Transcription
The first, I just wanted to thank Blackstone and Ken Kaplan, who you put me in touch with. Jon, actually the first, when I first started teaching real estate finance, you were not so high up Blackstone. And he, he came to my, he came and spoke in my real estate finance class. Um, and little did I know, I mean, it seems like all the Blackstone people that speak in my classes keep getting promoted and promoted. It's a good sign. Mike, Mike Nagelberg started in my real estate debt markets and now he's a, you know, very senior Ken Kaplan. Um, so yeah, really fantastic.
Uh, and I also wanted to thank you, uh, uh, Ken and Blackstone, when we do these trips, uh, we do international trips abroad. Um, we've been to India and Australia, and we visited many of the Blackstone properties. Uh, we went to year one in Hyderabad, which actually I'm invested in Bre Asia. So it was sort of my bit of due diligence. It was incredible to really, to see that.
Uh, before we start, I just wanted to play a little quick, uh, video. Uh, Sean, where are you? It's the alternatives. We buy Steve and Pete, they founded this place in 85 with 400. They had a dream of quick assets. Now a trillion under management. We look for market mega trends, as in life sciences. Get ahead of AI, always know what to buy our brands for. Power is our scale. They returns for institution And love, solution. Stay calm, say positive. Never give up. Never give up. We don't give up. Helping build wealth and security. A name you can trust, not to be confused with Black Rock. Give Better. It's the, it's just Oh, oh, oh Bill with white soldier. We lead in private equity. I think we estate, It's the, it's just era. This tour rolls on. Can I go home now? Yes, I can. And there you have Blackstone, right? We've summed up the entire firm. I I did particularly like that part where they toss you in the air, they get that idea from your bat mitzvah or something.
Yeah, exactly. Um, speaking of your childhood, so let's start a little bit in Chicago, right? Um, what were you thinking, I don't know how many people know this, but, um, your family firm was Blackstone. Um, and, um, so what was it like growing up, uh, in Chicago? Um, you know, what were your dreams? What did Jon wanna do? What were your ambitions? I wanted to be a professional athlete, like all little boys, I guess. Um, in the seventies in Chicago, I, you know, I played sports. That's what mattered to me. Uh, basketball, baseball, football, I would say, uh, school was not a primary focus. Um, I got to that probably a little later than most people, certainly people high achieving people, like the folks in this room. And, uh, the most frustrating thing was I grew late, so my, uh, high school athletic career was not what I would've hoped it would be.
But, um, you know, it was interesting you mentioned Blackstone, which is a funny story. Uh, that my grandfather had a manufacturing company that did automotive parts called Blackstone Manufacturing Corporation. And unfortunately it got into financial trouble late seventies, early eighties. Um, but I was very proud of the fact that when I got the job at Blackstone, straight outta college, just before my grandfather passed, I told him I'm going to work at Blackstone. So he was very happy about that. But I, I, I would say, you know, I was focused on, you know, making friends, sports, athletics, and, and the good thing was I did good enough in school, um, that I was able to get to the East Coast and get to Penn. And that's really where sort of everything changed for me.
Wow. Okay. Great. Um, so when, when you joined, when you were at Penn, uh, at that time, Blackstone I think was pretty small then I think what, uh, 75 people, maybe seven 50 million in assets. So what was it, was it just luck or you had no idea, or did you do some research on it? Why did you join Blackstone then? I would say luck has been a core competency for me for a long time. Um, I, you know, what happened? So first of all, I'd never been to the East Coast. So connecting the dots from, from Chicago to, to Blackstone, I got to Penn. I remember, by the way, I came to New York and it was at Columbia. I had a friend who'd gone to Columbia in fall break of my freshman year. In 1988, I came to New York and I was like, wow, this is amazing.
Um, but I made a really good decision at Penn, which was to get a dual degree. I was an English major and I was in Wharton and Finance, and that turned out great in terms of all sorts of life skills. But most importantly in my senior year, I met a young woman in romantic poetry class, and She's blushing. Yeah. And, um, I got a job at this very small investment in advisory firm Blackstone. And if you said, why did I go to Blackstone? I think part of it was I was a bit of a political junkie. And Pete Peterson, one of the co-founder with Steve, um, had been a former Secretary of Commerce at the time, Roger Altman, who'd been in the Treasury Department, David Stockman, who'd been the head of OMB. And people were talking about this new LBO business. It wasn't even called private equity. And it seems sort of exciting to go to a smaller place. And I was very fortunate to get that opportunity. And you're right, I joined a tiny little firm with 75 people and $750 million. And no, I had no idea that 33 years later we'd have 1,000,000,000,002 and this global thing, it was, no, it was just, it seemed like a really interesting place to go. There were very compelling people running the firm, and this LBO business seemed particularly interesting.
Hmm. What was, um, you just mentioned how much the firm has grown 12 over a trillion dollar business in 33 years. I mean, I, I get this question from students. Should I join a small firm or a bul bracket firm? I mean myself, you know, when once you've worked in different businesses, like I worked at Bear Strands, it felt like a big high school. Um, everyone knew each other. It was very, you know, there was no, uh, deadwood or anything like that. And then you work at larger firms, not to disparage them, but, you know, it's sort of like working in the Roman Army, you know, like a Wells Fargo. So what was it like at Blackwell? What was the culture like there that, you know, you think, what was in the water as you, I think you would say, that caused it to grow so rapidly? I, I would say a couple things. First off, I think big firms can still be great places. Mm-hmm. Uh, because I think big places, uh, big firms can train you, um, which is super valuable to get basic skills. I also think you can work in a small group at a big place, and that can feel very entrepreneurial.
But if you said, you know, what was in the water? I would say there was this incredible drive, and it really starts with Steve Schwarzman, this sort of will to win that we've gotta keep going, innovating. You wanna be at a place where there's, there's just this passionate drive to be successful and to be excellent at what you do. And you see that with entertainers or athletes or people who really succeed. They have this passion, and that was there. I think they're also, um, was a sense there that we should hire really great people. And so if you go to work at a place where there are amazingly talented human beings who are, of course, again, very driven, that good things can happen. And the great thing about finance is you're making it up as you go along. So what the rules were 10 years ago or 20 years ago, you can change the rules. You can invest in a new asset class, you can come up with a new structure. So if you have a firm that is, has very driven people who are also very talented, that I think is great combination. And then look, the decision by the founders to not just be another M and A boutique advisory firm, but to go into this private equity business was very smart because the business was just starting. It was back in a world where there were only a handful of firms doing private equity, raising capital from institutions to buy businesses. And then quickly thereafter, which is where my story sort of picks up, they had the idea, and Steve really pushed this, which is, if we can do private equity, well, why can't we do, you know, real estate private equity, and then why can't we invest in hedge funds and why can't we invest in credit? And oftentimes it's the same customers, and then you're getting more and more intellectual capital from this. And so, for me and my story, you know, a year into this doing, I did M and A and private equity work. I, I was offered the opportunity to go to a fledgling real estate business that was just starting. They had hired one guy out of Chicago named John Schreiber. They had really no one there. And they said, Hey, do you wanna help with this? And I talked to my consigliere and, uh, my parents, and it was like, okay, why not? So, but I do think being at a place where there, there is this real drive, this will to win to me, that's the thing you wanna be around. And, and, and then if you overlay that with some real entrepreneurial spirit, special things can happen. And by the way, you still make plenty of mistakes along the way, but there's this sort of relentless drive to win.
Talk about, um, when it's been challenging at Blackstone, um, I think you would say equanimity is one of the most important things. Talk to us a little bit about that and your philosophy there. Uh, you know, you Blackstone weather, the great financial crisis. Um, I remember the equity office properties, we actually use it, you know, and when I first was teaching real estate finance, you came in, we used that as a case study. Um, it was sort of done right in the middle of all of the madness. And it was pretty risky. Yeah, risky deal.
Well, look, I, I think the hardest thing about investing is things don't go up in a straight line. There are cycles and things that happen. Look at what happened here on April 2nd. The world can change quickly. There can be natural disasters. You can have a management team that does something unethical. You can have a great investing segment. US housing went up in value for, you know, basically from 1944 till 2008, 2007, uninterrupted. And everyone thought that would be the case, and things can change. And so I think what begins to happen to you is you work at investment firm and things go wrong. You begin to start to develop some muscle memory about this. And, and you quickly try to identify is what happened, you know, cyclical in nature there, you know, there's been a recession, a slowdown in the, but the long term demand for this product or service will continue to grow. Or is it secular? Is it the taxi cab medallion? Which, because Uber shows up, demand plummets relative to historic levels. And you also begin to realize when you experience these things, that your best investment opportunities tend to come along at the moments of, of greatest dislocation. You know, when things feel great, 2000, 2007, 2021, no one's worried. The prices are really high, and you're actually taking on the greatest amount of risk. And yet, when things reset, and it's the financial crisis, great financial crisis, stocks are down 50%. Real estate's down massively. Everyone can only think about what further can go wrong, when actually at that point, you should be thinking about what could go, right? Mm-hmm.
So, you know, I would say for me, the, the thing that was the hardest was we bought Hilton Hotels in 2007, in one of the worst time investments in world history. Um, we committed in the summer, um, shortly after Blackstone as a firm went public. We closed in the fall, we bought it for $26 billion, and we borrowed $20 billion, which is not something at this age I would do anymore, but we did back then. And, um, the within 18 months, uh, cash flow to business was down 40%. And you were reading in the paper all the time how this business was gonna go bankrupt. And, um, I was lucky to be the architect of this transaction. And to make it doubly worse, we had put, uh, it was the biggest investment ever in our real estate business and our private equity business. So we'd put a lot of chips in on this, so it didn't feel great. But, and then at one point in the spring of oh nine, we also had a lawsuit, uh, both a civil and then a potential criminal lawsuit about taking information from a competitor. Nothing ever came to that. And I remember talking to the CEO, Chris Nasta, who's a great guy and a friend, and still runs Hilton. And I said to Chris, well, Chris, the good news is we were on the cover of the journal for this potential scandal. You know, we'd written, I, we'd written the investment down by 75%. And I said, Chris, the good news is it cannot possibly get any worse than this. And so ultimately in that case, we put $800 million into the company to help deleverage it, get the debt extended. Um, the business kept growing outside the US. Ultimately, the hotel business was cyclical and recovered. And we, you know, it grew a bunch. We took it public, we broke it into three companies. Ultimately, we made 14 plus billion dollars in the most successful private equity or real estate private equity deal of all time. And so, to your question, Brian, yes, I think you need a certain level of equanimity, but you also, you know, need to recognize sometimes you've just made a bad call, right? Like, you, you've, you've fundamentally overpaid for something. You got caught up in the hype, like in the.com error, something, and you have to try to recognize the difference. But I, I, I think as an investor, you've gotta hang in there. And months like this last month can be scary, and people's immediate reaction is just sell everything. But you, you gotta hang in there. And I'm sure we'll talk about the current environment, but I think having a little bit of a longer term approach, and we have this, I think as a firm, I think it's so important if you're gonna go into the investment business.
Yeah. Um, speaking of that, let's talk a little bit about the decision making process. Like, uh, Blackstone has gone really big into life sciences, data centers, um, you know, uh, logistics. Could you talk a little bit about your thematic investing? Maybe we'll focus on data centers. Yeah. That's extremely topical. Um, Stein just wrote a, a very good piece on it. Uh, who introduced you and, you know, what, what do you see as the atmosphere there? Is there is still a huge opportunity set? Or is it talking about, or is it more of like a.com craze now everybody's going into it? Yeah. Or what do your thoughts?
So let's go back to the Hilton story for a sec. Because after the Hilton experience as an investor, you look back and say, well, gosh, I, I paid a huge price for a business. I bought it at the absolute worst time, and yet I ultimately had this amazing outcome. And by the way, if we had just held onto our Hilton stock, it would've gone up another three, four, five times because it's just such a good underlying business. And what I came to believe was that too often we're looking at our 50 page model and the footnote on a certain thing, and we're forgetting what really matters is sort of that first paragraph. Like, what's the neighborhood you're investing in? And is there a long-term tailwind that makes this a compelling opportunity? And it's always possible to buy a business in a good neighborhood. You could overpay or you could buy a bad business in a good neighborhood, but if you tend to fish in a better pond, your chance of success goes up. So I'll talk about data centers, which I think are actually in a very good pond. It's much harder to buy old media businesses or landline phone companies or department stores, right? So why do I think data centers are in a good neighborhood? And then I'll get to the specific question about, um, is it a bubble? Um, we have a simple view that our lives are moving online, that obviously we're gonna shop more online, we're going to be in social media, we're gonna share all this information. Um, but the biggest change is really coming by the way, our cars over time will, will not be driven by us. Um, but that this AI in particular is gonna revolutionize everything we do. And we're, there are 8 billion people, and I don't know how many, but there are gonna be billions of virtual bots helping us do a million things. It's gonna change, you know, how you act with companies. Everything you do, how you get information, and every time you do a query or every time you put a photo into chat GPT and ask for something back, that requires data. And ultimately, when we have a lot of robots that are doing a lot of different things, that's gonna require data and the physical manifestation of the data and the compute power is the data center. So that would argue mean that there's gonna be a lot of need for data centers, which today are obviously filled with a lot of GPUs. And by the way, adjacent to that, there's gonna be enormous demand for power. So boring things like utilities become much more interesting. Um, you know, electrical, electrical equipment providers, utility services. There, there's just gonna be huge need for electricity and power. Well above what we've experienced, which has basically been flat power usage for 25 years, it's starting to grow four plus percent a year. So the question is on the data centers, well, you know, there was a lot of need for railroads after the civil war, but we built too many of them. And you could go through a lot of examples of great and important things where they were great, but everybody got over enthused. The thing I like about the data centers is you don't build a $2 billion data center speculatively. So these are not condos in Miami or Dubai. These are things that require, they're very specialized and they cost a lot of money. So that is a limiting factor. The second limiting factor is the power, which is normally you would think if you had big companies, the big hyperscalers out there, Microsoft and Google, and Amazon and Facebook and so forth, you would think all the leverage would necessarily fall to them and drive the economics down. And obviously as major tenants, they do have that. But because the power is hard to come by, if you can have a site that's entitled, you can have a reasonable negotiation about the economics. And so if you engage in this business and you're not doing speculative behavior and you're signing long-term leases that are 15 to 20 years with the biggest companies in the world, that seems like a reasonable thing. Now, is it possible that, you know, people started, big companies went out there and started pre-leasing a little too much space, need to pause, you know, are there concerns generally about capital availability and return on capital from AI? And, and could that make people pause? Sure. But do I think the direction of travel will be the need for more and more data centers? I absolutely do. And therefore, if we own the biggest data center company in the US and we own the biggest data center company in Asia, and we have the biggest powered land bank in Europe, I think that's a good place to be.
Speaking of data centers, um, one of your colleagues, um, is it, uh, if I pronounce it correctly, Nadi Megi? Yes. Um, so he actually spoke, I've had all these Blackstones people speaking in my classes. He spoke in my capital markets class a few years ago and said, um, I said, how would you describe Blackstone? And he said, Blackstone is a data center. And, uh, what he meant by, which was really interesting to me, and he used the example how you guys are into everything. You have thousands of apartments, now you have infrastructure. Um, so his, his statement was, for example, with the CPI who was coming out, he said, we think the inflation's gonna be higher than everyone else does. It's public information. But our rents are, you know, apartments are going higher than the, uh, the numbers in, uh, which I think rents housing makes up like a third of the CPI. So, um, you know, we think inflation's gonna be higher, the Fed's going to be more aggressive in raising rates. Could you talk a little bit about that? Like, you know, in terms of your,
Well, if, if you think about, yeah, market, how you, you know, you're processing that information and AI, I mean, that's what it does. It just takes huge amounts of information and makes sense of it. So how are you using that? Well, I like Nadine's analogy. Yeah. Nadine, by the way, was a Columbia undergrad. Yes, Yes. Told us That. Um, but, but if you really think about what is investing at its core, it, it's really pattern recognition, right? You're, you're trying to take a, a bunch of dots, connect them, and you see a pattern before other people in liquid markets, you're trying to identify that a day, a week, a month. In private markets, you might be thinking years in advance. So that's what you're trying to get at. And so, if we are the largest investor in private markets in the world, and we control 250 companies and 13,000 pieces of real estate and all this infrastructure, shouldn't we be able to identify things and shouldn't we be able to use, ideally, AI to do it, but also human beings to see patterns, to get signals from what we're seeing in our portfolio? And, and clearly on inflation when it was going up, we saw it faster. We've certainly been seeing inflation coming down more. You know, there's been all sorts of talk about sticky inflation, and yet we would say we've continued to see shelter costs migrate down. Uh, the labor market has been softening. Now we're gonna see a surge from goods inflation, obviously given the tariffs. But that data is very helpful. And you can see things from ports, businesses and airports and huge distribution companies. You get all these insights in terms of financial firms, what's happening in the world. And if you can begin to see patterns, it could be real time things that make you nervous about inflation. So you're gonna try to lock in your debt or buy a bunch of long-term hedges, or it could be longer term patterns like, Hey, I'm seeing all this buying, you know, in e-commerce, which is showing up in our logistics business. Well, why don't we buy more warehouses, not just in the US but globally? Why don't we try to migrate more of our retail businesses to be direct to consumer? And it's funny, we, I just at four o'clock had my operating committee, these are all the people running the different businesses, and we were going around the table talking about what are we seeing real time? What are we seeing in data? What are we seeing anecdotally? And you're trying to take that insight both informally, formally with dashboards and use that to be better investors. And then if you see one of these really powerful patterns, if you see a neighborhood, you, you talked about India, and you see what's happening there, rising middle class, a government that's pro-growth, um, you know, a place where the physical infrastructure, the legal infrastructure, the capital market infrastructure's improving. Hey, let's go all in. And in an ideal world, you do it in private equity and real estate if it makes sense in infrastructure credit, in a whole range of your activities. And so to me, we're looking both for real-time data to make short-term decisions. Should we sell a stock or issue some debt, but also these longer term, um, secular trends that we're trying to capture and we're trying to use the Blackstone data machine to, to capture it. I would say it's still a work in progress. I wouldn't give us an A plus, but I think we've come a long way.
I don't wanna wanna get you into trouble, you don't have to answer this, but tomorrow, the commerce department leasing GDP numbers, um, what is the, uh, what is it, the BX TV, uh, the weather forecast? Yeah. For that number, GDP, if you can talk about it or, and then just generally where, you know, where's Yeah. The Fed going? Um,
Well, so I, I would say this, we don't forecast the GDP because there's a lot of technical stuff based on, you know, there was a ton of pre-buying, I think, anticipation of the tariffs, which pulled GDP down. Yeah. I would just say, if you start on the first quarter, growth across our companies was pretty good. We said publicly on earnings a week and a half ago, that revenue in our private equity companies was up 6%. That credit default in our non-investment grade 2000 borrowers were 50 basis points. Um, very low. And, and we actually saw very healthy leasing in our very large logistics business as well. So we saw broad based health. Obviously the announcements on April 2nd, you know, have caused things to shift. Interestingly, much of the economy continues to sort of move along because so much of the economy is tied to employment, and employment remains pretty strong. And that if I was looking for something for weakness in the economy, it would be rising unemployment claims. So the data, there's not a ton of hard data showing the slowdown. Where are you seeing it? Look, companies who are in the direct path of travel, if you're a manufacturer, um, you are a retailer and your input costs, you're now scrambling and there's a real impact. And they're beginning to look obviously at capital expenditures employment, that's where you're seeing companies real time try to figure out what they can do, can they source from other places and so forth. We've obviously seen a slowdown in the capital markets because if you think about IPOs and M and A activity, they generally require a certain level of confidence, sort of tariff firma, and people get cautious, um, given what's happened. So that slows down. And then I would just say decision making generally at businesses, if you were thinking of signing that big lease or opening that new factory, when there's this level of uncertainty, you tend to, people pull back a bit. Now, where does it go? I think the tariff diplomacy, much of it gets resolved relatively quickly. I don't know what that means. Next few months, whatever, because, and the administration has said publicly, they wanna try to get these things resolved. So I think we'll see a series of deals announced and people will begin to see a path. I think where it's trickier is with China, who is our largest trading partner, I guess, outside of Canada and Mexico. But I, I think that because there's a whole range of issues that's probably more complicated than takes longer. Um, but I think some of the extreme uncertainty starts to go away here a little bit. And the thing if you, you wanna feel a little better is when you think about past crises. So if you think about the global financial crisis, we had trillions of dollars of excess debt in our financial system, in our housing system. That took a long time to work through. If you think about COVID, we were all home in our PJs that shut down large portions of the economy. You know, we own theme parks and so forth. They, they weren't very busy there for a few months. Um, this was policy induced. So if the policies change, you can, you know, you can see things or if there are negotiations, you can see outcomes that reduce the uncertainty and volatility. I do think it is going to cause clearly some level of slowing here, but to me it's really about the duration this goes on. If you have high uncertainty for a very longer period of time, that becomes more challenging. If that uncertainty, some of it starts to get resolved and people start to see a path that'll give market participants more confident. So, and then I go back to what we're talking about as investors. All this stuff is obviously very important for the here and now, but just spend, you know, a few days in Northern California and hear about how they're moving to change the world and what's coming. And I think that story longer term is much more important.
Yeah. What do you, what do you think the Fed will do? I mean, I, people have been talking about a cut, I used, it was my first job was in open markets and I, I can't see them. How could they possibly act so quickly? They don't even know what's gonna happen in DC or what do you sort of see coming down?
Look, I, I think the Fed has a, has a difficult hand. Um, certainly they're gonna see a surge in goods inflation. Mm-hmm. Which is a, a 20% waiting. So they'll, they'll get a surge in that, those numbers, just math, the 10% tariffs, the 145% tariffs, so that's there. But then they're gonna continue, I believe, to get good data as a result of shelter costs being lower energy costs being down a bunch of the other components, I think they'll get favorable data. I think absent what had happened with tariffs, they would've had easy air cover to cut. I think now it makes it a harder call for them. But again, if they see what's happening as a one-time global, we're gonna have 10% tariffs with most people. Maybe it's different with Canada and Mexico. China's gonna be at a higher level. This is a one-time thing, but all the other data points downward, then I think they'll have the opportunity in the air cover to cut. So I guess this delays things. And I think they're also gonna be watching the labor market. So if the labor market hangs in there and there's still all this tariff uncertainty, then they'll be patient. But they have this dual mandate, which makes it really hard. Mm. They have to try to keep inflation under control, but they want to keep full employment. And if they start to see unemployment going up, then I think they'll lean that way. If we stay fully employed, they'll probably take a little more time. But if you ask my gut, I think this is more of a one time shock. I'm not a buyer that, that inflation expectations are gonna drive people that often. Yeah. I don't, this isn't the 1970s. We have very tight policy, right. Uh, CPI, last month X shelter was one point a half percent and short rates or four and a half. I think we have pretty tight policy. I think they have room to cut, but I fully understand why they're gonna wanna be patient.
Right. Let's talk a little bit about the opportunities at Blackstone. Um, Blackstone, you've built one of the largest, uh, private credit platforms, and I think you've said chat. GPT is great preparing for these interviews. You can find out anything. Um, you know, you've said that private credit is one of Blackstone's highest conviction themes. Could you talk a little bit about that, the size and scale? First people call Blackstone a private equity firm, but I know being a credit guy myself, I know has grown massively there. Um, and to help us understand what are the forces driving private credit and then also how the insurance businesses fit into that strategy.
Sure. So if you look at it just to frame the size of the business for us, um, credit is the largest business at Blackstone by a UM. Uh, if you look at our corporate and real estate credit, it's $465 billion. And that has grown a ton over the last five years. And the question would be, well, why is that the case? And what I would say in almost everything you see in finance, in the asset management world, why do things grow? They grow because of performance. So you asked, you know, back what was in the water at Blackstone, right? And then we talked about the people and the culture, but clearly our product is about delivering great returns. That's our great tasting pizza. And what's been happening is investors have been realizing now that they can get higher returns with the same or low levels, lower levels of risk in private credit versus what they can get in liquid fixed income. And the question is, why is that the case? And most of it is just because it's a direct to customer model. So if you think about a loan originated by a financial institution and the origination and securitization and distribution costs, by the time that loan or bond gets to an investor, there have been a lot of economics that have come out of it. If on the other hand, you are an institutional investor, you're a university endowment or state pension fund, or you're an individual investor, and some of our non-traded BDC products we're basically taking you and we're bringing you right up to the borrower and you're holding that loan and you're able to generate, again, higher returns with the same or lower risk. And it started in the non-investment grade world, basically lending to private equity firms when we bought companies. And it has migrated now into investment grade credit. And particularly to your question, Brian, insurance companies. So if you think about an insurance company, let's say it's a life and annuity company, it's got liabilities that might be five years, seven years on the annuity side, and then life policies that could be 30, 40 plus years. It is rational for them to trade away a little bit of liquidity, not for their whole portfolio, but for a portion of their portfolio that they would get owning bonds to do private credit. And so we would go make a loan on their behalf to a data center company or an energy business or consumer finance fund finance a whole range, mostly of asset based finance. And they can capture, let's call it 150 or 200 basis points higher than what they can if they bought a single A bond on the, instead of getting 75 over, they're getting that for two 25 over and in their business model. That's very powerful. And it started with a handful of insurance companies doing it, and now it's becoming an increasingly, um, competitive area where more and more are recognizing, hey, a little bit like if you go back to the pension funds, 30 years ago they had all public equities and then this private equity thing started and it grew and grew and grew and became a larger and larger piece of large pools of capital investing. If you looked at their fixed income portfolio, it's all been liquid. And now what you're watching is that same shift. And that's why you see this business growing. And if you ask me, are we near the beginning or the end, it feels much closer to the beginning because the penetration in large pools of capital is still very low. So I think it's gonna grow a lot. And, and in particular, I think on this investment grade side. And, and what's interesting about it is it's super helpful as an evolution for our economy as we're re industrializing, as we're building all these data centers, as we're building all this new power, we're gonna have a bunch of robotics and things. This type of private capital is very flexible to finance that. So I think it will get accelerated. Its push as as that trend continues.
See any particular risks in, in this trend? Or Yeah, what you have to watch for?
Well, it's Be careful. It's an interesting question. There's always this idea that it's private, so it's riskier and we don't see what's happening. But risk in lending is about not the activity itself. It's not me handing you a dollar, it's that we do most of our lending, particularly with financial institutions, it's about the amount of leverage they have and the duration of that leverage. So if you go back to the financial crisis, Lehman Brothers, you know, was 40 times leveraged to every dollar of capital that it had. And it had half its debt coming due every single day in commercial paper. And it was making long-term investments when First Republic went bad two years ago. This is interesting. It, it had a $70 billion Super prime mortgage book with no default. Its problem again was that it was 12 times leverage and its assets were 20 year mortgages and its liabilities were 22nd deposits. So if I'm lending on a lowly leveraged or unleveraged basis, I don't see how that creates any financial risk. If anything, it's de-leveraging the system. And if we're doing it on behalf of an insurance company, again, they've got a long duration liability stream. So when I look at this, to me it's really making our system much healthier by reducing leverage, mismatch of assets, liabilities. And by the way, the banks continue to be a vital part of the system and we partner and we can be a great source of capital for them because they've got relationships with businesses and consumers. And then we can bring this private capital to bear to hold it long term with much better asset liability magic.
Great. Um, the, uh, the VS up there showed this is the alternative, uh, era alternatives era. Um, you recently Blackstone, um, uh, did a deal with Wellington up in Boston and Vanguard. Tell us a little bit about that. I mean, traditionally Blackstone has worked with, uh, sovereign funds, pension funds, really big institutional players and very high net worth individuals. Um, now you're going a bit more down market, I guess, or to, well, I don't wanna say down, I don't wanna say down market, but, uh, maybe smaller, a little bit smaller players. Talk to us about, uh, that strategy, why you're doing it, how you're doing it. I mean, you don't have, you know, several hundred investment centers like Fidelity or, you know, I don't think you're going to that level, but talk to a little bit about that.
Well, what's the strategy there? I can't talk a ton about that specific thing, but I can give you the, the, the basic genesis of what's happening, right? So if you think about Blackstone, and we're framing this trillion two of capital, um, 237 billion today in the insurance capital we talked about. And $270 billion is now in our private wealth space. That is up obviously very significantly over the last certain 10 years from almost nothing. And what's happened is, again, it goes back to this idea of delivering returns. So if we can offer individual investors higher returns than they can achieve in public markets, then you will attract more capital. And our key insight, originally we were just going to individual investors with our drawdown funds, you know, where they have very long lives, 12, 15 years, you draw the capital down. It doesn't work great for individuals. We created these semi-liquid vehicles eight and a quarter years ago where an individual can put in capital on a monthly or quarterly basis, get it out on a similar basis. And they're set up in structures that work for individuals reporting wise. Oftentimes they have dividends and it's a much easier way for individuals to access alternatives. And I think what's important to remember is the institutions, the pension funds who are investing in alternatives are now call it a third allocated, um, to alternatives. But individual investors who have long duration liabilities, they're thinking about their retirement or passing things on to their kids, are one to 2% allocated. And so what we're really doing is trying to create products that deliver superior returns in packages that work. And as we potentially work with firms who are expert in passive and active equities and fixed income, it's another potential way to access more people by putting those things together and making it more accessible. And that's really, if you think about what's happening is alternatives are going for something that was like behind the velvet rope for just a small number of large institutions, maybe some super wealthy people, and we're opening up the addressable market to more people. Now the interesting thing I would say though is we've gotta deliver for the customers. 'cause if we don't do a good job, then they're not gonna allocate more capital. And so what's funny is, although the sources of where we're getting capital are expanding the basic business, a manufacturing, good investments, that is remarkably unchanged.
Um, switch, we have, uh, probably about 300 people in here, mostly students. Um, you're the, uh, head of a trillion plus dollar firm. You have four daughters. So what would you say is your advice or principles for a successful life? What, what do you want to tell these folks?
Well, they're much more likely to listen than our four daughters that I'd start with. Um, look, my advice would be to find something that you are really passionate about, that that's succeeding. It's very hard to succeed in a job you're doing. 'cause I don't know, it looks good on your resume, but you genuinely don't like it. So I think you have to enjoy it. For me, I love the idea of investing capital. I love the intellectual challenge. I love, to me it's like thinking about where the world's heading. And that's what makes it so much fun. We had our life sciences, um, annual review today, and we're talking about all these drugs and what's happening in that world and so forth. To me it's fascinating. So being passionate, you wanna, you want to go to a place, you know, where you feel this energy that, where it's not static. I mean, if you could go to a place where you're, you're intellectually challenged, the place is ideally growing and you're learning a ton and you share the values and culture because if you go to the place and they're not particularly nice to you and it's dog eat dog, you're spending so much of your time working there, that can be really depressing. Now it doesn't mean you can't be at a good place and have a bad boss along the way. Yes, you're gonna have to deal with that. But I, I just think you, you wanna feel like, wow, I'm proud to be at this place. What we do here feels good and important and I'm learning a ton. And if you're not, you should go somewhere else. But I, but on the advice side, the two pieces of advice would be I would advise you to work harder and care more than everybody else. That the people who win oftentimes to me, almost always are the ones who are all in on their jobs. And, and part of that ties back to the passion. And the second thing I would say is you should think of yourself, whatever career you go into as an entrepreneur, as somebody who wants to make change. It could be an legal function, it could be in a finance function, it could be in a tech function. You're, you wanna be like, Hey, we do it this way, but I think we could do it better. Lower cost, serve the customer better doing this. We could utilize technology. We could go to a a different market. We haven't sought customers here. And I think if you land wherever you do, obviously you're gonna, you start out, you gotta figure out what the company does and what the organization does. But if you think of yourself as an entrepreneur and somebody who's changing, you don't have to be Steve Jobs or Bill Gates in the garage to be entrepreneurial. Any function can give you that kind of opportunity. And people love being around folks with initiative. And ideally you're at a company that embraces you and doesn't just say, we've always made the donuts this way. Please don't change the donut making. And I think back to Blackstone, we are a place that is relentlessly focused on making it better. If you went into our board meeting, you would think we're the biggest failing company of all time because we're like, we're doing this wrong, we gotta get better at this and so forth. So I would try to internalize that and think about how you can be an agent of change wherever you land.
I wanna just give you a, a minute to talk a little bit about, I, I experienced firsthand, you're incredibly philanthropic. I experienced that firsthand with our daughters high school. Could you just tell a little bit about, uh, what you're doing in the charity area and then also we can open it up to questions after that. Hopefully we'll have about 10 minutes for that.
Yeah, okay, sure. So Mindy and I didn't come from, um, much to speak of. We had amazing families, uh, who gave us an incredible opportunity focus on education. And I think both of us have always felt like, Hey, we've gotta do something. Uh, we gotta try to make a difference. And I, I think initially we did a poor job at philanthropy 'cause we were not so focused. And people would come in the door and we'd say, oh, that's good. We care about this. And I don't know, it was probably 12 years ago or something, we sat down with our friend Dana Zucker and said, Hey, will you come and help us do this? And we concluded that we needed to focus. And so we focused in two areas.
Uh, one low-income kids in New York City because our children have had all sorts of amazing opportunities, education, healthcare, access to employment opportunities. Um, and then we focus on the BRCA, the BRCA gene mutation. 'Cause we lost Mindy's sister, Faith Basser, uh, to, uh, to an ovarian cancer related to that mutation when she was in her early forties. And when you have this gene mutation and it's passed on, you know, it, it creates very high incidence of cancer, particularly for women, breast and ovarian cancer. And we said, we really wanna focus and we set up a dedicated center, a pen in this area and have supported a bunch of other places. And I would just say this is a hugely rewarding thing for us to do as a partnership. I think it is, um, very impactful because you can see how you're making a difference in the world and you realize like when it's over, it's probably not gonna stay on your tombstone or obit generated high net IRRs for his customers. Now that's what's given me all this opportunity. So I can't forget that. But we've got to, to use what we have to try to have impact. And I would just recommend for all of you, you're obviously high achieving people. You're Columbia Business School, you've gotten good grades, you're super smart, you're all gonna go on to do interesting things. But to try to find some things where you have a passion and you can spend some time and initially you may not have a lot of capital, but you're really smart. You can help an organization and it often pays off in different ways where you meet other people and it'll lead to other good things. That's not why you go about and do it. But I would say it's another reason to be engaged. And, and for us, um, we love it. We're about to do something next week, um, that's notable and it's really where we feel really moved and we wanna have impact. But like a private equity deal, you wanna invest in organizations that have great leadership, clear mission are having impact and you can often make mistakes and then you pivot and course correct.
Great. Fantastic. Um, wanted to open it up to questions to the audience. We don't have too much time, but we can maybe take five, 10 minutes. Sure. Um, yes, Christine, I really like your s on LinkedIn, such a fan. Yeah. Companies, Um, at this size. Um, how do you ex you know, how do you think about responsible, disciplined, and sustained growth moving forward? So the question was Blackstone's massive, how do you, how do you do it in the right way? I, I think the key thing is you, you've gotta, what's really interesting as an investment organization is you need to make sure you have really great process, right? So if you're going into a business, are you raising money and starting a business just because there's capital to get at, oh, I can do a a SPAC now because there's lots of money. Or are you doing something that you fundamentally have conviction? There's a market opportunity. So if you start with that as a premise, it gives you a much better chance of success. Then whatever we build, we create an investment committee process, heads up committee, pre-investment committee, investment committee process where we're trying to put control around it. We're putting in place experienced investors. So often we're starting new businesses within existing business units. We'll bring in some outside people 'cause of their domain expertise. And so you are trying to create control. Interestingly, you also need to encourage dynamism and entrepreneurship. So you've gotta encourage people to go find new things to do. But I think if your true north is I've gotta be able to deliver a differentiated return in what we're doing, then that will guide you in what you do. And if you make sure you have good people, you set up the business with really good process and you connect it back to Blackstone. So we don't run a franchise business. There are some companies that everybody has the same brand name, but the investment organizations are completely disconnected. I spend my weekends reading investment committee memos, lots of fun. Um, don't comment. Um, uh, but, but, uh, I spend my time on this because I think the importance as we grow is that we maintain our quality and the customer. If you invested with us in one of our products and we give you a bad experience, you're not gonna show up and do something else. So I think it's about the standard of care on how you construct the investment organization, the process, and the people you put in charge of these things. And it is hard to get right.
Think, um, let's see. Wait, sorry. Yes, go ahead. Right there. I I, sorry, I don't know your name. Mm-hmm. It's good. Thanks. A lot of, uh, India's growth has been on the back of it, it services offshoring and Blackstones participated through the office space and private equity. How do you see AI kind of, you know, making a dent in that space, making it redundant, uh, a lot of those jobs may not be there. How do you think that could play out? It Is a great question and it's a real time question for us, because if you think about what did India do, um, you know, and, and really if you think about China brought in lots of low cost labor and manufacturing intelligence at lower cost into manufacturing, India has really brought, um, low cost high intelligence into services. And if the machines are as good as we think, how can you know, how will this work? I think the BPOs, um, will have to adopt. Now they should be the winners because they have incumbency. So they're providing the bank, you know, those services or the healthcare company, the hospital system. So they already have those, but they really need to disrupt themselves. So I think the labor intensity of a lot of those businesses in India and the Philippines and other places will go down. But some of those businesses I think will still go on to be very successful and India will grow just because I think it will, it's coming off a very low base, it's domestic economy. But I, I would say those businesses are going to have to adopt new technology. And it's not just gonna be, we have 10,000 people, 20,000, 30,000 people answering calls or doing lower level stuff. I think a lot of that stuff's gonna be by machine. So if you invest in those kind of companies, they have to add technology, they have to have a game plan. And interestingly today we're looking at some of those businesses, but our whole premise is we've gotta have the right people to run it going forward.
Other questions? Oh, yes, Kim. Good to be in the front. Couple rows here. Yeah, I was gonna say, is anyone in the back wants to ask questions? You can, you just have to really wave your hands so we can see you. I don't want to bias It. This is more of an international relations focus question. Given recent trends towards onshoring and in the wake of the global tariffs, how do you kind of view the future of the rules-based international order that we've kind of benefited from for the last 80 years? Well, it's definitely changing. You know, you could certainly, if to step back and look at what's happened here, the US was probably overly generous in the way it set things up, right? It, it spent three and a half percent of its GDP on the military, its main allies who it was defending and on the front lines or spending closer to 1%. It often, uh, allowed other countries either to have tariffs when it didn't have any, or what are called these non tariff barriers, right? It's very hard to sell pharmaceuticals in certain places in the world or US food products can't be sold. And yet these same countries sell all their stuff into our markets. So I don't think global trade's going away, but clearly some of that is gonna change. And I do believe the current administration wants to have a baseline of tariffs. Um, you know, who ends up paying that? Is it a different form of consumer tax? You could have debates about that, but I don't think trade's going away. I think the administration's trying to reestablish what they view as as a more equitable system. We could have a lot of debates about how this should be done and so forth, but I, I still think there'll be significant global trade. I do think they'll get some of these countries to eliminate non-trade barriers. I do think the US will have a base level of, of tariffs. And, and I do think you'll, and I also think there's a national security consideration where I think you'll see things like semis and pharmaceuticals and a bunch of things manufactured more in home countries. I think that's coming, which will probably add costs overall globally. So I think there's a reordering, but I don't think we're gonna be making t-shirts and, you know, gowns and things back in the United States. I don't think that's what's gonna be happening. But I do think if you're investing in these type of companies, you really have to think about what are the costs and what are gonna be the barriers selling your products globally. The world we lived in 10 years ago where things moved easily into the United States with no friction and all that's definitely changing.
We Take one or two months. Yes. And um, yes. Anybody in the back? Or I can't see everybody. Guy in the middle. Oh Yeah. Wave your hand. Go ahead. Uh, in the red shirt and then maybe the gentleman behind him. Go ahead. Stand up and give him a mic please. Uh, slightly bit macro. Uh, what's your opinion on the US national debt and how do you think things will turn out from here? Oh, the US national debt, um, that is our, it is really our greatest weakness. Um, if you think about this country, the rule of law, transparency, capital flows, the way we reward entrepreneurship. There, there, there are so many positives, but, but I think we're, we're doing something that is long term, not sustainable and, um, I, I, I think it, it, it is the biggest risk ultimately. And you know, what's been talked about for a long time, Pete Peterson, the Blackstone co-founder, set up a whole institute about this. Um, I, I, I think we've gotta get our deficit back to a place where it's not growing as a percentage of GDP, it's up six, 7%. We've got an economy that should grow two to three. So I think we've gotta find a way, um, to get that down. And, and I think it's, you know, for all these developed market economies, I do think it's the biggest risk, um, as the United States, um, as the reserve currency. We've had the ability to run these very large deficits, but it can't happen forever. And when you start to look at what a huge percentage of the debt is gonna go to interest expense, you overlay what we spend on the military, the discretionary part of the budget, then you take Social security and Medicare and what's left to cut, it becomes very small. So, um, yes, you're right. I think we and other countries around the world are gonna have to address it.
Another question that, um, back and then we'll come back up here. Yes. Way in the back. Uh, well, should wait a second. He is gonna give you a mic In a minute. Hi Jon. Um, thanks for taking the time. Uh, by way of background, I worked at a firm called I Capital, um, for the past three, four years, uh, with the partnership with Wellington and now KKR with Capital Group. Um, do you see, you know, firms like iCapital in case sort of going away, or do you see them sort of enhancing kind of their platforms to include those products? And then a second question would be how is, you know, Blackstone and, and asset managers, um, mitigating their risk since they're technically selling products to right. Financial advisors, RIAs, but at the end of the day to individual investors, mom and pop shops? Okay, maybe this is my last question. Okay. Um, well first of all, full disclosure, we own a small minority stake in iCapital. And I saw the founder Lawrence, uh, last week. And I think he's built a heck of a business, i I, that that company I think is well positioned because it provides infrastructure feeder funds so that asset managers like us can access, you know, large numbers of individual investors and you need that infrastructure and, uh, wealth managers don't really wanna provide it. So I view that as almost like the plumbing in the system. So I see it as very valuable. And as we grow, you need more plumbing. So I, I think, I think they're well positioned. Um, I'd say, um, in terms of risk, it's a really good question. I think you have to operate at a very high standard, your disclosure about what these products are, what the liquidity features are. These are not stocks and bonds, and you don't, you can't sell 'em every day in the same way. And you have to be very clear with the financial advisors and the customers. You've gotta make sure you have great KYC. So you're dealing with customers who, you know, there's nothing untoward being done. It, it's all about a standard of care. It's not any different than the question about an investment organization. Every element has to be done in the right way. And again, I think one of the reasons we've been so successful in this space is we've had really great returns, but we've run these products with a really high standard of care in terms of disclosure and liquidity and everything else. So I, I, I think this is a risk. And frankly, if you said to me what's my concern? My concern is there are other firms entering the space who may not have the organization and the same investments. And if they do something wrong, then you get a regulatory push that can have a much broader impact. So I'm very hopeful that all my competitors in the space do it in the right way.
Great. And with that, thank you so much. All right. Thanks everybody.