How Blackstone Chose Its Heir Apparent — Without the Usual Hunger Games

Illustration by Daniel Castro Maia

Illustration by Daniel Castro Maia

Jon Gray’s rise to the top of the world’s largest alternative-asset management firm felt inevitable. That was the point.

Is there a more compelling business plot for a Netflix melodrama than the clash between the founder of a financial services giant and the anointed successor?

Think of Sandy Weill, who as head of Citigroup created the greatest financial services conglomerate of his era and then defenestrated the young, very able Jamie Dimon for seeming too eager to replace him. Or Chuck Schwab, who tossed aside his first successor after less than a year and keeps his current CEO, Walt Bettinger, on a tight leash, expecting multipage, single-spaced memos from him every other Friday.

Even when the boss steps down gracefully, the successor is frequently chosen after an undignified bake-off between rival executives, with the talented losers being shown the door.

Then there is the case of Blackstone Inc., the world’s largest private equity and alternative-asset management firm. Under 74-year-old cofounder, chairman, and CEO Stephen Schwarzman, there has been a slow-motion, drama-free passing of the baton to Jonathan Gray, 51, now the president and COO, without ruffling feathers among colleagues.

Schwarzman often gets asked by heads of other corporations how Blackstone avoided a rocky transition to new leadership. “I’m still somewhat mystified,” he says about those queries. “This wasn’t hard.”

With no other heirs apparent in sight, nobody was forced to depart. “It made it much easier for me,” says Gray.

Schwarzman has made it easy for Gray in other ways as well. Despite a robust ego, he has allowed Gray ample leeway to transform Blackstone in his own image. Today, Blackstone is a financial behemoth with a range of businesses and investors far removed from the model created by Schwarzman and his cofounder, Pete Peterson, almost four decades ago.

With Gray guiding investment strategy, Blackstone has piled up one record-breaking earnings quarter after another. And Schwarzman has become a billionaire many times over.

To be sure, great investment returns aren’t the only predictor of success in running a firm as big and complex as Blackstone. “Jon Gray has been a strong performer for many years,” says Steven Kaplan, a University of Chicago business professor who does research on corporate successions. “Now the question is, can he manage?”

Schwarzman is giving the charismatic, even-tempered Gray every opportunity to prove he can. Just recently, Gray had the unpleasant task of replacing a longtime colleague who ran Blackstone’s large hedge fund business with an executive he recently hired. Gray has also occasionally had to “manage upward” — gently cajoling Schwarzman to accept moves he initially resisted.

The ultimate test of Gray’s managerial skills: whether he can get Blackstone’s employees to embrace his vision.

Gone are the days when Blackstone pursued only a traditional buy it/fix it/sell it strategy. The firm — like private equity rivals KKR & Co. and the Carlyle Group — still acquires undervalued businesses, chops head count and other costs, and unloads them five to seven years later at handsome profits for Blackstone and its clients.

But with strong guidance from Gray, deals increasingly involve much longer-term investments. Clients agree to put up capital for indefinite periods while accepting steady, predictable returns for themselves and generous fee-earning income for Blackstone. Those investments range across real estate, entertainment, pharmaceuticals, and numerous other business sectors, with a lot of cross-pollination.

For example, a tenant leasing space from a Blackstone-owned real estate company may also be developing a breakthrough medicine in which Blackstone has invested. Or studio lots that the firm partly owns could end up producing content for a media company also partly owned by Blackstone.

To accompany all these changes, Blackstone has adopted a new financial vocabulary. Perpetual capital, capital-light, and thematic investing have become key phrases — most often linked to Gray-led initiatives.

With Gray assuming more day-to-day CEO functions, Schwarzman at times chooses to act more like an executive chairman. A case in point: In 2019, when Blackstone raised an industry-record $26 billion private equity fund, Schwarzman didn’t make a single presentation to investors. Instead he left the fundraising pitches to Joseph Baratta, the global head of private equity, and his team.

Schwarzman and Gray say that almost three decades of collaboration have diminished the possibility of misunderstandings. But they remain in key respects an odd couple.

For instance, Schwarzman is a longtime friend and supporter of Donald Trump, whereas Gray is a major donor to Democrats.

Both are generous philanthropists. But though Gray maintains a low profile, Schwarzman splashes his name across his projects, such as the renovation of the New York Public Library’s Beaux Arts main building.

Schwarzman can occasionally arouse the ire of rivals and critics with intemperate remarks. He notoriously quipped that an Obama administration proposal to raise taxes on private equity investors reminded him of “when Hitler invaded Poland in 1939.” (The ensuing uproar caused him to apologize.)

It’s hard to find anybody who has unkind words for Gray. Even executives who have engaged him in arduous negotiations volunteer their praise. “He is very tough-minded and determined,” says John Waldron, Goldman Sachs’ president and COO. “But he communicates and listens well, so he’s hard not to like even when you’re disagreeing with him.”

Like Gray, Schwarzman got off to a fast career start. His talent and self-confidence impressed executives many years his senior. At Lehman Brothers, under chairman and CEO Peterson, Schwarzman quickly rose to become head of mergers and acquisitions. In 1985, the two men left Lehman to found Blackstone, with each putting up $200,000 in capital. Peterson, 59, was chairman and Schwarzman, 20 years younger, took the title of president while acting as the CEO. They arrived at the name for their new investment bank by combining the German schwarz, for black, with the Greek petros, for stone.

Schwarzman has often said his greatest failure was the conflict that led to his 1994 breakup with Larry Fink and the precursor of his BlackRock, in which Blackstone had a 35 percent stake. Fink wanted to attract talented new hires by offering them equity. Schwarzman refused to dilute his and his partners’ holdings.

Today, as it utterly dominates passive investing, BlackRock has assets under management 13 times Blackstone’s asset total. Schwarzman still rues the lost opportunity to combine the world’s largest asset manager and largest alternative-asset manager under one roof.

“Selling that business was a heroic mistake, and I own it,” Schwarzman conceded in his autobiography, What It Takes: Lessons in the Pursuit of Excellence.

But Schwarzman prides himself on learning from past errors. He was not about to give Gray any reason to be lured away from Blackstone.

Gray was born in Highland Park , a Chicago suburb. His father owned a small auto parts manufacturer (named Blackstone Manufacturing, ironically). His mother ran a catering business, where the teenage Gray worked as a busboy. Soon after graduating from the University of Pennsylvania and the Wharton School in 1992 with a double degree in English and business, he joined Blackstone.

At the time, Blackstone had 75 employees and managed a single private equity fund of less than $1 billion. Today it has nearly 3,800 employees and manages assets worth $731 billion. This year, about 30,000 young grads applied for roughly 100 available jobs. “Thank goodness I don’t have to apply today,” says Gray.

The only time Gray ever lost money on a deal was back in 2000. He got caught up in the dot-com frenzy and bought two single-story buildings in Silicon Valley. The main tenant was a technology startup called (for “Go big or stay home”). Gray failed to focus on the fact that the firm had no revenues or prospects of turning a profit anytime soon. It vanished when the dot-com bubble burst, and Blackstone lost some $20 million — chump change in today’s private equity world.

“At the time, it seemed to me a devastating loss,” recalls Gray. “But it was a valuable experience at a relatively young age as an investor.”

By 2005, at age 34, Gray was running Blackstone’s real estate business. He soon turned it into the firm’s biggest cash cow by applying a couple of innovative financial strategies.

The first was to use commercial mortgage-backed securities — rather than just bank loans — to acquire large properties. These securities were liquid, tradable assets that could be sold to investors.

Gray also shrewdly understood that companies anxious to unload their real estate holdings sometimes lacked the patience and resources to accurately value their individual properties and ended up selling them for less than the sum of their parts. After acquiring these properties, Blackstone could sell them in pieces to the highest bidders.

Gray went on to craft three deals that transformed not only Blackstone but the real estate industry — and made him the prohibitive favorite to someday succeed Schwarzman.

In 2007, he acquired Equity Office Properties from real estate mogul Sam Zell for $39 billion. With more than 500 buildings totaling 100 million square feet, EOP was at the time the largest manager of office space in the U.S. As the great financial crisis unfolded, Blackstone sold off many of the properties. But it kept those considered to be trophy buildings and thus less vulnerable to recession.

According to a Wharton School case study, the EOP acquisition was one of “the most successful real estate private equity deals of all time.”

Gray followed it with another eye-popping deal, for Hilton Worldwide Holdings, also made in 2007 on the eve of the financial crisis. With spending on travel plummeting, analysts wrote off the $26 billion acquisition as a disaster.

Even Schwarzman was nervous. He initially denied Gray’s request that Blackstone invest an additional $800 million. But the younger man was insistent. “Although we disagreed, we did what he proposed,” recalls Schwarzman.

Chris Nassetta, Hilton Worldwide’s CEO, was a participant in those taut discussions. “As bad as it got during the financial crisis, Jon never lost confidence,” he recalls. “He kept a very steady hand on the wheel.”

The Hilton investment eventually turned a $14 billion profit — making it one of the most lucrative private equity deals ever. Gray holds it up as a prime example of Blackstone’s capital-light strategy.

Hilton is a business that owns few properties. Instead it leverages its brand to negotiate long-term franchise and management contracts with some 6,700 hotels and resorts around the world while spending very little of its own capital.

With Hilton showing good returns in the aftermath of the financial crisis, Gray led Blackstone into its most controversial investment: rental homes.

The financial crisis was largely precipitated by the collapse of subprime mortgages used to purchase middle-class homes. Unable to keep up monthly payments, hundreds of thousands of owners lost their houses.

Gray’s real estate team scoured the lists of upcoming foreclosure auctions put out by local courthouses around the country. Although it wasn’t possible to enter these homes, Blackstone employees were able to drive by them, get a sense of the neighborhoods, and determine the quality of their schools.

Beginning in 2012, Blackstone bought $125 million worth of houses a week. Eventually, it owned more than 50,000 homes, making it the largest residential property owner in the U.S. The houses were renovated, put up for rent, and maintained by Invitation Homes, a company created by Blackstone.

But Invitation Homes soon became the subject of numerous complaints and lawsuits — amply reported in the media — alleging poor maintenance, rent-gouging, and high eviction rates. Blackstone countered that at a critical time in the economy, Invitation Homes had become a significant employer, helped restore derelict neighborhoods, and offered affordable housing to younger, middle-class families.

There was no argument, however, about the profitability of Blackstone’s rental house gamble. By the time it sold its last stake in Invitation Homes in 2019, Blackstone had earned more than $7 billion, or better than twice its investment.

When Gray took over Blackstone’s real estate business, it had $5 billion under management. Today the portfolio has grown to $230 billion. Real estate accounts for 45 percent of Blackstone’s earnings.

Gray was under consideration as heir apparent well before this real estate bonanza became fully clear. In 2003, then–president and COO Hamilton “Tony” James had informed Schwarzman that he was determined to retire at age 70. Although that day was 18 years away, he suggested that his eventual successor be quietly chosen and slowly groomed.

Both agreed that at the time there was only one possible candidate: Jon Gray. Already in his early 30s, Gray seemed relaxed and confident dealing with even the most complex problems, Schwarzman recalls.

Above all, Schwarzman wanted to avoid the painful succession struggles seen at so many other prominent firms. “What happens often in these transitions is a fight for power,” he notes. “There are teams, and if a leader succeeds, their team comes in and the other teams get squashed.”

Even attempts to make the process orderly and transparent can go awry. Earlier this year, Morgan Stanley chairman and CEO James Gorman disclosed a list of four possible successors — all male executives. News coverage focused on the absence of women candidates.

By contrast, Gray’s elevation has happened at a pace calculated to gain widespread acceptance both within Blackstone and among its investors.

The first strong signal was Gray’s appointment to Blackstone’s management committee in 2006. The eight-person group meets on Wednesday mornings at 8:30 to cover issues from deals in the making to personnel problems to media coverage to government relations. “This is where all major decisions for the firm are made,” says Schwarzman.

Beginning in 2013, Gray — whose purview was still officially real estate — accompanied Schwarzman and James into management meetings in other Blackstone business units. “In effect, [he learned] by watching Tony and myself doing our jobs,” explains Schwarzman.

It came as no surprise when Gray was named president and COO in 2018, replacing James, who became vice chairman (and will retire in January).

Although Schwarzman has not given a hint about when he intends to step down as chief executive, he has left no doubt that Gray is next in line and already exerts almost equal authority at the firm.

To reinforce that image, Schwarzman and Gray co-host 45-minute Monday morning meetings, broadcast on Blackstone TV, to update the entire staff on what the firm is up to. Guest speakers chosen from within Blackstone might include the chief economist, the head of government relations, or the leading executive of a business unit involved in a key deal.

Every broadcast ends with Gray’s sign-off: “Stay calm, stay positive, and never give up.”

That advice has served Gray well in the occasional disagreements that have arisen with Schwarzman and other senior partners. The most significant was the long-postponed decision to have Blackstone convert from a listed partnership to a C-corporation, the legal structure used by most publicly listed companies.

Blackstone partners who resisted the change feared a dilution of their holdings, a weakening of their control over the firm, and an increase in the firm’s taxes. But passive money managers — like mutual funds and index funds — had mandates against purchasing shares in listed partnerships.

Schwarzman complained that the market was undervaluing Blackstone — though he would later concede that by remaining a listed partnership, the firm was excluding two-thirds of its potential investors.

“I was definitely in the camp of those wanting to convert,” says Gray. Pacing the sidelines during his daughters’ soccer games, he would get an earful from other parents who happened to be mutual fund managers and felt frustrated by their inability to purchase Blackstone shares.

Then came Trump’s 2018 reduction of the corporate tax rate, from 35 percent to 21 percent. KKR decided to convert to a C-corporation and saw its share price shoot up.

With that, Gray finally won over the reluctant partners. Blackstone announced its conversion to a corporation in April 2019. Since then, its share price has risen 400 percent. Today its $160 billion market cap is larger than the combined total of its three largest competitors: Brookfield Asset Management, KKR, and Apollo Global Management.

Since Blackstone’s conversion, Schwarzman has almost tripled his personal worth, to $37 billion, elevating him to the 19th-wealthiest person in the world, according to Forbes. Gray himself has a net worth of $7.3 billion.

Although the successor choice went smoothly, Blackstone isn’t exempt from the usual tensions at other corporate levels.

“You have to sometimes make calls where you have to promote one person and there are two or three talented candidates,” says Gray. “Or sometimes people get to a stage in their careers where they have had a lot of success and they are not as engaged as they were before.”

Gray insists he is talking in generalities. But his words bring to mind the well-publicized case of John McCormick, cohead of Blackstone’s hedge fund business, which manages $81 billion.

In October, McCormick stepped down from that role, leaving the other cohead, Joseph Dowling, in charge. McCormick had been sole head from 2018 until Dowling, the former Brown University endowment chief, was hired by Blackstone last January to improve the performance of the hedge fund unit.

“Mr. McCormick left the firm of his own volition and stayed on for months after his desired departure date to help ensure a smooth transition,” a Blackstone spokesperson said in a statement to Institutional Investor.

Gray says his most difficult management decisions involve personnel. For him, the greatest comfort zone is overseeing investment strategy. At the heart of that strategy is thematic investing, which he pushed successfully in real estate and then spread across other business areas. The idea behind it is to invest heavily in a promising sector rather than seek out individual acquisitions.

Blackstone’s traditional buy it/fix it/sell it investments account for $531 billion AUM. But thematic investments are growing at a much faster pace, leaping by 70 percent to $200 billion AUM in the first three quarters of this year compared with the same period in 2020.

Gray points to last-mile logistics warehouses as the poster child for thematic investing. These are properties used by Amazon and other e-commerce retailers as distribution hubs for the final stage in the delivery of products to nearby consumers.

Blackstone began buying warehouses in 2010 and soon noticed that e-commerce firms were renting these spaces at a frenzied pace. Today, Blackstone owns nearly $140 billion of warehouses worldwide, making them its single-largest asset class.

Lately, life sciences have taken center stage. Highlighted by the Covid pandemic, investments in potential medical breakthroughs are accelerating. And so are real estate deals for laboratory space.

According to JLL, a leading real estate services company, life sciences real estate investments account for about a third of worldwide spending on commercial properties this year.

Gray has made a personal commitment to life sciences. Since 2012, he and his wife, Mindy, have donated more than $100 million to cancer research following the death of Mindy’s sister, Faith Basser, from ovarian cancer at age 44.

Blackstone’s involvement in the sector began in 2015 when the firm bought BioMed Realty, an owner of buildings catering to life sciences firms. Three years later, Blackstone acquired Claris, an investment firm that financed medical products. Claris founder Nicholas Galakatos became head of Blackstone Life Sciences and was also appointed to BioMed’s board.

These kinds of acquisitions create ample opportunities for cross-collaboration between Blackstone’s businesses. “If we have a question about a prospective tenant in BioMed, we can ask Nick for his thoughts about the company,” says Kenneth Caplan, global cohead of real estate. “And if Nick is looking at a company, he can ask our BioMed team about space for them.”

A prime example of this arrangement is Alnylam Pharmaceuticals, which is both a Blackstone business partner and a laboratory and office tenant in a Cambridge, Massachusetts, building owned by BioMed.

Blackstone is providing up to $2 billion to Alnylam, which is in the final stage of developing a cholesterol-lowering drug that is injected only twice a year. If the drug, inclisiran, gains the approval of regulatory agencies and proves to be a blockbuster, Blackstone will be paid back in royalties from sales.

The complexity of the deal offers insight into why smaller alternative-asset managers are hard-pressed to match Blackstone’s business strategy in life sciences.

Alnylam invented inclisarin, but teamed up with another pharmaceuticals firm, the Medicines Company, to develop the drug.

Then Novartis, the epitome of Big Pharma, acquired the Medicines Company specifically to mass-produce and distribute inclisarin. Novartis agreed to pay Alnylam, as the drug’s inventor, up to a 20 percent royalty on sales of inclisarin. Novartis projects annual sales of as much as $10 billion, as the drug lowers cholesterol dramatically and obviates the need for daily statin pills.

But Alnylam still needed to incur onerous development costs of $2 billion before inclisarin could receive the go-ahead from regulators and begin to be mass-marketed. Because Alnylam is valued at about $10 billion, it would have had to sell a huge part of the company and dramatically dilute its shareholder base to raise the $2 billion in the equity market.

At this point, Blackstone entered the picture. It offered to buy half of the future royalties paid to Alnylam by Novartis for $1 billion. Though Alnylam would still have to raise $1 billion in the equity market, it was a more palatable solution for shareholders.

Blackstone will provide Alnylam up to another $1 billion aimed at late-stage development of other pharmaceuticals in its pipeline. A drug to stave off heart failure is among those products.

Blackstone insists it has little to fear from rival asset managers in replicating the Alnylam model with other drug companies.

“Our main competitor is not another investor — it’s the pharmaceuticals industry,” says Galakatos. “If we don’t fund a particular product, then the industry is going to have to do it on their own or share the risk by joining us in the development process.”

Complicated deals like Alnylam were unheard of a decade ago among alternative-asset managers. What’s changed is an acute need for yield and long-term earnings for investors in a world where interest rates have been ultra-low for so long. In return, investors allow Blackstone to lock up their capital for many years.

According to ratings agency Morningstar, Blackstone posts annual retention rates above 90 percent, compared with the 70 to 80 percent rate registered by more-traditional asset managers.

The rise of perpetual capital and thematic investing has been a boon for fee-related earnings. For such long-term investments, Blackstone charges a 1 to 1.25 percent management fee and a 10 to 12.5 percent performance fee — lower than the 1.25 to 1.75 percent management fee and 20 percent performance fee that the firm charges for more-traditional, shorter-term investments.

Fee-related earnings now account for about two thirds of Blackstone’s distributable earnings annually, up from only a third just four years ago. Distributable earnings reached $3.9 billion for the first nine months of 2021, a whopping 108 percent jump from $1.9 billion for the same period last year.

Blackstone has also been able to expand its range of investors. Pension funds, endowments, and sovereign wealth funds still account for most of Blackstone’s assets. But new capital inflows are coming from life insurance companies concerned about covering mortality and disability claims, along with wealthy individuals eager to enjoy the same opportunities as institutional investors.

“It’s still early days in those markets, with a huge amount of runway ahead,” notes Blackstone CFO Michael Chae.

Blackstone is on pace to reach $1 trillion AUM well before 2026 — the target date set by Schwarzman. With the firm enjoying a ten-year head start in thematic investing, its moat looks impregnable for now.

Rival heavyweights like KKR and Carlyle are out of breath attempting to match Blackstone, and smaller asset managers trying to increase their presence in alternatives simply don’t have the needed perpetual capital, range of products, and track record.

The real challenge in the years ahead is likely to come from Schwarzman’s old nemesis: Fink’s BlackRock. Alternatives are only a small portion of its business today, but with $9.4 trillion AUM — more than twice the size of Germany’s GDP — BlackRock has deeper pockets than any other financial entity.

BlackRock elbowed out competitors in passive management by relentlessly cutting fees. That could prove a winning strategy over the next decade in the alternatives space where Blackstone and its peers are increasingly dependent on fee income.

But by then, Gray will have had enough time to devise new formulas for Blackstone — and maybe even start thinking about his own successor.

“We have been in this space longer and operating at a scale that gives us a meaningful competitive advantage,” says Gray. “But we’re not resting on our laurels.”