful competitive advantage, and there are a lot of long-term trends that are coming in place, particularly diversifying supply chains, growing middle class there. So, you know, I, I would say there are a number of areas that we're, we're leaning in on, and that's reflected in our deployment.
Yeah. I was gonna ask this later, but you kind of started touching on it, so I'll move to infrastructure. Obviously, one of the punchier discussions you had on the last earnings call, I think you made the analogy that it feels very similar to your real estate business out of the GFC, which suggests an opportunity in the hundreds of billions. So I think it'd be helpful, firstly, to kind of frame the specific themes driving that view. You hit on some of them. But then more specifically, since we've been talking about this for a few years, I think, for Blackstone, what do you think the time horizon is for this to really kind of hockey stick up to that hundreds of billions of dollars of AUM?
So what I'd say about infrastructure is, it's a really terrific asset class for our investors, particularly our institutional investors, because it's long duration, often inflation-hedged, has an income component to it, and provides real balance to a portfolio. And in public markets, these infrastructure assets, I would say, are often undervalued because the public markets are very growth-oriented. I don't need to tell the people in this room that. And yet, if you're a long-term investor, to own a pipeline or airports or data centers, all these assets, these are terrific long-term assets that compound and have great protective moats, in many cases, around their businesses. We started our business less than six years ago, and what I think is interesting about us is, you know, we utilized relatively small amount of capital to start it. We didn't acquire somebody.
We used folks from our existing, primarily private equity, energy team, real estate teams. We built it. Sean Klimczak, who runs that business, does a terrific job. We focused in three areas: transportation. We own Signature Aviation here in the U.S. We own Mundys, which is the biggest transportation infrastructure company in Europe, including the Rome Airport, Nice Airport. We made a big push in energy, particularly energy transition, with a company, Invenergy, which is the biggest independent developer of wind and solar. We've done some LNG facilities also, and then a very large push into digital infrastructure.
Mm.
- towers, fiber, but in particular, data centers. We've produced now, for the fund investors, 15 net since we started-
Mm
... well above what we set out to do. And because we've delivered for the customers, they're obviously more inclined to allocate more capital to us. I think it'll give us the opportunity to expand more geographically, more in Europe, Asia over time. We have an infrastructure secondaries business, which has been successful. We're doing more in infrastructure credit. And I would say having this whole ecosystem is very healthy and helpful. One of the things, if you think about these giant mega trends, if you think about the digital infrastructure needs of AI, the power associated, and then the private credit that latches on, that whole set-
Mm
of concentric circles plays well to our strength as a firm and in our scale. So, we're very excited about the potential for the infrastructure business, where it can grow to your point, over time. The key, as with everything we do, it doesn't matter if it's our private wealth products, insurance products, institutional products, we've got to deliver for the customer. We've done that here, and that gives me a lot of confidence.
I think that's a good segue into fundraising. Aside from infra, what do you see as the biggest drivers of your AUM growth, both in the near term, and then maybe where you see the bigger, longer term opportunities for the business from here?
Well, I'd say near term, you know, private credit is now grown for us between corporate and real estate credit to $420 billion, so it's a very large business. It accounted for, of the $142 billion we raised over the last 12 months, it accounted for over 60% of that.
Mm.
So, obviously, that's been a big driver for us. That's investors are interested. We mentioned infrastructure. Secondaries is another area where investors have a lot of enthusiasm, near term. I would say... or I would say in the longer term, you know, there, there are a few things. One is there'll be a cyclical change.
Mm.
Right now, enthusiasm for real estate is muted. That will change. Private equity, because of the returns delivered, I think you'll see more enthusiasm once that flywheel picks back up, once there are more returns of capital and so forth. I think geographically, Asia has a lot of opportunity for us, just given the strength of our franchise there in private equity and real estate. I think we're still early days, in that market.
Mm.
You know, obviously, there are channel expansions, which I'm sure we can talk about, but if you think about how early individual investors are today, you know, of the $80 trillion of wealth where people have $1 million or more, and then their accounts, we think it's about 1% allocated-
Mm-hmm
... to alternatives, versus a third, let's say, for our institutional clients. I'm not arguing it's going to the same place, but I think it could be much larger.
Mm-hmm.
And if you look at our insurance clients, again, their allocation to investment-grade private credit is still very small, mostly in commercial mortgages, and we think that can grow, particularly in the asset-backed world, pretty significantly. So what I find remarkable about our business and our competitors is we've been a very tough fundraising environment, and yet we've still managed to grow in this environment. You know, when the world turns again, then I think you can start to see a re-acceleration. I think you will see a re-acceleration.
Great. You, we haven't touched on realizations, and you mentioned the PE flywheel. I think on the 1Q call, you were still pretty cautious, particularly relative to some of your competitors. So has your outlook shifted at all since then? And secondly, what conditions would result in a meaningful pickup in that earning stream for you and your comps?
No, I don't, I don't think it's changed from five weeks ago. I would, I would say, when we think about realizations, we think about a couple things. Obviously, maximizing value for our underlying fund investors is top of the list. And then, as you move towards realizations, you know, IPOs take time, marketing assets takes time. You know, there's a process involved with that, and so I think we said on the call, you know, we see it as, you know, picking up activity towards the end of the year and certainly into 2025, and we would stick with that. I do think the key is our long-term confidence-
Mm
... given the quality of the assets we've invested in portfolio, is extremely high. And we know, because we've seen it over time, what ultimately happens. To your question, Patrick, what triggers it? You know, I do think if inflation comes down, the Fed gets a little more air cover to cut rates, that'll be helpful to accelerate this.
Yeah.
But we're a long-term business, and we're focused on delivering for our customers. That's the number one thing. And, and so if it takes a little more time, so be it. If we deliver for them, we'll raise plenty of capital, we'll have strong returns, and as a firm, lots of good things will happen to us and our shareholders.
On that point, I sense that there's a view from some people at least, that that part of the problem is that the, I guess, anticipated exit valuations are still too high. Are you sensing any of that out there? Not necessarily just for you, but just broadly.
I think, a lot of it is cost of capital related.
Yeah. Okay.
I mean, today, if you think about... if you get a leveraged loan and you're borrowing at 500 over 5.5%-
Yeah
... you know, and you pay two points upfront-
Yeah
... you know, you're borrowing at 11%-11.5%.
Yeah.
For private equity buyers, it's pretty expensive. Now, the good news is, that's come down from 3 points and 6.50 over. I think it's gonna continue to move down, and at some point, the Fed will make it easier. So I just see it as cost of capital comes down-
Mm
... that'll be supportive of both asset values and transaction activity. And we've sort of, I think we hit a near-term bottom, whatever, in October with rates and so forth. We've seen the equity markets rally-
Mm.
We're seeing credit markets pick up, and that will help transaction activity as we move out over time.
For sure. Okay. Let's move to private wealth. Last year, we, when we were here, the focus was obviously more BREIT, BCRED, and that opportunity is expanding to new products. For instance, BXPE, which obviously has had a very strong launch this year. To start, let's try to triangulate where this particular product is heading. Maybe framing that around, you know, how the distribution rollout is tracking, how many platforms it's on, what the pipeline looks like.
Well, I don't know how much detail I can go into, but what I can say on our private equity-oriented vehicle for private wealth is we did have a very good launch here. We've been at it since the beginning of the year, and I think it's public. We've raised approximately $4 billion, and that speaks to the strength of our brand, the relationships we have with financial advisors and with their underlying customers. And when you think about Blackstone and our asset light approach, it's really the brand equity and the confidence of investors, which is what we rely on to grow the business. I would say in the private equity space, utilizing the wide scale I talked about earlier is a real competitive advantage.
Mm.
So being able to invest in private equity control, minority private equity, U.S., Europe, Asia, secondaries, tactical opportunities, life sciences, growth, some of the higher octane opportunistic credit, some infrastructure, having that really broad remit-
Mm
... is very helpful. And I feel quite optimistic about what we can build over time here. What I would say, in general, is that the tone in the private wealth space has certainly increased. We said that on the first quarter call. I mean, you know, our non-traded BDC has continued to grow-
Mm
... and is, I think, by far the largest player in the space, with over $30 billion of equity, over $50 billion of gross assets. The redemptions, as we talked about, BCRED, have come down very sharply.
Mm.
Obviously, as equity markets have improved, that's helped this channel, and the fact that the performance has continued to be strong. I think for us, because I think the next question is, where does this go? We will be methodical in rolling out products, but we wanna do it when we feel like we have a scale product-
Mm
... that can deliver for the customers. Because the relationship we have with the financial advisors and the underlying customers is sacrosanct, and we've got to deliver for them.... And so we're building a long-term business. And, you know, at our firm today, almost a quarter of our $1 trillion of assets are in this private wealth space. As I said, I think there's still a significant amount of room, and I think our-- running these products in what we think is a very responsible, differentiated way. I mean, you look at our default rate across our non-traded BDC, you look at the differentiation of BREIT, we're trying to build these things for the long term, and if we do that and deliver for the , I think we can get very significant dividends.
Mm-hmm. Expanding on that a bit, some of the other players in the space have said, you know, maybe they only need four or five of these for the long run. Do you think, do you agree with that, or you think there's opportunity to have, you know, a vehicle for-
I mean, there may be a range-
Yeah.
There may be a range. I think for us, given some of the things we do in credit, some of the things we do, in liquid markets or semi-liquid markets, I wouldn't wanna put a number on it.
Yeah.
I just think the scale opportunity is significant, and also, I think it's important to recognize, versus the institutional market, where there can be thousands and thousands of managers-
Right
... The large distribution firms, the wealth management firms, are not gonna put thousands of names on their platform. They're gonna put three in a segment or maybe five, and in almost every case, Blackstone will be one of those on the shelf.
Mm-hmm.
When you think about our firm over a long-term period of time, that's why we're so focused on delivering-
Right
... because we know we should get the shelf space. We've got to deliver for the customers and build on the brand equity we have.
Makes sense. More specifically, KKR made a splash last week with the announcement of its partnership with Capital to build products with both liquid, traditional, and illiquid private credit, which they believe helps them better address the mass affluent market. Do you think that's a path Blackstone would explore, or do you think it makes more sense to develop similar products on your own, if at all?
I would say we've, you know, you don't wanna foreclose any opportunity.
Right.
Who knows over time? But we have had a bias, given our scale and brand, to try to do things on a direct basis.
Yeah.
That's been our bias. Markets evolve. It could change, but I would say for now, our plan is to access the customers directly, and so far, that's working well. We'll always evaluate the market.
Makes sense. Let's move to private credit, and more specifically, ABS, investment-grade asset-backed finance, which has obviously been a big focus point for you and others. I think you described the client demand as dramatically increased on the call. So how is Blackstone approaching the sub-arc opportunity, which I think is a little different than others? More specifically, maybe expand on the bank partnership opportunity.
Well, I'd start with, on private credit, we're seeing a structural shift. If you think about our clients who had a traditional 60/40 or 70/30, that 60 or 70 has been moved roughly half into alternatives over the last three decades. But that fixed income bucket has stayed almost virtually liquid.
Mm-hmm.
Even though as many people know, in structured credit, there's actually not that much liquidity in asset-backed, you know, securities or CMBS, but that has stayed that way. We are now beginning to see clients, particularly insurance clients, but also pension funds and sovereign wealth funds, think about trading some of this off.
Mm-hmm.
The question is: Why is this happening? And I'd give you two reasons. One is the direct-to-customer model that exists. So if you think about, you know, a leveraged loan being made, you know, if a bank originates that, they take a few points, they sell that to-
Mm
... a CLO manager like us. We then assemble these, we then go back to the bank, we do an offering, we pay the bank for that, we pay the rating agencies, we sell the bonds, all this. There's an awful lot of cost in that distribution system. If we bring our non-traded BDC or what we do with some of the biggest pension funds, and we bring it right up to the borrowers, then you can give them more... You know, you can give the borrower certainty because you don't need to flex because you're in the storage business, and you can give a lot more net economics to the underlying investor. So that's one reason why you see this share-
Mm
... shift happening, both in non-investment grade and investment grade. Second thing is, there's just better duration matching, which is healthier for the financial system. You think about First Republic and its failure, it had $70 billion in mortgages, super prime mortgages. I don't think it had any defaults, but it had 20-year assets and 22nd deposits. And if we can place these loans directly on the balance sheets of a life insurance-
Mm
... company, that's better matching. And so I think this migration of some portion, it's not gonna be 100%, but if you said a third of investors, long-term investors, fixed income, moved into the private credit space to get additional return-
Mm
... I think that could happen. When you do that math, you'd say: Wow, there's a long way to go on this particular journey.
So that dovetails nicely to the insurance strategy, which is a little different than a lot of the other peers. Maybe frame how it's different, and to what extent, there's like a larger pipeline of more strategic relationships there.
Well, by the way, I didn't answer your question on the banks.
That's all right.
For the banks, what works obviously is, in some cases, you know, taking some of these assets off-
Right
... keeping privity with the clients and running slightly more capital light and making their businesses a little more fee and a little less balance sheet. So there's a nice mix there. On the insurance side, we've made a choice different than most of our competitors to not become an insurance company.
Yeah.
... you know, I think our competitors are doing a great job. I think they'll continue to do a great job. But issuing annuities, essentially borrowing money at 4%, investing it at 5.5, leveraging it 14x, is a different business than just being an investment manager. And so I think they'll continue to be successful doing that, but that's not what we wanna do for our firm. We run an asset-light business, we don't wanna have that kind of capital intensity. Also, it can draw more regulatory focus. It and also, it creates a different dynamic with the underlying insurance market because-
Right
You're now competing with them selling products.
Mm-hmm.
We're going for an open architecture model. I, as I said, this is not one side can win or not, we just wanna be in this model as an investment manager. It takes longer to build than just issuing annuities.
Mm-hmm.
But we think long term, the potential market is quite large, and we prefer that as a business model for us. As I said, I think they'll continue to have success with what they're doing.
Mm-hmm.
What we wanna do is use as little capital as possible and serve as many potential customers as possible. I think in the insurance world, increasingly, because of the competitive dynamic, life, annuity, and even P&C companies are gonna move a portion of their assets-
Mm-hmm
into private credit. And if we can operate at scale with our open architecture model, our hope is to serve many of them. In the last year, our insurance business grew by 20% and has a lot of momentum.
Does your origination capacity at some point put a limit on how many of those new relationships you can layer on?
I think the interesting dynamic we're seeing is, as we scale up, it gets better. Because the biggest challenge in credit is, unlike equity, you can only have so much concentration. So if we do a financing for a new green energy project, and it's $2 billion, you can't put $2 billion on a single insurance company balance sheet. So if we have 20 underlying customers, we'll each take a $100 million-
Yeah
That's perfect. So what we're finding is the scale is beneficial and enables us to go out and deal with counterparties in a holistic way. We did this CoreWeave transaction, this enormous $7.5 billion financing. In that case, less for insurance clients because it was non-investment grade, but our ability to speak for $4.5 billion, the largest credit commitment we've ever made, was pretty notable. And so what we're finding is, as our size grows, it enables us to serve more customers.
Mm-hmm. So that's a nice segue into the trillion-dollar question. Some may argue that Blackstone could be bumping up against the law of large numbers. At the same time, you're known for your innovation, ability to step out into adjacencies. So as investors evaluate Blackstone's potential growth algorithm, how should we think about this aspect of the Blackstone investment case? In other words, do you still see enough white space and low-hanging fruit to keep the kind of growth trajectory as high as what we're used to?
Yeah.
Yeah.
Look, I still think we're in the early days in the alternative space. The total industry across all asset classes is equal roughly to the market cap of this magnificent S&P.
Yeah.
And, and when you look at how big infrastructure is, commercial, residential, real estate, private and public companies, you know, we could go on and on, the credit markets. I, I think the opportunity to grow and, and is significant. Even in our institutional market, we had our LP meetings last week with our big clients. Even them, in many cases, who are up at their caps today, are still thinking about how to increase their allocations to alternatives because of the strong performance. The individual investors are in their early days of this movement, and, and the insurance companies are in the early days. And we think having the scale we have is a competitive advantage, we think having the brand we have is a competitive advantage, and we think geographically, there's a lot to do.
There are some huge secular shifts that require enormous amounts of private capital.
Mm-hmm.
Back to this digital infrastructure, back to green energy, to private credit supporting that, the build-out of places like Asia and India. So I, I would say what gives me confidence is we've managed to continue to grow. AUM was up 7%, you know, last quarter-
Mm
... year-on-year, in a very tough environment. When we get back to an environment when the sun's out-
Mm
I think the opportunity to grow is still quite significant. I would just say, this has been the same question in the 32 years I've been at the firm, which is: Aren't you too big to grow? And I would answer it the same way: No.
Mm.
I do think the strength of our brand, what it means in terms of investors, assets we can attract, people we attract, will power our growth going forward.
So the culture, I asked you this last year, and wanted to get your latest thoughts. As you continue to get bigger and expand, how are you focused on keeping the firm integrated and maintaining the unique culture that got you here?
Look, our business, we don't have the secret formula to Coca-Cola, right? We have amazingly talented people who are well trained, connected by culture. And so for us, what we need to do is constantly reinvest in that culture. We just had an engagement survey. We do 360 reviews. We, every Monday, have something called Blackstone TV, where we talk to all employees around the world, talking about the trends we're seeing, where we're investing, where we're selling. We have a photo contest. We wanna keep people connected.
Mm.
We're a work from work company.
Mm.
We have people, our investment professionals, in the office five days a week. I travel a ton constantly in different offices around the globe, with an effort of keeping our people connected, something Steve Schwarzman believes is critically important for our firm. We think having a great culture that attracts the best people ultimately enables you to win and be successful. So I would say and then we do a bunch of things to give back that our people appreciate. You know, the fact that we have, whatever, 60,000 young people applying for 175 analyst jobs, is a testament to the firm. And the fact that we have a model where people really enjoy the intellectual challenge, but can still get financially rewarded, it's been powerful.
So I would say, when I talk about what are the most important things, I talk about the culture, the brand/reputation, and then obviously, our investment track record. I almost always lead with the culture-
Mm.
Because if we can keep that in a good spot, then we're gonna build a long-term firm that's gonna succeed. Forget whatever cost of capital is today, whatever headline headwind geopolitical, we keep this great culture. We deliver for our customers, lots of good things happen.
On the culture and compensation front, most of your comps have taken the step of moving more compensation to the management fees, I mean, from the performance fees to the management fees. I think you're the last holdout there. Any thoughts on that move from other-
Look, we have, we think, really good alignment-
Yeah
with our customers. How you categorize or with our people, and, and how you categorize it or shift it, you know, we, we can always look to optimize-
Yeah
When we do this. We're super focused on delivering, obviously, for our shareholders. I mean, 40% of the stock at Blackstone, a large market cap company, is owned by insiders, so we have a heck of alignment with the folks in this room who own our shares. I'd say we're constantly looking. Our model has worked for us, doesn't mean it can't evolve over time.
Okay. Fair. Before I get to the concluding question, kinda goes back to the retail retirement theme. But your predecessor, Tony James', white whale, was alts in 401(k)s. Any updated thoughts on products that could work in that wrapper since you've been,
Yeah
... pretty,
I think it's a big opportunity, Patrick. I— If you think about it, what's odd in our system, is as we've moved individuals in the private sector from defined benefits to defined contributions, you know, as we've moved to 401(k)s, we say to a 22-year-old individual, "Go make these investment choices yourself.
Yeah.
We say to them, "You must have daily liquidity, even though you're not gonna access this for 45 years.
Mm.
Meanwhile, when the companies have responsibilities or the governments, they invest in alternatives because there's tons and tons of data about the outperformance.
Yeah.
That seems like an odd disconnect. When you look in other countries, use Australia as an example, or Canada, when they create superannuation funds or other long-term vehicles, they try to maximize long-term performance. We have, because of our litigation system, created a disincentive. It would seem logical to me that if you had a safe harbor, and you said, "Yes, you can't give the money to your brother to manage, or to some small operation who has no experience," but if you had target-date funds, and you had an allocation of 10% or 20% to alternatives with responsible managers, and there were third-party consultants doing the vetting, yes, the fees will be higher than an ETF, but they've proven over time to provide outperformance.
And I do think some administration, at some point, will look at this and say that that's a rational choice to change, particularly because we're already doing it in defined benefits. It's being done in defined contributions in other countries. And so to me, it would be a matter of time, but so far, it hasn't happened yet.
So no movement on that front from what you can tell?
Not today, but I think there are thoughtful people who recognize that if we could get alternatives into defined contribution plans with the right parameters, that it would be, it would make sense.
Yeah.
I think you'll find researchers and others who support this idea. I think you need the right political environment, but I think once it happens, and once that performance is delivered, it'll become part of the system. I think there'll be a tipping point at some point, it's just very hard to predict when it happens.
Makes sense. So, to conclude, your stock's had a great run. You've proven a lot of naysayers wrong over the years, in a variety of environments. So through the lens of a still uncertain macro picture, why do you think the investors here should be putting more money to work at Blackstone stock now?
Well, I would say this... Maybe I give you a short-term and a longer-term ask. The short term, at some point here, obviously, I think when we get some good inflation prints and so forth, and the Fed starts to move things down, that'll be very helpful for a bunch of different types of assets we own, particularly real estate-
Yeah
... which people are focused on, and that will accelerate the flywheel. We talked about both deals and realization, and particularly shorter the performance side of the ledger, right? That. A big chunk of our earnings power has been in hibernation.
Mm-hmm.
At some point, that's gonna come out. It's hard to say when that happens, but it will. So that would be sort of the shorter-term argument. The business has shown remarkable resilience, despite a bunch of the earnings being in hibernation. Then the longer term is, alternatives are a mega trend.
Mm.
You know, we talk about good neighborhoods. I would put alternatives. That's why we invest in stakes and managers, in secondaries, and leveraged loans, and direct lending. More and more investors, institutional, individual, and insurance, the three I's here-
Mm-hmm
... they continue to increase their allocation to alternatives. And we're the global leader in alternatives-
Mm
... with the broadest platform. That seems to me to be a good place to be. We're running a business that has virtually no net debt, no insurance liabilities. We pay out, basically, the last five years, 100% of our earnings-
Mm
... to shareholders in the context of dividends or buybacks. We are a very motivated company.
Mm.
We are not a company sitting around today saying, "Oh, we've made it to the top of the mountain." We're always at base camp, and the drive to be better, to succeed, is a constant for us. And we're in this really good space with this incredibly powerful brand, which is hard to put in a model. So do I know what the realization is next month? I, I don't know that. I can just tell you, for me personally, my confidence in this enterprise, this sector, this business, is enormously high.
It's a great finisher. Thank you so much, Jon.
All right, Patrick, thank you.
Yeah.
Thank you all so much.