Blackstone (BX) CEO Steve Schwarzman appeared on Bloomberg TV with Betty Liu and Erik Schatzker to discuss the firm’s earnings, saying: “You can be a buyer and a seller at almost the same time and do well doing both…The firm keeps growing at a really good clip.”
Schwarzman said: “I think that the world is going to recognize that we have a really differentiated model. We are really more like a great branded company…We dominate our market. We are more like an Apple, a Google, a Boeing, a CAT, an Hermes. We have customers who need us, just like those companies do.”
On whether he worries about BlackRock going into Blackstone’s businesses, Schwarzman responded: “I worry about everything. You can’t be a good CEO or even an adequate one if you don’t worry about everything. And Larry [Fink] is smart to do that. There are moats around a business like ours.”
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BETTY LIU, BLOOMBERG NEWS: Okay, with us now is Blackstone cofounder and CEO, Steve Schwarzman, also “Market Makers” anchor, Erik Schatzker, joining me as well for a treat. He covers high finance for us. Thank you, Steve, for joining us, and thanks to Erik for joining as well.
ERIK SCHATZKER, BLOOMBERG NEWS: Of course. Good morning, Steve.
LIU: And, Steve, you guys are on a roll, right? I mean you said you are an earnings machine. So you’ve got assets now at $300 billion. I mean can you keep this pace going? How are you going to keep this momentum going?
STEVE SCHWARZMAN, CEO, BLACKSTONE: Well I think we’ve been keeping our momentum going for a long time. Over the last five years our earnings have been compounding at 46 percent. In the latest quarter we raised $30 billion of new money for our products, and that is more money than any alternative manager other than ourselves has raised for entire year. We are in a simple business. And we have been in it for 30 years.
And our job is basically just to earn very high returns with very low risk. And we have been compounding around ten percent, or 1,000 basis points, more than the stock market. So if we can do something like that over a 30-year period in a world of very low interest rates that if you’re a large pool of capital or if you’re just a person, you can use that type of return. And that is the business that we are in, doing it with safety.
LIU: What is — what is the fundraising environment like right now?
SCHWARZMAN: Well the fundraising environment for us is — is pretty remarkable. And it’s — it’s remarkable. We’re the only firm of our type in the world. No one else is in all the different alternative asset classes. And — and our stock market value is probably six times what the other competitors are who — who compete with us. And when institutions are looking for different types of products because ours have all performed well over decades, then they — they go to us. They need these high returns, whether they’re to pay their pensioners or to keep their endowments growing, all those types of good things that we provide. We’ve become a required course for these institutions. And they’re also limiting the number of managers they’re taking on. So if they want to move large amounts of money at very high returns, we’ve become like a mandatory stop.
SCHATZKER: So size begets size?
SCHWARZMAN: Well size —
SCHATZKER: You guys are growing by the equivalent of a TPG, right, or if you take the run rate, $30 billion a quarter. You are raising more money over the course of 12 months than KKR is large.
SCHWARZMAN: Well —
SCHATZKER: How sustainable is that?
SCHWARZMAN: I — I don’t think we can keep raising $30 billion a quarter.
SCHATZKER: No, why not?
SCHWARZMAN: Because — because that — we can’t deploy the amount of money that you would have if you had sort of $120 billion of alternative asset money right into us. We have $311 billion right now. And this year we’ve invested $26 billion. And — and the firm keeps growing at a really good, a good clip. And as we grow we invest more and more money. If we earn the same return our earnings just keep going up, and our distributions go up.
LIU: Right. But is there a point where the size becomes a challenge, right, where you have — and I know you look at me, but does it get to a point, Steve, where you have so much money that it gets harder and harder to deploy that to move the needle then?
SCHWARZMAN: Well —
SCHATZKER: Well on an aggregate basis, on a fund by fund or business by business basis.
SCHWARZMAN: Well it’s a good question. It’s a fair question. And I been asked that question since 1992 when we did our second fund. And it’s turned out to be wrong. And the reason it turns out to be wrong is we are not trying to take just one fund, one strategy and build it so big that it can’t do anything. We are not in the Magellan kind of business. So when we see something interesting we create a new pool of capital to do that. And we basically cap out the size, more or less, of existing ones.
And so we grow only when we see a terrific opportunity for our customer, only if we can attract somebody who is a ten out of ten to run that business, and only if going into that business creates intellectual capital that we can use to make our existing businesses stronger. So our model can be expanded geographically. It can be expanded in terms of different asset classes. It can be expanded in terms of different parts of the capital structure. So we’re not through all of that. And every year each of our big groups, private equity, real estate, and credit and hedge funds presents three expansion ideas. And we pick one. And we do that. And we only pick it if it has got great returns for our investors.
SCHATZKER: So what’s the one that you’ve picked right now?
SCHWARZMAN: Well we have got European lending, for example, for our —
SCHATZKER: That’s where your focus is?
SCHWARZMAN: Yes. Well that’s for GSO as well as — as energy, because that’s had a lot of interesting dislocation in real estate. It’s — it’s European real estate, which we have been the largest purchaser of the world for the last several years. And that looks like Europe is wheeling around and it’s going to do a little better. So there is something interesting typically all over the world. And each of our businesses doesn’t have to invest at all. And that’s part of an answer to Betty’s question.
LIU: Yes.
SCHWARZMAN: We are like a basketball team without a 24-second clock. We don’t have to shoot, right? We don’t have to be invested. We just wait for an easy shot. We keep passing the ball around and we go for a layup. And we only in private equity have to do 10 to 12 investments a year to invest our money. And if you think about the whole world, if you can’t come up with ten decent ideas with 200 people, something is wrong.
LIU: Then something’s wrong.
SCHWARZMAN: Something is wrong.
LIU: Somebody needs a new job then. Steve, hang for a moment. We are going to have much more with Steve Schwarzman, the Blackstone CEO.
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LIU: Let’s get back to our conversation with Steve Schwarzman, the CEO of Blackstone, Erik Schatzker joining me as well. And, Steve, we didn’t get a chance to talk a lot about the real estate part of your portfolio, right? So you just entered this megadeal with GE. And of course you bought the Willis Tower last month and, famously, Sam Zell, back in 2007 with Equity Office Properties. Given that there is always a cycle here with property, right, so what can we glean from Steve Schwarzman placing big bets in commercial property? What do we glean on his outlook?
SCHWARZMAN: Well we — we glean that you can be a buyer and a seller at almost the same time and do well doing both. And the reason for that is when we buy properties, typically we have a reason for buying them. We are just not buying a market. And we — we have a saying, which Jon Gray, who runs our business, popularized, buy it, fix it, sell it. And so we buy them, and then we do something to that property and re-rent it, put in new lobby, put in new facilities, if it’s a hotel put in a spa, raise the cost, increase the occupancy and then we sell it. And so that’s on the sell side, which has been very vigorous.
On the buy side, what’s most important is that supply and demand of properties in terms of new construction is — is under control. And right now we don’t have, and certainly in the United States, certainly in Europe, we don’t have overbuilding. There aren’t that many cranes. There are a few more in New York.
LIU: But that means you are not getting bargain prices either then, right?
SCHWARZMAN: Well you don’t get the same prices that you did at the bottom of the financial crisis, for sure. But that doesn’t mean that —
LIU: That you can’t make money.
SCHWARZMAN: — that you can’t make money.
LIU: Yes.
SCHWARZMAN: And so we are compensated at the moment by exceptionally low interest rates. And so real estate is a business that does use borrowed funds, and with the cost of money so low that’s an advantage.
SCHATZKER: Steve, you have so much to be happy about yourself. Your investors, for the most part, have got to be pretty happy, but I wonder to myself if there isn’t one thing that frustrates you, and that’s valuation. You are the most profitable money-management firm in the world. Why is one dollar of Blackstone earnings worth half as much as one dollar of BlackRock earnings? You trade at 11 times. They trade at 20 times. What’s wrong with this picture?
SCHWARZMAN: Well there is something wrong with the picture. And I think we are a relatively new asset class, and people have some fear that if we sell things we will never invest in anything ever again that will make money, and that this is a just one-time operation.
SCHATZKER: You think that’s why you trade at this discount.
SCHWARZMAN: I think that’s what it is. Now that happens to be wrong —
LIU: Given your track record?
SCHWARZMAN: And the track record says for 30 years we have been producing returns of approximately 1,000 basis points over the stock market. And in fact in the last year, despite all the sales we did, our accrued profits that aren’t realized yet is higher. In other words, we have not cleaned out —
SCHATZKER: You’ve got money in the bank.
SCHWARZMAN: We — we put more cookies in the cookie jar.
SCHATZKER: So what do you — what do you do about it?
SCHWARZMAN: Well —
SCHATZKER: And you can’t like just continuing to do what you do will obviously produce some good results. You make more money for your shareholders. You make more money from your investors, but still there’s this valuation divide.
SCHWARZMAN: Well —
SCHATZKER: If you — is there going to be at some point some kind of convergence between the traditional guys whose business model is kind of running out of rope, right, —
SCHWARZMAN: Well —
SCHATZKER: — and the alternative guys like yourself?
SCHWARZMAN: Well one of the ways to deal with that is come and see the two of you and talk about it. I think that the world is going to recognize that we have a really differentiated model. We are really more like a great branded company. We are more like a — and we dominate our market. We are more like an Apple, a — a Google, a Boeing, a CAT, an Hermes. We have customers who need us, just like those companies do. We got —
LIU: So you are like a Tim Cook?
SCHWARZMAN: Well not exactly like Tim. We are not as big, but in our sector we are certainly big. We have grown at 46 percent compounded in earnings over five years. And we — we — our reference are the great companies in the world. And we look at them, and what do they have? They have great products. They have customers. You’re their first call. It’s the same with us. They are all growing. We are growing because our customers want to give us —
SCHATZKER: Well people recognize this. Larry Fink recognizes this, right?
SCHWARZMAN: Yes.
SCHATZKER: He’s going into your businesses. Black — BlackRock is going into Blackstone. BlackRock wants to be in real estate. BlackRock wants to be in infrastructure, something that you have to be — do you worry about that?
SCHWARZMAN: Well I — I worry about everything. You can’t be a good CEO or even an adequate one if you don’t worry about everything. And Larry is smart to do that. There are moats around a business like ours. We have plenty of competition. And we are trading at — at roughly five to six times the value.
LIU: Steve, all right, we’ve got to run here, but thank you so much for joining us, really appreciate it, Steve Schwarzman, the CEO of Blackstone.
Video for viewing here.
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