Stephen A. Schwarzman, founder, chairman, CEO and director of the Blackstone Group LP, says the toughest part of heading a publicly traded alternative investment firm is his now-rock-star status. His lavish 60th birthday party, numerous mansions and glamorous lifestyle have been well reported.
Gossip in financial circles has centered on who will succeed Mr. Schwarzman, who turned 65 this year. But Mr. Schwarzman says he has no plans to retire. Despite the initial public offering and a $3 billion slice of Blackstone sold to the China Investment Corp., Mr. Schwarzman is still the man in charge. At the time of the June 2007 IPO, Mr. Schwarzman's co-founder and partner, Peter Peterson, retired and Mr. Schwarzman received a 100% voting interest.
Within the past 12 months, Blackstone closed a $16 billion private equity fund after four years of fundraising, a $13.3 billion real estate fund, a $4 billion mezzanine fund and its $2.5 billion first-ever energy fund. Mr. Schwarzman helms the group responsible for the firm's entry into the tactical opportunity separate-account business, gaining a total of more than $1.2 billion from the $71.8 billion New Jersey Division of Investment and the $245.3 billion California Public Employees' Retirement System.
Stockholders may have a different story to tell. Blackstone shares have not been in the same neighborhood as the $31 per share IPO price since 2008.
Talk about rumors that Jonathan Gray, head of real estate, is your heir apparent. The whole succession discussion is mostly a journalistic creation. When we went public in 2007, I designated Tony James (president) to succeed me if anything happened to me. ... I have no intention of retiring. I love my job. I love Blackstone. It's a fascinating opportunity to help grow a business, particularly given the breadth of what we do and the geographic diversity. From talking to Tony, he has no intention of going anywhere and he is quite happy at what he does. Below that level ... we have a lot of terrific people here and a cadre of next-generation people who are running all of our major businesses, which are all doing pretty well. ... Were anything to happen to any of us, there would be excellent people who could step up and do things.
What are some of Blackstone's new strategies? We started a new area called our tactical opportunity funds. What we are doing are separate accounts for large institutions to invest for returns in the midteens with very low risk, utilizing market discontinuities in all of our four major investment businesses. It's the only time we are investing in all of our four areas in one set of separate accounts. ...
This is run by one of my partners, David Blitzer, and ... we have the heads of all four businesses ... with Tony James and myself ... We are looking at investments that don't fit the mandates of existing funds so there won't be any conflicts of interest. So it's actually like watching a master class when an investment opportunity comes in and you have different philosophies of what makes a good investment.
Did you give investors in recent funds fee breaks? Whatever the small fee pressure we have is mitigated by the significant increases in alternative assets that we are managing because of the general pools of capital of dramatically underperforming assets. There are relatively few choices.
Typically, in a fundraising environment that is more difficult, occasionally you give a concession for early closers or early closers of a certain size. And what happens in those situations is that it doesn't work so badly for both sides because we get higher allocations from those participants.
What do you think of the argument that private equity returns are similar to a portfolio of levered stocks? I don't think that is arithmetically true, but private equity is a lot different than a portfolio of stocks, and the reason for that is that you buy control of companies as a general rule. That means you can control management and you can control strategy, unlike a public market investor. When a public market investor has bought into a company that isn't performing the way they want, they basically have one choice, which is to sell that security at a loss. In private equity, we start each deal with a plan to improve it. ... It's a major part of value creation and typically results in around 70% of value creation. The balance is buying at the right price and hopefully selling it at a high multiple. The third piece is debt pay down and the fourth piece is the use of leverage. So there are four mechanisms for increasing return.
In our firm's history just in private equity, we have averaged 900 basis points over the stock market (measured by the S&P 500) So, I would doubt you would get that by just buying stocks. In real estate it is 1,100 basis points over the stock market over 20 years.
What were the reasons for going public and did the IPO work out the way you thought it would? First, my partner was in his 80s and wanted to retire and the way we structured his stock resulted in a repurchase at book value, which, as we found out, was billions of dollars less than what it would have been if we hadn't gone public. I felt that was the right thing to do for him since we started the business together.
Secondly, I had an intuitive feeling that we would need more capital in the business for a rainy day. I didn't realize it would start raining as soon as we finished our deal, but I just wanted to have more capital in the business.
Third, we wanted to be able to have currency to be able to buy things to expand.
Fourth, I thought it would be an interesting branding moment for the firm, where we could become much better known internationally. ...
Fifth, I thought it would be good for my estate that they would have some wealth if something happened to me.
Sixth, I saw the advantage of expanding the incentives we could provide employees through the use of equity securities.
Seventh, I thought there would be some type of “X” factor that was unpredictable to happen as a result of doing this. I didn't know what it was, but I thought something would happen and it did. Without us doing anything, we had several sovereign wealth funds approach us to take major interests in the firm. One of them had not even been formed yet. ... (That) was China, where the government approached us to invest $3 billion in our offering. ... (The offering) was meant to be initially $4 billion, and we increased it to $7 billion and created a partnership with what became China Investment Corp. ...
I hadn't definitely decided to do (the offering) until I saw what the full prospectus looked like and we wrote a section ... called, “We intend to be a different kind of public company.” I wanted to make it clear, so there would be no confusion, that we are running the company to optimize returns for limited partners and reduce or eliminate our fiduciary duties to public unit holders. ...
And since we've been public, the only real disappointment was the price of the stock, which went down as a result of the financial crisis where all financial stocks declined.
The only other unfortunate aspect is that we're more subject to public scrutiny in a bad way — not in terms of our financials but I've become a bit more of a personality and a lightning rod, which no one likes but that is apparently what happens in modern America if you are involved with a public company.