01 Jun 2007
Chairman and CEO, The Blackstone Groupby Roger ThompsonTopics:
Last year the U.S. private-equity business set a number of impressive records: most money raised at $375 billion, most deals closed at 654, and biggest buyout ever at $38.9 billion. Of all the names associated with this surge in taking public companies private, none has shone more brightly than The Blackstone Group and its chairman and CEO, Steve Schwarzman (MBA ’72). Fortune crowned him “the new king of Wall Street” on the cover a week before his 60th birthday on February 13, celebrated by a gala event attended by hundreds of prominent figures in business, politics, media, and the arts.
With a personal fortune estimated by Forbes to surpass $3.5 billion, Schwarzman has come a long way since leaving Lehman Brothers in 1985 to cofound Blackstone with start-up capital of $400,000. Blackstone today has 52 partners and 770 employees, and controls 47 companies with annual revenues exceeding $85 billion. Under Schwarzman’s leadership, the firm has diversified into hedge funds, real estate, corporate debt, restructurings, and mergers and acquisitions. In late March, Blackstone surprised the investment world by unveiling plans to go public.
The rise of private equity here and abroad hasn’t gone unchallenged. The Justice Department has launched an investigation into whether buyout deals involving multiple private-equity firms are anticompetitive. In Europe, critics are campaigning for new government regulations. In a recent interview, Schwarzman defended his industry and cautioned that the good times can’t go on forever.
Private equity’s been all over the headlines for months. Why is it suddenly such a big deal?
Over the last ten years it has grown from 5 percent of total mergers and acquisitions to 20 to 25 percent. It hit a tipping point in public consciousness as private equity has bought more companies and larger companies, some of which are household names.
Last year, private-equity firms raised a record amount of funds. Do you expect another record this year?
I don’t know. I’m not the fundraising expert in that sense. A lot of the large funds did raise money last year, so I wouldn’t be surprised if their success represented an unnatural spike in the fundraising cycle.
Was it more difficult to raise money five or ten years ago?
Oh yes, it was much more difficult. It was much more like missionary work, although there is still some of that today. A lot of investors were not as familiar with private equity, so we needed to basically spend time just trying to explain what was going on.
Private-equity firms have borrowed billions at low interest rates to buy target companies. Will the low rates continue for the foreseeable future?
Conditions have really been almost as good as they can be over the last year or so. It’s reasonable to expect that will change because financial markets never remain stable by definition. So I would expect a less favorable credit environment to develop in the future.
Blackstone briefly held the record for the largest buyout, Equity Office Properties at $38.9 billion, which was eclipsed by the recent $45 billion TXU deal. How big can deals go?
I don’t know. That’s a game that people always like talking about. I don’t like talking about it because there are all types of structures that can give you different answers. So I’m not into that kind of speculation.
Bigger isn’t necessarily better?
No. The issue is, where can you make excellent returns with minimum risk? And sometimes that occurs on a very large deal. Sometimes it’s in a smaller deal.
We don’t look at deals to try and do big ones. That would be putting the cart before the horse.
Does Blackstone have a strategy that distinguishes it from its chief competitors?
First, we do a lot of corporate partnerships that are joint investments with corporations to buy assets. Secondly, we tend to be quite risk-averse. If we think the economy is going to get weaker, we tend to buy companies that do better than others. In a weak economy, when we see potential for a big rebound, we tend to buy cyclicals because those companies tend to do the best in the early stages of an economic recovery.
The key in our business is to avoid loss. I know that sounds simplistic. But it’s really important to have good downside models and downside planning on any potential investment.
Insiders estimate that Blackstone’s return has been at least 30 percent for the past five years. Is that accurate?
For a variety of reasons, we can’t disclose exactly what we earn. Consistently across the firm’s products, we’ve been a strong top-quartile performer.
In Europe, some labor leaders and government officials have called private-equity firms “asset strippers” and “locusts.” Your response?
A lot of that hostility has occurred based on incorrect information and the fact that private-equity firms basically have not dealt with the press. Because private-equity firms have not discussed the good things that they accomplish, the labor unions have been allowed to take one or two situations where there have been deep personnel cuts and make it look like that’s normal. In fact, there have been at least five studies done in Europe across a variety of countries that show that private-equity buyouts increase employment in target companies at a significantly greater rate than other private companies, as well as public companies. The studies also show that private-equity companies are the fastest-growing category of firms in their countries.
Is the rising chorus of critics the reason that Blackstone and ten other private-equity firms recently launched the Private Equity Council to lobby on behalf of the industry?
Yes, that’s one of the reasons. In general, the private-equity industry recognizes that it has to tell its story and compete in a marketplace of ideas. I think it’s pretty widely accepted now that private-equity firms have suffered in terms of being mispositioned.
Do you worry that the collapse of one major deal could trigger government regulators to tighten the screws on the private-equity industry?
It’s inevitable that one deal will get in trouble, just purely from a statistical point of view.
A lot of negative comments are being made from an odd perspective lacking historical context. Right now we’re at a 26-year low for financial defaults. So when someone asks whether we are going to have problems with increasing levels of defaults, I think it’s almost self-evident. Of course there will be higher levels of defaults when you’re at a 26-year low. That’s the way the financial cycle typically works. That should not come as a surprise.
Are China and India the next green pastures for private-equity dealmaking?
I think those areas will develop slowly. Culturally, in most of Asia, selling a company represents a defeat for the owner rather than a triumph. Outside Japan, Asian companies are basically seeking growth capital. And given the demands for growth capital, leveraged purchases aren’t necessarily the right financial structure for most companies. In Japan, the number of private-equity deals is slowly increasing, but they are still at quite a low level by the standards of the United States and Europe.
What about South America?
It’s hard to comment on South America as a whole continent. It has had periodic financial crises, so one needs to be careful in an environment that has experience with mixed levels of growth and historic high inflation. That doesn’t mean those things are going to happen tomorrow or the next day, but it does make one a bit more wary than in other parts of the world.
When you started Blackstone 22 years ago, what were your goals? Have you fulfilled them?
When we started the business, we actually wrote a letter to potential clients. We said that we were going to do three things. First, we were starting an advisory business in mergers and acquisitions. Second, we were going to start a principal investing activity, what you’d now call private equity. And third, we were going to try to attract extremely high-talent individuals who would be able to help us expand our business continually over the years in areas that we couldn’t delimit at that time.
In fact, we followed that basic blueprint, and we’re doing more or less what we set out to do. It has gotten to a larger scale, but each of our individual businesses is quite small in the numbers of people.
When I was at Lehman Brothers, we typically were doing some of the largest deals in the world. And the fact that we’re doing that now at Blackstone is not surprising. It’s consistent with my training as a younger person.
What’s your advice to new MBAs who want to sign on with private-equity firms?
Private equity is a very good business to be in. I think finance generally provides an enormous number of opportunities for young people. It’s a business that highly rewards and appreciates very smart, very analytic, very driven, and highly articulate people. In finance, the pie can always be made bigger. There’s great flexibility to go from one area to another, so I think the finance business remains extremely exciting for MBAs.
Class of MBA 1972, Section H