Transcription
Let's start the day off high level, right? You Blackstone have 13,000 pieces of real estate, 270 companies. Did I get those numbers right? All right. >> did my homework. Um, what do you see out there? What can you see in the global economy? How are you feeling going into this year? What should we know?
>> Well, I guess I'd start uh here at home and say the US economy has been a bit of a battleship. I mean, last year we had um liberation day, we had a long government shutdown, we had a lot of geopolitical concerns, and in the fourth quarter our private equity companies had 9% revenue growth. There is a little bit of softness on the consumer side, mid and lower income consumers. We see that in some of our water parks, hotels, consumer goods, but overall a pretty good picture. I would say Europe slower, definitely slower revenue growth there. But still around the world, I'd say a healthy picture despite the the inflation cycle we went through, higher rates generally, it's been it's been pretty healthy. And I would say as we look forward, it feels like the opportunity exists particularly in the US for the economy to move into a higher gear. And I say that because um I think hopefully we'll have less in the way of shocks going forward. Two, I think cost of capital is coming down. You're seeing that in rates and spread, which is obviously very helpful. And then of course, this enormous um tailwind from AI. First, this investment boom that's happening, which I'm sure we'll talk about, physical, you know, energy, digital infrastructure, and then the productivity boom that I think will come behind that. So, I think the outlook there there obviously there always pockets, there are risks, but overall I think the picture economically looks pretty darn good.
>> Yeah.
>> What about someone asked us last night, is this the year of the IPO? Like how are you feeling about deals, about your portfolio? I think people in private equity have been asked for a long time, when are you guys going to get out of some of this stuff?
>> Well, we said last week during earnings that we thought the deal business had reached escape velocity. And that's really how we're feeling today. Um it reminds me a little bit of that period back in 2013 and 14. You know, remember back then we had the GFC and then we had it took four or five years for markets to sort of find their footing again and companies went public. We did a bunch back in that period of time. Um Hilton was the biggest. And and I think today feels very similar to us. Um you know, in the fourth quarter both M&A activity in the US and I would say um IPO activity were up two and a half fold year-on-year. We did this Medline IPO, which was the largest sponsor-backed IPO of all time at over $7 billion. It traded exceptionally well, which is an important sign. And then we have a pretty long pipeline in the US and in some other geographies around the world. So, I do think 2026 should be the year of the IPO. And these things are cyclical. I mean, if you look at IPO volumes as a percentage of the market cap out there, of the stock market, we've been well below that now for four years. And inevitably, like a flotation device coming back to service the surface, that's the sort of thing that seems to be happening. So, yeah, I I I think the strength of the IPO market, earnings growth, and the success of some of these early IPOs, I think will lead to more in the coming year for sure.
>> What about on the deal side? What what do you think is possible for private equity in buying things? Like you you got any big scoops for me right now?
>> Yeah, I'm I'm here to tell you about all the public to privates we're working on. I I would say uh again, going back to my earlier comments, cost of capital is really important. If you think about what happened was back in 2021, early part of '22, we we had taken rates down basically to zero, spreads got very tight, and so you could borrow lots of money at very low cost. Equity markets were strong, you know, the flywheel was going very fast. When rates get taken up to 5 and 1/2% in the US and up pretty much everywhere around the world significantly, and then spreads gapped out, the flywheel stopped. Now we've been watching as inflation has been coming down. Cost of capital, central banks can ease, spreads have tightened. If you look today, high yield spreads are close to all-time tights, investment grade spreads are the lowest level since 1998. And so if you want to go and buy a business today, the availability of capital has grown. By the way, commercial mortgage-backed securities were up 40% last year year-on-year. So the availability of capital has gone up, and the cost of that capital's gone down. And that enables more transactions to happen, and people are obviously feeling pretty good in many sectors about the economy and the outlook, and that confidence level is important. The other thing I'd point to is the regulatory environment for M&A is much more favorable than it was.
>> That's for sure.
>> And so it's very hard to do a transaction to buy your business and create human issues, what's going to happen with management team if I don't know the deal's going to get done. Plus there's big uncertainty and financial costs. Now we've moved back to I think a more normalized environment for M&A reviews, and that's giving companies and CEOs and private equity firms more confidence. So the combination of the economic backdrop, the market backdrop, and the regulatory backdrop should make for a very good year for M&A.
>> I'm going to slide this question in here. What can you tell us you know about Kevin Warsh and what should he be doing at the Fed?
>> Uh well, it's definitely not my job to tell him what to do. Um what I'd say about Kevin is I think he was an outstanding choice. I've known him now probably a couple decades back when he was a Fed governor. Um and what struck me about Kevin going back then, particularly during the financial crisis, was how intellectually curious he was. He wanted to understand what was happening on the ground. He was very analytical, thoughtful, smart. Obviously, continues to be all of those things. And I think it's an important sign for the US economy, for markets around the world to have somebody of this kind of um credibility in that seat. I think it's very helpful. So, I think that's quite positive. In terms of um where the Fed goes from here, I think the data will be helpful. I I think one of the challenges is that we still use pretty dated methodology to look at things like rental housing cost, shelter costs. You know, we see across our large portfolio rental housing costs are probably in the 1 to 1.5% range. Yet, the Fed data's still at 3.2% and that's a 35% weighting in CPI. If you just made that adjustment, the Fed would be much closer to target today. And I also see in the labor market, it's less tight than it was a year ago. Hourly wages are probably 40-50 basis points down. So, I do think that'll help and I think the AI will help on the productivity front. And so, I do think you could have strong growth at the same time inflation continuing to ease. So, I think there'll be room. I think he will be data dependent. Um but I do think the data will allow the Fed to bring rates down over time. And again, that'll be be for consumers, for businesses and markets.
>> Okay. All right. All right. So, the last 24 hours in talking to people out here in the audience, I've heard two topics they want to hear from you a bunch. Okay. The first is private credit. Let's dive in. Like, what is your current feeling? Like, is private credit healthy right now? How do you feel?
>> Yes, private credit is healthy. What I would say is the difference between the headlines and the reality we see in our portfolio is quite striking. And so,
>> Not our headlines.
>> Not yours. Not one of yours. But, what what I'd say is, you know, at its core, what what private credit is is basically bringing investors, could be individuals, institutions, insurance companies, directly up to borrowers. Think about Amazon delivering goods directly to a consumer as opposed to doing it through the traditional bricks and mortar. And that doesn't involve greater risk. What it does is, in many cases, it eliminates the origination, the securitization, and distribution costs. So, when we look at our portfolio, let's say in direct lending, non-investment grade corporate lending, you know, what we see is average loan to values that were made were less than 45%. So, a lot of equity subordinate to these these loans. We see at the same time cost of debt capital has come down because these are mostly floating rate loans. So, Fed lowering rates 175 basis points very helpful. And at the companies themselves, what we see is earnings growth, cash flow growth in high single digits. And so, the credit metrics look very healthy. Now, that being said, will there be individual companies that face challenges? Yes. It's not investment grade lending. In historically in the leveraged loan and high yield market, there've been 3% default rates annually. So, that's not the question. The key is, will private credit produce a premium to what you can get in liquid markets non-investment grade? And we've done that for 20 years. I believe we will continue to do that. Partially because of our credit selection, but also because of this direct-to-customer model. So, that would be one thing. The other thing I would just add is the fastest growing area in private credit today is on the investment grade side. And so, if you think about an insurance company today earning just 71 basis points on investment grade liquid credit, if you can earn as our clients did in the last year, 180 basis point premium, because you're able to make that loan to an energy project, to digital infrastructure, to transportation, to consumer finance, but you can do that on a direct basis, and yet the rating is the same or higher, that is quite beneficial. So, this is a market evolution that I think will continue. We'll continue to have critical role for banks in the financial system, and lots and lots of portfolios will need a fair amount of liquidity, but just as we saw private markets on the equity side take share over time, I think we will continue to see private credit grow. It started in non-investment grade, but it is going to grow substantially on the investment grade side.
>> Do you think so so to the headlines that we've seen, right? We've seen we've seen a bunch of kind of blow-ups basically is what I think a a kind way to rephrase that. How like what does worry you? What what would worry you?
>> So, so interestingly, what started all this were two credits, First Brand and Tricolor, that were originated and syndicated by banks, which I thought was interesting, became the the trigger for a focus on private credit. I I think the risk in credit is the same risk that exists in equity and the world is focusing on which is this disruption risk. That that the pace of change is accelerating. And what we're seeing and we saw in the last couple weeks the announcement of JP Morgan saying, "I don't need proxy advisors anymore. I'm going to use the AI." Or Lemonade on the insurance front came out and said, "If you use your Tesla self-driving AI feature, I'm going to lower your rates by 50%." And so you start to say, "Well, what does that mean for a collision repair? What does that mean for auto insurance? What's going to happen to all sorts of rules-based businesses? What's going to happen um in the legal space?" Anthropic launched a tool today in that area. What's going to happen in accounting, in healthcare, claims processing? And we remember in the past what happened to the yellow pages or what happened to taxi cab medallions when technology changed. But this is now going to be moving much faster. But I don't view this as a private credit or liquid credit issue. This is about the change that's happening in the economy. And so there's so much focus today, of course, on bubbles. And obviously, when you have this kind of transformative change like you did with electricity, like you did you know, with the internet, the railroad, any of these things, there's going to be misallocations of capital. But the bigger issue to me is the pace of change and what does it mean for existing assets and existing businesses? And if you said, "What's to focus on?" And it's on the equity side and the debt side, it's this rapid pace of change.
>> Okay. So, where are you focusing Blackstone money? Let's talk a little bit about AI. Data centers.
>> So, so we have been the biggest investor in the infrastructure around it. So, we become the biggest investor in data centers, not only in the US, but around the world, in Europe and Asia. We're the biggest supplier today of private capital to the utility industry, which needs to grow its capacity very significantly. We become the most active investor in things like electrical equipment and related services. These are all the picks and shovels that are making the AI a reality. And to us, you don't necessarily have to know who the winners and losers are going to be. You know that the data centers, the autonomous vehicles, the robots, they're all going to plug into the wall. And there's going to be a lot of need for digital infrastructure. At the same time, we are also investing in some of the large language model companies, some of the application software companies that sit on top, because I think there will be an enormous amount of value, but that is obviously riskier. It's hard to pick the winners and losers. But I think as an investor, you want to be thinking about this in almost everything you're doing. Now, we own Jersey Mike's. That's less at risk. We own apartment complexes. But I think how to position your portfolio, for us, owning the infrastructure, being very thoughtful on playing this stuff directly, and then spending lots of time on our investment committee memos on new deals, but also existing portfolio, where is the disruption going to happen? And by the way, it's not static. Because you could be an incumbent software company that's got a great position that is the system of record. And maybe you do face risk from an AI disruptor. On the other hand, you have the customer base. And if you sort of AI yourself, you can make your business even better. And so, I would say infusing this sort of AI approach to everything we're doing, how industries, the economy's going to shift, and trying to anticipate this and we do not have all the answers for sure, but this is top of the page for us.
>> Um, all right, so tell us tease us up to talk about uh, both your running on LinkedIn and uh, going into retail allocation. We've got a lot of wealth management people here. What you've been a private equity firm for 40 years. Why do you suddenly want the masses?
>> Well, I guess I'd start with um, it's not so suddenly for us. Uh, we we we started we raised our first product in wealth in 2002. So it's almost been a quarter century. We started with our traditional closed end drawdown funds. We got into what we call these semi liquid funds, perpetual funds with BREIT almost a decade ago. Um, so this has been a long-term focus for us and we had a simple premise which was institutional investors allocate a third of their capital to privates and yet individuals who have very similar time frames, they're thinking about their retirement or passing the sound to next generation have low allocations, 1 to 2%. And we said, well, what are the barriers to this? And what we determined ultimately was we needed better user-friendly structures and there needed to be higher quality cuz traditionally in wealth products people were charging 10 12 points up front, acquisition disposition fees, they weren't focused on the customer experience, they didn't have experienced investment teams doing this and we said, what if we brought the same quality we bring to institutional to individual investors at comparable cost? Would they respond well? And the answer to that has been yes. And so today we have $300 of AUM, almost a quarter of our capital in this area. But the key thing is it's all about returns. It's no different with institutions or insurance companies. We've got to deliver for those customers. They've got to have a good experience. If they do, they'll allocate more to that product. They'll try other things we do. So the basic premise is we've got a capability to see what's happening in the world and we have the ability to add value to companies, to real estate, to infrastructure and we can use our sourcing, execution, value add for institutions, but we can also do it for individuals, and we can create products that work for them. And to your question on LinkedIn running videos, it does change when you go from having a couple hundred clients to hundreds of thousands of clients. And we found that if we're able to communicate directly with them about what we're seeing in the world, what's important to us, that that's a helpful tool. And there's a humanizing of this. There's always this sense in finance that people I don't know they're somehow different, but we're like everybody else. We're running around. We're getting up early. We're forgetting our key in the room or what our room number is, and we're we're we're intellectually curious. We want to learn, and we want to do the best job for them. And so it's proven to be a a powerful tool.
>> How far do you actually run?
>> During the week, not that far. Uh I did it this morning. It was 3 miles. It's fine. Um and sometimes you're waking up in city and or in a different city or time zone. It's just good to acclimate yourself. And um I don't know. It's it's been a fun thing. At some point, as I say, you'll jump the shark and say enough, but for now I we found it helpful.
>> All right. I want to go back real quick to the actual question, which is returns. So
>> Yes.
>> how do you taking in retail money causes you need to allocate it faster and differently, right? It's kind of a different muscle, I would argue, than than institutional money.
>> Yeah, I would say what's different about it, it's different than the drawdown funds because the capital's coming in on a monthly basis and you have to deploy it. I think what's really important is you have to have very large platforms to deploy this capital. Because if you're pretty narrow in what you do, it's hard. So when we look at our product design in real estate or credit, infrastructure, private equity, we've tried to make the deal funnel pretty large. And we have lots of strategies that produce excess flow that goes beyond what we can do in those strategies. Plus we just see a lot of things given the scale of our firm. And so I do think you need a pretty robust platform to do this. And then I'd also say what's different about it is valuation because you're bringing investors, you've got to be really good and timely in terms of valuing things fairly. That's really important. Your legal process, your allocation process. So we think we've got to be best in class in every way in this. And if we do that just like in the institutional big business, we can be as we are today the largest player.
>> Last slide and one more cuz it's something people have been asking me which is what about uh the risk of retail sort of trying to withdraw. Like what did you learn from what happened with BREIT or
>> Well,
>> you know, I think the key on these products is they're semi-liquid. So what we learned on BREIT was we did a actually a very good job designing and managing the product. Which is we said these will have a cap at 5% because we don't want investors who stay in to have to have forced liquidations and then be harmed. And so by doing that and then by also valuing things appropriately, when the market turned down in real estate, we sold $35 billion of assets and we were able in that one tough year to get the they they hit the gates, but we would still get investors their capital back basically within 4 months. And so the product worked the investors have had a terrific experience last year B REIT was up 8.1% since inception now 9 plus years it's beaten the public markets by 60% annualized that's what it is but the customers do need to understand that it is different than liquid asset but we're not talking about taking 100% of people's portfolios and so I think having a portion in semi-liquid assets makes a lot of sense but again who does this how they deploy the capital in that case we made a great decision to put in QTS the largest data center business in the US which allowed us to power through a very difficult environment the geographies places like Florida and Texas were very important to us so who your manager is how they run the products matter but I do think this is important as individuals seek to diversify and remember today the S&P 500 as we know 40% of it is 10 companies and there are 90% of of companies with more than 100 million dollars of revenue that are still private we also have most of the real estate most of the infrastructure that's private private credit growing so getting exposure to this and understanding it's not going to be as liquid as public equities and fixed income that's really important but I think the key will be again do we provide diversification benefits do we provide a return premium if we do that I think this grows a lot okay