Blackstone Inc. (BX) Earnings Call Transcript & Summary

Great. Well, good afternoon, everybody for our next session. It is my pleasure to welcome Steve Schwarzman, Chairman, Founder and CEO of Blackstone. With nearly $600 billion in assets under management Blackstone remains the world's largest and most diversified alternative asset manager. Despite numerous challenges presented by the pandemic, the firm continues to generate solid investment performance, drive meaningful fundraising with over $60 billion in year-to-date capital raise and delivers product innovation across increasingly broad set of strategies at scale. We look forward to hearing from Steve how Blackstone is capitalizing on these competitive advantages as well as, of course, his insights into today's investment environment. So Steve, thank you very much for joining us again this year.

Thanks a lot, Alex, and welcome to lunch for everyone. Alex and I will be working, you'll be eating.

Hopefully. Well, great. Listen, I have a bunch of questions. I'm sure we're going to get some questions on the webcast as well, so we'll try to incorporate them. But to kick things off, I wanted to ask you more of a macro question. And look, 2020 was an incredibly challenging year, it goes without saying, but it was prospect of a recovery. We're starting to see some light at the end of the tunnel. With that backdrop, I was hoping we could start with your views on the global economy into '21? How you expect the recovery to unfold across both industries and geographies?

Well, we're seeing what should be a major recovery. Let's just start in Asia because I think that China will end up as the global star in terms of growth. This year, 2020, they are going to grow around 1.5%, 2%, only major country. And next year, 2020, 2021, I think they are projected somewhere around 5%, 6% growth, and that's going to drag a lot of regional things there. So I'm expecting Asia to be very positive. In the U.S., the vaccine will make all the difference. And there will be some television coverage or something that isn't perfectly distributed. But on balance, we should, by the end of the second quarter, have enormous supply of vaccine available. Some of these things, as you know, have 95% effectiveness. And what I've learned from talking to the heads of some of the companies is for that missing 5%, one of the heads of those companies said to me, we didn't even have anyone go into the hospital. So when they report that there are no serious cases, not going in the hospital means that there's -- some of these vaccines have almost 100% practical effectiveness. And as this gets rolled out, I think the U.S. economy is going to really feel the impact of that in a positive sense, mostly starting in the second quarter because it takes for a number of these 2 shots. And so we're going to see that. And most of the people doing projections think that earnings in 2021 in the United States will exceed earnings in 2019. So that gives you some idea of the kind of snapback. And I just saw a business roundtable study that says, by the end of 2022, 90% of the CEOs believe that they will be exceeding 2019 levels. So that's what the U.S. looks like. And Europe, I think, will also come back, not quite as fast as the U.S., but they will get a lot of vaccine here, for sure, and we'll see that turning. And that's already been messaged in the stock market. The stock markets have sort of figured this one out. They priced it in. And so we're going from a time of enormous uncertainty on a macro basis into a much different change, although there's going to be a continued difficulty with unemployment. And I think in the United States, it's going to be a little tougher. A number of these restaurants and other businesses which will have gone out of business regrettably will have some difficulties starting up again. So that will be slower.

Got it. Well -- and hopefully, we'll continue on that path. Look, as we reflect on 2020, COVID-19 conditions have created enormous disruptions around the world, and in some ways, accelerated some of the secular changes that have already been unfolding, particularly with respect to technology. I mean, normally, obviously, we'll be doing that live on stage and now we're doing this like this. So can you talk a little bit about some of these lessons learned, so to speak, from the pandemic? And how they inform the way you run Blackstone and also how you run your portfolio of company, so to the go-forward strategy that was informed by what we've learned over the course of 2020?

Well, there are a lot of things we've learned because trends have been accelerated. So we've learned for sure that there are disruptors and disrupted in terms of companies. And some companies do both at the same time. So business models have been fundamentally challenged during this period. And the need to understand what a good neighborhood is in the investment area has also been redefined. Companies that grow past their problems and show resiliency are where you want to be. There are companies that are left behind, some of which will stay behind. You want to avoid, for example, in a bad neighborhood, certain types of real estate urban office, shopping malls. Internet shopping has redefined where things are going and everything has been accelerated. I don't know whether by 5 years trends that were already going on, but you want to be on the right side of that. You also learned that distance operations can work, particularly with people you already know. It's tough to train new people to come to organizations. But what we've all learned is that there's a need for more intensive communication. And so at our firm, we started Blackstone TV. Every Monday morning at 08:30, we have the heads of the firm, and in fact, we invite everybody in the firm to more or less, they don't quite know it, attend the management committee meeting where we're quite open with the things that we're thinking, and you can't leave people isolated. And one of the really terrific things that's going to come out of this COVID period is Blackstone TV is not going to shut off once. We're not going to get canceled as a program because people get vaccine and we, more or less, go back to work. That mode of communication and how we support each other and reinforce culture is very important. And we've learned as investors to have even more conviction in a limited number of themes than just investing financially at something we think represents value. If the world doesn't recognize it and if the business model is going to be hurt, that doesn't necessarily make a good model just because of the rapidity of change.

Got it. Well, let's bring this conversation a little bit closer to Blackstone. Pandemic implications of private markets, obviously, will have its implications as well, and I'm sure on market share trends within private markets also. We've seen broadly allocations to private markets rise over the years, not surprisingly, we've had these conversations many times. But curious how do you expect investors experience through the pandemic impact this broader allocation trend towards private markets? And perhaps like we've seen with other crisis, I suppose the financial crisis, the larger firms have really gained significant amount of share within private markets. Do you think the same will occur this time around or does something feel different?

I think something similar will happen. You always have winners and losers. Blackstone was a huge winner coming out of the global financial crisis, and I think something similar is going to happen now. About half of the firm's earnings are from a real estate business, just to give you some idea how this breaks. We picked the good neighborhoods, if you will. Real estate has a lot of different subasset classes. And we've concentrated in logistics. It's about 36% of all the real estate we own. We're the largest owner of real estate in a private world. And that asset class has boomed with huge increases in rents, almost no occupancies, rent collections from almost everyone. And we've gone into life science space that's also done well. Entertainment company space, where the number of programs being produced has increased. And the bottom line is our portfolio at the end of the third quarter was up 3.5%. The average real estate company, the REIT index, was down 18.5%. That's a 22% outperformance, 22%, 2,200 basis points. It's amazing. And so what happens is when people decide to allocate, you will find not all real estate companies are the same. And we will get a significantly disproportionate share of flows and that just alone is a massive asset class. And we're seeing that institutions were raising very large amounts of money, as you know, Alex, and that's continuing. In certain areas, it's accelerating. And we're not even visiting customers. Now imagine what we could do if we actually sat down with somebody and we weren't just operating virtually. So I think that the trend into private assets, particularly in a world of record low interest rates, people still need income even though the stock market has been so wonderful. People need income. It used to be a 60-40 split, as you know, 60% equity, 40% debt, may be somewhat changed now. But nonetheless, they're whole huge classes of individuals and institutions that need fixed income, and that's better earned, I think, in the private sector. Just to finish this relatively long answer, there's roughly $6 trillion of money in the alternative asset classes, but there's $200 trillion of public and private debt. So we're only around the 3% share in terms of where people put their money. And historically, the best firms in our alternative classes have significantly outearned public markets, although index funds have been a great place to be in the last year or 2. So I look forward to our industry, generally, but the really top performers, like ourselves, which have our own moat, if you will, now 35 years of dealing with institutions and individuals in a very straightforward, honest, high-integrity way, I think it's going to turn out to be another one of those acceleration moments.

Right. And well, it feels like still a long runway. Why don't we shift gears a little bit. I want to spend a couple of minutes on deployment and investment themes broadly. Now after a slowdown in the middle of the year, it looks like activity rates are really starting to accelerate. We saw that from your third quarter earnings, you talked about about $19 billion of yield commitments and a record pipeline for the firm, which is obviously encouraging. Blackstone has over $150 billion in dry powder. So plenty of capital to put through work. So with that in mind, can you discuss outlook for capital deployment from here? And what some of the key investment themes you're looking to get ahead of?

Sure. Capital deployment, as Alex says, has really rapidly accelerated for us, and we'll see where we end the fourth quarter. We had 19 roughly in the third and a lot of things going on. I'm not sure whether that's because people wanted to do things tax-wise because they didn't know what was going to happen. Values, you always get more things to buy, when prices go up. It's tough to buy at bottoms. Nobody likes to lose money by selling down there. But since so many people have made money, there's a lot of stuff to look at. That doesn't mean it's wise to buy it. Usually, when people -- somebody is buying, somebody is selling, somebody gets the better part of that bargain. And now because prices have gone up a lot, you actually have to be quite careful in terms of what you're doing, which requires not only a relatively good purchase price but you have to bring enormous improvement to that company or that asset because just buying something doesn't make you money forever. If things just -- if trees grow to the sky, then everybody always wins, no matter what you buy, that is unrealistic. And so we're redoubling our commitment in terms of how we manage companies and the business plans we have before we buy them. So as Alex said, what are you guys doing? So we're continuing in a variety of our businesses to pursue the similar themes that we've been playing. Where is the growth? Where is technology going? How do we take advantage of these trends to online, which are spreading all over the world at quite accelerated rates? And that means you could be buying cell towers that take advantage of that warehouses, that take individual companies, like ancestry, where we're going to improve that. We have life sciences that we've gone into a few years ago in a big way. And now look what's happened in life sciences, it's exploded, as everybody is focused on vaccine development and other types of things in our health care system. So we think there are a lot of areas in that zone for us to pursue. And each of our areas at the firm has ways to play those themes that aren't what you would think would be the obvious way to do it. And so when we stick to areas where we think very good things will happen, entertainment is good in certain areas, and that will come back from some cyclical lows with in-person things. There's a few cyclical things that we think are interesting as people return, for example, travel and travel-related things, which has been really beaten up. The question is what's the right one to buy. But I think things in the suburbs, for example, suburban residential has turned out to be quite a good place to be. And when the cities get cheap enough, then you go back to doing that. So there's a lot of interesting things and every part of the firm is really operating full out, which if you would have asked me in April, whether anything like this would have been possible, you'd have to say, no.

Interesting. Interesting. Maybe shifting gears a little bit. Let's talk about fundraising. That obviously remains one of the key growth pillars for the company and that's obviously a metric that investors are very focused on. And despite the pandemic, Blackstone continued to raise significant amount of capital this year, as we talked about earlier, over $60 billion year-to-date, with fee-related earnings on track for a record year. Looking ahead, can you talk a little bit about the outlook for fundraising, which funds specifically will be in the market? And really, the growing importance of perpetual capital vehicle and say, "No, that's been obviously a much larger part of Blackstone story over the years?"

Well, we have a number of funds. As we always do now, it's quite interesting. Since the global financial crisis, we've gone into 11 new business areas with 33 different products. And these products, we used to just do very high-return products. Now we do things that are intermediate and things that for us are low, which are 8% plus. But if you're in the fixed income business, you think that's pretty high. And we're expanding globally, doing that type of strategy. So fund flows for us at the firm will stay, I think, quite robust. And we find people who are looking to do things will be raising a secondaries fund this year. We've had great success in that business and that will be a major effort for us. We're finishing our growth fund. We've got all kinds of -- I was at management committee today. We have like a whole page full of things that we're doing. And -- so everything is really having a very good receptivity. So I think this idea of the fundraising used to be extremely cyclical when we just did our primary private equity fund and real estate fund, and we have so many different products in each area that fundraising is much smoother than it used to be 10 years ago.

Right. And the sustainability of that growth is clearly very, very important. One of the channels that I wanted to zone in a little bit more is retail. And retail market has been obviously a very important growth driver for the firm that really adds to that stability of fundraising that we've seen over the last couple of years. Now, first, with BREIT, which is nearly $20 billion in size, already. And I guess, most recently, we talked about a new vehicle BCRED, which is, I guess, the firm's perpetually raising BREIT. Can you tell us a little bit more about the addressable market you see for BCRED specifically? And how quickly you think that ramp could be relative to sort of the BREIT experience? And perhaps other areas within retail that you see yourself getting larger in over the next 3 years?

Well, retail is something that we entered about 10 years ago. It was the first time I ever deficit financed anything to firm. I always believed in going into something that was so good that it would turn almost instantly profitable. And this is the first time we knew it would be a number of years of loss that high-quality people and orient ourselves to the retail market and then serve as pioneers by giving like a little mini universities to registered reps and teaching them about retail. And so this year, we will probably be somewhere around $20 billion of annual sales at retail of our product and we think that's going to continue to increase at a pretty rapid clip. Retail investors are substantially underallocated to alternative products. Now with BREIT, that's been a terrific product for us. It's available at retail. As Alex said, we've sold $19 billion of it, and I don't know what that was 2 years or 3 years, and those sales went down. Of course, with the financial crisis, people stop buying things, that's rapidly coming back. And these types of products are geared to have a certain level of current income that vastly exceeds what you can get in government securities and then have the capital gains component that gets you to a good level. I have to be careful what I say because the compliance lawyers make you not disclose everything that's in a perspective. We pioneered in this area. We probably have in the private REIT area, around 80%, could be as high as 85% to 90% of the total revenues in that area because what we're doing is we're delivering an institutional quality product at very low pricing compared to what people have historically paid at retail. And so it's a pretty compelling thing, and we're getting response on that, not just in the United States but all over the world, and we're going to replicate that with our credit products, and we're just starting with that. And I can't disclose much about that because that's even worse than BREIT that's out there that everybody knows about, but we're taking the same philosophy of a very competitively pricing for the retail customer yield that we think they will find very interesting where we can generate proprietary product. So that gives them something that an institution would want. And in the world where sort of current income is tough to find, this should be very interesting to people, and we're already seeing that our expectations for that look like they're being significantly exceeded where we've introduced that, which is always a nice thing to happen when you go to a meeting and people tell you good things. Doesn't happen with every meeting that any of us on the Zoom have, but looks like that. That feels very good at the moment.

Great. Well, we'll watch how that unfolds for you guys. Shifting gears, another large pool of capital or a large addressable market, so to speak, is insurance. And we've seen essentially each of your peers take some sort of strategic steps to establish a presence in the insurance channel. And Jon Gray told us in the last call to stay tuned and we've been staying tuned. But curious if you can give us any updated thoughts around what Blackstone could do here? Does it make sense to partner with another insurance firm? Or does remaining sort of open architecture make more sense for Blackstone business where you could ultimately do more for a wider range of insurance companies?

Well, Jon is a wise person. And when Jon told you to stay tuned, he knew what he was talking about. And so you should stay tuned. The interesting thing about this particular area is there are about $30 billion of assets globally in the insurance area. We were managing currently around $66 billion, I think, the right number is of those assets. And there's the ability to increase those types of numbers substantially given the size of companies and the size of opportunity. So we're looking closely at that. Some of our competitors have been also doing that. It's -- there's a lot of value that you can create for an insurance company if you can increase the rate of return that they can earn consistent without straining the criteria they have for specific ratings, which is the way their companies are -- the way their companies are regulated. And so Blackstone has, by the virtue of the different scale -- the scale we have in the different products that we have that we can bring unique products to bear, to insurance companies solutions, that would be hard for anyone to duplicate. And so we have an optimistic view on this. We're obviously working on some things. We'll see what happens. And as Jon Gray would say, stay tuned.

All right. We'll do just that. All right. Shifting gears a little bit and staying on some of the themes, ESG. Obviously, very important part of kind of themes impacting the asset management industry, continued asset allocation trend and decisions continue to be impacted by ESG as well. How is Blackstone approaching this development, both with respect to portfolio of company management as well as product development.

Well, we've been involved with ESG for at least 10 years. We have a Chief Sustainability Officer, and so the changes that you're noting, Alex, that look like they've just sort of arrived in huge scale, we've been looking at for quite some time. We made an announcement that with every company and real estate asset that we buy, we're going to be targeting a 15% decrease in emissions, and I think this is an important thing to do. We're making a variety of changes. In terms of Boards of Directors, we've announced that 1/3 of our Boards will be comprised of diverse individuals, that's happened in our Blackstone top company, the firm itself, and we're also going to be implementing this over time to our portfolio companies. We've done some really interesting things in terms of increasing the number of women who work at the firm. Five years ago, that would have been an investment professional area, somewhere around 15%, and we tried to increase it, we couldn't understand why we couldn't. And we realized that people were sort of uncomfortable with working. Women were uncomfortable working, or at least a perception was, at firms like ours. So what we did is we start visiting colleges and universities,and meeting with women in their sophomore year. We would have them come to the firm, and lo and behold, they found out we're not such bad people and that there's great opportunity in finance for everyone. And so now in our starting classes, women are up to around 45% representation, a massive change. We've changed the way we're recruiting for diverse people. We used to recruit, 5 years ago, with 9 basic universities, now we're at 44, which gives us a much bigger net appeals to more people. And so our firm is responding to the world I think we'd all like to live in.

Right. Well, that's great to hear. I have a bunch of questions coming through the web and I have a few on my own. So I'm going to try to combine 2 of them in the last 2 minutes that we have kind of try to steam that one in there. So one is around M&A. And the root of the question is really that Blackstone has been successful in building out businesses organically, but you have done a few deals in the past. GSL, for instance, came out of the financial crisis. And you just recently announced an acquisition of DCI also in the credit space. Can you talk a little bit about that deal specifically? And I guess what you're looking out of the things that you can build organically? How important is M&A for Blackstone's scope with strategy?

Well, we've had a history of growing almost exclusively through internal growth. With relatively small acquisitions of organizations, which have terrific people, where, we think, combined with us, they can grow dramatically. So with GSL, who's namely just changed to Blackstone Credit when we bought them in 2008, they had $6 billion of assets under management. Now that number is $140 billion. So I'm not that good at compound rates of return. But when you go from $6 billion to $140 billion in 12 years, somebody else will give me the answer, that's pretty good in terms of growth. With DCI, this is, we think, really interesting because what they are as a quant manager, managing fixed income, and quant hasn't been used much in that area compared to equities, and they have $7.5 billion of assets under management. And I met with them and as the last person of the firm who met with them before we went ahead. And I said, what do you think you could do? I always ask that question because when you're working with very driven people, I said, "You're at $7.5 billion now. What do you think you can get to?" They said, "Well, we can get much, much bigger." I said, "Well, why haven't you gotten bigger?" They said, "Well, we just don't have much of a name. And for us to..." -- I said, "What does it take to expand?" They said, 'Well, it just takes the credibility. We've got the numbers, but we're just too small in that area. And if we have the Blackstone name and Blackstone's relationships, we have a really good record and we should be able to really, really improve." I'd said, like, give me a number, and he said, "Well, why couldn't we get to $100 billion." I said, "I don't know why you couldn't actually, and I hope you could do more." So I give you that to show you how we think, and this is the start really of quant in junk and in other parts of fixed income. And if we pick the right group of people, which I think we have that have the right set of algorithms and ability to adapt because nothing ever stays the same in finance, then I think we can build another significant leg to the firm. And as the group said, "All we really need to do is hire more people who are high-quality people." I said, "Okay, let's go and do it." And that's how you really create a firm that can do potentially extraordinary things.

Right. Well, we'll stay and look out for that as well. Look, unfortunately, we're out of time. I know we can continue talking next probably for a bit longer, but we're going to have to leave it there. Steve, thank you so much for joining us, albeit, virtually. Hopefully, next year, we can do this again live and watch people have lunch as opposed to assume that people have lunch. And you can bring your dogs.

I missed the box lunches that everybody eats.

That sounds great. Well, thank you, again. Happy holidays, and we'll talk to you soon.

Thanks, Alex.