HIGHLIGHTS: Jonathan Gray - President and COO of Blackstone

0:01Hi, everybody. Tune in to this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. hi everybody i'm nikon tangen the ceo of the norwegian sovereign wealth fund and today i'm here with john gray now john gray ceo of blackstone previously the head of real estate here and incredibly under his leadership blackstone's real estate division has become the biggest in the world you grew it from some five billion to more than 300 billion and you're known for some of the best deals in real estate the world has ever seen such as the hilton hotel which you took off market and then back on the market.

0:39And wow, well done. Great to be here with you, Nikolai. And you're taking off the tie today. I took off the tie because I watched your stuff and I didn't want to be overdressed. That's great. Now, in short, why has Blackstone been successful? I think we've been successful for a couple of reasons. The main one is we've never forgotten what our mission is, which is delivering for our customers. And that means delivering premium returns. If you invest in private markets instead of liquid markets, we have to deliver a premium. And because we focused intensely on that across all our different business units, it doesn't mean we've always gotten it right.

1:16But that focus on returns has been so important to our success over time. In your mind, what's a good business? What are the characteristics? Characteristics of a good business, it's in a large market that's growing as opposed to a little niche market. It's a business that has some moat around it, either a physical moat or something that makes it special, a brand. And as a result, you have higher margin. Generally, higher margin businesses say something about a company. It's a business generally with less capital intensity. Sometimes there are highly capital intense businesses that are great, but you love businesses that are capital light.

1:59You love businesses that have recurring revenues as opposed to having to start over every year. They're not exposed to one client or the government stroke of a pen risk. And there's a potential to do things adjacent to the business. So give me one example. What's the best business you've seen? Well, I've been the chairman of Hilton Hotels. You brought it up at the beginning for 17 years. And global travel is an enormous growth business. But it's capital incentive. It's not the way they do it. So the way the business used to be, they used to own the hotels and lease it. Today, what a company like Hilton is, is a management company and a franchisor.

2:39So the physical real estate is owned by third parties, investors. And they just get paid as a percentage of revenues, maybe a percentage of the bottom line. And that allows them to grow without a lot of capital. What kind of decision maker are you? Are you a pattern recognition slash gut feel kind of guy or analytical? Or how do you shift between the two? I think you've got to be both, right? Because the data tells you something, right? I mean, certainly you can look at a business. You can say, you know, over the last 20 years, every year, the revenue of this business has grown 4%. That tells you something.

3:15It sounds more like a long-term infrastructure asset. And you want to look at what's happening under the hood. You want to read the memo and look at the numbers. On the other hand, the past doesn't tell you the future. The past wouldn't tell you that data center demand would go up 20-fold in two and a half years. The past wouldn't tell you that power usage, which in the United States has been flat for 20 years, is all of a sudden going to go up by 4 % a year going forward because of the electrification. So I think you need to have both a quantitative side to you, but then an instinctual side that says, look, this really feels good.

3:57I actually, for the sake of full disclosure here, I did a master thesis on decision making and interviewed the 20 best investors in Europe. What did they say? Well, so the best ones move between analysis and gut feel. Now, nobody wants to admit when it's called gut feel, but when you call it pattern recognition, they all think it's much better. You need to be pretty senior to use it because you need to be in a position where you actually can trust your gut feel, where you don't have to back it up with a lot of analysis. And, of course, nobody trusts anybody else's gut feel. But it's a fascinating thing.

4:36You've been out or you've avoided office buildings and shopping centers for a little while now. Do you think it's time to go back in? I think it is interesting. We announced yesterday a small shopping center deal, small by our standards, grocery anchored, not big regional malls, but think convenience retail, because we thought it represented good value. And no one's building shopping centers these days. And that to us means the lack of new supply, even as e-commerce happens, I think there's an opportunity. We like grocery anchored, harder to move online, less capex. And then on office buildings, I would say you want to focus on the best quality office buildings.

5:17I mean, the values have fallen very significantly. We left office buildings for the most part a while ago because we were worried about the capital intensity. We didn't know COVID was coming. People were going to stop coming to the office. But you need to own the very best quality buildings. And I would say buying those buildings at a significant discount is interesting. but we'll do that selectively. You're also in private equity, and you built this up to be a very, very big business. Some people in my part of the world are a bit skeptical when it comes to private equity. Are they right? Are they wrong?

5:58Well, obviously, as the biggest private equity investor, we don't think they're right. Let's start the other way. What are the reasons to be skeptical to private equity? The reasons to be skeptical are why the business or how the business started, right? If you went back in time, it was in the 80s. There was a lot of leverage used. You were often buying divisions of bigger public companies. They were industrial companies. So leverage, aye, they took on a lot of loans. A lot of loans. Or not in the bank. The return often came from taking out maybe some cost, firing workers. You weren't enhancing the business that much.

6:37You didn't have much operational expertise. It was mostly financial arbitrage. If you flash ahead to what the business is today, it's very different. You look at the two biggest deals we did this year, Smartsheet, which is a workflow software business, or we did a large business, Tropical Smoothie, in the fast food franchising business. These are fast growing businesses. The amount of leverage we use is a fraction of what was done in the past. The returns are going to come by enhancing growth, bringing in our resources to help these companies grow faster. And that's how you're going to generate excess returns.

7:23What kind of people do you hire? We try to hire people who are obviously smart, Hire people who are driven. I think if you ask me one quality, that's the most important one. You said it. This is not a nine to five, five day a week job. Most of the people here work very hard and you need somebody who really cares. How do you use, how do you screen for drive? You know, obviously you're, you're finding out where they used to work or what they do. Sometimes there are telltale signs, you know, people who are in athletics getting up at five in the morning, people who've, you know, came here as their parents were immigrants.

8:07And to get to some elite school, they had to do extraordinary things to get to where they have. I don't know. You're trying to get a sense of somebody who just really cares a lot about what they do. Do people who put in the longest hours, do they do the best here? I don't think it's the longest hours. It's really about caring. So I would say you really care about what you're doing. And nobody's checking, were you at your cube at 8.32 a.m.? But do you really care about the quality of the presentations, the quality of your investment committee materials? There's something about you that makes you want to get it right.

8:45John, what is your advice to young people? I think it goes back to some of the earlier stuff, which is you got to really work hard. You got to care a ton about what you're doing. And I think that ties to the passion. I think one of the reasons we're having success at what we do is because we like it, right? And if you don't feel this genuine passion for what you're doing, I think it's hard. And you should find another career. The other advice I would say is don't be afraid to speak up. I think one of the challenges oftentimes, particularly people show up at businesses and they sit quietly. And, you know, once you start to get a sense of what makes this business you're working at tick, could be a nonprofit organization, whatever it is, you want to be an agent for change.

9:33And almost every company, Blackstone included, can do things better. You can serve your customers better. You can shorten some of the paperwork. You can find a new market, a new opportunity. If you think of yourself as an entrepreneur and an agent of change in whatever you're doing, it makes your job more fun. The people you work with really appreciate it. You get more out of it.