- 16 hours ago
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00:00John, thank you so much for joining this morning.
00:02Great to be here.
00:04So a surge in profits, deals abound, exits were robust.
00:10Is this the starting gun fired off?
00:14It does feel a bit of that, Danny.
00:17It's great to be here to be talking about it.
00:20We had a heck of a quarter.
00:21What we saw here was we delivered for our customers.
00:25That's the most important thing in terms of returns.
00:28We really leaned into digital and energy infrastructure.
00:32We also saw big inflows as well, $50 plus billion.
00:37And all of that produced big earnings, distributable earnings up 50%.
00:42But you've really hit on the key here.
00:44We've got a couple of things going on, a cyclical uplift in deal activity.
00:48And that's very helpful for our business and our investors.
00:52And then we also have some of these big markets that continue to grow in wealth, insurance,
00:57very attractive investment areas in places like India and life sciences.
01:02So a lot of good things are starting to happen.
01:05Across the board, it does look like deal activity is up, not just at Blackstone, but you see it
01:09within the investment banks, within some of your peers.
01:12John, the way that this is going, could we get back to record levels of deal activity?
01:16Well, if you look over time, you always see new highs.
01:23But it takes time after the downturn.
01:25It certainly happened after the financial crisis.
01:28I think it will happen after this inflation and rate rise period.
01:32It will not happen overnight.
01:34We're still at low absolute levels of M&A and IPO activity relative to historic levels as a percentage of market cap.
01:42But there were very encouraging signs in the third quarter.
01:46IPOs were up 100 percent.
01:48M&A activity was up 64 percent in the U.S.
01:52We did three IPOs globally in the quarter, which is the first time in four years that that's occurred.
02:00We announced an $18 billion deal this week with Whole Logic.
02:04It does feel like things are coming together.
02:06And what's helping is the cost of capital is coming down.
02:09The Fed's lowering rates, the long end has come down, spreads have tightened.
02:14High yield spreads are down almost in half from their highs a couple of years ago.
02:19And we've got record highs in the stock market.
02:21That is a very good combination for more deal activity.
02:25And so if we get a little bit of calm here in the overall environment with this kind of backdrop,
02:30I would expect next year will be an even better year for M&A and IPOs.
02:35Even so, there are still concerns.
02:38There's uncertainty around trade policy.
02:40Tariffs, to be honest, are really just starting to bite.
02:43You see that in some of the public company earnings.
02:45And sticky inflation is still with us.
02:47John, are those not still concerns?
02:51Well, I would tick through some of these.
02:54Certainly on the tariffs, we've been an advocate of letting this tariff diplomacy play out.
02:59Obviously, around Liberation Day, there was a lot of concern.
03:03But ultimately, we saw progress in deals being made by the administration.
03:08I would expect that will continue to happen.
03:11There will be noise as the negotiations go back and forth.
03:15But I do believe this will settle.
03:17And I don't think six, 12 months from now, this will be on the front page.
03:21The other thing I'd say around inflation is that our data is pretty encouraging in certain areas.
03:29Rental housing, the biggest component in CPI, our data says it's running about half of the 3.6 percent,
03:37what the Bureau of Labor Statistics produces.
03:39And that should be helpful for the Fed.
03:42Also, we've seen a cooling in the labor markets.
03:45If you look at hourly wages at our portfolio companies, they're down around 3 percent from north of 4 percent a year ago.
03:53So I think that should allow the Fed to continue to lower rates.
03:57That's a positive.
03:58So I think some settlement of the tariffs, continued good data on CPI and rates coming down should be helpful.
04:06And overall, that environment does feel pretty good.
04:09Obviously, there can be risks along the way.
04:12We're in the midst of a government shutdown that can slow things like IPOs in the short term.
04:16But when we look out over the horizon, it feels pretty good for deals.
04:21So you're an optimist.
04:22And there is clear robustness there, John.
04:25But you and your private capital counterparts, the shares of your companies have really been punished this year.
04:32Virtually all have underperformed the wider market.
04:35What do you think is behind those fears?
04:37And is any of it warranted?
04:39Well, it's hard to look at stocks day to day.
04:43We focus on the long term for our shareholders.
04:45I think our total return is something like three and a half times over the last five years, double the stock market.
04:52So shareholders have been rewarded for investing with Blackstone.
04:56We, of course, are very aligned with them as the largest shareholders of the company.
05:00I think in markets, when people are nervous about what's happening, there have been a lot of these stories around private credit, which I'm happy to talk about.
05:11That may have created concern.
05:13Maybe people have been focused on the government shutdown and the IPO market slowing or the tariffs causing that.
05:19We tend to take this longer term approach.
05:22And when we do that, it looks like a very bright environment.
05:25So I think with us, what we found is we just keep executing, keep delivering good returns for our customers.
05:31That enables us to raise money, to expand our business.
05:35And I think shareholders will see that this business can continue to grow and deliver.
05:40Well, let's get into the private credit of it all, John, because it feels like not a day comes by that someone,
05:44one admittedly not in private credit, comes on this show or others and say private credit is a troubled child and bankruptcies with some prime auto lenders are exemplary of that.
05:55Why do you push back against that idea?
05:59Well, we would say that if you look at the three big troubled credits that have been out there the last couple of weeks, this is not a private credit story.
06:07These credits were bank led, they were bank originated, they were bank syndicated.
06:15So we can't really understand why there's a referendum on private credit.
06:19I would also point out that these were non-institutional borrowers.
06:24If you look at what we do in our $150 billion direct lending business, we lend 98% to private equity sponsors, to public companies.
06:34These were individuals.
06:34And also, it appears based on the reporting that there was fraud involved in these three situations.
06:42That's something that's not so common.
06:44So I don't think it says really anything about private credit.
06:48And I also, because of the idiosyncratic nature of the facts here, I don't think it says a lot about the overall health of credit in the system.
06:56But, John, couldn't you make the argument that these were firms that were tapping the credit markets over a span of years and you had very reputable people coming in and lending to them?
07:08Does it not say something that very fact that despite this continued concern of financial impropriety, that people continued to lend to them and didn't spot some of the warning signs?
07:18Well, clearly, in these situations, there should have been more concern registered.
07:24When you go through a period of very low defaults, there can be, at times, people relaxing standards.
07:32And maybe that was the case in these situations.
07:34Although, in defense of the folks who lend here, fraud, not disclosing liabilities, double pledging collateral, those are hard things to catch.
07:45And so that, to me, is a little more understandable.
07:50And I do think you have to look at this in the scheme of overall credit.
07:54Look at what's happening in the banking system.
07:56Their defaults continue to be very low.
07:59They'll realize loss is very low.
08:01So it's a similar story in private credit.
08:04So in aggregate, the system, to us, feels very healthy.
08:08There will be these one-off situations.
08:10And certainly, as you get deeper into a cycle, could you see defaults go up or losses go up off of these very low base today?
08:19Yes.
08:19But overall, again, I think the system feels pretty good to us.
08:23What about returns?
08:24It had been lauded as the golden age of private credit.
08:27But, John, as rates start to come in, just performance-wise, is it still the golden era?
08:34Well, I still think it's a very good time for private credit.
08:38I would acknowledge that as base rates come down and as spreads tighten, some of the very high returns that were achieved being a senior lender in private credit,
08:47that's harder to do, achieving mid-teens returns.
08:51But the premium relative to liquid credit, what you get in leveraged loans and high yield, that's enduring because you have this farm-to-table model.
09:01You're bringing investors right up to borrowers and knocking out a bunch of origination and securitization costs.
09:08And so I think the key thing is not necessarily the absolute return, but can you deliver a premium return over liquid markets?
09:17And that I continue to have very high confidence in.
09:20And that's why I think we'll continue to see flows into private credit, not just non-investment grade, but investment grade.
09:27What we're seeing with insurance clients, the momentum in that area is pretty remarkable because insurance clients recognize, particularly as base rates and spreads come down,
09:38that getting that extra return from private credit without taking on any additional risk, that makes a ton of sense.
09:45There are those that are suffering, be it in credit or private equity.
09:49It's a real bifurcation of the industry.
09:51KKR somewhat famously told Bloomberg a few weeks ago that there are more McDonald's, or rather there are more private equity funds in the U.S. than McDonald's.
09:59It seems like that's slowly changing, John.
10:01You hear stories of Brookfield and Oaktree coming together.
10:04I was speaking with a manager yesterday who said every day he has a new inbound from a GP looking to sell itself.
10:10With that increasing fragmentation, has Blackstone considered acquiring new managers?
10:17Not really.
10:18We're an organically focused business.
10:21We're celebrating our 40th anniversary over that period of time since Pete and Steve founded the firm.
10:28There have been a small number of acquisitions, relatively small in the scheme of the firm.
10:34We would look for those type of acquisitions that give us some intellectual capital and capabilities we have.
10:41But in general, we find we don't want to buy AUM from another firm because we can raise capital.
10:48For us, what we really want is great talent to move into a space.
10:52We did this more recently, maybe seven years ago in life sciences.
10:57We did it 10 or so years ago in the secondaries business.
11:00So it would be very tactical where we're getting a capability we don't have.
11:06But in general, we found we can continue to grow this business organically.
11:11The rates of growth have been quite strong over time.
11:15And it's because investors have so much confidence in us.
11:18So I think of us as an organic business building firm.
11:21And I think that's the path we'll continue on.
11:24The exception is if we found something very special that we could add to the firm.
11:28My expectation, though, is that would be pretty small relative to the overall firm.
11:33Let's talk about some of the talent and changes to how people do work.
11:37Bloomberg recently learned that OpenAI hired a lot of bankers and has been working on a program of generated of AI specifically to do financial grunt work.
11:47How long do you think before something like that could take hold at Blackstone, where AI does the work of associates?
11:53Well, I would say it's a little bit of a harder task in aggregate.
12:00But there are elements of what our people do where we can continue to improve their productivity and have them do things they, frankly, don't enjoy doing.
12:10We've seen huge evolutions in the 33 years I've been in this business.
12:15I remember having to walk around the halls to get the orders, call people on the phone, look in the yellow pages, go down, pick things up.
12:24Long before an Uber Eats world, long before we were connected, I think we're going to continue to see an evolution.
12:31I think you will be able to interface with an AI agent to say, hey, I'm looking in this industry.
12:38You know, can you give me the relevant comparables, the risk factors?
12:41That's already starting to happen, by the way, in areas like engineering and cloud code.
12:48We're using those technology.
12:49Our video team starting to use this technology.
12:53Our legal teams are using AI to start doing things like marketing compliance.
12:58We're definitely going to be able to help our analysts and associates.
13:01So I think it'll continue to make them productive and make the job even more enjoyable.
13:06I think they're all going to be happy to hear this, John, because you notably did not say that it will replace them.
13:11So I think that's a good note to end it on.
13:14Yes.
13:14Well, thank you, Dani.
13:15Great to see you.
13:16Thank you so much, John.
13:17Really appreciate your time this morning.
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