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00:00Blackstone reporting a larger than expected jump in distributable earnings boosted by a robust start to the year for dealmaking.
00:06I spoke with the firm's president and COO, John Gray, following those results.
00:11When you look at the quarter, we're really proud of it because it showed we're an all-weather firm.
00:17We had this 25% increase in distributable earnings.
00:21We had nearly 70 billion of inflows.
00:24But the real key driver is what you're hitting on, which is the strength in performance, which was driven by
00:31the focus on AI infrastructure, this massive build-out that's underway.
00:36Eight of the top 10 investments for us in terms of performance in the quarter were around data centers, LNG,
00:43battery storage.
00:45And it's really rippling through our firm, to your point.
00:48So it impacts our real estate business, our infrastructure business, our private equity energy business.
00:54Our asset-based finance area.
00:57There's just so much need for capital to deliver this compute.
01:00It is really essential now to our firm and driving returns.
01:05And we see this shortage of compute and need for capital is really something that's structural now.
01:10So it's a big opportunity and it's clearly the biggest driver for us today.
01:14And you clearly, with 69 billion, pulled in the capital to be able to achieve something like that.
01:18I wonder, though, on the more AI side of things, John, because we've heard a lot of different partnerships with
01:24private capital firms, inking with Google, with Anthropik.
01:27Just this morning, we learned about CVC and Google.
01:30Are you partnering with any LLMs?
01:32Well, we're not in a position to announce anything.
01:35But obviously, getting this diffusion to happen is very important, getting this into our portfolio companies.
01:42So we're working on one of these opportunities.
01:45We want our portfolio companies to move quickly because we think it's a key competitive advantage.
01:51And what's nice about private equity firms, particularly us with more than 270 companies, we can really move the needle.
01:58And I would say what's exciting is today we're seeing a 15-fold increase in large language model spending for
02:06our companies off of a small base.
02:08But I think it's still early days.
02:10There are so many opportunities to improve efficiencies, to make content creation better.
02:16So big opportunity.
02:18The challenge is to change workflows.
02:20It's not easy to do, but it can have a big impact on our companies.
02:24Well, we will stay tuned for any announcements.
02:26I feel like that was a nice little teaser in there, John.
02:28On the other side of this, though, there's the fear of AI disruption in software.
02:32I know your exposure is something like 7%, but you have seen some write-downs.
02:36Do you think we've hit the peak of write-downs, or might there be more to come?
02:41Well, I think there are a couple things to note.
02:45One of the things we've seen is these companies have continued to perform well.
02:49And rightfully, folks would say that's in the rearview mirror, but I think it's an interesting data point.
02:54I do think there's going to be some disruption here.
02:58It's not all going to be the same.
03:00I think the outcomes will be heterogeneous.
03:02If you compare it to maybe retail 25 years ago, there were plenty of Sears and Kmart's Toys R Us,
03:09but also companies like Walmart and Costco, who are really more infrastructure-like.
03:15And I think that analogy will hold in software.
03:18Many of these companies who are really systems of record, they're deeply embedded.
03:23I think they have a good position, but the management teams are going to have to adjust.
03:27So I do think we're going to see here this spreading out.
03:32I also think overall in the sector, we have seen a re-rating lower in multiples because there's more uncertainty.
03:39And it goes beyond software to information services, professional services, really the white-collar world.
03:46So I do think we've seen a reset.
03:48And, of course, managers have to adjust valuations.
03:51We've done that in the software area.
03:54Multiples have come down quite a bit for these companies.
03:57So I think it's an evolving sort of playing field.
04:00And companies cannot sit still.
04:02They're going to have to move into an agentic world.
04:04And I know you were pretty early, Medallia, for example, in writing down the value of that loan.
04:09There have been reports that Tom O'Bravo is handing back the keys to you and other lenders.
04:13Is that the case, John?
04:15Well, I can't talk about the specifics of the situation.
04:19Medallia has been well reported to be having challenges well before AI.
04:24I mean, issues around this credit go back more than a year ago.
04:28I do think what's interesting there is it's a situation where we and the other lenders lent less than, I
04:35think, a third of the total cost.
04:36The equity sponsors had to lose more than $5 billion before you had a transfer here to the potential transfer
04:44to the lenders.
04:45But here again, the lenders also have taken write down.
04:49So the valuation multiples are down very dramatically.
04:52The overall value is down dramatically.
04:55I do think the business under a new management team can do much better here.
05:00But obviously, they're going to have to pivot as well to this new world.
05:04Blackstone, the world's largest alternative asset manager, expects 2026 to be its best year ever for IPOs.
05:12I spoke with the company's president and COO, John Gray, on a wide range of topics, including concerns around private
05:18credit.
05:19When you have this much noise in the system and concern, it will result in investors potentially looking for liquidity.
05:27So it's not unreasonable to expect this will take some time to work through.
05:32The key will be, do the products continue to show resiliency?
05:37And what's nice is because the yields are high, in the case of our BDC B-Cred, more than a
05:429% yield, you can absorb losses.
05:46And you have a very lowly leveraged structure.
05:49So if you think about a bank that's typically called 12 times levered, these vehicles for us less than one
05:55times levered.
05:55So if these vehicles can deliver a premium in performance, as they have, to liquid leveraged loans, investors will say,
06:04wow, these things are more resilient than I expected.
06:06They continue to deliver positive results.
06:09And then this will ebb over time.
06:11But it may take a bit to work through.
06:13What's a bit?
06:14Is that like quarters, years?
06:16What does it look like?
06:17You know, it's hard to say.
06:20I would think it would be more quarters than years.
06:22But you'll have to see how the environment evolves.
06:26And obviously, as base rates come down, that, of course, is a headwind as well from an absolute return standpoint,
06:33but not from a relative return standpoint.
06:35Even with the fears in private credit, it has been capital markets and M&A and activity that has been
06:42extremely robust.
06:43And, John, I think that would surprise a lot of people coming into this year, considering we've had the fears
06:48over AI, disruption still on trade, and now a war on our hands.
06:53What are you seeing in your portfolio companies?
06:56Are there any stresses around energy costs and inflation?
07:01What we've seen is remarkably strong.
07:04I mean, in Q1, our private equity portfolio had 10 percent revenue growth, which was an acceleration from Q4.
07:13And so, yes, there are isolated companies, particularly in Europe, who are facing higher energy costs.
07:20Their natural gas has gone up quite a bit, which is very different than the United States.
07:24Some companies are still dealing with some tariff issues.
07:27There's slowness or more challenges, I would say, in mid- and lower-end consumer businesses.
07:34But in aggregate, the picture is pretty good.
07:37And the big driver goes back to what we talked about at the beginning, this huge AI infrastructure boom, five
07:43companies spending $700 billion in capital.
07:48Just us alone, we think this year, our data center business, that we could lease across all our platforms, six
07:56gigawatts.
07:57Six gigawatts, to put in context, is almost $100 billion of data centers.
08:02There'll be another couple hundred billion of chips put in by the hyperscalers.
08:07That's $300 billion of aggregate spend.
08:09That's like the economy of Portugal or Finland.
08:12And so, I think that tailwind to the overall economy globally, but particularly in the United States, is powerful,
08:20which is one of the reasons why, even as we have a shock like we're seeing with the war, we
08:25can continue to power through.
08:26Our expectation is we'll see a pretty healthy economy despite these headwinds.
08:31Those numbers boggle my puny little human brain, so thank you for laying them out.
08:36But as we see higher energy prices, still the Strait of Hormuz is closed, gasoline prices go up.
08:43It's a market, and I know you're in private markets for a reason, but public markets are trading at all
08:48-time highs.
08:49Do you think there is an element at which we are maybe a little bit too sanguine about wider risks
08:54and disruption from what's happening in the Middle East?
08:57Well, I think the market has begun to develop a perspective because this is now the fifth time since 2020
09:04where, in the first quarter of the year, we've had a shock, right?
09:08COVID, which was obviously very big.
09:10We had the Russia invasion of Ukraine, which created an energy crisis.
09:15We had Silicon Valley Bank, which shook the financial markets.
09:19We had Liberation Day, which hit companies and markets.
09:22And now this.
09:23And in each one of those previous experiences, the market traded off.
09:29People were highly concerned.
09:31And ultimately, the returns, the market recovered by the end of the year.
09:36And so I think the market has now been conditioned a little bit to say, hey, we should have a
09:41bit of patience, that there will at some point here be a resolution.
09:44And we'll go back to underlying fundamentals, which again is a pretty healthy global economy and inflation away from energy
09:53prices generally heading lower in terms of certainly rental housing costs, labor market cooling, and then these big productivity gains,
10:02which should be beneficial for earnings growth and economic growth.
10:05So I'm not sure the market has it wrong.
10:08If the conflict escalates, things could obviously change.
10:12But based on past history and the underlying strength of the U.S. economy in particular, I think it's reasonable
10:18for the market to stay optimistic.
10:21Related to this, John, is the year of the IPO.
10:25I know you said it to start the year.
10:27There were some question marks because of everything we're discussing.
10:29But given the resiliency, the fact that liftoff, yes, gets delayed, but it's back on the docket, Jersey Mike's also
10:37going to be coming public too.
10:38At this point, can anything stop the year of the IPO or is this a train that's just going to
10:44keep running?
10:45Well, I would say I still think, as you noted, this is the year of the IPO.
10:51That prediction was not looking so good 30 days ago.
10:53But I think because of the strength in AI, and three of the biggest tech companies in the world are
11:01likely over the next 12, 18 months to go public.
11:04We're fortunately in our wealth vehicle, investors in all three.
11:09We have a number of companies.
11:11I can't comment on specifics that are on the docket that we think the market will receive well.
11:17But what I'd say is there's really a bifurcation.
11:20There are companies that are in sort of the path of AI, direct beneficiaries.
11:25The market wants more exposure to those companies.
11:28There are companies that are sort of AI unaffected, like our Medline business, which we took public at the end
11:34of last year in medical supplies.
11:36There's a lot of enthusiasm for that.
11:38The one area where I would say it's much tougher is in those white collar sort of job services areas.
11:46That's professional services, information services, software there because the market has concerns about what the business model will look like
11:55over time.
11:55That's going to be tougher.
11:56But the rest of that market is big enough that I think it can support a fair number of IPOs.
12:02We right now have nine of them filed globally in the U.S., Europe and Asia.
12:07And so we do think this should be our busiest year ever for IPOs at Blackstone.
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