Blackstone’s Jon Gray on the Economy, AI as “The Main Thing,” and Where to Invest Now (Transcript)

The people you’re going to hear from at this conference have been at Blackstone an average of 20 years.

Chapter Two: The Economy and Investment Environment

Let’s go to the economy and the investment environment. How are we seeing things? The world is obviously a tough place. The headlines, if you read them every day, can be very depressing. I asked ChatGPT to make this. I will admit, I put my picture in here and I said, make me look a little younger. There you go.

Tariffs, we know the uncertainty it created and continues to create. Hopefully some of that’s going to settle fairly soon. We’ve got some hot geopolitical conflicts which create risk. Hopefully those will settle over the next year. Inflation and rates we’ll talk about. But people are feeling pretty cautious in the investment world given some of this.

We would argue, however, that yes, there is some rain, there’s clouds, but there are also reasons for optimism. And what I’m going to spend time today is talking a bit about why it’s okay to see the glass maybe a little more half full while still recognizing some of these risks.

Let’s start with the economy. Clearly, Europe is slow. In the U.S., consumers, particularly lower-end consumers, face real challenges. But this is our private equity portfolio in the second quarter. Revenue growth was remarkably strong at nearly 8%. And when you look at our borrowers, non-investment-grade borrowers, several thousand of them, a default rate of just 0.5%. I think this will go up a bit, but this is overall a pretty good picture.

Also, the margin side of the equation at our companies were up 170 basis points in the second quarter. When you have rising sales, rising margins, that is not a formula for a recession.

Third thing, inflation. Inflation is cooling around the globe. Everyone talks about sticky inflation, but our data tends to show otherwise. Now, goods inflation in the U.S., as the parenthetical says, will be sticky, will be higher, because of the tariffs. But if you look at the headline CPI that came out last week, embedded in it is rental housing costs at 3.6%. That is very different than what we see as the largest owner of rental housing in the United States. By the way, this is the biggest category, 35% of CPI. We would say that BX derived shelter costs from our portfolio are a little over 2%, which puts CPI reality at 2.4%, much closer to the Fed’s target.

Now, it’s not just rental housing costs. It’s also the labor market. So every quarter, we do a survey. We say to our CEOs, what are the things that are keeping you up at night? Is it tariffs, technology? And if you went back to Q1 of 22, the number one thing they said was how hard it was to hire people. When we asked that same question last quarter, that had dropped to number nine. So something is happening here in the labor market.

And we see it now in our numbers. I would tell you our numbers are often 6 to 12 months ahead of what you see in the government data, but these are heads of human resources at our U.S. companies. 4.6% wage growth a year ago, which has dropped below 3% for the first time in the post-COVID period.

If I was a Fed governor, this is very encouraging when you think about inflation. Now also, cost of capital is so important. And as inflation comes down, so should rates. In Canada and Europe, they’ve obviously moved much quicker. In the U.S., we were on the path down. The Fed paused, given Liberation Day, wanted to see the impact of tariffs. I think we all know at 2 p.m. this number is going to go down by 25 basis points. But we would argue, if these inflation trends continue, we’ll continue to see cost of capital come down. That’s good for businesses, it’s good for consumers, and it’s good for us as investors, because the present value of cash flows are worth more.

But it’s not just base rates that are coming down. Here we have high yield spreads. Back in 22, when things looked scariest, high yield spreads were nearly 600 over. They’ve come down basically in half to 290 over. This, of course, drives down borrowing costs for companies and is very good for the transaction environment. And again, it’s not just about debt. It’s about the equity market. In 2021, the IPO market in the U.S. was booming, nearly $60 billion. By 22, it was shut off. It’s beginning to climb out. And at Blackstone, we’ve done three IPOs in the last couple months. Last week, we did our first U.S. IPO since 2021. I would expect you’ll see more. And across the industry, this should help with the DPI challenge that so many of you have been facing.

But what is the main reason I’m enthusiastic, we’re enthusiastic, what is the main thing? It is AI. This is the big thing. And why is it the big thing? Because it’s starting with this massive investment boom, which we’ll talk about, which provides the foundation for the technology, and then the AI itself, which we believe is going to create an enormous productivity boom. That’s what’s coming. And you shouldn’t just take my word for it. These are the leaders of the biggest tech companies in the world. My personal favorite comes from Jensen, who was our speaker last year, who said, a new industrial revolution has started. And we certainly subscribe to that.

So, what was the Sputnik moment that got this started? Obviously, it was the launch of ChatGPT. In less than two years, it got to 700 million customers, the fastest of any consumer product in history. Now, have we ever experienced anything like this before, where the world changed dramatically? I don’t think at this scale, but we do have something that is a bit of precedent. Go back to 1989, 94. I was in college and then a couple years working. If you go back then, productivity cumulatively over those five years was growing just 4%, less than 1% a year. The stock market did okay, grew 9.5% a year, but the Fed had cut rates by 300 basis points during that point.

But then something very powerful happened. I love that. You guys remember dialing up AOL, the first internet service provider, getting to Netscape, the main browser at the time, and dramatic things happened in the second half of that decade. You saw a three-fold increase in productivity to 11% here, and you saw the stock market grow five-fold, 251%. I am not advocating that’s what’s coming in the stock market. Multiples today are much higher than they were in 1994. But it gives you a sense of the power of a productivity boom and what it can mean for companies and values and growth.

Now, things did get a little ugly at the end, as you remember, in 2000. Pets.com, some business models that didn’t make sense, and this is the big risk. The big risk is as this technology takes hold, as we all get more enthusiastic, excesses will build up, and we’ve got to be thinking about those as we’re deploying capital.

Now, the question today is, is AI beginning to have an impact? And this study just came out a couple weeks ago from Stanford, and I think it’s starting to show the early impact of AI. It starts here with two, I’ll call it, AI unaffected sectors, stock clerks and health aides, and it has cohorts, early 20s and people in their 40s. And if you look in stock clerks, basically their growth in employment is roughly the same. And if you look in health aides, actually, there’s more hiring of young people than people who are more experienced. So AI here, no impact.

But now, let’s look at a couple other sectors. Software developers, look what’s happening to that orange line for 22 to 25-year-olds. Something dramatic, a clawed code effect.

Early programmers are being displaced, it appears. And by the way, the same story with customer service agents. As AI gets better, answering phones, answering questions, more and more technology taking over for people. It feels like it is very early days here.

So, how is this impacting us here at Blackstone? Well, we just did a commercial called Eureka about the gold rush in San Francisco or in Northern California in 1849. It’s about a couple of clever gold miners who decide instead of looking for gold, they’re gonna sell picks and shovels. Of course, it’s a metaphor about digital and energy infrastructure. Let’s take a look. We finally made it, now let’s go get that gold.

Anyway, it’s a little cut of that. I wanna show you the second version we have of this. We finally made it, let’s go get that gold.

Now, what’s the difference between these two ads? This one was filmed outside of Vancouver. We flew a bunch of people up, hotel rooms, cast and crew, all of those things. Took a lot of time to make, film editing. It cost a million dollars to make. Good ad. The one on the left is not quite as good yet. It was made on the eighth floor here with two guys in a couple hours. And you think about the cost of this. A lot, lot less. And you think about how this will work its way through the economy and businesses, it’s pretty extraordinary.

So, how do we invest around this generational change? That is the key question. Well, I think it’s really important to think about disruption and why you’ve gotta be proactive. And I’m starting here with the New York City taxing medallion, which may be the best asset class over a 66-year period in history. Because if you had a grandparent who decided in 1947 to buy one at $2,500, it would grow to be worth $1.2 million. Plus, you would have gotten a bunch of cash flow, and this is unleveraged. Extraordinary.

And if you looked at any time in your investment committee memo, you’d say this is the asset to buy. But of course, technology changed. Uber and Lyft came along, and in a matter of a couple years, you lost 82% of your value. And these are the sort of things that are keeping us up at night, the kind of change that could be ahead for a number of businesses.

Now, the good news is there are plenty of things that will be less impacted. Physical things like the airport in Rome, Stuyvesant Town, the massive apartment complex we own in New York City, Seven Brew, the fastest growing coffee chain in the US. These things will be much less impacted, but there’ll be plenty of businesses that’ll face major challenges.

So, of course, as investors, how should we play this? Well, it starts with the picks and shovels, with things like chips and data centers and power at massive scale. This is what you need to make this AI a reality. We have really focused on the right two circles here.

And what’s happening in this world? Well, CapEx spend in this world is up six-fold with just four companies, Microsoft, Meta, Google, Amazon, to $364 billion. To put that into context, that is bigger than the budget of NASA, the Department of Energy, and the Department of State. It’s equal to 1% of the GDP of the United States. This doesn’t include Oracle, which is now joining the party in a big way. These numbers are gonna be even bigger next year. The scale of this is hard to fathom.

Next up, how is the US, how are we playing this in the US and around the world with QTS? We have seen a 10-fold increase in this company that we bought in 2021. It’s grown from a $10 billion company to a $70 billion company. Pretty extraordinary.

It’s not just data centers, of course, it’s power. I stole this graph from Sean Klimczak. Over 25 years, power demand in the US was basically flat. Now it’s projected to be up 40%. Why? Data centers, reindustrialization, autonomous vehicles, robots. My guess is this curve will be even steeper.

We believe this is so powerful. We go back to the iconic 1967 film, The Graduate. You may remember this. This is Benjamin Braddock, AKA Dustin Hoffman, getting some advice from Mr. McGuire. I just wanna say one word to you. Just one word. Yes, sir. Are you listening? Yes, sir, you. Power.

Okay, I think you know he didn’t say power. He said plastics. But if you have young college graduates, I would tell them power is the way to go.

How are we playing this at Blackstone? Well, across the entire spectrum. Data centers in the US, Europe, and Asia. All sorts of infrastructure around that. We’ve given billions of dollars to companies like Corweave. Renewable energy, generation and storage, transmission, utilities. One of the most boring businesses of all time is now a growth sector. And electrical equipment. David Foley will talk about this. As you build out the grid, lots of companies are gonna need to grow and invest. Same thing with utility services. Lots of ways to play picks and shovels.

The one other area that I wanna stop on for a sec is what I’ll call rules-based businesses. The marbles come down. Are they white, orange, gray, you name it. There’s lots of opportunities with these type of companies. What do I mean by that? Healthcare claims processing. The technology, bringing AI to a company like AGS Health that we recently acquired. Same story with accounting, the ultimate rules-based business. Citrin Cooperman. You can take these legacy businesses and transform them. And then invest in some of the application software as well. We invested in a company called Norm AI, which is going to make marketing compliance so much more efficient. More and more of our investing is gonna be guided in areas like this.

Chapter four, the outlook for alternatives

Well, you guys all know that this is a business that has grown a ton. It was $3 trillion in 2010. It’s $13 trillion today. And of course, the question, why have they grown? Why do alternatives continue to grow? Well, it goes back to the North Star from the beginning. It’s all about returns. These are endowments and foundations over the last decade in the US. Those who are less than 10% allocated to alternatives underperform those more than 30% allocated by 270 basis points a year.

So much of this has happened because of the strength of private equity, the ability to pick the right management teams, incentivize them, add value to companies, optimize capital structures. This has been the key. But I often get the question, why is private credit having the same dynamic? Why are more people, can’t banks have a lower cost of capital? And here, what I’d say is, let’s go to the farmer. The farmer starts with his product, his corn in his barn, sells it to a distributor, sells it to the supermarket, finally makes its way to our table. This is very similar in public credit, particularly in asset-based credit, where a borrower goes to a bank who then does a securitization or CLO, and ultimately it makes it to your portfolio with lots of economics gone.

What is private credit all about? Private credit is about you having privity basically with the borrower, with our help. It is farm to table. And there’s no surprise why we have generated almost 200 basis points of incremental spread in private investment-grade credit over the last 18 months with Gilles and his team. So even as rates and spreads tighten, that gap, we think, will continue to persist. There’ll definitely be a gap because of this cost differential.

The other reason why private credit is gonna grow a lot is because it’s moving beyond its roots, from direct lending, from non-investment-grade corporate credit, to the real economy, to aviation, credit cards, nav lending, digital and energy infrastructure. This is an enormous market where private credit will again have a meaningful competitive advantage and grow quite significantly.

Now another question I get is alternatives have grown so much, isn’t there a risk that it’s just too big? Well, I would point out at $13 trillion today, the entire industry is equal to four public companies in the United States. And when you think about the aggregate market that we can go after, public equities, corporate and asset-backed credit, commercial, residential, real estate, infrastructure, it is a very big $300 trillion world. So I still think there’s plenty of room for this space to grow.

One other area that’s been getting a lot of focus, we’ve been investing in the wealth business for a long time, now there’s a lot of talk about 401k, what’s happening here, how’s this gonna affect things? If you look at the defined benefits world, the pension plans many of you work at, in the US it’s a $12 trillion industry, about one third allocated to privates. If you look at defined contribution plans, which are also $12 trillion and growing faster because obviously there are fewer defined benefit plans these days, it’s only 1%. So yes, our expectation is this will grow, but it’s definitely going to take time, it’s not gonna happen overnight.

And I would just point out, we have seen transformations, we’ve seen evolutions of capital before in our industry. If you went back to BCP1 in 1987, our first private equity fund, 85% of the capital came from insurance companies, corporate pensions and banks. By the time we got to the $21 billion BCP9 here in 2025, that number had dropped to 16%. Pension plans and sovereign wealth funds emerged. I do not think we’re gonna have this kind of change in the sources of our capital, but it just speaks to the fact as alternatives grow, there are new sources of capital that emerge and there are plenty of things we believe to invest in.

Okay, what are some good places to invest in? We’re gonna talk about this much of the day today. The first stop I’ve got is commercial real estate. It’s been three and a half very tough years for commercial real estate, but now this good dynamic has taken over, which is new supply has declined by nearly 70%, in this case, in US logistics, but it’s really happening around the world. Cost of capital is coming down. Assets have been repriced. This is the time you wanna be an investor in commercial real estate.

Next stop, secondaries. Another industry that has grown a ton from $23 billion to $200 billion over the last 15 years. Again, the concern, has this gotten too big? What I would point out, it’s just one and a half percent of outstanding AUM that is trading hands. That compares to 100% of the stock market by value that trades hands. That’s why we believe that discounts and secondaries will continue to persist.

Third stop, leaving the United States here. India, this is the G10, clearly the fastest growing country. There’s been some, obviously, tension geopolitically recently, but this is a country that is investing massively in physical infrastructure, legal capital markets infrastructure. There is a rising middle class here. This is a place we particularly like.

And it’s not just India, in Asia, it’s Japan. But the story in Japan is not about growth. It’s a story about trap value. It’s about activism showing up here in a big way, the government embracing return on capital, investment over savings. We bought, in Tokyo, a super luxury real estate complex that was owned by a railroad company, a $2.6 billion complex. There are lots of assets like that that our private equity and real estate businesses hope to take advantage of in the coming years.

Some other interesting areas to quickly hit on. Regional banks, there are, in the United States, more than 4,000 banks. Now, with a more favorable regulatory environment, we believe we’ll see more consolidation in that space, lots of private credit opportunities. We’ve been buying a lot of real estate debt from regional banks.

Second spot, life sciences. Why is this exciting? Well, AI is gonna accelerate innovation, but trials, phase three trials, cost tons and tons of money. The big pharma companies, the small life science companies, they don’t have the capital. And they’re just not that many people with the expertise. You’ll hear about this from Nick today.

Third area that I think is really interesting, providing capital to reinsurers. There’s $800 billion of money in the reinsurance industry. I think the same kind of opportunity that exists in private credit, bringing your capital directly to insurers and giving you higher returns on an uncorrelated basis. Our tech ops team’s done an amazing job here.

And finally, absolute return strategies. As base rates come down, places where you can get attractive returns, lower downside risk, things like macro and quant, very helpful in the context of your overall portfolio to provide returns and ballast.

Okay, I’ve talked about a lot of very positive things. But we are investors and there are real risks in the world. So I just want to hit those quickly. First off, AI valuations. I mentioned it earlier, but there is no question that when you get this kind of excitement, you’re going to get accesses. People are focused on this, we’re focused on this. Will people start to speculatively build data centers? Today they’re leased. Will they speculatively build them? Will it start to create bubbles? We’ve got to keep our eyes on this.

Second thing, excessive government debt. We’re running deficits of 4% to 6% in major economies around the world. That could lead, of course, to higher long end rates. That could lead to lower multiples. We’re very focused on the exit multiples, exit cap rates, we’re assuming.

Europe, much less exposure to tech, more regulatory issues, immigration challenges. Will we get far left, far right governments that will impact Europe?

Something we’re obviously keeping our eyes on. US and China, the two biggest economies in the world. I think we have to find a way to coexist. It’s good to see there are talks going on now, have been in Europe, that President Xi and President Trump will meet. But again, something worth keeping our eyes on.

And finally, the thing that keeps us up at night the most, underestimating technological disruption. That obviously is enormously important. We think about this all the time. We’ve now added to our investment committee memos that in the first two pages of the memo, you’ve got to have a paragraph on the AI risk of this investment. Not just in our equity investments, but in our debt investments. And we’re going back through our portfolios in each business unit, thinking about what are the risks. We don’t want to own those taxi medallions.

So I will close with where I began, the North Star here. Thanks to the tech team for this. We continue to be totally committed to delivering for all of you. It’s about delivering great returns. That’s what we have to do. That’s why we spend so much time thinking about the future. That’s why we spend so much time analyzing things. We don’t always get it right, but we are committed to doing the absolute best job possible for everybody in this room.

So I will close by saying thank you all for coming. It means a ton. Thank you all for entrusting us with your capital. Thank you for being our partner. I hope you have a great day today. We’ve got a lot of good content. Thanks, everybody. Thank you.

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