Steve Schwarzman Starts Warming Up
MARIA BARTIROMOYou told investors in a conference call on Nov. 6: "We see the world changing once again, at least for private equity. The worst is behind the industry." What did you mean?
STEPHEN SCHWARZMANObviously, the improvement in the economy makes an enormous difference. That's been exceeded by the improvement in the markets. We've had much lower interest rates, and equity markets around the world have recovered, which provides a lot of options for us in terms of exits. Institutional investors have been concerned about getting more money back from the private equity investments they made. So it looks like that's starting to flow. And we can see within our own portfolio the opportunity to have exits for our investors.
It seems as though many firms are trying to get out while the getting is good and take advantage of the recovering economy. You're planning to list up to eight companies and sell at least five others. Is that right?
That's the way it looks at the moment. You know, that can change up or down. But that type of alternative for us as managers in private equity really wouldn't have been there three to six months ago.
So what's the biggest change on Wall Street and the lessons learned over the past two years?
The changes on Wall Street are immense. There are major players who no longer exist, and the remaining players are making more money because there are fewer competitors and bigger spreads. And you're seeing a revolution in terms of the potential regulatory structure.
When you look back at the boom years for private equity, were they good for the American economy or just good for private equity?
I think it's pretty clear those boom years led to excess. Leave aside private equity for the moment. When you look at the impact of rating agencies on subprime loans and the ability to create leverage in the system generally, it's pretty clear that was way overdone. The American consumer over-borrowed. Real estate was over-leveraged. And to some degree, private equity was paying too much money for companies. And we had a regulatory regime that was set up in the 1930s and could not cope with modern types of securities.
You know, I was looking at one of our interviews from a couple of years ago, right in the middle of the boom. I said to you: "How easy is it to do a deal today?" And you said: "Look, I could do a $30 billion, $40 billion deal in a very short period of time with no covenants." What kind of a deal can you do these days?
Well, fortunately, Maria, we didn't do many of those. And the world has changed quite dramatically. You know, you can do transactions in the $3 billion-to-$5 billion range. The amount of debt you can borrow is probably in the five-times-cash-flow range. That's down from as high as 11 at the peak. And the equity in the capital structure, which got as low as 10% at the top of the cycle, could be in the 30%-to-45% range now. You actually have to put in pretty good-size equity checks to do reasonable deals. But deals of a few billion dollars that require $500 million of equity or deals at $3 billion to $5 billion that require a billion dollars of equity—that's still quite a big equity check in the old world or the new.
So would you put money into some of these depressed areas, whether it's retail or the consumer-related areas or financial services?
I think you have to be selective. We're buying the Busch amusement parks. And we're buying at what we believe is a very good price.
Are you interested in resources? We're seeing so much money move into commodities.
Resources are interesting, but you have to be really careful. There's been a huge cyclical rebound in resources—and not necessarily because those commodities are being utilized in what is a slowly growing global economy. Those resources are going up because the world is getting a little unsure about paper money. And different types of resources—gold, hard resources to some degree, oil—are used as offsets for currencies that are subject to the fiscal deficits of governments around the world. So, we like resources, but we're a little cautious given how much commodities have run up.