‘We are still in the early stages, hope to expand into infrastructure, growth equity, private credit,’ says Blackstone’s Gray

During his brief visit to India, Jonathan D Gray, spoke in an exclusive interview with Moneycontrol

Jonathan D Gray, Blackstone’s President and Chief Operating Officer, is one of the titans of the world of private equity. He has been a lifer at the storied buyout firm, having joined it in 1992. He was named President and chief operating officer in February 2018. During his brief visit to India, he spoke in an exclusive interview with Moneycontrol. Edited excerpts:

Let me start with what’s on everyone’s mind: How close are we to a Fed interest rate cut? And what will that mean for investment activity, especially considering the impact of high interest rates on leverage?

The data from the last few weeks has had markets push this back a little bit. The most important thing is that inflation is continuing to come down more slowly than last year. But if you look at our portfolio companies and input costs in the labour market in apartment grants, which contribute to Consumer Price Index (CPI) inflation, we think it will decline over time, which will give the Fed the ability to lower rates, but they’re going to be cautious because they’re mindful of not getting inflation to reignite. And as a result, I think they’ll cut rates this year, sometime in the middle of the year, maybe one or two times. The most important thing for investors is that we are past that big spike in inflation. And we’re moving to an environment where the cost of capital is coming down. And that’s part of the reason why you’re seeing more M&A activity. It’s part of the reason why the stock markets rally, right?

What are the key learnings from elevated interest rates?

The learnings are always the same for investors, which is you have to make sure you have the ability to get to the other side. So when you have these shocks, like Covid or what happened back in 911 or the financial crisis, what you are concerned about is that you don’t have the ability to hold on to assets through a difficult period of time. And so I think having resilient capital structures, owning good businesses, having diversification, and then making it to this period of time, where you start to begin to see the light at the end of the tunnel. And to me, that’s the biggest learning. And too often, people lose heart too early. And you’ve got to have some perseverance, right?

Coming to India, there is an election ahead of the one in America. And it’s widely expected that the current administration would come back to power. What are your expectations from what could possibly be a third term for Mr. Modi?

The expectation is that they will continue on the pro-growth path and keep encouraging foreign direct investment. Some of the reforms they’ve made have made it easier to invest in this country, such as the dispute resolution mechanisms they put in place, making it easier for companies to access the capital markets, and the allowing of public REIT markets has enabled us to take a number of real estate companies public. They have been quite supportive in facilitating commercial activity in the country. Other reforms, such as the goods and services tax (GST) and the bankruptcy laws, are accelerating investments on the infrastructure side. Such legal and capital markets infrastructure makes it easier for an economy to grow and for investors to come to a market. Then, the physical infrastructure, of course, allows commerce to happen.

What are the two or three areas in which you would like to see more reforms?
To delist a company in India requires 90 percent of the outstanding shares to vote. And obviously, sometimes people don’t vote. So it’s mathematically very hard to delist. As a result, there are something like 7,000 companies in the Indian public markets. That’s almost double that in the US, even though the US is a 10 times larger stock market. So, I think bringing that threshold down would help. Also, it’s difficult to list companies in India that aren’t domiciled here. Also, in the US, if you merge two companies on a tax-free basis and if you’re not cashing out, it can be done in a couple of months time. But some of those things can take a couple of years in India. And that slows transaction activity. This government has done a terrific job, and our expectation is that they will continue these reforms into their next administration.

One remarkable aspect of Blackstone’s 20-year journey in India is that it has emerged as possibly the biggest real estate owner in the country. Are there any specific changes or improvements that you would like to see when it comes to making REITs more accessible to investors?

I would say the REIT market has seen a great evolution. In fact, the growth of the Indian public markets, both for real estate and capital markets, have facilitated a lot of investment into the private markets. And that’s been really positive. So, one of the early challenges when we were investing in Indian real estate was that we could not exit because the private markets were not that deep, and borrowing costs were pretty high. Working with the government, we were able to help create a public REIT market; we’ve now taken three of the four public REITs public. The government has made a lot of progress, but there are still some limitations on who can own those shares. For instance, regular mutual funds outside of balanced funds really can’t invest. Over time, that should open up. And again, as you open up access, that allows more investors to come and values to go up, which is really important. And so we’ve seen this dynamic here. We’ve seen it on the private equity side as well. All of it helps build great companies in India.

So where does India stand on a global scale for Blackstone?

India is actually quite important to our firm. It’s our biggest investment market in Asia. When you look at our equity investing across our firm, first is the US, which is no surprise; second is the UK, and India is third when it comes to equity investing for us. So it’s very important for our private equity business and for our real estate business. Over time, we hope to expand into infrastructure, growth, equity, and maybe private credit as well. This is a market that has served us very well. Next year will be our 20th year in India and it’s pretty remarkable. But it feels like to us we’re still in the early stages because of the great fundamentals here and the terrific team we’ve got on the ground.

Blackstone has publicly stated that it intends to deploy an additional $25 billion in India. What kind of sectors are we talking about here, and in what time frame?
The idea is that we will continue to expand in the areas we have been present over time. Part of that will come from growth in the companies we already invest in. But in terms of where we will deploy incremental capital, I think a lot of it will be in companies in the ‘make in India’ category, which will export to the rest of the world.

We have done this already with EV parts manufacturer Sona Comstar.A lot of it will also come from IT services. Second, I would say it is the theme of ‘made for India” which will attract investment. We think there would be companies serving India’s growing middle class. So, there will be a lot of investing in healthcare, financial services and the money management business, I think energy transition can be another area because there’s so much need for energy here. And all of us want to try to find opportunities in that space. Then, in real estate, which supports those efforts, other areas include last-mile logistics for e-commerce companies and data centres. One of our biggest pushes globally at the firm has been digital infrastructure, which is really the physical manifestation of Artificial Intelligence ( AI). India is short of data centres, and we have built a company in that space and got a couple of projects under development. We’re excited about that, too.

Which of these themes (between ‘made for India’ and ‘make in India’) will dominate the most in the foreseeable future ?

I think ‘Made for India’ has a lot of potential just because we are so early in the growth journey. If you look at the GDP per capita in India, it’s only just 3% of the United States and it’s less than 3% of China. Given the entrepreneurial spirit, hard work, reforms and infrastructure, I think there’s a lot of scope for growth. So, serving that domestic market, to me, seems like a very big opportunity.

As far as Blackstone is concerned, you are a Democrat by affiliation and Steve Schwarzman, CEO of the group, is clearly not. Does that present any difficulty ?

Steve and I both love our country. We are both passionate about America; we may have slightly different views on how to get there. And in a lot of ways we dont not see things nearly as differently compared to some of the extremes which get covered. At Blackstone, there is always intellectual rigour, there is debate, and we want people with different views and different ideas to get the best outcome. So, the idea that the two of us have slightly different political views is good for everyone. That gets you better outcomes in a lot of ways, I feel. And I would also say that we also both share the same passion for India. We think this country has really tremendous potential.

Have you made mistakes in the last 20 years?

We did make mistakes early on. For instance, we were very passive as investors. We concluded over time that we wanted to have bigger stakes, really partner with management teams to help build their businesses and concentrate in some of these high conviction sectors. And over time, it’s really gone from strength to strength. In fact, in private equity, our highest returns geographically have been in India. So we’re always learning. We’re always trying to be better. But this is a place where we think we’re differentiated. And lots of folks are showing up here today. But we’ve been there a long time. We’ve got terrific teams and private equity, real estate, a great track record, great partners, great people. So the opportunity is large, particularly given the fundamentals of the economy and some of the change that’s happening, so it’s a good time to be here. That’s why I’m excited to spend this time here with you