Listen: Ep52: Blackstone’s Jon Gray on Private Markets, Career Advice & Jogging on LinkedIn

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Joe Cass   00:00:00

Hello, and welcome. My name is Joe Cass, Senior Director of S&P Global Ratings and the host and the creator of the FI15 podcast. On this episode, we have Jon Gray, President and Chief Operating Officer at Blackstone; and Doug Peterson, CEO and President of S&P Global. So a quick reminder before we start that the views of the external guests are their views alone and they do not represent the views of S&P Global. Okay. Thank you so much, John and Doug, for joining me today.

Jon Gray   00:00:25

Great to be here.

Doug Peterson   00:00:26

Thank you so much.

Joe Cass   00:00:28

Jon, we'll start with you. Now a lot of our viewers will already be familiar with Blackstone as the largest alternative asset manager with around $1.1 trillion in AUM. How do you explain what you do overall? And really, what's the firm's approach to investing?

Jon Gray   00:00:47

Well, I think what we do is pretty simple. We raise capital from all different types of investors, pension funds, sovereign wealth funds, endowments, individual investors, insurance companies. And then we deploy that capital mostly in alternative assets or private assets, private equity, real estate, credit, infrastructure, life sciences growth, hedge funds. And then the goal, of course, is to generate really good returns. And a bit like a restaurant, if you deliver great food, if you deliver great returns for your customers, they will come back, order more, try different things on the menu. And so our focus every day is how can we deliver for those customers, how can we use our scale, how can we use the data and insights and our high conviction investing to deliver better returns. That's the focus for us.

Joe Cass   00:01:45

Cool. Thanks, Jon. Doug, welcome back. Would you be able to give us an overview of, say, the past 12 months at S&P Global, including any highlights or interesting milestones?

Doug Peterson   00:01:59

Great. Joe, it's great to be back. Thank you so much for having me. We've had a fantastic last 12 months. As you know, 3 years ago, we undertook the acquisition of IHS Markit, and we started a really robust integration process, and that's paid off now in the last 12 months. We've been able to deliver over $600 million of expense synergies. We're well on track for $350 million of revenue synergies. And all of the themes that we've been looking at, including what Jon just talked about related to private markets and private credit, private capital playing a whole new role in the markets energy, energy transition, what we're seeing there, the way artificial intelligence is now being used. We've been able to take all of that and build it into our business. And with a strong issuance market with strong IPOs, what we're seeing with other capital movements, we're having a really good year. In the second quarter, we had revenue growth of 14% and an EPS of over 30%. So we've had a pretty good last 12 months.

Joe Cass   00:02:56

Great. Thanks Doug. Jon, can you talk us through the current macro environment, so including rates, inflation and also what they mean for you as an investor?

Jon Gray   00:03:09

Sure. I start with the positive, which is the U.S. economy and really the global economy have been much more resilient than most people would have expected, given central banks tightening rates now for more than 2 years. The Fed took interest rates up 550 basis points. They shrunk their balance sheet pretty significantly, and that was a real headwind. And yet companies continue to grow, and we've seen that in our companies. Revenue growth last quarter was still mid-single digits. We see very low default rates in our private credit portfolio. So a pretty good sign of resilience. We have begun to see a bit of a slowdown in terms of hiring at our companies. Revenue growth sequentially has been lower -- and in the consumer segment, in particular, we've seen some weakness. So think about theme parks or water parks or some of the consumer goods companies we have. So there is some slowing out there. Fortunately, what we're also seeing is inflation come down. So input costs at our company is flat, apartment rents very modestly growing, well below the government data. We're seeing wage growth. When we survey our CEOs, they're saying they think when they look out a year, it will be back down around 3% -- and so that is going to give the Fed air cover to do what I think is necessary to give us a softer landing, which is lower rates. We saw that this week. They cut rates by 50 basis points. I think that's the beginning of a process. So I think we're shifting out of a rising cost of capital environment and moving into a declining cost of capital environment, both base rates and spreads tightening. And as investors, that should be good for assets. What we've been trying to do is get ahead of that, deploy more capital. The second quarter, we had our busiest deployment quarter in 2-plus years. And we've been really focusing on investing before that all clear sign. And we still think it's a good time now to put out capital across real estate and private equity and infrastructure, credit and so forth. So overall, I think the risk here is that things slow too much, but I think the fact that the Fed is moving to become more accommodative and other central banks are doing the same, that should be really helpful. And as a result, it's leaning us more towards investing.

Joe Cass   00:05:39

Great. Thanks, Jon. Doug, you recently announced your upcoming retirement as Group CEO and President of S&P Global with Martina Cheung announced as a next leader. Can you talk to us about this decision itself, but also the succession process, too?

Doug Peterson   00:05:58

S&P Global, in addition to having really good businesses, we also have great governance. And our Board is well known for strong governance. Last year, we were ranked in a Fortune profile as #3 of 25 modern boards. We took a step back. And as I talked about earlier with the integration of IHS Markit, we knew at some point, we're going to have to have a new strategy that the integration would shift from being integration to then consolidation and then looking forward. And that was a perfect time to start a succession plan. We've been looking at succession for many, many years, at least 8 years, where we spend at least one Board meeting a year talking about succession for the CEO and other executives. And so we put in place a very robust process looking at external potential candidates. We looked internally. We did ways that we brought all of the potential candidates to meet with the Board of Directors. So it's a very robust process. And Martina herself has been the Head of Strategy. She worked in the Ratings business. Recently, she was the President of Ratings before that, the President of Market Intelligence, our 2 largest businesses. And we know her well, and she's a phenomenal leader and is going to take S&P Global to a whole new level.

Joe Cass   00:07:08

Yes, agreed.

Jon Gray   00:07:10

I'd just say kudos, Joe, to Doug for making this kind of seamless transition with a great internal candidate. It's the model of what a great leader does. So congratulations.

Doug Peterson   00:07:24

Thank you.

Joe Cass   00:07:25

Great. Jon, private market popularity has grown significantly over the past, kind of, 5 years. What has driven that growth? And does it create an increased need for transparency and liquidity in private markets today?

Jon Gray   00:07:42

So the driver of this has really been following the financial crisis, investors started becoming much more open to private assets. They used to only invest in private equity, real estate private equity, opportunistic credit, trying to get the highest returns. And it was a small number of customers. After rates came down following the financial crisis, there became more openness to doing private investing in things like infrastructure, more stabilized core plus real estate and in all forms of performing credit, private credit, both non-investment grade and investment grade. And the potential customer base expanded into individual investors, insurance companies and more institutions. And so you've seen a business that operated in a very small space start to really expand what we do and who we do it for. In terms of your specific question, and obviously, Blackstone is the largest player has really led this. But in terms of your specific question, I think on the liquidity side, no, I don't think there's a need for greater liquidity because ultimately, you're making the trade for giving up some of your liquidity for higher returns. And so that's sort of the benefit of the bargain. Now some of these vehicles are semi-liquid in nature, so they have to provide some liquidity. But I don't think you're striving to match what you see in the liquid markets. On the transparency side, because you're not selling a public security to every potential buyer in the world, -- the key is to have transparency to those who are looking to invest, those who are looking to invest in a closed-end drawdown fund or in an open-ended fund and you're providing them enough information to buy into that to invest in that vehicle. There, I think it's really important and to provide regular updates on performance, what's driving good and bad parts of performance. So it's a more targeted form where you're delivering those investors different than when we take a company public or we Blackstone or S&P is public. But I think there, the standard of care in terms of the transparency you give to your investors, yes, I think that's very important and trying to operate at the highest standard, I think it's so important to give investors confidence. And so I think the whole industry continues to mature I think you'll see companies move to higher standards. But I think this mega trend we've been seeing, particularly in areas like private credit will grow quite a bit. I think you'll see individual investors continue to migrate into this space. And net-net, private assets will be a bigger and bigger part of the investable universe.

Joe Cass   00:10:30

Great. Thanks, Jon. Doug, as CEO, you get to see the impact of major trends across all 5 divisions of S&P Global. How have private markets impacted our businesses? And where do you see client demand in this area?

Doug Peterson   00:10:46

Well, it's sort of the corollary of what we just heard from Jon. And on the other side of it, we have been serving private markets and private credit for a long time, but we never really thought about it like that. We had pockets or if you want to call it kind of fragmentation of relationships and products and services that we were providing information, data, benchmarks, analytics, ratings, et cetera, to different players in the private credit and private market value chain. But we hadn't thought about it as a business, and we hadn't really connected the dots. And so about 5 years ago, we started thinking about it. The real inflection point was in 2022 when interest rates started spiking. They really went up fast. And when they went up that fast, the bond markets closed, a lot of IPOs stopped. There was not a lot of traditional public market activities. And the private market activities really started blossoming and they started ballooning. And what we heard in addition to the private market players like a Blackstone that we're having a lot more activity and wanted some support in data analytics, the LPs were also coming to us and saying, we would like to understand more about our portfolios and what's in them across all of our asset classes from our public assets to our private assets. And we already had the tools in place through ratings, through securitization ratings. We have a product called iLEVEL, which provides information. In fact, Blackstone used to be involved in that, iLEVEL, which is used for LPs and GPs for information. We also have indices. And what we started doing was linking all of those activities together and getting a whole new view of the private credit and private markets. And this for us right now is probably our most important growth area, and we really appreciate having relationships with Jon, so we can learn from what they're seeing and enhance and improve what we're doing all along the way.

Jon Gray   00:12:34

I would make to that point, Doug, I do think it's really important. If you think of a company like S&P who really puts a stamp of approval on financial products, rates them, says these are safe or appropriate at this risk waiting for them to provide some of those valuable services that have been done in the public markets now in the private markets, also tracking performance, I think that's a natural synergy between these businesses. So as we in the private market grows, I think a business like S&P gives a lot of confidence to third-party participants. And I think both sides of us are going to benefit and grow in this private sector.

Joe Cass   00:13:16

Fantastic. Thank you both. Jon, I wanted to get your take on two important areas: energy transition and infrastructure. How are you approaching these sectors? And what kind of challenges or opportunities do you see?

Jon Gray   00:13:31

Well, I would say on energy transition first, we are huge believers that there's two powerful trends underway. One is there is this movement towards green energy, de-emphasis of hydrocarbons, particularly coal, movement to renewables. And secondarily, there's also a surge in demand for power, particularly coming from digital infrastructure and data centers, but also re-shoring electric vehicles. And so all of that means that a pretty -- what people thought of as a boring industry in energy has this surge of activity today, and it needs a lot of capital. And so what we're trying to do is focus with our infrastructure business on building generation assets, particularly renewables, building transmission because the wind and solar come from different parts of the country than where the population centers may be. We're thinking about in private equity, all sorts of services, utility services, backup power generation, consultancies, software businesses. There's just a massive amount of transition that's happening in the energy space. And so that's, I think, a super dynamic area, and our investors are very interested as well. Other categories of infrastructure, digital, as I mentioned, as you have cloud migration, data storage, but particularly now AI, there's real importance in the growth of data centers, and we've been probably the leading investor in the world. We just bought $16 billion Asian data center business called AirTrunk a few weeks ago. I think this is going to grow pretty aggressively. Cell tower is also an important part of the infrastructure world. And then I would say transportation, human beings continue to move roads, ports, airports, that's an area we like. And our investors really appreciate investing in these long-term inflation-protected assets. So one of the great things we can do for them is assemble this large amount of capital and go buy these big assets, try to improve the operations and drive good reasonable returns. Obviously, the expectations in infrastructure are different than something like private equity. And so I think these big capital-intensive areas, infrastructure, in particular for us, has had tremendous momentum. We've delivered for the customers. I think that will continue to be the space. And there's just an enormous amount of capital needs, particularly in power, particularly in digital infrastructure. So this is, I would say, perhaps the most exciting areas at our firm.

Doug Peterson   00:16:23

Joe, let me just add that I can't have a conversation with any organization where we don't talk about energy transition. And then depending on who they are as well, infrastructure. In addition to what we've already discussed for our organization of things like ratings and indices, -- we also have our business of Commodity Insights, and we're taking all of the information that we can gather from the energy complex, whether that's oil and gas, it's renewables, it's also the metals that you're going to need for the energy transition for grids, et cetera. And so we're taking all of that information and marrying it with the financial benchmarks and the financial data to support the energy transition and the infrastructure needs around the world. So it's a really exciting area for us as well.

Joe Cass   00:17:05

Fantastic. Thank you both. Doug, we just kind of touched upon it there. I'd be interested to know how S&P Global is approaching Gen AI? And what could the future hold for integrating AI technologies into our business?

Doug Peterson   00:17:22

Again, it's another topic that I can barely go anywhere where we're not talking about it. And as you know, 6 years ago, we purchased a company called Kensho in Cambridge, Massachusetts that has a large set of very specialized artificial intelligence engineers and mathematicians and computer scientists, et cetera. And they've been a captive for us for the last 6 years, and they built a lot of really interesting applications, especially for productivity, data management, data linking, visual and voice tools, et cetera. And about 2 years ago, we started using the information and the knowledge we had from Kensho to apply the Gen AI models, the large language models that have started coming out. And so we have a framework where we have a vision that started with Kensho about how we think about the future is not going to replace people. It's going to enhance them. It's going to give analysts better tools and give them -- allow them to move up the value chain and how they use their time. We put in place a governance structure. We have a Chief AI Officer in the company. We brought tools in place through our governance where we're locking down our data. So we bring the models inside of our firewalls instead of letting our data leave the firewalls. We're training 100% of our people in the company on large language models and Gen AI. We have this new model garden called Spark that we use that we have a set of power users. And so this is something for us that we believe that it's going to be necessary as a data company, and analytics company. We've got to be at the leading edge on this. And we do have some products in the market now. We have some products in Cap IQ Pro. We have a tool on top of Cap IQ Pro that allows you to chat and gather information, same for Platts Connect. It's another tool on top of that called Chat AI. We have a lot of tools that you can use now for transcripts to get summary of transcripts. We have a market sentiment tool. So we've started actually piloting and delivering to the market some new tools that are based off of large language models. But it's a really exciting area for us, but we think we need to stay ahead. But one thing I'll tell you is we're not going to build large language models. We're leaving that to somebody else. That's billions of dollars. Our team wanted to build them 2 years ago, everyone is coming to me and saying, we want to build a model. We're going to do the same thing as Google and Chat AI. And I looked at it quickly and said, no, we're not. We're going to become experts in using models and layering models and building tools that extract the information so you can use it and visualize it better. We're going to train our people, but we're not going to build the large language models, but we're going to be experts in what they are, how they work and how you can use them.

Joe Cass   00:20:00

And Jon, at a high level, what do you think the impact of AI could have on companies and also specifically companies Blackstone invests in?

Jon Gray   00:20:09

Yes. I'm with Doug. I think it's pretty significant. And I also agree with Doug. I mean, I think these models are incredibly powerful. I think the real question is how do you go from what these models can do to real-time applications in your businesses. And I think of it a little bit like translational medicine, basic science, but you need somebody to take that to the hospital and the patient. And I think that's what's just starting to happen at companies. And so we're very focused on this. In terms of where I think the impact shows up first, I think it's in customer engagement, certainly. When people think about your phone company or cable company, over time, obviously, these machines should be powerful tools in customer engagement. If you think about 2-dimensional when we think about searching for a product, a company may have a website as opposed to being able to communicate and say, I like this kind of clothing and I live in this area and so forth and the machine hears you and gives you something that works for you. And you say, well, actually, that's a little too long. I think the dynamism and improvement in customer engagement is going to go way up. I think for creative tools, really powerful. If you think about software developers, content and media, these will be really sort of copilots, using the Microsoft term, to help people expand their capabilities here. I think over time, robotics will gain a bunch of momentum. As we've seen with driverless cars, things in the physical world probably tend to take longer. But I do think you'll have machines that can do a lot of things powered by AI. And so for our companies, what we're trying to do is what are the use cases here. We've done a good job for a pretty long time with what we think of as predictive AI, putting numbers in a -- taking numbers about when demand for the product is to think about pricing or staffing, so sort of numbers in, numbers out. Now with the generative AI, when you're taking in video and words and all of this, and that's coming out the other side, those tools to translate that are just starting. And so we've hired a number of senior people. We're trying to implement it at our companies, trying to do it at the Blackstone level. I think hoping the world isn't going to change is a great strategy. I think you've got to believe this is coming. And then as investors, back to what we've been trying to do is let's own the super highway that all this is going to happen, let's own the digital infrastructure, let's own a bunch of support services around this, recognizing what's coming. So I think for everybody in their conference rooms, this focus on the future, which is moving very quickly towards us and then incorporating it in our various businesses is an absolute top priority. I would not want to say, hey, we have the -- we figured this out and as a result, we're the best in the world at doing this. But I would say our level of focus and the talent we're putting against it is pretty significant. And I'm hopeful we'll have a pretty big impact with some of our companies.

Joe Cass   00:23:26

So Jon, I follow you on LinkedIn, and it doesn't look like you're going to be slowing down anytime soon. So I've seen some of your LinkedIn posts where you're taking a jog, taking a run around basically everywhere in the world. So Montreal, Michigan, San Francisco, Beijing, Tokyo, Sydney. What's your day-to-day like during travel to meet clients and investors?

Jon Gray   00:23:53

Well, I will say the LinkedIn, which sort of happened completely organically, I used to, when I was traveling around the world, take little videos and send it to my wife and 4 daughters just so they remembered I existed like, hey, here's your dad. He's in Sydney, jogging at the opera house. And I sort of took that and said, "Hey, why don't we throw that on to LinkedIn. And people, I think, really appreciate the human element because they see you're struggling with the same thing. You're out there running. You're excited about seeing a new place. I would say travel for me is it's a full contact sport. I do try to get up early and run. But then after that, breakfast through dinner, I'm generally working hard and then maybe traveling late at night. It involves, of course, seeing our clients because I often say this, there's no replacement for being in person. Zoom is an effective tool, but it's not the same thing as going to see your client in their offices, having a face-to-face, grabbing a meal. We have offices around the globe. I'm often seeing our people and having town halls. Again, it's a great way to talk to your teams in person, maybe have some one-on-ones with the senior leaders in those offices, hear what's on their minds. And then we have companies and infrastructure and real estate assets or potential investments, and there's an opportunity to meet with the management team, hear about what's happening in their business. And so when the day ends, particularly when you're on a different time zone, then you're trying to catch up with the e-mails. And it's a bit exhausting and Doug knows the feeling, but it's exhausting when it's over, but there's a real sense of, I think, satisfaction. And as much as I love being in the office and being here and it's easier, I just feel like I learn more, I do more, I accomplish more when I'm out there. So I'm constantly pushing myself to be on the road. And it's something that I've actually enjoyed. And of course, the food and the people, all that is sort of the gravy. So I think oftentimes, people have a negative attitude towards business travel and so forth. I think if you sort of embrace it and say, "Hey, I'm going to have a bunch of new experiences. This is going to be great. That change in attitude can make it a much more positive experience.

Joe Cass   00:26:09

Great. Thanks, Jon. Doug, as you transition from CEO into a new chapter, -- what could feature more on your professional, your personal agenda, more theater, more Jazz maybe? I'm guessing maybe a portfolio of professional interest.

Doug Peterson   00:26:30

Well, first of all, this is a completely new thing for me. The last time I didn't know what I was going to do, I think I was 5 years old. And that was when I go to kindergarten, I went to grade school, junior high, high school, college, I worked, I went to business school. I worked in the city. I came to S&P Global. So I've known what I was going to do in my entire life. And so this is the first time that I have an opportunity to take a step back and field all kinds of interesting opportunities. I'm so excited about all of the possibilities. I know I'm going to stay busy. I know I'm also going to add some more time for some travel, some Jazz, some Opera, some archaeology things that I really enjoy a lot. I don't run. I'm a powerwalker. I do the same thing John does. Every time I go to a new city, I find some place to go walk to go see a museum. -- and I'd love to travel. So I'll probably do a little bit more of that. But the criteria that I'm using, there's 2 key criteria for what I'm going to do next professionally. The first is I want to work with people I like. That's number one. And the second is I want to continue to learn and do something that's exciting. So I will stay busy, but I don't know what it is yet, but I'm going to take my time and make sure I do the right thing.

Joe Cass   00:27:38

Great. Jon, what opinion or view on investing do you have that few others would agree with you on?

Jon Gray   00:27:47

I guess I always think of myself as a high conviction investor that I know many people think about investing through the lens of diversification. And obviously, it's prudent to have a mix of stocks and bonds in some different geographies and asset classes. So I'm not advocating against that. But I think one of the reasons at Blackstone that we've had a high degree of success is that when we found one of these thematic areas where we have real conviction, goods are moving from physical retail, online, therefore, global logistics are going to have an incredible run. Or India is really moving from a collectivist place to more capitalistic society, a lot of highly educated people and entrepreneurs, and we should really lean in there larger than other firms. When we've had these high conviction views and we put a lot of capital behind it, that's when we produce the highest returns. And we also develop a lot of domain expertise in an area in the process. And when we sprinkle money around in a bunch of different areas where we don't have as much conviction, we say, well, maybe it's cheap or so forth, we haven't had the same kind of success. So I think for me, it's the idea of going all in, being focused when you really have high conviction. And when you do that, you can generate outsized returns.

Joe Cass   00:29:18

Doug, as you reflect on your pretty stellar career spanning 40 years, what pointers would you have for people who are at the earlier stages or midpoint in their careers?

Doug Peterson   00:29:31

Well, I only have one message, and that's to always keep learning. So I'd say learn, learn, learn. And one of the ways is to ask lots of questions to be curious, to explore, to discover. The second is to take advantage of mentors. I benefited tremendously in my career from mentors and learning from people who have been there before, asking questions, the mentorship. And then the third is to take a risk on yourself, take really hard jobs. I took some of the hardest jobs that people never wanted and I always benefit from those. I had to roll up my sleeves, I had to learn new things. I had to do some really tough jobs in my career. And every single time when I did those, I came out better. So take risk on yourself.

Joe Cass   00:30:16

Great. And Jon, final question goes to you. What's the best piece of advice you've been give them? And who gave it to you?

Jon Gray   00:30:25

Well, Doug's advice on learning is very good advice, and it's something Charlie Munger was always advocating. For the best piece of advice I've gotten, I think I'd say my father-in-law on 9/11, he was -- he had served -- he'd grown up in a boy's orphanage home during the Great Depression. He had served in World War II in the South Pacific and then in Korea. And I remember that day in 9/11, we had -- my wife and I had 3 small children at that point. And obviously, it was a chaotic day. And I'll never forget him saying to me, John, our country has been through a lot. We'll get through this, too. And one, it was about the U.S., and it's something I firmly believe in the U.S., but it also was an attitude about maintaining calm looking beyond the moment you're dealing with right now and also an underlying sense of optimism that we're going to get to the other side. And it doesn't matter if it's a very obviously tragic day like that or a personal challenge you have or a business challenge, this idea that we've been through difficult times before, we can get through this, too. And I think that makes a huge difference if you can bring that attitude, if you can stay calm and think about how you're going to get to the other side. So that was a valuable gift. He unfortunately passed last year at 105 years old. But I think his positive attitude was super helpful in his life, and it's definitely been a legacy for me.

Joe Cass   00:31:59

Yes. Fantastic advice. Listen, that's it. Thank you so much to Jon and Doug for your time today, for everybody watching, everyone listening. See you next time on Fixed Income in 15.