Blackstone Inc. (BX) Earnings Call Transcript & Summary

Great. Welcome. Good afternoon, everybody. Thank you for joining us. We're going to get started with our next session. It is my pleasure to welcome Steve Schwarzman, co-Founder, Chairman and CEO of Blackstone back to our conference this year in person. It's great to see you. With $730 billion in AUM, Blackstone remains the largest and most diversified alternative asset manager in the world. More importantly, though, Blackstone continues to be the fastest-growing alternative asset manager in the world as well, with a lot of momentum entering into '22. So again, thanks for being here. It's great to see you. Looking forward to spending time on how Blackstone is positioned into next year and obviously getting your perspectives on the private markets industry as well.

Well, thanks, Alex. It's nice to be here again. There are a few empty seats, but we believe in sort of you're better together as sort of a principle in finance. So it's nice that you all believe that, too.

There we go. So starting off the question for you, Steve, just around the private markets post the pandemic. Clearly, we've seen an acceleration in a lot of the secular themes within private markets over the last 18 months, maybe they were pandemic-related, maybe not. But curious to get your thoughts on how the pandemic's changed private markets investing?

Well, it's made it much more popular. Actually, you've had an explosion of aggregate assets in the financial community, money management of all type. Private markets have gotten more than their share. There's been terrific performance across almost every vertical in private markets, whether it's private equity or real estate or credit and subsectors of it. So when the government prints enormous amounts of money, it has to go someplace, and it's coming to our alternative assets area generally. And for our firm, we're increasing share everywhere. Institutions which have been operating remotely, for the most part, want to simplify the people who are giving money to the people they know well. And so that's working out extremely well for Blackstone.

That's great. Let's unpack some of the drivers, I guess. Very impressive growth rate, obviously, for you guys so far this year. You raised over $100 billion of capital year-to-date. Retail is a big part of it so I was hoping to spend a couple of minutes on that. Clearly, you have BREIT, you have BCRED collectively that you're raising anywhere from $3 billion to $4 billion of capital per month. . You've spoken in the past about just an enormous runway for wealth management and the role alternative managers will play in that part of the market. Why don't you take us through some of the other initiatives you're thinking about when it comes to retail, some of the distribution channels that contributed up to this point and where you're looking to go next?

Well, in terms of retail, it's become a very big part of the firm. There's $80 trillion at retail. Total financial assets in the world of about, I think it's $350 trillion and alternatives are just $7 trillion. So we really haven't scratched the surface. And for us, retail, in particular, is really underpenetrated. So if you look at the different categories of investors, we have endowments, which are relatively small but very high performing, they're up around 50% alternatives. Pension funds have somewhere between 25% and 30% and retail is 5% or below. So what we're doing is we're adapting our institutional products to the retail market, and we have a whole variety of different things. As you know, Alex, we have our real estate product today called BREIT, and we have our credit product, BCRED. So I'm reluctant to tell you the targets for what we're supposed to be offering customers. I'm always so worried about compliance things that it constrains exactly what you can say. But we bought into the concept of retail, unlike other people in our industry 10 years ago. And it was like a tough decision for me personally because I'm used to making money every time we go into something. That's why we go into it, as well as to have a good customer experience. This time, we looked at it. And so we're just going to start hiring people to interact with retail systems. And I said, "But where's the profit?" They said, "Well, this is a good thing to do long term." So finance changes so quickly that making long-term investments is a little bit odd, and we decided to do it anyhow. And now it's been 10 years, and we have, by far, the only, I believe, large distribution thing. And it's -- selling at retail is different. You have -- you need to interact with the sales force of each of the distributors. And then you have to have a very large servicing organization because when you sell something at retail, sometimes there are a lot of questions or people don't understand something. So we have a direct ability to service all of those types of things. We currently have 200 people doing that. And we do, like many, use universities. We've had 5,000 people come into the firm, and we teach them about alternatives and why this is a smart thing to do because of the performance over the time and very limited downside historically. So this has been a really big part of the firm. In fact, in the last month, you mentioned $3 billion to $4 billion. Last month, you can tick it up to $5 billion. And a lawyer would say there's no assurance that we'll continue like that but we're opening more and more doors. We're hiring more and more people. So this is a different concept of white space that you may have heard before from people who have no share and really no presence. And so we love sort of expanding this part of the business. It's really so underpenetrated that if you can deliver a really great product with reliability. And one of the things is that Blackstone is 36 years old. I still think it's a new company. But we have the best brand, I believe, if you do the sample, certainly at retail and other things, and we're a much, much larger firm than other ones. And we still have the zip of an entrepreneurial, sort of make it happen and don't make mistakes for customers. So I think that the prospects in this area are quite good.

Sounds like a long runway still, which is great. Another area where you, in the past, talked about, a really large addressable market has been insurance and you've done a number of really strategic things there over the last couple of quarters, Allstate and obviously, AIG most recently. Curious to get your thoughts around the role Blackstone sees for itself in managing insurance assets. To what extent do you think utilization of your balance sheet could play a role? Or do you expect most of that to be off balance sheet? And given that there's so many other firms pursuing a similar strategy in service of insurance clients, how do you differentiate yourself within that part of the market?

Well, the reason to manage money for insurance companies is because they actually need more returns. They make long-term promises to their customers. And then they have to -- if they're in the life business, they have to invest the money in the spread. It's really hard to do today because insurance companies are limited to certain risk parameters, so you have to invest money within those rating agency classifications. So the reason we're involved with that and the reason we're growing so rapidly is we can originate product that can be used by insurance companies to increase their yields, and it becomes quite material. So for example, if you have a target of increasing your yield by 75 basis points or 100 basis points in a world where interest rates are so low, it's very material for those companies. And so we've taken our money management skill and gone to people to say, "We can help you a bunch." Now we've decided as a firm that we don't want to be an insurance company. We've never wanted to be an insurance company. We just want to be an alternative asset management company. Other people have taken different approaches. And historically, owning insurance companies has pretty -- have been a pretty low multiple valuation. And we're an asset-light company. We don't want to use our balance sheet. We just want to manage more and more money. And so there are different ways of approaching this. You can buy an insurance company but then you'll have the responsibility to the liabilities. And it's a highly regulated industry. And so you don't completely control your own destiny if you're in that business. So we decided at the start, we really don't want to use balance sheet. We just want to manage money, and we don't want to compete with our customers. So if you're an insurance company and you go to somebody,, how you decide on allocations and other types of things, if you're trying to get third-party money in addition. So we like a nice, simple life. We don't like the complexity of operating in that other world. We've grown our assets to about $150 billion today, which contractually over the next 5 years, will grow to $200 billion, and that's without bringing on more customers. In retail, just to go back to that, we're growing around 40% a year. So if you're a financial company, most of them don't do that. So that gives you some idea of the growth. And here, over the last 3, 4 years, the way we looked at it, we got $150 billion going to pretty much $200 billion without any new clients. And we think based on some of the conversations we're having with them that, that's going to grow pretty aggressively. So as you look at these 2 areas as areas of growth for us, it's a pretty good runway. It's like a really big runway for us to grow. We spend, those areas, that's outside our existing institutional business.

Well, you kind of jumped ahead of me a little bit on this 1 because clearly, we spend a lot of time talking about new addressable markets for yourself, for some of your peers, whether it's retail or insurance, et cetera. But the growth in the sort of traditional alternative products has also been remarkable, right? So when I look at the fundraising page across private equity, real estate, infrastructure, et cetera, over the last couple of years, it's been quite substantial. So I'm curious if we could spend a couple of minutes on that part of the market. And part of the fundraising might be cyclical, right, like asset values around the world are higher, so naturally, you have to allocate more just to sustain the same level of target allocations, but there's also structural elements to that. So let's focus on that second piece. How much further do you see institutions allocating structurally to the asset class? And then anything in particular within private markets? Like private equity versus real estate, infrastructure versus private credit, where there's incrementally more?

Well, let's just start out, and I already gave you the breakdown by different types of managers. 91% of the people investing in private equity are either going to be the same or increase their percentage allocation. So say roughly it's 50% of all of the investors in that asset class are increasing their percentage. Now what's happening is from a cyclical point of view, the assets themselves that they're managing, that they are managing are going up a lot. So if 50% are going to increase their allocation and the whole bucket is going up pretty dramatically, that for a firm like ours is the largest manager in the world by far, then this is like a very good macro position for us. And the growth is coming pretty much from everywhere in terms of individual asset classes. Private equity has been extremely successful as an asset class for its investors. And so there's big increase there of all types, whether it's for primary private equity, core private equity, secondaries, special situations, all of those types of things. Real estate is an area where we're the largest actor in the world buying real estate. And so for us, this is really -- we're the place to go and a reward for good behavior over many years. And so there's big increase there. Credit, as you've heard from some other people and will hear from someone else, has been a very hot area. We've pioneered a perpetual product in that where we can advance very large amounts of money. Importantly, what's happening in that area, the opposite of what you might think, is that's really becoming a floating rate business because with inflation, people are worried about investing in credit but they also need income. And so that's become probably, at Blackstone ironically, that's our fastest growing of our verticals. So it all sets up in quite a good way for a firm like ours.

Right. So honing in a little more specifically on some of the products coming online over the next couple of years for you guys on the flagship side, you'll be out with the next vintage private equity, real estate, et cetera. Given the market environment today, how are you thinking about rightsizing these vehicles? And ultimately, given fairly high valuation levels across asset classes, really, how are you thinking about the IRRs that you're targeting in these products relative to historical returns?

Well, the great thing about finance is it always changes. And as much as you think you know, it always comes out differently. And so we keep the same investment targets for rates of return. You don't want to chase yourself down and ruin high-performance products. But what we tend to do is, unlike almost everyone in our industry, is we tier products. So we'll raise separate monies for high return, whatever you think high return is at a given point in time, somewhere 18 net, 17 net, 20 net, another tier sort of a core plus somewhere, 12, 14. And then another 1 down around 8, 9 to 10. And so for us, we can always find a place, a really good company, a really good piece of real estate, whatever, fitting into that bucket, and we're taking every 1 of our business lines around the world geographically as well as sort of different tiers of return. So we can deal with enormous volume of incoming things because we can make them fit. Most firms sort of started in the high return area and haven't gotten lower in terms of the returns. And what we've also done is money raising, as you lower the rate of return, is bigger, which is quite counterintuitive. So we're finding in this environment that this is an opportunity to put on very large amounts of investments. But it's easier when the returns are lower. Whereas most people just don't even pursue those, we can develop a huge business at those 2 other investment target points. And that way, we can keep everything sort of where it should be in terms of what different customers actually want. So we've sort of changed the model of the industry. And we're very far advanced with that, which you can see, Alex, as you know, in our real estate business, we have huge funds at every rate of return.

Right. So you touched on this a little bit in this question, but I want to -- I was hoping to dig in a little more, really just a concept around deployment landscape and the constraints around it. I mean, it feels like the private markets are raising a tremendous amount of capital and success at deploying that capital might become the ultimate constraint in the next cycle as we think about the next 5 years. So how are you addressing that within Blackstone? And again, importantly, what are the areas that you're most worried about in terms of the constraint factor where you could actually deploy capital and achieve the things you're promising your customers?

Well, part of it is where is the right relative value, right? And today, some of the tech stuff is pretty highly valued. And so you look at that and you have to be careful about what you're doing. When we analyze things, and this may not be a perceptive answer to your question, but we always look at all of our downsides. We look at everything that could go wrong, and we just try and fit the rate of return to a pool of capital that can handle that. If you're stuck in a way with an old model of an alternative asset firm, where it always has to be like a 20% return and you try and do that every time you go to bat, you're going to have trouble, right? So our system allows us to deal with risk and return in a way that works for customers but also works for the ability to put on new assets. So we don't have to stop, if you will, at a point in the cycle where you can't reach the very top. What you do is you just don't do as much in that class of return. So we try and handle sort of our approval process for figuring out, what is this investment capable of doing safely and satisfying customers?

Great. Maybe pivoting a little bit and more of a macro question for you, inflation and higher interest rates. Clearly, for the last 1.5 days and I'm sure for the rest of the day, we'll hear more on this from a number of companies seeing significant amount of inflation in their structures and that feels like might continue. Curious what you're seeing across your portfolio of companies when it comes to inflation, and that's sort of part 1. Part 2 would be the outcome of that is high interest rates. And we've talked a number of times of impact of higher rates on alts. Any updated thoughts on that?

Yes, sure. Well, we were quite public when inflation started really going up, that this wasn't transitory. It was interesting to have people use that word. And there are a bunch of different factors going on. Some are supply chain disruptions. When you start the world up, you can't sync it up in a just-in-time delivery world, right? So you're going to have those kind of problems. That's 1 part of inflation. More worrying to me is the fact that you have wages that are really sort of booming up. So why is that? And is that going to create a problem? My own view is that the reason -- there are many reasons people want to stay at home and work, but one of the biggest is that when you stay at home, you don't have the same expense load. You're not commuting, you're not buying sort of work clothes, that you're not going out so much to restaurants for lunch. You're not traveling as much. There's a whole array. And I think what happened during the pandemic, among many things, is that people's income, for the 90% of people who had jobs and are paid as if they're still at work is that their disposable income skyrocketed. And when you ask them to go back to work, I don't know if you've ever managed anybody and suggested to them their compensation should go down, my experience is that they're never too enthusiastic about it, right? And often, they just quit in a huff. And so we now have a large part of the country whose disposable income has gone up dramatically. Who would have imagined in a pandemic? And so now when you say, "Okay, enough of that. Come back to work." They, I think, not all of them, but a lot of people say, "But that's a pay cut for me so I'm not going to come back. I like my salary increase, my total comp increase." And so to get them back is going to be a negotiation between employers and employees to get them in some place that satisfies labor in this negotiation. And that's not just a onetime thing. So I think that element of creating the right ground for people to go back to work on a normal basis is like structural inflation for a while. And so I think we're going to have that, and the Fed is going to have to respond to some of that. For our business, let's take real estate first. It's our biggest business along with private equity. For real estate, that drives higher rents, and we have a natural hedge for that. So I think we'll do quite well as long as we're in asset classes like warehouses, where we're the largest in the United States that have relatively short leases and not 10-year office leases, which we're not in the office business like some other people. So I think we can find our way through that, and that should work out, I think, on balance, relatively well. In private equity, you have to be owning things where you have enough ability to pass through some of the inflation. The issue of what will happen to general multiples, not to our business, like it's generalized, we've gone to moving from value to growth because you need to grow your way through that as a general concept. And we're doing all kinds of interesting things, some of which are not correlated like life science type of investing, investing in content and all the derivatives of it. Studios, like owning a physical studio as well as content that can feed into streaming and other types of things. So I think inflation is the most difficult for working people, right? And so I worry about that from a societal point of view.

Right, that makes sense. Next question I wanted to ask is really around evolution of Blackstone and going back to when I feel like you and I started having these conversations up on the stage, Blackstone was probably half the size that you are today, maybe even smaller and now you're on the way to probably closer to $1 trillion in assets under management. From a culture perspective, how do you preserve kind of the culture at Blackstone as the firm just continues to get bigger and bigger?

Well, that is a great question. And I spend a lot of time working on that. We still think we're a small firm. We're entrepreneurial. We start new things. Everybody has a shot of being successful at the firm, and we want them to be because we keep expanding. So what's happening is no, I don't think I've adequately, today, captured how much growth is going on at the firm. It's really quite substantial, so leave it at that for the moment. We're really gearing up hiring not because we like overhead but because we think we understand sort of what the demand is. And for me, the #1 thing, I'm not as worried about, investment process. We've really got that 1, it's very familiar for all of us, don't lose money. We have all kinds of committees, approval processes, risk aversion. Where we're more vulnerable is if we can't keep this special culture going. So first, we talk about it almost every week to the whole firm. I've gone around and visited every group at the firm because we've got very substantial hiring stuff we're doing and saying, "You can only do this if we can preserve our culture. And so let's figure out, given the level of growth, how we're going to do that." So I have a meeting today at 2:15 with a thick document because we're growing at such a rate that you can't just mentor or take onboard what you did before. And so we're involving other layers of the firm besides just simple onboarding. But how you make the firm fun and minimal. And we're trying to codify this so that all new people get to be surveyed, in effect, every 2 months to see how they're doing. We have assignments for everybody at the firm and what we want them to do to make sure people are comfortable and we're passing on culture. We're hiring a special person for each 1 of our business areas to make sure that people don't say, "Oh, yes, I saw that person. It's all fine," when they didn't. So it's sort of a trust-no-one kind of implementation. And everybody at the firm, because we've all been trained in the same intimate style, wants it to be unchanged. And so when we sit down with senior people in any 1 of our groups and say, "Okay, we know it's a bigger span of control now. Here is how we want to handle it and here is your way of doing it." And we keep reinforcing that. We do fun things. I mean, for those of you who are in finance and it's not so much fun, we have a lot of fun. And what we do is we started something called Blackstone TV, this is one of the advantages, one of the few, of the pandemic. And so every Monday, at 8:30, Jon Gray, who by the way, forget me, Jon is amazing. He is truly an amazing person and the most effective president of any organization I could imagine. And we start off, and John gives -- first, we have funny pictures from -- we have a theme like tell me about your turkey or something. And all of a sudden, we're flooded with turkey pictures and/or pets or weddings or whatever. So each week, we theme it and then we do the pictures and then we determine winners from the pictures. And then John goes over everything that's happening at the firm. We treat everybody as if they're on the management committee. And so you get to hear everything going on. And we have a lot of stuff going on. And then we have a guest, one of the people running one of our businesses or something that's interesting or a political person, briefing everybody at the firm as if we're being briefed. And then I follow up with unstructured observations about this blizzard of stuff that people are hearing, can barely understand it all and say, look, this is already -- I talk about the Jets and the Giants. I -- not much to talk about and sort of give a human face and talk about how we need to go forward as a business. So every week, everybody at the firm understands what we think, what's happening, the endless communication you need to run a great financial institution. It's like really high. Everybody has to feel important. Everybody has to feel connected because they are all important. And the culture is important. And I know I've taken a bunch of my time where I could have given you more substance with some numbers. But if this is the kind of firm you set up and everybody feels that they have a shot at doing really well because we keep expanding, that's another thing about culture. If you have a limited set of businesses, people have to kill somebody to be promoted. We don't have that, right? So we've set up a unique culture and we are dedicated to protecting it. And it's not me, it's everyone. So I think we'll get through that and we'll end up, in another 2 years, as a really astonishing business.

Great. Well, look, on that note, it was great to see you. Thank you so much for making the trip down here and meeting with us as always. Great to have you. Thanks again.

Thanks for your coverage, Alex.