Blackstone's Gray Says AI Demand Is 'Parabolic'

Author: Bloomberg Television · Watch on YouTube

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Original language: English

Original video: Blackstone’s Gray Says AI Demand Is ‘Parabolic’ · Channel: Bloomberg Television · 09:29 · Watch on YouTube

Topics: AI infrastructure and hardware, Markets and economy

Summary

Blackstone’s John Gray says the firm delivered strong client performance and inflows despite a volatile quarter, while assuming market conditions will remain choppy. He argues that AI is not currently showing the classic signs of a bubble because demand for compute is growing faster than constrained supply can be delivered. Neo-cloud companies face challenges raising capital and building data center and power capacity, but strong demand and pricing give them options. Gray says an Anthropic IPO could ease financing pressures, while geopolitical uncertainty has narrowed the IPO window for now.

Key points

Blackstone reported $63 billion in inflows for the quarter and more than $270 billion over the last 12 months, its highest total in four years.
Fee-related earnings rose 6% in the quarter, and overall earnings were up 12% year to date.
Gray expects a choppy environment to persist but points to underlying economic strength and revenue growth among private-equity portfolio companies.
Gray distinguishes current AI investment from past bubbles, saying demand for models is rising rapidly while supply is struggling to keep up.
Constraints on compute supply include permitting, power, equipment delivery, and the capital required to build infrastructure.
Neo-cloud businesses benefit from strong compute demand and higher pricing, but must secure financing, data center capacity, and power to fulfill commitments.
Gray expects companies to use a mix of public and private capital, including debt and equity, to fund the AI buildout.
An Anthropic IPO could help lower the company’s cost of capital and reduce pressure on the AI financing system.
US IPO volume is up three and a half fold year to date, but market volatility and geopolitical uncertainty have delayed offerings and narrowed the IPO window.

Chapters

Start	Chapter	Summary
00:00	Quarterly performance and market outlook	Gray reviews Blackstone’s inflows and earnings, and says the firm is planning for continued volatility despite underlying economic strength.
02:39	AI demand and the risk of a bubble	Gray contrasts today’s strong AI demand and constrained compute supply with the excess capacity and leverage of the telecom bubble.
04:48	Neo-cloud financing and compute capacity	Gray describes the financing and infrastructure hurdles facing neo-cloud companies, while noting that strong demand and pricing power may help them attract capital.
07:53	Anthropic IPO and the IPO window	Gray says an Anthropic IPO could improve access to lower-cost capital, while market choppiness and geopolitical uncertainty have delayed other offerings.

Quotes

Our flagship strategies beat comparable public market indices — 00:00

So demand is almost parabolic. — 03:44

There’s really an indisputable shortage of compute — 04:14

as long as the end product, the compute has so much demand and pricing power, I think these neo clouds will find sources of capital. — 06:19

I definitely think the IPO window will reopen. — 09:29

Concepts and entities

Blackstone, John Gray, Anthropic, CoreWeave, neoclouds, compute, IPO, data centers

Full transcript (original language)

00:00 Was a challenging quarter. You had energy prices up 30%, you had interest rates up 80 or 80 basis points. And that obviously slowed transaction activity a bit. The key for us is we delivered for our clients across the board. Our flagship strategies beat comparable public market indices, and that’s what we’re really focused on. And then in terms of inflows we did manage to raise $63 billion of inflows,

00:32 more than $270 billion over the last 12 months. That’s the most in four years. And on the financials there was a bit of lumpiness on the realization side. But the fee related earnings were up 6% in the quarter. The overall earnings are up 12% year to date. And when we look out towards Q4, uh, in 2027, net feel strong for us in looking to the future, the strength that you’re

01:02 pointing out. What has to change for that to go right, John? Because some of the volatility, be it from energy, there’s no sight to the end of the war in Iran at this moment. Be at rates. The fed isn’t entertaining discussions of cutting rates at this moment. So what needs to change in order to realise the strength to come? Well, we’re assuming that we’re going to be in a choppy world for a while. So I’m not just, you know, sort of planning for the world to get much better, but you could to the upside, see better things happen. Obviously, if you had a resolution of

01:33 either or both of the conflicts in Russia, Ukraine or the Middle East, that would be very helpful out there. I think it would ease pressure on the fed and other central banks and take inflationary pressures down. We just need a bit of terra firma. I think the thing people are forgetting about is the underlying economic strength, particularly in the United States, um, globally are companies in private equity had 10% revenue growth margins continue to expand. And when you get that, you get that kind

02:05 of very strong earnings growth. At some point here you get a little terra firma out there in terms of the environment. You’ll see a better capital markets world. And I think we’ll get there at some point. But for now, we’re assuming we’re in a volatile world for the foreseeable future. Shall we talk about the other market anxiety that’s going on right now? John, I spoke to Ken Griffin about it earlier this week. We see signs of bubbles. Ray Dalio has been on bubble watch to you perhaps better than anyone know this world because you’re both financing it and using the AI technology itself.

02:39 John are you seeing bubbles and if so, is there a risk that something’s going to burst? So we see it a little bit differently. Um, I would say when you think about a bubble, you think about building capacity and then hoping the demand comes with ie You’re building capacity and you’re hoping you can keep up with the demand. That’s a very different dynamic. If I click on that, you go back to the 90s and telecom infrastructure classic

03:13 bubble, right? They built tons of fiber hoping the demand would come. They used a lot of leverage. It ended poorly. Contrast that with what we’re seeing today at our portfolio companies. Demand for models spend on models is up 20 fold year on year. We created a company with anthropic called Ode, and this company is designed to deploy the AI, and we can’t keep up with custom customer demand. Obviously, these personalized agents are

03:44 rolling out as well creating incremental demand. So demand is almost parabolic. And on the supply side. That’s the part of the world where we’re really focused. It’s governed by a lot of things that are slowing down delivery. So getting entitlements getting power, getting ships, amassing the capital. That’s meaning that supply is struggling to keep up with this demand. And we as a firm are really focused on that infrastructure and building long

04:14 term assets, being energy assets or data centers that are contracted to the biggest companies. So we see it differently today. There’s really an indisputable shortage of compute, and it’s hard to deliver that compute. And that’s what’s preventing some of the excesses we’ve seen in past, what they call bubbles on the supply of capital. You mentioned that is one of the constraints, John. It is a market that feels like it’s testing it in real time core. We’ve a company that you work for that you’ve done ship financing with in the past is seeing its yields on some of its debt go to 15%.

04:48 Is the overall rate environment also moves higher on? Is cost of capital an issue also for the I build out? Well, it is creating a challenge. And it’s interesting when you talk about core. weave in the neo clouds. There’s a real contrast between delivering compute and demand for compute on the demand side. As I mentioned, it’s incredibly strong. And so if you’re in Neo Cloud and you can deliver compute, the price you can get today is up 50% from where it was a year ago.

05:18 Your your chips older chips 8181 hundreds are releasing today close to their original rates where people thought 3 or 4 years ago they wouldn’t have any value. The data centers you’ve contracted, the lease rates have gone up and now you have an in the money lease. So the main business for the Neo Clouds is quite good. What you’ve hit on, Danny, is the challenge, which is you’ve got to deliver that compute. You’ve got to deliver on those commitments. So you need to amass the debt, the

05:49 equity, the data center capacity, the power. And if you’re not able to do that, that’s what’s creating the challenge. A company like core we’ve it’s got an outstanding CEO in my introduction. They’re very creative. I think they’ll find a way to navigate through this, but that’s what the real market test today is. What does it take to navigate through it? John, is there this real risk that what at the moment is kind of a technical issue, a structural one with yields moving higher becomes a fundamental one.

06:19 Well, as long as the end product, the compute has so much demand and pricing power, I think these neo clouds will find sources of capital. They can do chip financings at the asset level. They may have to raise equity. Each one’s going to face these issues in a different way. If the end market was weaker then it would be highly problematic. This is really a question of what form of capital should they raise? What should they utilize to meet the

06:51 needs to deliver this compute. And so the market is going to watch and wait and see. The good news is there’s obviously public capital both debt and equity. And then there are all sorts of forms of private capital. And one of our great strengths as a firm is that we have access to enormous amounts of private capital. We can be a solutions provider. We can do investment grade credit, you know, to companies at lower cost. We can do more junior credit at higher cost. We can do participating equity, we can

07:21 do common equity. And I think it’s going to be in all of the above when it comes to this compute buildout. And the neo clouds are really at the center of the issue today. They’re going to have to show creativity. The good news for them is there’s a lot of demand for their end product. John, how important for market sentiment, be it for what we’re seeing in the neo clouds more broadly, the trough, the concerns about bubbles, about AI, how crucial will it be to get an anthropic IPO that goes smoothly? Could that be the cure for the shaky market?

07:53 Well, I think anthropic IPO would be a real positive for the market because as we saw with SpaceX, when you get one of these large, uh, private companies, public, they get a big market cap. The rating agencies will make them often investment grade companies. And in that context, their cost of capital goes down. One of the challenges for the big labs is they’ve had to rely on the hyperscalers in order to do, let’s say, data center leasing or some of the chip financings they’re doing.

08:24 And when they get their own large market cap, their own credit rating, they can access capital much more easily at lower costs. So I do think it’s a very helpful thing to reduce pressure on the system. And I think the market is obviously going to be watching this. The key again is what’s happening in the AI world the deployment, the speed of demand growth. All of that seems to be quite positive. I do think more capital coming into this system would be helpful.

08:55 Does it also need to be smooth for it to be, in your words, on the year of the IPO is that is that banner year starting to be in question with the market chomp that slowed down the progress of some public offerings. Well, we did say at the beginning of the year was the year, the IPO. And on paper, you know, that is coming to pass a year to date. I think IPO volume in the US is up three and a half fold. If anthropic gets done, the total volume will rival 2021. We managed to get five companies public three in the US, two in India.

09:29 But it’s fair to say today, given the choppiness in markets, there have been delays of IPO IPOs, that window has narrowed. And again, until we get a little more stability, I think in the geopolitical picture it’s going to stay a little bit tougher. Once that window reopens there is stability. Again the real earnings strength. We’re seeing companies in both the public and private market that will start to shine through. For right now it’s a little bit choppy or at some point here on the horizon, I definitely think the IPO window will reopen.