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- [00:00]
A
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B
John, thank you so much for joining this morning.
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A
Great to be here.
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B
So a surge in profits, deals abound, exits were robust. Is this the starting gun fired off?
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A
It does feel a bit of that, Danny. It's great to be here to be talking about it. We had a heck of a quarter. What we saw here was we delivered for our customers. That's the most important thing in terms of returns. We really leaned into digital and energy infrastructure. We also saw big inflows as well, 50 plus billion dollars. And all of that produced big earnings, distributable earnings up 50%. But you've really hit on the key here. We've got a couple of things going on. A cyclical uplift in deal activity. And that's very helpful for our business and our investors. And then we also have some of these big markets that continue to in wealth insurance, very attractive investment areas in places like India and life sciences. So a lot of good things are starting to happen across the board.
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B
It does look like deal activity is up, not just at Blackstone, but you see it within the investment banks, within some of your peers. John, the way that this is going, could we get back to record levels of deal activity?
- [01:49]
A
Well, if you look over time, you always see new highs, but it takes time. After the downturn certainly happened after the financial cris crisis. I think it will happen after this inflation and rate rise period. It will not happen overnight. We're still at low absolute levels of M and A and IPO activity relative to historic levels as a percentage of market cap. But there were very encouraging signs in the third quarter. IPOs were up 100%. M&A activity was up 64% in the U.S. we did three IPOs globally in the quarter, which is the first time in in four years that that's occurred. We announced an $18 billion deal this week. With whole logic, it does feel like things are coming together and what's helping is the cost of capital is coming down. The Fed's lowering rates, the long end has come down. Spreads have tightened. High yield spreads are down almost in half from their highs a couple of years ago. And we've got record highs in the stock market. That is a very good Combination for. For more deal activity. And so we get a little bit of calm here in the overall environment. With this kind of backdrop, I would expect next year will be an even better year for M and A and IPOs.
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B
Even so, there are still concerns. There's uncertainty around trade policy. Tariffs, to be honest, are really just starting to bite. You see that in some of the public company earnings, and sticky inflation is still with us. John, are those not still concerns?
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A
Well, I would tick through some of these, certainly on the tariffs. We've been an advocate of letting this tariff diplomacy play out. Obviously, around Liberation Day, there was a lot of concern, but ultimately we saw progress and deals being made by the administration. I would expect that will continue to happen. There will be noise as the negotiations go back and forth, but I do believe this will settle. And I don't think 612 months from now, this will be on the front page. The other thing I'd say around inflation is that our data is pretty encouraging in certain areas. Rental housing, the biggest component in CPI. Our data says it's running about half of the 3.6% the what the Bureau of Labor Statistics produces, and that should be helpful for the Fed. Also, we've seen a cooling in the labor markets. If you look at hourly wages at our portfolio companies, they're down around 3% from north of 4% a year ago. So I think that should allow the Fed to continue to lower rates. That's a positive. So I think some settlement of the tariffs, continued good data on CPI and rates coming down should be helpful. And overall, that environment does feel pretty good. Obviously, there can be risks along the way. We're in the midst of a government shutdown that can slow things like IPOs in the short term. But when we look out over the horizon, it feels pretty good for deals.
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B
So you're an optimist and there is clear robustness there, John. But you and your private capital counterparts, the shares of your companies have really been punished this year. Virtually all have underperformed the wider market. What do you think is behind those fears and is any of it warranted?
- [05:11]
A
Well, it's hard to look at stocks day to day. We focus on the long term for our shareholders. I think our total return is something like three and a half times over the last five years, double the stock market. So shareholders have been rewarded for investing with Blackstone. We, of course, are very aligned with them as the largest shareholders of the company. I think in markets when people are nervous about what's happening, there have been a lot of these stories around private credit, which I'm happy to talk about, that may have created concern. Maybe people have been focused on the government shutdown and the IPO market slowing or the tariffs causing that. We tend to take this longer term approach. And when we do that, it looks like a very bright environment. So I think with us, what we found is we just keep executing, keep delivering good returns for our customers, keep that enables us to raise money to expand our business. And I think shareholders will see that this business can continue to grow and deliver.
- [06:11]
B
Well, let's get into the private credit of it all, John, because it feels like not a day comes by that someone admittedly not in private credit comes on this show or others and say private credit is a troubled child and bankruptcies with some prime auto lenders are exemplary of that. Why do you push back against that idea?
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A
Well, we would say that if you look at the three big troubled credits that have been out there the last couple of weeks, this is not a private credit story. These credits were bank led, they were bank originated, they were bank syndicated. So we can't really understand why there's a referendum on private credit. I would also point out that these were non institutional borrowers. If you look at what we do in our $150 billion direct lending business, we lend 8% to private equity sponsors, to public companies. These were individuals. And also it appears based on the reporting that there was fraud involved in these three situations. That's something that's not so common. So I don't think it says really anything about private credit. And I also, because of the idiosyncratic nature of the facts here, I don't think it says a lot about the overall health of credit in the system.
- [07:27]
B
But John, couldn't you make the argument that these were firms that were tapping the credit markets over a span of years and you had very reputable people coming in and lending to them. Does it not say something that very fact that despite this continued concern of financial impropriety that people continue to lend to them and didn't spot some of the warning signs?
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A
Well, clearly in these situations there should have been more concern registered. When you go through a period of very low defaults, there can be at times people relaxing standards. And maybe that was the case in these situations. Although in defense of the folks who lend here, fraud, not disclosing liabilities, double pledging collateral, those are hard things to catch. And so that to me is a little more understandable. And I do think you have to look at this in the scheme of overall credit. Look at what's happening in the banking system, their defaults continue to be very low. They'll realize loss is very low. It's a similar story in private credit. So in aggregate the system to us feels very healthy. There will be these one off situations and certainly as you get deeper into a cycle, could you see defaults go up or losses go up off of these very low base today? Yes. But overall, again, I think the system feels pretty good to us.
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B
What about returns? It had been lauded as the golden age of private credit. But John, as rates start to come in just performance wise, is it still the golden era?
- [09:05]
A
Well, I still think it's a very good time for private credit. I would acknowledge that as base rates come down and as spreads tighten, some of the very high returns that were achieved. Being a senior lender in private credit, that's harder to do, achieving mid teens returns. But the premium relative to liquid credit, what you get in leveraged loans and high yield, that's enduring because you have this farm to table model. You're bringing investors right up to borrowers and knocking out a bunch of origination and securitization costs. And so I think the key thing is not necessarily the absolute return, but can you deliver a premium return over liquid markets? And that I continue to have very high confidence in. And that's why I think we'll continue to see flows into private credit, not just non investment grade, but investment grade. What we're seeing with insurance clients. The momentum in that area is pretty remarkable because insurance clients recognize, particularly as base rates and spreads come down, that getting that extra return from private credit without taking on any additional risk, that makes a ton of sense.
- [10:16]
B
There are those that are suffering, be it in credit or private equity. It's a real bifurcation of the industry. KKR somewhat famously told Bloomberg a few weeks ago that there are more McDonald's, or rather there are more private equity funds in the US than McDonald's. It seems like that's slowly changing. John, you hear stories of Brookfield and Oaktree coming together, speaking with a manager yesterday who said every day he has a new inbound from a GP looking to sell itself. With that increasing fragmentation, has Blackstone considered acquiring new managers?
- [10:48]
A
Not really. We're an organically focused business. We're celebrating our 40th anniversary. Over that period of time since Pete and Steve founded the firm, there have been a small number of acquisitions, relatively small in the scheme of the firm. We would look for those type of acquisitions that give us some intellectual capital and capabilities we have. But in general, we find we don't want to buy a from another firm because we can raise capital for us. What we really want is great talent to move into a space. We did this more recently, maybe seven years ago in life sciences. We did it 10 or so years ago in the secondary business. So it would be very tactical where we're getting a capability we don't have. But in general, we found we can continue to grow this business or organically. The rates of growth have been quite strong over time and it's because investors have so much confidence in us. So I think of us as an organic business building firm and I think that's the path we'll continue on. The exception is if we found something very special that we could add to the firm. My expectation though is that would be pretty small relative to the overall firm.
- [12:04]
B
Let's talk about some of the talent and changes to how people do work. Bloomberg recently learned that OpenAI hired a lot of bankers and has been working on a program of generative AI specifically to do financial grunt work. How long do you think before something like that could take hold at Blackstone where AI does the work of associates?
- [12:26]
A
Well, I would say it's a little bit of a harder task in aggregate, but there are elements of what our people do where we can continue to improve their productivity and have them do things they frankly don't enjoy doing. We've seen huge evolutions in the 33 years I've been in this business. I remember having to walk around the halls to get the orders, call people on the phone, look in the yellow pages, go down, pick things up long before an Uber eats world, long before we were connected. I think we're going to continue to see an evolution. I think you will be able to interface with an AI agent to say, hey, I'm looking in this industry, you know, can you give me the relevant comparables, the risk factors? That's already starting to happen, by the way, in areas like engineering and quad code, we're using those technology. Our video team starting to use this technology. Our legal teams are using AI to start doing things like marketing compliance. We're definitely going to be able to help our analysts and associates. So I think it'll continue to make them productive and make the job even more enjoyable.
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B
I think they're all going to be happy to hear this, John, because you notably did not say that it will replace them. So I think that's a good note.
- [13:44]
A
Yes. Well, thank you, Danny. Great to see you.
- [13:47]
B
Thank you so much, John. Really appreciate your time. This morning, Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.
- [13:58]
A
And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.
- [14:11]
B
Listen to the Bloomberg Daybreak US Edition podcast each morning. For the stories that matter with the context you need, find us on Apple.
- [14:19]
A
Spotify, or anywhere you listen.