Q&A With Steve Schwarzman: “There Are No Brave Old People in Finance”

Steve Schwarzman seems strangely content—up to a point. A decade ago, the Blackstone co-founder, chairman, and chief executive officer was astride Wall Street as the private equity poster boy, armed with record-setting deals, a momentarily blockbuster initial public offering, and a birthday party that people are still talking about.

The intervening 10 years brought turbulence to the financial industry, yet the associated regulatory and market reaction ultimately buoyed Blackstone’s, and Schwarzman’s, bottom line. Nonetheless, the company’s stock price has languished—a sore point for Schwarzman, even as Blackstone has outpaced all its competitors to become the unrivaled leader in alternative assets, the class of investments that includes private equity, hedge funds, credit, and real estate. Schwarzman himself has widened his focus to encompass large-scale philanthropy, and he counsels heads of state, most notably President Trump. Alongside the president in Saudi Arabia, Schwarzman—who chairs Trump’s Strategic and Policy Forum—announced a $100 billion infrastructure effort, with $20 billion of equity coming from the Saudis.

During two wide-ranging conversations in his Park Avenue office in Manhattan, Schwarzman ruminated on presidential politics, Chinese dealmaking, that stubborn share price, and relaxing to Law & Order after working “two and a half full-time jobs.”

JASON KELLY You’ve counseled the last three presidents. What have you taken away from that experience?

STEVE SCHWARZMAN Well, it gives you new respect for how complex it is being president of the United States. It’s a really tough job: the differences in the political parties, the difficulties of passing legislation. And then there’s the variety of the job itself—from dealing with highly complex things to doing public events without much substance. And then there’s the fact that the world never stops, and we’re just in one time zone. Washington, D.C., puts enormous burdens on people who, at the end of the day, are just humans. They come with a title, with expectations, but they’re people—and it’s really hard, in a complex, international, instant-communication world that we live in now, to be the person at the center of the vortex.

This interview appears in the June / July 2017 issue of Bloomberg Markets. Subscribe now.
Photographer: Dylan Coulter for Bloomberg Markets

JK How have your interactions with this president been different from those in the past?

SS I think that the current president is quite practical in terms of being willing to change his positions and is quite practical in terms of what’s effective, what can work. He’s very driven on execution and has some very strong ideas on regulatory reforms and changes in tax. I would say he’s extremely pro-growth, which gets described as pro-business, but it’s really pro-growth, pro-job creation. Every president has some type of ideology, and the current president is basically a capitalist who believes in efficiency. I think that’s what his ideology is. So whenever he sees something that is inconsistent with efficiency, he’ll abandon what he said before in order to get to execution. The previous government was different. They had a very strong ideology, which wasn’t necessarily as simple as capitalism.

What I’ve found in being around political people is they’re willing to negotiate their ideology somewhere around 5 percent. They believe that’s really stepping out. And it’s really hard to do business when you only move 5 percent from your ideology. So you have to take each of these people as who they are and work with them.

JK Blackstone went public almost exactly 10 years ago. As you think back to 2007, is this where you expected to be personally and at Blackstone? [Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a nonexecutive director at Blackstone.]

SS There are a lot of things that happened in 10 years. I didn’t think, 10 years after we went public, that the stock would be the same price. That’s without dividends; the dividend is around 6 percent a year. So in that sense, it’s a 6 percent appreciation. I thought it would be a good deal higher. On the other hand, I didn’t think the company would be as large and as profitable as it is now. In 2014, Blackstone was the most profitable money manager in the world. I did not anticipate that. We’re a specialty money manager. The idea that we’d be 4 times bigger, when almost everyone else is smaller as a result of the financial crisis, was a sign of enormous strength and execution, and it speaks to the power of alternatives as a concept. Overall, I’d give us quite a good grade. The only unhappy element of that would be our stock price.

JK And why hasn’t the share price budged?

SS That is a really interesting question. If I truly understood that, I’d fix it. But there’s a complete dichotomy between the people who give us $367 billion [Blackstone’s total assets under management], who are quite confident of what those results will be, and the public investors, who represent probably $17 billion, roughly half our market cap. So why would that $17 billion take a position completely different than the $367 billion? Which is like, if I have my math right in my head, 20 times bigger. How do you come to the right answer?

“You had to be in the continual invention business to do well. I just took it for granted that we had to keep inventing new things all the time”

JK How have you managed to diverge from your competitors so much over the last 10 years?

SS We’ve had a different strategy all along. One part was to be in the advisory business; it required no capital and generated cash, which we could use to hire more people without diluting. Second, to get into the private equity business; it was a great business and still is. And the third was to find other fantastic investment opportunities from a risk-reward perspective. So that was our strategy from Day One. I was sort of in the last generation of people in finance who did everything. It was before specialization. If you were in corporate finance at that time, like I was, you were doing mergers, IPOs, debt deals, debt for equity swaps, restructuring—anything that needed to be done you did. And because you were seeing the entire field in play, you realized that nothing lasted forever. There are no patents in finance. Everything has a decay curve, in terms of its margins. You had to be in the continual invention business to do well. I just took it for granted that we had to keep inventing new things all the time.

JK Why did that make Blackstone so resilient after the financial crisis?

SS When we went into the crisis, we already had the platforms. As the opportunities presented themselves, all of our businesses were in great shape. We didn’t have to deal with the world of problems. We were good underwriters, and the opportunities were profound—they were almost everywhere. And so that enabled us to enter those different business lines further. We basically raised very, very large-scale capital from everyone we could. The more successful the outcome, the more they wanted to give us. And it became a virtuous circle of doing well for them, looking for new opportunities whenever we could, and them giving us very large amounts of capital. Our timing was right for all of these different opportunities. The system we designed, of being able to see across asset classes and controlling risk, informed us where we should be and not be, which enabled us to grow very large-scale businesses with a small number of people. I think for people who weren’t set up like that, it was much more difficult.

Photographer: Dylan Coulter for Bloomberg Markets

JK You’ve leaned much harder into real estate than anyone else.

SS We jammed down the accelerator everywhere we could. The difference is that we were in real estate since the collapse in 1992; that’s when we entered the business. We’ve been very large purchasers since way back then. We were already doing the largest deals in the world in 2007. The deal for EOP [Equity Office Properties Trust], announced that February, was a $40 billion purchase. We sold $30 billion of the $40 billion within five weeks. So that’s $70 billion of real estate coming in and out of Blackstone. Before EOP, nobody in the real estate business had bought and sold more than $10 billion in a year. That one transaction was seven times what anyone had done.

JK When I think about the private equity industry, it was started—if I may be so bold—by a group of swashbucklers: you, David Bonderman, Henry Kravis, David Rubenstein. How does this industry retain that swashbuckling nature?

SS Well, reluctantly, we all grow up. And I don’t know about swashbuckling. I can only speak for our organization and not for others. I’m 70 and in great health with enormous enthusiasm. I love what I’m doing. But in 1987, when we closed our first fund, I was absolutely essential, because there was hardly anybody else here. At this point in my career, I’m not essential. We have enormous capability with the people here running each of our businesses, from a managerial sense. These are remarkably talented people, each of them running businesses worth somewhere around $100 billion. In fact, each of our businesses is the same size as the other firms—and growing quite rapidly with world-scale standards for results.

JK One of the people you didn’t have to grow was Tony James, whom you brought in as president in 2002. That’s a noteworthy moment in Blackstone’s history, in part because we don’t see people come in at that senior of a level very often in the alternatives space. What led you to make that decision?

SS That was a really easy decision. I was working 18-hour days, the business kept growing very rapidly, and the demands on me were astonishing. Beside the fact of living a life of perpetual overstimulation as we were growing, I could see that I couldn’t get to everything. The firm was too dependent on me as a choke point because I was very focused on controlling risk. When you lose control of risk at a financial institution, you do a variety of unfortunate credit extensions or purchases—and all of a sudden you’ve blown up your business. I was committed that that wouldn’t happen.

JK Was that a lesson from your days at Lehman Brothers?

SS It’s a lesson from Lehman. And also, when I started in finance, I asked someone, “Why do A-rated financial institutions trade at big premiums, in terms of their debt interest rates, compared to a similarly rated industrial company?” He said to me, “Steve, financial institutions go broke in a day. It takes years for an industrial company to lose its market position and finally give up the ghost.” So it became clear to me that doing mergers and private equity deals was unsustainable if I was going to grow the firm. So I decided we needed somebody else to help at a similar level. I was very close to bringing Jimmy Lee in from JPMorgan. They had worked with us a lot, and I really liked Jimmy. In fact, we had completed the contract and the press release, and he called me the day of the announcement to say he was just too loyal and couldn’t leave.

JK He kept that contract in his desk drawer for years afterward. [Lee died in 2015.]

SS Well, I knew all the people at JPMorgan, so I knew why he felt that way. When we’d first started discussing things, I’d told him, “Jimmy, you’re not going to be able to leave.” He said, “No, no! I want to try something new. You and I get along great.” I was on the veranda at a Ritz-Carlton in Florida when he called my cell phone. I couldn’t believe it.

JK So then you realized you needed to do a search?

SS Which we did—and I didn’t like anybody as a complete package. Rather than go forward with anybody who wasn’t perfect, we canceled the search. I doubled down and said, “No solution right now. I just need to keep doing things myself.” I did that for another year or two, but it just felt increasingly hopeless. So I did another search. A lot of the same names were on there; I figured they hadn’t changed. Of the new options, one was this guy named Tony James, who’d made his name at DLJ before they sold themselves to Credit Suisse. I called three people who’d known me from my few months at DLJ and had also worked with Tony, and it turned out he’d done similar things to what I had done. He’d started their private equity business, oversaw their M&A activity, ran their investment banking, and was the head credit extender. He was the person who pushed the button: “We’ll buy this at this price.” I started out doing that here. These were all things we had in common, so when I started interviewing Tony, it was like interviewing myself­—except that we have a different personality type, and he’s somebody who was smarter than I was, which I sort of liked.

JK How difficult was it to persuade him?

SS He really hated where he was. He’d loved DLJ; it had a wonderful spirit, kind and thoughtful management, great interpersonal chemistry. I liked it when I was there, even for what was, like, seven or eight months. It had a special feeling. Other people were trying to recruit him at that time—he wanted out from Credit Suisse—so that was probably the single best decision I’ve made.

JK Has there been anything he persuaded you to do that you weren’t immediately in favor of? According to lore, he brought you the idea of acquiring GSO Capital Partners, which formed the cornerstone of your credit business.

SS For sure. I didn’t even know GSO—because why would you? It was a little business with $5 or $6 billion in it. We tried to buy them several times, and each time they had something more wonderful. We had three shots on goal with nothing. They said, “We’re, like, really happy. Go away.” We sort of gave up, and what happened was, after we went public, our IPO was the second biggest in the world for that decade. This is a pretty noteworthy moment. And they called afterwards and asked, “Would you buy us?” I actually couldn’t believe it.

JK What did you do?

SS Bennett [Goodman, the CEO] came in, and I said, “Why do you want us to buy you? You’re like a pretty girl we’ve been asking out all these years. What’s happened to you?” And he said, “We’ve read your prospectus, and what you all have done is so impressive that if we can combine with you, our ability to grow will be accelerated so much just by virtue of all the relationships you’ve cultivated around the world and how you handle your business. We would rather be with you than on our own, and we’d love to be acquired.” Who knew?

“I don’t get emotional about business decisions”

JK One of the things that the growth of real estate—and other businesses you developed like GSO—gave you was a deep bench.

SS It was beyond a bench. At that point, we had four ­platforms—private equity, real estate, credit, and hedge fund, with great people—that were among the largest in the world in the alternatives space. So we were talent-long and were perfectly positioned. And we didn’t get into trouble, which is very important in finance. Because if you get in trouble in finance, you have only so many people working at your firm. If they’re all working on messes, they can’t be doing investments; there isn’t enough bandwidth. So part of what benefited us was that we’re risk-averse. I have a saying: There are no brave old people in finance. Because if you’re brave, you mostly get destroyed in your 30s and 40s. If you make it to your 50s and 60s and you’re still prospering, you have a very good sense of how to avoid problems and when to be conservative or aggressive with your investments.

JK One thing you voluntarily shifted out of in 2015 was the advisory business, which, as you mentioned earlier, was a foundational element of Blackstone. How difficult was that decision?

SS I don’t get emotional about business decisions, but I was emotional about that. It’s where we started the firm. I always enjoyed the business because I viewed it not just as a profit center but as a flag carrier for the firm—and, in effect, free advertising.

JK It’s also where you started your career as an M&A banker, right?

SS It’s where I came from, yes, and we were planting the flag all over the world for the firm, in addition to our investing businesses. I was personally the last person to agree that spinoff was the right thing to do. It was very painful for me and carried a real sense of loss, but even I realized that the people in our advisory businesses would do better being separate. It was the right thing for them. And I just looked at the stock the other day. When we spun out our advisory businesses and it combined with Paul Taubman, who now runs the business, to become PJT Partners, the stock went as low as $20. Now it’s almost twice that, which was the same value we thought it should be back when we did the spinoff.

Cover artwork: Zachary Walsh

JK Speaking of IPOs, let’s revisit yours for a moment. One of the most notable aspects—then as well as now—was the sale to the Chinese. And that has tied the firm, and tied you personally, to China in a very meaningful way. How did that come about?

SS Credit to China, not to us. In the spring of 2007, I got a call from Antony Leung. I was at home watching Law & Order and doing some office work. Antony was very well-known in China, having helped them restructure their banking system when it got into trouble. He’d been the head of Greater China for Citibank and JPMorgan and then financial secretary of Hong Kong before we hired him to be our chairman in Greater China. So the phone rang, and Antony said, “Steve, I was in Beijing for a meeting with ICBC”—which is China’s biggest bank—“and the chairman said there were two Chinese people who wanted to see me. So I saw them, and they offered to invest $3 billion in our $4 billion IPO.” At this point I asked, “What did you say?” and turned down the volume on Law & Order. “Who are these people, and where do they work?” He said, “Well, they don’t have jobs.” I said, “That’s interesting. I assume they’re very rich if they can write a check this big.” He said, “No, they’re not rich at all.” “So,” I said, “they’re unemployed nonrich people who want to give us $3 billion?” He said, “Yes, that’s right.” I asked, “Is there some reason you called me with this?” And he said, “Because they want to invest $3 billion.” I said, “Not to be forward, but where are they going to get $3 billion, and what did these people used to do?”

“One of them,” he said, “was the deputy finance minister of China, and the other was the deputy head of the Central Bank.” “Aha,” I said. “So where are they getting the money?”

“It’s coming from China,” he said. “Where in China?” I asked. “China,” he said. “The government of China wants to buy $3 billion of our IPO.” “No reason to go public if they want $3 billion out of $4 billion,” I told him. “Let me think about this overnight, and I’ll call you back.”

I came into work, and I said, “Tony, I had the craziest phone call last night from Antony. He’s got $3 billion from two unemployed guys who he says are the government of China. What do you want to do?” And Tony said, “Why don’t we take the money and make the IPO $7 billion? We can put another billion in the company, and we can give another billion to our retiring partner, and we can take a billion dollars and let the partners themselves have it as a secondary offer.” So I said, “We don’t even know who these people are. We need to have them vote with us because I don’t want to have the appearance that we have a large shareholder.” And, “I don’t think we should have anyone on our board of directors from a foreign government. We have to know who we’re dealing with.” Tony said, “OK, that sounds good.”

So I called Antony back, and the way things work is it’s 12 hours ahead there, so I’m at home watching Law & Order reruns again. Antony was ready to talk, because he’d done his stuff in China. So he called me that night and said, “I’ve talked to the Chinese, and they don’t want to vote with us on issues. They said it’s too cumbersome. Why don’t they not vote at all and take nonvoting stock? Not being on the board of directors is fine with them.” That sounds pretty good, I figured. So I said, “One other thing: I’d like them not to sell it for five years, then they can sell it at one-third, one-third, one-third.” Antony said, “I think that’s a bad idea.”

“Why?” I asked. “I think that’s an awfully long time in China,” he said. “Go ahead and do it,” I said. So he called me the next night and said, “They’re willing to do three years, selling one-third, one-third, one-third.” So I said, “Sounds like they really want to do this deal. Just go back at five years.” And he said, “That’s unwise.”

“Why is it unwise?” I asked. He said, “Well, if they do it, they won’t like you because you’ve taken away their face. The right answer is four years—in the middle—and then do one-third, one-third, one-third.” And I said, “But I know I can get five.” And he said, “Yes, but that’s not the point. The point is to have a long-term relationship with people who have mutual respect. So you should do four.” I said, “OK, I’ll do four.” The next evening he called and said, “Fine. Done.”

JK So this is all over a very short period of time?

SS Yes, a few days. I asked, “Well, what’s next?” He said, “There has to be a vote of the State Council.” As the “informed” China expert I asked, “What’s the State Council? Is it like our cabinet? If so, it never meets and does nothing, and we’ve got an IPO to do in another month.” He said, “No, the State Council meets every week. We can get a decision pretty quickly.” So I said, “How do you know that?” And he said, “One of the two people who approached me is spending spare time as the secretary of the State Council.” So three days later he called and said, “State Council approved.” “Are we done?” I asked. He said, “No, not done.” I said, “How can we not be done?” He said, “We’re not done, because there’s no provision to take $3 billion from the Chinese treasury. China has never made a stock investment in a foreign company since World War II, so there’s no law that allows the money to be taken.” I asked, “How does that get solved?” He said, “The premier himself must approve to take the money.” I said, “How long does that take?” He said, “One or two days.” I asked, “How is that?” He said, “The temporary secretary for the premier will put it at the top of the pile.” A day later, the thing’s approved. I think it took a total of eight days, including weekends.

JK And, obviously, China has become even more important since, not just to Blackstone but also to you personally. And you’ve become something of, maybe not an expert, but certainly someone who is now more “informed” than then. What’s the most important thing you’ve taken from that?

SS Well, as a result of that investment, they’ve included me on the board of Tsinghua University’s school of economics and businesses, which was started as a feeder into the senior levels of the Chinese government. That extends from President Xi, to the previous president of China, President Hu, to the head of the central bank, the person who used to be finance minister. It’s very much like Harvard in the 1960s with [President] Kennedy. And so I got to meet all these people at board meetings and so forth. It was a very easy introduction to China, and Chinese institutions have given us a lot of money to invest in private equity and alternative products. And I personally know a lot about China now, because I’ve had the exposure, and I have exposure in the States at a pretty high level. I see the common elements of things; I can see the strains. I find that Chinese are really easy to deal with. They’re pretty straightforward with me. I enjoy it. They have a great sense of humor, which is unexpected but fun. They’re also the second-biggest economy in the world and are growing at three times the rate of the United States. Their culture is ancient—5,700 years old—and they’re clever, inventive, hard-driving. They want to win. Sure, they’ve got a complicated bureaucracy, but I find China endlessly fascinating. It’s sort of like a year in China is like a dog year.

JK How much do you worry about the world as it stands now, especially as we seem to be veering toward greater protectionism?

SS There’s going to have to be some changes to the relationship between China and the United States. That’s something President Trump’s been quite vocal about. And I think the Chinese understand that there’s going to be some adjustments. That will all happen in due course. It will be either easy to accomplish or very hard. Nobody knows.

JK Do you feel as if that’s one of the key roles you can play in this administration?

SS Both countries are very central to each other. So if I can play a productive role and President Xi asked me to help—it’s not like I have nothing else to do—but if it’s important to the two countries, I can help. If nobody needs me, that’s fine, too. We’ll see what happens.

JK It does seem as if we’re kind of at an inflection point for the alternative asset business. What are the most important regulatory issues for you as you think about the next year or two or five years?

SS As you look at the things that can be modified, really it’s low-hanging fruit everywhere. I’m quite optimistic that well-­intentioned people who want their company to grow faster, to provide more jobs for regular Americans, can do that. I believe this is totally achievable. Because I’m studying this stuff as part of the President’s Forum. I’m just impressed. It’s, like, every place. We can do that without endangering things that need to be protected.

“We were rejected 16 times out of 17. People were looking at me, saying, ‘You are really a loser’”

JK You seem to be a pretty busy person. Presumably you’ve got to be able to chill at some point?

SS It’s hard to relax when you have iPads and iPhones and you’re involved in a global enterprise where there’s something happening every hour of every day. I have a lot of involvement with the Schwarzman Scholars; Yale University, my alma mater; the New York Public Library; and all kinds of other things that I touch. And now I have this political dimension to my life, so that’s somewhere around two and a half full-time jobs. I do like to stop.

JK I can’t help but ask: You mentioned watching Law & Order earlier. Do you still watch the show?

SS Still do.

JK Is that your go-to on television?

SS It appears to be in syndication on almost every channel continuously, but leaving that aside, I, like all of us, have some things that occupy me in a different way. I like being in warm weather. I find that relaxes me. I like being near water. I like sitting on a beach and sort of hearing the water, watching waves break, looking at the shimmering. I find that really relaxing. I’ll do office work in that kind of setting, or I’ll read a book or a news­paper or talk on the phone to someone. I really like that. In business school, you have to figure out how to function in a world where you can’t even read all of this stuff, let alone make judgments. So that’s sort of continued. Now it’s—because of the magnitude of some of this stuff I’m involved in—if I don’t do a good job, or a responsible job, or understand something in a nuanced way, it’s a very bad place to be.

JK Doesn’t that weigh on you?

SS Not at all. I look at everything sort of like it’s an endless series of fascinating short stories, and I love each one of those short stories. They’re all fascinating, otherwise I wouldn’t spend my time with them. It’s endlessly engaging and entertaining and fascinating, and I love my life. I don’t find any of this a burden, because if it were, I wouldn’t do it. Every once in a while, I get something that isn’t so much fun, but it has to be dealt with. I definitely don’t feel any of this as a burden.

JK We’ve talked a lot about these past 10 years. I would submit that, if you think back to where we were in 2007, you’ve changed. You seem maybe a little more … mellow?

SS I’m certainly less anxious. And I’m less anxious because we have marvelous people at the firm. Our businesses are doing well. I don’t have to worry now about some of the things that I used to worry about: Is every number, every assessment of a deal right? Are we hiring quality people? Are we training them appropriately? We now have A to A-plus players in every position. If you weren’t a little more mellow as a result of having all of these remarkable people and great processes at a global brand where people really want to do business with us—I mean, when we started, we were rejected 16 times out of 17. People were looking at me, saying, “You are really a loser.” Maybe I’m more mellow, but there are times—and people around here can attest to it—when I am decidedly unmellow. But I think what you’re sensing is that I’m happier. I look around at where we are as a business, and who I get to work with, and what I get to do, and I am extremely fortunate. And I’m having a lot of fun. And if I wasn’t, why would I be doing all this?

Kelly is the New York bureau chief and executive editor of Bloomberg TV and the author of The New Tycoons.