Blackstone Group LP’s Steve Schwarzman said his decision 19 years ago to sell what would become the world’s largest money manager was a “heroic” mistake.
Blackstone, the largest manager of alternative investments such as private equity and real estate, in 1994 sold a mortgage-securities unit with $23 billion in assets to PNC Bank Corp. for $240 million. Schwarzman, Blackstone’s co-founder, had disagreed with the group’s leader, Laurence Fink, over methods of compensation, and the men parted ways. The unit, which traded mortgages and other fixed-income assets, changed its name during the sale process from Blackstone Financial Management to BlackRock Financial Management.
“That was certainly a heroic mistake,” Schwarzman, chairman and chief executive officer of New York-based Blackstone, said in an interview with Arthur Levitt airing on Bloomberg Radio on Oct. 6. “We all stumble on and have some success. But it’s a humbling experience to see what you don’t do right.”
Today, BlackRock Inc. (BLK), which Fink leads as chairman and CEO, is the world’s biggest money manager, overseeing $3.86 trillion in assets, dwarfing Blackstone’s $230 billion. It has a market value of $46 billion, compared with Blackstone’s $28 billion.
Schwarzman, 66, is ranked 137th on the Bloomberg Billionaires Index with a net worth of $8.8 billion. He personally had a stake of more than 9 percent in the business when it was sold, which would be worth more than $4 billion at New York-based BlackRock’s current market capitalization.
Schwarzman and Blackstone co-founder Pete Peterson were drawn to Fink in 1988, when the First Boston Corp. banker was recommended as “by far the most gifted person” at the bank by Bruce Wasserstein, then First Boston’s co-head of mergers and acquisitions, according to “King of Capital” by David Carey and John Morris (Crown Business, 391 pages, $11.59). Blackstone gave Fink and his team, which included now-Evercore Partners Inc. (EVR) CEO Ralph Schlosstein, a $5 million credit line in exchange for a 50 percent stake in the bond business.
The business turned profitable within months, according to the book. By 1989 Fink had more than quadrupled the group’s assets to $2.7 billion. The stake held by Blackstone’s partners had fallen to 40 percent as Fink’s staff grew.
By 1992, Blackstone’s stake was about 35 percent, according to the book, and Schwarzman and Fink were planning to raise more money for the group by selling shares to the public. Fink wanted to be able to award new hires a stake in the business as a way of luring them from top banks.
Schwarzman drew the line, not wanting to drop Blackstone (BX)’s stake any further, according to the book. He resisted Fink’s demands to sell the business until agreeing to offload it to PNC in June 1994. Blackstone’s partners made more than $110 million, with Schwarzman receiving $25 million, the book says.
Since then, the two have reconciled, according to a 2008 BusinessWeek account of Fink’s rise. Fink has attended Schwarzman’s birthday parties and they have given speeches together.
“It was a very bitter divorce,” Fink said in a 2011 interview with the New York Times. “But I don’t regret it. I’m larger. I’ve never heard from any source in the world anything but praise from Steve about who I am and what BlackRock is.”
Levitt, who interviewed Schwarzman in two parts at Bloomberg’s headquarters in New York, is a director of Bloomberg LP, parent of Bloomberg News. He was the longest-serving chairman of the U.S. Securities and Exchange Commission, leading the SEC from 1993 to 2001.
Asked what worries him most in the current environment, Schwarzman said dysfunction in the U.S. government, such as disagreements between and within the White House and Congress regarding debt, health care and taxes, hinders all businesses.
“It’s now become almost structural uncertainty,” Schwarzman said in the first part of the interview, which aired yesterday. “The biggest issue that worries me is just overall effective functioning of the U.S. government. The periodic crises and dysfunction in Washington creates problems for all of us.”
To contact the editor responsible for this story: Christian Baumgaertel at firstname.lastname@example.org