Unlocking Investment Insights with Jon Gray, President and COO of Blackstone
Willy Walker: Good afternoon and welcome to a very special Walker Webcast. Today marks the fifth anniversary of the Walker Webcast. For the fifth-anniversary episode, I reached out to Jon Gray, and with deep, deep thanks to Jon for taking an hour to join me. Today, I am thrilled to have the president and chief operating officer of Blackstone joining me. Jon, it is fantastic to have you with me, and as I just said, I'm deeply appreciative of you taking the time.
Jon Gray: Willy, it's great to be with you and your audience. I've gotten a lot of texts about doing this, so I know I've got some friends out there watching. I know you’ve pulled together a heck of a show over time. So, congrats on everything you've done here.
Willy Walker: I'm only trying to get the same number of LinkedIn viewers you have from all of your running videos that you put out so consistently and so creatively, Jon. On one of those videos, I heard you were asked by one of your Blackstone colleagues to name your three favorite songs. And you said, “Gosh! Finding my three favorite songs. That's going to be a tough one.” The first one that came to mind to you was “Eye of the Tiger,” and so I thought I'd pull the lyrics from eye of the tiger to just start this off. The first stanza of it goes “Rising up, back on the street. Did my time, took my chances.” You've clearly taken your chances. “Went the distance. Now I'm back on my feet, just a man and his will to survive.” As all of us know, you've done more than just survive. But in the next paragraph it says, “Don't lose your grip on the dreams of the past.” I want to start here. You grew up in Chicago. Take me to Jon Gray's dream of what he wanted to accomplish back in the 1970s or 1980s, as you were figuring out what was going on in high school, and where you might go to college. What was the dream for Jon Gray back then?
Jon Gray: It was definitely not to be sitting here today, Willy. I'm a long way from home. I think the dream back then, like a lot of kids, certainly, young boys at the time, was to be a professional athlete. I was a huge Chicago Bears, Chicago Bulls, Chicago Cubs fan. We would watch every sport, play every sport. I ended up focusing more on basketball than anything else in high school, but that was really my passion. The hard part was that I developed later than other kids, and I ended up spending most of my high school basketball career sitting on the bench, which was a huge disappointment. So, my dreams of being a professional athlete were dashed pretty early on. I would say academically, it wasn't a huge focus, but I was always intellectually curious. I loved reading the newspaper, and then a little later in high school, I got a little more serious. I think for me, the key sort of pivot point was that I ended up getting accepted at the University of Pennsylvania. I left my Midwest roots and my incredible family and went to school in Philadelphia. I found myself surrounded by a bunch of these highly motivated kids from the Northeast. That's really when things changed and I became, I would say, a little more focused. But in childhood, playing sports would have been the passion
Willy Walker: I was a late developer as well. My mother used to call me a late bloomer, but I did hear you tell a story about getting your driver's license and getting to the drive-in window, and having the person say, “Please pull around, ma'am.” You and I share a very similar experience along those lines.
Jon Gray: Other people do not understand really how formative that is in terms of your character. It creates some drive.
Willy Walker: I fully concur with you on that one. Jon, just staying on your childhood for a moment, your father had an auto parts manufacturing business, which, by coincidence, was called Blackstone. I'm just curious. At any time, has your dad turned to you and said, “How come you didn't come to my Blackstone and make it worth $200 billion?”
Jon Gray: Yeah. It's funny. It's one of the great coincidences of my life that our family had this business on the west side of Chicago that built automotive parts. It evolved and did some office furniture as well over time through metal fabrication. What happened? Unfortunately, my grandfather had the business and passed it on to my dad. Manufacturing automotive parts on the west side of Chicago is not necessarily the most competitive thing, and the business got into a lot of financial trouble in the late’70s and early 80s. My dad really tried to make it work, but it ultimately didn't. So the business left the family. One thing I will say that ultimately made me quite happy is just before my grandfather passed in 1992, I told him I was going to work at Blackstone, and he loved that. It was a different Blackstone. It was in New York, but it was the same name. But no, it was very ironic that that was the family business—a very different business. But this Blackstone, of course, has turned out okay, too.
Willy Walker: You said you got to Penn, and that opened your eyes a little bit, as it relates to both academics and being around a bunch of really driven, highly talented students and colleagues. You tell the story about going to your first summer job. As your mom was dropping you off for it and you're all dressed in your tie, her one piece of advice to you was, “Keep your desk clean.” I'm just curious. If I walked into your office at Blackstone today, do you still have a clean desk?
Jon Gray: I would say, not as clean as my mom was hoping, but I've gotten better as I've gotten older, I think. As I was younger, it was very messy. But look! My parents, my mother, my father, both of my stepparents, have all been incredibly supportive, and my mom, interestingly, was an entrepreneur and had a catering company, which was pretty unique if you go back 40+ years ago. So, she pushed me, as did my father. But on the desk neatness, I'd say, “Okay. Clearly, the technologies helped.”
Willy Walker: No doubt about that. You talked for a moment about your love of sports and the Bulls and the Bears. There's a picture of you and your now wife, then girlfriend Mindy, at your Wharton graduation, and you've got a Sony Walkman earpiece in your ear with the string hanging down. This was long before we had wireless AirPods. You were actually listening to the 1992 Bulls-Knicks playoff game in your ear during your Wharton graduation. I actually went back to check whether the Bulls won that year, which, as you very well know, they did. Do you remember what Michael Jordan averaged per game during that NBA final? I would think you probably know pretty clearly.
Jon Gray: I don't know, but I would guess it's probably 30+.
Willy Walker: 36 points a game. I was like, “Wow, that's quite something.” I mean, what a great gift to you. I mean, a lot of your and my friends’ kids have grown up in Boston over the last two decades, and they've had the great benefit of watching the Patriots and the other Boston teams. But when you were growing up in Chicago, having the Bulls was just an incredible gift.
Jon Gray: Six championships. In that gap in the middle, Michael played Minor League baseball, which was not perfect for the Bulls. But he was the greatest basketball player of all time. The guy was amazing, and so fun to watch.
Willy Walker: I'm assuming you've met him.
Jon Gray: I have, but I wouldn't say I have a particular relationship. It's been in larger groups and, like anybody, you get so nervous when you're around Michael Jordan. You're truly in the presence of greatness.
Willy Walker: One of the things I was going to ask you a little later on, but I'll jump to it now. I was doing an interview with Barry Sternlicht and Bob Faith at a conference a couple of years ago, and I asked Barry and Bob this. They've both had great careers and been able to do and see a lot of different things, and I asked them both, “Just tell the audience something unique that you've had the opportunity to engage in.” I can't remember exactly what it was that Barry said. But, Bob Faith, in front of hundreds of people in this conference, he goes, “You know, Willy, you may not like me telling this story, but one of your competitor firms actually took me to meet Warren Buffett, and I thought that was a really fun life experience.” And I'm sitting here and saying of all the things Bob could have brought up, he talked about the fact that Berkadia took him to meet Warren Buffett and that that was a great experience. I was pulling the knife out of my back after he said that on a big stage. But it's fun that you've met Michael Jordan. So, Jon, let's jump to joining Blackstone in 1992. I guess the first thing about it was that it was a very small firm back then. There were 75 employees, a fund of 750 million, and it was really focused on doing buyouts. How'd you end up leaving Wharton and going to Blackstone in the first place?
Jon Gray: So, I’ll back the tape up just a little bit. At Penn, I ended up actually getting a dual degree. So I was an English major, and I was also in Wharton with a finance concentration. That turned out to be a very good decision because my senior year, I met a young woman in romantic poetry class and I ended up marrying that woman. We've been together ever since, me and my wife, Mindy. A few weeks after that, I was just interviewing on campus, and I got a job working at Blackstone. The firm had maybe seventy-ish people at the time. We managed just $750 million. We did M&A advisory work, and we did private equity. But back then, it was called the LBO business. I was excited about Blackstone because LBOs were a new, interesting area, and there were a lot of political luminaries at the time at Blackstone. Pete Peterson, one of our co-founders, who was former Secretary of Commerce was here. Roger Altman was here. David Stockman and Steve Schwarzman had run M&A at Lehman Brothers. It was a very high-profile firm, but small. I didn't know that much. Frankly, I was just interviewing for jobs, and it seemed like a super interesting place to go. I also had a woman I was friends with whose boyfriend, David Blitzer, still works here, and that was a connection also. I would say it was more luck, and I've described in my life luck being a core competency. Getting to Blackstone, I think, was good luck. I'd done really well in school. I got this job, but I really had no idea at that time what it meant, and I had no idea where the future was going.
Willy Walker: Over 23 years, Blackstone has gone from being that firm with one fund and 75 employees to now having $1.1 trillion in assets, a market cap of over $200 billion back in November, which made it larger than Morgan Stanley, Goldman Sachs, Citigroup, or BlackRock. I guess the question I'd have on that is, over that 23-year period of time, there are two things…
Jon Gray: 33, Willy. You’re making me young, which I am happy about.
Willy Walker: 33. You know I wish he was just 23. He's exactly right. Over that 33-year period, was there a moment where you weren't sure that Blackstone would survive, and was there a moment when all of a sudden, because of a fund you'd raised, a deal you'd done, a team you'd brought on, that you realized that Blackstone was not only going to be a very successful firm, but was going to be the firm in your industry?
Jon Gray: I'd say there are a couple things that I would point to. I mean clearly the scariest moment in this firm's history, and I think most investment firms’ history of the last couple of decades, was the financial crisis. We were engaged in private equity. We obviously moved into real estate. We had a private credit business. We invested in hedge funds, and the business had steadily grown from the time I joined it until we hit the financial crisis. Really, just before the financial crisis, as you know, in real estate in particular, we really started to supersize our business. We went from buying individual assets or portfolios to buying large public companies, Equity Office for $39 billion, Hilton Hotels for $26 billion, and then the storm of the century comes along. You're obviously dealing with massive liquidity challenges, operational challenges. You're taking huge markdowns, and it does feel like at that moment, “Oh, my gosh! Where is this going to go?” I think there was a basic resilience at this firm. I think we'd made a lot of really good decisions about how we financed things, how we had sold stuff down, how we de-risked our portfolios. It was really true across the firm. The fact that we had a lot of dry powder, we didn't panic. We took the opportunity when prices fell, even though we were dealing with our own challenges, to deploy capital. There was an element here of “stay calm and carry on.” I think the learnings from that and that sort of near-death experience were so important. By the way, when I look back at the concentrated bets and the amount of leverage, there were definitely some risks that I personally shouldn't have advocated for. But we managed to get through it because we own some amazing businesses. We had the right management teams in place. We made some really good decisions. In most of those cases, we ended up generating enormous profits. So I would say, clearly, the financial crisis was the thing that really shook our real estate business at the time, and the firm overall. In terms of when we realized we were getting to some sort of liftoff velocity, that was different. In real estate coming out of the crisis, because so many of our competitors didn't survive or were badly hurt, it was clear at that moment that we had an opportunity to do something different, to expand more geographically, to move more into debt, to move into core plus real estate, and continue to operate at a unique scale, so I would say that in real estate. More broadly for the firm, really over the last five or six years as we've expanded the business and continue to do what we've done traditionally in private equity and real estate, private equity and opportunistic credit, but really move into some of these other areas like infrastructure, continuing in core plus real estate. In credit, performing credit both investment grade and non-investment grade, and expanding with insurance companies and really moving into private wealth, that it became, I think, more and more apparent that we had a brand that was differentiated, that we delivered for customers, and that the potential addressable market was much larger than people thought of this sort of private equity alternatives world, that there was a much bigger universe of customers and a much larger place we could deploy capital. And that's something, I think, that has changed our mindset. But I would say this: for all the success the firm's had, there's still a sense of nervousness, concern, and a relentlessness—that there's never a feeling here like we're on top of the mountain. We've made it. We're in a different spot. If you sat in our boardrooms, and you listened to us talk about it, or you heard Steve Schwarzman talk about the business, we're always talking about what we're not doing right, how we can do better for customers, how we can deliver better returns, what innovations we need. I think the sign of a business that keeps pushing is one that feels that sense of basic insecurity. Yes, we've had a lot of success. We can look back and pat ourselves on the back. But what are we doing tomorrow? How are we going to deliver? How are we going to be better than our competitors? How are we going to build a business that serves our customers? So, I tend not to like to reflect a lot on the success of the past, and I love to think about what are the challenges today and how are we going to get through them.
Willy Walker: So, two things on that, as it relates to the most challenging time, and then the opportunity. I've heard you say a number of times that one of the great lessons you've learned is to maintain equanimity through difficult times. I just heard you speak there of the GFC and some of the deals. Clearly, the Hilton deal, which was a $26 billion dollar buyout with $6 billion of equity and $20 billion of debt, was quite the LBO to be done in July of 2007, right before the world changed so dramatically with the GFC. But when you say, maintain equanimity during difficult times, it sounds great. It makes all the sense in the world, but as you and I both know, it's exceedingly difficult to do that when times are tough. What is it about the DNA of Blackstone? What was it, as it relates to the partnership that you and Steve had, that you and the other partners had, that actually allowed you all to maintain that equanimity and the conviction in your bets? I mean on the Hilton deal specifically, you all had to turn around and put, I think it was, another $850 million into Hilton, after having done the original buyout to push out some debt and restructure the balance sheet, which obviously was what gave it the lifeline to be able to get through. But that's not a minor thing. I'm sure there were a lot of people around the table that said, “Hey, Jon, are we putting $850 million of good equity after bad equity of a $6 billion equity check?” So, what is it that allows for the equanimity at Blackstone in tough times?
Jon Gray: I don't know. I think it's the drive, Willy. I mean, Steve himself just has this unbelievable will to win. I share some of that as well. We want to be successful, and when you have that kind of drive, you realize that you're going to be in difficult situations, and you have to find a way to get through them. I also think there's a fundamental optimism. Every week we do our Blackstone TV, and I'm in this room every week on Mondays, and I say something I said to my kids growing up, “Stay calm, stay positive, never give up.” I think those watchwords are very simple. But I say that every week to everybody at the firm because it's what I believe. When you're in the investment business, I think part of this is, you just know this. I mean, look at the events of the last six weeks. Look at how much volatility, how much the M&A market slowed down. Stocks have traded off. People are very nervous. If you go from pillar to post every time something doesn't go right either within broader markets or an individual investment or business you own, you're never going to get through it. So, you have to be realistic in the assessment of things, because sometimes you made a bad judgment, the management team may need to change, or the investment you made was flawed in some way. But if you have this basic idea that you're not passive and that you can take action, you can improve things. You can figure out how to put more capital in or improve the operations or pivot in some way that you're an active agent of change. You believe, fundamentally, you're going to find a way to get to a better outcome. If that's core within you and that's been inculcated in the whole firm, then I think you just approach these things with a degree of positivity that gives you a chance to get to the other side. I agree with you when it's really going bad, it's hard. It's easy to say it on this call. It's easy, but when you really make a bad decision, you make a terrible investment, or you feel so, it really hurts. Or when there's a terrible news article and there's something that's gone awry, it's hard. But I do think if you constantly remind yourself, “Hey, look! I'm at a great place. We still have time. We can figure this out. I've got access to capital on a personal basis. I've got a great family. I've got a solid base. I'm just going to work harder than anybody else. I'm going to figure out how to get to the other side.” If you bring that to every problem you face, your chance of success goes up. It doesn't always mean you'll get a great outcome. But, as I said, your success rate goes much higher.
Willy Walker: Let's go to the other one, which is opportunities and jumping after opportunities. I remember distinctly—it was probably 2012—and I was at Sam Zell's conference in Chicago, the Marshall Bennett Classic, when your colleague, John Schreiber, stood up and talked about single-family rentals. You all had moved quickly into the SFR space. You'd bought 50,000 single family homes before anyone else had blinked, and Jon stands up to talk about SFR. Everyone in the room starts throwing darts at him. And I mean everybody, including Sam. Sam, I'll never forget, sat there and said, “You know, who's ever taken a rental car and taken it to get it washed.” He's like, “No one's going to take care of these homes. It's going to be a complete you know what, as far as managing the assets. This is just a whole new asset class. Who would ever do it?” I remember turning to David Neithercut, who ran EQR at the time, and I said to Neithercut, “You ever look at this?” He said, “Man, I have a hard enough time managing one asset with 350 units in it in one co-located place. I can't imagine managing 350 or 3,500 homes spread across a diverse geography.” Yet Blackstone had the insight and the conviction to move into that space before anybody else and really make a whole new industry in the SFR space. Talk about the decision to go do that. In other words, everyone theoretically thought about it. But I've heard you talk about not looking in the rearview mirror. You had to literally rip the rearview mirror off your car at that point to have conviction to buy 50,000 single family homes before anyone else had gotten through the fact that we'd just gone through a massive single family housing crisis.
Jon Gray: I think part of this actually ties back a little bit to the Hilton experience where we had this near-death experience. Even by then, in 2012 we were beginning to see things had definitely turned. I was coming to the conclusion more and more that we want to be high conviction investors—that what matters ultimately is not page 58 of the memo, but really the big mega theme. Are we investing in a good neighborhood? In the case of single-family housing, you have to remember from 1945 until 2009, single family homes have gone up every year. Maybe they went down a little bit in California in 1991. Alan Greenspan said, basically, it was the safest asset class in the world. Here we saw close to a 30 percent national decline in home prices which nobody could have imagined before. I think what we tried to do in this case was to say, “Look, this is a massive asset class.” The demand for housing is not fundamentally changed. We had begun since 2009 to see a very sharp decline in new supply, which means demand, we think, will grow with population and employment growth. The economy was starting to grow again. Supply was greatly constrained, and you were able to buy hard assets, single family homes, at significant discounts to replacement costs. Something I hadn't realized was there were something like 14 million single family homes that were already being rented. But it was all done on a mom-and-pop basis. So, the business existed and had just never been done at scale. The idea we had was not to buy debt. We don't want to foreclose anybody in their homes, but obviously lots of financial institutions and servicers had foreclosed and were selling homes. We had a business plan where we were going to go to the agencies and large banks and buy huge swaths of homes and build a company. Well, that was a great plan, except we never did any of that, because no one sold the homes that way, particularly because of the legal nature of the process. They were all onesie, twosie. We found some great partners, some entrepreneurs from the UK, the Gould Brothers. We said, “What if we went out and just started buying these individual homes, built a company, and tried to give the tenants better services to a concentrated handful of markets, so that we could deliver better services and spend a bunch of capital to upgrade the homes, something that had never been done because it was individual investors?” We just said, “Look, home prices should recover, and there's going to be a shortage.” And we ended up building Invitation Homes, ultimately took it public, and sold our shares. It was a successful investment. And I'm actually quite proud about the business because what I think is essential here is, oftentimes families can't afford to own homes in neighborhoods, or they have a choice of renting from somebody who doesn't run the home professionally. In this case, by building a professional business, we could provide affordability to families who want to be in those neighborhoods and do it at a higher standard of care. And that's how we got into it. It turned out to be successful, to your point. It was as simple as—it's funny, back to my parents. I was driving around with my dad in suburban Chicago over Thanksgiving back before we really started, and I had a bunch of the homes we were looking at. I told him, “Guess how much for the home.” He would say, “You drive around and you'd say $300,000.” I’d say, “No, Dad, you can buy that for $180,000.” It was just a simple insight like “These homes seem to be at attractive prices. We can deploy capital at scale on behalf of our Pension Fund investors, and we can build a company that delivers great service.” There were a lot of skeptics, including Sam, who I loved. It made a big difference on this. He ultimately acknowledged that he was wrong on this—something Sam was willing to do—and it worked out well. But to me it became this idea of “Find something that's high conviction, and as opposed to buying a thousand homes, go all in, and in that case, buy 50,000.”
Willy Walker: Let me stick on commercial real estate for a moment. I know you've done a lot of investing in Europe, you've done investing in India, you were very big into the infrastructure behind the dot-com revolution, and did exceedingly well on industrial. But right now, it appears that there are two major areas that you're continuing to focus on and put capital toward: multifamily being one and data centers being the other. On the multifamily side of things, I was looking at some data earlier today, Jon. In 2021, Blackstone, the BREIT put a $100 million dollars a day for the entire 365. Obviously, it's an average over that time. You weren't doing a deal every single day, but on average, $100 million dollars of capital per day into the multifamily market in 2021. As I mentioned to you previously, Walker and Dollop is in the process of selling the BREIT, its first multifamily property in three years. We went from that torrid pace of investing to a very quiet period. Now you all are back, and you did a very significant investment of the take-private of AIR Communities. I think it was last June that you all did, and I think one of the things that I found to be interesting was your comments of saying, “Look, we're not trying to time the market perfectly, but we have long-term conviction in the multifamily space.” I've also heard you talking about “The storm has clearly passed. There's some wreckage that was caused by the storm that's going to take time to clean up. But we're not too concerned about the wreckage.” This is back to taking the rearview mirror off the car. We're not too concerned about the wreckage. We're much more focused on the fact that the storm is past, that supply is going to be down, and that long-term fundamentals of multifamily are very solid. Still feeling that way about the multifamily industry, before we turn to data centers?
Jon Gray: Sure. Yes. I mean, look back to these very simple supply-demand factors. New building and multifamily is down two-thirds from the peak of 2022, and the U.S. population continues to grow. There's some obsolescence in housing, and we've been under-building housing now, really, since the financial crisis, unfortunately. When you have that kind of dynamic, invariably, you're going to see rental growth that I think will be above inflationary rental growth once we absorb some of the supply that's still coming through the system back from that 2022 period. So I think, as an investor, the hard part, to your rearview mirror comment, Willy, is you've got to not look backward. Think about the fact that no one's building today; that means that there's going to be a shortage in the future. Therefore, there'll be rental growth that's outsized. So I want to put my chips in that area. The other thing that's happened, of course, is real estate's gone through a pretty tough cost of capital shock, right? Base rates went up from basically zero on the short end to five and a half, spreads gapped out very wide, and we've now begun to see a reversal of that. Borrowing costs in real estate on a three-year swap versus the wides of 2023 for deals are down 35 or 40 percent. So cost of capital is coming down. The supply picture is pretty darn good, and what you want to do now is buy hard assets at discounts to physical replacement costs, which is what you could do. You've seen us across our real estate platform really ramp up our investing in multifamily and logistics. We've actually done an office deal, and you'll see us do more in that area. It's not a complex business in real estate. You're at that moment like after the late eighties, early nineties downturn, where it made a lot of sense to deploy capital. It was the same thing after the financial crisis. The next few years will be similar, but most investors are still licking their wounds from the past. Their real estate's underperformed. Their committees want to look in a different direction, and that's when the time of maximum opportunity tends to exist. But there tends to be minimal interest. And so it's in a moment like this. We're back to this stay calm little bit of a contrarian view that we have at Blackstone. You try to take advantage of a moment like this.
Willy Walker: So I love you mentioning office. I had our mutual friend, Peter Linneman, on the Walker Webcast back in January. By the way, did you take Linneman's class at Wharton?
Jon Gray: I didn't. But I know Peter. He's terrific.
Willy Walker: I love that that you built the largest commercial real estate owner on the face of the planet, and you didn't take the one real estate course at Penn. That's fantastic. So I had Linneman on. And I said to Peter, “Okay, so if you had to pick one asset class to invest in right now, and obviously it's all location-specific and basis-specific and everything else, but just give me a broad brush. Where would you go?” Peter said to me, “Stay rich—multifamily.” So then my question to him was, “Okay, get rich?” He goes, “Office.” And then I said, “Get poor?” He said, “Data centers.” So with that as the preamble to data centers, Blackstone has put a lot of capital and a lot of focus on the data center space. You've put $50 billion of equity into buying data centers and investing directly in data centers. I think you have another $50 billion teed up in 2025 to continue investing. I've heard you talk about investing in the picks and the shovels. Back to the gold rush analogy, you might not want to buy the gold mine, but you might want to be Levi Strauss and supply the dungarees to the people who are working in the mines. But when you and I last saw each other at the J.P. Morgan Asset Management Conference, Michael Cembalest got up and talked about AI, and he talked about data centers, and by JPMorgan's calculation, with just the hyperscalers have put enough capex into data centers to basically have 12,000 Chat GPTs run on them. And whether we get 12,000 Chat GPTs or two chat GPTs, what he's trying to basically say is, we may be headed toward oversupply in the data center space. I guess the direct question, Jon, I'd have for you is, given the backdrop and the amount of capital that is going into data centers, what gives Blackstone the conviction that we're not going to see a bubble here in data centers, as it relates to the amount of capital and infrastructure that's going into the data center space?
Jon Gray: It's absolutely the right question. I'd start with what we do in data centers, which is, we build only when we have long-term leases with some of the biggest companies in the world. So if you contrast that with building condominiums in Miami or Dubai when the price is high and then lots of people come in and you get this variability and so forth and overbuilding, or what happened back after the Civil War with railroads, in this case, we don't go out and build a billion dollar data center speculatively. What we do is we get a long-term lease from a major company, and then we invest the capital. Then, those leases are 15+ years. So to me, the sort of back book of what we own here is very safe, very stable. The question, then, is, will we find ourselves soon where a bunch of players, a bunch of the hyperscalers, will say they're full up? Or the DeepSeek dynamic that the cost of computers come down, that we don't need as much training? What I would say is, “We continue to believe that the data centers are the physical manifestation of the migration of our lives online. Data storage, what's going to come from autonomous cars, the migration to the cloud. Obviously, AI, which we could talk about, which I think is going to have a very profound effect on all sorts of businesses. Even if there's less creation of new large language models and training them because the cost of compute is coming down, there's going to be more and more usage. Based on what we're seeing with our tenants, what you've seen with the biggest hyperscalers, their demand continues not only in the U.S., but in Europe and Asia. We will continue to deploy capital when they come to us and say, “Hey, I want to build a data center.” We may have an option on the land, but the vast majority of the capital only goes in the ground when we have a lease. My gut today is the world's going to need more compute power, and therefore, the world is going to need more data centers. If it turns out it slows a lot, then our development pace will slow. Adjacent to this, Willy, I'd say, what's really interesting is the power that goes with it. Power demand in the U.S. has basically been flat for 40 years. Now because of this digitalization, because of AI, ultimately, because of robotics, I think you're going to see a very big increase in demand for power, which impacts transmission and generation and utility services. It's another picks and shovels way to play this megatrend. So if you said as a firm, “What are we trying to do in investing capital?”, which is, think about some of the big things that are happening out there, like we did with single family homes or the movement to logistics online, and now with data center. What we're doing with energy and power is find those great neighborhoods, and then put a bunch of chips against them, and do it in private equity and real estate and credit and infrastructure. That thematic approach has really paid dividends in terms of delivering for customers.
Willy Walker: Two other quick things on AI. The first one is, do you use one of the AI services? And if so, you willing to put an endorsement of who Jon Gray uses for his AI Chatbot?
Jon Gray: I think everybody at the firm has our own way, labeled AI. Here on my phone, OpenAI is what I'm using on my phone. I do that for personal use. I would say that's like the early stage. I was in Europe last week with one of our CEOs who's now using AI. They give incentives online to customers, and they used to use what they thought was advanced technology. They're now using one of the large language models, and it's allowing them to reduce their customer acquisition costs by two-thirds, a massive increase in margins. One of my partners here took the Blackstone earnings call transcript and a couple of equity analysts reports and put it in the Google large language model, and it created two virtual bots having a conversation for 20 minutes about the pluses and minuses of Blackstone stock. Now it wasn't a 10 out of 10, but maybe it was a 7.5. When you think about customer engagement, you think about content creation, you think about coding, we're going to see a huge movement. I think this is going to have a very large impact. So that's really what underpins my continued belief that there'll be demand for data centers.
Willy Walker: It's really funny that you talk about the use of AI. We had a Goldman Sachs CMBS report that circulated inside of Walker and Dunlop yesterday to give a sense of where the market was. One of my colleagues, Aaron Appel, took it and ran it through a chatbot to just have it spell out all the different acronyms that were in it that allowed someone to actually read it as if it was real English. You didn't have to be an expert on CMBS like you are to be able to understand it. It makes me think about how I went to the 2023 annual report of Blackstone, Jon, and in the first page, there were 14 different acronyms of various groups inside of Blackstone. B rep, B everything. I was just curious. It was seven years ago that you took over as president and COO and moved from just a focus on real estate to the broader focus on the firm. As it relates to the data you now sit on top of, I believe it's 230 operating companies and 13,000 individual real estate assets. That's obviously everything from a big office tower, and not many of those, to multifamily businesses, to logistics centers, to single family homes. Given your view over all of that, how are you using data to manage such a vast organization? Because, as I ask you that question about AI, I'm certain you have certain data feeds that come to you that tell you something about how PE is doing, how your insurance and credit business is doing, how your commercial real estate business is doing, and how your hedge fund business are doing, which are your four big food groups. But if I were to sit there and look at the data you look at, what are you looking to to help you drive Blackstone forward?
Jon Gray: What we're trying to do is capture these data feeds on what's happening in some of the key areas, obviously, revenue volumes and inflation. What's happening with wages? What's happening with input costs and the bigger businesses that have broad reach? Some of our infrastructure businesses—you know, we own the largest ports business in North America, or we own the Rome airport. We own all sorts of roadway services, business, all sorts of things that track GDP. You love to see those inputs, the real estate as we've talked about. When you own tons of apartments and warehouses and hotels, you get a lot of insights. We have some very large operating businesses and private equity that are servicing the healthcare industry, or they may be automotive parts-related. And what you're trying to do is pull this all in and also do it on a global basis. Then on a real time basis, share it and try to do it on a more automated basis. But to be fair, you need human interaction with this because sometimes someone sold a division or there's a one-time factor. So somebody has to look at this, and we have a really dedicated a team of people here now whose job it is to assemble this information, because what we want is a competitive advantage. If you think about investing as connecting dots, seeing more, we should have more dots than anybody. We should, in real time, be able to see, is the economy strengthening or weakening? Are we seeing inflation going up, going down? Where are we seeing pockets of strength or weakness? And therefore, can we deploy capital? We're trying to automate a bunch of this. There is a human element of it. Interestingly, we send out to the senior partners the board summaries of all the boards of companies, to the people on the private side of the business. So you can look at and see what's happening across major businesses, and we have the AI sometimes do these summaries which can be helpful if you're trying to consume all this information. Yesterday I had my operating committee, all the people running the different business lines at Blackstone, talking about what they're seeing real time. So I'd say some of it's a little bit old-fashioned communication, our regular Monday meetings, our management operating committee, but a bunch of it is moving more automated, and I think, as a firm like ours, we should make scale one of our great competitive advantages. Information at scale should be our best advantage. But I'd say it's still a work in progress
Willy Walker: When I looked at your four major groups, if you will, of PE, which is obviously the founding of the firm and it's what Steve set out to build at the beginning, then you've got commercial real estate. Then you've got your insurance and credit business, and then you've got your hedge fund business. I was interested, Jon, that in those three big food groups of PE, commercial real estate, and credit that the three of them now have about the same AUM. They're all $350 billion, give or take, as it relates to AUM. I was surprised at that, but I also have heard you talk about that we are in a golden age of private credit. Talk for a moment about Blackstone's growth in the private credit space. The other question I have for you, there is one related to the composition of your investor base there, and individual investors versus institutional investors. But for a moment, talk about the private credit space and the great growth you, as well as some of your competitor firms in that space over the past couple of years, have had.
Jon Gray: On the first part of the question, I don't think there was a plan for all of them to get to roughly the same size. But the credit goes to Steve Schwarzman to push us to diversify so you could have a business when you're in a higher rate environment, higher spreads. You have a credit business that does really well. As rates fall and multiples expand, you have equity-oriented businesses. Having that balance, I think, is really important. I would say there's been a cyclical element to the growth in private credit, and then there's a secular element. The cyclical would be rates went up a bunch, spreads widened. The returns you got for being a senior lender in corporate land and asset-backed finance in real estate were very high equity-like rates of returns for debt-like risk. Some of that is going away as spreads come back down, and as base rates come down. The part that's not going away is us bringing up our investors. You talk about the composition of investors. It's certainly institutions, our pension funds. It's insurance companies, and now individual investors, and bringing them right up to borrowers and them trading away a little bit of liquidity. It's not a QC bond, but they've made essentially a private loan, but capturing in the case of investment-grade debt, 175 basis points of extra spread. That is incredibly valuable. What we're seeing with our clients is a lot of interest to earn that extra return. I'm taking the same A minus risk that I was taking before, but I'm earning a spread that may be more than double than what I was earning, and that is what's causing this sea change movement into private credit. If you think about insurance companies, what's interesting is if you're an annuity provider who writes 5, 7 year annuities, or you're a life provider who's got 34-year liabilities, if you can trade away a little bit of near-term liquidity for those higher returns that makes a ton of sense, and it's also helpful to the financial system. If you think about First Republic failing, they had a $70 billion super prime mortgage book. They basically had no defaults, but they had 20-year mortgages and 20 second deposits. And so what we're really doing is match funding the assets and liabilities. We're also doing it in this farm-to-table mode that gives higher returns. I'd say we're doing it a little differently than some of our competitors. They've chosen to become insurance companies and take on the balance sheet risk. We're doing it no different than we've done private equity or real estate or anything. We're a third-party investment manager where what we're trying to do is deliver our customers higher returns. So we're sticking with that model and credit, and we're doing it on an open architecture basis with a whole range of clients. Today, obviously, there's a lot of momentum in that space. If you include real estate debt plus the corporate credit area, it's now up to over $450 billion. So that combined is actually the biggest thing we do at Blackstone on an AUM basis. When I look at what I'm hearing from clients today, I would say that business has a high likelihood of growing a lot.
Willy Walker: So when I hear you say farm-to-table, I sit there and go, “I thought that's what banks do.”
Jon Gray: Banks do some of that, but they also, as you know, distribute an asset-backed finance. They distribute in direct lending through the broadly syndicated loan market. They distribute in real estate and CMBS. They'll take fees and distribute. So some of that, they're in the distribution business. Then the other thing, today banks are trying to drive their returns on equity higher, so it may make sense for banks. You've seen us and others announce a bunch of partnerships where they say, “I've got all these consumer loans on my book. Maybe what I should do is retain 20 percent, bring in somebody like Blackstone to hold 80 percent of the debt. I'll get origination fees, and I'll get servicing fees.” You're seeing more and more partnerships between us and the banks. But this evolution of private credit is actually driving down the cost for consumers and businesses, and I think making the financial system stronger, and, of course, banks are going to continue to be a huge part of the whole package.
Willy Walker: When I think about the consumer, you clearly don't take deposits, but I believe that of your $1.1 trillion of AUM, about $230 billion of it is from private investors.
Jon Gray: Companies would be the $230 billion you're talking about. You're talking $230 from insurance, $260 billion from individual investors.
Willy Walker: $260 billion from individual investors. If you think about it, basically, where you are today is, you're at a quarter individual investors and 75 percent institutional investors. If you look forward, Jon, a decade, what's that mix between the individual and institutional as it relates to the if Blackstone's going to have $2 or 3 trillion of AUM in a decade's time? What's that composition going to be? Is it going to continue to be more heavily weighted toward institutional? Or do you see the individual investor piece growing as a proportion of AUM?
Jon Gray: It's funny, Willy. I'll break it down into three component parts, because think about it as the institutions of pension funds, sovereign wealth funds, but then break out the insurance companies who are very early in their journey. They're about $230 billion, as I noted, and then the individuals $260. So it's roughly half institutional half these other. I think it's likely that both the insurance companies and the individual investors grow much faster, because today the private assets alternatives are a very small piece of what they do. Our large pension funds and sovereign wealth funds, on average, are about a third allocated. Now they're continuing to grow because they've had a good experience with us and other managers in secondaries and private equity and real estate private equity. That will continue to grow, but it is a more mature market. Individual investors, $80 trillion around the world where people have more than a million dollars of liquid assets, it's about 1 percent allocated to alternatives. So to your point, yes, that area, in particular, probably has the most runway. But the thing I would say about that for the individual investors, insurance company institutions, it's the same underlying business. We have to deliver for the customers. We have to deliver returns. So we're a little bit like a pizza shop, right? We can have a great window, and we can have napkins that are nice and good music and all this. But if the pizza tastes bad, nothing else really matters. For us, the net returns and all these things are the difference. What you're seeing happen with individual investors and insurance companies is they're saying, “Hey, I'm getting higher returns versus the liquid assets, and therefore I'm willing to make this trade,” because as long as we make that pizza taste good, we deliver for them. We'll continue to see this movement. When you think about a firm like Blackstone, you go back to our beginning of the conversation of a place with $750 million that's grown to a $1.1 trillion, and the natural thing would be like, “Hey, haven't you had your day?”, when I look out at those two huge markets and what's addressable there, and how early we are, I still see a lot of room. The interesting thing is the benefit that happens as we expand is we get more data. We have more relationships, more scale, and it ends up helping our regional business in a powerful way, too. The challenge for us as we grow, of course, is to maintain the culture, maintain the investment process. I was just down in a private equity deal in a heated debate about a potential transaction. That sort of the basic business and what matters to the customer, we can never lose sight of that even as people get excited about growth.
Willy Walker: I think your team's gonna make you change the analogy to the pizza, to the Jersey Mike sub, because you now own Jersey Mike. So you've got to put the plug in for Jersey Mike's as you're talking about that. The sub actually has to taste good.
Jon Gray: By the way, Willy, I think you're totally right. Jersey Mike's is an amazing product.
Willy Walker: There you go. So as we talk about institutional investors, Jon, at the beginning of February you went and did a Middle Eastern trip. You went over and you were in Abu Dhabi, and you were in Riyadh. I was just over in that part of the world, hat in hand, if you will. I was sitting there. I was going, “I work really, really hard to get the meeting with the proper person who sits there and looks across the table at me and says, ‘You know, maybe if you show back up here fifteen more times, we might think about giving you a check.’” I just sat there and said, “You know, I'm sure that when Jon shows up in these meetings, they literally throw money across the table at him.” What's it like to be so successful? And all the money that Blackstone has raised from these major sovereign wealth funds, when you show up, I guess the question would be this. You're clearly not going over to help close the $8 billion fund that you literally just closed last week that's going to go buy loan portfolios from insurance companies and from banks. Is the conversation that you're having more strategic, if you will, with those large, starving wealth funds that have been such consistent big investors in Blackstone? Or is it something else?
Jon Gray: I'd say it’s a bit of all. Obviously, we have a unique spot. So there are insights that we can bring across our portfolio, which is very valuable to our customers. There are strategic discussions about how we can help them do some things at real scale, because individual small commitments may not be, you know they've got an objective to expand in a certain geography or asset class. Then there is a bit of “Hey? We are very excited about XYZ vehicle that we're doing. We're talking with your team. I think this makes a lot of sense.” Again, you're talking about what you've done in the past, because before the meetings they're looking at the same set of materials you are. How has Blackstone done in its various verticals? Hopefully, we've done a really nice job, and that gives us incremental credibility. But I think it's no different, Willy, for a big business or a small business. You care deeply about your customers. If you care about them, you go and visit them in your offices. You talk about what you're seeing; you talk about what you do together. You're honest. When you've come up short, you talk about how you're going to fix that. And you build trust, relationships, and friendships over time. I don't care if you're Blackstone or you're a small manager doing XYZ strategy or whatever. I think that basic business is exactly the same. So, yes, we are able to get good meetings with people who have decision-making authority, but the basic thing we're doing is no different than anybody else in the asset management investment management business. We're talking about what we see. We're talking about opportunity. We're talking about how we've delivered for our customer.
Willy Walker: Your comment about talking about when you've come up short, I will say I watched your Wharton commencement address from 2019. You spent the first 11 minutes of an 18-minute address or 19-minute address talking about being so self-deprecating about you, and where you were when you were at Wharton, and asking Mindy out on a date for the first time, and her sort of laughing at you. After that, you didn't sit there and talk about all the great success that Blackstone has had, and that you've had at Blackstone. You actually talked about the trials and tribulations and some of the tougher times, and I would highly recommend that speech to anyone. But I think that that says a lot about Jon Gray, and it says also a lot about the culture that you and Steve have been able to build at Blackstone, because I think that that 19 minutes says a lot about those things of not trying to hide the bumps and bruises, but actually being very transparent on them. I have three quick things before we run out of time. My friend Dana Zucker will not let me get done with our conversation without talking about the Gray Foundation, so I want to get there but two quick questions before that. The first one is, I believe, that 62,000 people applied to be an entry-level associate or analyst at Blackstone last year, and you accepted 0.3 percent of the applicants. If I am a young person aspiring to work at Blackstone, I obviously am going to have done really well in school. I'm obviously going to have gone to a great university. But if you gave them one piece of advice, as it relates to showing up and showing something about what they've either done or a skill set they have, what's that one thing that Blackstone's looking for outside of just general competency at the very, very highest level?
Jon Gray: To me, I love seeing people who've shown resilience, back to your earlier conversations. You know, I'm always impressed. Athletes, immigrants, people who it's clear that they care deeply. That if you said the quality, we want people who are super smart, we want people with good judgment. We want people who also have some EQ. Nice people. Honestly, we do not want jerks. We want good people. This is a team sport. But you want that level of care that allows you to overcome the challenges—the person who shows up early, who deeply cares. That comes out in a conversation. It may be in the resume. But to me, if there's 1 thing I look for, it's that sort of passion, that will to win, and that deep caring. When you find that, then you have a much better chance of having somebody who's going to be very successful.
Willy Walker: You've had the honor and privilege to work with some of the great luminaries in finance and private equity: Steve Schwartzman, Pete Peterson, Tony James, John Schreiber. Is there anyone, either of those four or anyone else, who has been a great mentor to you, or has taught you some a unique lesson, as it relates to leadership or management of Blackstone, that you want to share?
Jon Gray: Well, it’s interesting. All four extraordinary business people, brilliant business builders, and I've learned tons, I'd say, from all of them. The commonality with all of them is again, how much each of these individuals cared. These are people who read the memos, who show up prepared, who are willing also to take risk, which I think is really important. I think the danger when you get to be a big organization is you lose that risk-taking appetite. Each of them is a little different. I mean, Pete had this amazing Rolodex and connectivity. Steve is like visionary in terms of “You can do more. You can think bigger. You can go to a market. Something just makes you think the horizon's much further away.” Tony is just so smart analytically and can analyze a problem and get to the crux of it so quickly, and you learn. And then John Schreiber, just somebody who has this lovely way about him, immensely successful, but with so much humility and warmth, even though he's negotiating to change the price by just a really gentle way about him. And so I think, like anybody you learn from these people, and you're constantly in the room learning, seeing how they do, and all of them had an enormous impact on my career.
Willy Walker: So finally, you and Mindy have the great foundation. You've been wildly philanthropic, done some great things, as it relates to the New York Public School System and setting up a grant program to give 10,000 kindergartners in 2016 a head start, if you will, by setting up savings accounts. I very much look forward to seeing how that grows and what the returns are on all that. But as it relates to your medical research, Jon, and the foundation that you all set up after the loss of Mindy's sister, Faith, you're doing cutting edge research on BRCA and on inherited cancers. You're right at the cutting edge with your researchers. Have you started to see some really incredible things as it relates to AI accelerating the pace of research in the areas where you all are funding right now that gives you just great excitement about what we might see as it relates to medical breakthroughs?
Jon Gray: I would say it is early, but I think it's promising, BRCA is this gene mutation which unfortunately we lost my wife's sister, Faith Basser, to when she was in her early forties. We set up a center at Penn called the Basser Center, named after Faith. We've been doing a ton around early detection, and awareness raising, and ultimately, treatment also. But the thing where I think the AI can be super powerful is in the early detection area. Can we use the AI to identify particularly in people with elevated risks of cancer? In the case of BRCA for women in particular, it's breast and ovarian cancer. Can you look at what's happening in their blood to start to see the early evolution of cancer? If a woman has a BRCA mutation today, the recommendation is to have a prophylactic oophorectomy, mastectomy as well, which is very difficult for a woman in her late thirties, early forties. If we can use the AI to make the early detection so much better, so you can get it basically at a precancerous level, then I think that can vastly improve the quality of life for people with BRCA. So, I would say, the AI is coming. There's nothing today. I'd say we've had this step function increase, but if I close my eyes, five or ten years from now, I'd be shocked if in an area like early detection the AI hasn't made a massive difference.
Willy Walker: Jon Gray, I am deeply thankful for our friendship for the things that our two firms do together, and for you taking an hour out of your time to give us all your insights and thoughts on where we are and what Blackstone is doing today. Deeply thankful and thanks for all you give back. It's a true testament to you and Mindy, the amount you put to your philanthropy, and I'm just super honored and thankful to call you a friend, and to have had you join me today.
Jon Gray: Willy, this has been a treat. You're so prepared. I think I haven't been with anyone who's done as much work. You're such a class gentleman. Thank you for your friendship, everything you do to give back. This has been a really special hour. I thank everybody for tuning in.
Willy Walker: Thanks, Jon. Thanks everyone, and have a great day.
