Jon Gray Talks Tariffs, Economy, and AI

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Blackstone President and COEO John Gray says that despite market volatility, there is a pent up desire to engage in transactions and IPOs across the market. Gray spoke with Bloomberg Shanali Basseg at Bloomberg invest in New York on Tuesday.

Being here, John, thank you for being here. Tariffs. I mean, I don't know how you start anywhere else on a day like today, because the big question is, when you own so many businesses, when you have so many types of debt and equity tied to companies around the world, how do you think about the way this is evolving.

So I'd start with us. The good news is we.

Don't own a lot of businesses that export physical goods in the United States at scale, so that's helpful for us. But of course, as you point out, we're big investors and lenders to lots of companies and markets impact us.

And what I'd say is we try to take.

A little bit of a longer term perspective that there is tariff diplomacy going on, and that what is happening now could change depending on what market participants, what government officials do and you've got to take that longer term approach and hope or maybe expect at some point that they'll get to outcomes.

Markets will calm and actually, in.

A moment like this, you look around and say, are there good businesses that are now on sale? We can deploy capital into this volatility. So I would just say to investors be a little bit patient here. Let this tariff diplomacy play out a bit.

So as you look across the universe and try to find things on sale, what are you finding?

Well, I don't know if you know, it's so short term right now what's happened. But in terms of the areas we find most interesting, we love to be thematic in what we do think about sectors where there are long term tailwinds that are quite compelling. So digital infrastructure has been a huge theme for US data centers. We've been the leading investor in the world in that area.

The last one I.

Just threw out is a cyclical recovery and commercial real estate, which we're big believers.

In it and have been deployed capital.

So big picture as well, people are talking about a return of the deal environment. People are talking about the return of an IPO environment. In the IPO space in particular, it's been almost stunning how slow it's been this year. Isn't it a big problem if this doesn't come back sometime soon. There are a lot of companies out there that have been holding assets for a long time.

Yeah.

The IPO market and the M and A market, as you know, Shanali, are pretty cyclical, and we've been through a rough period of time. Right we saw the costs of capital go up globally. As rates went up a bunch, as central banks tighten to fight inflation, we saw spreads go up a bunch.

Market participants became cautious.

We had a regular platory environment that was not that friendly towards M and A activity, particularly from strategics, and I think we're beginning to see a lot of that change. We've seen credit spreads tighten a bunch, both investment grade and not investment grade. The stock market, even with this recent tradeoff, I think, is up about fifty percent from two years ago levels. You know, I think there's a

And there's sort of a mean reversion in terms of activity levels.

IPOs or M and A is a percent of the public markets value and we're below that, and there's just a lot of pent up demand looking for liquidity.

I think it will come. I think high quality.

Businesses want to be owned in the public markets. And this week it may not feel as good, but I think when we finish the year, it'll be a better year in terms of activity.

End of the year's a long way away still, John, I was just saying cumulatively, but yes, but to that end, you know, if we think about what happened this week, you know, if you looked behind the green room, a lot of people, one by one are looking at their phones, looking at the stock prices of their own firms and others. And it's been pretty ugly. Yesterday was the worst day for the S and P this year. We've erased everything

In the near term, certainly, when you have these moments, investors tend to step back. Market participants say, well, do we want to make that big commitment today?

Is the world more uncertain?

But we've seen these periods of time, and again I like to look at the bigger picture and what we see out there is still a decent economy. Right in the fourth quarter, our private equity companies grew seven percent in terms of revenues. We sell very low default rates amongst our private equity firms that we lend to today, non investment grade lending. Our CEOs, when we ask them at the end of the year, do they see a recession zero percent in the US, said yes over the next twelve months.

And we see inflation continuing to moderate.

So shelter costs, the biggest component of CPI, is running well below the government's four and a half percent data, which tends to lag. Input costs are still pretty flat. And when we look at our companies and ask them is it hard to hire, they say it's the easiest that's been in a few years. And so that combination of a healthy economy, some weakness certainly on the consumer side, but overall pretty good in the US, and inflation that is moderating. Maybe the pace of disinflation isn't as fast.

As it was a year ago.

That should give the Fed some room to bring rates down.

They'll do it very gradually. That's a pretty good backdrop, So that gives.

Me more confidence again why I think we'll see this pickup in activity.

There might be a silver lining to your point on the FED potentially cutting interest rates gradually. Every morning, the first thing I do is look at the tenure yields. We are down to four point one percent, which feels pretty stunning given we were flirting with five percent not too long ago, or five percent was a dangerous level that investors were talking about in January, potentially hitting your

Well, I'd start with sort of the bigger picture on real estate, which is we've been through a tough period of time. Right the sharp upward movement and rates hit, real estate values hit multiples, cap rates went up in real estate spreads, borrowing costs went up a bunch, and in the office sector in particular because of remote work, we saw a sharp decline in demand and so that created a very tough period for valuations. I think we're

Question is should I be an investor in real estate?

And what I'd say is, you know, whenever you have a sharp decline in value and then people stop building new real estate. We've seen two thirds decline and apartment building and warehouse building, then it's generally a good time to invest. And the real question is the pace of the recovery and value. If it comes purely from cash flow growth, it may take a little more time. If rates fall as they have, then you may see an acceleration in multiples and it'll happen more quickly.

But the path of travel in real estate is upwards. So we've been leaning in quite a bit.

We privatize a number of large companies last year. Clearly real estate is a sector that's going to benefit from a lower cost of capital.

But even if it.

Goes back up the ten year, I still think the path is very positive, just given the lack of new building in the space, which creates the ground really to have positive cash flow growth going forward.

I'm going to give you what I think might be a tough question for you in the world of real estate, which is your favorite child data centers or offices At the moment in terms of the near term ability to put money to work.

It's an interesting question.

I think from a value standpoint today, offices are pretty compelling in a place like New York City or San Francisco, because in New York you have financial services firms who are growing rapidly.

You don't have any new building.

In San Francisco, the values fell very hard in some cases seventy five percent, and AI and technology innovation really housed in San Francisco.

And so I think in.

Some of these markets now, given the sharp decline and value and the lack of new supply, office buildings become interesting.

You definitely want to buy more modern buildings.

But I still like the data centers too. They're what's attractive is this need for compute power.

I reference Deep Seek. But obviously the cost.

Of compute has come down pretty dramatically, and we think the usage is going to go up. There may need to be a little less training, and it may be more inference, but our lives are migrating online, and I think these data centers are a critical part.

Of that infrastructure. So I'd say I like both of these children.

So on data centers in particular, the estimates are staggering. But they're not only staggering, they're all over the place. You've seen estimates from a need for a trillion dollars or three trillion dollars globally to build data centers. You've seen estimates higher than ten trillion dollars. Both things can't be true.

Well, I think it's a question of what you're measuring.

If it's just the physical data centers, it's probably on the lower end. But if you're talking about the GPUs that go in those data centers or the power that needs to go, then those numbers get really large, and then I'd be at the higher end.

And it's a global phenomenon. I mean, if you think.

About where the world's going, I think our lives are going to be so impacted by this technology. What we do, how companies function, coding, customer engagement, even things like translation. Today now you don't even need translation anymore because the machines can do at real time. I think margins and companies are going to expand dramatically.

I think we're going to use these.

Bots to help us do so many things in our lives, and so ultimately, I think the infrastructure spend against this will be quite significant. I'm not a student enough or knowledgeable enough to know exactly what the number is, but it feels like it's going.

To be very big.

You know, one investor that we're speaking to tomorrow has this theory where AI is going to be so productive that they're betting on leisure and entertainment because they believe the work week is going to be shorter. Do you see that happening? And I think it matters because of the implications it would then have across the real estate sector and offices and all of the above.

You know, it's hard to say.

Historically, there's been a lot of prediction technology eliminates the need for work. What it's done is eliminated, some needs, expanded others.

I think there'll be some of that.

I think there's a potential as you get further and further out that maybe.

The aggregate work hours go down.

The good news to your point is the real world still exists, and so people are gonna do physical things as well, and interestingly, infrastructure, which has been a great.

Area for US physical real estate, some of the.

Entertainment, amusement parks, water parks, those things are gonna stick. You're not gonna do those virtually, I don't believe so in the near term. I still see this technology in many ways. It's eliminating certain jobs, but it's creating others. And you know, we own a business ancestry dot com, and you think about what that.

Experience could be like where it starts to create.

Movies and captures the music and the newspapers, and therefore what it's creating to the end user experience is different, and it's going to require some human interaction as well.

Obviously other functions may not.

So I think as investors, again back to the beginning, what's going to happen with tariffs this week?

I don't know. Will the FED cut two times or three times? I don't know. But this technology and the way it's going to.

Change our lives, I think that's profound, and thinking about these kind of big trends, that's what I'd focus on as an investor.

I want to ask you about a part of your business that I don't think that people ask you about enough. It's the business of hedge funds. We just heard from Don Fitzpatrick on the big picture here in terms of where the industry is going and how the multastrats are getting so big, but you seem to be finding a lot of opportunity elsewhere.

Yeah, it's interesting.

So our hedge fund business is primarily focused on absolute returns. The division is called BXMA for US. It manages a little more than eighty billion dollars of the capital. Joe Dowling, who ran the Brown Endowment and was a hedge fund

And we managed to do that.

So since Joe joined us four years ago, we haven't had a down quarter. We've outperformed sixty forty by fifteen hundred basis points. Last year we were up twelve percent net and we're doing it in this very uncorrelated way. And I think as cost of capital comes down, as base rates come down, I think investors will look for things like this as an area. I think historically in the old long short equity days, people were looking for

That's the key.

But are you willing to fight against the notion then that it's a multistrat or nothing in this environment.

Well, I think the multishrets have done a great job.

I mean, if you look at Ken.

And Izzy and the businesses they built and the performance, you can't argue with that.

But it's a big world and we can do.

Things a little bit differently. Our approach is different. We think we can offer something attractive to clients and if we do that, we think we'll find capital. And it can be across quant and macro and long short equity and credit. And if you can deliver investors a basket of that uncorrelated with an attractive absolute return, I think that's something that you do quite well.

So we have spent a lot of this time thinking about investment opportunities that exist in today's environment. If you can name probably the biggest shift heading into the next couple of years that you're trying to capitalize on, what exactly is it?

So in our business, I'd say it's a couple of things. First, it's the movement to private credit, which is essentially bringing investors directly up to borrowers. It could be non investment grade direct lending or investment grade in many cases insurance companies doing things like consumer loans and infrastructure loans and energy loans, fun finance, and in that process of bringing them sort of farm to table, you can generate higher returns.

Change with a lot of runway.

The other area I would point to would be the individual investor. There we have grown to two hundred and sixty billion dollars for individual investors, and again, institutions who are are more allocated to privates. Even wealthy individuals are only about one percent.

And so the advent of these.

Perpetual products across real estate and private equity and infrastructure and credit, and doing it in structures that have a little more liquidity but are still semi liquid, don't have the draw down features. These sort of products, if we can deliver out performance, I think will continue to be very attractive.

They've grown quite a bit. I think they'll continue to grow.

But again in both of these areas, I'd come back to our true north. We've got to deliver for the customers. If we do that, I think we'll continue to see major investors take a larger portion of their portfolio and move it into private assets, and at Blackstone we should benefit from that.

That was Blackstone President and COO John Gray speaking with Bloomberg Shanali Bask at Bloomberg invest in New York