Blackstone President and Chief Operating Officer Jonathan Gray on Disruption: Play the Right Themes

[Music] hi i'm mike cypress equity analyst covering brokers and asset managers for morgan stanley research i'm excited to be joined here today by john gray president and chief operating officer of blackstone a diversified alternative asset manager with nearly 620 billion of client capital under management john has been with blackstone for his entire career almost 30 years and helped guide the firm through a record fourth quarter in 2020 the single best quarter in the firm's 35-year history john it's a pleasure to be speaking with you here today mike it is great to be here morgan stanley has been and continues to be a great partner to our firm so john i wanted to talk with you about investing during disruption as the pace of change accelerates for many investors it can be hard to get a beat on what's a fad and what the future may hold so with things changing so rapidly how do you look at the landscape and see what disruptions will stick well i try to think about it simply which is what trends have emerged that are fundamentally better that the use case is wow getting that good delivered to me within two hours as opposed to me having to drive 10 miles to a store wait in line pick it out that's better i think that will stay on the other hand if you look at cooking at home which has been on a downward trend probably for a hundred years and now has seen this enormous spike upward that probably is not now maybe some people fall in love with cooking again but in general i think we're going to revert to the way life was for a bunch of different reasons and so i think separating that sort of wheat from the chaff what's temporary what's permanent is really important what's cyclical what's secular will people get back on planes again will they travel again those experiences will come back but i would go back to sort of the basic use case what feels better who feels like the winner and if that's the case then i think the trends are likely to continue blackstone is unique from many other asset managers in that you take a more thematic approach to investing how would you say that process has evolved and how does that give you an edge the danger i think in investing is you tend to focus on should i pay 97 99 102 for an asset and yet when we look back in the fullness of time that is not really the key decision we we say when we focus too much on the house as opposed to the neighborhood we're losing the force from the trees the best example of this would be in our real estate business if you went back a decade ago and bought a shopping center and you did the best deal possible and you bought it 10 percent cheaper than market and i went out and i bought a last mile logistics a warehouse just across the bridge in new jersey and i paid 10 percent more than anybody back then it wouldn't have mattered right the shopping center today unfortunately is worth materially less that last mile logistics assets probably worth triple what it was back then and so getting these big themes right it doesn't mean you can pay any price but it's really important to sort of fish in the right location and so what we're trying to do is step back and say what are those big themes that are out there we talked about e-commerce but basically broadly speaking everything's moving online how can i benefit from that and not necessarily by buying the companies themselves but maybe things that are one derivative off companies that provide supply chains to that companies that provide compliance there's all sorts of things in that ecosystem similarly we're seeing massive transition in energy we're going from a world that was hydrocarbon driven to a green world we can debate is it going to take 20 years 30 years 40 years it's heading in that direction so how can i be part of wind and water and solar battery power how can i be part of charging stations and energy infrastructure there's lots of opportunity what are the different parts of that supply chain and so again it's taking a top-down approach saying these are big thematic areas that we like and then going out there and bottoms up analyzing opportunities to take advantage of those themes and john how is that thematic approach being put to work here in in 2021 i think as we get out of this pandemic sometime over the summer or early fall the pay down of credit card debt the enormous increase in savings and the global cabin fever is going to unleash an enormous amount of spending on automobiles on homes on durable goods and on travel like you've never seen before and as a result i think you'll see um pressure on commodity prices i think you'll see upward pressure on wages i think people will be talking more about inflation and i think the long end of the curve could move up materially so what does that mean i think you want to invest hotels transportation infrastructure rail airports roads ports entertainment places we own a big water park business people are going to get out there and so travel is something that's been a mega trend now for a long time it's going to revert it's been interrupted but not permanently so what we're trying to do is find again something one derivative off so we believe in e-commerce we've continued to be big believers in global logistics that is our number one theme at the firm we bought a hundred billion dollars worth of warehouses increasingly what we call the last mile that's really an area that we like a lot we love content so movies tv shows video games music we're looking at that area in a bunch of direct ways by investing in folks who make content advertising firms that that do online video game advertising and then in the physical world buying studio space that's an area one of the hallmarks of blackstone is its ability to innovate by extending into new product sets and finding applications for new customers can you talk about your process around that how do you identify and approach these new verticals so innovation is really built into our dna we're constantly talking about how can we serve our customers in new and different ways how can we deliver great returns to them and so everything we do starts from that premise and what it's enabled us to do is say look we do private equity in the u.s we can do it in europe we can do it in asia we do uh secondaries in private equity we can do it in real estate we can do it in infrastructure and so building on those adjacencies has been a powerful tool for innovation and then there are new areas i would say life sciences would be another big area which is we're seeing the intersection of big data technology and genomics coming together to do precision medicine which is the computers are going to tell us how everyone's going to be treated it's going to require a whole new range of drugs and cocktails of drugs and so forth and that's going to create enormous demand and again what does that mean for us it means we're investing in life science companies that develop are developing phase 3 trial drugs but we're also investing in companies that do cold storage and bring these therapies to patients we're investing in companies in private equity that are commercializing these drugs and in real estate we've become one of the biggest owners in the world of life science office buildings so big thematic investing has helped us i would just add that it's not always technology some of the themes are aging populations you can play that around the world in japan we've done a bunch around pharmaceuticals and over-the-counter drugs you can see what's happening in india and china in rising middle classes and what that means and servicing them by investing in education and consumer finance similarly in infrastructure insurance we see a bunch of areas where we can continue to innovate and expand can you talk about how you're innovating with new strategies such as be read and core plus to meet these challenges so our our clients really were the ones who got us into this perpetual capital in real estate we have always been in the real estate private equity business going back now almost 30 years and they came to us really that's probably six or seven years ago and said hey you know we love what you do here what we call buy it fix it sell it but could you buy more stabilized real estate more yield oriented longer term hold period we have even more capital for that line of business and we started going into it we started in the u.s with some separate accounts then we created an open-ended u.s fund then a fund in europe then in asia now one in life sciences and that institutional business is now close to 50 billion dollars and then separately the same thought came to us really in the retail world historically private reits had gotten a bad name customers were charged a lot the investors deploying the capital didn't have much experience and the outcomes were bad and we said what if we brought sort of the blackstone quality our experience in real estate our ability to add value to assets where we focus the key sectors and charge basically what we do institutional clients and did this again in a more yield oriented open-ended vehicle that led to the creation of blackstone real estate income trust which today has grown to more than 20 billion dollars itself and so i see it in a low rate environment more capital continuing to migrate to these areas and it's not just in real estate we're doing it today in private credit as well so we see it as a real win win and a place where we can grow quite a bit so there's a lot of excitement in the markets today some making comparisons to the late 90s can you compare what we're seeing in the markets today to your experience then and what lessons did you learn that you're applying in today's environment yeah i it's funny in terms of lessons i remember buying some warehouses actually and office buildings in silicon valley uh at prices in 1999 that made no sense relative to the physical value and we got caught up i was young and i remember we bought a company a building the tenant was gobosh.com go big or stay home.com and i should have stayed home and and you know sort of the traditional metrics had been thrown out the window what was interesting back then is the market was right that the internet was going to change the world but the valuations became unglued from the company's value from the company values and we're seeing a bit of that today i think the areas where that's obviously most pronounced are companies that don't produce positive cash flow and are trading on very high multiples of revenues because the risk is high some of them will turn out to be great many of them may not and so i do think you want to be a bit cautious when businesses are no longer valued on traditional metrics they're valued sort of on momentum i think it is a fraught time i think the support from the market continues from these very accommodated policies more stimulus coming and the reopening and and you're trying to balance that against very high prices and the risk that the long end of the curve moves up i would just be i'd say in public markets a little more cautious on those the most speculative companies out there so john you've never worked anywhere else besides blackstone how's that formed your view on culture within blackstone i benefited from an environment that's been a real meritocracy i i benefited from an environment that has really constantly strived for excellence constantly pushed for growth and innovation and been a place where people have been nice to each other and want to work together i think that's really important in an organization and so when i got to this seat three plus years ago my goal was how can i do the same thing how do i make sure the environment here is as open for as many people creates as much opportunity on the hiring front we have the widest funnel possible so we're drawing from the broadest community as diverse talent as possible when they come in the door there's a real sense of meritocracy that we don't as we grow become a place that's bureaucratic where it's based on your time served know the most talented people can move up and that we're growing as a firm because when we grow new people can go to run different divisions and have new experiences and ultimately i also think it's important to have some fun along the way so we do our holiday videos and our photo contests and all this because it's a human place and we spend a lot of time here so creating an environment where people want to work where they're proud to work where they want to win that's a really special place that's what we're trying to do blackstone is such an iconic brand within asset management how do you view your role as a steward of its transformation here in 2021 it speaks to sort of who we are that our job is to manage capital deliver strong returns operate with high integrity that's sort of the essence of who we are and everything we do has to be sort of in furtherance of that mission so we can't say things and act a different way and what that means is at times there are businesses we can't go into there are people we can't partner with we do have to pass up some opportunities we're really focused on how we can deliver what we've promised and and i think if we do that and we take a long-term approach to everything we do then we'll it'll pay great benefits and it's not just the investment returns it's how we communicate how we report how we do compliance it's just i want everything to be the absolute best and so if we do that then we'll burnish the reputation the brand will be stronger people will have more confidence the virtuous cycle will continue john thanks so much for taking the time to speak with us today mike thanks so much for having me you

Channel: Morgan Stanley

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Length: 15min 13sec (913 seconds)

Published: Mon Mar 15 2021