Blackstone's Jon Gray on AI, energy, and the $1.3T firm's biggest strategic pivot: picks-and-shovels investing in power and data centers

Speaker 2: He's the president and CEO COO of Blackstone. And he's in the waiting room, and we will bring him into the TBPN UltraDome. John, how are you doing? Welcome to the show.

Speaker 8: Great to be with you guys. I've never had a preamble on ogres and goblins. Very excited.

Speaker 2: We are in we are in odd territory, odd times with the AI boom. I'm sure we'll talk about all sorts of different elements of it, different machinations in the global economy. But I'd love to start with a little bit of background on you. I know you've been with Blackstone for a long time. I'm fascinated by the decision to join, what the firm was like when you joined and how it's evolved over your tenure.

Speaker 8: Well, I came here in 1992 straight out of college, straight out of Penn. My senior year in college, I met a young woman in romantic poetry class, and a month later, I got a job, and now thirty four and a half years later, same woman, same firm. So very simple, very boring. Amazing. And when I joined this place, it was small. We had 75 people, We had a small m and a advisory business, and then we had an investment business with $750,000,000 of capital. Wow. And it was exciting because we were doing the private equity business and investing, and you flash ahead to today, and we've got a firm that manages over $1,300,000,000,000.

Speaker 9: Mhmm.

Speaker 8: And it's been a remarkable ride. Exactly. It it it would be hard to imagine because when we started at the firm, when you go to meetings, you'd have to tell people what Blackstone is and what we do. And that's obviously changed quite a bit, and credit to the founders, Pete Peterson, Steve Schwarzman, who continues to drive things today. They just had a vision that they could do more. And the alternatives business, private markets, was a tiny industry. And it started in private equity, but Steve in particular had this idea that we could do other things. So we went into real estate where I moved after about a year at the firm. We expanded into hedge funds, ultimately into credit, and later on into infrastructure and growth equity to the point now where we have this massive scale and can give almost any sort of capital solution in the private market. And I'd say the key thing that's really changed is what was a very much of a niche business serving a small number of endowments and pension funds and just doing a a high octane investing in private markets, private equity, real estate private equity has evolved today to serving insurance companies and individual investors and sovereign wealth and all different people around the world and doing things at high returning strategies and low returning strategies all around the globe. So but the most exciting thing I'd say is that the firm has stayed remarkably constant, that the commitment to excellence around the place to drive the entrepreneurial spirit, that's what it allowed it to grow. And it still feels like, even at this scale, like we're running a small business, which is not what maybe your viewers would expect, but we still have tons of pride of ownership, doing the right thing for our customers, and we know at the end of the day, the only thing that ultimately matters is that we deliver great performance. Yeah. If we don't deliver a premium to our clients, they're not going to come back. And so everything's focused around that and obviously operate with integrity as well.

Speaker 2: Yeah. I I want to talk about the entrepreneurial DNA of the firm. It feels like the partnership is extremely entrepreneurial. That's definitely a core value. As Blackstone has grown from one strategy to 80 strategies, 80 plus strategies, I think, what is the process for standing up a new strategy? How organic is that? We've seen venture capital firms go from they were doing Series As, now they're doing growth equities. They just sort of like bleed into the other strategy. And I'm wondering if there's a more deliberate process where there's someone on the team who's going out and exploring, finding a new opportunity or you notice that, hey, we're doing a type of we're engaged in a strategy and we actually need to sort of split this off and it's like cell division.

Speaker 8: I think it's all of the above. There is no master plan, but somebody comes along to us. In fact, yesterday we got a about an opportunity in an area that's adjacent to something we do, where we don't have a focus. It was somebody who wants to give us a serious amount of capital and said, hey, would you be willing to do a business? So in that case, it it came from sort of reverse solicitation. Obviously, when we were a smaller firm, you didn't get a lot of those. But I would say it was always this sort of basic idea of adjacency, where we were doing something, you know, you're doing private equity, you're doing real estate, and infrastructure sits right in between those two. Mhmm. Or you're doing, you know, higher risk debt capital, but maybe we can move a little more senior, and then ultimately you move to very senior capital. And the same thing in real estate, opportunistic, then more stabilized, then debt. And I think the key is, can you use the intellectual capital? That's really one of the great assets. It's the people here and all the insights. And if you think about investing as pattern recognition, which is you connect dots. If you have a broader platform and you can connect a bunch of dots, then you can be better at these adjacent things. And you end up serving the same customers who would prefer you to show up and say, oh, you can do private equity really well, and you can do real estate, and you can do credit. I'd love to work with you. We we really trust your organization. But the key is there's got to be a market opportunity. You've got to be able to deliver that return, and then you've got to have the people to do it right. Because the worst thing is to say, oh, there's a great opportunity. I can raise money for SPAC. Right? And then you raise tons of money and you end up not delivering for the customers. So the standard has to be, can we deliver a premium return? Do we have the expertise? And do we have the people to do it?

Speaker 2: Yeah. I'm sure we're going talk about artificial intelligence, but is there a second macro trend that you have locked onto that is an overarching thesis? I mean, we've been following the peptide boom and what's going on in GLP-one. Are big stories in financial markets broadly.

Speaker 1: Manufacturing is

Speaker 2: And another one with lot of interesting I'm just wondering if there's anything else that's actually

Speaker 8: I'd give you a bunch of those. Yeah. Mean, and we spend a lot of time trying to be thematic. Know, one of the things I've learned over time as investors is you you're so focused on your model. What is page 52 of the model? This assumption, whatever. But when you look back over time, I often say it's the first paragraph that matters. What's the basic business, the industry you're going after, definitely matters who your management team is. But theme,

Speaker 1: the theme,

Speaker 8: right neighborhood makes all the difference. I don't care if you're the greatest investor operator in the world, if you buy department store chains or legacy media companies. Right? There are just businesses where the wind's at your in your face, and you'd love to do things where the wind's at your back. Now you can still overpay, you could have the wrong business model in a good neighborhood, but your chance of success is much higher. Yeah. So as an organization, we're constantly saying to ourselves, what are those things? And so to the question, I'd say there are some basic ones. There's a global shortage of housing since the GFC. We've been investing against that. We've been selling goods obviously, really now for twenty five years increasingly online. Owning last mile logistics has been an incredible business. Mhmm. Because every time you buy something from Amazon, it goes through one of these last mile logistics hubs. There are geographies. India has been moving towards capitalism, you know, more physical, legal, capital markets infrastructure. And so building a great team there, investing in the right sectors, that has been an unbelievably successful theme for us. Japan has really reemerged in the last three or four years as a place that's open to foreign capital, that's allowing companies to restructure, allowing people like us to take companies private, and that's creating a lot of energy and excitement. You mentioned life sciences. I mean, you think about this AI and the number of products that can be created, and yet it's all still going to have to go through phase three trials, and we've got a big business that does just that. We love that. That's an area where obviously human beings are going to continue to invest a bunch of capital. The physical world, the re industrialization is massive. Probably the biggest theme beyond the data centers for us today, which we can talk about, is what's happening in electricity. I mean, all of the things. The data centers, the robots, the autonomous vehicles, that reindustrialization, it all needs power. Mhmm. And it's everything from LNG to renewables to pipelines to electrical equipment to utility services. The way to think about it is you try to find some great thing, like data centers. Yeah. And then you turn it upside down and say, what are all the inputs that go into that? Mhmm. Or today, sadly, defense feels like it's gonna be a massive tailwind business. Right? Every country around the world is gonna be spending more on defense. Mhmm. And so I think as investors, getting your heads around that and positioning your portfolio in private markets or public markets to say, these are the areas I have the highest conviction. The best is when you can find something one derivative off because today, as you guys know, the hottest things tend to get really high multiples. Yep. But can I find that thing that's not quite as sexy? And for us, of course, the data centers have been an unbelievable way to play it. Then you get the benefit of this without necessarily having to pay a huge price.

Speaker 2: How are you grounding the your thesis around artificial intelligence and the growth there? Like, are you obviously, there's a million data points about revenue and and multiples and valuations and there's a lot of good news where no matter where you look. But do you ever zoom out and look at how you at Blackstone are using artificial intelligence, the value that you're getting for it, where it's working, where it's not working, and use that to sort of level set on how real, how impactful this technology will be?

Speaker 8: Absolutely. I mean, I think the thing driving us is seeing the power of this technology as it gets deployed. Now I think all of us are frustrated that the technology is so powerful, but getting it inside of companies is hard. Yeah. It's sort of the beaker to bedside problem in clinical trials, right? Like, we've got this great medicine, how do we get it to the patients? How do we turn it into something usable? That is the challenge. But we are definitely finding more and more use cases. The first thing I'd point out, and our companies, their LLM spend and we have by the way, we have 270 companies, 13,000 pieces of real estate. It's massive in its scale. Our company's spend on LLMs was up 15 fold q one of this year over last. It's off a small base. Yeah. Of course. But it tells you what's happening. Yeah. And all of these companies are trying to find ways to be more efficient. Yep. We own an accounting firm. They're trying to make obviously tax and audit much more automated using this technology. We own ancestry.com, and they're trying to do things with content creation, which is telling an immersive story based on your family history as opposed to just giving you a bunch of dates and geographies and so forth. And by the way, content creation in a lot of ways is the easiest. Yeah. You know, coding, music, movies, because it's not the rules aren't as important.

Speaker 2: Sure.

Speaker 8: Probabilistic works better than you know, software's great because it's deterministic. There's yes or no. Yeah. But content is the easiest place we're seeing pickup. But I could go through we have a company that does lab grown diamond grading, and of course, reviewing these things visually with the AI is improving the efficiency of that company.

Speaker 2: Yeah.

Speaker 8: At Blackstone, we're trying to make our investment process better. Take in all this data from what we have in the outside world. Look at our historical memos. Read the diligence that's here and say to the teams, these are the areas you should focus on. It's not making the decisions, but it's a tool that's making us much more efficient. So I I would say to us on the compute side, it still feels like it's very early days in the implementation, but we can see particularly in rules based businesses, you know, transaction processing, legal, what is a billable hour going to be? This feels like the path of travel in a big way, but I think it's taking more time than most of us would hope.

Speaker 2: Yeah. How have you been processing the idea that certain moats might be eroded? There might be more more competition in certain sectors of the economy going forward. Is the moat section of every investment memo getting longer these days? How are you investigating that?

Speaker 8: I would say the uncertainty section of every one of these memos is getting longer because investing is hard and what you did historically was look at the, you know, ten or twenty year history of a business and industry and it just may not apply. Right? And we've seen this in the past, The yellow pages, I may be dating myself with you guys, but used to get a plumber opening up your yellow pages, find them. When the internet came along, they disappeared. Taxi cab business, which still exists, but obviously when Uber and Lyft showed up, it changed the world in a really profound way. Now the issue is in 50 different verticals, there are gonna be impacts. Mhmm. And how do I think about it? Autonomous vehicles, which reduce the accident rate by ninety five percent on serious accidents, like, won't that happen and what does that mean for collision repair? What does that mean for auto insurance? So I would say the areas of greatest risk today are obviously in sort of the white collar world.

Speaker 9: Mhmm.

Speaker 8: It's the software, it's professional services, information services, and there you're spending a lot of time trying to understand what the world may look like. Mhmm. And as a result, what you're beginning to see both in the public markets and the private markets, describe it almost like the red sea parting, where obviously there are companies viewed as AI winners, could be LLMs, application software, could be the digital energy infrastructure. That's easy. Then there are companies in the physical world that are pretty unaffected. We took a company Medline public at the end of last year. It's in medical supplies. Manufacturers distribute them. No impact basically from this, and that's easy to underwrite. And I think what you're gonna see, I think you'll see a recovery for instance in an area like real estate that's been very much out of favor the last four years because of higher rates and a bit of overbuilding, that's gonna come back because people are gonna say, oh, that warehouse, it's gonna exist. That hotel is gonna exist. I think sports, obviously. And so I think there's definitely a tendency from investors now to look at this physical unaffected AI world, certainly the AI benefiting world. And then this other area is fascinating because some of these companies could end up being very attractively priced, and they may need to change their business model, but they have real incumbency. So we have a business that does revenue management for hospitals, helps them with their billing, basically. What do you charge for certain procedures? Now, they need to incorporate AI into the business. But if they do that, they should be a winner because they have the trust of their customers.

Speaker 2: Yep.

Speaker 8: And that's super valuable.

Speaker 2: Yeah.

Speaker 8: So I would just say the risk levels on investing have gone up Mhmm. But I also at the same time the opportunities have gone up as well, the upside.

Speaker 1: How's your recall on your thinking around the .com era? There was very similar fears around how the internet would disrupt different businesses. We had Rick Caruso sitting here yesterday and we were asking him about this and he's like, I never I never thought I never thought my my category of retail would go under even though at the time everyone was projecting that like, hey, why no one's gonna would somebody go to the store to get something if they could get it shipped directly to their house? And so, yeah, I'm curious if you've reflected back on on that era when you started your career and and kind of tried to understand where you were where you had good intuition, where you were maybe off.

Speaker 8: I I think it's a great analogy, and Rick is a very good man. It's funny. If you look at retail, I think that does resonate with what we're talking about in software. So if you go back twenty five years ago, you know, just as the bubble's bursting, as Amazon's starting to become a marketplace for everything, you could have said retail will be an apocalypse. And by the way, Sears, Kmart, Toys R Us did not make it.

Speaker 2: Yeah.

Speaker 8: On the other hand, Walmart, I think it's up sevenfold. Costco's up like 20 fivefold. TJ Maxx is up 40 times and has a $180,000,000,000 market cap.

Speaker 2: That's crazy.

Speaker 8: And for those companies that won, they either had something that was infrastructure like groceries or had a great value proposition, really understood their customers. They they found a way to navigate it. And I think that is the kind of way to think about what's coming to so many businesses. Mhmm. Which is if they just sit and operate the way they have, they have enormous vulnerability. If they do something and have a market position that's protected, you know, they can end up doing much better. In terms of my own accuracy, I think I probably at times may have been too negative on some of the retail if I look back at it, and some of it obviously ended up thriving and doing quite well. And so you try to have a little bit of mental flexibility.

Speaker 1: Yeah. Well, it's good to have a mental model of like am I looking at a am I looking at a Sears management team or a Costco management team?

Speaker 8: Mhmm. Yeah. And it makes all the difference in the world. I've been the chairman of Hilton now for almost twenty years, and when Airbnb came out, which is an amazing business model they built, a bunch of people were saying it's the end of Hilton. Whatever, you know, the stock has been a rocket ship. Chris Nissette, the CEO's done an amazing job. It had a differentiated business model. It offered something fundamentally different. And so both of those companies ended up thriving and doing great. So I do think that is the hardest part today because the technology is moving so quickly and is so capable, it's making it harder. What I would say as investors is anything in this AI uncertainty world will see these multiples come down. Because people are until there's a sense that there's terra firma, that hey, this business model is gonna survive or may end up thriving. But right now, I think people are taking a step back, and I do think there'll be some baby thrown out with the bathwater. They'll end up being some software companies that you could buy at very reasonable prices, but this is the sort of stuff. The other thing I would just point out for us, because of the risks that exist, one of the easiest ways is to be in the picks and shovels. So invest in that electricity, invest in those data centers, because you don't know who's going to win of the incumbents, who's going to win of the new model companies, but you do know they're all going to need AI factories, they're all going to need power. And that for us has been really the biggest strategic pivot we've made, and we think it's going to pay huge dividends for our investors.

Speaker 2: Well, we appreciate you taking the time to hop on the show today. We've kept you already five minutes long. We would love to have you back and go way deeper. This was a fantastic conversation.

Speaker 1: No. Let's do it again soon.

Speaker 2: Have a great rest of your week. My name, John. We'll talk to you soon.

Speaker 8: Hey. Was an honor to be with you guys. Have a Take great care.

Speaker 2: You. You're the man. Up next we have Colleen Aubrey from Amazon Web Services. You know it as AWS. She's the SVP of Applied AI Solutions here with us in the waiting room. We'll bring Colleen in to the TBPN UltraDome in just a minute. Last question I wanted to ask, we didn't get a chance was the barbell strategy. I wanted to hear his take on this idea that you have Josh Kushner buying the Giants, the most legacy thing possible and then the AI labs and then you have Ellison owning Bugs Bunny and a bunch of data centers. And it's this weird new normal of you buy the oldest possible thing that is resistant to any sort of disruption and then the exact opposite. But we are joined by Colleen Aubrey from AWS in the waiting room.