Blackstone Inc. (BX) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thank you for joining us. We'll get started with our next session. Hopefully, everybody is well fed. Next up, it's my pleasure to introduce Jon Gray, President and COO of Blackstone. With more than $1.2 trillion in assets under management, Blackstone is the world's largest and most diversified alternative asset manager, distinguished by its expertise across effectively all major subverticals within private markets. The firm also has had enormous amount of success growing in the wealth channel as that market continues to expand as well. So lots to talk about. Hopefully, lots of good cyclical things to talk about as well looking out into 2026. So Jon, thank you for being here. Always fun to have the conversation with you.

Alex, I'm happy to be back.

That's great. Look, why don't we start with a bit of a question on the macro side first with the economic outlook. Given Blackstone's breadth of investment capabilities, you always have very unique perspectives in terms of what's going on, on the ground real time with respect to corporate health. So talk to us a little bit about that and what '26 looks like for the corporate world.

I think we're a little more optimistic than most people are. The U.S. economy has been incredibly resilient. We had Liberation Day. We had a government shutdown. We've had pretty high absolute level of short rates. And yet in Q3, our private equity companies saw 9% revenue growth. I'm sure we're going to get into private credit. Default rates amongst noninvestment-grade borrowers have been low. Profit margins have been increasing. And globally, it's a pretty good picture, too. I would say the things powering it, obviously, are this AI CapEx cycle. That is clearly the biggest engine of growth. And it's been a great thing, obviously, for our business, I think for the alternative space overall. I'd say the weakness is in Europe and then also around some of the consumer businesses we have, particularly middle and lower income. So water parks, theme parks, hotels. If you looked in the November Smith Travel data for hotels, revenue in luxury was up 6%, 7%. It was down the same in economy. So you're definitely seeing a bit of this K-shaped economy. But overall, I'd say it's a pretty good picture when I look at it net-net from our company's vantage point. I'd say the other encouraging thing is the inflation data to us has continued to look better than what you read about. And we often find that our 270 companies and the 13,000 pieces of real estate give us better insights. So rental housing inflation is running well below the 4% that's in the CPI data today. In the labor market, what I would say we see is basically the difficulty of hiring has gone way down. 93% of our CEOs 3 years ago would have said it's hard to hire. Today, it's 30%. Hourly wages have gone from [ 4.1% ] a year ago to 3% at our U.S. companies. So there's a bit of stickiness in goods inflation, but I think the Fed will actually get data here over time that will allow them to cut rates. So if you've got a resilient economy, cost of capital coming down, obviously, we have spreads that have tightened a bunch in investment-grade and high yield. That's helpful. And then we're on the cusp of this massive both investment boom followed by what I think will be a very significant productivity boom from the technology. And I think it's hard to get really negative in aggregate when you overlay that with the other set of facts. So that makes us all more inclined, which is why you see us active investing.

Great. Let's translate that into the investment activity, which has really accelerated for you guys over the last couple of quarters. I think about $140 billion of capital deployed over the last 12 months. And again, the pace of that deployment has really accelerated. I guess looking out into 2026, can we talk a little bit about key themes and investment areas where you're finding the most attractive risk-adjusted returns? And also, by the same token, talk a little bit about areas you're trying to avoid.

Yes. I mean, if you subscribe to our world view that bringing superintelligence at scale at very low cost is going to be transformative. You try to figure out how can I invest in that and take the least amount of risk. And I think we've become the leading investor in the infrastructure around this. Massive investments on data centers, but long-term lease data centers where you don't put a shovel in the ground until you have a 15-plus year lease with a very large market cap company. Huge investments in energy and power. So that's generation, transmission, utilities, electrical equipment, everything we're going to be doing, the data centers, the robots, the autonomous vehicles is going to plug into the wall. So making huge bets. And in our business, what's great is we can express it in infrastructure, in energy transition, in real estate, on the equity side, on the debt side. So I would say that infrastructure around what's happening continues to be a huge theme for us. I would say coming to alternatives, we really like the secondary space. We're the largest player in that. There's a lot of push, obviously, for DPI. Alternatives continue to grow. Being able to provide liquidity there at scale is a real advantage. We like that area. I would say some of these big corporate solutions deals we're doing on the private credit side, we've done them with Rogers and EQT in the midstream space and Sempra, energy, where you're helping them in very capital-intensive businesses, do things that are capital efficient for them and lower their cost of capital. And that at our scale on the credit side is an area that is -- there's a relatively small number of competitors to do that. I would say commercial real estate, which I'm sure we'll hit on, has had a tough 3.5-year run, but you can sort of see the pillars of this recovery starting to come in place, and we're definitely getting closer to that. And then geographically, I would point out in Asia, two places we love, India, which has been hugely successful for us, both in real estate and private equity. That is an economy that I think will continue to be the fastest growing of the big 20 economies out there where the physical capital markets, legal infrastructure continues to improve. And then Japan, where the growth won't be as high, but there's a real openness to foreign capital coming in. And that is unlocking all sorts of assets. We bought a $3 billion luxury real estate complex from a railroad company this year. We did a couple of privatizations, and that is a market we also like. So one of the great things about our business is being -- having global scale and being to play in different markets, different parts of the capital structure. What I don't love, I would say emerging markets generally away from India and maybe the Middle East, that has been a tough place. We haven't done a lot of it, but we just haven't, over time, achieved real return premiums for the risk and perhaps and definitely much more importantly, businesses at risk of disruption from AI. Everybody is talking about bubbles in AI. And yes, there'll be plenty of losers in AI, but -- in the race, but what's happening to legacy businesses. If autonomous vehicles continue to gain share, which I suspect, what does that mean for an auto insurance company? What does that mean for a company who's focused on collisions? And yes, it may take 15 or 20 years, but what begins to happen to multiples. We saw that in the media business, or we've seen that in other industries. So I would say disruption around horizontal enterprise software companies, IT services businesses and then lots of rules-based businesses, legal, accounting, transaction processing, I think you've got to be very mindful. And if I was giving one piece of advice [ to ] investors, this is the main thing to focus on.

Yes. No, lots to unpack there. Thank you for that. Why don't we double-click on really that first theme and probably the biggest theme, which is around AI. Blackstone was very early in identifying the secular opportunity. We've talked about, it feels like for years, but it's finally kind of here. Talk to us, I guess, maybe a little bit more about how you envision this market evolving from an investment perspective where it feels like other people are on to this as well and the opportunity set is still there, but there's a lot more capital, obviously chasing that around right now. So what are the parts of the market where you still feel comfortable deploying capital? What do you see in terms of performance of these assets relative to your expectations? And then within AI, what are the risks?

Yes. So this has been the best performing area for our firm. There's no question. We bought QTS in 2021 for $10 billion, and its lease capacity is up 12-fold. And we did that in our infrastructure business. We did that in BREIT and our institutional real estate Core+ Funds. That turned out to be a really good decision. We bought the biggest data center player in Asia. I would say, surprisingly, despite the capital that's moved there, because of the constraints of power, it's still an attractive place to deploy capital. And as I said, you're not really investing the capital at scale until you have a long-term lease. So these are not condos in Miami. This is a much safer underlying activity. And so I continue to believe that's a really good way to invest in this. I do believe -- and by the way, again, both on the equity side and the debt side. We talked about the energy. I just -- if there was one thing you could believe in, it is power. I just -- I can't come up with a scenario where we're not using significantly more power 5 years from today, 10, 15 years, it feels like we're going to a world where there's a lot of need for electricity. I'd say as you move up into more of the direct business, we are investing, but obviously, we recognize the risk. It's with different pools of capital. We've invested in a couple of large language models, companies. We have begun to invest in a few of the application software companies, companies like OpenEvidence in the medical field or Norm Ai in the legal field. And some of these companies have the opportunity, if they are able to execute, to grow to be very big and very profitable, but we recognize not everyone is going to win. And what we're trying to do is figuring out how to play this, recognizing what's coming and again, not taking too much risk. On the traditional sort of private equity side, we're also looking at businesses where we think we can potentially transform them, have sort of an AI-or-die strategy where you could buy a health care claims processing business or an accounting firm and bring this technology to bear and make them much better in serving their customers and much more productive. So every investment memo, in the first two pages of the memo, there's at least one paragraph about the AI risk for that business. We've gone through all our portfolios, yellow, red, green, where do we have the most risk. We just see this. Look, it's taking time. It's a little bit like basic science where they've invented some unbelievable therapies, but getting them to the hospital, the clinic is hard. But it's going to happen. And when it does, it's going to radically change like we saw with Yellow Pages and taxi cabs. And I think usage is going to continue to go up. So I think for us as a firm, it's a great opportunity because the needs and capital around the chips and data center and power are so enormous, and we're really uniquely set up to go after that. And then in some of our growthier strategies, we can also make some very interesting investments on things that have a lot of upside. And at the same time, we've got to look at our legacy portfolios and try to limit the risk and push to get those companies to transform.

Great. Well, it will be fascinating to us for sure. So all right. Another hot topic, credit, not surprisingly. And it feels like the news flow around that has died down a little bit, but it's clearly still very much top of mind for investors. When we sort of take ourselves out of the day-to-day news flow related to this topic, talk to us maybe a little bit of what you guys are seeing as far as credit trends across the portfolio, not just in direct lending, but maybe in your private credit holistically. That's part one. And then part two, the development with Bank of England. You and I think some of the others are effectively volunteering to participate in a stress test, which might be quite helpful to the ecosystem. What do you think it's going to look like?

Well, I would step back and try to focus on what's happening and why is it happening here. And what we've really seen is an innovation that's been taking place now really in an accelerating way over the last 5, 7 years, but started earlier than that. We've been at direct lending now for 2 decades. We have a private credit business that doesn't use balance sheet; that, between corporate and real estate credit, is $500 billion and is growing very rapidly. And we have competitors who are obviously growing as well. They may be using a different approach in how they do things. Why is it happening? It's happening because what you're basically doing is bringing investors directly up to borrowers. It's not that much different than what Amazon did to revolutionize the delivery of goods to consumers. And obviously, we still have a large brick-and-mortar retail world, but we have other players now who do this online at scale. And why are borrowers embracing this, both on the investment-grade and noninvestment-grade side? It's because we're able to do things with speed and flexibility that at times you can't do in the public markets. Why are investors embracing it? Well, they're producing higher returns. So for our insurance clients on the investment-grade side, year-to-date, they've earned 170 basis point premium over comparably-rated securities. It's not a surprise. Our insurance business is growing at 20% a year. When you're able to deliver that premium, it becomes even more important, by the way, as base rates come down. So on the noninvestment-grade side, similar dynamic. We produced in our non-traded BDC 300 basis points of premium return. And that is the reason why this is happening. And by the way, as a side note, it's also deleveraging the system. Our non-traded BDC is probably 1/10 as leveraged as you would see in a financial institution, and you also get better duration matching. You don't have daily deposits and so forth. So it's helpful for the financial system. Obviously, banks are hugely important and play invaluable roles, but we've added something that is helping consumers and businesses and investors. Now your question is what's happened to credit quality? And I'd say, in general, credit quality looks pretty darn good. If you look across, again, our non-traded BDC, the average loan-to-value we made was 40% at origination. So a fraction of what it was back in the '06, '07 days. EBITDA this year at the companies in the portfolio, up 9%. And of course, we've got a Fed now that's cutting rates, which is helpful for the borrowers. Now will there be isolated credit incidents? Sure. Could there be disruption given what's going on? Yes. But the question is, will we have higher losses, higher defaults than -- and therefore, lower returns than the leveraged loan and high-yield market? We don't believe that at all. And so ultimately, this is going to be about delivering enduring premiums and returns without taking on incremental risk. That's what we've done in both investment and noninvestment grade. That's why I think it will continue. To your point on the stress test, if they show up and say, "Hey, you're doing noninvestment-grade lending." And using BCRED as an example, $80 billion balance sheet, $50 billion of equity, and they compare that to the financial institutions, they rate who would have $5 billion of equity, it seems a little different to me. And so I think whenever you have this kind of innovation and change in a market, it's obvious people are going to want to ask questions. You also are creating some disruption to existing business models. But in my mind, this is a structural change that will continue, and you will continue to see more capital allocated. Yes, you are trading away some liquidity. And so you're not going to see this for the full fixed income market. There are plenty of things that will continue to be done by banks. But private credit is not some sort of short-term blip. It's not adding enormous risk to the system. It is a fundamentally sound change in the system that's helping the overall financial markets. It's helping borrowers, it's helping investors.

Yes. That all makes a lot of sense. Why don't we spend a couple of minutes on another kind of mega trend out there, which is the wealth market. Enormously powerful from a growth perspective for you and many of your peers. But I do think Blackstone is still by far and away the leader. I think you have roughly 50% market share of the industry fee pool in this market. So let's spend a couple of things there. First, I'd love to get your perspective on the road map for additional product innovation. So you guys were early with BREIT and BCRED. You obviously have a product in private equity. You have one in infra. What does the makeup of this product set looks like over the next couple of years? What else are you working on that will be rolling out in the next 1 to 2 years?

Well, again, why have we had so much success? Why have we gotten to $290 billion in the wealth space? It's because we started a long time ago, 23 years ago in drawdown funds, 15 years ago in building a dedicated team, almost a decade ago with creating semi-liquids with BREIT and bringing the fees down and the quality of investing way up. And it's all performance driven. Again, you're asking investors to make a trade, you have to deliver a premium performance. You have to give them something different in terms of diversification, access to things they couldn't otherwise have. We've been very successful at that in both good times and bad. That gives me a lot of confidence. The keys to me in the market to us are that what we introduce delivers those returns, and we're not just creating products because that's what can sell, but we can have an enduring advantage. We have generally done things that are broad-based in scale because we know certain markets can go in and out of favor pricing-wise. We've made decisions over time where we've chosen, in the case of private equity and infrastructure, to sell only to qualified purchasers because the 40 Act limitations we thought would have made it harder to deliver in those asset classes, the kind of returns and scale we wanted. To your question, I think you'll see us find ways to put some of these products together, simpler solutions. You'll see us do some things in collaboration. We announced our alliance with Vanguard and Wellington. I think you'll see some of that introduced in the new year. We've done a multi-asset credit product. There are a couple of other things. I think I'm going to hold off on the announcement, just like what the theme of this year's holiday video will be. We're going to...

I'm going to try that later, but you already shut me down on this one. So...

Yes. What I would say is there is a lot of enthusiasm. But again, just like with our institutions, just like with our insurance clients, we've got to deliver performance. And so when you look at individual investors, they're probably about 1% allocated to private assets versus 1/3 for institutions. That still feels like it has a long way to run. And I think our positioning in the market, given the strength of the brand and the strength of the performance and then the breadth of the product offerings, that feels like a really, really good combination. And in Q3, we saw a doubling of inflows over last year's levels. In a better market environment, given the breadth of what we're doing, it feels pretty good, too.

Let's talk a little bit more what's going on, on the ground, I guess, today. Obviously, lots of focus on credit like we talked about earlier. It's really the first time that the growth in this private credit part of the market with wealth gets tested like we are seeing now with a lot of headlines and the barrage of headlines on this part of the market for the last couple of months now. Obviously, BCRED had a filing out this morning. Redemption picked up, not quite to 5%, but close, but also gross sales slowdown as of December 1. So what are you hearing on the ground from financial advisers, the wire house, the gatekeepers in terms of this being either a short-term reaction to the news flow or something more substantive?

Well, there's obviously been an enormous amount of noise out there around private credit, much of which we would push back with the facts. But I would point out a little differently, Alex, we've been through a couple of these tests before. In fact, we've gone north of the 5% in '22, went north of it in '23 after Silicon Valley Bank. We saw a pretty meaningful spike after Liberation Day. Whenever you get a lot of negative headlines, particularly among the individual investors, you can see a shift in sentiment. What matters ultimately, again, is performance. So in October, we produced 70 basis points of performance. We feel really good about the underlying both credit quality, we talked about the growth in the EBITDA in terms of the companies here, the low loan to value. To me, that's ultimately what is determinative here. And so as I said, you could be in an environment where you'll have several companies with defaults. The question on those things are have you marked those appropriately? Do you know how to handle it? Are you senior secured? We feel really great about what we've been doing. And by the way, on the flow side, despite relentlessly negative press, in the fourth quarter, we had $3.3 billion of gross inflows. And we still had implied $1.2 billion of net inflows. So I think, again, what matters is performance. And I think interestingly, we went through BREIT, which was a different sort of environment, obviously, a much harsher downturn in the underlying asset class, we significantly outperformed. And my confidence in that product is extraordinarily high. And so again, if we show that we can outperform the leveraged loan market, the high-yield market, an enduring premium in returns, then I think financial investors will continue to subscribe to these products. That's to me the key focus.

Great. That all makes sense. Okay. Let's talk about another important area for Blackstone, which is obviously the real estate business. We talked a little bit about that before we got on stage but clearly feels like the sentiment from some of your peers and the marketplace broadly around real estate is starting to improve. It's something you talked about as well in the past. So give us your expectations around sort of growth in your real estate franchise for the next 12 to 18 months.

Well, it's been a difficult 3.5 years, no question about it. COVID hurt the office market. You had this huge step function increase in cost of capital. So cap rates went up a bunch, values came under pressure. And investors, not surprisingly, don't feel great because they haven't had a great experience during this period of time. But when you look under the hood, the pillars of a recovery are coming closer, right? So you've seen values fall. This is definitely not your bubble asset class, that's for sure. And yet underlying demand for housing will continue, logistics for going to a resort hotel. So it's an asset class that has fallen out of favor, but has long-term strong demand profile. Supply is down almost 2/3, new starts in terms of logistics and rental housing, which takes time to play out, but is very beneficial. Cost of capital, base rates down, spreads down, borrowing costs are probably down about 40% from their wides a couple of years ago. And you're beginning to see transaction activity pick up. It can take some time, but it certainly feels like we're getting closer. And so I think for us, we have focused on these -- the picture that's coming, and we're trying to invest ahead of it. So not a surprise. We've been privatizing a bunch of REITs. We announced a commercial real estate REIT in Hawaii, Alexander & Baldwin this week for $2.3 billion. This reflects our view of real estate and what we do believe will be a coming recovery.

Great. Okay. Let's pivot from kind of the themes to maybe some of the financial KPIs for the business. Really starting with fundraising. Again, incredible year, I think, over $225 billion over the last 12 months of inflows across the franchise. As you look out into 2026, what are your early expectations for fundraising?

I think it should be a very good year. We talked about wealth, a lot of momentum there, given the introduction of new products and the success of existing products. I feel very good about that. When I think about our insurance business, again, more and more insurers are beginning to recognize to be competitive, they need this additional yield. Our open architecture model, not competing with them is a very helpful space to be and to be able to do it broadly. I think that should continue to grow. Again, I mentioned 20% growth in the last quarter. And then our institutional business, where people have always said is a mature business, it's grown 60% in the last 5 years. I think over the last 12 months, it's about half of our flows in. It's -- a number of those things are drawdown. So you send the money back, you don't get that perpetual compounding thing. But the strength of our franchise in energy transition, in Asia private equity, in secondaries, in credit, in so many areas, in real estate, in life sciences, we have so many areas where we've delivered for clients that it feels to me we will continue to have another good year. We have a good fundraising cycle ahead of us. So I would say, right now, with this kind of market backdrop, it feels pretty good.

Yes. Well, speaking of market backdrop, the outlook for realization and broadly capital markets activity has definitely been a bright spot in these conversations for the last 2 days. So you've been also pretty bullish on that for a couple of quarters. I think one of the points you made is that Blackstone's IPO pipeline is the highest it's been since 2021. Talk to us a little bit more about your expectations for realizations over the next 12 months and maybe help us frame that in some sort of a historical context because it does feel like there's a lot of pent-up demand on the exit side.

Well, we saw M&A and IPO activity basically crater during that sharp increase in rates. And it's still running today well down versus historical levels as a percent of the market cap of the stock market. And so to us, it feels natural now as you get cost of capital coming down, spreads coming down, a strong equity market, that you begin to see an IPO market that's emerging. Yes, we did three in the quarter -- in the third quarter. We have a large one in the market today. We've got an active pipeline for next year. M&A activity in the U.S., I think quarter-to-date is up almost double. And I wouldn't underestimate the power of the regulatory environment changing. And so I think the ability to have confidence that you can buy or sell a business really matters. I still think we're operating well below historic levels. This year, you had Liberation Day, the government shutdown. I think if you have smoother sailing next year with lower cost of capital and some confidence, I think you'll see a meaningful pickup. So I would be in the camp that we've sort of moved from sort of taxi to takeoff as it relates to transaction activity, the IPO market. That feels pretty good to us. And obviously, that's good for our business. It should be good for our shareholders.

Great. With a couple of minutes left on the clock, I'd love to wrap up with a couple of thoughts on evolution of the business, given the fact that you guys celebrated your 40th year anniversary this year. You've been there, I believe, for 33 years of those 40. Couple that with really the performance of the stock, and it's not just you, but the whole space obviously struggled a bit this year, coming off a phenomenal 2-year run, and I think that's important to acknowledge. But how do you think the company is evolving? If you see further points in the cycle where there's a bigger disconnect between the value and what your forward looks like, how do you think about capital management in that context? Or any other thoughts around that would be helpful.

Well, I feel great about the underlying business. We did have this 40th anniversary. We brought all our partners together around the world. When we talk about all the potential markets, all the potential growth, we feel really good. We still think alternatives, even though they've grown a lot, and it seems big, it's a $13 trillion industry. When you think about public equities and corporate fixed income, asset-backed fixed income, infrastructure, residential, commercial real estate, $300-plus trillion market out there for us potentially to invest capital into. The total business is equal to the market cap of, I don't know, four stocks in the United States today. I think there's still a lot of room to go here. And to me, the key continues to be delivering for the customers, making sure we get right these technological changes. We're able to intervene in businesses. We've got a really rigorous disciplined process, that we attract and retain amazing people, that we have an entrepreneurial spirit. I mean, Steve Schwarzman has really sort of pushed that into the firm this idea. We're constantly thinking about what we can do better. We are not a place despite our size, scale that is sitting around saying, "Hey, we're there." I described recently at our CEO conference, our Boardroom meetings. You would think we're a failing company. I mean the conversation is a relentless focus on we missed this market. This competitor has done this. I feel, for us, we have this vast expanse in front of us. The key thing is we've got to maintain the quality of our people, our integration and process. And being able to be a full-service capital solutions provider in the private markets, we can give you super low-cost investment-grade debt. We can give you more junior debt. We can give you pref equity. We can do control. We can co-invest as a minority. We can do stakes. Second -- everything across the platform, that is really powerful. And do it increasingly on a global basis. And of course, do it without a balance sheet. All the capital we're managing is third-party capital. We don't owe it back to anybody. It's not an obligation. If rates and spreads tighten, our business is to deliver returns. And so the way I feel about the business is we are in exactly the same business we've always been. Our plan is to continue to be in that business and to be excellent in it. And things come up and down in cycles and this and that. But if we continue to deliver premium returns in these different areas, our relationships and the strength of our brand, which is really, really powerful and allows us to grow without capital, if we have that, then we can expand a ton in our original institutional business and in a very profound way with insurers and individual investors. So my optimism about the future is extremely high. And then back to your earlier question, it's nice to be coming to a part of the cycle where things are starting to turn up. So the long term, we feel great about. And obviously, the short-term pickup in deal activity, that's also very good.

Great. Well, we talked about a lot of themes over the course of the day today. I was hoping you could hit on one more theme, which is your holiday video. So if you're willing to share anything with us today, that would be of great interest to...

It's -- I could tell you, but I'd have to tell you. It's basically what it is, Alex. It's so funny. We're so crazed about it because we don't want it to get out. We don't even tell our colleagues, partners. They just get their role, like show up, wear this ridiculous outfit at this time, and we're going to film you. And I will say the broader point for us is we want to be great at what we do. We demand a lot of our people, but we want it to be a human-scale place. We want to make fun of ourselves, which is what the holiday video is. We want to have a really integrated culture. It's why every Monday, we do our internal Blackstone TV, where we connect with people. It's why I do these sort of ridiculous running videos. It's all in an effort to humanize what we do for all our constituents out there. And obviously, we've got a lot more, both shareholders, investors. We have 300,000 investors these days. You're reaching a broader audience. And I couldn't be more proud of the quality of the people, what they do, how they give back. We've had a very difficult year because of what happened. We had this horrible shooting. But the pride I have in our people is immense. And so my optimism going forward is very high. But I would say the video will be cringeworthy. So please don't hold that against me.

On that note, thank you so much, Jon. Great to see you.

Thank you, all.