What is the Blackstone view? The operating thesis right now about
where we are in the economy and where it's headed and inflation on whether
we're going to have a big downturn or not?
Sure. Well, on the macro, which obviously
affects everything, we do benefit from having the lens of a really big
portfolio of investments. So we have stakes in over 200 companies
that together have over 200 billion of revenues in aggregate.
We have a real estate portfolio with over 12,000 individual assets.
We have a very big private credit portfolio.
So that's a very sort of rich sample. And I'd start with the good news.
So the good news first, I think is we pretty definitively, definitively see
inflation trending down. If you look at the inflation prints, the
standard metrics and you adjust for shelter, which sort of lagged on the way
up and is now lagging on the way down. If you look, for example, at core CPI, a
very important metric X shelter that's running in the mid threes.
And if you look at CPI by itself, X shelter, it actually hit about 2% last
month. So we definitely see the direction of
travel being down. Other good news is the performance of
the and resilience of the economy and of many companies to date.
So in our own portfolio, we talked about this publicly in the first quarter, our
private equity portfolio companies grew with double digit revenues in the first
quarter with stable resilient margins. We see in our portfolio clear signs that
costs have peaked in the last few quarters, including with respect to
wages, very importantly. So there's some good news on both those
fronts. Now, against that, of course, is the
challenge of the cost of capital and the availability of capital.
And there I think you see the confluence of three really big things.
First, obviously, the escalation in short rates over the last 14 months or
so, 500 basis points. I think the Fed has
basically achieved its goal of achieving positive real rates for the first time
in this country in many years. And we're going to take the Fed at its
word and plan for higher for longer short rates.
Second, quantitative tightening. You know, as you and I know, I think a
few years ago, we sort of couldn't stop talking about you.
And now I think we don't talk about it enough.
And so pre-COVID, the Fed balance sheet, as you know, was 4 trillion or so.
It more than doubled in the subsequent couple of years.
And now they're embarking on a on a balance sheet reduction program where
they're basically through run off of assets, shrinking that balance sheet by
about a trillion, you know, annual run rate a year.
So that's going to have significant effects over time.
And we already see some of the impact in certain markets and how they're behaving
like agency mortgages. And then third, as a result of the
banking challenges, especially the regional banking challenges of earlier
in this year. We do think you'll see credit
contraction from that over time. So those are three big forces.
And I think the result of all that is the Fed is basically going to deliver
what it intended, which is a slowdown in the economy.
And I think, you know, you should expect to see deceleration in the economy, you
know, in the coming months. So take all that together, a complex and
nuanced view, strengthen the economy at the same time, reduction of liquidity,
some uncertainty. What does that mean for deal making?
Because we saw at the end of last year going to the beginning of this year, it
almost dried up. I mean, M&A really went down a lot.
What are you seeing at Blackstone? I think we're seeing the overall M&A
cycle playing out probably is we more or less expected even a year ago, which is
you had this really big rate shock again, the 500 0 to 500 basically in 14
or 15 months. And during that time period, M&A
activity essentially froze. We are now seeing on the ground some
thawing of that that freeze. And I think the reasons for that, you
know, having seen these cycles before, are, you know, that seller expectations
need to be recalibrated and that takes time.
It generally takes sort of 12 to 24 months after a market shock or after a
cycle a bottom. And so I think that process is playing
out. And then in this particular
circumstance, I think market participants are now seeing that we're
nearing the end of this dramatic rate increase cycle and therefore feeling
like there's a little less uncertainty, a little more certainty and are readier
to transact. And so if you look at our own business,
you know, just in this month of June, we've been busy people.
And so in the last couple of weeks, you know, we announced things like a $2
billion investment in one of the country's fastest growing utilities, an
almost billion dollar additional investment in the country's largest
private developer of renewables. We're financing in partnership a
potential vaccine for pneumonia in the logistics area.
Real estate, which we're big fans of, we've been selling and buying.
We announced the sale of over $3 billion of logistics assets to a public company
earlier this week. And we also.
Wired three different portfolios of logistics assets in both the US and
Europe. So I think those probably constitute
green shoots or potential green shoots. I think you'll be hearing that that term
will be more in fashion this summer, I think among Wall Street types.
But really for us, in terms of our business, our business model is really
made for times like this. At its core, we're all about long term
locked up, committed capital through fund structures and what that allows us
to be as patient and it allows us obviously to have capital in time when
capital is short. And indeed we have nearly $200 billion
of dry powder to invest opportunistically in the coming time
period. And our history has shown that those
couple of years coming out of a cycle are some of the best times to invest.
So we're excited about what the future will bring.
As you look at the the landscape out there, where are the
investment opportunities and how dependent on their assumptions that were
done or close to done with the hiking of the rates?
Sure. Well, it's a multifaceted answer and we
have a broad business, and so we have sort of a balanced attack and aren't
relying on one single strategy. But I think for sure, on the on the
credit side, lending money right now in this environment is a very compelling
thing to do with very good risk reward, probably some of the best risk reward
we've seen in a long time in the credit area.
So in things like direct lending, you know, you can generate double digit
returns given where base rates are and spreads for being the very senior most
part of the capital structure with a lot of equity beneath you.
So that is very attractive in other forms of private credit, whether it's
asset backed credit or real estate credit.
Similarly, it's a very good time to invest my risk reward standpoint.
So that's one big theme. And then on the equity side, a little
bit apropos of what I talked about when I went through the deals we're doing,
you know, I'd say we're still applying some of our same key themes
around sort of the sectors and areas we want to invest in.
But now we think we'll do it in a more interesting environment, maybe a
somewhat more dislocated environment to find value.
So that's really how we're approaching it.
You mentioned real estate. Obviously, Blackstone has a very
substantial presence in real estate. It's been a lot in the news.
There's a lot of report of the challenges for commercial real estate.
What is your perspective on that? Are we headed toward a real substantial
downturn in real estate? Well, it's interesting.
I think, you know, when you see the acronym CRT in a newspaper article, you
can be sure it's probably going to portray the sector and paint it with a
broad brush. And the reality is
it's the reality is there's a real bifurcation in terms of the dynamics in
the sector, in real estate as an industry, it's a big industry.
You have one sector traditional office, especially in the US, that really does a
fundamental challenges and vacancy levels of 20% plus and so forth.
That happens to be a very small portion of our portfolio, less than 2% of our
global real estate equity portfolio. And then you have a number of sectors
where fortunately we're concentrated there.
I think some good sector selection decisions like logistics, data centers,
a number of areas in rental housing, Life sciences office, where where the
fundamentals are really quite good. Vacancies in many of those sectors are
at 2 to 5%, which is almost at or just above the frictional level of vacancy.
You know, market rents growing at double digits in number of those sectors.
So it really matters where you invest and the portfolio construction.
I think our firm is created in real estate over the last decade or really,
you know, some of our some of our finest work as a firm artificial intelligence,
particularly generative or large language model articles and such very
much in the news these days. Start with Blackstone.
What difference might it mean for Blackstone's operations?
Before we get to the investment in a Well, it's a really good question.
Obviously a lot of focus and we've been focusing on the potential in this area
for a while. I'd first just big picture say that I
believe I will reinforce and further the advantages, advantages of private market
investing relative to public market investing.
Why is that? Well, I think the reason for that is
it's actually pretty simple. Public market investing, which relies
obviously on publicly available data. That sort of data will be increasingly
and further commoditized in an AI world. And in contrast, the value of
proprietary data and insights that you can glean from a really large private
market portfolio accumulated over many years across many businesses, the value
of that sort of information and data and ability to mine insights from that and
have pattern recognition coming out of that both longitudinally and across your
business. That will only be further enhanced again
relative to public market investing. So I think that is a big picture
perspective for us on our business. You mentioned this first.
Operationally, I think for sure over time they'll be efficiency gains in our
business processes and our operating processes from leveraging these tools.
And then on the investing. Hide what you were getting at.
Obviously, lots of focus. You could say there's a bit of a gold
rush mentality right now. We're going to be very careful and
thoughtful about how we go about it. But what I'd say is we've already been
able to action what I would call some derivative plays relative to the space
that we already know. We're going to be big winners in the
ecosystem.