Chapter 1: What is the main topic discussed in this episode?
Hello and welcome. This is The Michelle Hussein Show. I'm Michelle Hussein. I speak with people like Elon Musk. I think I've done enough. And Shonda Rhimes. That's so cute. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.
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You certainly ask interesting questions.
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John, thank you so much for joining this morning.
Great to be here.
So a surge in profits, deals abound, exits were robust. Is this the starting gun fired off?
It does feel a bit of that, Danny. It's great to be here to be talking about it. We had a heck of a quarter. What we saw here was we delivered for our customers. That's the most important thing in terms of returns. We really leaned into digital and energy infrastructure. We also saw big inflows as well, $50-plus billion, and all of that produced big earnings, distributable earnings up 50%.
But you've really hit on the key here. We've got a couple things going on, a cyclical uplift in deal activity, and that's very helpful for our business and our investors. And then we also have some of these big markets that continue to grow in wealth, insurance. very attractive investment areas in places like India and life sciences. So a lot of good things are starting to happen.
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Chapter 2: What were the highlights of Blackstone's Q3 earnings?
The long end has come down. Spreads have tightened. High yield spreads are down almost in half from their highs a couple of years ago. And we've got record highs in the stock market. That is a very good combination for more deal activity. And so we get a little bit of calm here in the overall environment with this kind of backdrop.
I would expect next year will be an even better year for M&A and IPOs.
Even so, there are still concerns. There's uncertainty around trade policy. Tariffs, to be honest, are really just starting to bite. You see that in some of the public company earnings. And sticky inflation is still with us. John, are those not still concerns?
Well, I would tick through some of these. Certainly on the tariffs, we've been an advocate of letting this tariff diplomacy play out. Obviously, around Liberation Day, there was a lot of concern. But ultimately, we saw progress and deals being made by the administration. I would expect that will continue to happen.
There will be noise as the negotiations go back and forth, but I do believe this will settle. And I don't think six, 12 months from now, this will be on the front page. The other thing I'd say around inflation is that our data is pretty encouraging in certain areas. Rental housing, the biggest component in CPI.
Our data says it's running about half of the 3.6%, what the Bureau of Labor Statistics produces, and that should be helpful for the Fed. Also, we've seen a cooling in the labor market. If you look at hourly wages at our portfolio companies, they're down around 3% from north of 4% a year ago. So I think that should allow the Fed to continue to lower rates. That's a positive.
So I think some settlement of the tariffs, continued good data on CPI and rates coming down should be helpful. And overall, that environment does feel pretty good. Obviously, there can be risks along the way. We're in the midst of a government shutdown that can slow things like IPOs in the short term. But when we look out over the horizon, it feels pretty good for deals.
So you're an optimist and there is clear robustness there, John. But you and your private capital counterparts, the shares of your companies have really been punished this year. Virtually all have underperformed the wider market. What do you think is behind those fears and is any of it warranted?
Well, it's hard to look at stocks day to day. We focus on the long term for our shareholders. I think our total return is something like three and a half times over the last five years, double the stock market. So shareholders have been rewarded for investing with Blackstone.
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Chapter 3: How is Blackstone navigating current deal activity?
We, of course, are very aligned with them as the largest shareholders of the company. I think in markets, when people are nervous about what's happening, there have been a lot of these stories around private credit, which I'm happy to talk about. That may have created concern. Maybe people have been focused on the government shutdown and the IPO market slowing or the tariffs causing that.
We tend to take this longer-term approach. And when we do that, it looks like a very bright environment. So I think with us, what we found is we just keep executing, keep delivering good returns for our customers. That enables us to raise money, to expand our business. And I think shareholders will see that this business can continue to grow and deliver.
Well, let's get into the private credit of it all, John, because it feels like not a day comes by that someone admittedly not in private credit comes on this show or others and say private credit is a troubled child and bankruptcies with some prime auto lenders are exemplary of that. Why do you push back against that idea?
Well, we would say that if you look at the three big troubled credits that have been out there the last couple of weeks, this is not a private credit story. These credits were bank led. They were bank originated. They were bank syndicated. So we can't really understand why there's a referendum on private credit. I would also point out that these were non-institutional borrowers.
If you look at what we do in our $150 billion direct lending business, we lend 98% to private equity sponsors, to public companies. These were individuals, and also, It appears based on the reporting that there was fraud involved in these three situations. That's something that's not so common. So I don't think it says really anything about private credit.
And I also, because of the idiosyncratic nature of the facts here, I don't think it says a lot about the overall health of credit in the system.
But John, couldn't you make the argument that these were firms that were tapping the credit markets over a span of years and you had very reputable people coming in and lending to them? Does it not say something that very fact that despite this continued concern of financial impropriety, that people continue to lend to them and didn't spot some of the warning signs?
Well, clearly in these situations, there should have been more concern registered. When you go through a period of very low defaults, there can be at times people relaxing standards. And maybe that was the case in these situations, although in defense of the folks who lent here,
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Chapter 4: What factors are influencing the return of M&A and IPOs?
fraud, not disclosing liabilities, double pledging collateral, those are hard things to catch. And so that to me is a little more understandable. And I do think you have to look at this in the scheme of overall credit. Look at what's happening in the banking system, Their defaults continue to be very low. They'll realize loss is very low. It's a similar story in private credit.
So in aggregate, the system to us feels very healthy. There will be these one-off situations. And certainly, as you get deeper into a cycle, could you see defaults go up or losses go up off of these very low base today? Yes. But overall, again, I think the system feels pretty good to us.
What about returns? It had been lauded as the golden age of private credit, but John, as rates start to come in, just performance-wise, is it still the golden era?
Well, I still think it's a very good time for private credit. I would acknowledge that as base rates come down and as spreads tighten, some of the very high returns that were achieved being a senior lender in private credit, that's harder to do, achieving mid-teens returns.
But the premium relative to liquid credit, what you get in leverage loans and high yield, that's enduring because you have this farm to table model. You're bringing investors right up to borrowers and knocking out a bunch of origination and securitization costs. And so I think the key thing is not necessarily the absolute return, but can you deliver a premium return over liquid markets?
And that I continue to have very high confidence in. And that's why I think we'll continue to see flows into private credit, not just non-investment grade,
But investment grade, what we're seeing with insurance clients, the momentum in that area is pretty remarkable because insurance clients recognize, particularly as base rates and spreads come down, that getting that extra return from private credit without taking on any additional risk, that makes a ton of sense.
There are those that are suffering, be it in credit or private equity. It's a real bifurcation of the industry. KKR somewhat famously told Bloomberg a few weeks ago that there are more McDonald's, or rather there are more private equity funds in the U.S. than McDonald's. It seems like that's slowly changing, John. You hear stories of Brookfield and Oaktree coming together.
I was speaking with a manager yesterday who said every day he has a new inbound from a GP looking to sell itself. With that increasing fragmentation, has Blackstone considered acquiring new managers?
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