If you think about the development of a successful company, there's kind of an S-curve. It starts off small and entrepreneurial. Then there's this kind of escalation where you create a lot of value and a lot of size.

People know Blackstone today, a trillion dollars in AUM. It did not look anything like that when you joined.

Running an investment organization like Blackstone, I think you almost have to be a really good investor. If you're going to catch the signals early, they're never obvious. By the time they're obvious, it's priced in.

You led the series A into Costco. Charlie Munger was still on the board and you guys served together for 30 years. What did you learn?

Focus, focus, focus. Flawless execution of details. Build for the long term. Everybody that I spoke with literally attribute the success that they've had in their careers to you. If a young person came to you today, what would you tell them about building a career?

Um, Tony, thank you so much for being here.

You're very welcome, David.

You joined uh DJ as an investment banking associate in 1975. I think just after business school. Maybe give us a reminder of what the shape of that business looked like at the time.

Well, if I'd known what I was doing, I probably wouldn't have joined DJ. It was, it was nothing, honestly. It was a, it was a sub-major firm or a sub-sub-major firm as they used to say in those days. So, there were at least a 100 firms bigger than it was. We had an investment banking team of five.

Wow.

We hadn't done a financing or a merger in two years. So, we hadn't done any business in two years.

Oh wow.

But you know, I liked the people. I liked the unstructured nature of it. I decided that, um, I'd give it a shot.

And I mean, you ultimately stayed for, you know, 25 years, I believe, uh, which was a pretty long tenure generally, but uh, certainly for for Wall Street at the time.

I guess. What were some of the kind of, you know, key inflection points in that journey maybe that led to your success or kind of the evolution of the business, you know, which grew obviously massively during your tenure?

Well, the, I mean, the good part of getting in on the ground floor is if, if it starts to work, you get pulled up with the growth of the organization and you get responsibilities earlier than you deserve them, and that kind of feeds on itself. Your learning accelerates, everything accelerates, your confidence accelerates, maybe to an excess, but it feels really good and your expectations are low. So when you start winning business, it's always a positive surprise. If you lose, well, that's that's par for the course. But so you, you got a, you got a very positive feedback loop. And, you know, we ran DJ, ultimately was renowned for its culture. People just loved working there.

And that created a really nice environment and you spent so much of your career or your life in your office, that was fantastic.

And, um, you know, we grew DJ from essentially nothing to the fifth largest securities firm. We grew it at over 15% for 25 consecutive years. That's kind of like one of your tech companies. Um, and, and it was, and I, and I, and I, and I love that. And every few years the business changed, changed, and my opportunity set changed radically.

The big turning point I would say was 1980 when KKR did an LBO for Hudai Industries.

The first big public company that went, actually, was taken private. And I thought, wow, you can buy these huge companies with almost all debt.

Mhm.

And it struck me that DJ at the time was competing with dozens of other firms that had more of everything than we did.

More bankers, more clients, more of a track record, more capital, more distribution. There was nothing we had that should win.

So that struck me as a way to kind of end-run. They weren't really doing it themselves. It was a, it was a new sector. We could buy clients we couldn't actually win competitively and then do all their investment banking business.

And that really fed on itself out of the, we built a, we built a private equity business. I think our first fund had a 90% IRR. Those days it was easier because prices were lower, companies were more undermanaged.

And essentially you could get, you could borrow a 100% of the purchase price.

Um, so just by rolling your fees, you could kind of own the company. And then that drove, then we had to, could and had to build a high-yield business and and other debt businesses. We, we, a lot of those were our biggest IPOs. One thing led to another. So we built the whole investment banking business.

Cheek by jowl was the principal business. So it was, in essence, it was a true merchant bank.

There was no reason really that a KKR or a Forstmann Little, that were the big players back then, should ever have existed. Your old firm Goldman should have beaten them.

Yep.

But the big firms were ambivalent about this business. They were ambivalent because it wasn't quite an agency business.

Yep.

They were all, there were old-line bankers that didn't understand it and didn't actually want to understand it, really. They just didn't want their clients to complain about competing with something that the firm bought.

Right. And so, so that institutional ambivalence gave us a huge runway that we just plowed through and, um, and it, you know, it became a magic synergy between the investment banking and the merchant banking and ultimately we built funds of funds and real estate businesses, venture capital. We had a business back then called Sprout, which was one of the big three back, back in the '70s, gone now.

Yeah.

And, and I want to dig into the merchant banking business in a bit. You know, one of the folks that, you know, I spoke to, kind of in, in preparing for this conversation, was was Bennett Goodman. You've had a long, you know, history with and he, he told me a funny story of you recruiting him when he was, I think, at Drexel at the time.

Right?

And, you know, you know, Mike Milken was sort of at the top of the p, top of the power chain, you know, in terms of like the, you know, the junk bond ecosystem and kind of the growth of the private equity world. And he said he asked you, you know, what, what makes you think you can compete with with Drexel? And, and you gave an amazing answer, or at least his recollection. I'm curious if you remember that conversation and what you said.

I, I don't. What did he say? He basically said because he said you had the whole theory for why Drexel's business model was flawed was basically that, like, you know, all they had to do was sort of, um, say that they had high confidence that they could raise the capital, and you had a very different point of view that you were going to actually have dedicated pools of capital. You were going to start effectively a bridge fund.

Bridge fund, right?

And Bennett, I think, had said, "Okay, well, so these are like, you know, $250 million, $500 million financings." Like, how big's your balance sheet? And you're like, "I don't know, 300 million bucks." And he's like, "Okay, how does that work?" You're like, "Well,

we were owned by Equitable, you know, which I think was or controlled by Equitable, which was the one of the biggest life insurance companies." And it was just, this is something I've heard from a lot of people, but like the confidence that you had, go, and the confidence that you instilled in others to go compete against people who are far better capitalized, had much bigger businesses, you know, he would argue drove a lot of the firm's success. I'm just curious if you could talk through kind of that dynamic, you know, in the '80s.

Yeah. Well, of course, back then Drexel was the big gorilla and we were second in high-yield. We were more of a client than a threat to Drexel at the time.

Okay.

Because of our, because of our principal business.

Yep.

Drexel had the high-yield, the high, the highly confident letter. If we said we were highly confident, people would say, "Well, so what?"

Sure.

"You don't matter, right?"

So, we created this bridge fund and we, we turned it, we turned it heavily. We, we bet the, we bet the fund and we bet the firm on every bridge loan and ultimately that lack of capital became an Achilles' heel. But, um, we had a remarkable stretch of making the right credit assessments and the right market assessments. So every time we got it, we would win the business and we would have the distribution because we were often controlling the issuer. We could put a little extra vig in the interest rate.

So we became known as as the distributor of high-yield that people should buy on the issue.

Because we'd price it to trade up.

With debt, it doesn't have to trade up much. Which is not like equities.

Sure.

It doesn't have to trade up much to be juicy. So we used that and we developed quite a following. And then when Drexel went under, um, the bigger firms were also ambivalent about high-yield. It had a taint, especially when Drexel went under.

And so we were, we were sitting there in second place and we, we just inherited the world in that sense and it became the most profitable part of of Wall Street. We, we accounted for all 40% of all trading volume in high-yield for 12 years. It was a huge, Drexel's going under was a huge boost to our banking business. It didn't really help our, our principal business much, but it was a huge boost to our trading.

You were able to recruit like real talent from from Drexel.

We were, we were. Ken Mullis was a, a big one and, and Bennett was a, was huge. And although Ben was only an associate at the time, but,

but I always believe in young talent, great young talent and and unleash them. So that's always served me well, uh, throughout my career to.

Totally. And that, that has definitely shined through in a, a lot of my conversations. Um, yeah, I mean, maybe just kind of talk through the inception of the, of the merchant banking, you know, kind of platform and, you know, how that grew, ultimately, I think it became one of the largest or the largest in the world at the time.

Right. Well, again, KKR does that Huda deal back in 1980 and I said, "Wow, this is something we can do. We don't even have to have a client. We're the client, in a way."

And so I went to the firm and I said, "We should do this." As I was running M&A at the time, which in and of itself was some kind of distortion of reality because I was like 30, maybe not 30, 29.

Um, and they said, they said, "Go back, go back to work with you. We have a principal business called Sprout, the venture capital, okay? And they, you know, they know how to buy things and you know how to advise." So go back to advising.

Y. And I sent them a few deals over the next year or so and they said, "No, that doesn't work." And then someone else would do it and make a lot of money. And I kept going to the firm and saying, "This is ridiculous. These guys don't know how to get out of their way."

Um, so ultimately they gave me the responsibility and we started off with a landmark deal. I think it was the third biggest LBO ever called. We bought the retailing subsidiaries from Household International. We ended up with Vans and Ben Franklin, um, TGI Fridays.

And, uh, Coast to Coast Hardware Stores.

And we sliced and diced and sold them all. And we closed. We closed and we put up a couple hundred million equity. And the day after closing, we pulled out $400 million or some, some huge number because we sold the discount business to another discounter and ended up essentially owning a great grocery store in Southern California called Vans for free.

Yep. I grew up going to Vans, San, Southern California. And around that, we did massive amounts of high-yield and one thing and another and that put us on the map. So, and, and led to us raising a fund and it was a very high return fund. So that then we got a lot of follow-ons, but we were, we were pretty aggressive about starting new businesses. We, we started a secondaries business, a fund-of-funds business, real estate, as I mentioned, all these things and they all pretty much all worked. The, the private markets in those days was not as competitive.

And, um, and prices, prices were lower as a multiple of EBITDA and whatnot, and, and companies were asset-heavy, so there, there was a lot to work with there.

Yep.

And that, and we built that business. When we, when we sold DJ to to Credit Suisse, it was about a 29 billion AUM business.

Um, Blackstone at the time was high teens. So, just to put that in context.

Um, and so that, that, that was a key asset. Once it got put into a Swiss bank, they had all of the institutional issues.

Right.

And the lack of commitment to the principal business that all the other big firms had. So it kind of started to waste away, but.

And what, and what was the kind of core motivation to sell, uh, DJ to Credit Suisse? Was there some like a macro reason or just good timing? I'm just curious.

I think there were macro and micro reasons. Um, DJ had had a hell of a run, as I mentioned. Um, and this was 2000, and honestly, I looked around and said, "Wow, the market's at some kind of peak."

Um, and at the same time, the industry was changing. Uh, Glass-Steagall was coming down. So, the banks were coming in with very deep capital pockets. Uh, regulations were changing about how closely research, which was DJ's strength, could work with investment banking.

Yes, sir.

Um, markets were changing. We'd gone from, uh, we'd gone from negotiated rates to very low commission rates and so the big firms were essentially doing the cash business on a break-even basis to make money on the derivatives. We didn't have a derivatives business and we didn't have the technology to build one.

Interesting.

Um, and then the, our success in, in, in high-yield and, and, and private equity meant we were running out of balance sheet. Our bridge fund was $1 billion, and all of a sudden you were doing $1 billion bridge loans. So you can do one deal at a time and if one mistake and you're out of business because a hundred million of that was ours at the bottom, by the way.

Which was 40% of our equity or something. So, so it just seemed to me like everything looked great right then.

But was unsustainable.

So, uh, and, and I tried to push the management, uh, I was number two, but I tried to push the CEO to kind of like invest in the future a little bit, but it's, he didn't really want to, honestly, and, and it would have meant, meant some tough years for earnings. So, um, we decided to sell the company. And I, I'd say, I think in retrospect, a lot of people blame me for that decision, for pulling the rug out from them because because working at DJ had a little bit of a, of a, um, you know, kumbaya feel to it that people still talk about. They still get together twice a year.

That's amazing.

And, and, and pine over those days.

Um,

not so much Swiss Bank. We sold it for 14 billion of cash and two or three years later, Morgan Stanley sold for eight.

Oh wow.

So I would say our timing was, if you're going to exit because you don't have a winning hand.

The timing was really good.

Totally.

Uh, now that it happened to be, it happened to be a, essentially a merger of equals, but it was.

That's, that's never pretty.

Yep.

Especially when you have two firms of such different cultures.

Totally. One of my favorite fun facts, uh, about your time at DLJ and, you know, we're sitting in a venture capital office, was that you, you led the series A into Costco.

In the 1980s.

Uh,

I have to hear more about that story. You know.

Starbucks too, by the way.

Is that right?

Yeah.

Oh wow.

I mean, a few others. They weren't all that successful.

That's amazing. You might be the best, uh, retail venture capitalist of all time. Um, I guess how did you meet, you know, Jim Sagal and Jeff Broman and then ultimately, like, what did you see in them at at that time?

Well, they walked in, they walked in, unknown to me, and said, "Gee, we have, we have what we think is a really interesting opportunity." Uh, there was one unit like that called Price Club. It had opened in San Diego.

That's right. Yep. Where, where Jeff had been the number two, or sorry, Jim had been the number two, uh, there, and Jeff recruited him to come start Costco and open the same thing in the Pacific Northwest.

Yep.

Um, there was a research report from a Goldman named Joe Ellis that sort of laid out the business model, and it was very, very powerful and elegant.

Um, and so, and it was proven in one case, and, and the, the Pacific Northwest was a very good market, very affluent, and very good market. Jim was one of the best executives I've ever met. May, maybe the best. He's not, he's driven. He, he can, he can, he's excellent on the smallest details of execution, but also the biggest principles. He knows exactly, he, you know, he never compromises. He never does something that's expedient. It's always about serving the customer and driving the competitive advantage to where no one else can can go.

Totally.

Just relentless about that and incredible standards of excellence and focus, focus, focus. Um, and, you know, the guy, the guy traveled 225 days a year, you know, as a CEO.

Totally.

And was at every opening, knew the price of every item in the store. And so, you can't meet a guy like that who's a total force of nature and not be blown away. At the same time, he was coupled with Jeff Broman, who's a clever lawyer, real estate lawyer, and also owns some retailers up in Seattle. He really knew that market.

And the, the, the economic model of, of the store was so powerful that it was compelling. I thought.

Totally.

And, and you're not like betting on a new technology. Is the market going to embrace it or is it going to work? Because there was,

it was pretty prosaic, and you're someone like even me, I could understand it, but also there was a working model.

Yep. So, we did that and then, and it, it was one of the all-time great investments. I have to say, one thing I learned is a lot of people I think hold things too long. I probably sell too early.

Well, we, we'll get into, I mean, again, the other amazing fact about your, you know, time with Costco is that you've, you've been on the board, I think, 38 years, which is probably one of the longest tenures in American corporate governance that I can think of. Um, why, like, what has Costco meant to you, you know, and why have you stayed on the board or in affiliated for for so long?

Well, I mean, I mean, David, you, when you find a couple of executives and back them before there's a company, before there's a dollar of revenue, before there's an order, um, you feel as much as they do that you're a founder.

Totally.

And so it, it becomes like, like, and I'm, you know, I've been a director now. I'm on my third CEO.

Yep.

So, it feels like, like I identify with the company as if it's mine. I, I don't want to take any credit away from the great management we've had. We have had great management, but I, I emotionally, I feel that kind of connection and that sense of ownership. Um, also, it's, it's just such a great company that I'm, I'm constantly learning from them, the things they do and the way they think about it. And they're, they're not, they're, they're very down to earth and very focused, but they come to such good decisions all the time.

And then as you're, if you're an investor, as I was for many years at Blackstone, the window on the world that you get from the second largest retailer in the world, what goods are working, what goods aren't working, how are consumers reacting, what's the cost of supply, what's happening, what, what are tariffs doing to our income, you know, our, in cost, what, how are we handling, how are we handling, uh, shipping and all that stuff. It's a, it's a huge source of value-added information.

So, for a lot of, I mean, I, I feel like a real sense of identity there. I guess what have you, what have you learned from watching Costco grow in terms of, you know, business building or, you know, they're so famous for for culture, right? And how they treat their employees and ultimately the value they deliver back to the end customer by by keeping prices low and really making money through the membership more than they do on margin on the products, but I, I'm curious if, I mean, the business has grown obviously so much, I mean, from nothing, you know, to what it is today.

You know,

yeah, 250 billion. Yeah. Um, I, I think there's, there's some similarities between DJ, Costco, and, and Blackstone, actually. But, but focusing on Costco, um, we, we built that. It was first of all, all about taking care of the customer. If you, if you take really take great care of the customer, um, then, um, you know, a lot follows from that. You have a, you have a robust business model with a fantastic following franchise, and you get a lot of growth, and your shareholders do fine. So, take care of your customer. Build quality long-term. Don't ever worry about short-term expediency. Gee, we're having a soft quarter. Let's raise prices or let's sell some real estate. We don't have to own the real estate or this other thing. It's so easy to get, um, enticed into short-term expediency. Similarly, people have been coming to us for years of, "You should buy this," or "You should buy that," and, and, um, we really, we've always had so much growth in doing just what we do. If we do it really well, we just have never been distracted by that. So, focus, focus, focus, execution, flawless execution of details. Build for the long term. Build quality and keep driving your prices down. Keep enhancing your value to your customer. Never let that be static.

So the more value we give to, so whatever, if, if Costco can go find a new source for batteries and save a nickel, a 100% of that nickel gets lower prices. None of it goes into higher margin.

And so they're always driving down prices. So their customer value proposition keeps growing.

Totally.

Most companies,

either nibble away at it because they're tempted to have a little more earnings, or they let it be static.

Mhm.

And Costco's always driving to increase the customer value proposition. So I think those are all good lessons for any business.

Totally. I know. I know we originally met, I think, in the, in the context of the Costco, uh, you know, board meeting and,

um, you know, I, he wasn't there in person, but, you know, when I, when I met with the board, Charlie Munger was still on the board, and I think you guys served together for.

30 years.

30 years. Yeah.

Um, you know, he's such a legend. I guess, you know, what did you learn from Charlie Munger over, you know, those few decades?

Well, first of all, Charlie never compromises intellectually. Um, if he doesn't like something, there you're never in any doubt what he thinks about things.

And, um, and he isn't either, by the way, which, which I love. It doesn't mean he was always right, but he was right as a hugely high percentage of the time.

I believe that.

Um, Charlie believed in the company. So even when we would have doubts, and, you know, the, the management and the board, "Gee, is this going to work? Is Amazon going to flatten us now? They're buying Whole Foods. Oh my god, are they going to do this or that?" And before Amazon, it was Walmart. He believed in the company. "No, you're the best. Just go right at them. Open that unit in Bentonville, you'll beat the heck out of Walmart."

And it happened.

Yeah.

And, "No, don't worry about Whole Foods. You'll crush them." It happened.

And so, you know, he, he, he was really a believer, uh, with good reason. It's not, he wasn't blind. But sometimes that sense of confidence, and I tried to put that in the businesses that I've run too, that sense of confidence. You're, you are good. You're really, really good. Believe in yourself. You can do anything.

Yep.

And people lose that. That, um, um, Charlie could distill everything into a sound bite.

You know, I, we were, we, I was, you know, they owned a newspaper, and I think the Wall Street Journal was up for sale, and I said, "Char, what do you think about newspapers?" He said, he says, "This, the newspaper business. This is not a business, Tony. It's an oil well. It's depleting to zero." I said, "Well, what about the Wall Street Journal?" "Well, that's not a newspaper. That's a trade journal." I mean, everything gets right. He distills it into such an accessible, understandable,

Um, way of thinking about things. Charlie was my, uh, my rock. I, I talked to him every two weeks, whether we were on the board or not. We talked about the world. There are many times when I'd say, "Charlie, I'm, I'm starting to worry about this other thing." And he, he was an absolute rock.

So, I mean, I love the guy. Honestly, I have a bust, bust of him in my conference room, my office. Uh, real mentor, uh, so loyal, so supportive, and, um, and very, very high principles. There was, there was no, no cutting corners on anything.

Totally. And he was still coming to board meetings at like 98 years old, you know. I mean, it's pretty, pretty.

Well, to all the way to his death. Yeah.

I mean, that is remarkable. So, I want to transition to Blackstone, which I think, you know, most people know you for, because you had such a huge impact on the growth of that business. Um, you know, talk through kind of when you first met Steve Schwarzman. I know it was kind of before you you joined the firm.

Sure.

And what was sort of the conversation like, you know, for him getting you to join?

Yeah. Okay.

Yeah. I, I think our first serious engagement dates to back to 1989, I think it is, when we, we were working on a deal together to buy a railroad company called CN CNW. And it was a hairy time because the markets were falling apart. We were sort of pregnant with this public bid for this railroad company. We were an equity shareholder, but we were also providing all the high-yield debt and the M&A and on and on and on and on part of our business model. Put a little equity in, get all the investment banking business. And we had a, we had, um, a big high-yield deal which had a reset note.

And Steve was backing at the concept of a reset note. I think we're pricing at 15% and it could reset up to 18. Think of those rates today.

Totally.

But Steve said, "No, I'm not going to do the reset because I know you guys will reset it to the max." That's just, you know, and this is. Well, Steve has a great instinct.

Um, yeah. And how to avoid it, but what might happen.

Yep.

And we couldn't sell it without the reset. And of course, what that tells you is the market all thought it would be reset.

Interesting.

Right? Or at least you want to take the risk. So we kind of went round and round and round that we had done a, we had done a bridge loan. So we were, we needed to get this financing done. And, and, you know, the story is Steve said, "Well, are you willing to put your money on on your own personal money on the line?" And I said, "Yes."

Um, and so we said, "Okay, if it resets to the max, you, you'll, you'll pay me a certain amount of money." And I said, "Okay." Frankly, the amount I would pay Steve was dwarfed by the amount the firm would lose if we didn't get the deal done.

And, and Steve might have knuckled under anyway, but to me, this was a, a very good example of losing a battle to win the war. And I felt like if I could give Steve a, you know, a pound of flesh,

then I could get the whole thing done.

And, and, and, and the idea of someone putting money up and actually, if Steve had to pay more interest rate, which wasn't Steve really, it was the LPs had to pay a higher, I would lose some money. All that appealed to him.

So that, that did the trick and, and he agreed. We got the deal done and, um, you know, we both look back on that slightly differently.

But I think we each accomplished something in our own heads, which is sometimes what it takes to make a deal.

So then after that, I was running investment banking for a long time and Steve was a client, not necessarily the closest client. He did a lot with with Chemical Bank and Jimmy Lee and other banks, but, but we would, we would have a casual, like a once a year lunch or something like that. Um, and then after DJ was sold, I had to, had to agree as part of the condition of merger agreement to stick it out for two years. Uh, no other employee did, by the way. But I'd stuck my two years out and then decided that it wasn't fun.

Yep.

And that I wanted to do something else anyway. My DJ, that I felt that same sense of proprietary ownership for that I felt for Costco was gone.

Yep.

Steve called out of the blue and said, "Can we have lunch?" And one thing led to another. And he said he'd been looking to hire someone for a couple years and,

would I consider coming in and and helping run the firm?

And my first reaction was, geez, Steve, you're a tough boss, and I really haven't had a boss in like 15 years.

Totally.

And I, I don't really, you know, DJ went public and went private a few times, so I didn't really need to work. And I said, "Steve, I don't know that I want to be told what to do or what not to do. I haven't had that in a long time." He said, "No, no, no. Um, uh, you come in, you run the firm day-to-day. We'll talk all the time. I'll back you. Um, if, you know, if we don't agree, uh, by the way, we agreed 98% of the time.

I'll back you. Um, but if performance is not good, I reserve the right to get rid of you."

Yeah.

I said, "That's fair."

Yep.

Um, so we cut a deal where he could get rid of me at a drop of a hat. I got, I was vested up to the minute in whatever I had.

Sure.

And we agreed to try it.

Like, like so many entrepreneurs, I, we've all seen this, right? Where they say they'll, or they, they want to bring someone in, and there were issues with around Blackstone at the time and all the businesses.

But then once, once those issues are kind of fade, then the, then this entrepreneur wants to kind of reassert control.

Totally.

I have to say, Steve was an absolute prince. I mean, he, he, he, he always respected my role and, and, and, um, running the day-to-day firm. When a lot of the, I made a lot of changes and when I made those changes, a lot of people didn't like him. He backed me 100%. Even when he wasn't necessarily sure they were right,

Um, they turned out to be right.

But,

but he was, he was a great, he was a great boss, really. I have to say. And, and that's hard. It's his baby,

right?

To give that element of control, that level of control to someone else. I'm not one in a hundred would have done that. So, credit to Steve.

Totally. Well, and I guess like, you know, you could have obviously started your own firm. You know, most of the people I've, you know, spoken to, whether it was Joe Parata or Michael Chay or, you know, um, David Blitzer, like any of these folks talk about kind of Blackstone before Tony James and Blackstone after Tony James. I mean, cuz you joined, I think, what, 17 years after the firm's founding?

Uh, thereabouts.

I think, um,

you know, how did you think about joining a firm versus potentially starting your own? And then, you know, we'll talk about kind of the trajectory of the business because it grew.

I did think about starting my own firm. I had a lot of people encouraging me to do that, both LPs and also professionals.

But, you know, I, I kind of, what I like doing, if you think about the development of a successful company, there's kind of an S-curve. It starts off small and entrepreneurial. It's kind of, if it's not a tech company, it's kind of flat for a while. It bumps along and then,

are sort of like that too.

Then, then there's this kind of escalation curve where you create a lot of value and a lot of size, and then you get, if you're lucky enough, you could be very successful, and it's kind of protect the bastion. My, what I like doing is that steep part of the S-curve. I like taking something small and growing it, making it better, and making it very successful. And then once it's very successful, it's not that much fun to to protect the castle anymore, in when the girls grow by.

And, and so I felt, I, I looked, when, when I looked at Blackstone, they were in every business DJ had been in and had reported to me, and there was no one else in the world that had had that mix of businesses under their authority. So, I thought, "I'm, I'm uniquely knowledgeable about every business," and I'd seen, and Blackstone had growing pains at the time, but DJ had had those same growing pains a few years before. So, I knew

how to work through them, and I thought, "Gee, if I could get my hands on Blackstone, I could be dangerous."

The other thing is, if you start, you know, when you're used to running a big firm, after the merger of Group DJ and Cres, it was the largest by headcount investment bank in the world. Didn't stay that way because of all the blood letting and the, but once you've been on, I wanted to paint on a somewhat bigger campus, a canvas. And starting my own firm with two guys in a corner.

And so, uh, I'm, that was the choice I made. And Steve, as I say, I was originally not going to do it, but Steve was very convincing, and he lived up to everything, and it was a great partnership, I have to say. I mean, we worked really well together for 18 years.

Totally. Um, you know, people know Blackstone today. You know, a trillion dollars in AUM. It did not look anything like that when you joined in 2002.

I think the firm was maybe $14 billion in total assets,

something like that.

Which is, you know, shockingly like, I don't know, a sixth of our size, which is, you know, kind of insane. Um, again, maybe, maybe just give folks kind of a reminder what, what was the shape of the business then, what businesses existed, and,

you know, we'll talk through kind of the, the 50-fold increase, I guess, you know, during your tenure.

Yeah. I mean, Blackstone, Blackstone was, was in, in private equity and real estate and hedge fund fund-of-funds and a tiny credit business, and then an M&A business and a restructuring advisory business. All those businesses were kind of subscale, a little bit. The private equity business, they'd raised a fund and had made a couple of disastrous investors. So that, that were within a year write-offs with about a third of the fund. The,

the advisory business, the M&A business was down 50 or 75% from its peak and

not going up. The, the fund-of-funds business was tiny, tiny, and not very profitable. And the real estate business was a, was again, a small business.

Um, so, um, all those, it, um, there were, there were things to do to grow all those businesses. And what I'm, what I'm prouder of, honestly, than moving the, the AUM from 16 billion to nearly a trillion, is the market cap of the company because, you know, it's AUM is just AUM.

And AIG had just put a hundred million into Blackstone for 10% of the company and the rights to invest in our funds. So at best, it was worth a billion dollars, and when I left, it was worth 170.

So that's a 170-fold value increase.

And while we're growing the business, increasing the value,

our IRR and all our funds went up.

So we weren't, we weren't driving down, sometimes an asset manager can drive

100%.

Down in return for for commodity, more commodity, um, returns. We weren't doing that.

Yep. And so that, that was, um, it was a great run, I have to say. But it, it, it was, we got very lucky.

Um, and but, you know, I, I started focusing right away on culture. Again, coming from DJ where I had, and, and my experience with Costco, culture is so important.

And that required, that required making some changes in people and talent. Um, I think virtually every, the leader of every business, almost, was changed.

Because a lot of culture comes from leadership. We moved from being a, a collection of real, of talented people, but difficult people that didn't work together, to a team orientation.

We put in place processes that people initially said, "Why, any process is by definition bureaucracy. So I don't want that." But processes that encourage better decisions, sharing of information, and more efficient use of time actually frees people up.

So, and I'm, I'm very much against bureaucracy and hierarchy. So, we, we, we, we did a lot. We, we added there were some businesses I felt we should be in. We added those. And there were some businesses we shouldn't be in, like the advisor business. We spun those out.

Mhm.

So it was a long journey, but it, it was, um, a fantastic journey.

I mean, people, again, one, one of the other kind of common threads that I mean, literally everybody I spoke to, um, highlights was that you were both an incredible investor and probably one of the best managers of like, high, high potential talent and firm builders, you know, that they've seen. It's a rare combination to have both. You know, people talk about, um, you know, being in an IC meeting with you and you finding the, uh, you know, the detail on page 16 that conflicts with the thesis on page 36 from six weeks ago and being able to hold kind of people accountable to that, while also kind of seeing the bigger picture of the fund and the firm.

Yeah.

Well, I, I think I, I think I'm a good manager of small elite teams, Navy Seal type teams. I don't think I'd be a good manager of the US Army.

Uh, or Costco, or, or a huge Swiss bank, for that matter.

Um, and, and I think my style is, there's certain principles that I have around which, which those kind of smaller elite investment organizations react well to.

Totally.

Um, I mean, one, one of them is robust debate. I, there's, you know, lack of hierarchy, lack of status hierarchy, not just organizational hierarchy. So that if we're talking about a business, I want you to argue with me.

I want you to challenge me. But you've got to be able to, and I want to be able to challenge you, but I got to do that so that you don't get insecure or hurt feelings.

And creating a culture where you can have robust debate because you're all in it together in a search for truth,

and people don't take it personally. It, um, is not so easy. And, and you really want to be very direct about this because the more indirect and you, you are, it's so inefficient. You're not really saying what you're thinking, you got to take, takes weeks to get around to it.

So, robust debate's a big one. Lack of hierarchy is a big one.

I feel so strongly that you have to model the behavior that you want your people to have, which means you got to work as hard as they do.

Um, and it, it extends into personal values and things as well. Um, um, I, I think it's, I, I running an investment organization like Blackstone, I think you almost have to be a really good investor.

Um, I know there'll be exceptions to that, but our firm, where you earn your chops, your respect, is being able to talk to some of the best investors in the world on an equal footing.

And you're not losing a step with them.

Mhm.

And, and similarly, um, when I go over those investment committees, I mean, if I'm not going to go over them carefully, then the sloppiness and the will will go up a lot. You know, the, the same amount of care. So, I want people coming in there,

working really hard to, to have great investment and great thought processes. And part of those catches, those little things is sending a message.

Someone's watching.

You're paying attention.

You got to be flawless. And also for a firm like Blackstone, it's investment committees that are the cultural crucible of what, what defines the firm.

Say more about that.

Yeah.

Well, how we think, how we talk to each other, how we think, the, our analytical rigor, the, the frankly, the lessons we learn from our failures and our successes.

Yep.

All that is transmitted from senior management, me and the partners, let's just say, to the junior people through investment committees.

And, and so, so if you're not able to hold your own in those, if you're just presiding over them, or you, or you're not engaged, or you haven't done the work, you lose a lot, in my opinion.

So, and I could go on and on. There are lots of, um, lots of principles that for me work well in an elite investment organization, but they might not work in another organization.

Sure. Correct me if I'm wrong, but like, I think Blackstone by and large was more kind of consensus oriented, uh, or at least the stories that I heard was that if, if there was a, you know, a tie, you would always back the deal team. And I, David Blitzer told this story, um, yeah,

uh, you know, I think, uh, he was in London, you know, you were maybe three months into the job, and he gets a call saying, "You have a new boss." Uh, and, you know, and, you know, I think he's like a little bit apprehensive. You made him feel really comfortable, but there was a particular deal, I think, that you were working on pretty early in your tenure at the firm. I think it was for Houghton Mifflin, was like a spin-out or carve-out of a Vendi at the time. And I think the, the investment committee initially,

um, you know, didn't, didn't, uh, denied the deal, but basically created like too narrow of bounding from like a price perspective.

And he was describing how he was bummed. He was like, you know, having a drink in a pub and,

and, and basically, I think you met with him and

was like, you know, how strongly convicted you are. Are you in this deal? Do a bunch of work over the weekend. Let's go back on a Monday.

And you really like, he believes, like, put your weight behind him, which gave him the confidence to sort of like, you know, champion the deal. Um, well, that's true in that instance, but there are times when there are times when you're you're not on that side of it, of course.

But I would say in general, when a deal committee comes in, I don't want them coming into, when a deal team comes in to the committee with a recommendation, they better want to do it, otherwise, what are we doing there for, right? So, so if they're coming in with a conviction to do it, almost by definition, I'm going to challenge them, and I'm going to try to find the weakness or the things they haven't thought about or or whatnot. And so people often accuse me of, no matter what they say, arguing the other side. There's some truth to that, but it's, but there's a reason for it, right?

There are times when I feel like there's something, and in investing, there's something that's not on the page. You've got to have a feel. So you got to, you know, you know, we kind of talk about seeing, seeing around corners a little bit. And partly that's the partner and his conviction. Partly it's my own gut, even though it's not provable.

Partly it's the process becomes a little unfair sometimes because someone gets on something if there's a mistake or there's or something, and they just stay on it, and the whole committee kind of loses momentum. So definitely, there were times I put my finger on the scale to level that out, for sure. Um, and I'm sure there were plenty of times when it went the other way.

But that's, that's kind of what you have. You know, you're, you're, you're more than just a referee, but I really felt strongly that it's a collective decision. So when I put my finger on the scale, it wasn't that I was deciding. I had to get the other people there.

And I just, I just think groups make, especially in investing, rates better decisions than any one individual. And Blackstone came from a lot of, as I say, independent talented people that wouldn't challenge each other, wouldn't even do the work to look at someone else's deal. One CIO that was a very smart guy, but a bottleneck. And it wasn't a scalable model.

This is like a distinction that I've, I've written about, I think, a lot about here in the context of Andreessen Horowitz, which is this notion of firm versus fund. You know, the, the sort of contrast that I try to draw is, um, you know, most people run funds. Very few people, in my definition, build firms. And the objective function of a fund is, how do I generate the most carry with the fewest people in the shortest amount of time possible? You know, often that's run by a single CIO. There's a handful of people. There's like, ultimately, one decision maker.

And a firm, I think, by by contrast, maybe is has to deliver exceptional returns because that's a prerequisite. But the other, I think, variable is like building sources of compounding competitive advantage, like what are your moats? You know, if you think about Blackstone as a company, not just a collection of individual funds, like, you know, it's a much more entrepreneurial question because every entrepreneur wakes up every day asking about their competitive advantage. Um, I'm curious, you know, if you agree with that distinction, how you sort of think about that in the context of, of Blackstone or DJ.

I do, and I do. One of, one of the tricks of running a firm is making people in a fund care more than just about their fund, right? So that's a, that's a sensitive balance, and you want them to care enough, but not too much. And then within funds or within sub-businesses, maybe private, how do you get the guys in India to care enough about the guy deals in New York?

And for me, I, I have my way of thinking about that and my how to balance the rewards on both sides, really from trial and error and what's worked over the years. Not, there's no theoretical model that makes it right. But the, the first thing is to make you do want everyone, even people in the fund, to care a little bit about the firm for lots of reasons.

Um, the, the, the issue as Blackstone became successful, the issue was we weren't in, we weren't a monoline boutique investor anymore, which is what, uh, which is what all the LPs wanted. No, no, no. I want, I want, you know, I want Andreessen Horowitz. They do one thing, and there's a genius who sits in the corner, and he, he divines the right answer.

We, we were becoming, right or wrong, not only a supermarket, but a big supermarket with lots of different. And and and that was not where LP's heads were. Today's different, back then.

So, so my, my challenge as a firm manager was to figure out how do we take our disadvantages and make them advantages. Um, because, because we, we don't want to stop growing, and we don't want to descend into mediocrity. I mean, as we've talked about before, growth in and of itself creates opportunities for new talent. So we could keep talent that would otherwise get frustrated and go do their own thing. I mean, I always wanted to have the most talented people in the world and train them so they were better than they would have been any other place.

But those people have tons of opportunities. So, so I had to create new opportunities, not just a war of attrition with more senior people. So growth was important. And and and so how do you, how do you mitigate the the negatives that come with that? And so we spent a lot of time thinking about that. We, we tried to add businesses that were made the other businesses around them better. They brought insights, access, relationships, capital, something that made each of the other businesses better.

I also, it was, this is why we were lean so early in our stealth effort to build retail distribution. Again, just distribution power. I mean, it was a hedge against the time when maybe all the funds aren't high top quartile returns, and so how do we still, you know, drive business and customers and AUM and so on so forth.

And so, yeah, we, we're constantly thinking about ways to take our disadvantages and make them advantages. To drive growth.

One of the things that I, I've read certainly in a lot of like Blackstone materials over time is just, um, you know, they'll identify kind of a big secular trend and find ways to express conviction in that thesis across different asset classes. And one of my kind of core beliefs, both, it's kind of an investment philosophy. I think it's a bit of a metaphor for, for my career, maybe today, which is that opportunities live between fields of expertise. And it seems like very well expressed, at least like, you know, you know, we're believers in e-commerce, so we'll bet in the e-commerce brand, but we're also going to buy warehouses. We're also going to invest in the cloud infrastructure.

And that, and that's an area where these different, you take a mosaic tile from each different business, you put it together, and you have a clearer view. So, yeah, so we, um, we could see what was happening in e-commerce, but we could also see what was happening in warehouses, and we could see, and, and, and so that ability to develop, to see themes, because, because the early sign, if you're going to catch the signals early, they're never obvious, right? Because by the time they're obvious, it's priced in, right? So you got to catch them early, especially if you're Blackstone and you want to move a lot of money into it, right?

So how do you see things early? You get, you get, you get reinforcement from independent. No one signal is dominant. This is so clear, of course, but you get reinforcement from multiple different businesses and insights and so on so forth. And and and that that became a, that was one of our competitive advantages that we, we tried to maximize.

You, you talked about kind of retail distribution. You know, everybody I've, I've spoken to has said you were like incredibly early kind of in that wave, both just covering the warehouses, by the way, treating LPs as true partners, but that was something that was, you know, kind of core. You, you talked about driving IRs, not just sort of scaling AUM for the sake of it. Um, I think you also helped catalyze kind of the creation of Blackstone's insurance, you know, insurance solutions business. Um, I imagine both of those became kind of sources of like perpetual or permanent capital to some degree, you know, for the business as well.

Yes, definitely. I mean, the insurance, like both, both are big untapped asset classes. So the institutions have generally 25% of their assets in, let's say, the more sophisticated ones, like endowments are 50. Retail was at 2%.

So it kind of screamed, and insurance was very low too. Now, insurance has regulatory restrictions to keep it lower. Although they're increasingly structural ways to kind of nudge that boundary, but those seemed like, um, there was just as much insurance assets as there was pension assets, and just as much 401k as or retail assets. So how do we tap? Are we're living with one-third of the market? How do we open up those other thirds? And again, it's all about how do we use our scale and our size. There's no other firm that could have afforded to build the retail distribution. We have 500 people in that.

And we started off not just by hiring salesmen, you know, we started off because, because the wirehouses, they need training. So we ran Blackstone University, and people would come through, and every broker of every wirehouse, the only place they're going to come and learn about alternatives is Blackstone University. There was no other alternatives university. And then we had a master class where you go back and get the equivalent of a master's in this.

And then we, we built our own proprietary, um, data, CRM system and data system. So we knew more about every Merrill Lynch client and whatever question they've ever asked us than Merrill Lynch knew about that client. And we did that across the board. And, and we did that for not just Merrill Lynch and UBS and the Birros, but thousands of RAs.

And that, that, that I think is the now the one, the dominant strategic asset that Blackstone has that no one else can really replicate because no one else has the breadth of product. Um, so that you're always in the market. You always have something that a customer wants or a broker wants to sell it. The number of products that were always open that were, you could put money in any time.

Uh, no one else has the revenue scale to justify the overhead. And it, and it, and it becomes reinforcing of the brand and the, the value. So that, I, I felt like, you know, in the investment business, you can be really good, or you can have a cold hand. And I didn't want to, I mean, you can live by the sword or die by the sword. I didn't want to die by the sword.

So I was okay to live by it while we had the hot hand in investing, but I wanted a hedge so that we would still have an unassailable business when we didn't have the the best returns.

I want to talk about the IPO because it was, you know, uh, obviously a huge deal in the kind of history of the firm. Also, I imagine very complicated, both kind of tactically, but even culturally, I imagine you talk about kind of firm dynamics and how do you kind of create incentives for people in a given fund to care about other funds. I imagine going public, you know, part of that is you're creating a new currency in some ways by which to compensate people. You have kind of, you know, LPs, you have employees, you have, um, you know, the public shareholders.

Well, this maybe just talk through the IPO and all those dynamics. We could spend an hour on the subtleties and complexities of this, but just to give you some windows on it, Blackstone wasn't a firm. It was 173 independent partnerships, all with different percentage ownerships. Every fund had a different percentage ownership than every other fund. All that somehow had to be rolled together into one entity.

And everyone had to have the right number of shares in that entity. Just, just, just number one. Yeah. Number two, at that time, there was no nothing like Blackstone. We had three different ways for account to count for carry. We could account the way we did it, and now the industry does it now, which is kind of, um, you get carry when it's realized. You could do it on a mark-to-market basis. So an accrued carry, you could, you could use option models to to compute the option value of the carry, and then how do they vary over time? We had lots of choices just on something as basic as the accounting for carry.

So there was not even an accounting standard. You know, the tax structure and all that, you know, should it be a publicly traded private partnership? We thought that was more value added because that's what all the insiders wanted because they pay, like, don't like paying taxes. Turns out the market didn't like it. So, you know, we converted, but I don't think that was a compelling. Never, but we were making it up as we went along. And then, then, you know, the reason we could get public is Blackstone had to have a hell of a run. We didn't want to ruin that.

Um, so how do, how do you protect your day-to-day working partners that go into work every day and try to make good investments from being distracted or influenced by the public? So, so first of all, we built an elaborate corporate overhead so that we didn't involve that any of them in any of it. Not only the going public, but once we were, once we were public, added $75 million a year at the time to our operating cost, which is not nothing, a lot more today.

Um, we also were making people wildly rich. So in those days, if you were work for one of these firms, if you got paid a million dollars this year, that was great, but the next year, you maybe you get paid a million or 750 or a million a quarter, whatever it was. But it was year-to-year. We were coming in saying for that, you know, we're going to give you hundreds, hundreds of millions in many cases, or tens of millions, and you're going to give up a little, you're going to give up a million of your annual income, but we're going to give you essentially 30 of a stock that's forever and grows over time in exchange. So, how do we, how do we not demotivate our, not only how we not distract them by by looking at the stock every day, but how do we not demotivate them from just, well, I'm, I'm worth $100 million today. I'm, I'm just going to put my feet up and come to work three days a week.

So, all of that. How did you do that? We, we did that. We did that first of all by basically telling people they can't sell any stock for eight years. And then we had unusual vesting, whereas what was unvested, we could take away. So most companies, if you have five-year vesting, if you let someone go, that triggers acceleration of their vesting. We didn't do that. We, we, we could let them go, and the last three years of their vesting, or if they were demotivated and weren't working, we could say, "I'm sorry, you're not working hard anymore. We're going to take away your unvested stock."

So, so what's vested is yours. Uh, but the unvested stuff, and in eight years, we had eight run at it. And, and we didn't lose anyone that we didn't want to lose for eight years. And people were totally motivated for the whole time. So, that part of it worked. But all these things are just little small pieces of the whole that you have to think about.

And as I say, I could go on and on, but, um, it was, it was incredibly complex. And the other thing I would just say and file on this, Steve and I and Pete Peterson, who was still around then, wanted to take a hard look at this and see what it be and do all of the plumbing to make sure we had the option, but we weren't sure we wanted to do it. So, how do we go through this and not have it loom over everyone in the firm, and everyone's trying to come into, and so essentially this was something, um, that Steve delegated to me, and I did, um, really with, with no one else in the firm actually helping for nine months, and did it at night, and worked out all this with bankers, outside bankers, and lawyers, but not internal people. And I would report back to Steve, of course, and, and to Pete Peterson, but Steve was much more front and center on this, but it was kind of a secret project because otherwise people would have been, Tony, I'm, I should be the number two person, you know, you know how it is.

I remember we had lunch once, and you said, "Yeah, literally like went into a room and was deciding who was going to become a billionaire, you know, on the other side of the IPO." I kind of blows my mind.

Um, the, the other thing that I, I imagine being a public company then gave you was currency that you could then use to acquire other businesses. And again, one of the folks I spoke to was, was Bennett Goodman, that, you know, the, the G and GSO, right? Um, I know he had worked for you, obviously, at DJ. He had then, I guess, gone off and built GSO, which was a, you know, small credit business at the time. Maybe talk through that acquisition. Obviously, it became kind of the basis of a much bigger, you know, credit business.

Well, we had a, we had a very small credit business. Blackstone had about a billion and a quarter in it. But, and, and the people running that business then were solid insurance company debt investors, but they were perfectly happy with the business of the scale that it was and really didn't see a lot of ways to to drive it. At Blackstone, we, we wanted to have a few large businesses. We didn't want some other firms have gone to a million little businesses, little popcorn stands there. We wanted to have few big dominant businesses.

And so, as when I mentioned before, that a lot of the leadership of the groups needed to be changed, this was one of them. You could, you know, sometimes an acquisition, especially if you have a lot of the purchase price contingent on future earnings and this and that. It's almost like a, you know, a team hiring. You see this all the time in tech, right? You have all kinds of big tech companies buying smaller companies to get the team.

So, it's a little hard to say, was it an acquisition or was it a group hire? But either way, I knew these were talented guys, and I, and I knew they were very ambitious, and most the purchase price was contingent on future success. So, I knew that we could, you know, I think thought we could build a big business around them, and we did. We built a hundred billion dollar credit business around them. But GSO was the first, but it was only one of about a dozen acquisitions.

Oh, interesting. Uh, we did a lot of acquisitions. I mean, the, maybe the best acquisition we ever did was Strategic Partners, our secondary business. We paid $119 million for that business.

Was this the secondary fund from credit from DJ credit? From credit, right? Because again, they're ambivalent about the business. So, we bought it for $119 million. It's a $120 billion business today. It's worth tens of billions.

That's amazing, right? And we made about a dozen of those acquisitions. Every single, and, and the book on financial services firms buying other financial services firms is not very positive, right? They almost never work. Every one of our acquisitions worked. Um, there were two that didn't really move the needle strategically, but we made a very good return on the investment. We probably made three or four times our money.

Was there anything non-obvious about what made those acquisitions work? Like, you know, kind of the industrial logic or the culture? You know, I'm, I'm just curious.

Yeah. Culture is key. Having people that fit in, uh, is key. Number one. Number two, people that want to really grow something and appreciate what Blackstone brings to the party. The, um, you, you have to have balance between what the house takes from an entrepreneurial management team running a fund, and what, what the house gives them. When that gets out of bounds, if, if you go buy a hedge fund, and the, and, and you're not doing anything for them, and three years into the deal, he's fully vested, you're going to have to buy the company all over again, essentially.

So, so we wanted people that would were happy fitting in a bigger corporate organization if that helped them scale their business a lot. That's a cultural thing. Other people would just, I'd rather have a small business and not have to talk to anyone. Right. So, so the right culture, the right people, the right balance between what the house brought and what the firm, what the acquired company bought, they had, we had to feel like we could be a leader in it. I didn't want to buy a company and be not a leader. So, we wanted to lead in a few big businesses.

We also had to feel we could be a top quartile investor consistently with this team. I didn't want to be an average investor in any business. Um, we wanted people that, and we wanted to buy small where we could scale them. We could, we never wanted to buy a fully built-out franchise where you're, you're paying someone else for all the growth. We wanted to, we wanted to deliver the growth, the value of the growth to our shareholders.

So those are, you know, we, we had a seven or eight kind of criteria that we looked hard at and made, made sure fit. What, one of the things Bennett said, which, um, resonated a lot, was he's like, I, I never felt like an employee, like it never felt bureaucratic, you know? And I, again, I think about that a lot here. One of the things that surprised me about Andre, you know, it says Andreessen Horowitz on the door, is actually there's not a ton of top-down direction. I think Mark and Ben have done a very thoughtful job of trying to make the firm feel like a platform for smart entrepreneurial people to build on top of. And I think it was really wise if you want to attract and retain, you know, some of the folks here who've been very, very successful entrepreneurs in the past. Like, if they needed to be micro, they would never work here if they were micromanagers.

And it's helped by the fact that you have a lot of discrete businesses and funds, right? So everyone can feel like they're in charge of their empire.

I, I completely agree with that. And we, I always bent over backwards to minimize bureaucracy and process and hierarchy. And so I had at one point, I think 56 direct reports. Trying to Jensen before Jensen, you know, trying to minimize hierarchy. Because with hierarchy comes comes bureaucracy. And, and we, and I'd learned from DJ that, in contrast to credit suits, that putting more controls in doesn't necessarily protect you. That a lot of it, if, if you have good people and you trust them, and you hold them to very high ethical standards, and that becomes the behavioral norm, that's much better than having lots of watchers and watchers of watchers trying to check every little thing that you do.

And so credit had all kinds of ethical lapses, DJ had none, but they had immense controllers and process and whatnot, and DJ was skeletal. So I kind of brought that attitude to Blackstone.

One of the things that I think is is rare to see is that my understanding is when you first had that conversation with Steve, you basically told him you were going to retire at 70, right? Um, that's not normal. Most people try to sort of hang on, you know, especially at that level. Um, how did you think about that decision?

Well, I'm, I'm glad I did because I, if I, if I hadn't committed myself, I probably would have been harder to let go. First of all, remember, Blackstone was my like, in since my third run. I had DLJ, I had Costco, which started the same year as Blackstone, but became even more successful, and then Blackstone. And I felt like I'm kind of a paripatetic kind of person, and I, I have a lot of interests, and I felt like there's something else out there. I, I don't, I don't want to do this for the rest of my life. I want to do it. I want to do it well. I want to build something I'm proud of, but I've got more potential.

And so, so that was that was one thing. And I just felt by then. And I, you know, Steve's only four years older than I am. So, so, and I'm fine with that. I didn't, I didn't aspire to anything but what I had there. Then too, I have to say, um, leadership transition is the Achilles heel of an alter, of any asset manager, in my opinion. It's really not so easy, and you don't even see the problems right away necessarily, but you might see them three, four, five years in.

So for me, it, one of my top priorities, if I did a good job managing Blackstone, all the statistics we talked about of the growth of AUM and market value and all that, that that was fine, but succession planning was one of them. I had to nail that. And that's a process. Well, at least for me, it was a process. It meant picking the successor. It meant grooming him and making sure that that there was no breakage around his movement, either in lawsuit, his business, or people being disappointed. It meant picking the right successor, making sure he was 100% ready, on and on and on.

So, you start down that process, and it comes to an end. I mean, if you do that well, you know, three or four years in, he's ready. And, you know, credit to John, he said, "What do you think, Tony?" And, and I said a couple of times, "Give me another year." But I felt that obligation, and I felt he was ready. And so, but it's never easy to let go of that seat. Y. It's such a great seat. It's such a profitable seat. It's such an ego-gratifying seat.

So, I, I would say most people, as a result, hang on too long. And I, I believe you've got to move out of that seat while the company's still, while you have plenty of gas and you're still at the peak of your performance, and the company's still on the arise. If you wait till it tops out, you're going to lose momentum for a while before, maybe the new guy can correct it. And there was no reason to lose that momentum. And I'm gonna love my, I love my years at Blackstone, but I, I've loved my every day since.

So, you know, it seems like you obviously did an amazing job. I guess, you know, um, what did you see in in John Gray early on? Like, why, why was he the logical kind of successor?

Um, well, we had a, we had a lot of great talent, some of whom you've talked to, and, and, you know, they're all, they're remarkable people. I would say, well, first of all, John ran our biggest business, so let's start with that. But but beyond that, he's a great leader. He's a very natural leader. He's a wonderful external spokesman. He's much better than I am about that.

Um, John has a knack for seeing, in in a very complex, cluttered environment, he has a knack for seeing the simple path and right path through it. He works incredibly hard. Um, um, and so I, I think John was a, was a great choice, and he, and he's, he's very decisive, and he's got very good investment instincts. So, I mean, how lucky was I to have John that I could hand the reins to? Because if it would have been a failure if I hadn't handed the reins to someone who could, who could take Blackstone for on up.

Maybe we'll spend a minute just kind of looking ahead into kind of the alternatives ecosystem. You know, we're sitting here amidst, I don't know, fear-mongering and private credit, the SAS apocalypse, right? I don't know where, where is this all going? Like, how, how do you sort of view the maybe private markets land, or maybe markets generally, but private market landscape and, yeah, this ecosystem.

Well, you know, I try to look at private markets not as a series of individual businesses, but kind of a whole. And I still think private markets over time can significantly outperform public markets. Before we leave public markets, so many people have the vast bulk of their assets of stocks and bonds they could trade tomorrow. Not only don't they need that liquidity, it has a real opportunity cost. Um, but they also entice them to often do the wrong thing at the wrong time. So a hidden cost. So I'm a big believer that over time you can outperform in public in private markets, but markets evolve. I mean, it was clear to us that P, that private credit capital, it was good for a while, you know, yields were 12%, capital flooded into that, and yields kept coming down into the sort of mid to high single digits for the same risk, but there was so much capital, there was more competition for deals, so you also lost covenants and things like that, and the kind of capital that was started to be raised, uh, with retail money, where it comes in one month, and it's got to be invested right away, or you have the, you have the negative drag, means that you kind of have to buy the market, what's out there, you can't.

One of the great things about drawdown funds is always there's nothing good to do, I don't have to do anything, right? You kind of lost that with this with this structure.

I, you know, so I think there'll be some correction in private markets, but it's not going to be 2008 where you were destabilizing the system because it's not owned by banks at 30 to 1 leverage, or these days, the leverage is lower, but it was plenty were, 20 to 30 to 1. So, okay, there'll be a correction. There'll still be an opportunity when that shakes out to to buy private debt and get higher returns than publicly traded high yield debt.

You know, the AI revolution, I, I would say you get these things periodically where a new technology makes you question the old business models, and that's an adjustment, but it's just an adjustment. Um, I think, uh, I think one of the great opportunities right now is there's, there's, there's about 30,000 portfolio companies of mid-market private equity firms that can't be sold, can't go public. There's no strategic. You know, 20 trillion or something worth of value. Um, all those companies need to be willed, and eventually need to be sold. So for, for P, for, for capital pools, there's going to be an immensely attractive being able to pick company by company, whether it's co-investments or continuation vehicles.

Um, you're getting a seasoned investment at an attractive price with much lower fees, and you're able to, with a sponsor that's doubling down his commitment, and you're able to really analyze it. I think it's one of the great times to put money to work. I believe.

Um, similarly, look, look what's happened in your business, you know, more than I do, but the scale of the business is so radically larger than it used to be. You know, a big venture fund used to be a billion dollars, and you know, and, and there weren't, they, there weren't firms like Andreessen Horowitz that had lots of different different funds, and companies are staying private longer, and, and I think there's an opportunity to to ride those companies longer, and I love that if you're, if you're good enough about picking them.

Um, what I don't like about drawdown funds, the traditional private equity fund, is you, you know, you commit to them, they charge you management fees for a while, they find a deal, they draw it down, so your money's not been in the ground for a few years, and then a few years later, if it's a successful deal, they sell it for two, two times their money. You know, you've, you've paid a couple, couple of turns, a couple of ten of turns in management fees. They take off 20% of the of the gain in carry, and you've got 1.4 times your money, and you've tied up your money for five years. Go buy a New York municipal bond, right? After taxes, you're getting almost as much.

So, I, I think the opportunity to hold assets longer in a private context and really let them grow is very attractive. And I think the industry models need to reflect that. LPs, and certainly private capital and family office capital, is much more towards the long hold. LPs are getting there, but they need to evolve that way.

So, I, I think they'll be, you know, and, and life sciences. I mean, it's another explosive upside, longer holds, harder than harder than the rest of venture. Totally. Just because you're in the body and the regulatory and so on so forth. But man, there's going to be some huge fortunes made in that. So, I'm, I'm optimistic about private cap, but it evolves.

You mentioned you had, you know, lots of interests outside of, you know, Blackstone, Costco, and DJ. I know, um, you know, one of the things that you, uh, you know, have been passionate about is, uh, spending time with historically black colleges. Maybe talk about that nonprofit and, and kind of the impact that you've had.

Yeah. Well, in 2018, a friend of mine who had worked for Obama and, uh, in their department of education came in and said, and he, he had been an M&A banker at DOJ and then I think Bank of America, and then he went into the government and he ran the student loan program for the government, and he came in and said, you know, um, I'm out here. The one thing that we didn't clean up in the financial crisis was student loans, and maybe we should come up with something. And we started thinking about that, but, and we started working with some historically black colleges and universities around income share agreements, so that a graduate would get his college education for free, and then would agree in return to give a certain percentage of his or her income over a minimum wage, uh, to repay the college, and then the college would take all those receivables. This is the Blackstone opportunity, and securitize them. And, you know, we'd make a lot of money while doing good for society.

And we started down that path, but while we were doing that, um, a number of HBCUs came to us and said, geez, we really need help with this or help with that. And so we kind of morphed the idea to much like, and I don't know about Andreessen Horowitz, but much like a private equity portfolio management capability. We have IT people, we have lean people, we have pricing people, we have on and on and on and on. Marketing people. And if we could set up a capability like that and put, and then donate them to HBCUs, we could do, we could help them a lot. And HBCUs do remarkable things for, uh, educationally. So 8% of African-Americans that go to college go to HBCUs, but 16% of black graduates graduate from HBCUs. So twice the graduation rate.

And then those graduates earn on average 50% higher lifetime income than black graduates or non-HBCUs. So they get, they get more kids through college for a better life, and they start with the highest percentage Pell Grant and first-generation college. So they're doing great things with the toughest kids with one-third the money. But they are skeletal in their ability to manage themselves, track students, get students jobs, offer students loans, prepare their own financial statements. So we thought this would be a wonderful thing to empower the HBCUs to to be stronger and better, and we now have 11 offices around the country, and it's, and we work with about 70% of the students in America that go to HBCUs.

So, it's been a spectacular success.

I know you're also a passionate fly fisher. Uh, I don't know what has fly fishing taught you about life or, uh, what do you love about it?

Yeah. I, what I love about it is is like so many things like investing, it's lifelong learning. You never know everything. And there's a randomness to it and a connectivity to it that defies analysis, but but rewards that sort of almost six sense, that instinct, which, which I think great investors have. So that all appeals to me a lot. Uh, the connectivity, you, when you are engaging with nature in a really tactile way, you connect it and you see it much, much more, much more in much more detail, and you appreciate its nuances much more. That's that connectivity to nature has been an antidote to the rest of my, my existence, which has always been so, so driven and analytical. When I, I don't know if you ski or anything, but, but if you're going down, you know, going down through bumps, whatever concerns are in your head, you're not thinking about that, you're just thinking turn, turn. So, and fly fishing is the same way. You can't worry about anything else while you're out there doing that. But it's not stressful intellectually. But it unplugs you from intellectual stresses. So, I think, I think those elements have always really appealed to me.

That's awesome. You know, we have a lot of, uh, you know, young people that that watch our content. Um, you know, if you were a young person, if a young person came to you today with, you know, a lot of the same kind of raw materials that you had in in 1975, um, you know, somebody obviously super sharp and very ambitious, what would you tell them about building a career?

Well, first of all, there's a lot of luck in that. Um, and I never really planned, but I reacted. But I would say some of the attributes you're looking for, or some of the effort that I looked for, maybe is a better way to put it. First of all, I wanted an unstructured opportunity where someone didn't tell me how to do something then expect me to do it, where I could figure out what and how to do and do it my way. And, um, so I, so that was non-hierarchical, non-structured organizations. Uh, I wanted something where, um, where I could change the paradigm, because that's how I felt, frankly, intellectually engaged. But it's also where the upside comes from.

I, I think an opportunity that really provides a lot of economic, firm, personal, and professional growth. Growth is very important. What, what not to do is worry about, I'm going to move over to the next firm because they're going to pay me another $100,000 next year. I wouldn't do that at all.

Make sure you've got lifelong learning. Make sure you're empowered to do stuff and take risks. Make sure if you take smart risks, your firm's got your back. Um, and then, you know, roll the dice and be lucky.

It's awesome. You know, again, I just want to say like, I guess on the record, that one of the things that was most remarkable to me about kind of preparing for this conversation was just, you know, everybody that I spoke with, these are some of the, you know, most successful people on Wall Street at Blackstone and elsewhere. All of them were instantly willing to jump on the phone and just wax poetic about the impact that you, I mean, they all literally attribute the success that they've had in their careers to you. Um, so just, I, I really admire kind of the impact that you, your career, but, but also the impact you've had on other people.

Well, and that's mutual. I mean, I'm so lucky to have had incredibly talented people playing their hearts out for the firm, but for me, I'm only as good as they are, right? And, and if, if, if they play their hearts out and do really well, I benefit. And so, so I'm, and I, I think they always knew at the end of the day, no matter what, I was out for the firm first, never for myself. And, and that created a sense from them of loyalty and trust because, because none of them, if you're out for the firm, for they don't really want undue rewards. They just want fair rewards. And then if you can, if you can captain a winning team, and it carries everyone along, it, it's a virtuous circle.

Tony James, thank you so much for your time. This is awesome. Thank you.

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The Investor Behind Costco, Starbucks, and Blackstone | Tony James on The a16z Show

Transcription