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

1. 0:00 – 0:45

   Trailer

   1. TJTony James0:00

      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.

   2. DHDavid Haber0:08

      People know Blackstone today, a trillion dollars in AUM.

   3. TJTony James0:11

      Right.

   4. DHDavid Haber0:11

      It did not look anything like that when you joined.

   5. TJTony James0:13

      Running an investment organization like Blackstone, I think you almost have to be a really good investor. If you're gonna catch the signals early, they're never obvious. By the time they're obvious, it's priced in.

   6. DHDavid Haber0:24

      You led the Series A into Costco. Charlie Munger was still on the board, and you guys served together for 30 years. What did you learn?

   7. TJTony James0:30

      Focus, focus, focus. Flawless execution of the details. Build for the long term.

   8. DHDavid Haber0:34

      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?

2. 0:45 – 3:05

   Starting at DLJ: Getting in on the Ground Floor

   1. DHDavid Haber0:46

      Tony, thank you so much for being here.

   2. TJTony James0:48

      You're very welcome, David.

   3. DHDavid Haber0:50

      You joined, uh, DLJ as an investment banking associate in 1975, I think just after business school. Maybe give us a, a reminder of what the shape of that business looked like at the time.

   4. TJTony James1:00

      Well, if I'd known what I was doing, I probably wouldn't have joined DLJ.

   5. DHDavid Haber1:04

      [chuckles]

   6. TJTony James1:04

      It was n- it was nothing, honestly. It was 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 an investment banking team of five.

   7. DHDavid Haber1:18

      Wow.

   8. TJTony James1:18

      We hadn't done a financing or a merger in two years, so we hadn't done any business in two years.

   9. DHDavid Haber1:23

      Oh, wow.

   10. TJTony James1:25

       But, you know, I liked the people. I liked the unstructured nature of it. I decided that, um, I'd, I'd give it a shot.

   11. DHDavid Haber1:35

       And y- I mean, you ultimately stayed for, you know, 25 years, I believe, uh-

   12. TJTony James1:39

       Yes

   13. DHDavid Haber1:39

       ... which is a pretty long tenure generally, but, uh, certainly for, for Wall Street at the 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-

   14. TJTony James1:52

       Yeah

   15. DHDavid Haber1:52

       ... during your tenure?

   16. TJTony James1:53

       Well, the g- 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 of the o- organization, and you get responsibilities earlier than you deserve them. And that kind of, uh, feeds on itself. Your learning accelerates. Everything accelerates. Your confidence accelerates maybe to an excess. But it feels really good.

   17. DHDavid Haber2:14

       Yep.

   18. TJTony James2:14

       And your expectations are low, so when you start winning business, it's always a positive surprise. If you lose, well, that's, that's par for the course. But so you, you gotta, you got a very f- positive feedback loop. And, you know, we ran DLJ. Ultimately, it was renowned for its culture. People just loved working there.

   19. DHDavid Haber2:32

       Hmm.

   20. TJTony James2:33

       And that created a really nice environment, and you spend so much of your career or your life, uh, in your office. That was fantastic.

   21. DHDavid Haber2:42

       Hmm.

   22. TJTony James2:42

       And, um, you know, we grew DLJ from essentially nothing to the fifth largest securities firm. We grew it at over 15% for 25 consecutive years. That's kinda like one of your tech companies. Um, and, and it was f- and, and I, and I, and I loved that. And every few years, the business changed, and my opportunity set changed radically.

   23. DHDavid Haber3:04

       Hmm.

3. 3:05 – 9:09

   The LBO Revolution & Building a Merchant Bank

   1. TJTony James3:05

      The big turning point I would say was 1980 when KKR did a LBO for Houdaille Industries-

   2. DHDavid Haber3:11

      Hmm

   3. TJTony James3:11

      ... the first big public company that went-- actually was taken private. And I thought, "Wow, you can buy these huge companies with almost all debt."

   4. DHDavid Haber3:20

      Mm-hmm.

   5. TJTony James3:21

      And it struck me that DLJ at the time was competing with dozens of other firms that had more of everything than we did.

   6. DHDavid Haber3:31

      Hmm.

   7. TJTony James3:32

      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 kinda end run. They weren't really doing it themselves. It was a n- it was a new sector. We could buy c- clients we couldn't actually win competitively and then do all their investment banking business.

   8. DHDavid Haber3:52

      Hmm.

   9. TJTony James3:53

      And that really fed on itself. Out of the... W- We built a, we built a private equity business. I think our first fund had a 90% IRR. Those days it was easier because prices were lower. Companies were more under-managed.

   10. DHDavid Haber4:07

       Mm-hmm.

   11. TJTony James4:07

       And essentially, you could get-- you could borrow 100% of the purchase price.

   12. DHDavid Haber4:11

       Mm-hmm.

   13. TJTony James4:12

       Um, so just by rolling your fees, you could kind of own the company, and then that drove... Then we had to-- could and had to build a high-yield business and, and other debt businesses. We, we-- A lot of those were our biggest IPOs.

   14. DHDavid Haber4:25

       Yep.

   15. TJTony James4:26

       One thing led to another. So we built the whole investment banking business cheek by jowl with the principal business. So it was-

   16. DHDavid Haber4:33

       Yep

   17. TJTony James4:33

       ... in that sense, 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 have existed. Your old firm, Goldman, sh- should have beaten them.

   18. DHDavid Haber4:45

       Yep.

   19. TJTony James4:45

       But the big firms were ambivalent about this business.

   20. DHDavid Haber4:48

       Hmm.

   21. TJTony James4:48

       They were ambivalent because it wasn't quite an agency business.

   22. DHDavid Haber4:52

       Yep.

   23. TJTony James4:53

       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.

   24. DHDavid Haber5:03

       Right.

   25. TJTony James5:04

       And so, so that institutional ambivalence gave us a huge runway that we just plowed through. 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- [chuckles]

   26. DHDavid Haber5:28

       Wow

   27. TJTony James5:28

       ... back in the '70s.

   28. DHDavid Haber5:30

       Wow.

   29. TJTony James5:30

       Gone now.

   30. DHDavid Haber5:31

       Yep. And, and I wanna 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, who you've had a long, you know, history with. And he, he-
4. 9:09 – 15:00

   Leading the Series A into Costco & Lessons from Jim Sinegal

   1. DHDavid Haber9:09

      To- totally. And that, that has definitely shined through in a lo- a lot of my conversations. Um, yeah, I mean, may- maybe just kinda talk through the inception of the, of the merchant banking, you know, kind of-

   2. TJTony James9:18

      Sure

   3. DHDavid Haber9:18

      ... Foltz 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.

   4. TJTony James9:24

      Right. Well, again, KKR does that Hooters deal 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."

   5. DHDavid Haber9:35

      Yep.

   6. TJTony James9:35

      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 a distortion of reality 'cause I was, like, 30. Maybe not 30, 29.

   7. DHDavid Haber9:48

      Oh.

   8. TJTony James9:49

      Um, and they said, they said, "Go back, go back to work. We, we have a principal business called Sprout, the venture capital."

   9. DHDavid Haber9:57

      Okay.

   10. TJTony James9:58

       "And they, you know, they are-- they know how to buy things, and you know how to advise, so go back to advising."

   11. DHDavid Haber10:03

       Yep.

   12. TJTony James10:04

       And I sent them a few deals over the next year or so, and they said, "No, that doesn't work," and then someone else would do it and make a lot of money. And I kept going to the firm and saying, "This is ridiculous. These, these guys don't know how to get out of their way." Um, 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, uh, uh, we bought the retailing sub series from Household International. We ended up with Vons and Ben Franklin-

   13. DHDavid Haber10:30

       Hmm

   14. TJTony James10:31

       ... um, TGI and, uh, Coast to Coast Hardware 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-

   15. DHDavid Haber10:45

       Wow

   16. TJTony James10:45

       ... or some, some huge number 'cause we sold the discount business to another discounter and ended up essentially owning a great grocery store in Southern California called Vons for free.

   17. DHDavid Haber10:54

       Yep. I grew up going to Vons.

   18. TJTony James10:55

       [laughs]

   19. DHDavid Haber10:55

       San Die- Southern California.

   20. TJTony James10:56

       And around that, we did massive amounts of high yield and one thing and another. And that put us on the map, so... a- and, and led to us raising a fund, and it was a very high return fund, so that then f- we got a lot of follow-ons. But we were, we were pretty aggressive about starting new businesses. We s- we started a secondaries business, a fund to funds business, real estate, as I mentioned, all these things, and they all pretty much all worked. The, the, the private markets in those days was not as competitive.

   21. DHDavid Haber11:27

       Hmm.

   22. TJTony James11:28

       And, um, 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.

   23. DHDavid Haber11:38

       Yep.

   24. TJTony James11:39

       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. Um, Blackstone at the time was high teens, so just to-

   25. DHDavid Haber11:52

       Oh, wow

   26. TJTony James11:52

       ... put that in context. And, um, s- so that, that, that was a key asset. Once it got put into a Swiss bank, they had all of the institutional issues-

   27. DHDavid Haber12:04

       Right

   28. TJTony James12:04

       ... 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-

   29. DHDavid Haber12:10

       And what, and what was the kinda core motivation to sell, uh, DLJ to Credit Suisse? Was there some, like, a macro reason or just good timing? I'm just curious.

   30. TJTony James12:19

       I think there were macro and micro reasons. Um-DLJ had had a hell of a run, as I mentioned.
5. 15:00 – 25:17

   38 Years on the Costco Board & Learning from Charlie Munger

   1. DHDavid Haber15:01

      One of my favorite fun facts, uh, 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.

   2. TJTony James15:11

      Right. Right.

   3. DHDavid Haber15:11

      Uh, I have to hear more about that story. You know-

   4. TJTony James15:15

      Starbucks too, by the way.

   5. DHDavid Haber15:16

      Is that right?

   6. TJTony James15:17

      Yeah.

   7. DHDavid Haber15:18

      Oh, wow. Uh-

   8. TJTony James15:18

      I mean, a few others. They weren't all that successful.

   9. DHDavid Haber15:21

      That's amazing. [chuckles] You might be the best, uh, retail venture capitalist-

   10. TJTony James15:25

       Right

   11. DHDavid Haber15:25

       ... of all time. Um, I guess, how did you meet, you know, Jim Sinegal and Jeff Brotman, and then ultimately, what did you see in them at, at that time?

   12. TJTony James15:33

       Well, they walked in on-- they walked in unknown to me and said, "Gee, we have, we have what we think is a really interesting opportunity." Uh, there was one unit like that called Price Club. It had opened in San Diego.

   13. DHDavid Haber15:45

       That's where I grew up. Yep. Mm-hmm.

   14. TJTony James15:46

       Where, where Jeff had been the number two... Or, or, 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.

   15. DHDavid Haber15:56

       Yep.

   16. TJTony James15:58

       Um, there was a research report from a Goldman analyst named Joe Ellis that sort of laid out the business model, and it was very, very powerful and elegant. Um, and so... And it was proven in one case, and, and the, the Pacific Northwest was a very good market, very affluent and very good market. Jim was one of the best executives I've ever met. May-maybe the best. He's not-- He's driven. He, he can, he can-- He's excellent on the smallest details of execution, but also the biggest principles.

   17. DHDavid Haber16:34

       Hmm.

   18. TJTony James16:35

       He knows exactly... He, 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.

   19. DHDavid Haber16:49

       Totally.

   20. TJTony James16:49

       Just relentless about that, and incredible standards of excellence, and focus, focus, focus. Um, and you know, the guy, the guy traveled 225 days a year, so, you know, as a CEO. [chuckles]

   21. DHDavid Haber17:04

       Totally.

   22. TJTony James17:04

       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. At 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-

   23. DHDavid Haber17:22

       Hmm

   24. TJTony James17:22

       ... knew that market. And the, the, the economic model of, of the store was so powerful that it was compelling, I thought.

   25. DHDavid Haber17:33

       Totally.

   26. TJTony James17:33

       And, and you're not, like, betting on a new technology. Is the market gonna embrace it or is it gonna work?

   27. DHDavid Haber17:38

       Sure.

   28. TJTony James17:38

       'Cause there was-- it was pretty prosaic, and you understa- or someone like even me, I could understand it, but also there was a working model.

   29. DHDavid Haber17:46

       Yep.

   30. TJTony James17:47

       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 a lot of people, I think, hold things too long. I probably sell too early.
6. 25:17 – 33:44

   Joining Blackstone: The Partnership with Steve Schwarzman

   1. TJTony James25:17

      yeah.

   2. DHDavid Haber25:17

      I mean, that is remarkable. So I wanna transition to Blackstone, which I think, you know, most people know you for 'cause you had such a huge impact on the growth of that business. Um, you know, talk through kinda when you first met Steve Schwarzman. I know it was kind of before you, you joined the firm.

   3. TJTony James25:32

      Sure, yeah.

   4. DHDavid Haber25:32

      And, and what was sort of the conversation like, you know, for him getting you to join and-

   5. TJTony James25:36

      Yeah. Okay.

   6. DHDavid Haber25:37

      Yeah.

   7. TJTony James25:38

      I, I, I think our first serious engagement dates to back to 1989, I think it is, when we, we, we're working on a deal together to buy a railroad company called CN-CNW. And it was a hairy time because-

   8. DHDavid Haber25:53

      Hmm

   9. TJTony James25:53

      ... the markets were falling apart. We were sort of pregnant with this public bid for this 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. Part of our business model, put a little equity in, get all the investment banking business. And we had a, we had, um, a big high yield deal which had a reset note.

   10. DHDavid Haber26:16

       Hmm.

   11. TJTony James26:18

       And Steve was balking at the concept of a reset note. Well, I think we were pricing it 15%, and it could reset up to 18. Think of those rates today.

   12. DHDavid Haber26:28

       Totally.

   13. TJTony James26:29

       But Steve said, "No, I don't-- I'm not gonna do the reset because I know you guys will reset it to the max." That's just, you know... And this is-- And well, Steve has a great ins- great nose for how to get screwed. [chuckles] Um, you know-

   14. DHDavid Haber26:43

       And how to avoid it. Yeah.

   15. TJTony James26:45

       Um-

   16. DHDavid Haber26:45

       Yeah

   17. TJTony James26:46

       ... yeah, and how to avoid it, but what might happen.

   18. DHDavid Haber26:48

       Yep.

   19. TJTony James26:48

       And we couldn't sell it without the reset. And of course, what that tells you is the market all thought it would be reset.

   20. DHDavid Haber26:54

       Interesting.

   21. TJTony James26:54

       Right? Or at least you wanna take the risk on it. So we kinda went round and round and round on that. We had done a, we had done a bridge loan, so we were, [chuckles] we needed to get this financing done. And, and the, you know, the story is Steve said, "Well, are you willing to put your money on, on, your own personal money on the line?" And I said, "Yes." Um, and so we said, "Okay, if it resets to the 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.

   22. DHDavid Haber27:30

       Hmm.

   23. TJTony James27:30

       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.

   24. DHDavid Haber27:38

       Hmm.

   25. TJTony James27:39

       And I felt like if I could give Steve a, you know, a pound of flesh-

   26. DHDavid Haber27:43

       Hmm

   27. TJTony James27:44

       ... then I could get the whole thing done.

   28. DHDavid Haber27:48

       Mm-hmm.

   29. TJTony James27:48

       And s- and, and, and the idea of someone putting, uh, 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 interest, I would lose some money.

   30. DHDavid Haber28:00

       Hmm.
7. 33:44 – 44:09

   Blackstone's journey from $14B to nearly $1 Trillion

   1. DHDavid Haber33:44

      Totally. Um, you know, people know Blackstone today, you know, a trillion dollars in AUM.

   2. TJTony James33:51

      Right.

   3. DHDavid Haber33:51

      It, it did not look anything like that-

   4. TJTony James33:53

      No

   5. DHDavid Haber33:53

      ... uh, when you joined in, in 2002. I think the firm was maybe $14 billion in total assets-

   6. TJTony James33:58

      Right. Something like that

   7. DHDavid Haber33:59

      ... which is, you know, shockingly like, I don't know, a sixth of our size, which is, you know-

   8. TJTony James34:02

      [chuckles]

   9. DHDavid Haber34:03

      ... uh, kind of insane. Um, again, maybe, maybe just give folks kind of a reminder of what, what was the shape of the business then, what businesses existed-

   10. TJTony James34:11

       Yeah, sure

   11. DHDavid Haber34:11

       ... and, you know, we'll talk through kinda the, the 50-fold increase, I guess, you know, during your tenure.

   12. TJTony James34:16

       Yeah. I mean, Blackstone, Blackstone was, w- was, was in, in private equity and real estate, in hedge fund, fund of funds, in a tiny credit business, and then an M&A business, and a restructuring advisory business. All those businesses were kinda 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 wi- you know, write-offs-

   13. DHDavid Haber34:45

       Hmm

   14. TJTony James34:45

       ... with about a third of the fund.

   15. DHDavid Haber34:46

       Hmm.

   16. TJTony James34:47

       The advisory businesses, their M&A business was down 50 or 75% from its peak and not going up. The, the fund of funds business was sm- tiny, tiny and not very profitable. And the real estate business was a, was again a small business. Um, so, um, all those, uh, it, um... There were, there, there were things to do to grow all those businesses. And what I'm, what I'm prouder of h- h- honestly than moving the, the AUM from 16 billion to nearly a trillion is the market cap of the company because-

   17. DHDavid Haber35:25

       Mm-hmm

   18. TJTony James35:25

       ... you know, it's AUM is just AUM.

   19. DHDavid Haber35:28

       Sure.

   20. TJTony James35:28

       And w- AIG had just put $100 million into Blackstone for 10% of the company and the rights to invest in our funds. So at best it was worth a billion dollars-

   21. DHDavid Haber35:41

       Mm-hmm

   22. TJTony James35:41

       ... and when I left it was worth 170. So that's 170-fold value increase. And while we're growing the business and increasing the value, our IRR on all our funds went up. So we weren't, we weren't driving do- Sometimes an asset manager can drive-

   23. DHDavid Haber35:58

       100%, yeah

   24. TJTony James35:58

       ... down in return for, for commod- more commodity, um, returns. We weren't doing that.

   25. DHDavid Haber36:06

       Yep.

   26. TJTony James36:07

       And so th- 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-

   27. DHDavid Haber36:23

       Hmm

   28. TJTony James36:23

       ... and, and my experience with Costco, culture is so important.

   29. DHDavid Haber36:26

       Hmm.

   30. TJTony James36:27

       And that required, that required making some changes in people and talent.
8. 44:09 – 53:41

   Investment Committee Culture & the Art of Robust Debate

   1. TJTony James44:09

      Uh, but that's, that's kinda what you ha- you know, you're, you're, you're more than just a referee, but I really felt strongly that it's a collective decision.

   2. DHDavid Haber44:19

      Mm-hmm.

   3. TJTony James44:19

      So when I put my finger on the scale, it wasn't that I was deciding. I had to get the other people there.

   4. DHDavid Haber44:26

      Sure.

   5. TJTony James44:26

      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.

   6. DHDavid Haber44:39

      Hmm.

   7. TJTony James44:40

      One CIO-

   8. DHDavid Haber44:41

      Hmm

   9. TJTony James44:41

      ... that was a, a very smart guy, but a bottleneck.

   10. DHDavid Haber44:44

       Mm-hmm.

   11. TJTony James44:45

       And it wasn't a scalable model.

   12. DHDavid Haber44:47

       Th- this is like a distinction that I've, I've written about and 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 amount 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.

   13. TJTony James45:12

       Mm-hmm.

   14. DHDavid Haber45:13

       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-

   15. TJTony James45:25

       Yes

   16. DHDavid Haber45:26

       ... 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, I'm curious, you know, if you agree with that distinction, how you sort of think about that in the context of, of Blackstone-

   17. TJTony James45:44

       I, I-

   18. DHDavid Haber45:44

       ... or DLJ even.

   19. TJTony James45:44

       I do, and I, I do. One of, one of the tricks of running a, a firm is making people in a fund care more than just about their fu- fund, right?

   20. DHDavid Haber45:54

       Yep.

   21. TJTony James45:54

       So that's a, that's a sensitive balance, and you want them to care enough, but not too much. And then within funds, uh, uh, or within sub-businesses, maybe private equity, how do you get the guys in India to care enough about the guy that-

   22. DHDavid Haber46:09

       Sure

   23. TJTony James46:09

       ... deals in New York? And for me, I, I ha- I have my way of thinking about that and my how to balance the rewards o- on both sides really from trial and error and what's worked over the years.

   24. DHDavid Haber46:21

       Hmm.

   25. TJTony James46:21

       And not... 'Cause there's no theoretical model that makes it right. But the f- 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.

   26. DHDavid Haber46:30

       Yep.

   27. TJTony James46:31

       Um, the, the, the i- the issue, as Blackstone became successful, the issue was we weren't in w- we weren't a monoline boutique investor anymore, which is what, uh, which is what all the LPs wanted.

   28. DHDavid Haber46:44

       Hmm.

   29. TJTony James46:45

       "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-"

   30. DHDavid Haber46:52

       Right
9. 53:41 – 1:05:39

   The IPO, Retail Distribution & Building Competitive Moats

   1. TJTony James53:41

      returns.

   2. DHDavid Haber53:41

      Totally. I, I wanna talk about the IPO because it was, you know, uh, obviously a huge deal in the kinda history of the firm. Also, I imagine very complicated, both kinda 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, you know-

   3. TJTony James54:11

      Yeah

   4. DHDavid Haber54:11

      ... the sh- public shareholders. Um-

   5. TJTony James54:14

      Well, this-

   6. DHDavid Haber54:15

      Maybe just talk through the IPO and all those dynamics

   7. TJTony James54:17

      I mean, we, we could 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, all with different percentage ownerships. Every fund had a different percentage ownership than every other fund.

   8. DHDavid Haber54:35

      Huh.

   9. TJTony James54:35

      All that somehow had to be rolled together into one entity-

   10. DHDavid Haber54:39

       Yep

   11. TJTony James54:39

       ... and everyone had to have the right number of shares in that entity. Just, just, just number one.

   12. DHDavid Haber54:44

       Yep.

   13. TJTony James54:44

       Number two, at that time, there was no, nothing like Blackstone. We had three different ways for a count, to count for carry. We could count the way we did it, and now the industry does it now, which is kind of, um, [clears throat] 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-

   14. DHDavid Haber55:14

       Hmm

   15. TJTony James55:14

       ... and then how do they vary over time.

   16. DHDavid Haber55:16

       Hmm.

   17. TJTony James55:16

       We had lots of choices-

   18. DHDavid Haber55:17

       Hmm

   19. TJTony James55:17

       ... just on something as basic as the accounting for carry.

   20. DHDavid Haber55:20

       Totally.

   21. TJTony James55:20

       So there was not even an accounting standard that-

   22. DHDavid Haber55:23

       Hmm

   23. TJTony James55:24

       ... you know, the tax structure and all that, you know, should it be a publicly traded private sh- partnership? We thought that was more value added because that's what all the insiders wanted, 'cause they pa- like, don't like paying taxes.

   24. DHDavid Haber55:35

       Sure.

   25. TJTony James55:35

       Turns out the market-

   26. DHDavid Haber55:37

       Didn't like it

   27. TJTony James55:37

       ... actually didn't really like it, so, you know, we converted, but it, 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 had a hell of a run. We didn't wanna ruin that. Um, so how do, how, how do you protect your day-to-day working partners that go in to work every day and try to make good investments from being distracted or influenced by-

   28. DHDavid Haber56:04

       Hmm

   29. TJTony James56:05

       ... the public? So, so f- first of all, we built an, an elaborate corporate overhead so c- we didn't involve the, any of them in any of it.

   30. DHDavid Haber56:12

       Hmm.
10. 1:05:39 – 1:10:00

    Succession Planning & Knowing When to Step Away

    1. DHDavid Haber1:05:39

       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 gonna retire at, at 70.

    2. TJTony James1:05:48

       Right.

    3. DHDavid Haber1:05:48

       Um, th- that's not normal. Most people try to sort of hang on, you know, especially at that level. Um, how did you think about that decision?

    4. TJTony James1:05:58

       Well, I'm, I'm glad I did 'cause I, if, if I, if I hadn't committed myself, I probably would've been harder to let go. 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.

    5. DHDavid Haber1:06:16

       Hmm.

    6. TJTony James1:06:17

       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 wanna do this for the rest of my life. I wanna do it. I wanna do it well. I wanna build something I'm proud of, but I've got more potential.

    7. DHDavid Haber1:06:34

       Hmm.

    8. TJTony James1:06:35

       And so, so that wa- that was one thing, and I just felt by then... And I, I... St- you know, Steve's only four years older than I am, so, so, uh, uh, and I'm fine with that. I didn't, I didn't aspire to anything but what I had there. Then, too, I have to say, um, leadership transition is the Achilles' heel of an altern- of any asset manager, in my opinion.

    9. DHDavid Haber1:06:57

       Yep.

    10. TJTony James1:06:58

        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.

    11. DHDavid Haber1:07:05

        Hmm.

    12. TJTony James1:07:05

        So for me, it-- one of my top priority, if I did a good job managing BlackstoneAll 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.

    13. DHDavid Haber1:07:21

        Yep.

    14. TJTony James1:07:21

        I had to nail that.

    15. DHDavid Haber1:07:23

        Yep.

    16. TJTony James1:07:24

        And that's a process. Uh, at least for me it was a process. It meant picking the successor, it meant grooming him and making sure that, that there was no breakage around his movement, either in l- loss to his business or pe- people being disappointed. It meant picking the right successor, making sure he was 100% ready, on and on and on.

    17. DHDavid Haber1:07:44

        Yep.

    18. TJTony James1:07:46

        So you start down that process and it comes to an end. I mean, if you do that well-

    19. DHDavid Haber1:07:50

        Totally

    20. TJTony James1:07:50

        ... you know, three or four years in, he's ready.

    21. DHDavid Haber1:07:52

        Totally.

    22. TJTony James1:07:53

        And, you know, credit to Jon, he said, "What do you think, Tony?" And, and I said a couple times, "Give me another year."

    23. DHDavid Haber1:07:58

        [laughs]

    24. TJTony James1:07:59

        But I felt that obligation, and I felt he was ready. And so-

    25. DHDavid Haber1:08:02

        Yeah

    26. TJTony James1:08:03

        ... but it's never easy to let go of that seat.

    27. DHDavid Haber1:08:07

        Yep.

    28. TJTony James1:08:07

        It's such a great seat. It's such a profitable seat.

    29. DHDavid Haber1:08:10

        Totally.

    30. TJTony James1:08:11

        It's such an ego-gratifying seat. So I, I would say most people, as a result, hang on too long.
11. 1:10:00 – 1:15:24

    The Future of Private Markets

    1. DHDavid Haber1:10:00

       ecosystem. You know, we're sitting here amidst, I don't know, fear-mongering in private credit, the SaaSpocalypse.

    2. TJTony James1:10:08

       Right. [chuckles]

    3. DHDavid Haber1:10:08

       I don't know. Where, where is this all going? Like how, how do you sort of view the maybe private markets lan- or maybe markets generally, but private market landscape and, yeah, this ecosystem?

    4. TJTony James1:10:18

       Well, I'm, you know, I try to look at private markets not as a series of individual business, 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.

    5. DHDavid Haber1:10:40

       Yep.

    6. TJTony James1:10:42

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

    7. DHDavid Haber1:11:11

       Mm-hmm.

    8. TJTony James1:11:12

       And, and yields kept coming down into the sort of mid to high single 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.

    9. DHDavid Haber1:11:25

       Mm.

    10. TJTony James1:11:26

        And the kind of capital that was started to be raised, uh, with retail money, where it comes in one month and it's gotta be invested right away or you have the, you have the negative drag-

    11. DHDavid Haber1:11:35

        Mm-hmm, mm-hmm

    12. TJTony James1:11:35

        ... means that you kinda have to buy the market what's out there. You can't-

    13. DHDavid Haber1:11:39

        Mm.

    14. TJTony James1:11:39

        One of the great things about drawdown funds is always there's nothing good to do. I don't have to do anything, right?

    15. DHDavid Haber1:11:43

        Sure.

    16. TJTony James1:11:43

        You kinda lost that-

    17. DHDavid Haber1:11:45

        Mm

    18. TJTony James1:11:45

        ... with this, with this structure. I, you know, so I think there'll be some correction in private markets, but it's not gonna be 2008 where you were de- destabilizing-

    19. DHDavid Haber1:11:53

        Sure

    20. TJTony James1:11:53

        ... the system 'cause it's not owned by banks at 30 to 1 leverage, or these days the leverage is lower, but it wa- plenty were-

    21. DHDavid Haber1:11:59

        Yep

    22. TJTony James1:11:59

        ... 20 to 30 to 1. So okay, there'll be a correction. There'll still be a opportunity when that shakes out to, to buy private, get debt and get higher returns than publicly traded high yield debt.

    23. DHDavid Haber1:12:13

        Yep.

    24. TJTony James1:12:14

        Okay. You know, the AI revolution, I, I would say you get these things periodically where a new technology makes you question the b- old business models and, and that's an adjustment, but it's just an adjustment.

    25. DHDavid Haber1:12:29

        Mm-hmm.

    26. TJTony James1:12:30

        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.

    27. DHDavid Haber1:12:41

        Mm-hmm.

    28. TJTony James1:12:42

        Can't go public. There's no strategic-

    29. DHDavid Haber1:12:43

        Mm-hmm

    30. TJTony James1:12:44

        ... you know, 20 trillion or something worth of value. Um, all those companies need to be will and then eventually need to be sold.
12. 1:15:24 – 1:23:07

    Advice for Young People

    1. TJTony James1:15:24

       evolves.

    2. DHDavid Haber1:15:24

       Totally. You mentioned you had, you know, lots of interests outside of, you know, Blackstone, Costco, [chuckles] and DLJ. 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.

    3. TJTony James1:15:42

       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 wa- he had been a, an M&A banker at DLJ and then I think Bank of America. And, and then he went into the government, and he ran the student loan program for the government. And he came in and said, "You know, um, I'm out here. The one thing that f- 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 w- 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 a return to give a certain percentage of his or her income over a minimum wage, uh, to repay the college.

    4. DHDavid Haber1:16:33

       Mm-hmm.

    5. TJTony James1:16:33

       And then the college would take all those receivables, this is the Blackstone opportunity-

    6. DHDavid Haber1:16:36

       Mm-hmm

    7. TJTony James1:16:36

       ... and securitize them.

    8. DHDavid Haber1:16:37

       Sure.

    9. TJTony James1:16:38

       And, you know, we'd, we'd make a lot of money [chuckles] while doing good for society.

    10. DHDavid Haber1:16:42

        Yep.

    11. TJTony James1:16:44

        And we started down that path, but while we were doing that, 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, and I, I don't know about Andreessen Horowitz, but much like a private equity portfolio management capability.

    12. DHDavid Haber1:17:03

        Hmm.

    13. TJTony James1:17:03

        We have IT people, we have lean people, we have pricing people-

    14. DHDavid Haber1:17:07

        Hmm

    15. TJTony James1:17:07

        ... we have on and on and on and on, marketing people. And if we could set up a capability like that and put-- and then donate them to HBCUs-

    16. DHDavid Haber1:17:19

        Hmm

    17. TJTony James1:17:19

        ... w- 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.

    18. DHDavid Haber1:17:33

        Mm-hmm.

    19. TJTony James1:17:34

        But 16% of Black graduates graduate from HBCUs.

    20. DHDavid Haber1:17:37

        Hmm.

    21. TJTony James1:17:37

        So twice the graduation rate. And then those graduates earn on average 50% higher lifetime income-

    22. DHDavid Haber1:17:44

        Hmm

    23. TJTony James1:17:45

        ... than Black graduates of non-HBCUs.

    24. DHDavid Haber1:17:46

        Hmm.

    25. TJTony James1:17:47

        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, uh, great things with the toughest kids with one-third of the money.

    26. DHDavid Haber1:18:00

        Mm-hmm.

    27. TJTony James1:18:01

        But they are skeletal in their ability to manage themselves, track students, get students jobs, offer students loans-

    28. DHDavid Haber1:18:08

        Hmm

    29. TJTony James1:18:08

        ... prepare their own financial statements. So we thought this would be a w- wonderful thing to empower the HBCUs to, to be stronger and better. And we now have 11 offices around the country-

    30. DHDavid Haber1:18:21

        Hmm

Episode duration: 1:23:22