Jon Gray: Stay Calm, Stay Positive, Never Give Up

0:01Dan Simkowitz:For Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out-of-consensus calls, one that was on the money and one that wasn't.

0:14Jon Gray:I remember distinctly going to see investors and telling them about one of the write-downs. And the investor was almost physically ill, which is understandable because he had a very large investment with us.

0:26Dan Simkowitz:Today on the show, John Gray, president and chief operating officer of Blackstone.

0:31Jon Gray:And I just remember that awful feeling, leaving that meeting, going back to the airport and being like, wow, I cannot let this person down.

0:39Dan Simkowitz:John stepped into his current role in 2018. Since then, Blackstone's assets under management have nearly tripled to over$1.2 trillion.

0:48Jon Gray:Fortunately, maybe because of my core optimism, but also my belief in the underlying business, I didn't lose faith.

0:55Dan Simkowitz:John reveals the thinking behind two of his out-of-consensus calls with Dan Simkiewicz, co-president of Morgan Stanley.

1:01Jon Gray:Okay. Showtime.

1:03Dan Simkowitz:Are you ready to go, John? Yeah, I'm ready. They met at the Campbell, inside Grand Central Terminal. Listen in to hear how John turned a write-down into one of Blackstone's biggest wins, how an early misstep sharpened his focus on fundamental value, and whether he thinks the market is experiencing a bubble today. They start with their shared Midwestern roots and the popularity of John's running videos on social media. Well, it's so good to have you here. It's fantastic. Maybe we could start, given our conversations about Midwest basketball, the running videos were not a surprise to me, but they've become like the fixture in LinkedIn.

1:45Dan Simkowitz:What do you make of it? And all the sort of, maybe not hype, but success of it? And, you know, it's completely random.

1:54Jon Gray:I was resistant to the whole social media thing. And Christine Anderson, who runs our corporate affairs, finally pushed me to do it. And like everybody, I started posting pictures of speaking in an event, very corporatist stuff. And then I was running in Australia. And I normally send my kids and wife, you know, videos, hey, remember me. And I decided to post one. and it went viral. So I was like, okay, let's try that again. And it works in Japan and it works in LA and wherever you go. And so I think what it says though is people are looking for authentic connections. They wanna know, people in finance, they presume one thing, they wanna get an unfiltered view of who you are, your insights and your humanity.

2:46Jon Gray:You're running around, you're sweating, you forgot your phone or you forgot your shoes or whatever it is. And so I think in this world where things are so fragmented, fractured, whatever, a direct connection to other human beings, showing sort of who you are, I would describe it for me as a little bit of dorky dad vibes. If you do that, it works. And at some point, people will be like, enough. But for now, we keep running. It's fantastic.

3:14Dan Simkowitz:You know, I'd say 30 years ago, our industry was so private, frankly, so small. So I think it's a little inspiring what you're doing around marketing for financial services. But, you know, when we led the Blackstone IPO, you're 88 billion of AUM. Now you're over a trillion. The organization is bigger and more complex. You've built both a world-class client service organization, but at the core of it is just incredible investment discipline and performance. And so we're going to talk about two out of consensus investment decisions, one that won and one that didn't. So maybe let's talk about one of the winners first.

3:55Jon Gray:Okay. Always better to talk about the winners, although you learn more from the losers. Right around 2007, we bought Hilton Hotels. I led that investment. It was a$26 billion investment. And I was excited because this was an obviously iconic company that owned some incredible real estate like the Waldorf, had a timeshare business, and then had this unbelievable management franchise business. Hilton and Hampton Inn and Doubletree, Conrad, Hilton Gardens, all of that. And it was at a time when the market was pretty frothy because it was before the financial crisis. You remember people were borrowing a lot to buy homes.

4:39Jon Gray:They were borrowing a lot in leveraged lending in the corporate world. They were borrowing a lot in commercial real estate. Prices were elevated. And I thought we had found something in operating business with some real estate inside that we could buy at a reasonable price. Now, we paid a big premium, 40 % over the stock market at the time. And Steve Bolenbach, the CEO, had decided he wanted to sell. And we pulled this off. And we bought the business,$26 billion. We borrowed$20 billion. It was a different era.

5:09Dan Simkowitz:But you had never borrowed$20 billion before.

5:11Jon Gray:No. Well, except that we had bought EOP. We had bought the largest office business, and that was a$39 billion deal. And we had been on this run buying public companies because at the time I was running real estate, and we were able to buy the businesses on the screen much more cheaply than we could be when we were bidding for individual properties. And so we started scaling way up. But in this case, we took a business with some volatility, hotels, and put a lot of leverage on it. And we took money from our private equity business and our real estate private equity business,$5.6 billion of equity, the largest investment we'd ever made at the time as a firm, and we bet on this.

5:52And we closed the deal in the fall of 07.

5:57Jon Gray:Terrible timing. And by all accounts, I should not be sitting here with you, Dan. They should have carried me out. And it looked that way because, if you recall, the financial markets really tighten up and the real economy goes down. And this business, Hilton, loses 20 % of its revenue and 40 % of its cash flow. And we've leveraged it up a bunch. We write down the investment by 71%. So you actually took the action to write it down. We took the action to write it down because it was clearly very impaired. And I remember going to see investors and I remember distinctly one of our state pension funds in the meeting telling him about one of the write downs.

6:37Jon Gray:And the investor was almost physically ill, which is understandable because he had a very large investment with us. And I just remember that awful feeling leaving that meeting, going back to the airport and being like, wow, I cannot let this person down. This is not good. And I think, fortunately, maybe because of my core optimism, but also my belief in the underlying business, I didn't lose faith. We also had an amazing management team led by Chris Nassetta, who's still the CEO of Hilton. I'm still the chairman 18 years later. It's pretty amazing.

7:11Dan Simkowitz:That's a rarity in private equity, right? Yes.

7:14Jon Gray:Even after we sold our stake. But it reflects my loyalty to him and the company because we got through this. Now, how did we do it? We ended up putting in an extra$800 million to help deleverage the company and get some additional term on the debt. The management team did an amazing job. They kept growing the business, particularly outside the United States. And then ultimately, the world started coming back. People started traveling again. The business was performing. We went public a few years later. You guys were involved in that as well. And we ended up, you know, splitting into three companies, a timeshare business, an owned real estate business, and a management franchise business.

7:56Jon Gray:We sold some individual assets, and then we sold our stock. And we ended up making$14 billion, the most profitable real estate private equity deal of all time. And the movie should not have been written. It should have looked completely different. And so it makes you think a lot, what are my takeaways as an investor? And I would say the biggest ones are, one, stay calm, stay positive, never give up. That's what I say every week on Blackstone TV. It's what I say to my family as well. But the most important thing on Hilton was that what I learned as an investor was maybe I spend too much time thinking about whether I should pay$99 or$101 and so forth.

8:41Jon Gray:And maybe what matters more is sort of the neighborhood I'm investing in, the underlying tailwinds, in this case, global travel, the quality of the business, in that case, a capital light, fast-growing franchise management business, as well as the quality of the management team. And if you can get those things right, even if you made a really poorly timed investment and paid a big premium, it can still turn out okay. And so what I think about today is we're investing into digital and energy infrastructure or in India or in life sciences or areas where we have really high conviction. That to me comes from this experience, which was why did this turn out well?

9:26Jon Gray:It should not have turned out well. And so the lesson of let's try to find the right neighborhoods to deploy capital, that has really stuck with me.

9:35Dan Simkowitz:It's interesting because we're such great partners, our two firms, partly because in the last 15 years, we got intensely dedicated on just helping clients allocate capital. But we needed to be bigger and a little different. So we bought Smith Barney, bought E-Trade, bought Eaton Vance, all these acquisitions. But they're all around a neighborhood we loved. So in your case, you had Chris, but presumably you also had your own team. How important is that, especially when it's really dark? How important was that?

10:05Jon Gray:On a deal like Hilton, super important. I would say having business colleagues who still believe in you, first of all, you guys have done an amazing job because also you've got a great culture and you have all these capabilities, both serving individual investors and obviously as an investment in commercial bank, providing capital and that ability to show up as a partner, even in the bad times. Let's say Steve Schwarzman saying like, we're going to get through this too. my colleagues in real estate at that time, John Schreiber and others, having people who still say, yeah, we've got to find the way out through this thicket.

10:44Jon Gray:That's really important. And I would add a personal element to this. Having a wife and children and people you can go home to who still believe in you, even when the world doesn't, that matters. And I'll just give you a sense of how dark it felt. In early 09, the company had an employee who had taken some documents from a competitor, The GC of the company had found out, sent him back. Nevertheless, there was a federal investigation. There was a big article in the Wall Street Journal. And I was talking with Chris Nassetta. And I called him. And it was probably March of 2009. We'd written the investment way down.

11:22Jon Gray:We have this investigation in the headlines. And I said, Chris, the good news is it cannot possibly get any worse. But the fact that I had him, I had my family, I had colleagues, and ultimately that this was a terrific business, that what we faced was cyclical, not secular in nature, that made a huge difference.

11:43Dan Simkowitz:So now it's one of the greatest private equity deals of all time, but in the darkest days it was hard. What's the one big hard lesson coming out of Hilton? Well, I think the hard lesson was you don't want to put that much leverage

11:58Jon Gray:even on a great business because the key is you've got to be able to get to the other side. When you own a great business, great piece of real estate or infrastructure, ultimately it'll compound or grow. And the problem is people get stopped out. In the trading world, it's margin debt. It could be leveraged lending in corporate world or real estate debt. And if you have too much, put so much pressure, you may be forced to sell, dilute your ownership at exactly the wrong moment. So the hard lesson for me, the good lesson was focus on great businesses, great neighborhoods, and stay calm. But the hard lesson is don't put yourself in such a precarious position that if the weather outside gets tough, you're at risk of losing things.

12:42Dan Simkowitz:So this one worked out perfectly in the end. Yes. EOP worked out great. These are 07 vintage deals right before the crash. Give us one that didn't work out so well. Well, you know, it's funny.

12:56Jon Gray:One of the toughest lessons for me happened in the late 90s during the dot-com boom. I joined Blackstone in 92. I did M &A in private equity for a year, year and a half. And then I went into real estate after a crash. And basically for, I don't know, six, seven years, I'm in real estate. Things just keep going up and up because you had bought things very cheaply. Interest rates were reasonable. There wasn't too much building. and when you buy everything and it goes up, it doesn't really train you to be a great investor, right? It's the experience. It's these hard lessons that make all the difference.

13:34Jon Gray:And sort of the top of that was in the late 90s, I was really focused on Northern California because you were seeing the innovation. We were moving onto the internet and so forth. And what happened was I bought a building on North First Street in San Jose, nondescript, two-story. And these were really crummy assets. They were crossed between office buildings and warehouses. They weren't worth very much physically. And we paid a big price for them because they had a tenant paying a huge rent. And instead of buying it at a 7 % or 8 % yield, I was buying it at 11 % or 12%. I thought this was amazing.

14:11Jon Gray:What I failed to notice was the major tenant was GoBosh.com. What does GoBosh mean? GoBosh means go big or stay home.com. Oh, God. I'm sure that this company, unfortunately, didn't last very long. I should have stayed home because by March of 2000, the dot-com bubble blows and this tenant disappears. And I should have recognized we were paying well over physical replacement costs. The quality here was poor. And the tenant didn't have much in the way of revenue. It had very few people in the space. and in my enthusiasm of what had come before it, I sort of lost sight of that. Now, we ended up getting a letter of credit.

14:55Jon Gray:I think we got about a third of our money back, but it was really the first time I experienced financial loss in an investment. And I don't know, we lost 20 or$25 million. But it was embarrassing to tell your investors, to tell your colleagues, and to look at it after the fact. It was like, oh my gosh, how stupid could I be? Why would I have paid that price for this? And there, it's a little bit of the danger of the mania of crowds, right? Where things were going so great that in that moment in time, we became disconnected from fundamental value.

15:29Dan Simkowitz:And did someone come to you in that instance because you're not a senior as you were in 07 and say, you know, John, these are the lessons that have to happen and hang in there? Or did you have to learn that yourself in a moment?

15:42Jon Gray:We all sort of talked about it. It was pretty clear. When you look back after the dot-com bubble burst, it was pretty clear to look back and say, gosh, when companies are trading at hundreds of times revenue, they're not making any money, the business model isn't viable. This was way too speculative. And what's interesting is I know today there's a lot of are we in the same kind of environment. The only thing I would say is it feels very different to me. I mean, back then, as you know, Cisco, I think, was the biggest company. They traded at 130 times earnings. NVIDIA, the biggest company today, I think is less than 30 times earnings.

16:17Jon Gray:And so I don't think we're at that kind of time. Now, if this runs for five more years and people think trees grow to the skies, that's always a risk. But I think as an investor, again, when you go through those experiences, it reminds you to question yourself that the danger is sort of the winning hand thing, that you keep doubling down, you keep doubling down because it's working. But at some point, the prices move too far, the assumptions move too far. And just because something's worked for a long period of time doesn't mean that's going to continue.

16:50Dan Simkowitz:Blackstone probably has great people joining all the time. But if they've joined since 2010, away from the COVID period, which is pretty V-shaped, they may not have experienced the same challenge that you did. how important is it to go through one of these drawdowns or real hard lessons?