If Blackstone’s Steve Schwarzman Had To Do It All Over Again, Would He Still Pick Finance?

That there is a marked absence of women in his autobiographical book—What It Takes: Lessons In The Pursuit Of Excellence. Except for mentions of close family, and brief interactions with female politicians or celebrities. The mentors, partners, dealmakers, competitors... are all men. Maybe, that speaks more of the golden age of finance in which Schwarzman built his firm, Blackstone, now one of the world’s largest alternative asset managers.

He also paints a much gentler, diffused image of this alpha world than you’d see in, say, Wolf Of Wall Street. Sure, there’s a brief reference to hopped up, shirt tearing traders at one firm. A hint of soul-destroying culture at another. There’s cutthroat deal making of course. But for the most part, the world Schwarzman describes is almost a Disney-esque adaptation of the toxic finance culture that almost took the world down in 2008. I can’t say if Schwarzman, a middle class boy who fearlessly grasped every opportunity that he got or could make, had an invisible hazmat suit through it all or makes it seem that way in the book. But he, at least in the book, remains largely uninfected, by it all.

The book is why I had a chance to interview him—as he made a brief stop in Mumbai.

What It Takes... is an introspective account of the business and leadership lessons Schwarzman learnt as he, and co-founder Pete Peterson, built Blackstone over three decades starting 1985. It’s an episodic narrative, with the import of each experience concised into pithy chapter headlines: The Best Way To Learn Is by Doing; The Harder the Problem, the More Limited the Competition; Money Is A Poor Cure for a Bad Situation... and my favourite one... Time Wounds All Deals.

Through the many incidents and stories in the book, Schwarzman espouses two important principles on picking a business idea, and making it work.

• “If you are ever going to dedicate your life to a business, which is the only way it will ever work, you should choose one with potential to be huge.”

• “We applied our usual three tests for a new line of business. It must have the potential to be hugely rewarding for investors. It must add to Blackstone’s intellectual capital. And it must have a 10 in charge of it.”

By 10, he’s referring to talent best suited to run new businesses. In 1985, having quit Lehman Brothers, Schwarzman teamed up with Peterson, his mentor and former Lehman Chairman and CEO, and the two spent days brainstorming about the business they wanted to start up together. Eventually, they decided it would focus on M&A advisory and leveraged buyouts, but also new business opportunities.

In the book he says, “Pete and I thought of the people we wanted to run these new business areas as “10 out of 10s”. We had both been judging talent long enough to know a 10 when we saw one. Eights just do the stuff you tell them. Nines are great at executing and developing good strategies. You can build a winning firm with 9s. But people who are 10s sense problems, design solutions and take the business in new directions without being told to do so. Tens make it rain.”

Watch | Blackstone Chairman and CEO Stephen Schwarzman in conversation with Menaka Doshi

Edited excerpts. (Author’s notes in italics)

Fear?

Somewhere early in the book, in a chapter titled All Deals Are Crises, Schwarzman writes about how he struck the second biggest M&A deal that year (1978). It was the $488 million purchase of Tropicana by Beatrice.

“I had had no sleep, had no partner with me, not even another associate, and I had never done a merger. You are in such trouble, I told myself. What are you going to do?”

Menaka Doshi: The first thing that struck me about your story, is the apparent absence of fear. Calling the Harvard Dean of admissions as a young student seeking to study at Harvard. Or doing the Tropicana deal with little preparation. Or starting your own firm and raising a billion dollars in the very first fund. You don’t seem to suffer much self doubt.

Steve Schwarzman: I think you just asked a really great question. I have fears like other people but not in certain circumstances. I don't worry about certain types of things if I've evaluated them and I think they're going to work. I try never to do anything that I'm not really comfortable with. If I get trapped in a situation, like doing the second largest merger in the world when I’d never done a merger and there was nobody else around, I figured I don't have an alternative, I've got to figure it out and I reached out to some of the senior partners in my firm; who gave me some of the basics so I could go on.

But fundamentally, I think what you're observing is I'll go and do things other people won't - not because I have no fear but because I've thought about them and I just totally believe that those things will work and that's when I go forward. Once I go forward, I don't stop. I may have to mid-course correct, but other people don't do some of the things I do. I think that's because other people don't like change. They like doing what they're doing, they're very happy with it even if it's not working so well. Their desire to actually change (is low) as opposed to giving lip service to changing.

I just look at the world every day, and you know it's a new day, and what’s happening and what do we have to be doing and what will work and what isn’t going to work. I have a sort of a non-emotional approach to that because it's not about emotions, it's about the world and the ability to look at it and assess it. I'm comfortable going in some other directions because I can articulate to anyone why I'm going there. It's not just happenstance.

The Rise Of Alternative Assets

Founded in 1985, Blackstone helped build the alternative asset management industry, now estimated to have exceeded $14 -15 trillion globally. In recent years institutional investor interest has expanded from financial firms to pension and sovereign funds. Institutional Investor reports, that in the past decade alternatives have risen from 5 percent of allocations at pension and sovereign funds to 25 percent. Blackstone competitor Brookfield predicts that by 2030, more than half of sovereign and pension funds’ allocations will shift into alternatives, and allocations by endowments and insurance companies could climb into double-digit-percent.

Then there’s private wealth-chest waiting to be opened.

Menaka Doshi: How do you see the alternative asset management industry grow from here on? Given there has been a considerable shift in (institutional) investment approaches over the last several decades, away from more conventional instruments of investment like equity into things like real estate and infrastructure that your firm invests in.

Steve Schwarzman: Well, the reason why it's a really interesting and important asset class, is that you have the advantage - unlike when you buy a stock where you don't quite really know what's going on within that company. Everything that we do, we get what’s called due diligence - which means we can investigate that company or that real estate completely by signing a non-disclosure agreement, which means we won't do anything with that information or tell anybody else about it. The way we generate returns is we take that company or that real estate and we figure out how to make it grow faster, how to make it better. The faster we grow the higher the multiple of earnings when we sell it, the more people we’ll hire, and it’s very positive type of thing and we can analyse it before we buy that asset.

So historically, over decades we've made about double the profit doing that as the stock market has. That would be logical because you're growing the companies faster than the average company and you're putting some debt in it which amplifies it mathematically in terms of the return. I don't see that changing and we keep moving from different parts of the world, different parts in the capital structure, and as long as we can generate superior returns with very little risk - then that part of the money management business will continue growing. By the same token, index funds - which charge very little are growing rapidly, and it's the long only money managers in between that are shrinking or at best staying about even.

So, I see there has been continued growth particularly for firms like ourselves - which as people tell us, I don't have to represent it, that we have a really great brand name. So, people trust us and the most important thing we can do is always have excellent products for people to buy.

The India Story

Blackstone has invested $15 billion in India in the 15 years it’s been here. $6 billion of that was put to work in just the last one year.

Over 50 percent of the investments are in real estate - the firm claims it is the largest owner of Class A office space in India, with a portfolio spanning over 70 million square feet across key office markets and IT hubs. It’s also focused on warehouses and malls.

As for private equity investments - they’ve ranged from IT (Mphasis Ltd.) to packaging (Essel Propack Ltd.) to finance (Aadhar Housing Finance Ltd.). The one unifying theme is ‘control’, says Amit Dixit, senior managing director and head of private equity in India, something they couldn’t pull off in the early years in India.

Menaka Doshi: You’ve been in India for over a decade and in many ways developed the alternative asset management industry here as well. Today, your real estate investments or assets in India are larger than your private equity investments. Can you talk us through how you view the Indian economy, the stage of growth it is in. We've had some setbacks in the last year or so - at what point do you see us close to our potential?

Steve Schwarzman: Well, I don't think you're at your potential at all. India’s now the fifth largest economy in the world which is really amazing because I remember meeting with the finance minister in the early 1990s when India was changing its economy and moving in a more open way and the change has been amazing. I think what's going on now is it appears to be somewhat discouraging to people in India because growth rates are down in the 4 to 5 percent area which is a lot lower than it has been. Inflation is up. A part of the problem, when looked at as an external person, is that the banking system here is going through some type of readjustment and having difficulty extending credit. If a banking system isn’t healthy and can’t extend credit, then economies don't expand. We've seen that around the world. We've also seen situations where banking systems become somewhat encumbered by non-performing loans and there are standard ways that you deal with (that). You have to, over time, clean that out and put new capital in financial institutions.

Indians have found ways to grow. They are becoming better and better educated. For example, 7 times as many engineers are graduating in India than the United States. The information technology area is really growing. India's going to have the youngest working age population - 35 and under - in the world. Now to the extent that the education keeps improving here, India has gone from being almost not connected to the Internet to now being one of the leaders in that area. I see a lot of potential for India.

Menaka Doshi: Are you discouraged or disappointed in the policy reaction to the growth slowdown in India or do you believe that the government and the regulatory agencies are doing the right thing?

Steve Schwarzman: Well, I I'm a foreigner so I don't get involved in local politics.

Menaka Doshi: You just raised the biggest real estate investment fund in history, at $20.5 billion. Will real estate continue to be a core area of investment for you, in emerging markets or countries like India?

Steve Schwarzman: I would say that real estate is our biggest business now and it’s growing very rapidly. Private equity is still growing quite rapidly, and real estate will be a core, particularly here in India. It's been great for us - we did the first real estate investment trust (Embassy Office Parks REIT). I think the stock is up very substantially, though that changes day to day. The demand for new real estate in India is quite high as India's tech businesses are growing rapidly and the world relies on that. It's a real advantage operating in English, which is sort of the global language, if there is any global language. The people work hard here, the proposition is really good compared to other parts in the world. More and more people are continuing to offshore, and India benefits from that trend. We’ve sort of positioned ourselves in real estate. We don't buy all real estate, we were very disciplined as to what we like. We like office buildings with service tech. We’re the largest owner of office buildings in India. We are buying warehouses because that benefits from the internet in terms of shipping and positioning goods. We're doing quite well in the mall business here. So, we'll stick to what we do and then we'll do more and more of it.

Calling Tops And Bottoms

In his book, Schwarzman lists three rules for identifying market tops and bottoms;

• When buyers become overconfident and believe “this time is different”
• A surplus of relatively cheap debt capital to finance acquisitions
• The number of people you know who start getting rich

But, he admits, timing the bottom of a cycle isn’t easy.

Menaka Doshi: There's an aside in your book on calling market tops and bottoms. In an age of negative interest rates and sustained central bank intervention - how much tougher has it gotten to call a top or bottom?

Steve Schwarzman: The answer is no; it has not become more difficult. Sometimes you see things that really don't make any sense - that's when you know you’re dealing typically with the top. I mean, tech valuations - whenever people start valuing things on measures nobody's ever used because conventional measures don't work, that's a wake-up call. When people issue securities that require, for example, no interest payments - usually people who lend money want to get interest - that’s usually a wake-up call. There's certain wake-up calls, (but) that doesn't mean that the world is going to end the next day, but it does mean it won't continue like that for a long period of time.

Tech valuations for example, we’re the largest owner of real estate in the world, we were looking at this company, WeWork, which was basically just leasing buildings and sub-leasing space for two to three years. What happens if you have a recession and you own all these buildings with the 10-year lease and all of a sudden rents go way down so that you can't even operate your existing business at a profit. This is not a high multiple business and they just kept growing and trees don't grow to the sky and neither do WeWorks.

Now, there are other companies that don't earn money, they aren’t going to earn money and not all companies have the outcome that Amazon does. Amazon was like a genius company and not all companies are genius companies. So, when you see things like that, you sort of go, ‘hmm, that's new, could that be right?’ The answer is maybe, but also maybe not. So, I don't think seeing tops is particularly difficult.

Actually bottoms are interesting too - because you usually invest before you get to a bottom because you think it's a bottom.

Failure?

Menaka Doshi: The other thing I thought characterized the book was the absence of failure. There are setbacks, challenges, difficulties in the process of building out Blackstone. But the only instance you mention failure was the Edgcomb steel investment. From there came the foundation of how Blackstone decides to make investment decisions. That seemed to be the only real big failure I could identify in the book. Can you recall others that, maybe, you didn't choose to include?

Steve Schwarzman: Oh, my goodness yes, we fail we get some things wrong and the Edgcomb thing was so profoundly a failure because I learned that I wasn't so smart. So, the reliance on me alone, which is what most people think they're smart or they're knowledgeable or they know how to handle something. Can you imagine being responsible for an organisation and recognising you didn't have all the capability you needed to protect the organisation, to protect the investors. That was, you know, sort of pretty shattering for me because I had all that responsibility and even worse, I created it for myself. So, I had to come up with something different that ends up being much better than one smart person. We created a whole approval mechanism and an inquiry system on any investment so that it's very adversarial - intellectually, but not interpersonally. It's important that it never be personal, and that was setting up a process. They can be adapted anywhere in the world to evaluating almost anything and so that was a failure that resulted in change.

There are other kinds of mistakes we’ve made. Every organization that makes a lot of decisions periodically makes an error - never the same one twice.

Menaka Doshi: You lived through a golden age of finance - if you had to do it all over again, if today was 1985 and you were building out Blackstone, what would you pick? Because you've mentioned repeatedly in your book that finance was not what you necessarily started with - you weren’t very good in math, you didn't know much about the stock markets. What would you pick if you had to do it all over again?

Steve Schwarzman: The way my life has worked, those handicaps that I had were obviously offset by some other good stuff, and finance is still an amazing business because they keep printing so much money. Every government is running deficits, printing money - more and more money. So, being able to do something with all that money as it is available.

One field that’s really pretty an open field - it is in the technology area. There's an enormous amount of innovation going on there with the advent of AI and then later, quantum. We’re going to see a variety of fascinating things that people couldn't anticipate, and I happen to have no particular gift in that area. On the other hand, I had no particular gift in finance. I just sort of got into a field that I thought was going to be good, and as it works out, it’s a lot less about mathematics and things of that type than it is figuring out human behaviour and identifying patterns in in the world - which you can see just because you're observant. Getting a pattern right before other people, marshalling human resources to pursue that - that's pretty good paradigm for success.

Menaka Doshi: As you pointed out in your book your initial ambition was to be a telephone switchboard operator...

Steve Schwarzman: Yes, that was a funny one. I was interviewing my last year in university for a job and you know nobody gave us training then, there were no databases, there was no internet. So, you just sort of made up whatever you were doing, and I forget which company was interviewing me, and they said what do you want to be later in your career, or something like that. I said, well I want to be a telephone switchboard, and that sort of ended the interview. Most people don't show up as an inanimate object and the guy just sort of looked at me and I realized I had said the wrong thing to be successful at the interview because he wanted a different answer. I wasn't smart enough to know what answer he wanted, so I was just sort of open and honest because what I wanted to do and what I've ended up doing is - basically having inputs come in to the system, twirl them around, think about them and then they go out you know, and connect with other people. That was my vision of what a telephone switchboard did and that's sort of what I do for a living - but now I could sort of admit it because people will tolerate it. Back when I was 21 years old, there wasn't a lot of appetite for that as a visualisation of somebody's career.