Transcription
Welcome back to Squak Box. Blackstone reporting earnings of $1.52, topping estimates of $1.35 a share. That's on revenue of $3.8 billion, also ahead of expectations. Joining us right now is Jon Gray, President and Chief Operating Officer of the Blackstone Group, which has more than $2.3 trillion in assets under management. Good morning to you.
So many things to walk through in the quarter. Obviously, the AI infrastructure piece is probably the standout, and maybe we should talk about that, especially given what we've been talking about with Alphabet this morning and how much money it's planning to spend on its continued buildout, but also we should probably talk about private credit as well, Jon.
Sure, Andrew, it's great to be with you. We had a heck of a quarter. We had 26% earnings growth. That was on top of 25% growth in the first quarter. But the thing that is really exciting for us is this strategic pivot into that AI world and AI infrastructure is really paying benefits to our investors and our various vehicles. We really got a front row seat to what was happening here. If you go back to 2021 when we bought QTS, our big data center platform, and we saw the demand that was growing, and we started investing in scale across this ecosystem. We did it in energy and electrical equipment, data centers, neoclouds, foundational models. And those seeds we planted are starting to come to bear real fruit today. We sold a data center portfolio a couple of weeks ago at a large gain. We sold the big battery storage company yesterday for $7 billion. And we're not done with this seed planning. In the quarter, we announced partnerships with Google around their TPUs, with Anthropic in deploying their technology, with Broadcom around financing their chips. We're doing this in debt and equity. And as a firm, we really sit in a unique spot at the intersection of AI and the physical world. So we're big believers in this global shortage of compute. And we're doing it and investing in what we think is a really thoughtful way. And it's beginning to pay off for our investors. And that's what really excites us.
Jon, when you sort of look out at the future, how many more years of spending at this kind of pace do you think we are going to see? Obviously, even this morning, interestingly, some of the investors don't seem to be giving, you know, there was a period of time where any tech company, hyperscale, had said they were gonna spend more money, investors applauded. When it came to Alphabet this morning there was little bit less applause about higher spending and so I'm curious how you're thinking about that and how you think. We all should be thinking about that.
Well, I think the context is thinking about supply and demand. And the market obviously is concerned about this kind of capital spend. People talk about what happened in the telecom boom and bust in the 90s. They talk about, frankly, housing where we had a bust in '08, '09. But in those cases, what we saw was massive speculative overbuilding. And supply ran way ahead of demand. What we see in this marketplace today is something that looks very different. The demand is growing so quickly. I think Anthropix revenue has grown run rate five fold since the beginning of the year. At our portfolio companies, we've seen a seven fold increase in spend on large language models in just six months. And we're seeing powerful application of this technology at our companies. It's early days. But the returns are really strong. And then on the supply side, you don't build data centers and power plants speculatively. What you need is enormous investment that requires long-term contracts in almost all cases from big, lowly leverage investment grade companies. And so right now, there's a shortage of compute. If you had compute today available for 26 or 27, There'd be plenty of hyperscalers and large language model companies to take it. It feels like we've got a long way to go. Most of us in our lives, our businesses are just starting on this journey. It doesn't mean, by the way, there won't be misallocations of capital. There won't be losers. But in aggregate, we really think this is a new operating system for the global economy. You've got to make this enormous physical investment. And I do think it'll pay big dividends over time.
Hey, Jon, not to harp on this, but we just had Michael Nathanson on talking about some of these issues. He thinks that the capital markets will kind of put the kibosh on some of these companies being able to spend those same amounts. He likes Alphabet because they have a very deep war chest, said the same thing about Meta and Amazon for those reasons. But he thinks there could be a point where an open AI or an Oracle is going to have to rein in some of its spending. I just wonder. How that plays out on the larger thesis for a, if you agree with that, but how you think it plays out on the thesis for there's huge demand for this, somebody's gotta spend from somewhere. What would that do to the entire ecosystem if that were to happen, if some of the big players who have been big spenders to this point had to pull back?
Well, there is obviously gravity from the capital markets. And you could see cost of capital go up for non-investment grade companies, certainly those companies who issue more debt. But you will also see, I think, a response, more equity raised. And it's also going to be a function of how these companies perform. The fact that Google's revenue was up 24% yesterday It was powerful. The first quarter results from the hyperscalers saw their earnings grow 60%. So I think it's gonna be a yin and yang. There's gonna concern about this spending. But then the question is, are they getting a return? And if you went back in time, Amazon, for years, people said, what is this bookseller doing, spending enormous amounts of money to build out this huge warehouse network? Well, that turned out to be a very good decision. So I do think there will be some limitations because of the scale of the build. There's also going to be limitations we see, obviously, in power. There could be political pushback. But at the same time, we're seeing enormous leasing activity and demand. Our data center platforms leased one gigawatt in 24. 2 gigawatts and 25. And this year, we think we'll lease at least 7 gigawattes. And that's more than $100 billion of data centers, another couple hundred billion dollars of chips. There are limitations, and the market may make it harder. But I still think because there's so much demand for the underlying compute and the productivity it's going to create, I think we're going to head on this path. It may get slowed a bit, but the path of travel, I think, is pretty clear.
Jon, there has been a slowdown in the private credit space. Yours, along with the rest of the industry. I'm curious what you think that looks like going forward.
Well, private credit is interesting. Our institutional clients, insurance companies, pension funds continue to allocate at scale because they get that premium return in private credit relative to very tight liquid credit. And they're expanding, moving from non-investment grade now to investment grade private credit. And that's one of the big ways that we're seeing this financing back to this digital and energy infrastructure that's needed. On the wealth side, we have seen a slowdown. There was a lot of noise in the system. That's not a surprise. But again, I think some of the... Call it town criers of private credit doom, are going to be disappointed. Had they come out and said that returns would be lower as a result of normalizing default rates, lower base rates, that would have been credible. But the calls for crisis and all that is not going to happen. And I think as investors see that, they'll recognize that private credit is a good place to deploy capital within our BCRED product. You know, inflows have been muted, but redemptions, at least early in this quarter, are down significantly. And so I think this is just a moment in time. You and I spent a lot of time talking about the private REIT space a few years back. BREIT today is delivering terrific performance, up more than 10% the last 12 months. And it's beginning to see very positive inflows, the best net inflows last quarter, in almost four years. So, I think the key is... Do we deliver performance? If we do that, then the flows will resume.
Okay, let me ask you a different question. Because you're an investor, you're a investment firm that makes investments, I wanna ask you about your stock, because the stock is down a year to date a little over 20%, and how you think about that, and what you think the investor class is looking for from you to move that number in the positive direction.
You know, I think the market is focused on this private credit topic. It's focused on the fact that rates are elevated and what that's going to mean for transaction activity, for certain asset classes, like real estate. And it tends to be pretty short-term focused. What we're focused on is delivering strong returns for our clients, which we did again this quarter. We feel very good about it because of some of the strategic moves. Beyond AI, what we're doing in life sciences and secondaries, our platform in Asian private equity, there's a whole universe out there where we are delivering. And if we deliver earnings growth that is strong, which we have certainly this year, we expect to over time, we're paying today around a 4% dividend yield, which is four times the market dividend. And the market we serve is growing. People want access to privates because of the diversification benefits, because of their return benefits. We're serving individual investors, insurance companies, institutional investors. If we keep executing, one day, as we've seen in the past, the market will wake up and say, this is a heck of a company, and we'll get rerated upward. Right now, we're in a moment of macro volatility. That's weighing. I think that will pass, and people will see the strength of this franchise.
And then, Jon, finally, Blackstone famously has these Monday morning meetings where you all talk about the big investments you're making. I'm curious, when you guys have those conversations today about interest rates and where you think they're headed, what Kevin Warsh and this Fed is going to do against this backdrop of increased oil prices around the world, given what's happening in the Middle East, you say what? What is happening in that room these days?
Well, Kevin Warsh is a very capable, very financially analytical person, and I think he'll look at the data. What we see in our room is, yes, energy prices have gone up, yes there's still some lingering effect from tariffs. But if you look away from that, inflation has remained relatively subdued. You know, we own a lot of rental housing, and we see the shelter rates growing. About half the rate of the government data, about one and a half percent. When we look in the labor market in the U.S., it's come down from 5% wage growth to about 3%, which is very favorable when you consider the productivity gains that are happening. I think this is a near-term supply shock to inflation. I think when the war settles, we will see energy prices come down. And I think the Fed will want to be patient. We don't see any sort of price-wage spiral. We actually see inflation really, as I said, away from energy and away from the AI infrastructure in a pretty good place. So I think that gives the Fed room to wait and watch what happens here.
Okay, Jon Gray, always good to see you. We appreciate you joining us and your perspective on all things around the globe. Thank you both. Thanks.