Picking Blackstone's Brain

By Maria Bartiromo

When Steve Schwarzman, CEO of private equity powerhouse The Blackstone Group, lunches with you at the Four Seasons in New York, expect interruptions. As we talked, Bernard Schwartz of Loral (LORL ) stopped by to say Happy New Year. Then dealmaker Ron Perelman table-hopped over. Between schmoozing, Schwarzman made provocative points about the boom in private equity buyouts. (Later, though, he declined to comment on reports that Blackstone and HP are looking at a deal for Computer Sciences.)

With so much money flowing into private equity funds, do managers feel pressure to make deals?

In the high end of the market, where we're involved, there's not enormous pressure because you can always buy larger and larger companies. In the medium-size part of the market...there is enormous pressure on general partners.

With all of the money that has been raised, how does that change the types of deals you're looking at?

In the olden days, doing a billion-dollar buyout deal was a major event. Now we're looking at $10 billion and $15 billion deals.

Do you have a targeted return, and what's your exit strategy?

We don't set up a deal unless we think we can make at least a 20% annual return on investment. We also like to make around 2 1/2 to 3 1/2 times our money. And we either exit by taking a company public or we sell the company to another buyer or we take out dividends with supplementary borrowings. Sometimes that's called a recapitalization, but fundamentally it's using the company; continue to own the same percentage ownership and just take out money.

Could you see yourself getting more active like, for example, Carl Icahn at Time Warner (TWX )?

Attacking companies, that's not our business. We in private equity use inside information. That's our lifeblood. We sign confidentiality agreements. We work closely with corporations to figure out if it's a sensible transaction.

Has energy peaked?

I don't know if energy has peaked, but it has shown such a huge increase that we viewed it as prudent to take what are unusual levels of gains off the table. Maybe we'll be wrong and would have earned 8 to 10 times our money. Our view is that 7 [times our money] is probably enough in a year.

Has real estate peaked?

You always hate to call tops, but...I think you can predict for sure that the rate of increase in real estate is not sustainable.

Some people say housing represents 70% of economic growth, and if that's the case and we see housing slow....

Companies are in great financial health right now -- a lot of liquidity. There's much more inflation in the economy than is being measured by the Fed, and corporations are getting for the first time in many years the ability to start increasing prices. And with net income at record levels, they will start to invest in equipment and plant expansion, and that will be a slight offset to housing getting softer.

The buyout boom in the '80s was fueled by opportunistic buyers of broken companies. But today corporations are lean and flush with cash. Are the pickings getting slimmer?

We haven't found that to be the case yet, and one of the major reasons is Sarbanes-Oxley. What we're finding is that it's a dual tyranny of Sarbanes-Oxley and the relentless disappointment of the quarterly earnings that institutional investors require. As a result of those factors, many more boards, and particularly senior managements, are very happy to go private because they aren't enjoying running public companies. They're not able to do some of the things they know should be done to fix their companies. If it requires their earnings to be depressed for two or three quarters or write-offs, they'd rather, in many cases, not do the right thing, because if they do the right thing, they'll be penalized by their shareholders or they'll be put under more scrutiny by their board or they feel they'll have more legal liability under Sarbanes. Sarbanes has companies very risk-averse. So we've been lucky beneficiaries in the private equity business of both those factors, which make our lives, frankly, very easy.

Maria Bartiromo is the host of CNBC's Closing Bell

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