Blackstone’s Jon Gray: Stay Calm, Stay Positive, Never Give Up

I remember going to see investors and distinctly one of our state pension funds in the meeting telling them about one of the write-downs. And I just remember that awful feeling, leaving that meeting, going back to the airport and being like, wow, I cannot let this person down. This is not good. From Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out of consensus calls, one that was on the money and one that wasn't. Today on the show, John Gray, president and chief operating officer of Blackstone, with Dan Simkiewicz, co-president of Morgan Stanley. John stepped into his current role in 2018. And since then, Blackstone's assets under management have nearly tripled to over $1.2 trillion. It's so, so good to have you here. It's fantastic. You know, I'd say 30 years ago, our industry was so private, frankly, so small. I think it's a little inspiring what you're doing around marketing for financial services. But when we led the Blackstone IPO, you're 88 billion of AUM. Now you're over a trillion. The organization is bigger and more complex. You've built both a world-class client service organization, but at the core of it is just incredible investment discipline and performance. And so, John, we're going to talk about two out of consensus investment decisions. Set the scene for one of the winners. Always better to talk about the winners, although you learn more from the losers. Right around 2007, we bought Hilton Hotels. I led that investment. It was a $26 billion investment. And I was excited because this was an obviously iconic company that owned some incredible real estate like the Waldorf, had a timeshare business, and then had this unbelievable management franchise business. Hilton and Hampton Inn and Doubletree, Conrad, Hilton Gardens, all of that. And it was at a time when the market was pretty frothy because it was before the financial crisis. You remember people were borrowing a lot to buy homes. They were borrowing a lot in leverage lending in the corporate world. They were borrowing a lot in commercial real estate. Prices were elevated. And I thought we had found something, an operating business with some real estate inside that we could buy at a reasonable price. Now we paid a big premium, 40% over the stock market at the time. And we bought the $26 billion. We borrowed $20 billion. It was a different era. How did that feel? Well, at the time, there was so much leverage in the system. But you had never borrowed $20 billion before. No. Well, except that we had bought EOP. We had bought the largest office business, and that was a $39 billion deal. And we had been on this run buying public companies because at the time I was running real estate and we were able to buy the businesses on the screen much more cheaply than we could be when we were bidding for individual properties. And so we started scaling way up. But in this case, we took a business with some volatility, hotels, and put a lot of leverage on it. And we took money from our private equity business and our real estate private equity business, 5.6 billion of equity, the largest investment we'd ever made at the time as a firm, and we bet on this. And we closed the deal in the fall of 07. Terrible timing. And by all accounts, I should not be sitting here with you, Dan, and they should have carried me out. And it looked that way because if you recall, the financial markets really tighten up and the real economy goes down. And this business, Hilton, loses 20% of its revenue and 40% of its cashflow. And we've leveraged it up a bunch. We write down the investment by 71%. So you actually took the action to write it down? We took the action to write it down because it was clearly very impaired. And I remember going to see investors. And I remember distinctly one of our state pension funds in the meeting telling him about one of the write downs. And the investor was almost physically ill, which is understandable because he had a very large investment with us. And I just remember that awful feeling, leaving that meeting, going back to the airport and being like, wow, I cannot let this person down. This is not good. And I think, fortunately, maybe because of my core optimism, but also my belief in the underlying business, I didn't lose faith. We also had an amazing management team led by Chris Nassetta, who's still the CEO of Hilton. I'm still the chairman 18 years later. It's pretty amazing. That's a rarity in private equity, right? A rarity, yes. We got through this. Now, how did we do it? We ended up putting in an extra $800 million to help deleverage the company and get some additional term on the debt. The management team did an amazing job. They kept growing the business, particularly outside the United States. And then ultimately, the world started coming back. People started traveling again. The business was performing. We went public a few years later. You guys were involved in that as well. We ended up splitting into three companies, a timeshare business, an owned real estate business, and a management franchise business. We sold some individual assets, and then we sold our stock. We ended up making $14 billion, the most profitable real estate private equity deal of all time. And the movie should not have been written. It should have looked completely different. And so, it makes you think a lot, what are my takeaways as an investor? And I would say the biggest ones are, one, you got to stay calm. Stay positive. You've got to never give up. That's what I say every Monday on our BXTV. It's what I say to my daughters. But the most important thing on Hilton was that what I learned as an investor was maybe I spend too much time thinking about whether I should pay $99 or 101 and so forth. And maybe what matters more is the neighborhood I'm investing in, the underlying tailwinds, in this case, global travel, the quality of the business, in that case, a capital light, fast-growing franchise management business, as well as the quality of the management team. And if you can get those things right, even if you made a really poorly timed investment and paid a big premium, it can still turn out okay. And so, what I think about today is we're investing into digital and energy infrastructure, or in India, or in life sciences, or areas where we have really high conviction. That to me comes from this experience, which was, why did this turn out well? It should not have turned out well. And so, the lesson of, let's try to find the right neighborhoods to deploy capital, that has really stuck with me. It's interesting because we're such great partners, our two firms, partly because in the last 15 years, we got intensely dedicated on just helping clients allocate capital, but we needed to be bigger and a little different. So, we bought Smith Barney, bought E-Trade, bought Eaton Vance, all these acquisitions, but they're all around a neighborhood we loved. Having a partner. So, in your case, you had Chris, but presumably you also had your own team. How important is that, especially when it's really dark? How important was that? On a deal like Hilton, super important. I would say having business colleagues who still believe in you. First of all, you guys have done an amazing job because also you've got a great culture and you have all these capabilities, both serving individual investors and obviously as a investment and commercial bank providing capital and that ability to show up as a partner, even in the bad times. Having people who still say, yeah, we've got to find the way out through this thicket, that's really important. And I would personal element to this, having a wife and children and people you can go home to who still believe in you, even when the world doesn't, that matters. And I'll just give you a sense of how dark it felt. In early 09, the company had an employee who had taken some documents from a competitor. The company had found out, sent them back. Nevertheless, there was a federal investigation. There was a big article in the Wall Street Journal and I was talking with Chris and I called him and it was March, yeah, it was probably March of 09. We'd written the investment way down. We have this investigation in the headlines. And I said, Chris, the good news is it cannot possibly get any worse. But the fact that I had him, I had my family, I had colleagues and ultimately that this was a terrific business, that what we faced was cyclical, not secular in nature, that made a huge difference. So now it's one of the greatest private equity deals of all time. But in the darkest days, it was hard. What's the one big hard lesson coming out of Hilton? Well, I think the hard lesson was you don't want to put that much leverage, even on a great business, because the key is you've got to be able to get to the other side. When you own a great business, great piece of real estate or infrastructure, ultimately it'll compound or grow. And the problem is people get stopped out. In the trading world, it's margin debt. It could be leveraged lending in corporate world or real estate debt. And if you have too much, put so much pressure, you may be forced to sell, dilute your ownership at exactly the wrong moment. So the good lesson was focus on great businesses, great neighborhoods and stay calm. But the hard lesson is don't put yourself in a precarious position that if the weather outside gets tough, you're at risk of losing things. So this one worked out perfectly in the end. Yes. EOP worked out great. These are 07 vintage deals right before the crash. Give us one that didn't work out so well. One of the toughest lessons for me happened in the late 90s during the dot-com boom. I joined Blackstone in 92. I did M&A in private equity for a year, year and a half. And then I went into real estate after a crash. And basically for, I don't know, six, seven years, I'm in real estate. Things just keep going up and up because you had bought things very cheaply. Interest rates were reasonable. There wasn't too much building. And when you buy everything and it goes up, it doesn't really train you to be a great investor, right? It's the experience. It's these hard lessons that make all the difference. And sort of the top of that was in the late 90s, I was really focused on Northern California because you were seeing the innovation, we were moving onto the internet and so forth. And what happened was I bought a building on North First Street in San Jose, nondescript, two-story. And these were really crummy assets. They were crossed between office buildings and warehouses. They weren't worth very much physically. And we paid a big price for them because they had a tenant paying a huge rent. And instead of buying it at a 7% or 8% yield, I was buying it at 11% or 12%. I thought this was amazing. What I failed to notice was the major tenant was GoBosch.com. What does GoBosch mean? GoBosch means go big or stay home.com. Oh, God. I'm sure that this company, unfortunately, didn't last very long. I should have stayed home because by March of 2000, the dot-com bubble blows and this tenant disappears. And I should have recognized we were paying well over physical replacement costs. The quality here was poor. And the tenant didn't have much in the way of revenue. It had very few people in the space. And in my enthusiasm of what had come before it, I sort of lost sight of that. Now, we ended up a letter of credit. I think we got about a third of our money back. But it was really the first time I experienced financial loss in an investment. And I don't know, we lost 20 or $25 million. But it was embarrassing to tell your investors, to tell your colleagues, and to look at it after the fact. It was like, oh, my gosh, how stupid could I be? Why would I have paid that price for this? And there, it's a little bit of the danger of the mania of crowds, right, where things were going so great that in that moment in time, we became disconnected from fundamental value. And did someone come to you in that instance, because you're not as senior as you were in 2007, and say, you know, John, these are the lessons that have to happen and hang in there? Or did you have to learn that yourself in the moment? I think we all sort of talked about it. It was pretty clear. After the dot-com bubble burst, it was pretty clear to look back and say, gosh, when companies are trading at hundreds of times revenue, they're not making any money, the business model isn't viable. This was way too speculative. And what's interesting is I know today there's a lot of, are we in the same kind of environment? The only thing I would say is it feels very different to me. I mean, back then, as you know, Cisco, I think was the biggest company. They traded at 130 times earnings. NVIDIA, the biggest company today, I think is less than 30 times earnings. And so I don't think we're at that kind of time. Now, if this runs for five more years and people think trees grow to the skies, that's always a risk. I think as an investor, again, when you go through those experiences, it reminds you to question yourself that the danger is sort of the winning hand thing, that you keep doubling down, you keep doubling down because it's working. But at some point, the prices move too far, the assumptions move too far. And just because something's worked for a long period of time doesn't mean that's going to continue. Blackstone probably has great people joining all the time, but if they've joined since 2010, away from the COVID period, which is pretty V-shaped, they may not have experienced the same challenge that you did. How important is it to go through one of these drawdowns or real hard lessons? I think you learn so much more because when you have success, what it teaches you, you're a genius, right? Like you buy something, it goes up, it doubles in value, look how smart, you don't even think about it. It's when something goes wrong that you sit down and say, why did that happen? Like, what did I lose sight of in fundamental value? What did I miss about this business? Shouldn't I have known that? And you tend to really dwell on it and it makes you better. And then you begin to have pattern recognition. You begin then as you get more senior to say, oh, I've seen this before. And so the danger of course is when people get burned sometimes, they have a hard time going back, right? And so they bought an asset at 100, it now trades at 40 and they're like, oh no, no, I'm still scared. But you're like, wait, wait, the risk is much lower. And as you know, the psychology is people are more enthusiastic investing as the prices go up, as people perceive risk is lower. And one of the good things I think about the current environment is there's so much negativity. Everybody, there's a bubble in private credit, there's a bubble in AI, there's a bubble in the stock market. In some ways, that sort of caution that lingers over everything is helpful to stop things from getting out of hand. John, these are incredible investment perspectives, but if you think about your career, your adult life, what's the hardest situation or lesson? Well, I would say certainly in my career was what happened this summer. We lost an amazing colleague in Wesley La Patner. We had a horrific shooting at our building, random act of violence. And to lose somebody who was an amazing professional, but an even better human being, mother, wife, daughter, great mentor to so many of our people. And then to have your people go through the trauma of one of these mass shootings, that was really hard because there's not really a playbook. It's not like an investment thing, oh, here's what we're going to do. And the only thing you could do is sort of express your humanity, try to give people support, mental health support, do all sorts of things, bringing people together, and then honor Wesley's legacy, which I think is really important. So for me, that was the toughest moment, I would say, certainly in my career, because it went well beyond financial and to the human. And hopefully you never endure anything like that again. No, it's very tough. But the really important thing, again, is to connect with people. And the thing about our firm I felt has always been special. It's always run like a small business. And we can emphasize over and over again, the importance of delivering for our clients, the performance that we operate with integrity. But if you think about an investment organization or financial services company, at its core is the culture of the place. And that's what we're desperately trying to hold on to. John, that was incredible. Amazing lessons. Thank you for the partnership. We really appreciate it. It was fun. Dan, it was great. Thank you. Thank Morgan Stanley. Great partnership as well. Thank you. You can listen to an extended audio version of this episode on Apple, Spotify, or wherever you get your podcasts. For more information about the series, visit morganstanley.com hard lessons.