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Exclusive: First Interview With New Co-Heads Of Blackstone’s $115B Real Estate Empire

It is the biggest job in real estate, and you are taking over from someone with a 13-year run of unbroken success. Feeling nervous?

“I wasn’t until you asked that,” Blackstone’s new real estate co-head, Ken Caplan, said, laughing. Sitting next to him on the 43rd floor of the firm’s Park Avenue HQ is fellow co-head Kathleen McCarthy. The pair are now on month two of running the world’s largest manager of real estate, with total assets of $115B stretching from the U.S. West Coast via Europe to South East Asia and Australia.

Blackstone Real Estate Co-Heads Kathleen McCarthy and Ken Caplan

“Of course there are nerves, because you want to get it right — if you didn’t feel that way there would be something wrong with you,” she said. “But I’m really excited to be working together with Ken in this capacity and about this opportunity.”

In February the duo took over the running of Blackstone’s real estate business from former head Jon Gray — now elevated to president and chief operating officer of the entire company — who had been running the business since 2005, first as co-head with Chad Pike and solo from 2011 onwards.

In that time Blackstone rode out the worst recession in 80 years to leave its competitors trailing in its wake and become the largest real estate firm in the world, with only Canadian rival Brookfield able to come close to its ability to raise capital and spend it profitably to make stellar returns.

In their first interview since taking over the business, McCarthy and Caplan talked about how they will run the business, their management style and how the firm can stay agile as such a big beast.

They also outlined how they see the real estate cycle progressing, the sectors where they are investing big — and those they are avoiding — and the lessons from the run up to the last downturn that are applicable today.

No disruption

Blackstone's Jon Gray

McCarthy and Caplan make sense as heirs to Gray: intelligent but open and friendly, humble but steely. Indeed, Caplan said the biggest compliment he received from a colleague after the changes were announced was that the two of them were the “obvious” choice. 

To some degree things will not change much in the day-to-day running of Blackstone — as chief operating officer, McCarthy previously focused on managing the 450-person division, investor relations and capital raising. As chief investment officer, Caplan was responsible for the investment strategy. While they stressed that things are not totally delineated, this situation will continue.

You can see why you would not want to rock the boat too much — both have been incredibly successful in their respective roles. Blackstone is a capital raising machine, and has raised the three largest-ever real estate funds. Since McCarthy joined from Goldman Sachs in 2010, that includes its seventh and eighth global funds, which raised $13.5B and $16.4B respectively.

That ability to raise capital is hugely predicated on the returns the company makes on its deals, Caplan’s area of expertise. Since the firm started investing in real estate in the early 1990s it has had an average internal rate of return of 20%, and the last global fund, invested after Caplan became CIO in 2015, has an IRR on realized investments of 34%.

Caplan personally led some of the firm’s most profitable deals, including the acquisition and subsequent float of Hilton Hotels — more on that later — and the creation of Logicor, the European logistics business recently sold to the China Investment Corp. for €12B, the largest-ever European property deal.

McCarthy and Caplan's management style will look to continue a Blackstone tradition that sees youth as no impediment to promotion — what McCarthy calls a “hyper meritocracy” with examples including the promotion of 38-year-old James Seppala to run the firm’s European real estate business.

Anbang acquired the legendary Waldorf Astoria hotel in New York for nearly $2B in 2015.

“I’ve found a lot of success giving clear and focused guidance to the teams but allowing people to do their job and giving everyone responsibility throughout the business,” McCarthy said. “We’re really focused on running a hyper meritocracy — putting talented people in leadership positions. That is how you motivate not only that person, but the people below them, by showing them if you work hard, are creative, innovative in what you do and how you do it, and have a nice way about you then you will get great opportunities.”

So far, Blackstone has avoided the pitfalls that come with becoming the biggest in a given field — the returns on the monolithic funds it raises today are comparable to those from its earlier, smaller days.

“If you’re Blackstone trying to recruit now, we’re at a huge advantage attracting more and better talent compared to 30 years ago,” said Caplan, who has been with the firm since 1998. “Scale has a huge advantage. We have access to a huge amount of data that comes off of our properties. We have great access to financing. And we have a huge amount of knowledge that we can transfer across our different businesses.”

That often happens in person and on a global level. 

“We’ve been a big investor in rental housing in the U.S. and bought more than 100,000 units. We have learned a lot about that sector over many years, so when we started doing that in Europe the team flies over and works with the European team to see what we can do there, and the same thing is happening now as we go into that sector in Asia.”

Stuyvesant Town

The path to scale was a risky one. The way Blackstone negotiated before and through the global financial crisis allowed it to streak clear from almost all of its peers and advance from large to behemoth. But by rights deals led by Caplan at that time should have taken the firm down.

At the height of the boom in 2007 it paid $39B to take Equity Offices Properties private, the biggest real estate deal in history, and $26B to take Hilton Hotels private. Deals of that size at that time typically did not work out well, and Goldman and Morgan Stanley took years to recover from disastrous deals done in the boom. But Hilton turned into the most profitable private equity deal ever, EOP eventually turned a profit, and the fund Blackstone was investing at that time has a 13% IRR and a 2.3 times multiple on invested capital.

“A lot of the reasons the business is in the position it’s in today is because of the things that were done right in the last downturn,” McCarthy said. “If you buy good quality real estate, have flexible financing and have a value creation story on the buy side and the sell side then generally, whatever moment you are at in the cycle, you will be OK.”

Investment outlook — where Blackstone is placing billions

The duo said commercial real estate is in a good place.

“We’re many years into the recovery, in most sectors you’ve had really strong growth, and here in the U.S. it feels later in the cycle,” Caplan said. “But supply is in check and capital markets are in check and healthy.”

The company is continuing to invest heavily: In the fourth quarter of 2017 it sold $10.2B of real estate, but bought $11B. Overall in 2017 it sold a record $24.5B and bought a record $19.9B. It is still sitting on a war chest of $38B of unspent capital.

It is ironic that as Blackstone has grown, it has narrowed down the sectors in which it invests: “We have a stronger conviction in fewer areas where we have been more actively investing,” Caplan said.

Rented residential is one of those. In the U.S it recently floated single family homes giant Invitation Homes. It owns the Stuyvesant Town apartment scheme in New York which it bought for $5.3B in 2015, and Caplan said Blackstone is still an active buyer in the sector.

“There is a general undersupply of new housing — construction is well below historic levels and we aren't building enough to keep up with population growth. Having skill and expertise in that market is a big advantage.”

In Europe Blackstone has spent more than €6B on rented residential assets in Spain, Scandinavia and to a lesser extent the U.K. in the past 18 months.


Then there is logistics, where the firm has bought more than 450M SF of assets since the financial crisis, and Caplan said it is on the hunt for more. In spite of the huge spike in prices in the sector, something Blackstone caused in part by investing so heavily, Caplan said there is still the chance to make opportunistic returns in the sector.

“E-commerce is growing 15% year on year and that seems to be accelerating, and that is creating a lot of demand for last-mile logistics,” he said, and indeed Blackstone’s strategy to a large degree seems to have shifted from big-boxes to the smaller units needed to fulfill the final leg of the e-commerce supply chain. “It depends on the profile of the investment, but we are buying things with stable income [for core plus funds], but where there is opportunity for value creation then we are buying there too.”

The last of the conviction areas Caplan outlines is “innovation cities” like Stockholm, Berlin, Amsterdam, West Coast U.S. cities like San Francisco, Los Angeles and Seattle, and Sydney.

“They are cities with strong population growth and creative workforces, which drives stronger real estate demand,” he said. "Blackstone is targeting offices, rented residential, logistics and some urban retail in these cities, buying both individual assets, portfolios and companies.”

And what about the flip side of the coin — the sectors where it is not buying. McCarthy pointed out that the firm never does ground-up development, and has been steering clear of net-leased assets.

And of course there is retail. Blackstone does not own any regional malls in the U.S. and Caplan said this was unlikely to change any time soon.

“We’re hesitant in the retail space in the U.S.,” he said. “It’s a sector where there has obviously been a lot of disruption. We’ve been investing in logistics in part because of that, but it is a sector with challenges.”

In big global cities like London and New York, Blackstone is tapping into strong investor demand to sell assets, but Caplan said it is still on the lookout for further purchases.

“There is just not a lot of opportunistic stock being put up for sale at the moment, it tends to be the more stabilized assets.”

A day in the life of running a $115B global real estate business


How is it possible in practice to run a business that has $115B of assets and people scattered across the globe, as well as hundreds of different investors and $38B of capital with different return targets still to spend?

The practical answer gives an insight into how Blackstone got where it is today — but also the type of people it looks to hire and the degree of commitment it takes to make it to the top of the firm.

“As we grow and manage different types of capital, we become ever more focused on a high degree of communication and connectedness,” McCarthy said.

This means getting on a lot of planes and a lot of phone calls at odd hours of the day.

“We’ve got a really good work-life balance,” McCarthy says with an ironic laugh. 

McCarthy and Caplan’s Monday morning schedule looks like this:

6:30 a.m. pipeline call with Chris Heady and Alan Miyasaki in Asia;
8 a.m. dial in to the European acquisitions meeting;
9:30 a.m. real estate partners meeting;
10:30 a.m. global investment committee call; and
Noon Americas acquisitions meeting.

“We’ll often be on the phone talking to Jon Gray at 10 p.m. at night,” McCarthy said. “We try and find people who crave that kind of connectedness, who want to get on planes and see colleagues in different regions, think in a strategic sense and learn.”