CNBC EXCLUSIVE: CNBC’S DAVID FABER INTERVIEWS JONATHAN GRAY FROM CNBC INSTITUTIONAL INVESTOR DELIVERING ALPHA CONFERENCE
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Jonathan Gray, Blackstone President and Chief Operating Officer, live from the CNBC Institutional Investor Delivering Alpha Conference in New York City on Wednesday, July 18th.
Following are links to the video of the interview on CNBC.com: https://www.cnbc.com/video/2018/07/18/blackstones-gray-hopefully-policymakers-can-thread-the-needle-on-foreign-investment.html and https://www.cnbc.com/video/2018/07/18/blackstones-gray-brexit-has-had-adverse-impact-on-uk-economic-growth.html.
Mandatory credit: CNBC Institutional Investor Delivering Alpha Conference.
DAVID FABER: Okay. Like we only have 25 minutes. I want to go fast. Thank you for doing this --
JONATHAN GRAY: Great to be here.
DAVID FABER: -- for being here again. We always appreciate it. You're a veteran of Delivering Alpha. Earlier today Jim Cramer interviewed Larry Kudlow. And it seems to me Kudlow had, in particular, remarks on China that were strident and did not seem particularly lending themselves to the idea that we're making progress. You're launching your first PE fund in China. You're launching your second real estate fund there. You rely on China to a certain extent, I would think, for flows as well in terms of investing in various products.
JONATHAN GRAY: In Asia, but yes, China will be part of it.
DAVID FABER: And as you pointed out many times, Asia is two-thirds, I think, of the growth overall of global growth. China is an important part of that. So give me your take. Are you concerned about what seems to be the growing tension still between our country and China?
JONATHAN GRAY: So we think of ourselves as long-term investors; that if you get caught up in the news of the day, it can be very disconcerting. We saw that with North Korea, say, a year ago. And we tried to step back and say, What's going on here? And I think a couple things are happening. One is the parties involved here, there is conflict, but they recognize that if there was a sharp cessation of trade, a real trade war, it would have negative impacts on both sides. And there is a collective self-interest to try to resolve this. That's the first thing I'd say. The second thing is, I think all the parties recognize, and in the case of China as well, that there needs to be a rebalancing; that China has historically not had as open of a market, and that needs to change. And so I think the overall picture is one of there should be a resolution. The fight is really about the extent of that shift and the rebalancing. Now, is this going to be easy or clean? Will it happen fast? I don't think so. There are a lot of big issues at stake, and there will be some volatility along the way. But I do think if you look at the broader trade issue, the same underpinnings exist. It sounds like there's probably more progress on the NAFTA front, maybe behind that, Europe. And China, given the scale of the issues, is behind that. But if you step back, looking at it from a long-term perspective, we believe there should be some resolution here, but there is obviously risk for all of us as investors.
DAVID FABER: Right. All right. But if it gets bad before it gets better, how do you -- I mean, obviously, we don't know what is going to happen. But how do you view it from Blackstone's perspective?
JONATHAN GRAY: Well, for a lot of businesses that are domestically focused, the impact is less. For businesses in the service area, less of an impact. When you start thinking about folks in the global supply chain, so if you're an ex forwarder or a retailer, I think you have to start to factor in some potential friction. There could be some interruption. Your cost of goods sold could go up. And so I think you've got to incorporate that in investing, but not necessarily as broadly. And I would say the bigger trend today -- this is getting, obviously, the most attention today. But the biggest focus probably should be on the strength of the U.S. economy, which has proven to be I think much stronger than most people realize. So I believe fundamentally these will get resolved. There will be volatility, and there is risk, and escalation could happen. But in the fullness of time, we're hopeful that the parties will solve this.
DAVID FABER: You know, I hear this a lot and of course we bring people on all the time on CNBC. There does seem to be this continued belief that rationality will prevail. But I mean, Steve Schwarzman, your CEO, who spent a lot of time in China on your earnings call on the 19th of April, was saying China trade looked good and NAFTA was a few weeks away. Those are more or less quotes. It seems to keep getting worse, not better, even though guys like Steve who have great insight both into this administration and China feel otherwise. I mean, do you feel as though perhaps you just don't really have a grasp of it?
JONATHAN GRAY: I think these things are fluid. There's toing and froing. Sometimes there's posturing in these things. Enemies can become friends. Things can change quickly in these negotiations. I think reading too much, again, into the news of the day can get you nervous. And as investors you may say, "Oh, my gosh, I've got to pull back, take everything out of the market, wait for the all-clear sign." And I think that's a mistake. So maybe the problems are deeper, and it sounds like, based on the commentary today, the distance between the U.S. and China is further than people would hope for. But I'm looking at it, as I said, with this long-term lens.
DAVID FABER: Right.
JONATHAN GRAY: Which is it's in the parties' interest to resolve this.
DAVID FABER: Are you seeing or hearing anything on the ground in China that gives you pause? Are you seeing any holdups in perhaps investments that you were looking to make and/or, on the other side, money coming in to some of your investment vehicles? And so anything that you're seeing that you could show us?
JONATHAN GRAY: We really haven't seen much that you could point out. Obviously, in our conference room, as we're looking at investments, we're thinking about a potential slowdown, as you look at Chinese investments in particular, and we're thinking about it obviously in the context of export businesses. But more generally, we're looking at what we see certainly in the U.S., but across the world, pretty good economic climate.
DAVID FABER: Right. I want to talk about the economic climate here. But before we sort of move on, I mean, foreign investment into the U.S. has been important. At Blackstone, certainly when you were running real estate, you were a beneficiary in particular of Chinese buying. Are you concerned at all about that?
JONATHAN GRAY: Well, the pull-back in Chinese buying in the U.S. was driven by the Chinese a couple years ago when they put in place capital controls. I think the question now is, and it relates to China more broadly, the U.S. is looking at foreign investment. There's some legislation working its way through Congress. And what our hope is, is that obviously they're focused on national security, which is really important and they've got to get right. But we also want to make sure that capital that creates jobs gets into this country. So if a Chinese company wanted to build a hotel here in New York, hire a bunch of people on the construction side, or people who work in the hotel, that's a positive. We want that to happen. So we're hopeful that policymakers thread that needle.
DAVID FABER: Do you think they will?
JONATHAN GRAY: I'm, as I said, hopeful. I think they recognize --
DAVID FABER: You've always been an optimist, and it's worked out.
JONATHAN GRAY: Yeah, it's worked out. But part of being an investor, as I said, is taking this longer view and trying to understand why something may or may not happen. Now, in this case, the technology side is really tough. So that's one where I'd say I don't see a clear path to how that gets resolved. But foreign investment in something like real estate, I would think that should be able to get through.
DAVID FABER: Your CEO, I mentioned, of course, Steve Schwarzman, I mean, has been a fairly visible participant from the business community in this administration. Is there any insight you can share that he has in terms of where he sees things going?
JONATHAN GRAY: You know, Steve has these conversations. And one of the reasons why I think he's trusted by all parties is because he holds them pretty close to the vest. He has direct dialogue. He's also very candid on these things. I think all of us are watching this obviously concerned on the trade side because we believe in the importance of trade and investment; and, as I said, I think all of us are hopeful there will be resolution here. But it's hard to be confident, you know, when these things will settle soon.
DAVID FABER: Right. Well, Europe perhaps there was maybe just -- at least judging from Kudlow's comments, a reason to be a bit more optimistic than you might have been after NATO. I think you had your largest private equity and real estate investments in the first quarter were in Europe. Why?
JONATHAN GRAY: So Europe has been a bit out of favor from investors relative to the U.S. Even if European growth may be slower than the U.S., as investors, it's also about price. You know, where is that price relative to other markets? And there's still some legacy distress. In Europe in particular we've been big investors in Spanish housing where we saw, you know, a large decline like the U.S. market where prices fell sharply. There was very little new building, and there was a strong recovery in the Spanish economy. So we've seen that. We also think in New York interest rates are likely to stay lower for a longer period of time, which is one of the headwinds here in the United States. And there's just not as much competition in certain areas, large-scale private equity, real estate, we found the investment environment on balance a little bit better; but again, U.S. economic growth certainly stronger than Europe today.
DAVID FABER: Are you concerned at all about Brexit? Is it in any way sort of delaying investment in particular in the UK?
JONATHAN GRAY: Yeah, Brexit, I would say, unfortunately has had an adverse impact on economic growth in the UK. We have long-term goals on the UK, given rule-of-law transparency, English language, tons of great talent there. But by creating the level of uncertainty that exists today, there's really a bit of a vacuum. And people are concerned about what the rules are going to be going forward. And you can see it in the numbers, which is if you went back pre-Brexit, UK was growing 100 basis points faster than Continental Europe. I think in the last year it's almost 100 basis points slower. And so we would be in the camp of more along a soft Brexit, something that allowed a more seamless transition. Something more abrupt I think could slow growth even more.
DAVID FABER: You mentioned Spanish housing. Blackstone also, I think, the largest owner of office buildings in India. Largest owner of -- well, through Invitation Homes -- of individual homes in the United States. Let's start with Spanish housing. You still like it? You're not a seller there yet, or are you still buying?
JONATHAN GRAY: No, no, we're still buying. You know, we generally look for things where there's a favorable supply-demand fundamental. And if you look at Spanish housing, you look at U.S. housing, construction is well below what it needs to be to keep up with population and household formation. And when that occurs, you see better than inflationary growth. So, short answer, Spain we would continue to invest in.
DAVID FABER: For the foreseeable future?
JONATHAN GRAY: For the foreseeable future.
DAVID FABER: Regardless of --
JONATHAN GRAY: And there's still a legacy. There's still lots of real estate there held by the banks that needs to be transitioned to private ownership. Because it's been held by the banks, there hasn't been capital investment. We say our motto is buy it, fix it, sell it. There's a lot of stuff in Spain that still needs to be fixed.
DAVID FABER: Given already -- we're running through our time quickly. I do want to move through a number of other things, as well. Blackstone's bought 550 million square feet of warehouses over the last -- a relatively short amount of time.
JONATHAN GRAY: Since 2010.
DAVID FABER: Why?
JONATHAN GRAY: Well, you know, as you think about investing, you're trying to think about sort of where the puck is going to, what's happening. And we came to a simple view that online sales were going to grow. Now, I don't think even we had an anticipation of what it would be. But they've been growing at 15, 20 percent a year now for almost a decade. And if anything are accelerating, as Amazon's gone from two days to two hours -- and, by the way, it's similar with China, Alibaba, and Flipkart in India. And we're seeing this all over the world. And if you look at the data, what it tells you is you need three times the amount of warehouse space to deliver a good online that you do if it's sent to a retailer. And so as a result, we've seen this pickup in demand for warehouse space, which traditionally was a pretty boring business. And so we've gone out and done it in the U.S. and in Canada and all over Europe and Australia and China and Japan. And we've had this simple premise. We're particularly excited about what they call "the last mile," because as you bring goods in, they've got to be closer and closer to the customer. And interestingly, in our private equity area, playing on the same theme, we just bought a European manufacturer who makes steel racking systems for warehouses based on the same premise. And in an environment where it's hard to invest, finding things you have high conviction in, where you think there's going to be growth, that's a pretty good strategy.
DAVID FABER: As we watch malls under pressure -- certain malls, not all of them. As we watch -- even if you walk the streets in our own city of New York, you'll see a lot of vacancies. Are the warehouses, so to speak, going to move even closer to the customer? I mean, do we get to some point where the store is the warehouse?
JONATHAN GRAY: There may be a bit of that. I mean, there still will be land-based retail. It won't go away entirely. But the share shift continues and more and more will be done direct. Look at your house. All of us here, when you look at those boxes outside our homes, they keep getting up and up. Our children are much more inclined to buy things online than we are. The service is getting better. So this feels like one of those inexorable trends. And as investors, how can I be on the right side of that, benefit from the tailwinds of that?
DAVID FABER: Right. Well, at the same time you were growing in logistics, so to speak, you were selling some of the mall properties, as well. I mean, you don't have a lot on that front.
JONATHAN GRAY: We don't have a lot of retail. We actually have a private REIT today that today is like 2 percent in retail, and 90 percent of what it is is rental housing and logistics.
DAVID FABER: Whatever happened to infrastructure with this administration?
JONATHAN GRAY: So I don't know where it sits in their sort of priorities. I do believe it's a bipartisan issue. I think everybody recognizes there's a shortfall. You just have to go to the airport, train station, roads, you see it. By the way, it's bigger than that. It's in the private sector, mid-stream assets, pipelines. Because of the shale revolution. Utilities, transmission grids, renewables. The need is massive. You're seeing some cities and states do some things, public-private partnerships. At some point I think the federal government will get there. But the need is in the trillions, and as a result, I think you'll see capital continue to move into that.
DAVID FABER: And, well, I mention, of course, because of your infrastructure fund, Saudi Arabia makes a $20 billion commitment. You raise third-party money against that, as well. So the opportunity is not necessarily dependent on whether the government makes a big move or a big push in terms of funding infrastructure?
JONATHAN GRAY: No. Again, the underlying need, the math is so compelling for infrastructure dollars, both in the public sector and private sector, that we feel really confident that it's a good place to invest.
DAVID FABER: And continue to?
JONATHAN GRAY: And continue to invest.
DAVID FABER: All right. Let's talk about the U.S. economy. You wanted to talk about it now for the last 15 minutes, and I haven't gotten you there yet. We heard from Chairman Powell this morning. We heard from him yesterday. There is obviously still the prospect of rate rises, which would not seem to be particularly good, to a certain extent, for some parts of your business. At the same time, we're not sure about inflation. Give me your take. You say things are very strong. Where are you seeing it, and what are your fears as a result?
JONATHAN GRAY: I would say "cross-currents" would be the right term for this. On the one hand, I think U.S. economy is probably stronger than most people realize. S&P earnings up 20 percent. Consumer confidence back to the levels of almost 20 years ago. Employment was up 17 percent in the first half of the year. All those signs are positive, and that's what we're seeing on the ground in our company. So I'll put that over there. On the negative side, we are seeing incipient signs of inflation. CPI is back up at 3 percent. Wages are running close to 3 percent. Commodities are up almost 10 percent year-on-year. And then add to that we've increased the size of deficits.
DAVID FABER: Not to mention the prospect of tariffs, which conceivably will also raise the cost of goods.
JONATHAN GRAY: Which could raise cost of goods, as well. So when you look at that picture, you say, if you think about assets, what drives their value? It's either earnings growth or multiple expansion. Well, I actually feel pretty good about earnings growth, given the strength of the U.S. economy. On the other hand, I'm concerned about multiples, because I think we'll be in a rising rate environment. And that's what we're trying to evaluate. So when we think about deploying capital today, what we're saying is let's focus on things that will grow faster. You don't want to own something that's purely bond-like in nature because if rates rise sharply, you're vulnerable. So in our private equity or real estate world, let's buy something like logistics where we have secular, real faith in, where we think there will be faster growth, or let's buy a business where we can really intervene. We are buying Thomson Reuters, a $20 billion company, where we think there are lots of things to do around that business. So I think in this kind of environment you've got to be aware that inflation and interest rates heading higher, and you want to own things where cash flows can improve.
DAVID FABER: Yeah, I mean, you mentioned, of course, about private equity, which is what we originally knew Blackstone for before, of course, it made real estate its largest asset class. But there's enormous amount of money sitting on the sidelines, for lack of a better term, in private equity, in part because prices seem fairly high, at least from the perspective of the buyer. When is that money going to get deployed? And in the environment you're describing, is it more likely or less likely?
JONATHAN GRAY: So, looking at it overall, I'd say a couple things. First, when we raise this money, the good news is you're not forced to do anything. You can be patient, because the investors give you the capital for six years. The second thing I'd say is, on the investment environment, it's challenging because there is a lot of capital out there in private equity, particularly smaller-sized private equity deals. But if you went back to 2007, which was probably the worst time in 75 years to invest in capital, we bought Hilton Worldwide. We ended up making $14 billion, most profitable private equity, real estate private equity deal of all time. Because we bought a great business, we were able to intervene, terrific management team. So there's always opportunities somewhere. The final thing I'd say is, I think for us we're looking at factors or areas where there's better value. So we tend to be scale players in almost everything we do. So larger-size deals that involve public companies for us tend to be more interesting. Things where, as I said, we can go in and intervene, or situations or industries, tech-enabled services where we see real growth. Places like India, where we've seen really great fundamentals on the IT side, business processing side. I think you need more conviction in this environment, and you go in this environment from sort of buying everything, let's say five or six years ago, where you could be more comfortable, to be much more narrowly focused in where you'll deploy capital.
DAVID FABER: Speaking of that, then, I mean, I mentioned, obviously, logistics, your decision a number of years ago to move more forcefully into sort of warehouses as a result of what you saw. When you think about technology and how it's disintermediating different businesses, for example, autonomous cars, they're not quite here yet. But does that figure into the way Blackstone thinks, not just in real estate but across the board? And if so, how do you think about it?
JONATHAN GRAY: Yeah, I think that's a great point. We have a large energy business. I was in Houston last week. We do it on the equity side and debt side. I'll come back to that. I think besides the cyclical factor on rates and growth and so forth, what you're talking about is a secular trend that is really impacting all sorts of businesses. Where here in New York City, we saw the taxicab business, which again went up in value for 50 or 75 years, and in 18 months, a taxi medallion lost 90 percent of its value because of Uber and Lyft. And huge capacity increases. And that's a cautionary tale. We're seeing in all sorts of businesses where a company makes a good or service and somebody consumes it over here. There used to be somebody who charged economic rent. We talk about retailers, cable companies. A lot of those businesses are being disintermediated. So when we sit down and look at any investment of Blackstone, could be energy, could be infrastructure, private equity, real estate, we're not only thinking about the cycle and what's going on, but we're saying is this a business that's sort of on the right side of where things are heading, or is it facing more challenges? And if it's facing challenges, electric vehicles, autonomous vehicles, how soon is that going to happen? Because in the energy business, yes, that may be the case 20 years from now or so forth, but in the interim, there's still a lot of need for oil and gas. And, by the way, even if we go to electric vehicles, you still need gas to create that electricity. So I would say for us, thinking about growth and technology and its impact is probably the number one theme as we're thinking about each individual investor.
DAVID FABER: Do you have a point of view, a Blackstone point of view, in terms of autonomous vehicles, in terms of when we're actually going to be not just thinking about what's coming but dealing with it?
JONATHAN GRAY: I think our view is it will come; it's just a question of timing. You know, the battery powered, getting this to work, getting the charging stations, the whole thing, the infrastructure -- this is not something that will happen overnight. But when you look out 10, 15, 20 years, I think it will have a bigger impact.
DAVID FABER: It's going to have an impact, I mean, for energy, but also real estate, your old area of expertise, I would think. I mean, parking garages, to -- you can think about so many things, and people can get in from a suburb much more easily because there's no traffic, so to speak, because everything is, you know, networked.
JONATHAN GRAY: And you don't want to be a Luddite and just say everything is going to be the way it is. Because things can change rapidly. But energy is something that I think will take some time. I think in the long-term there's no question that's where we're heading; it's a question of time.
DAVID FABER: All right. We're at an investment conference, you haven't pitched for Blackstone yet, but there's an audience here conceivably that might be interested. As the president, you can do that. Let me do a little bit for you. I mean, you guys have 450 billion in assets, you raised 260 billion over the last three years, I think 112 billion in gross inflows last year, and you outperformed in virtually every area of alternative assets that you're in. So you don't need to do it; I just did it for you. But the one thing that doesn't outperform, Jon, is your stock. Five years, ten years, you've trailed the S&P. And you keep talking, I was looking, about a light switch that's going to go on and people will recognize value. It's been 11 years.
JONATHAN GRAY: Yeah. I liked the opening part of that question. So I'd say a couple things on that. One is the market does seem to be recognizing the value of these companies in the last year. We've had a nice run, as have our competitors, in the space. Two is, I think we were born at a difficult time. There was a lot of volatility, '08, '09. Our structures sometimes can be a challenge for investors when we're reporting the volatility. What we're trying to convince investors of is the fundamental value equation we give to our limited partners, which back to your point, David, we deliver outsized returns to our limited partners in a whole range of alternatives, and they keep giving us more capital. And as a result to that, we generate steady, fee-related earnings and we generate performance fees. They may go up or down in a given quarter, but if you look at the earning power of the business, it's pretty remarkable. We paid out $7 in dividends in the last three years. And, yes, we are a patient group. We do think at some point the market will recognize this is a really special business. Margins that are 50-plus percent, utilizes almost no capital, growing rapidly, and in a sector that is growing rapidly and we're the clear market leader. So we're going to also and have done some things that are shareholder-friendly. We own, insiders, almost 50 percent of the company. We pay out significant dividends; we announced the special dividend. We started --
DAVID FABER: A billion --
JONATHAN GRAY: Billion-dollar share buyback. I can tell you we're focused on maximizing shareholder value.
DAVID FABER: I just don't understand what's going to change the -- why you believe there will be a change in perception when it has yet to happen, despite what has been a fairly long record of success.
JONATHAN GRAY: I think there was a sense that these companies went down, they then rebounded and maybe they were melting ice cubes and so forth. I believe fundamentally, consistently delivering for our limited partners and therefore our shareholders at the same time there's total alignment there. Investors will see the power of this business model.
DAVID FABER: I'm going to let you end it on that note, Jon, thank you.
JONATHAN GRAY: Okay. Thank you, David.
DAVID FABER: Jon Gray.
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