Where Blackstone's Schwarzman Sees the Next Bubble

Stephen A. Schwarzman, co-founder, chair and CEO of big private equity firm Blackstone, has just released an autobiography, “What It Takes: Lessons in the Pursuit of Excellence” (Avid Reader/Simon & Schuster-Sept. 17).

An apt subtitle also would be “Lessons in the Pursuit of Deal-making.”

The sometimes controversial investment manager reveals how he rose from his first job, at Donaldson, Lufkin & Jenrette — at which he “would cower in [his] office hoping no one noticed [him],” he writes — to building Blackstone, the world’s largest alternative asset manager. It boasts assets under management of $545 billion.

In an interview with ThinkAdvisor, Schwarzman, 72, discusses his method of finding investment opportunities, where he sees a market bubble right now and whether he forecasts a recession on the horizon. He was an early detector, in 2006, of big trouble in the housing market.

Schwarzman turned down President Donald Trump’s 2017 offer to join his administration but has since counseled him and chaired the president’s short-lived Strategic and Policy Forum of business leaders.

Last year the manager, who founded a fellowship program in Beijing, made eight trips to China on behalf of the White House. In the interview, he explains Trump’s U.S.-China trade objective.

At 10, Schwarzman was working for pay in his family’s linen store. Then it was on to Yale University and Harvard Business School. Following his Wall Street initiation at DLJ, in 1972 the investment banker moved to Lehman Bros.

Thirteen years later he and Peter Peterson, previously chair-CEO of Lehman when Schwarzman was there, co-founded Blackstone with $400,000 in startup capital. Peterson retired from the firm in 2008.

Blackstone’s clients include large institutional investors, pension funds and insurance companies, as well as individual investors.

Schwarzman, who is worth $18.3 billion, according to Forbes, is a notable philanthropist who has given billions to Yale, the Massachusetts Institute of Technology, the University of Oxford and the New York Public Library, among other institutions.

ThinkAdvisor recently interviewed the Philadelphia native, who spoke by phone from his New York City office. He took the opportunity to point out that by reading his book, “financial advisors could learn how their clients are thinking. It can teach advisors to be more effective in relating to their customers.” Indeed, he stresses what he claims has been one of his most important strengths: being a good listener.

Here are highlights of our conversation:

THINKADVISOR: You made eight trips to China on behalf of the Trump administration in 2018, assuring officials that the president “was not looking for a trade war,” you write. Please elaborate.

STEPHEN SCHWARZMAN: I think he wasn’t.

What was he looking for?

A rebalancing of the relationship. That rebalancing didn’t occur through regular negotiation. As a result, the tariffs started. The objective is to have a much more balanced and open market system with similar tariffs going both ways at, hopefully, much, much lower levels so that the best products and services from each country prevail.

How would that happen?

You can’t make somebody win or lose. That’s up to the goodness of the products and the prices. The objective was, over time, to have that normalized and be much closer to even between the two countries, [with] equal market access and intellectual property retention.

Some experts are predicting that a U.S. recession is imminent. Are you of that mind?

If I remember correctly, they said the exact same thing last December! And we didn’t see it. Now, we do see the economy slowing, [but] we still have 70% of the economy in the consumer area, which is quite strong. So it doesn’t seem likely that any type of recession will happen in the short term. You would need something that really shakes confidence. Typically, those are geopolitical things rather than just an economic cycle. So I don’t think [a recession] is going to happen, in the United States, at least.

You write that when a market bottoms, people should invest only when values have recovered at least 10% from their lows. Why wait?

When you’re in a really deep recession, the problem usually is that you buy too early — you buy on the way down because you think that’s the bottom. So there’s that problem. Then, when you’re actually on a bottom, often people won’t sell you things — they’ll sell you stocks but typically won’t sell you companies because everything has lost so much of its value that if they don’t have to sell, they won’t. And sometimes, if you do buy something, it could stay at that bottom for a few years. This is like money that’s making nothing.

So, if you wait, what’s the biggest benefit?

If you wait till the economy starts recovering and markets start recovering as a confirmation, then you really can load the boat. You may miss the first 10% or 20% of the economic recovery, but you’ve got 80% left. That’s enough. And you’re catching things as they’re happening rather than hoping they’ll happen.

You write that the notion “no one can see bubbles” isn’t true. Do you see a bubble now?

Certain types of privately owned tech companies are clearly bubbles. Look at what happened at Uber and WeWork. Those are the fruits of a bubble. This is where you have very interesting ideas or companies providing a service at very big financial losses. Because Amazon managed to do that successfully, everyone assumes that every other [such company] will do the same. I don’t know if that will turn out to be true. What people will pay at the top of that cycle ends up, retrospectively, being quite unrealistic.

In 2006, you saw — early on — many problems in housing and a crisis on the horizon. What were the signs you observed?

AIl of a sudden, in a very short period of time, we had three big suppliers to housing show up saying they wanted to sell their family companies. Why are they all showing up in a month and a half? What do they know? And then, as we were trying to buy real estate, we saw [housing troubles], first in our private equity business and then in real estate itself.

What did you note specifically?

We could see, sort of, huge valuations for raw land in India; we could see huge oversupply in Spain and 25% increases in housing prices in Palm Beach. You put all that together, and it’s pretty clear that you’ve got some kind of residential housing excess going on. So, all you needed was knowledge of what was happening. It was pretty easy to see. We didn’t get hurt like most other financial institutions as a result of housing.

Nonetheless, in February 2009, Blackstone’s share price dropped from $31 at the time of your June 2007 IPO to $3.55.

After the global financial crisis, the average stock of a financial institution went down 85%. We were an outperformer — we went down 90%! But since our IPO, we’ve outperformed the S&P by 1.8 times. We also grew the firm six times in size since the crisis. Almost every other financial institution has shrunk.

What’s the secret to Blackstone’s success?

We look at everything through a lens of never losing money. It’s a funny kind of risk control. If you analyze things with an enormous focus on downside protection and are really good at that, and if the businesses you’re in are, for the most part, those where you can control assets and add value so you never buy anything unless you know you can make it much better than regular indices’ growth, and if you put it on leverage, then you should be able to earn roughly double the S&P. It’s just in the selection.

Why doesn’t Blackstone invest in liquid securities?

It’s very hard to outperform liquid securities. So we found over time that if we were buying illiquid securities — basically companies and real estate — we could have control of them, and before we buy, have a plan to make it much better, and if we grow much faster than regular companies and put leverage on it, we’ll get a higher exit multiple and higher growth. So, it’s a simple model. That’s why the money is basically flowing much more now to the alternatives — and we’re the largest in the world — than to regular long-only liquid managers. It’s just about performance.

Do you actively search for opportunities or wait till something happens and go for it?

Sometimes things are there. We usually look at things [according to] more of a longer-term cycle. For example, when we got into real estate in 1991, nobody could buy or sell real estate. It was completely illiquid. Well, that looked like a fantastic opportunity. And it seemed to me like a very easy thing, and pretty much nobody in the United States did it. But it was right there. You could see it.

So you pursued it, even though you lacked experience in real estate?

We had a lot of capital and no real estate knowledge. But we hired somebody who was really good and had the whole country’s assets available to us at very cheap prices. It turned out to be enormously successful. That’s how you can build something very substantial.

You’re obviously good at spotting opportunities. What comes after identifying them?

You need to figure out what you should do with them. If you’re a company like us, you can start a whole new product line. You can buy companies or other assets that benefit from what’s going on, and you can avoid buying things that might get hurt. You can do all three of those things when you assess an opportunity, particularly if other people don’t see it.

You’ve been lucky sometimes, and the rest is that you’ve made your own luck. What’s an example of the latter?

If you keep your eyes open and survey what’s going on in the world and get a lot of input, you can identify patterns of things and when a piece doesn’t fit. When something doesn’t fit, you understand that something is happening. You may not know what it is at that moment; so you have to keep thinking about it, looking to connect another dot to that one piece of data that doesn’t fit.

So you keep pondering it?

Most people just brush right over it and say, “Something doesn’t fit. Who cares?” I always look at things and say all I care about is that one piece.

With your packed schedule, how can you block out time to just think about such things?

I think a lot when I’m asleep. It’s very odd, but you can sort of mull things over in your head while you’re asleep. These are things that happen during your day; and when you don’t have any more inputs, they, sort of, float around. And so, you can play with them while you’re asleep, or half-asleep and half-thinking. It can give you a better sense of where you want to be.

Do you remember it all when you get up?

Oh, sure.

In 2016, you put together and chaired President Trump’s Strategic and Policy Forum of top business leaders, but in 2017, it was disbanded. Please talk about that.

It was really a, sort of, victim of the Charlottesville situation, which made it very difficult for a lot of CEOs to continue to be in that group. The group had a very good [mission], which was to give the president objective feedback whether he was right or wrong. It’s a shame that that didn’t continue.

You were set to announce that the CEOs were going to disband the Forum; but then President Trump beat you to it and said he was disbanding it. Were you surprised?

Somewhat. It was too bad, but it was the right decision.

In your book, you say that one of your strengths is being a good listener. What’s your advice to financial advisors — who need to listen to clients so they can learn about them and invest appropriately for them?

Usually people will tell you what’s on our mind. Once you know what they’re thinking or what their problem is, it’s relatively easy to solve it. But if you just go into a solution or a bunch of solutions without really understanding what problem you’re solving, you’ll probably bore the person. And they won’t think you’re very smart, in any case, because you’re not responding to their needs.

What’s another benefit of being a good listener?

If you listen, [clients] will make it easier for you. You have to be a good listener to solve complicated problems. It’s good in any part of the financial industry to carefully listen to what’s on people’s minds and solve their problems. It’s how you’re value-added. Just offering a product in the absence of knowing what’s really on somebody else’s mind is a hit-and-miss proposition.

For the last 20 years, you’ve been talking with a psychiatrist once or twice a week, you write. Is this something you recommend that other CEOs do? You say it helps test your intuitions.

It’s helped me more in terms of understanding the behavior of the people I work with rather than outsiders. Sometimes you’re faced with very complex problems that you haven’t seen before; so I find it’s good to have somebody you can talk to who’s got a lot of experience, as opposed to just figuring it out yourself and, maybe, having no one to test that against except reality. If you get reality wrong, you’ve made a mess.

You write that your wife, Christine, in 2008, strongly urged you to phone then-Treasury Secretary Henry Paulson to warn him about and help prevent what you saw as the impending collapse of the financial system. You told her it would be “ridiculous” to call because he knew what was going on. Yet you called him.

That’s the definition of a good second marriage!

Would you have called if your wife hadn’t persisted?

Absolutely, I would not have done that. No kidding.

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