In Good Company with Nicolai Tangen - HIGHLIGHTS: Jonathan Gray - President and COO of Blackstone

Episode Date: January 3, 2025

We've curated a special 10-minute version of the podcast for those in a hurry.  Here you can listen to the full episode: https://podcasts.apple.com/no/podcast/blackstone-president-and-coo-investment-decisions/id1614211565?i=1000682366351&l=nbJoin Nicolai Tangen as he sits down with Jonathan Gray, COO of Blackstone and former head of its real estate division. Gray shares what drives Blackstone’s success, the evolution of their investment philosophy, and the process for identifying outstanding businesses. He also provides insights into Blackstone's entrepreneurial culture, their approach to private equity and credit markets, and why scale and innovation are key to staying ahead. Tune in for a masterclass in leadership and investing!In Good Company is hosted by Nicolai Tangen, CEO of Norges Bank Investment Management. New full episodes every Wednesday, and don't miss our Highlight episodes every Friday.The production team for this episode includes Isabelle Karlsson and PLAN-B's Niklas Figenschau Johansen, Sebastian Langvik-Hansen and Pål Huuse. Background research was conducted by Sara Arnesen.Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Hi, everybody. Tune into this short version of the podcast, which we do every Friday. For the long version, tune in on Wednesdays. Hi, everybody. I'm Nicolai Tangin, the CEO of the Norwegian Sovereign Wealth Fund. And today I'm here with John Gray. Now, John Gray, COO of Blackstone, previously the head of real estate here, and incredibly under his leadership, Blackstone's real estate division has become the biggest in the world. You grew it from some five billion to more than 300 billion and you're known for some of the best deals in real estate the world has ever seen such as the Hilton Hotel which you took off market and I'm back on the market and wow well done. Great to be here with you

Nikolai. And you're taking off the tie today. I took off the tie because I watched your stuff and I didn't want to be overdressed. That's great. Now, in short, why has Blackstone been successful? I think we've been successful for a couple of reasons. The main one is we've never forgotten what our mission is, which is delivering for our customers. And that means delivering premium returns. If you invest in private

markets, instead of liquid markets, we have to deliver a premium. And because we focused intensely on that across all our different business units, doesn't mean we've always gotten it right. But that focus on returns has been so important to our success over time. In your mind, what's a good business? What are the characteristics? Characteristics of a good business, it's in a large market that's growing as opposed to the little nichey market. It's a business that has some moat around it, either a physical moat or something that

makes it special, a brand. And as a result, you have higher margin. Generally higher margin businesses say something about a brand. And as a result, you have higher margin, generally higher margin businesses say something about a company. It's a business generally with less capital intensity. Sometimes there are highly capital intense businesses that are great, but you love businesses that are capital light. You love businesses that have recurring revenues as opposed to having to start over every year. They're not exposed to one client or the government stroke of a pen risk And there's a potential to do things adjacent to the business and I would give me one example. What's the best missus you've seen?

Well, I've been the chairman of Hilton hotels You brought it up at the beginning for 17 years and it's global travel is an enormous growth business. But it's capital incentive. It's not the way they do it. So the way the business used to be, they used to own the hotels and lease it. Today, what a company like Hilton is, is a management company and a franchisor. So the physical real estate is owned by third parties, investors, and they just get paid as a percentage of revenues, maybe a percentage of the bottom line. And that allows them to grow without a lot of capital.

What kind of decision maker are you? Are you a pattern recognition slash gut field kind of guy or analytical or how do you shift between the two? I think you've got to be both, right? Because the data tells you something, right? I mean, certainly you can look at a business, you can say, over the last 20 years, every year the revenue of this business has grown 4%. That tells you something.

It sounds more like a long-term infrastructure asset. And you want to look at what's happening under the hood. You want to read the memo and look at the numbers. On the other hand, the past doesn't tell you the future. The past wouldn't tell you that data center demand would go up 20-fold in two and a half years. The past wouldn't tell you that power usage, which in the United States has been flat for 20 years,

is all of a sudden going to go up by 4% a year going forward because of the electrification. So I think you need to have both a quantitative side to you, but then an instinctual side that says, look, this really feels good. I actually, for the sake of foolish closure here, I did a master thesis on decision making and interviewed the 20 best investors in Europe. What did they say? Well, so the best ones move between analysis and gut feel. Now, nobody wants to admit when it's called gut feel, but when you call it pattern recognition, they all think it's much better. You need to be pretty senior to use it because

you need to be in a position where you actually can trust your gut feel, where you don't have to back it up with a lot of analysis. And of course, nobody else, nobody trusts anybody else's gut feel. It's a fascinating thing. You've been out or you've avoided office buildings and shopping centers for a little while now. Do you think it's time to go back in? I think it is interesting. We announced yesterday a small shopping center deal, small by our standards, grocery anchored, not big regional malls, but I think convenience retail, because we thought it represented good value and no one's building shopping centers these days. And that to us means the lack of new supply, even as e-commerce happens, I think there's

an opportunity. We like grocery anchored, harder to move online, less capex. And then on office buildings, I would say you want to focus on the best quality office buildings. I mean, the values have fallen very significantly. We left office buildings for the most part a while ago because we were worried about the capital intensity. We didn't know COVID was coming.

People were going to stop coming to the office. But you need to own the very best quality buildings. And I would say buying those buildings at a significant discount is interesting, but we'll do that selectively. You're also in private equity, and you built this up to be a very, very big business. Some people in my part of the world are a bit skeptical when it comes to private equity. Are they right? Are they wrong?

Well, obviously, as the biggest private equity investor, we don't think they're right. Let's start the other way. What are the reasons to be skeptical to private equity investor, we don't think they're right. I'd say, I think it's so, yeah. Let's start the other way. What are the reasons to be skeptical to private equity? The reasons to be skeptical are why the business or how the business started, right? If you went back in time, it was in the 80s, there was a lot of leverage used. You were often buying divisions of bigger public companies.

They were industrial companies. So leverage, either took on a lot of loans. Lot of loans. Or a lot in the bank. They were, the return often came from taking out maybe some cost firing workers. You weren't enhancing the business that much. You didn't have much operational expertise. It was mostly financial arbitrage. If you flash ahead to what the business is today, it's very different. You look at the two biggest deals we did this year, Smartsheet, which is a workflow software

business, or we did a large business, Tropical Smoothie in the fast food franchising business. These are fast growing businesses. The amount of leverage we use is a fraction of what was done in the past. The returns are gonna come by enhancing growth, bringing in our resources to help these companies grow faster, and that's how you're gonna generate excess returns.

What kind of people do you hire? We try to hire people who are obviously smart, hire people who are driven. I think if you ask me one quality, that's the most important one. You said it. This is not a nine to five, five day a week job. Most of the people here work very hard.

And you need somebody who really cares. How do you screen for drive? Obviously you're finding out where they used to work or what they do. Sometimes there are telltale signs, people who are in athletics getting up at five in the morning, people who've came here as either

parents were immigrants and to get to some elite school they had to do extraordinary things to get to where they have. I don't know, you're trying to get a sense of somebody who just really cares a lot about what they do. Do people who put in the longest hours, do they do the best here? I don't think it's the longest hours. It's really about caring. So I would say you really care about what you're doing

and nobody's checking where you at your cube at 8.32 a.m. but do you really care about the quality of the presentations, the quality of your investment committee materials? There's something about you that makes you want to get it right. John, what is your advice to young people? I think it goes back to some of the earlier stuff, which is you got to really work hard. You got to care a ton about what you're doing. And I think that ties to the passion.

I think one of the reasons we're having success at what we do is because we like it. And if you don't feel this genuine passion for what you're doing I think it's hard and you should find another career. The other advice I would say is don't be afraid to speak up. I think one of the challenges oftentimes, particularly people show up at businesses and they sit quietly and once you start to get a sense of what makes this business you're working at tick, it could be a non-profit organization, whatever it is you want to be an agent for change.

And almost every company, Blackstone included, can do things better. You can serve your customers better, you can shorten some of the paperwork, you can find a new market, a new opportunity. If you think of yourself as an entrepreneur and an agent of change in whatever you're doing, it makes your job more fun. The people you work with really appreciate it. You get more out of it.