TIGER 21 Welcomes a Lion: Stephen Schwarzman, Chairman and CEO of The Blackstone Group, Addresses Peer-to-Peer Investment Group on Joys of Private Equity and Other Alternative Investments
NEW YORK (March 2, 2006) – As head of the world’s largest private equity firm, Stephen A. Schwarzman, Chairman, CEO and co-founder of the Blackstone Group, says there is more payback to his job than his firm’s historic outsized returns.
Speaking to members of peer-to-peer investment group TIGER 21 recently, Mr. Schwarzman said much of his satisfaction at Blackstone came from “participating in a lifetime learning group on deals. Our firm has enormous intellectual capital and knowledge base and you can’t help but benefit from being around so many smart people.”
Mr. Schwarzman talked about investment strategy and his own deal-rich career in a free-flowing address at TIGER 21’s offices on Manhattan’s Upper East Side. He was the latest in an ongoing speakers’ program that has exposed TIGER 21 members to a wide variety of eminent investors, money managers and Wall Street chieftains, as well as leading authors and presenters from beyond the world of finance.
“Steve Schwarzman is a legendary investor and dealmaker, but he’s also a wonderful raconteur, who can draw from a tremendously varied mix of personal adventures in dealmaking, each one more captivating and instructive than the last,” said TIGER 21 president Tommy Gallagher.
“What made his presentation especially riveting, besides his own personal charm, was the combination of passion and wonder with which he approaches his work at Blackstone,” Mr. Gallagher added. “Despite a peerless track record and a magic touch across so many different asset classes, Steve never seems content to stick with what worked yesterday when tomorrow is likely to call for a whole new slate of rules. He sees the constancy of change and the need for good intelligence, which is one of the cornerstones of TIGER 21 as a networking group for serious, high-net worth investors.
“Steve also made it eminently clear that investment success is not a short-term, quarter-by-quarter proposition, nor does it come exclusively from studying financial models and deal-books, but from a fundamental understanding of how businesses work and what constitutes genuine value,” Mr. Gallagher said. “We are honored that he was able to take a brief pit stop from his multiple duties at Blackstone and elsewhere to share his experiences with our members.”
The Blackstone Group, founded in 1985 by Mr. Schwarzman and former U.S. Commerce Secretary Peter G. Peterson, is best known as a private equity investor. Based on the firm’s current holdings – 38 businesses with more than $55 billion in aggregate revenues – Blackstone is one of the largest stand-alone operating companies in the world.
But in addition to acting as a principal investor in large companies, Blackstone operates seven other business lines – real estate investments, hedge funds, debt/mezzanine financing, placement agent for alternative investments, advising troubled companies, and a longstanding M&A advisory practice, which reflects Mr. Schwarzman’s own start on Wall Street as a former investment banker and head of M&A at Lehman Brothers, where Mr. Peterson was former chairman and CEO.
“Having both been on the inside of big firms, Pete and I wanted to create an investment business on a human scale,” Mr. Schwarzman said. Yet despite an initial buzz of interest around the launch of their new firm, he recalled, “we were initially treated to the thunderous sound of silence – for anyone who has ever started a new business, there is nothing scarier than that sound of no phones ringing.” A $50,000 commitment a few weeks later started the ball rolling and Blackstone thereafter escaped the silent treatment for good, as well as for the good of its investors.
In 1988, the firm started a fund management unit called Black Rock, which under Lawrence Fink became the second largest money manager in the world and recently announced that it was merging with Merrill Lynch.
Mr. Schwarzman described Blackstone’s approach to its investments, which has not wavered in 21 years: “Scout cyclical-based companies at the bottom of the economic cycle, buy them with appropriate leverage, add value, and ride them to the top,” he said, noting that the firm looks for assets that “can benefit from changes in the overall economy.”
Of course, like so many aspects of life, he added, “executing on the opportunities is what makes our jobs challenging.”
Here are some other highlights from Mr. Schwarzman’s talk with TIGER 21 members:
On investing in private companies: “We don’t care about what’s happening on a quarterly basis – we look at a much longer time horizon. Public companies have become more obsessed with oversight and compliance than with creativity.”
On owning real estate assets: “Our real estate strategy is simple – we buy things, fix them up, and then sell them. We are always improving our properties. Real estate is a wonderful business – buildings don’t change the way companies do and there are nice, slow-moving trend lines that let you know exactly what’s going on, the macro stuff is usually so obvious.”
On investor expectations: “One of the surprising lessons of our business is that people will readily give you money to buy overvalued investments. No one likes to buy undervalued securities or companies – it takes considerable effort to convince people not to invest in what everyone else is investing.”
On being a hedge fund manager: “Our prime objective in this sector is to retain principal – you work so hard for your money, you want to be certain not to lose it,” Mr. Schwarzman said. Blackstone was in the hedge fund business long before it became fashionable, starting in 1994. Today, the firm has more than $11 billion in hedged vehicles.
On alternative investing: “Alternative asset classes continue to draw enormous pools of capital – sophisticated investors are eager to back quality mangers and operators with good track records, almost regardless of the particular sector. Major investors frequently approach us simply to ask, ‘What else have you got?’” In its 20-years plus history, Blackstone has probably raised more money for alternative investment than any other equity firm.
On pursuing large deals: “These days the competition in the middle markets has become too crushing – a $400 million dollar deal will draw dozens of bidders, whereas a quality $15 or $20 billion deal may only have one or two people competing. Frankly, we like working in that rarified climate and we think we know how to create value and upgrade even the world’s largest private companies, as long as we believe in the business and the management.”
On avoiding the hubris of a mega-dealmaker: “I try and approach every single day as if it’s my very first day in business, and remember what it was like before those phones started ringing. No matter what your skill level or your access to opportunities, so much about investing comes down to an act of God – it’s not our birthright to generate strong rates of return. Two truths in particular are worth remembering: One is that the need to excel is constantly before you; the other is that the world is a very dangerous place.”
On staying motivated after so many years: “The amazing thing about finance is that it never stops – history means nothing and you are always reinventing yourself, which appeals to my own nature. For those who need the feel of steady ground, I would not recommend my line of work. But for those who can tolerate the bounce of a trampoline, it’s an exhilarating feeling to do make the kinds of investments we do.”