Blackstone's Jon Gray on Why Compute Demand is Outpacing Supply

[00:00:00] Speaker 1: Alternative asset giant Blackstone out with third quarter results a short while ago. Join us right now to discuss the company's performance, AI, the investing environment, and more is John Gray, President and Chief Operating Officer of the Blackstone Group, which has more than $1.3 trillion in assets under management. Good morning to you. Let's talk about the quarter, but then let's also talk about the environment, because I think there's so many questions about where things stand. But let's look back before we look forward, John. [00:00:26] John Gray: Great to be with you, Andrew. It was a challenging quarter with markets. Energy prices up 30 percent. The 10-year Treasury up 80 basis points. But the key for us is we delivered for our clients. Across the board, our flagship strategies beat comparable public market indices, and that's what we care most about. We also saw in the quarter $63 billion of inflows, more than $270 billion over the last 12 months, the highest in four years. And on the earnings front, a little bit of choppiness and realizations, but fee-related earnings up 6 percent. Year-to-date, total earnings up 12. And we think we'll have a strong quarter in Q4 and in 2027. [00:01:18] Speaker 1: Okay, let's talk, though, about the future, because I think there really is questions about inflation. There's questions about what you think interest rates are really going to look like and how much that can put a crimp on the business. [00:01:31] John Gray: Well, there are cross-currents today, no question. Cost of capital has gone up, driven by, of course, the war and the inflation pressures there. Some concerns, of course, about deficits. A little bit of crowding out of capital from the AI infrastructure bill. And so that is the challenge. The good news on the ground is we see real economic strength. So at our companies in the third quarter in private equity, we had 10 percent revenue growth globally, which is very solid. And we continue to see margins expand. So like in the public markets, we're seeing real earnings strength. And that's a positive. Yes, we do need to see a little bit of settling in the geopolitical environment for the markets to reopen. But that will happen at some point. And this underlying economic strength, that's very positive for investors over time. [00:02:28] Speaker 1: In terms of exits, you know, we were talking to Peter Orszag in the 6 o'clock hour. And he was suggesting that there's sort of another potential leg of big M&A activity because a lot of private equity firms are going to ultimately have to exit a number of businesses, which a lot of firms, including your own, have been holding for quite some time. And I said to him, does that happen as a function of something bad in the market, meaning that at some point it's just gone on too long? Or has that happened because the market gets better? I'm curious where you land on that. [00:02:58] John Gray: Yeah. Even in this choppy market, we continue to find realizations. We announced a couple of sales to strategics and events and gaming in Europe. We're finding liquidity in our energy and electrical equipment companies. Places like Japan and India have a lot of liquidity. And given the breadth of our firm, we're finding realizations. But the broader picture is a little tougher because of the choppiness in markets. I do think the underlying earnings strength is really key. I think the IPO market, which has closed a bit here, will reopen when the markets and the geopolitical situation calms a bit. And so I think you need a little bit of patience. But we have a long-term approach. And we feel very good about where we position capital for our investors, the growth of those companies, the growth of those assets. And that's what gives us confidence. At some point, the wider window will open. And when that happens, we and others will sell even more. [00:04:00] Speaker 1: John, you guys have gone all in on the data center build out. At the same time, there's been all sorts of questions about neoclouds and the like. And I'm curious what you're seeing in that regard. Jensen was on the program from Germany this morning. He said that he's seen no signs of any kind of slowdown in the need even for more neoclouds. [00:04:23] John Gray: Yeah, I think what we're seeing in the market is a little bit of a conflation between deliverability of compute and demand for compute. And at our companies, as an example, we've seen a 20-fold increase in spend on models over the last 12 months. It's pretty extraordinary. We have a joint venture with Anthropic to deploy these models. The company's called Ode. And it can't keep up with the business that's coming in the door. So we're seeing demand really growing for compute. And at the same time, the constraint, of course, is delivering that supply. And that's hard because of amassing capital, data centers, power, chips, all of that. And so for the neoclouds, if they can get to the other side, the pricing of compute's up 50%. Their legacy chips are worth much more than people thought. Their data centers are least below market. Their challenge is, do they have the capital, the debt and equity and the quantum that's needed to deliver? I think some of these companies have very talented CEOs. CoreWeave's a good example of this. They'll find a way through it. But that's the challenge they face. The underlying business is actually quite strong. [00:05:44] Speaker 1: John, a lot of the way you and others have been trying to securitize some of these data centers is against the actual value of the chips themselves. We've been talking a lot recently about how NVIDIA's margins on these chips run around 75%. That should be a siren call for more competition, which I think we're going to start to see in the next year, year and a half. And what you think that does to that margin and therefore what that does to the value of the chips. [00:06:14] John Gray: Well, there's just so much demand for chips. NVIDIA obviously has an extraordinary position, not only in its chips, but its CUDA software and how it integrates things. There will in any market, of course, be more competition, particularly one as large and growing as this. There are obviously Google's TPUs, Amazon's Traniums. There are more of these custom chips coming. But this is a large and growing market. And I think we will probably see more competition. But at the same time, a leader like NVIDIA has a remarkable position. And so the challenge again today is can you deliver on the promises? I would say for us, the key is we've really focused, as you pointed out, on the digital infrastructure, the data centers, the energy, long-term lease, contracted income with very large companies. And so we think that's a really safe and good place to be. [00:07:10] Speaker 1: When you think about interest rates, to the extent if you had the ear of Kevin Warsh, given what you do for a living, what would you tell him right now? [00:07:19] John Gray: Well, Kevin is a very smart, thoughtful person. And it is a bit of a challenge because, on the one hand, you have these inflationary pressures. You've got crude prices and diesel prices, fertilizer prices, all of those going higher. And yet, away from that, much of the inflation data is pretty subdued. When you look at wages, they're sitting around 3%. We haven't seen a lot of movement there. You look at rental housing, which is a large component of CPI, it's running well below the government 3%, probably about half of that. And so if the geopolitical conflict goes away here, we've got two of them obviously going on here. But if that recedes, then I think the inflation picture looks a lot better. So I think the Fed has some room to wait and see what happens here. We're not seeing inflation expectations really rising. We're just seeing pressure in these commodity areas tied to the conflicts. [00:08:18] Speaker 1: John Gray, it's always good to see you. We appreciate it. Thank you. Thank you, Andrew. You bet.