Blackstone says Wall Street is complacent about AI disruption

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Wall Street investors are underestimating the potential of artificial intelligence to make entire industries obsolete, Blackstone's president said, adding that the technology's impact is now “at the highest of our list” when evaluating deals.

Jonathan Gray said understanding AI risks has change into a priority for the private capital group when evaluating investments since the technology is already upending business models and resulting in job losses.

“We told our credit and equity teams: Cover AI in the primary pages of your investment memos,” Gray said Financial Times Private Capital Summit this week in London.

High valuations of loss-making AI corporations and the circular financial relationships between many key players have fueled fears of a bubble within the industry.

Gray said investor exuberance meant there would inevitably be a misallocation of capital into AI corporations – “think Pets.com in 2000.” However, he added that due to the dimensions of the technology's impact, investors should still be underestimating its potential to disrupt entire industries.

FT interview with Jonathan Gray from Blackstone

“People say, 'This smells like a bubble,'” but they don't ask, “What about legacy businesses that may very well be massively disrupted?” Gray said.

“If you concentrate on rules-based businesses – legal, accounting, transaction and claims processing – that might be profound,” he added.

Gray compared the looming disruption to New York's taxi licenses, which rose in value nearly 500-fold over many a long time before quickly losing 80 percent of their value as ride-hailing apps Uber and Lyft revolutionized the market.

Gray said Blackstone has put AI risks “at the highest of our list” when assessing the potential downsides of investments.

“We are investing an infinite period of time each in recent deals and, above all, in our existing portfolio: What does AI mean for business software, for service corporations that handle data, and for rule-based work?” he added.

The rise of AI algorithms developed by OpenAI, Microsoft and Google is already transforming industries similar to accounting, consulting and law and threatening business models of corporations similar to advertisers, publishers and software corporations.

Machine learning technology also threatens manual jobs in areas similar to manufacturing.

Blackstone, an early and prolific investor in the info centers utilized by OpenAI and others to run large language models, has been assessing AI risks for years. The company recently decided not to purchase some software and call center corporations considered vulnerable to AI-related risks, the matter said.

Blackstone has also invested heavily in utilities that power data centers and has even repositioned a few of its industrial portfolio corporations, similar to Copeland and Legence, to sell products to AI infrastructure providers.

Despite assessing AI-related risks, a few of Blackstone's investments are exposed to the impact of technological change. Its personal lending business has lent billions of dollars to enterprise software corporations, including Medallia, that risk losing customers to AI-driven competitors.

Gray said that while AI would result in some negative economic disruption, the technology could also result in underappreciated productivity advantages for big corporations and the worldwide economy, creating trillions of dollars in recent corporate assets. He due to this fact called on dealmakers to not miss opportunities in the sector of AI.

“We're forcing the conversation. We don't claim to know exactly how all the pieces will play out. But if every deal team needs to research the impact of AI, then that's the primary topic within the room,” he said.

“It can be a mistake to pretend all the pieces is business as usual,” he added.