Blackstone Inc. (BX) Earnings Call Transcript & Summary

Hey. Good afternoon, everyone. My name is Patrick Davitt. And as most of you know, I cover the U.S. asset managers here at Autonomous. It's my pleasure to welcome Blackstone President and Chief Operating Officer, Jonathan Gray, for our next presentation. Blackstone is a company that needs little introduction but obviously presents one of the more interesting growth stories in all of financials, particularly as alternative asset managers gain a wider acceptance as public companies by the investment community. [Operator Instructions]

So Jon, thanks for coming. Maybe let's start with a quick review of what has happened since we sat here last year with Steve Schwarzman. I think Steve was pretty spot on with how things played out but perhaps even a little too conservative given what feels like a very clean view like recovery now, at least in the U.S. So from your perspective, what's your view on the economic outlook from here as the economy continues to reopen?

Well, Patrick, it's great to be here. And I'm not surprised Steve made the right call. He was saying last year, "Look, if these vaccines work and we can roll them out, we'll see a robust recovery." And that's absolutely what we're seeing. The way I think about it is, if you think of the economy as a river, a river of commerce that flows, what the pandemic did is really put a dam there and stopped business and leisure activity, all sorts of things. And of course, these vaccines are breaking that dam down. And what we're now seeing is really a torrent of economic activity that's picking up. And the strength reflects a couple of factors. First, it reflects the huge savings that have built up in the system. There's $1.5 trillion of additional savings in the U.S. We've also had enormous monetary and fiscal stimulus. And then there's global cabin fever. I think about myself, last year was my wife's 50th birthday. I probably shouldn't say that. But we were supposed to go to Italy, and we ended up driving to Vermont, which is lovely. But of course, as the world reopens, people want to travel. They want to go to sporting events. They want to go to restaurants. They want to get out there, and they want to spend. And we're seeing all sorts of signs of strength. You see it in the housing market, where new home construction is back to the highest level in 15 years. You see it in autos. You're seeing it in revenues of S&P companies up double digits in the first quarter. And our portfolio, which is very large, is seeing the same thing. So we have a very big ports business in our infrastructure area, record volumes last week, last month in terms of containerships. Our Cosmopolitan Hotel and Casino, record slot activity last month. Everything we see points to real economic strength in the United States. We're seeing similar dynamics in the U.K. Obviously, where the virus has not yet been contained by vaccines, we're seeing less. So Continental Europe is slower, parts of Asia, particularly India. But I do think this will be a very good next 12 months for the economy. There are some challenges for investors around inflation, which we can certainly talk about. But on pure economics, we're pretty positive. We think the numbers will surprise to the upside.

That's helpful. Thanks. Yes, and to the inflation point, it's obviously the topic du jour. What's Blackstone's position, I guess, on the inflation concern? What are you seeing across your portfolio? And how do you think Blackstone would be positioned for any inflation and/or rate shock?

So I think inflation is the risk. And what we're seeing out there, obviously broad-based, is strong inflationary pressures. We're seeing commodity prices up double digits, things like steel and lumber. We're seeing similar dynamic around energy. We're beginning to see wages move, particularly in the U.S., for lower-wage workers. Part of that may be related to the government program. Part of it may be COVID resistance, people not wanting to get back out. But wages are starting to move a fair amount. And I think you're going to see it in the CPI numbers because the CPI numbers are made of wages and food and energy and housing costs, and all of those are going up quite a bit. The question is, to your point, what happens in investment markets? I think invariably, that's got to put some upward pressure on the 10-year treasury. It's hard to believe in a higher inflationary environment that the 10-year is still 40 bps below where we were pre-pandemic. Intuitively, I think we will head towards a higher rate environment. What does that do? It obviously hurts long-duration fixed income, and it makes you want to own assets where you can see some growth in cash flow to offset what may be some multiple compression. So for us, I feel pretty good about where we have our portfolio position. Obviously, higher inflation, higher rates is a pressure generally on asset prices. But if I look in our credit area, both corporate and real estate credit, virtually all of our assets are floating rate. And so we'll benefit, the company's credit will improve in a stronger economy, and you don't have the duration risk. In our real estate portfolio, we're very heavily oriented towards logistics, which has been a big play on e-commerce, very strong underlying fundamentals, also shorter-term leases generally. Apartments is our next biggest asset class. Again, 1-year leases, strength in wages and inflation can be captured in that business. We own some hotels and leisure assets that should do well, some life science office buildings where the fundamentals are strong. So I feel good about our real estate portfolio. And similarly, when I look in our private equity portfolio, we've got a fair number of assets in the travel space. We made a number of investments recently in that area, in the meetings business, theme park business, which should get a pop as we reopen. We own some traditional energy assets, which should do well. And then our biggest themes have been around growth in technology and life sciences, again, areas where I think we'll see higher rates of growth, which should help offset what should be, I think, higher rates and some multiple pressures. So overall, I feel pretty good. I'm hopeful that we see a surge, it goes back down and that it's more transitory as many policymakers believe. But there is some risk that we end up with higher sustained rates of inflation, and I think that's something investors should be mindful of.

That's helpful. And how do you kind of -- with that view kind of look at the idea that you're getting kind of longer growth when value is starting to outperform growth with the reopening and the potential for higher inflation?

So I would say what we're trying to do is be as thematic as possible. Some of the things we're doing, you could argue, are quite value-oriented in the sense that we bought hotels in -- all over Asia, Europe, the United States. We bought a private aviation business as well recently, Signature. You could argue those are value plays, recovery plays. As I said, we have exposure to similar assets in those areas. But I think the growth is really about thinking about where the economy is moving over -- moving towards, where it's moving over time, that there are enormous changes happening primarily due to technology and that you want to be in what we call the right neighborhoods, what's happening in terms of all of our lives moving from sort of the physical analog world to the digital world. We're shopping online. We're watching movies online. We're going to the doctor online. We're dating online. There are all sorts of opportunities there. I think when you think about value, buying a legacy retailer or a landline phone company, I don't see that as value. What -- when we think about value, it's what is a great growth trend, like what's happening in the migration of things online that's one derivative off. So it could be compliance, it could be logistics. It could be something that supports this megatrend, buying studios in our real estate business to keep up with this content explosion. I'd say the same thing in life sciences. There's something powerful happening there, and we're investing in Phase III trial drugs in life sciences. But at the same time, we're buying buildings that house life science researchers. We're providing logistics to move cold storage of these life science products. We're also running trials in one of our private equity businesses for these promising drugs. And I'd say the same thing about what's happening in green in terms of hydrocarbons and the movement to wind and water and solar. So I think a lot of this is about where the world's moving. Not all of it is technology-driven. It could be travel, aging populations, rise of the middle class in China and India. It could be alternatives, right, stakes, leverage loans, secondaries. But I do think as investors, being more thematic, starting top down and then expressing that, in our case, across our different verticals makes a lot of sense. And I think you want to have that wind at your back, particularly in an environment where there could be some multiple compression.

Makes sense. The other side of the macro discussion is obviously investment opportunity. Obviously, capital markets activity is strong. Public markets prices continue to reach new highs. So how do you look at the environment to deploy capital today? You touched on it a bit earlier, but what are the most interesting areas you think with markets at all-time highs?

So I would just go back to what I said, which is we're looking for some of these areas where we think tailwinds are strong. And clearly, the reopening play has been one really strong area. I think sustainability -- we bought a company that does carbon filtration in Europe recently. We bought a business that does energy efficiency across buildings, and we're doing a series of roll-ups in that area. Sort of the ESG area is very positive. All of these various verticals in terms of technology and transformation are areas we're trying to invest in. But as I said, often one derivative off. So we love what's happening in content and video games. We bought a number of businesses in the video game advertising space. I mentioned China and India. We bought a very large student housing platform in the U.K., which is really a play on young people from China and India who want to get British educations. And so I would say it's thematic in nature. It's where we see the sort of the world heading to. And from a valuation standpoint, I know people are nervous, but if you look at the S&P, what I would say today is it's trading in the low-ish 20s, particularly if you think companies are going to beat the earnings estimates. And relative to a 10-year at 1.6%, I'm not sure that's such bad value. So I still think there's investable opportunities. Obviously, there are pockets of excess, and we're not in an environment of distress and super-attractive deployment, but I still think there are plenty of things that could be positive in an environment of very strong growth. And so we're continuing to look for where are these thematic areas, how can we express them across the firm. I would throw out digital infrastructure is another area we like a lot. If you believe, again, this migration to the cloud, owning fiber and data centers, cellular towers, these are all really important things supporting this migration. So again, think about where the world is going, what are the different areas that will benefit. And as you look at what Blackstone is doing, so much of it's related. I would even throw in housing where we've had a big shortage in the U.S. Since the financial crisis, we've done a ton in real estate, obviously, around rental housing. But we've been buying a bunch of companies who are part of the housing manufacturing chain to play that recovery as well. So a thematic approach and then using our scale to go after larger opportunities where there's less competition.

So in that vein, this is a question I get all the time from investors, this idea that there's too much dry powder out there chasing too few deals. What's your opinion of that view? And how does Blackstone underwrite to an appropriate IRR with so much money in the system, so to speak?

Yes. So I think to level set, it's important to look at the size of the alternatives market in comparison to the size of the liquid market. So today, there's about $7 trillion in the alternatives market. We're the largest player in that space. But if you look at the stock in bond markets, there's $250 trillion. Now obviously, not all of that's moving into alternatives. But is there an opportunity for this space to get larger? If you look at the largest private equity funds today, including our own, it's not that much bigger, same thing in real estate private equity, than they were back in '06, '07. What's happened in the alternative space, and I think this is really important for investors to recognize, is where people are willing to give away liquidity to get excess return continues to broaden. So if you went back a decade ago, basically, you gave somebody money on an illiquid basis to produce to 20% growth, 15% net return. And you said that if I'm going to tie up my money for illiquidity, what institutions have seen and over time individual investors are now going to see, particularly in such a low rate environment here, in Europe and Japan is, wait, I can get additional return by giving up some liquidity. That's a good trade. Even if I go from my liquid alternative is to produce 4%, I can get 8%. And so what you're watching happen is capital flow into firms like ours, not necessarily seeking these super-high returns. And therefore, the investable universe for things like Core+ real estate or direct lending or infrastructure, where the targeted returns are lower and the investable universe is much larger, is allowing alternative firms like ours to grow much larger than people expected. If the business was only these very high-returning areas, then I do think there would be some constraints. But when you expand to retail, broaden what you do for institutional investors and also insurance companies who now want the benefit of private credit, you really expand the universe. And that's why these companies, I think, have much more potential to grow than people who think of them as really little niche businesses.

Great. I think that's a good segue to fundraising at the earnings growth, which is what I think most investors care about. As we triangulate all these data points from macro improvement, portfolio improvement, what do you see as the biggest drivers of Blackstone's AUM growth from here both in the near term and long term?

So I think what's nice about the firm is we have multiple engines of growth. Our traditional businesses, our drawdown funds in private equity, in real estate private equity, secondaries, tactical opportunities, they're going to keep growing. This year, we'll raise our second vintage Asia private equity fund, our third vintage Asia real estate fund, our fourth tactical opportunities fund, our ninth private equity secondaries fund. And in every one of those cases, I think virtually everyone, we should raise a fund that's larger than the predecessor. And that basically has been our history now for 35 years. So we think our traditional business will continue to grow. In addition to that, we've moved into some new spaces that are still very early in their life cycles. So if you think about growth equity, an area that we did not have a big presence in, we raised a $4.5 billion fund that we closed earlier this year. The year before, we raised a $4.6 billion fund in life sciences. We've announced in our hedge fund area, this Horizon fund, which is really about the intersection of fast-growing companies when they're getting to the public markets immediately before at the time of an offering, maybe afterwards as well. And I look at these as part of our creation machine, where we're constantly looking for new areas in how we can serve our customers. And our customers, of course, because we've done such a great job deploying capital and generating returns, have a lot of confidence in us, and they allocate more capital to us. And we don't need to invest capital, for the most part, to grow these businesses. I would add as an additional leg, these perpetual capital vehicles. And those are happening in both the institutional market and the retail market. So there, it's Core+ real estate. We've got open-ended funds in the U.S., Blackstone Property Partners, BPP; U.S., Europe and Asia. We just raised a $12 billion life science Core+ vehicle that closed about a month or 2 ago. We also have a public mortgage REIT, another perpetual capital vehicle. So we've got a number of these products that are out there in real estate. In terms of infrastructure, which I mentioned, we've raised a $14 billion fund, but it's in an open-ended fund format. As we deploy that capital, we'll go out and raise additional capital. Again, the targeted returns are lower. And unlike our traditional buy it, fix it, sell it, send the money back format, here, the money stays and we generate performance fees without realizations. And that's part of the reason why you see this big drive, as you noted, in our fee-related earnings because we're building up this big perpetual capital base. Interestingly, our Core+ real estate business, which just started, I think, less than 7 years ago, is now our biggest contributor to fee-related earnings. The business didn't exist. Perpetual capital overall is up 50% year-on-year, went from $100 billion to $150 billion, representing, call it, 20% of our assets. And I'd say the area that's growing the fastest is in the retail space, the individual investor space around perpetual capital. So we have a private REIT, BREIT, which has had great success generating favorable returns. It's basically doubled the public REIT index over the last 5 years since it started because it's had heavy orientation to the right markets. The Sunbelt to rental apartments and the logistics, it's really delivered for customers. Similarly, we started a private BDC, BCRED, which has had very good success. It's early days, but those 2 products alone on May 1 raised nearly $3 billion for a month. And I think what investors may not fully appreciate is the power of the brand, the power of the track record, the breadth of the brand and investors' desire to have access to alternatives. And I would add to this mix, in terms of the perpetual capital, the movement into insurance. We have a large client in Fidelity Guaranty. We announced a deal with Allstate. That should close later this year. Again, this capital, we should be able to manage for a very long period of time. Lower fee rates, lower targeted returns, much more around credit, but another source of ballast. And today, we have, I think, 15 perpetual vehicles up and operating, and I expect that number will continue to proliferate. And so when I think about the firm and I think about the momentum we have, it's pretty powerful. The most important thing, though, is whatever products we create, we've got to deliver for the customer. So I spend and our senior leadership team enormous amounts of time on our people, our Investment Committee process to make sure no matter who we're raising this capital from, where we're deploying it, we've got the same Blackstone process, the same standards. And so today, the challenges in a lot of way are more about building our organization, our infrastructure and process because the ability to raise capital here is very favorable.

That's great. Could you maybe elaborate what you mean by perpetual capital? I get this question a lot, and I feel like everyone has a different definition. Some people call it permanent capital. I think it would be helpful for the crowd maybe what Blackstone means when they call something perpetual.

So when we think about perpetual capital, it's -- where -- when we buy the assets, we do not have -- it's not in a closed-end fund format where you invest the capital, you harvest it, you send it back. I think of those as if you're thinking about growing plants, they're annuals, right? You raise them, you send them. And then you restock, you plant again. It's a wonderful business. It's what we built our firm on, and we'll continue to do it in a big way. The same thing in our Hedge Fund Solutions business. The investors who give us capital, they have the right to redeem that capital every quarter, every 6 months. We don't call that perpetual capital. What we call perpetual capital are vehicles that raise money, that don't have an obligation to return it, the capital, on a finite time frame. There may be liquidity, but in many of those cases, most of those cases, we can control the liquidity around those things. And we -- and what's going to happen here is we'll get paid incentive fees on performance based on valuations as opposed to based on realizations in sales. And often, the base management fees are tied to NAV as opposed to the amount of capital. And what the investors are seeking generally in these vehicles are lower stated returns but the capital being deployed the entire time. And they're looking generally for more of a current income component in these things. And so what you're watching happen is this asset base grow very quickly because whereas our traditional model, we're sending it back, here you have these perennials that just keep growing. And so the asset base continues to grow in place, and we're continuing to get new inflows. So we think about it as assets that we think will be with us for very, very long periods of time and where we're not obligated to sell and return the capital as we are in our traditional drawdown funds.

That's helpful. And I think a good segue to insurance, which you mentioned as one driver of perpetual capital. It's obviously a big buzzword in the industry right now. But many of your biggest competitors are taking a much different path than Blackstone, with large controlling investments in insurance companies putting the insurance assets on their balance sheet. Why is Blackstone taking the capital-light route? What's your view of the capital-heavy route and maybe the opportunity to grow that business, taking the capital-light route? Yes.

Well, I'd start with why alternative asset managers are moving into insurance. And I would say it makes a ton of sense because if you think about an insurance company 10 years ago, and they had liabilities, they had to earn a 4% or 5% return, they could basically buy bonds on the screen and defease their liabilities. As rates have come down, they need as much return as they can get. So buying a bond that's already had excess returns sold off, that's bid away, doesn't meet their needs. So the closer they can get to originating those assets, corporate debt, real estate debt, structured credit, the more likely they're going to have additional return. And so you're watching the movement of alternative managers in this space in a very big way. Now you asked the question, Patrick, about why aren't we using our balance sheet. I'd start by saying we have amazing competitors who do a terrific job. And I think everybody's got to make their own choices for their firms, and their decisions to take on liabilities make sense for them. And they're saying, "Look, we're comfortable with these liabilities, and we can make a spread over that and generate a return." That's their decision. And I think these companies -- by the way, I don't see alternatives as a zero-sum market. I think all of these firms are going to do quite well. But for us, where we're able to raise capital and not use capital -- it's not just in insurance. It's in our mainline business. I mean we could deploy in our funds. We've chosen not to do that. Today, we have about $1.5 billion of our $650 billion of AUM. We have about $1.5 billion invested. And when we look at that, we say -- with much more from the individuals at the firm, what we say our desire is to pay out all of our earnings in the form of dividends and stock buybacks. And we don't want to -- we run our business today with no net debt. We don't have significant liabilities, and we're still finding the way to grow very quickly. And when I look at the best companies in the world, they tend to be balance sheet-light. They tend to grow based on brand. And that's what we're trying to do. And so I think we can continue to grow in insurance. In the case of the Allstate deal, we did use -- we bought 9.9% of the company but then raised third-party capital. To me, that's the kind of model for us. And for other firms, I think they may have a different approach, and they'll still be highly successful in that approach. But for us, we're going to stick with the asset-light model. It's served us really well for a long period of time. And I still think we can grow very aggressively. And I think in insurance, we'll find ways to grow there even though we will not own an insurance company.

Got it. And is that -- do you think that's an impediment maybe to seeing all of the potential insurance assets that are out there to the extent there are more blocks that want to go the balance sheet-heavy route or to the people that have...

It's possible. It's possible that there'll be transactions that we won't be able to do. But it's a big world out there. And a lot of folks who have insurance assets recognize the strength of our platform. And my hope is between third-party investors where we can raise capital and insurance companies who may want the benefit of the Blackstone platform, that we can find ways to grow the business. But it's possible. Certainly, there'll be some transactions that may not work for us because we're focused on an asset-light approach.

And one more on this point that's come up in the audience questions. We've heard from other private equity firms some pressure to put more GP capital into new fundraises. It doesn't sound like you're seeing that pressure. Could you maybe speak to that trend and maybe why you think you're not seeing that from your perspective.

Yes. We haven't seen that trend. As I said, we commit typically 1% to 2% in most of our funds. And then we offer that up to our -- the individuals here at the firm to invest, which the investors like quite a bit because now the individuals are even more committed. We have not seen any pressure in terms of the amount of capital we need to deploy nor have we seen really fee pressure in any of our traditional drawdown funds or in these open-ended funds. And the question as to why, I think it comes down to performance. The fact that we've delivered 15 net in private equity and real estate private equity and secondaries for 30 years, when you deliver for your customers, you still have strong pricing power. And most of our funds face limitations in terms of hitting the caps. So we haven't seen a need to do that. And we also haven't seen a need to use our balance sheet to seed new businesses in almost all these cases, again, because of the confidence investors have in us because of our track record. We've been able to do this without putting in large amounts of capital, and I would expect that'll continue.