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Below is the transcript of a CNBC Exclusive interview with Tony James, Executive Vice Chairman, The Blackstone Group. The interview was first broadcast on CNBC's Squawk Box Asia on 17 September 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Amanda Drury
Amanda Drury(Mandy): Ten years on from the collapse of Lehman Brothers, do you think that we've taken the right steps globally to prevent another similar crisis?
Tony James(Tony): I think we've taken a lot of the right steps. We're definitely safer today. The banks are much more capitalized. The risk systems are so much better. The compliance systems are much better. The regulators are more vigilant. The mix of businesses has shifted away from the highly risky stuff and I think it makes a world of difference.
Mandy: Where do you think the next crisis could come from and when?
Tony: I think the last crisis was a terrible crisis. But it was both a financial crisis and an economic downturn. Right now, I don't see any economic downturn on the horizon. So it will be a little while before you have that confluence of factors. The other thing is it really was residential mortgages that drove the last crisis. I don't see the kind of excess and lack of risk systems and the interconnectedness anywhere on the horizon. So actually I'm not sure where it comes from but that's one of the things that make crises, they always surprise you somehow.
Mandy: That's right. But how do you think the current trade war between the United States and China? Could something that hit the U.S. economy?
Tony: Well I'm an optimist on that. There are certainly rivalries between the countries but I believe the mutuality of interest will at the end of the day mean they come to some kind of agreement. I think you know there is a lot of talk at the Summit here today about the U.S. and the changed view and how all that is terrible and that's understandable it's certainly scary. But one way to look at the world is that the last 70 years is a bit of an aberration. So this may be a return to normalcy, not a change from normalcy. And what I mean by that is pre-World War II it was a multipolar war world where you had a number of global powers. Now we're moving to that again. The U.S. was a dominant power coming after World War II and it had trade policies to encourage the rebuilding of developed markets like Europe and Japan and to encourage developing markets to further develop. 70 years in, those policies worked. But now the U.S. is struggling to keep up with the rest of the world and the rest doesn't want its own unvarnished leadership anymore. So there's a recalibration. The cost of the U.S. losing that leadership position and losing that economic superiority so to speak is a retrenchment and they want level trade rules. And so I don't see any reason why there can't be a leveling of the trade barriers, trade rules and still everyone I think everyone can succeed and thrive.
Mandy: I certainly hope that your optimistic view is the correct one but here and now how much could the trade spat hinder you Blackstone from doing business in China?
Tony: Obviously we're worried about that but the recent signals out of China, notwithstanding the tension between China and the U.S., China is open for business and encouraging Foreign Direct Investment, encouraging foreign involvement actually making it easier. They've changed the rules so 51 percent of financial institutions can be owned by foreigners and things like that. So we're actually feeling undiminished enthusiasm. I would say the biggest risk is not so much trade or government resistance as in my view currency, because whatever investments we make in China is obviously going to be affected by the value of the Renminbi.
Mandy: If you start to see any further negative damage on your business though considering that CEO Stephen Schwarzman is a friend and supporter of President Trump how much appetite might there be at Blackstone to use that leverage to urge Trump to go a little easier on China in these policies?
Tony: Well as a as a firm we've been urging. I just want to say Mr. Schwarzman is also a good friend of President Xi and Liu He and the people in China. So we've been urging both sides to be reasonable and reach an agreement. I think that's getting a little more receptive audience in China than it is in Washington. But we keep working on it.
Mandy: You've said that Blackstone is facing the tightest labor market in nearly 2 decades. Considering that construction, real estate is one of the big areas this year end and obviously construction has relied quite a lot on immigrant labor. Do you feel that the President needs to go easier on his immigration policies?
Tony: Well as we talked before the interview started, I'm a believer that immigration is a good thing. I think increased population growth drives economic growth. I also think it brings in talent diversity which is part of the secret sauce of America that creative swirl is driven by non-homogeneity. So I'm all for immigration. I think we could have wiser immigration policies. We should view immigration as a talent recruiting tool and not a threat, my opinion. And you're right. Labor markets in the U.S. are very tight. So immigration is I think going to both help that. But it will benefit from that too as people feel less threatened as they feel that immigrants aren't taking their jobs because there are plenty of jobs out there. There's more jobs available than people looking for jobs now for the first time in history. As that situation persists and maybe even gets worse I think people will be more open to immigration.
Mandy: What is your reading on the real estate sector though in the United States with the cost of labor with the cost of land having gone up, we already starting to see home sales slowing down are you worried about a significant correction in the real estate sector?
Tony: No but the forces you mention are not necessarily bad for real estate. The real estate cycles are driven by two things. Cap rates or go up and so prices come down of existing assets and then overbuilding. I would say there's a lot of building going on in the United States right now. The forces you mention of more expensive steel, more expensive wood more expensive building products because of the tariffs and more expensive labor actually put a damper on new building. And it perpetuates the values of existing assets longer. I think real estate values in the U.S. are full but not excessive and I don't worry. We don't see any sign of a downturn yet.
Mandy: What do you think about the valuation of the U.S. stock market because you were on CNBC back in February and said you saw equity markets falling 10% to 20% at that stage so what is your post check on the market now?
Tony: And a week later it was down twelve.
Mandy: Yes that's right.
Tony: I still see think the equity markets are overvalued but the equity markets people talk about the S&P as being representative of 500 companies. Point of fact, someone told me recently that the S&P which is up 9 percent this year if you take out Amazon is flat - one stock. So a lot of the S&P is now driven by a few stocks. The FANG stocks and they're great companies and they have fantastic futures. But to get good multiples of your money from here you really have to believe a lot. So I feel like were nearer a peak in values than a trough for sure and at some point there'll be a correction but there's a lot of things going on in the world right now to have them the stock market in essentially an all-time high with a risk of North Korea and the trade wars and all the things we're talking about higher interest rates. It feels full to me and it feels like there's more downside than upside.
Mandy: What do you see as the risk from North Korea?
Tony: We were very worried about that a couple of years ago and I have to say that swung from being an issue I thought the world didn't worry near enough about when the two presidents were going at each other. Now maybe that's a source of upside because there's some chance they work something out. It'll be hard without the support of China. And that gets back to the whole trade thing which is another reason why I think eventually we will reach a trade agreement. But I think if we do reach some accommodation with North Korea, it would be wonderful for the world and that would be reflected in higher equity values actually.
Mandy: Could maybe even one day present an opportunity of investment for Blackstone?
Tony: Certainly could. We try to find new opportunities. We try to get there early and I don't know enough about North Korea to know where those opportunities would be. But I can certainly see opportunities as that economy develops faster.
Mandy: Have there been meetings or discussions about that?
Tony: No there haven't.
Mandy: Where do you see the best opportunity then when you scour around the globe for assets to invest in? What are you looking at?
Tony: Well it's different in different countries. So for example in India we are very optimistic about high quality office space because there continues to be lots of international companies wanting international quality office space and people in India and the lower rupee just makes that stronger and stronger. In Europe and most countries around the world, the internet is driving delivery to consumers and no country has enough last mile logistics to deliver fast enough to the consumers so and if you have a piece of property in an urban area where most of the people are you're probably not going to build a new warehouse, you're going to build an apartment building or an office building or something with higher value so there's not much the building is not keeping up with the demand for last mile logistics so that's all over the world. We like that. The world continues to urbanize and it continues to urbanize in a different way than in the past with mixed use neighborhoods where young people want to want to live, work and play all in in reasonable proximity of each other. So doing that in gateway cities driven by technology, media, healthcare, those long term positive trends has been a very good play for us everywhere. So we really like that kind of stuff in real estate. In private equity, it's all about finding under managed companies and sending our people in to fix them and run them better. And a lot of that also is getting great management teams and having them consolidate industries and bring new technology, new investment. Amazing how many companies we invest in which they don't have an internet strategy, they don't have an AI strategy, they're just behind the curve on the application of technology to their businesses. We can bring that to bear.
Mandy: Any interest at all in Blockchain? Since it's such a buzz word at the moment?
Tony: Yeah. Blockchain is really interesting I think. Blockchain will be much more transformational than anyone expects because just about anything where you have to keep records of tracks of things can be done officially and securely with block chain. I think it'll be huge and yet it's not really an investable asset class yet because there are no pure play Blockchain companies. There are Blockchain divisions in IBM or something but they're tiny today. So you're buying a lot of other stuff to get the Blockchain. I personally made an investment in a very exciting Blockchain company that's doing the Australian Stock Exchange called digital assets and it's my biggest personal investment and I think Blockchain will change the world.
Mandy: You've also raised at Blackstone 5 billion dollars for your first open ended infrastructure fund. Have you made investments for that and what?
Tony: No, we haven't made our first investment yet but we're close to two very large and wonderful investments that I think would be landmark transactions and they feel it could be two of the biggest investments Blackstone has ever made in any field.
Mandy: Where, geographically, are they?
Tony: One is in Europe, one's in the United States.
Mandy: Do you feel though, we were speaking actually yesterday with Mark Machin from the CPPIB and he was saying that they want more infrastructure as well the problem is in a developed world there is a lot of demand but not a lot of supply. Does that mean you increasingly have to pay premiums for these assets?
Tony: Well no. Two ways about the fact that there's a lot of capital has moved down returns and core infrastructure but we're still seeing very good opportunities to earn returns which we think are extremely attractive in things like midstream and brownfield, where you have to put new capital in, Greenfield stuff. Over the years we've been investing in infrastructure for 12 years and I think we've made a 38% percent IRR or something. So it's been a fantastic field for us. And in the US, we have two trillion dollars of infrastructure needs and there's not near enough capital to satisfy that need. So I think there'll be a lot of very big opportunities there. There are some social and political barriers to overcome maybe the Trump administration helps that maybe they don't. We're not dependent on it, if they do so much the better.
Mandy: As for Australia I have to ask an Australian question because I've a little bit of home biased there but in light of the fact that the Canadian landlord Oxford Properties group is sweeten their bid for the Aussie office owner IOF, Investa Office Fund, this has escalated the bidding war with you where does it leave you?
Tony: Well I think they've also bought 20 percent so I think that gives them nearly a blocking position. So I think that leaves us out on this one.
Mandy: And last question with John Studzinski leaving Blackstone, does that mean any kind of change in direction for the firm?
Tony: No I mean Stud's was as a great guy and he's a good friend and I'm very sorry to see him go. But he was he was very helpful with family officers here and there. But we've got other people we can fill in with that.
Mandy: Do you see a bottom in the Chinese Yuan and what is your position on the internationalization of the Chinese Renminbi?
Tony: Well I don't pretend to be a currency expert so when I talked before about the work we can in the currency we just have to be realistic that however much the value of a company in China appreciates, we have to translate that back to dollars. But as far as the one goes I think the Chinese government's done a very good job managing its currency. Obviously at this time there are some benefits for weakening the yuan or allowing it to weaken. But at the same time that's a very delicate balance because if it goes too far it can cause can cause a stampede. I feel if it gets too weak, it causes political issues in Washington D.C. So I think China has done a very good job allowing it to weaken. It's come down somewhat I suspect what's going on with trade, with the strength of the U.S. versus the strength of China. It will weaken somewhat further but I don't think it's going to be a big problem. I think they'll manage it well.
Mandy: What is your involvement in the, if any, in the belt and road project?
Tony: We don't really have any involvement at this point and it's getting a lot of attention here obviously unfavorable attention. At the same time it's obviously causing a lot of stresses in many of the countries and I think my guess is it will be there'll be some changes to some of the projects and that will go a little slower than it's gone.
Mandy: Do you feel that the world is shifting in terms of its alignment towards the East namely China away from the west as increasingly as your president pivots away from this region?
Tony: I think the weight of population and economic growth will definitely pull the world East. But as I said before I still think there's a way forward and a need for both economies to succeed together it is very hard for one to succeed when the other doesn't.
Communications Manager APAC, CNBC International
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