Blackstone President Jon Gray on Q3 results: We've got a cyclical updraft in the deal markets

Key Concepts

• Blackstone's Q3 Performance
• Capital Raising
• Distributable Earnings
• Deal Market Cyclicality
• Secular Tailwinds (Wealth, Insurance, India, Life Sciences)
• M&A and IPO Market Recovery
• Cost of Capital (Interest Rates, Spreads)
• AI and Data Centers Investment
• AI Bubble Concerns
• Data Center Lease Structures
• AI Productivity Gains
• Capital Misallocation
• Private Credit Returns
• Base Rates and Spreads
• Direct Lending Model
• Premium Returns in Private Credit

Blackstone's Third Quarter Performance and Outlook

Blackstone reported a strong third quarter, driven by a clear business model focused on delivering for customers and strategic investments in digital and energy infrastructure. This performance has led to significant capital raising, with the company securing $54 billion in the quarter, marking the fourth consecutive quarter exceeding $50 billion. This influx of capital has translated into extraordinary results for shareholders, with distributable earnings increasing by 50%.

Key Drivers of Performance and Future Optimism

John Gray, President and Chief Operating Officer of Blackstone Group, highlighted several factors contributing to their optimism:

• Cyclical Updraft in Deal Markets: A resurgence in M&A and IPO activity is anticipated, which will keep the firm and its investors engaged.
• Secular Tailwinds: Long-term growth trends in wealth management, insurance, the Indian market, and life sciences are expected to provide sustained momentum.

Despite broader market uncertainties, Blackstone feels optimistic about the future, particularly concerning the IPO market and sales.

Resurgence in M&A and IPO Markets

The transcript indicates a significant shift in the M&A and IPO landscape:

• M&A Market: The overall M&A market in the US saw a 64% increase in the third quarter.
• IPO Market: The IPO market experienced a 100% surge in the same period.
• Cost of Capital: A decrease in the cost of capital is evident, with the Federal Reserve cutting rates, lower long-term interest rates, and tightening spreads.
• Blackstone's IPO Activity: Blackstone participated in three IPOs in the third quarter across India, Europe, and the United States, a feat not seen since 2021.
• Significant Deal Announcement: The company announced an $18 billion deal with Hologic this week.

Gray noted that "you can feel sort of those animal spirits recovering and deal activity as you know has been very muted and this is obviously a positive for us and our investors."

Strategic Investments in AI and Data Centers

Blackstone has made substantial investments in the AI and data center space, a sector currently generating considerable discussion regarding potential bubbles.

• Addressing AI Bubble Concerns: Gray acknowledged the "bubble talk" surrounding AI but emphasized Blackstone's strategic approach to data center investments.
• Counterparty Focus and Lease Lengths: Blackstone is highly selective about its counterparties and the duration of its leases. They are not engaging in speculative development.
• Long-Term Leases with Major Corporations: Investments are secured by 15 to 20-year leases with global companies possessing market capitalizations ranging from $1 trillion to $4 trillion. This strategy is described as a "very sensible way to play this very large investment theme."
• Justification for Capital Spend: The significant capital investment in AI is justified by the potential for massive productivity gains.
  • Global Labor Costs: Estimated at $60 trillion globally.
  • Efficiency Gains: A 15% increase in company efficiency through AI technology could translate to $9 trillion in annual productivity gains.
• Acknowledging Capital Misallocation: While the aggregate investment makes sense, Gray conceded that "there will be misallocations of capital. There will be poor investments," drawing parallels to past investment booms like railroads and the internet. However, he stressed that "in aggregate, the prize here is very large."

Perspective on Private Credit Returns

Addressing a Financial Times headline suggesting the "era of bumper private credit returns has ended," Gray offered a nuanced perspective:

• Overstated Claims: He believes the headline is "a little overstated I would say in some respects."
• Normalization of Returns: Gray acknowledged that with lower base rates and spreads, achieving mid-teen returns as a senior lender in a "more normalized environment" will be challenging.
• Premium Returns in Private Credit: He emphasized that private credit, through its direct, "farm-to-table" model that connects investors directly with borrowers, can still generate premium returns. This is achieved by eliminating significant origination and securitization costs.
• Relative Strength: While absolute return levels may have decreased, the relative returns of private credit compared to liquid credit remain "really strong." This is a key reason for continued investor allocation to private credit, encompassing both investment grade and non-investment grade investors.

Technical Terms and Concepts

• Distributable Earnings: A measure of a company's ability to pay dividends or repurchase shares, often used by private equity firms.
• Secular Tailwinds: Long-term trends that are expected to drive growth in a particular industry or sector.
• M&A (Mergers and Acquisitions): The process of combining companies or one company buying another.
• IPO (Initial Public Offering): The first sale of stock by a private company to the public.
• Cost of Capital: The rate of return a company must earn on an investment to satisfy its investors.
• Base Rates: The prevailing interest rates in the economy.
• Spreads: The difference between the yield on a risky asset and the yield on a risk-free asset.
• LLMs (Large Language Models): A type of artificial intelligence that can generate human-like text.
• Counterparty: The other party in a financial transaction.
• Market Cap (Market Capitalization): The total value of a company's outstanding shares of stock.
• Private Credit: Loans made by non-bank lenders to companies.
• Origination Costs: Expenses incurred in originating a loan.
• Securitization Costs: Expenses associated with packaging loans into securities.
• Liquid Credit: Debt instruments that can be easily bought and sold in the market.

Synthesis and Conclusion

Blackstone's third quarter results demonstrate robust performance driven by strategic focus and favorable market conditions. The company is successfully raising significant capital, evidenced by consistent over-$50 billion quarterly raises, and is delivering strong returns to shareholders. A notable shift is the observed recovery in M&A and IPO markets, supported by a more favorable cost of capital. Blackstone's substantial investments in AI and data centers are underpinned by a long-term perspective, focusing on secure, long-duration leases with creditworthy counterparties, and are justified by the transformative productivity potential of AI. While acknowledging the possibility of capital misallocations in the AI space, the overall investment thesis is considered sound. Furthermore, Blackstone maintains that private credit, despite a normalization of absolute returns, continues to offer attractive relative returns due to its direct lending model, making it a compelling asset class for investors.