The Investor Behind Costco, Starbucks, and Blackstone | Tony James on The a16z Show

Key Takeaway

Focus relentlessly on customer value and never compromise for short-term gains. When Costco finds a way to save a nickel on batteries, 100% of that savings goes to lower prices—none to higher margins. This continuous enhancement of customer value, combined with flawless execution of details and building for the long term, creates an unbeatable competitive advantage that compounds over decades.

Episode Overview

Tony James, former President and COO of Blackstone, shares insights from his 25-year journey building DLJ into the fifth-largest securities firm, his early-stage investment in Costco, and his 38-year tenure on its board alongside Charlie Munger. He discusses recognizing inflection points in business, building culture, and taking Blackstone from $20 billion to over $1 trillion in AUM through disciplined focus and long-term thinking.

Full Transcript

Transcript of The Investor Behind Costco, Starbucks, and Blackstone | Tony James on The a16z Show from A16Z. Auto-generated from episode audio; may contain minor errors.

If you think about the development of a successful company, there's kind of an S curve. It starts off small and entrepreneurial. Then there's this kind of escalation where you create a lot of value and a lot of size. People know Blackstone today, a trillion dollars in AUM. It did not look anything like that when you joined. Running an investment organization like Blackstone, I think you almost have to be a really good investor. If you're going to catch the signals early, they're never obvious. By the time they're obvious, it's priced in.

You led the Series A into Costco. Charlie Munger was on the board and you guys served together for 30 years. What did you did you did you Learn focus, focus, focus. Flawless execution of details. Build for the long term. term. term. Everybody that I spoke with literally attribute the success that they've had in their careers to you. If a young person came to you today, what would you tell them about building a career? Um Tony, thank you so much for being here. You're very welcome, David.

You joined uh DLJ as an investment banking associate in 1975, I think just after business school. Maybe give us a reminder of what the shape of that business looked like at the time. Well, if I known what I was doing, I probably wouldn't have joined DLJ. It was It was nothing, honestly. It was a a a It was a sub-major firm or a sub-sub-major firm as they used to say in those days. So, there were at least 100 firms bigger than it was. We had investment banking team of five.

Wow. We hadn't done a financing or a merger in 2 years. So, we hadn't done any business in 2 years. But But But you know, I like the people. I like the unstructured nature of it. I decided that um I'd I'd give it a shot. shot. shot. And you I mean you ultimately stayed for you know, 25 years, I believe. Uh which is a pretty long tenure generally, but uh certainly for for Wall Street at the time. time. time. I guess what were some of the kind of you know, key inflection points in that journey?

Maybe that led to your success or kind of the evolution of the business, you know, which grew obviously massively during your tenure. Well, the I mean the good part of getting in on the ground floor is if if it starts to work, you get pulled up with the growth in organization and you get responsibilities earlier than you deserve them. And that kind of feeds on itself. Your learning accelerates, everything accelerates. accelerates. accelerates. Your confidence accelerates maybe to an excess. excess. excess. But it feels really good.

And your expectations are low, so when you start winning business, it's always a positive price. If you lose, well, that's that's what's par for the course, but so it you you got a very positive you got a very positive feedback loop. Um you know, we ran DLJ ultimately was renowned for its culture. People just loved working there. And that created a really nice environment and you spend so much of your career or your life in your office. That was fantastic. And um you know, we grew DLJ from essentially nothing to the fifth largest securities firm.

firm. firm. We grew it at over 15% for 25 consecutive years. That's kind of like one of your tech companies. Um and and it was and and I and I and I and I love that. And every few years, the business changed and my opportunity set changed set changed set changed radically. radically. radically. The big turning point I would say was 1980 when KKR did a LBO for Houdaille Industries. Industries. Industries. The first big public company that went actually was taken private. And I said, "Wow, you can buy these huge companies with almost all debt." And And And it struck me that DLJ at the time was competing with dozens of other firms that had more of everything than we did.

More bankers, more clients, more of a track record, more capital, more distribution. There was nothing we had that should win. So, that struck me as a way to kind of end run. They weren't really doing it themselves. It was a it was a new sector. sector. sector. We could buy clients we couldn't actually win competitively and then do all their investment banking business. And that really fed on itself. Out of the we built a private equity the we built a private equity business. I think our first fund had a 90% IRR.

90% IRR. 90% IRR. Those days it was easier because prices were lower. were lower. were lower. Companies were more under-managed. And essentially you could get you could borrow 100% of the purchase price. Um so just by rolling your fees you could kind of own the company. And then that drove then we had the could and had to build a high-yield business and and other debt businesses that we that we a lot of those were our biggest IPOs. One thing led to another. So we built the whole investment banking business business business cheek by jowl with the principal business.

So it was in essence it was a true merchant bank. There was no reason really that a KKR or a Forstmann Little that were the big players back then should ever existed. Your old firm Goldman should have beaten them. them. them. But the big firms were ambivalent about this business. They were ambivalent because wasn't quite an agency business. They were all they were old line bankers that didn't understand it and didn't actually want to understand it. Really. They just didn't want their clients to complain about competing with something that the firm bought.

And so And so And so so that institutional ambivalence gave us a huge runway that we just plowed through. through. through. And um And um And um and it you know it became a magic synergy between the investment banking and the merchant banking. And ultimately we built funds of funds and real estate businesses, venture capital. We had a business back then called Sprout which was one of the big three back back in the '70s. three back back in the '70s. Gone now. And and I want to dig into the merchant banking business in a bit.

What you know one of the folks that uh you know I spoke to kind of in in preparing for this conversation was was Bennett Goodman. He's had a long you know history with and he told me a funny story of you recruiting him when he was I think at Drexel at the time. Right. And you know you know, Mike Milken was sort of a top of the power chain, you a top of the power chain, you know, in terms of like the you know, the junk bond ecosystem and kind of the the growth of the private equity world.

And he said he asked you, you know, what what makes you think you can compete with with Drexel and uh and you gave an amazing answer or at least his recollection. I'm curious if you remember that conversation and what you said. I I don't. What did he say? He basically said cuz he said you had the whole theory for why Drexel's business model was flawed. Was basically that like, you know, all they had to do was sort of um say that they had high confidence that they could raise the capital.

And you had a very different point of view that you were going to actually have dedicated pools of capital. You were going to start effectively a bridge fund. fund. fund. Bridge fund, right. And Bennett I think had said, "Okay, well well well so these are like, you know, $250 million $500 million financing, like how big's your balance sheet?" And you're like, "I don't know, 300 million bucks." And he's like, "Okay, how does that work?" And you're like, "Well, we were owned by Equitable, you know, which I think was or controlled by Equitable, which was the one of the biggest life insurance companies.

And it was just this is something I've heard from a lot of people, but like the confidence that you had you had you had go and and the confidence that you instilled in others to go compete against people who are far better capitalized, had much bigger businesses, I you know, he would argue drove a lot of the firm's success. I'm just curious if you could talk through kind of that dynamic, you know, in in the '80s. Yeah, well, of course back then Drexel was the big gorilla and we were second in high yield.

We were more of a client than a threat to Drexel at that time. Okay. Because of our because of our principal business. Yep. business. Yep. business. Yep. Dre- Drexel had the high yield the high the highly confident letter. If we said we were highly confident, people would say, "Well, so what? Sure. You don't matter." Right. So we created this bridge fund and we we turned it we turned it heavily. We we bet the we bet the fund and we bet the firm on every bridge loan.

And ultimately that lack of capital became an Achilles heel. Mhm. Mhm. Mhm. But, But, But, um we had a remarkable stretch of making the right credit assessments and the right market assessments. So, every time we got we would win the business and we would have the distribution. Because we were often controlling the issuer, we could put a little extra vig in the interest rate. Mhm. So, it we became known as as the distributor of high yield that people should buy on the issue. Mhm. Because we'd price it to trade up.

Mhm. It would With that, it doesn't have to trade up much. It's not like equities. equities. equities. Sure. It doesn't have to trade up much to be juicy. So, we used that and we developed quite a following. And then when Drexel went under, under, under, um the bigger firms were also ambivalent about high yield. It had a taint, especially when Drexel went under. And so, we were we were sitting there in second place and we we just inherited the world in that sense and it became the most profitable part of of Wall Street.

We we kind of for all of 40% of Wall Street in volume in high yield for 12 years. It was a huge Drexel's going under was a huge boost to our banking business. It didn't really help our our principal business much, but it was a huge boost to our And you were able to recruit like real talent from from Drexel then? We were. We were. Ken Moelis was a a big one and and Bennett was a was huge. And although Bennett was only an associate at the time, but but I always believe in young talent, great young talent.

Yep. And and unleash them. So, that's always served me well uh throughout my career. career. career. Totally. And that that has definitely shined through in a lot a lot of my conversations. Um conversations. Um conversations. Um yeah, I mean maybe just kind of talk through the inception of the of the merchant banking, you know, kind of Schultz platform and you know, how that grew. Ultimately, I think it became one of the largest or the largest in the world at the time. Right. Well, again, Well, again, Well, again, KKR does that HLT idea back in 1980 and I said, "Wow, this is something we can do.

We don't even have to have a client. We're the client in a way." Yep. And so, I went to the firm and I said we should do this as I was running M&A at the time which in and of itself was some kind of distortion of reality cuz I was like 30 maybe not 30 29 and they said they said go back go back to work where you we have a principal business called sprout the venture capital and they you know they are they know how to buy things and you know how to advise so go back to advising.

Yeah. And I sent him a few deals over the next year or so and they said no that doesn't work and then someone else would do it make a lot of money and I kept going to the firm and saying this is ridiculous these guys don't know how to get out of their way. their way. their way. So ultimately they gave me the responsibility and we started off with a landmark deal I think it was the third biggest LBO ever called we bought the retailing subsidiary from household international we ended up with bonds and Ben Franklin TGI TGI TGI and Costco's grocery stores.

And we sliced and diced and sold them all and we closed we closed and we put up a couple hundred million dollars equity and the day after closing we pulled out 400 million dollars or some some huge number cuz we sold the discount business to another discounter and ended up essentially owning a great grocery store in Southern California called bonds for free I grew up going to bonds in San Diego Southern California and around that we did massive amounts of high yield and one thing and another and and and that put us on the map so and and led to us raising a fund and it was a very high return fund so that then we got a lot of follow ons but we were we were pretty aggressive about starting new businesses we we started a secondaries business a fund of funds business real estate as I mentioned all these things and they all pretty much all worked the private markets in those days was not as competitive and and and and prices and prices and prices prices were lower as a multiple of EBITDA and whatnot.

And and companies were asset heavy. So there there was a lot to work with there. Yep. And that and we built that business when we when we sold DLJ to to to Credit Suisse, it was about a $29 billion AUM business. business. business. Um Blackstone at the time was high teens. So just to put that in context. And um And um And um So that that that was a key asset. Once it got put into a Swiss bank, they had all of the institutional issues Right.

and the lack of commitment to the principal business that all the other big firms had. So it kind of started to waste away. But And what and what was the kind of core motivation to sell uh DLJ to Credit Suisse? Was there some like a macro reason or just good timing? I'm just curious. I think there were macro and micro reasons. Um DLJ had had a hell of a run as I mentioned. Um mentioned. Um mentioned. Um And this was 2000 and honestly, I looked around and said, "Wow, the market market is at some kind of peak." of peak." of peak." Um And at the same time, the industry was changing.

Uh Glass-Steagall was coming down, so the banks were coming in with very deep capital pockets. Uh regulations were changing about how closely research, which was DLJ's strength, could work with investment banking. Interesting. banking. Interesting. banking. Interesting. Um markets were changing. We'd gone from uh we'd gone from the go We'd gone from negotiated rates to very low commission rates. And so the big firms were essentially doing the cash business on break-even basis to make money on the derivatives. We didn't have a derivatives business and we didn't have the technology to build one.

Interesting. Um and then the our success in in in high-yield and and and private equity meant we'd running out of balance sheet. Our bridge fund was $1 billion and all of a sudden you were doing $1 billion bridge loans. So, you can do one deal at a time, and if one mistake and you're out of business cuz 100 million of that was ours at the bottom, by the way. Which was 40% of our equity or something. So, so it just seemed to me like everything looked great right then.

Yep. But was unsustainable. Yep. unsustainable. Yep. unsustainable. Yep. So, and and I tried to push the management I was number two but I tried to push the CEO to kind of like invest in the future a little bit, but it's he didn't really want to, honestly, and and and and it would have meant meant some tough years for earnings. So, So, So, we decided to sell the company. And I'd say I think in retrospect a lot of people blame me for that decision for pulling the rug out for them cuz cuz working at DLJ had a little bit of a of a of a you know, Kumbaya feel to it.

The people still talk about it. They still get together twice a year. That's amazing. And and and pine over those days. Um Um Um Not so much Swiss Bank. But we sold it for 14 billion in cash, and two or three years later Morgan Stanley sold for eight. Wow, wow. So, I would say our timing was good. If you're going to exit because you don't have a winning hand, the timing was really good. good. good. Totally. Totally. Totally. Uh now, that it happened to be it it happened to be a essentially a merger of equals, but it was that's that's never pretty, especially when you have two firms of such different cultures.

Totally. One of my favorite fun facts about your time at DLJ, and you know, we're sitting in a venture capital office was that you you led the series A into Costco in the 1980s. I have to hear more about that story. You know, Starbucks, too, by the way. Is that right? that right? that right? Yeah. Oh, wow. Uh I mean, a few others. They weren't all that successful. That's amazing. You might be the best retail venture capitalist of all time. Um Um Um I guess how did you meet, you know, Jim Sinegal and Jeff Brotman and then ultimately like what did you see in them at at that time?

Well, they walked in unknown to me and said, [snorts and clears throat] "Gee, we have we have what we think is a really interesting opportunity." Uh there was one unit like that called Price Club that had opened in San Diego. That's where I grew up. Yeah. Or or Jeff had been the number two or Jeff sorry, Jim had been the number two uh there and Jeff recruited him to come start Costco and open the same thing in the Pacific Northwest. Yep. Yep. Yep. Um there was a research report from a Goldman analyst named Joe Ellis that sort of laid out the business model and it was it was it was very very powerful and elegant.

Um Um Um and and and so so so and it was proven in one case and and the Pacific Northwest was a very good market, very affluent, very good market. Jim was one of the best executives I've ever met. ever met. ever met. May maybe the best. He's not he's driven. driven. driven. He He He he can he can he's excellent on the smallest details of execution but also the biggest principles. Mhm. Mhm. Mhm. He knows exactly he you know, he never compromises. He never does something that's expedient.

It's always about serving the customer and driving the competitive advantage to where no one else can can go. Totally. Just relentless about that. And incredible standards of excellence. And focus, focus, focus. And and you know, the guy the guy traveled 225 days a year. So, you know, as a CEO. Totally. Totally. Totally. And And And was at every opening, knew the price of every item in the store. And so you can't meet a guy like that who's a total force of nature and not be blown away.

It's the same time he was coupled with Jeff Brotman who was a clever lawyer, real estate lawyer, and also owned some retailers up in Seattle. So, he really knew that market. And And And the the the the economic model of of the store was so powerful so powerful so powerful that it was compelling, I thought. Totally. And and you're not like betting on a new technology. Is the market going to embrace it or is it going to work? Cuz there was it was pretty prosaic in your under someone like even me, I could understand it.

But also, there was a working model. Yep. Yep. Yep. So, we did that and then and it it was one of the all-time great investments, I have to say. One thing I learned is learned is learned is a lot of people I think hold things too long. I probably sell too early. We'll we'll get into it. I mean, the again, the other amazing fact about your, you know, time with Costco is that you've you've been on the board, I think, 38 years, which is probably one of the longest tenures in American corporate governance that I can think of.

Um why like what has Costco meant to you? You know, and why have you stayed on the board or, you know, affiliated for for so long? Well, I mean I mean, David, you wh- wh- when you find a couple of executives and back them before there's a company, before there's a dollar of revenue, revenue, revenue, before there's an order, um you feel it as much as they do that you're a founder. Totally. And so, it it becomes like like like and I'm, you know, I've I've been a director now.

I'm I'm on my third CEO. Yep. So, it feels like like I identify with the company as if it's mine. I I don't want to take any credit away from the great management we've had. We have had great management. But I I emotionally, I feel that kind of connection and that sense of ownership. Um also, it's it's just such a great company. The I'm I I'm constantly learning from the the things they do and the way they think about it and they're they're not is they're you know, they're they're very down-to-earth and very focused, but they come to such good decisions all the time.

time. time. And then as you're if you're an investor as I was at for many years at Blackstone, Blackstone, Blackstone, the window on the world that you get from the second largest retailer in the world, what goods are working, what goods aren't working, how are consumers reacting, what's the cost of supply, what what's happening, what are what are tariffs doing to our income, you know, our income cost, what how are we handling shipping and all that stuff. It's here's it's a huge source of value-added information.

information. information. So, for a lot of I mean I I I'm I love it and I'm I I feel like a real sense of identity there. I guess what have you learned from watching Costco grow in terms of, terms of, terms of, you know, business building or you know, I mean they're so famous for for culture, right, and how they treat their employees and ultimately the value they deliver back to the end customer by by keeping prices low and really making money through the membership more than they do on margin on the products, but I I'm curious if I mean the business has grown obviously so much I mean from nothing, you know, to what it is today.

You know. You know. You know. Yeah, 250 billion. Yeah. Um Um Um I I think there's there's some similarities between DLJ Costco and and Blackstone actually. But but focusing on Costco, um we we built that it was first of all all about taking care of the customer. If you if you take really take great care of the customer, um um um then then then you know, a lot follows from that. You have a you have a robust business model with a fantastic following franchise following franchise following franchise and you get a lot of growth and your shareholders do fine.

So, take care of your customer, build quality long-term, don't ever worry about short-term expediency. Gee, we're having a soft quarter, let's raise prices or let's sell some real estate. We don't have to own the real estate or this or the other thing. So easy to get um enticed into short-term expediency. Similarly, people have been coming to us for years, "Oh, you should buy this or you should buy that." that." that." And And And um we really we've always had so much growth in doing just what we do if we do it really well.

We just have never been distracted by that. So focus, focus, focus, execution, flawless execution of details, build for the long term, build quality, and keep driving your prices down. Keep enhancing your value to a customer. Never let that be static. So the more value we give the So what whatever if if Costco can go find a new source for batteries and save a nickel, 100% of that nickel gets lower prices. None of it goes into higher margin. And so they're always driving down prices. So their customer value proposition keeps growing.

Most companies Most companies Most companies either nibble away at it cuz they're tempted to have a little more earnings or they let it be static. And Costco's always driving to increase the customer value proposition. So I think those are all good lessons for any business. business. business. I know I know we originally met I think in the in the context of the Costco you know board meeting and um um um you know I he wasn't there in person but you know when I when I spoke met with the board, Charlie Munger was still on the board and I think you guys served together for We did.

30 years. 30 years, yeah. Um you know he's such a legend. I guess you know what did you learn from Charlie Munger over you know those few decades? Well, Well, Well, first of all, Charlie never compromises intellectually. intellectually. intellectually. Um if he doesn't like something, there you're in never in any doubt what he thinks about things. And And And um um um and he isn't either, by the W- which I love. It doesn't mean he was always right, but he was right a high hugely high percentage of the time.

that. that. that. Um Um Um Charlie believed in the company. So, even when we would have doubts, um and you know, the the management and the board, "Geez, is this going to work? Is Amazon going to flatten us? Now they're buying Whole Foods. Oh my god, are they going to do this or that?" Uh and bef- before Amazon, it was Walmart. He believed in the company. No, you're the best. Just go ahead right at them. Open that unit in Bentonville. You'll beat the heck out of Walmart.

And it happened. Yep. And now, don't worry about Whole Foods. You'll crush them. It happened. happened. happened. Yep. And so, you know, he he he was really a believer. Uh with good reason. It's not he wasn't blind. blind. blind. But sometimes that sense of confidence and I tried to put that in the businesses that I've run, too. That sense of confidence. You're you are good. You're really really good. Believe in yourself. You can do anything. Yep. And people lose that that uh um um Charlie could distill everything into a sound bite.

Mhm. You know. You know. You know. I uh we were we I was you know, they owned a newspaper and I think Wall Street Journal was up for sale and I said, "Charlie, what do you think about newspapers?" He said he says this the newspaper business is not a business, Tony. It's an oil well that's depleting to zero. I said, "Well, what about the Wall Street Journal?" Well, that's not a newspaper. That's a trade journal. I mean, everything gets right. Mhm. He distills it into such an accessible understandable accessible understandable accessible understandable um um um yeah, a way of thinking about things.

Charlie was my uh my rock. I I talked to him every 2 weeks, whether we were in the board or not. We talked about the world. world. world. There are many times when I'd say, "Charlie, I'm I'm starting to worry about this or that thing." And he he was an absolute rock. So, I mean, I love the guy, honestly. I have a bust a bust of him in my conference room, my office. Uh real mentor. Uh so loyal, so supportive. And And And um um um and very very high principles.

There was there was no no no cutting corners on anything. Totally. Totally. Totally. And he was still coming to board meetings at like 98 years old, you know? I mean, it's pretty pretty unbelievable. What all the way to his death. Yeah. I mean, that is remarkable. So, I want to transition to Blackstone, which I think, you know, most people know you for cuz you had such a huge impact on the growth um um um you know, talk through kind of when you first met Steve Schwarzman.

I know it's kind of before you you joined the firm. And what was sort of the conversation like, you know, for him getting you to join? Yeah, okay. Yeah. I think our first serious engagement dates to back to 1989. I think it is when we when we when we were working on a deal together to buy a railroad company called CNW. And And And it was a hairy time because the markets were falling apart. We were sort of pregnant with this public bid for this railroad company.

railroad company. railroad company. We were an equity shareholder, but we were also providing all the high-yield debt and the M&A and on and on and on and on. and on. and on. Part of our business model, put a little equity in and get all the messing banking business. banking business. banking business. And And And we had a big high-yield deal which had a reset note. Mhm. note. Mhm. note. Mhm. And And And Steve was balking at the concept of a reset note. We I think we're pricing at 15% and it could reset up to 18.

I think of those rates today. Totally. But But But Steve said, "No, I don't I'm not going to do the reset because I know you guys will reset it to the max. That's just, you know, you know, you know, And this is and what Steve has a great ins- great nose for how to get screwed. And how to avoid it. Um yeah, and how to avoid it. But what might happen. Yep. And we couldn't sell it without the reset. And of course, what that told you is the market all thought it would be reset.

Interesting, right? Or at least you want to take the risk out of it. So, we kind of went round and round and round on that. We had done a bridge loan, so had done a We had done a bridge loan, so we were we were we were we needed to get this financing done. And and you know, the story is Steve said, "Well, are you want to put your money on your own personal money on the line?" And I said, "Yes." Um Um Um and so we had okay, if it resets to the max, max, max, you you'll you'll pay me a certain amount of money.

And I said, "Okay." Frankly, the amount I would pay Steve was dwarfed by the amount the firm would lose if we didn't get the deal done. And I Steve might have knuckled under anyway, but to me this was a a very good example of losing a battle to win the war. war. war. And I felt like if I could give Steve a you know, a pound of flesh, then I could get get get the whole thing done. And And And and and and the idea of someone putting up money up and actually if Steve had to pay more interest rate, which wasn't Steve really, it was the LPs had to pay a higher rate, I would lose some money.

All that appealed to him. So, that that did the trick. And and he agreed, we got the deal done and and and um you know, we both look back on that slightly differently, slightly differently, slightly differently, but I think we each accomplished something in our own heads, which is sometimes what it takes to make a deal. So, then after that, I was running investment banking for a long time and Steve was a client, not necessarily the closest client. He did a lot with with Chemical Bank and Jimmy Lee and other banks.

But But what we would we would have a casual like a once a once a year lunch or something like that. that. that. Um and then after DLJ was sold, I had to had to agree as part of the condition of merger agreement to stick it out for 2 years. years. years. Uh no other employee did, by the way. But I'd stuck my 2 years out and then decided that it wasn't fun. Yep. And that I wanted to do something else anyway. anyway. anyway. My DLJ that I felt that same sense of proprietary ownership for that I felt for Costco was gone.

Yep. Steve called out of the blue and said, "Can we have lunch?" And one thing led to another. to another. to another. And he said he'd been looking to hire someone for a couple years and would I consider coming in and and helping run the firm. Mhm. And my first reaction was "Geez, Steve, "Geez, Steve, "Geez, Steve, you're a tough boss and I really haven't had a boss in like 15 years." Totally. Totally. Totally. And I I don't really, you know, DLJ went public and went private a few times.

So, I didn't really need to work. And I said, "Steve, I don't know that I want to be told what to do or what not to do. I mean, I haven't had that in a long time." He said, "No, no, no. Um Um Um uh you come in, you run the firm day-to-day. We'll talk all the time. I'll back you. Um if you know, if if we don't agree. don't agree. don't agree. Uh by the way, we agreed 98% of the time. time. time. Mhm. Mhm.

Mhm. I'll back you. Um but if performance is not good, I reserve the right to get rid of you." Yeah. I said, "That's fair." Yep. Um so, we cut a deal where he could get rid of me at a drop of a hat. I got I was vested up to the minute in whatever I had. had. had. Sure. And we agreed to try it. Like like so many entrepreneurs, I we've all seen this, right? Where they say they'll say they'll say they'll or they they they want to bring someone in and and there were issues with around Blackstone at the time and all the businesses.

businesses. businesses. Mhm. But then once once those issues are kind of fade, then the then the entrepreneur and entrepreneur and entrepreneur and wants to kind of reassert control. Totally. I have to say, Steve was an absolute prince. I mean, he he he he always respected my role and and and and um um um running the day-to-day firm. When a lot of the I made a lot of changes and when I made those changes, a lot of people didn't like them. Backed me 100% even when he wasn't necessarily sure they were right.

Um Um Um they turned out to be right. But But But but he was a great he was a but he was a great boss really. He really I I have to say and say and say and and that's hard. It's his baby right to give that level element of control that level of control to someone else. I I'm not one in a hundred would have done that. So credit to Steve. Totally. Well, and I guess like you know, you could have obviously started your own firm.

firm. firm. You know, most of the people I you know, spoken to whether it was Joe Perella or Michael Che or you know, um um um David Blitzer like any of these folks talk about kind of Blackstone before Tony James and Blackstone after Tony James. I mean cuz you joined I think what 17 years after the firm's founding. Uh Thereabouts. Yeah. Thereabouts. Yeah. Thereabouts. Yeah. You know, how did you think about joining a firm versus potentially starting your own and then you know, we'll talk about kind of the trajectory of the business cuz it grew.

I did think about starting my own firm. I had a lot of people encouraging me to do that both LPs and also other professionals. [snorts] [snorts] [snorts] But you know, I I kind of what I like doing if you think about the development of a successful company, there's kind of an S curve. It starts off small and entrepreneurial. entrepreneurial. entrepreneurial. It's kind of if it's not a tech company, it's kind of flat for a while bumps along And some of ours are like that too. then there's this kind of escalation curve where you create a lot of value and a lot of size.

And then you get if you're lucky enough, you get to be very successful and it's kind of protect the bastion. My what I like doing is that steep part of the S curve. I like taking something small and growing it and making it better and making it very successful. And then once it's very successful it's not that much fun to to protect the castle anymore and when it grows by. And and so I felt I I looked when I I looked at Blackstone they were in every business Blackstone in was in DLJ had been in and had reported to me.

And there was no one else in the world that had had that mix of businesses under their authority. So, I thought I'm I'm uniquely knowledgeable about every business. And I'd seen and Blackstone had growing pains at the time, but DLJ had had those same growing pains a few years before. So, I knew how to work through them. And I thought, "Gee, if I could get my hands on Blackstone, I could be dangerous." The other thing is if you start, you know, when you're used to running a big firm.

After the merger of DLJ and Credit Suisse, it was the largest by head count. The investment bank in the world. Didn't stay that way because of all the bloodletting and the But But But once you've been on I wanted to paint on a somewhat bigger campus a canvas than starting my own firm with two guys in a corner. corner. corner. And so, And so, And so, I'm I'm That was the choice I made and Steve, as I say, I was originally not going to do it, but Steve was very convincing and he lived up to everything.

And it was a great partnership, I have to say. I mean, we worked really well together for 18 years. Totally. years. Totally. years. Totally. Um Um Um you know, people know Blackstone today, you know, a trillion dollars in AUM. It did not look anything like that No. when you joined in in 2002. I think the firm was maybe 14 billion dollars in total assets. total assets. total assets. like that. Which is, you know, shockingly like, I don't know, a sixth of our size, which is, you know, kind of insane.

Um insane. Um insane. Um Again, maybe maybe just give folks kind of a reminder what What was the shape of the business then? What businesses existed? And, you know, we'll talk through kind of the the 50-fold increase, I guess, you know, during your tenure. Yeah, I mean, Blackstone Blackstone was Blackstone was Blackstone was was was in in private equity and real estate estate estate in hedge fund fund of funds and a tiny credit business and then an M&A business and a restructuring advisory business. advisory business.

advisory business. All those businesses were kind of subscale a little bit. The private equity business, they'd raised a fund and had made a couple of disastrous investors so that that were within a year white write-offs with about a third of the fund. The advisory business the M&A business was down was down was down 50 or 75% from its peak and not going up. The the fund of funds business was tiny tiny and not very profitable. And the real estate business estate business estate business was a was again a small business.

Um Um Um So So So um um um all those all those all those it it it um there were there were things to do to grow all those businesses. And what I'm what I'm prouder of honestly than moving the the AUM from 16 billion to billion to billion to nearly a trillion is the market cap of the company because you know, it's AUM is just AUM. And And And AIG had just put a hundred million dollars into Blackstone for 10% of the company and the rights to invest in our funds.

So funds. So funds. So at best it was worth a billion dollars and when I left it was worth 170. So that's 170-fold value increase. And while we're growing the business increasing the value our IRR and all our funds went up. So we weren't we weren't driving down sometimes an asset manager can drive 100% yeah. down in return for for commod- more commodity um returns. We weren't doing that. Yep. And so And so And so that that was um it was a great run, I have to say, but it it it was we got very lucky.

Um and but I you know, I I started focusing right away on culture. Again, coming from DLJ where I had and and [clears throat] my experience with Costco, culture is so important. And that required that required making some changes in people and talent. Um I think virtually every the leader of every business almost was changed cuz a lot of culture comes from leadership. leadership. leadership. We moved from being a a collection of real of talented people but difficult people that didn't work together to a team orientation.

orientation. orientation. We We We put in place processes that people initially said why should any processes by definition bureaucracy so I don't want that. But processes that encourage better decisions, sharing of information, and more efficient use of time actually frees people up. So So So and I'm I'm very much against bureaucracy and hierarchy. So hierarchy. So hierarchy. So we we we we did a lot. We we added There were some businesses I felt we should be in and we added those. And there were some business we shouldn't be in like the vinyl business so we spun those out.

So it was a long journey but it it was um um um a fantastic journey. I mean people again one of one of the other kind of common threads that I mean literally everybody I spoke to um highlights was that you're both an incredible investor and probably one of the best managers of like high high potential talent and firm builders you know that they've seen and it's a rare combination to have both. You know people talk about um you know being in an IC meeting with you and you finding the uh the uh the uh you know the detail on page 16 that conflicts with the the pieces on page 36 from 6 weeks ago and being able to hold kind of people accountable to that while also kind of seeing the bigger picture of the fund and the firm.

Yeah. Well I I think um uh I I think I'm a good manager of small elite teams. Navy SEAL type teams. I don't think I'd be a good manager of the US Army. Uh or Costco. Or or a huge Swiss bank for that matter. Um and and I think my style is uh there's certain principles that I have around which which the those kind of smaller elite investment organizations react well to. Totally. Totally. Totally. Um, I mean one of one of them is robust debate. I there's you know, a lack of hierarchy, lack of status hierarchy, not just organizational hierarchy.

So that if we're talking about a business, I want you to argue with me. I want you to challenge me. But you've got to be able to and I want to be able to challenge you. But I got to do that so that you don't get insecure or hurt feelings. feelings. feelings. And creating a culture where you can have robust debate because you're all in it together in a search for truth. And people don't take it personally. It um It um It um is not so easy.

And and you really want to be very direct about this because the more indirect and you you are, it's so inefficient. You're not really saying what you're thinking. You got to take take some weeks to get around to it. So robust debate's a big one. Lack of hierarchy's a big one. I feel so strongly that you have to model the behavior that you want your people to have, which means you've got to work as hard as they do. Um Um Um and it extends into personal values and things as well.

Um Um Um um um um I I think it's I I running an investment organization like Bridgewater, I think you almost have to be a really good investor. Um, I know there'll be exceptions to that. that. that. But our firm, where you earn your chops, your respect, is being able to talk to some of the best investors in the world on an equal footing and you're not losing a step with them. And And And and similarly, um when I go over those investment committees, I mean I mean I mean if I'm not going to go over them carefully, then the sloppiness and the will go up a lot.

They you know, they the same amount of care. So I want people coming in there working really hard to to to have great investment and great thought process. And part of those catches those little things is sending a message. Someone's watching. watching. watching. You're paying attention. You got to be flawless. And also for a firm like Blackstone, it's investment committees that are the cultural crucible of what what defines the firm. the firm. the firm. Say more Say more about that, yeah. Well, how we think how we talk to each other, how we think, the our analytical rigor, the the frankly, the lessons we learn from our failures and our successes.

Yep. All that is transmitted from senior management, me and the partners, let's just say, to the junior people through investment committees. investment committees. investment committees. And and so so, if you're not able to hold your own in those things, if you're just presiding over them or you're or you're not engaged or you haven't done the work, you lose a lot. Mhm. opinion. Mhm. opinion. Mhm. opinion. So, and I could go on and on. There are lots of um lots of lots of lots of principles that for me work well in an elite investment organization, but they might not work in another organization.

Sure. Correct me if I'm wrong, but like I think Blackstone by and large was more kind of consensus-oriented or at least the stories that I heard was that if if there was a, you know, a tie, you would always back the deal team. And David Blitzer told the story um Yeah. Yeah. Uh you know, I think uh he was in London. You know, you were maybe 3 months into the job and he gets a call saying you you have a new boss. Uh and you know, I think he's like a little bit apprehensive.

You made him feel really comfortable, but there was a particular deal, I think, that you were working on pretty early in your tenure at the firm. I think it was for Houghton Mifflin. It was like a spin-out or a carve-out of Vivendi at the time. And I think the the investment committee initially initially initially um you know, didn't didn't sort of deny the deal, but basically created like too narrow a bounding from like a price perspective. perspective. perspective. And he was describing how he was bombed.

He was like, you know, having a drink in a pub and and and basically I think you met with him and was like, you know, how strongly convicted you are are are you in this deal? Do a bunch of work over the weekend. Let's go back on a Monday. And and you really like he believes like put your weight behind him, which gave him the confidence to sort of like, you you know, champion the deal. Um, well, Um, well, Um, well, that's true in that instance, but there are times when you're you're not on that side of it, of course.

Yep. But I would say in general, when a deal committee comes in a I don't want them coming into a a when a deal team comes in to the committee with a recommendation, they better want to do it. Otherwise, what are we doing there? All right? So, so if they're coming in with conviction to do it, almost by definition, I'm going to challenge them. Mhm. Mhm. Mhm. And I'm going to try to find the weakness or the things they haven't thought about thought about thought about or what not.

And so, people often accuse me of no matter what they say arguing the other side. There's some truth to that, but it's but there's a reason for it. it. it. Right. Right. Right. There are times when I feel like there's something in in investing there's something that's not on the page. You've got to have a feel. You got to you know, you know, we kind of talk about seeing seeing around corners a little bit. And partly that's the partner the partner the partner and and his conviction.

Partly it's my own gut, even though it's not provable. not provable. not provable. Partly it's the process becomes a little unfair sometimes because someone gets on something if there's a mistake or there's a needle or something and they just stay on it and the whole committee kind of kind of kind of loses momentum. loses momentum. loses momentum. So, definitely there were times I put my finger on the scale to level that out, for sure. for sure. for sure. Um, Um, Um, um, and I'm sure there were plenty of times when it went the other way.

Yep. way. Yep. way. Yep. But that's that's kind of what you have you know, you're you're you're more than just a referee. But I I really felt strongly that it's a collective decision. collective decision. collective decision. Mhm. So when I put my finger on the scale, scale, scale, it wasn't that I was deciding. I had to get the other people there. Sure. Sure. Sure. And I just I just think groups make especially in investing makes better decisions than any one individual. And Blackstone came from a lot of as I say independent talented people that wouldn't challenge each other, wouldn't even do the work to look at someone else's deal.

One CIO that was a very smart guy but a bottleneck. Mhm. Mhm. Mhm. And it wasn't a scalable model. This is like a distinction that I've I've written about I think a lot about here in the context of Andreessen Horowitz which is this notion of firm versus fund. You know, the the the the sort of contrast that I try to draw is um you know, most people run funds. Very few people in my definition build firms and and the objective function of a fund is how do I generate the most carry with the fewest people in the shortest span of time possible.

You know, often that's run by a single CIO. There's a handful of people there's like ultimately one decision maker. decision maker. decision maker. And a firm I think by by contrast maybe is has to deliver exceptional returns because that's a prerequisite. But the other I think variable is like building sources of compounding competitive advantage. Like what are your moats? You know, if you think about Blackstone as a company not just a collection of individual funds like you know, it it's a much more entrepreneurial question because every entrepreneur wakes up every day asking about their competitive advantage.

Um Um Um I'm curious you know, if you agree with that distinction, how you sort of think about that in the context of of Blackstone or DLJ. do and I I do. One of one of the tricks of running a firm is making people in a fund care more than just about their front fund, right? So that's a that's a sensitive balance and and and you want them to care enough but not too much. much. much. And then within funds or within sub-businesses, maybe private, how do you get the guys in India to care enough about the guy that sells in New York?

York? York? And for me, I I have I have my way of thinking about that and my how to balance the rewards on both sides really from trial and error and what's worked over the years and not because no theoretical model that makes it right. But that the first thing is to make you do want everyone, even people in the fund, to care a little bit about the firm for lots of reasons. Yep. Um Um Um The The issue as Blackstone became successful, the issue was we weren't in we weren't a mono-line boutique investor anymore, which is what all anymore, which is what all the LPs wanted.

No, no, no. I want I want you know, I want Andreessen Horowitz to do one thing and there's a genius who sits in the corner and he he divines the right answer. right answer. right answer. We we were becoming, right or wrong, not only a supermarket, but a big supermarket with lots and and and that was not where LPs' heads were. heads were. heads were. Today is different, but back then. So So my my my challenge as a a firm manager was to figure out how do we take our disadvantages and make them advantages.

advantages. advantages. Um Um Um because because we we don't want to stop growing and we don't want to descend into mediocrity. into mediocrity. into mediocrity. I mean, as we've talked about before, growth in and of itself creates opportunities for new talent so we could keep talent that would otherwise get frustrated and go to their own thing. I mean, I always wanted to have the most talented people in the world and train them so they were better than they would have been any other place. But those people have tons of opportunities.

So opportunities. So opportunities. So So So I had to create new opportunities, not just not just not just a war of attrition with the more senior people. people. people. So growth was important. And and and so, how do you mitigate the the negatives that come with that? And so, we spent a lot of time thinking about that. We we tried to add businesses add businesses add businesses that were made the other businesses around them better. They brought insights, access, relationships, capital, something that made each of the other businesses better.

I also it was this is why we were leaning so early in our stealth effort to build retail distribution. Yep. Again, just distribution power. I mean, it was a hedge against the time when maybe all the funds aren't high top quartile returns. And so, how do we still drive, drive business and customers and AUM and so on and so forth. forth. forth. Yep. Yep. Yep. And so, yeah, we we we're constantly thinking about ways to take our disadvantages and make them advantages yep to drive growth.

Yeah, what one of the things I I I've read certainly in a lot of like Blackstone materials over time is just um you know, they'll identify kind of a big secular trend and find ways to express conviction in that thesis across different asset classes. And one of my kind of core beliefs both it's kind of an investment philosophy. I think it's a bit of a metaphor for for my career maybe today, which is that opportunities live between fields of expertise. And it seems like very well expressed at least like, you know, you know, we're we're believers in e-commerce.

So, we'll bet in the e-commerce brand, but we're we're also going to buy warehouses. We're also going to invest in the cloud infrastructure and And that's that's an area where these different You you take a mosaic tile from each different business and you put together and you have a clearer view of it. Yep. So, yeah, so we we um we could see what was happening in e-commerce, e-commerce, e-commerce, but we could also see what was happening in warehouses and we could see and and and so, and so, and so, that ability to develop to see themes because because the early sig if you're going to catch the signals early, they're never obvious.

Right. Right. Right. Because by the time they're obvious, it's priced in, right? So, you've got to catch them early. Especially if you're Blackstone and you want to move a lot of money into it, right? So, how do you see things early? You get you get you get reinforcement from independent No one signal is dominant. This is so clear, of course. But you get reinforcement from multiple different businesses and insights and so on and so forth. Totally. And and and that that became a That was one of our competitive advantages that we we tried to maximize.

Totally. Totally. Totally. [snorts] [snorts] [snorts] You you talked about kind of retail distribution, you know, everybody I I I've spoken to has said you were like incredibly early kind of in that way. But just covering the warehouses, by the way, treating LPs as true partners. But that was something that was, you know, kind of core. You you talked about driving IRRs, not just sort of scaling AUM for the sake of it. Um I think you also helped catalyze kind of the creation of Blackstone's insurance, you know, insurance solutions business.

Um Um Um I I imagine both of those became kind of sources of like perpetual or permanent capital to some degree, you know, for the business as well. Yes, definitely. I mean, mean, mean, the insurance the insurance the insurance um um um like both both were big untapped asset classes. So, the institutions have generally 25% of their assets in a in alternatives, let's say. The more sophisticated ones like endowments are 50. 50. 50. Retail was at 2%. Yep. So, it kind of screamed and insurance was very low, too.

Now, insurance has regulatory restrictions that keep it lower. Yep. Although there are increasingly structural ways to kind of nudge that boundary. boundary. boundary. But those seem like um there was just as much insurance assets as there was pension assets in the amount and just as much 401k as our retail assets. So, how do we tap our we're living with 1/3 of the market. How do we open up those other thirds? And again, it's all about how do we use our scale and our size. There's no other firm that could have afforded to build the retail distribution.

We have 500 people in that. And we started off not just by hiring salesmen salesmen salesmen you know, we started off because because the wirehouses the wirehouses the wirehouses they need training. So, we ran Blackstone University and people would come through and every broker of every wirehouse, the only place they're going to come and learn about alternatives is Blackstone University. There was no other alternatives university. And then we had a masterclass where you go back and get people who want to get a masters in this.

this. this. And then we we built our own proprietary data data data uh uh uh CRM system and data system. So, we knew more about every Merrill Lynch client and whatever question they've ever asked us than Merrill Lynch knew about that client. And we did that across the board and and we did that for not just Merrill Lynch and UBS and the BWI house, but thousands of RIAs. Yep. Yep. Yep. And that that that I think is the now the one the the the dominant strategic asset that Blackstone has that no one else can really replicate.

Because no one else has the breadth of product product product um so that you're always in the market and you always have something that a customer wants or a broker wants to sell it. it. it. The number products that were always open that were you could put money in anytime. anytime. anytime. Yep. Yep. Yep. Uh no one else has the revenue scale to justify the overhead. Totally. Totally. Totally. And it and it and it becomes reinforcing of the brand and the and the value. So, that I I I felt like you know, w- in the investment business, you can be really good or you can have a cold hand and I didn't want to I don't I mean, you can live by the sword die by the sword.

I didn't want to die by the sword. So, want to die period. So, I was I was okay to live by it while we had the hot hand in investing, but I wanted a hedge so that we would still have a have a have a unassailable business when we didn't have the the best returns. it. I want to talk about the IPO because it was, you know, uh obviously a huge deal in the kind of history of the firm. Also, I imagine very complicated both kind of tactically, but even culturally, I imagine.

You talk about kind of firm dynamics and how do you kind of create incentives for people in a given fund to care about other funds? I imagine going public, you know, part of that is you're creating a new currency in some ways by which to compensate people. You have kind of, you know, LPs, you have employees, you have um um um you know, the share public shareholders. Um Um Um Well, this Maybe just talk through the IPO and all those dynamics. spend an hour on the subtleties and complexities of this.

But just to give you some windows on it. Blackstone wasn't a firm. It was 173 independent partnerships. independent partnerships. independent partnerships. All with different percentage ownerships. Every fund had a different percentage ownership than every other fund. All that somehow had to be rolled together into one entity. Yep. And everyone had to have the right number of shares in that entity. Just just just number one. Number two, at that time there was no nothing like Blackstone. We had three different ways for account to account for carry.

We could account the way we did it and now the industry does it now, which is kind of um you get carry when it's realized. You could do it on a mark-to-market basis, so an accrued carry. You could you could use option models to to compute the option value of the carry and then how do they vary over time? We had lots of choices just on something as basic as the accounting for a carry. So, there was not even an accounting standard. standard. standard. The The The you know, the tax structure and all that, you know, should it be a publicly traded private partnership?

We thought that was more value added because that's what all the insiders wanted cuz they paid like don't like paying taxes. Sure. out the market didn't like actually didn't really like it. So, you know, we converted, but I don't think that was a compelling narrative, but we were making it up as we we went along. And then then you know, the reason we could get public is Blackstone had to have a hell of a run. We didn't want to ruin that. Um Um Um so how do how do you protect your day-to-day working partners that go in to to to work every day and try to make good investments from being distracted or influenced by the public.

So So, first of all, we built an elaborate corporate overhead so that we didn't involve that any of them in any of it. of it. of it. Not only the going public, but once we were public. were once we were public. Added $75 million a year at the time to our operating cost. Which is not nothing. nothing. nothing. A lot more today. Um we also we're making people wildly rich. So rich. So rich. So in those days, if you were work for one of these firms if you got paid a million dollars this year year year that was great.

But the next year you maybe get paid a million or 750 or a million and a quarter, whatever it was. But it was year-to-year. We were coming in saying for that, you know, we're going to give you hundreds hundreds of millions in many cases or tens of millions. And you're going to give up a little you're going to give up a million of your annual income, but we're going to give you essentially 30 in a of a stock that's forever and grows over time in exchange.

exchange. exchange. So how do we not demotivate So how do we not demotivate our not only how we not distract them by by looking at the stock review, but how do we not demotivate them from just well, I'm I'm worth $100 million today. I'm I'm just going to put my feet up and come to work 3 days a week. So, all of that How did you do that? We we did that first of all We we did that first of all by basically telling people they can't sell any stock for 8 years.

Okay. And then we had unusual vesting whereas it whereas it whereas it it would what was unvested we could take away. away. away. So most companies, if you have five-year vesting, if you let someone go, um that triggers acceleration of their vesting. vesting. vesting. Right. Right. Right. We didn't do that. We we we we could let them go and the last three years of their vesting their vesting their vesting or if they were demotivated and weren't working, we'd say, "I'm sorry, you're not working hard anymore.

We're going to take away your unvested stock." Yep. So so what's vested is yours, um but the unvested stuff on an eight years we had an eight-year run at it. Yep. And and we didn't lose anyone that we didn't want to lose for eight years. And people were totally motivated for the whole time. So that part of it worked. But all these things are just little small pieces of the whole that you have to think about. Totally. Totally. Totally. And as I say, I could go on and on, but um but um but um it was it was incredibly complex.

And the other thing I would just say and final on this, Steve and I and Pete Peterson, who was still around then, then, then, wanted to take a hard look at this and see what it be and do all of the plumbing to make sure we had the option, but we weren't sure we wanted to do it. So how do we go through this and not have it loom over everyone in the firm and everyone's trying to come into And so essentially this was something um that um that um that Steve delegated to me and I did um really with with with no one else in the firm actually helping for nine months.

I did it at night. And worked out all this with bankers, outside bankers and lawyers, but not internal people. internal people. internal people. And And And I would report back to Steve, of course, and and and to Pete Peterson, but Steve was much more front and center on this. But it was kind of a secret project because otherwise people would have been, "Tony, I'm I should be the number two You know you know how it is." Totally. No, I remember I we had lunch once and you you said, "Yeah, I literally like went into a room and I was deciding was deciding was deciding who was going to become a billionaire, you know, on the other side of the IPO." And it's just kind of a well, you know, blows my mind.

Um The The other thing that I I imagine being a public company then gave you was currency that you could then use to acquire other businesses. And again, one of the folks I spoke to was was Bennett Goodman, the you know, the the G in GSO. Right. Um I know he had worked for you obviously at DLJ. He had then I guess gone off and built GSO, which was a, you know, small credit business at the time. Maybe talk through that acquisition. Obviously it became kind of the basis of a much bigger, you know, credit business.

business. business. Well, we we had a very small Well, we we had a very small credit business. Blackstone had about a billion and a quarter in it, but and and and and the the people running that business then were solid insurance company debt investors. investors. investors. But they were perfectly happy with the business of the scale that it was and really didn't see a lot of ways to to to drive it. At Blackstone, we we wanted to have a few large businesses. We didn't want Some other firms have gone to a million little businesses, little popcorn stands there.

We wanted to have a few big dominant businesses. And then so as what I mentioned before that a lot of the leadership of the groups needed to be changed, this was one of them. You could You could You could you know, sometimes an acquisition, especially if you have a lot of the purchase price contingent on future earnings and this and that, it's almost like a you know, a team hiring. You see this all the time in tech, right? You have all kinds of big tech companies buying smaller companies to get the team.

team. team. So, So, So, it's a little hard to say was it an acquisition or was it a group hire? Mhm. Mhm. Mhm. But either way, I knew these were talented guys and I and I knew they were very ambitious. very ambitious. very ambitious. And most of the purchase price was contingent on future success. So, I knew that we could you know, I think I thought we could build a big business around them and and we did. We built a hundred billion dollar credit business around them.

But GSO was the first, but it was only one of about a dozen acquisitions. Interesting. Uh we did a lot of acquisitions. I mean, the maybe the best acquisition we ever did was Strategic Partners, our secondary business. We paid $119 million from that business. Was this the secondaries fund from Credit Suisse or from DLJ Credit Suisse or From Credit Suisse, right. Because again, they're ambivalent about the business. So, we bought it for $119 million. It's a $120 billion business today. It's worth tens of billions. that's amazing.

Right. And we made about a dozen of those acquisitions. Every single And And the the book on financial services firms buying other financial services firms is not very positive. Right. They almost never work. Every one of our acquisitions worked. acquisitions worked. acquisitions worked. Um there were two that didn't really move the needle strategically, but we made a very good return on the investment. We probably made three or four times our money. Was there anything non-obvious about what make made those acquisitions work? Like, you know, kind of the industrial logic or the culture, you know, I'm just curious.

Yeah. Cult- Culture is key. Having people that fit in in in uh is key, number one. Number two, people that want to really grow something and appreciate what Blackstone brings to party. The The The the um you you have to have balance between what the house takes from a entrepreneurial management team running a fund a fund a fund and what what the house gives them. When that gets out of balance, if if you go buy a hedge fund and the and you and you're not doing anything for them and 3 years into the deal, he's fully vested, you're going to have to buy the company all over again, essentially.

So, So, we we wanted people that would were happy fitting in a bigger corporate organization if that helped them scale their business a lot. That's a cultural thing. Other people would just I'd rather have a small business and not have to talk to anyone. Yep. Right? So, So, the right culture, the right people, the right balance between what the house brought and what the firm what the what the acquired company bought, they had they had they had We had to feel like we could be a leader in it.

I didn't want to buy a company and be not a leader. So, we wanted to lead in a few big businesses. We also had to feel we could be a top quartile investor consistently with this team. I didn't want to be an average investor in any business. Um Um Um we wanted people that and we wanted to buy small where we could scale them. We we could We'd never wanted to buy a fully built-out franchise where you're you're paying someone else for all the growth. We wanted to deliver the wanted to We wanted to deliver the growth the value of the growth to our shareholders.

Yeah. So, those are you know, we we had a seven or eight kind of criteria that we looked hard at and made made sure fit. What one of the things Ben had said which um which um which um resonated a lot was he he's like I I never felt like an employee. Like it never felt bureaucratic. You know, and and I think again, I think I'm about that a lot here. One of the things that surprised me about Andreessen, you know, it says Andreessen Horowitz on the door, is actually there's not a ton of top-down direction.

I think Mark and Ben had done a very thoughtful job of trying to make the firm feel like a platform for smart entrepreneurial people to build on top of. Yeah. I think it was really wise if you want to attract and retain, you know, some of the folks here who've been very very successful entrepreneurs in the past. Like if they needed to be micro they would never work here if they were micromanaged. micromanaged. micromanaged. And it's helped by the fact that you have a lot of discrete businesses and funds, right?

So, everyone can feel like they're in charge of their empire. Totally. I I completely agree with that. Um we I always bend over backwards to minimize bureaucracy and process and a hierarchy. Yep. And so, I had at one point, I think, 56 direct reports. Oh, well. Trying to minimize before Jensen, you know. Trying to minimize hierarchy. Well. Cuz with hierarchy comes comes bureaucracy. And And we And I'd learned from DLJ that these in contrast to Credit Suisse, that putting more controls in doesn't necessarily necessarily necessarily doesn't necessarily protect you.

That a lot of it if if you have good people and you trust them and you hold them to a very high ethical standards and that becomes the behavioral norm, that's much better than having lots of watchers and watchers of watchers trying to to watch check every little thing that you do. Totally. And so Credit Suisse had all kinds of ethical lapses, DLJ had none, but they had immense controllers and processes and whatnot. DLJ was scalable. Totally. So I've kind of brought that attitude to Blackstone.

One of the things that I think is is rare to see is that my my understanding is when you first had that conversation with Steve, you basically told him you were going to retire at at 70. Right. Um Right. Um Right. Um that's not normal. Most people try to sort of hang on, you know, especially at that level. that level. that level. Um Um Um How did you think about that decision? Well, I'm I'm glad I did cuz I if I if I hadn't committed myself, I'd probably put him in harder to let go.

But But But First of all, remember Blackstone was my like in my since my third run. I had DLJ, I had Costco, which started the same year as Blackstone, but became even more successful. successful. successful. And then Blackstone. And I felt like I'm kind of a peripatetic kind of person and I I have a lot of interests. And I felt like there's something else out there. I I don't I don't want to do this for the rest of my life. I want to do it, I want to do it well, I want to build something I'm proud of.

But I've got more potential. Hm. And so so that was that was one thing and I just felt by then and I I you know, Steve's only 4 years older than I am. So So and I'm fine with that. I didn't I didn't aspire to anything but what I had there. there. there. Then too, Then too, Then too, I I have to say um leadership transition is the Achilles' heel of an alternative of any asset manager in my opinion. Yep. It's really not so easy and you don't even see the problems right away necessarily, but you might see them three, four, five years in.

Hm. So for me, it one of my top priority if I did a good job managing Blackstone, managing Blackstone, managing Blackstone, all the statistics we talked about of the growth of AUM and market value and all that that that was fine. But, succession planning was one of them. I had to nail that. Yep. Yep. Yep. And that's a process. At least for me it was a process. It meant picking the successor, and grooming him, and making sure that that there was no breakage around his movement either in loss to his business or people being disappointed.

It meant picking the right successor, making sure he was 100% ready, on and on and on. Yep. So, you start down that process and it comes to an end. I mean, if you do that well, Totally. you know, three or four years in, he's ready. Totally. And, you know, credit to John, he said, "What do you think, Tony?" And and I said a couple times, "Give me another year." But, I felt that obligation and I felt he was ready. And so, but it's never easy to let go of that seat.

It's such a great seat. It's such a profitable seat. Totally. It's such an ego-gratifying seat. ego-gratifying seat. ego-gratifying seat. So, I would say most people, as a result, hang on too long. Yep. And I believe you've got to move out of that seat while the company still while you have plenty of gas and you're still at the peak of your performance and the company's still on the arise. If you wait till it tops out, you're going to lose momentum for a while before maybe the new guy can correct it.

And there was no reason to lose that momentum. momentum. momentum. And I'm going to love my I love my years at Blackstone, but I I've loved my every day since. So, Totally. Well, and it seems like you obviously did an amazing job. I guess, you know, um what did you see in in John Gray early on? Like, why why did why was he the logical kind of successor? Um well, we had we had a lot of great talent, some of whom you've talked to and and and and you know, they're all they're remarkable people.

remarkable people. remarkable people. I would say Well, first of all, John ran our biggest business, so let's start with that. with that. with that. But but beyond that, he's a great leader. He's a very natural leader. He's a wonderful external spokesman. He's much better than I am about that. Um John has a knack for seeing in in a very complex, cluttered environment. He has a knack for knack for seeing the simple path and right path through it. He works incredibly hard. Um Um Um Um and Um and Um and so so so I I think John was a was a great choice.

And he And he's he's very decisive and he's got very good investment instincts. So So So I mean, how lucky was I to have John that I that I could hand the reins to because of it would have been a failure if I hadn't hadn't the reins to someone who could who could take Blackstone for on up. Maybe we'll spend a minute just kind of looking ahead into kind of the alternatives ecosystem. You know, we're sitting here amidst I don't know, fear mongering in private credit, the SAS-pocalypse.

I don't know. Where Where is this all going? Like how do you sort of view the maybe private markets land or maybe markets generally, but private market landscape and landscape and landscape and yeah, this ecosystem. Well, Well, Well, I'm [clears throat] you know, I try to look at private markets and not as a series of individual businesses, but kind of a whole. And I still think private markets over time can significantly outperform public markets. Before we leave public markets, so many people have the vast bulk of their assets into stocks and bonds they could trade tomorrow.

Yep. tomorrow. Yep. tomorrow. Yep. Not only don't they need that liquidity, it has a real opportunity cost. Um but they also entices them to to often do the wrong thing at the wrong time. time. time. So a hidden cost. So I'm I'm believer that over time, you you can outperform in public and private markets. markets. markets. But markets evolve. I mean it was clear to us that pri- that private credit capital was it was good for a while, you know, yields were 12%. Capital flooded into that.

And and yields kept coming down into the sort of mid to high single digits digits digits for the same risk. But there was so much capital, there was more competition for deals, so you also lost covenants and things like that. And the kind of capital that was starting to be raised uh was retail money where it comes in one month and it's got to be invested right away or you have the negative drag. Means that you kind of have to buy the market what's out there.

You can't One of the great things about drawdown funds is always there's nothing good to do. I don't have to do anything, right? Sure. Sure. Sure. You kind of lost that with this with this [clears throat] structure. I You know, so I think there'll be some correction in private markets, but it's not going to be 2008 where you were just destabilizing the system cuz it's not owned by banks at 30 to 1 leverage. These days leverage is lower, but what plenty were 20 to 30 to 1.

So, okay, there'll be a correction. There'll still be a opportunity when that shakes out to to to buy private get debt and get higher returns than publicly traded high yield debt. debt. debt. Yep. Okay, you know, the AI revolution I I would say you get these things periodically where a new technology makes you question the old business models. And and that's an adjustment, but it's just an adjustment. an adjustment. an adjustment. Mhm. Mhm. Mhm. Um Um Um I think uh I think one of the great opportunities right now is there's there's there's about 30,000 portfolio companies of mid-market private equity firms that can't be sold, Mhm.

can't go public, there's no strategic Mhm. strategic Mhm. strategic Mhm. you know, 20 trillion or something worth of value. of value. of value. Um all those companies need to be willing that and eventually need to be sold. sold. sold. So for for pri- for for capital pools, there's going to be an immensely attractive attractive attractive being able to pick company by company. Whether it's co-investments or it's continuation vehicles. continuation vehicles. continuation vehicles. Um you're getting a seasoned investment at an attractive price with much lower fees and you're able to with a sponsor that's doubling down his commitment and you're able to really analyze it.

I think it's one of the great times to put money to work. Um similarly look look what's happened in your business, you know more than I do, but the scale of the business is so radically larger than it used to be. You know, a big venture fund used to be a billion dollars and you know, and and there weren't there weren't there weren't they they weren't firms like Andreessen Horowitz that had lots of different different funds. different funds. different funds. And companies are staying private longer and and I think there's an opportunity to to ride those companies longer.

I I love that if you're if you're good enough about picking them. Um what I don't like about drawdown funds, traditional private equity fund is is is you know, you commit to them, they charge you management fees for a while, they find a deal, they draw it down, so your money's not been in the ground for a few years. And then a few years later if it's a successful deal, they sell it for two two times their money. And now you've you've paid a couple of couple of turns uh couple of tenths of turns turns turns in management fees, they take off 20% of the of the gain and carry and you've got 1.4 times your money and you've tied up your money for 5 years.

Go buy a New York municipal bond. After taxes, you're getting almost as much. So I love I I I think the opportunity to hold assets longer assets longer assets longer in a private context and really let them grow grow grow is very attractive. And I think the industry models need to reflect that. LPs and and certainly private capital and family office capital is much more towards the long hold. Totally. LPs are getting there, but they need to evolve that way. that way. that way. Yep. Yep.

Yep. So, I I I think they'll be you know and and life sciences, I mean it's another explosive explosive explosive upside. upside. upside. Longer holds Longer holds Longer holds harder than harder than the rest of venture Totally. because you're in the body and the regulatory and so and so forth. But, man, there's going to be some huge fortunes made in that. So, I'm I'm optimistic about private capital, but it evolves. Totally. You mentioned you had you know a lot of interest outside of you know Blackstone Costco and D E Shaw.

I know um you know one of the things that you uh you know have been passionate about is uh spending time with historically black colleges. Maybe talk about that nonprofit and and kind of the impact that you've had. Yeah. Yeah. Yeah. Well, in 2018, a friend of mine who had worked for Obama and uh in their Department of Education came in and said and he would he had been a an M&A banker at D E Shaw and then I think Bank of America and America and America and and then he went into the government and he ran the student loan program for the government.

government. government. And he came in and said, you know, um I'm out here. The one thing that the we didn't clean up in the financial crisis was student loans and maybe we should come up with something and we started thinking about that. But, But, But, and we started working with some historically black colleges and universities around income share agreements. So, that that a graduate would get his college education for free and then would agree in return to give a certain percentage of his or her income over a minimum wage uh to repay the college.

And then the college would take all those receivables. This is the Blackstone opportunity. And securitize it. And you know, we'd make a lot of money while doing good for society. And we started down that path, but while we were doing that, um um um a number of HBCUs came to us and said, "Geez, we really need help with this or help with that." And so, we kind of morphed the idea to, much like much like much like and I don't I don't know about Andreessen Horowitz, but much like a private equity portfolio management capability.

We have IT people, we have lean people, we have pricing people, we have on and on and on and on, marketing people. people. people. And And And if we could set up a capability like that that that and put and then donate them to HBCUs we could do we could help them a lot. And HBCUs do remarkable things for uh educationally. So, 8% of African-Americans that go to college go to HBCUs. to HBCUs. to HBCUs. But 16% of black graduates graduate from HBCUs, so twice the graduation rate.

And then those graduates earn on average 50% higher lifetime income than black graduates of non-HBCUs. So, they get they get more kids through college for a better life, and they start with the highest percentage Pell Grant and first-generation college. So, they're doing a great things with the toughest kids with 1/3 of the money. But they are skeletal in their ability to manage themselves, track students, get students jobs, offer students loans, prepare their own financial statements. So, we thought this would be a wonderful thing to empower the HBCUs to to be stronger and better.

better. better. And we now have 11 offices around the country, and it's and we work with about 70% of the students in America that go to HBCUs. to HBCUs. to HBCUs. So, it's been a spectacular success. That's awesome. That's awesome. That's awesome. I know you're also a passionate fly fisher. Yeah. Uh I don't know what is fly fishing taught you about life or Well, or what do you love about it? Yeah. I I I What I love about it is is like so many things like investing, it's lifelong learning.

You never know everything. Mhm. Mhm. Mhm. And there's a randomness to it and a connectivity to it that defies analysis. But But But but rewards that sort of almost sixth sense, that instinct which which I think great investors have. Mhm. So that all appeals to me a lot. Uh the connectivity you When you are engaging with nature in a really tactile way, you connect it and you see it much much more much more in a much more detail and you appreciate its nuances much more. So that's that connectivity to nature has been an antidote to the rest of my Mhm.

my existence which has always been so so driven and analytical. When I don't know if you ski or anything, but but if you're going down and and and you know, going down through bumps, whatever whatever whatever concerns are in your head, you're not thinking about that. You're just thinking of the turn turn turn. Mhm. So and flyfishing is the same way. You can't worry about anything else while you're out there doing that. But it's not stressful intellectually. Mhm. Mhm. Mhm. But it unplugs you from intellectual stresses.

stresses. stresses. Mhm. So I think I think those elements have always really appealed to me. It's awesome. awesome. awesome. You know, we we have a lot of uh you know, young people that that watch our content. Um content. Um content. Um you know, if if you were a young person if a young person came to you today with you know, a lot of the same kind of raw materials that you had in in 1975, um you know, somebody obviously super sharp and very ambitious, what would you tell them about building a career?

a career? a career? Well, first of all, there's a lot of luck in that. Um and I never really planned, but I reacted. But I would say some of the attributes you're looking for are some of the attributes that I looked for. I mean, that's a better way to put it. First of all, I wanted an unstructured opportunity where someone didn't tell me how to do something then expect me to do it, where I could figure out what and how to do and do it my way.

And um so I so that was non-hierarchical, non-structured non-hierarchical, non-structured non-hierarchical, non-structured organizations. organizations. organizations. Uh I wanted something where where where um um um where I could change the paradigm because that's how I felt frankly intellectually engaged, but it's also where the upside comes from. I I think an opportunity that really provides a lot of economic, firm, personal, and professional growth. Growth is very important. important. important. What what what not to do is worry about I'm going to move over to the next firm cuz they're going to pay me another hundred thousand dollars next year.

Well, I wouldn't do that at all. Make sure you've got lifelong learning. Make sure you're empowered to do stuff and take risks. Make sure if you take smart risks, your firm's got your back. Um Um Um and then and then and then you know, roll the dice and be lucky. It's awesome. It's awesome. It's awesome. You know, what what I got I just want to say like I guess on the record that one of the things that was most remarkable to me about kind of preparing for this conversation was just you know, everybody that I spoke with, these are some of the you know, most successful people on Wall Street at Blackstone and elsewhere.

All of them were instantly willing to jump on the phone and just wax poetic about the impact that you I mean, they all literally attribute the success that they've had in their careers to you. Um so it's just I I really admire kind of the impact that you that your career, but but also the impact you've had on other people. Well, and that's mutual. I mean, I'm so lucky to have had incredibly talented people talented people talented people playing their hearts out for the firm, but for me.

I'm only as good as they are, right? And it And if if if they play their hearts out and do really well, I benefit. And so So I I'm And I I think they always knew at the end of the day, no matter what I was out for the firm first, never for myself. myself. myself. And and that created a sense from them of of of loyalty loyalty loyalty and trust because because because because none of them, if you're out for the firm first, they don't really want undue rewards.

They just want fair rewards. Sure. And then if you can captain a winning team and it carries everyone along, it it it's a virtuous circle. It's awesome. Tony James, thank you so much for your time. This is awesome. Thank you.