Blackstone's Quest for Value

Private equity is the pride of Wall Street these days, and Steve Schwarzman is one of its lions. The CEO and co-founder of the Blackstone Group has been busy putting together bulge-bracket deals, including the $39-billion buyout of Equity Office Properties. Blackstone, which likes to lure public company boards into retirement, is currently working on a public offering of its own and is reportedly selling a $3-billion stake to the People’s Republic of China. Schwarzman spoke recently at the Council of Institutional Investors in Washington, D.C., where he expressed his views on regulators, creditors, the media, and what’s wrong with public companies.  

Private equity is booming right now and Blackstone has really positioned itself to take advantage of that growth. To what do you attribute your success?    

I think part of our success is predicated on the phenomenal amount of time people like us have put in—20 years at the same desk looking at the numbers and making decisions. The fact that our deals have turned out to be bigger is of relatively low importance to us. The current environment has to be looked at in the context of overall economic expansion. Markets are always correlated with economic activity. We were coming out of a recession not too far back. So, it is no surprise that as the cycle resumes, you get a big increase in [growth].

Frankly, this may be the only time in my business career that I have ever seen an environment in which every country in the world is undergoing economic expansion. Add to that low inflation and interest rates, due to increases in productivity, and it is even bigger. As to the cost of capital, if we show up with a lower cost we ought to be competitive relative to other asset classes, and we are … What has made private equity go up as much as it has is our cost of capital. So our market share has naturally increased.

Certainly, the credit market has helped fuel growth. What happens when those great terms and rates aren’t there?

When the world turns south, what happens to all that loan activity? No one knows. In the days when banks controlled the credit, the workouts were done with people who knew each other. Now there is no one to talk to, only hedge funds and structured vehicles. You can be sure it is going to be different.

Is the competition for deals fierce?

Let’s be clear. It is not an easy business, and there are [winners and losers] in all deals. Sellers are not stupid, nor are their investment bankers. Board directors are wise … every company and its directors have their own lawyers and fairness advisers. No one comes to a deal to give anything away, and by the time you’re finished negotiating, you feel like your pockets are empty.

Private equity’s image sometimes takes hits in the media. Does that concern you?

I’m no public relations expert and frankly, I ache when I see the headlines [that criticize our industry as a whole]. One reason you see this here and not in Europe is that there is a major cultural difference between European private equity and the American version. Basically, in Europe, private equity firms simply do not talk to the press. In America, they’re much more transparent. In many cases in Europe, firms don’t even return phone calls, so there is little or no knowledge of what is going on.

In the United States, there have been a lot of studies done on job creation. It hasn’t gotten a lot of attention, but studies on private equity-financed deals show two to four times the number of jobs that existed before … because the way to make the most money is not by cutting but by having the company grow.

Despite our very good track record of increasing employment, there will be one or two cases of deep cuts in union employees and that gets the attention of politicians, regulators and, of course, the media. The politicians will use those cuts as a rallying point in a campaign, so suddenly [private equity]  becomes a target. We have not done a compelling job of telling our story. If one of our firms is attacked in the press, no one answers back. The only headline you see is the attack.

In this frothy market, are companies that you have taken private really better off than before?

We have been in a raging bull market, so that has helped, but our industry has been able to attract some of the top managers in the world. You put together a detailed plan of how you are going to move a company and put in a process to build and grow it … It’s stunning to see how we can help companies. For instance, we provide our companies with global telecommunications services, group health plans, and other infrastructure necessities. We bring together the latest thinking from around the world on issues like lean manufacturing, and have case histories of taking that learning into our companies where they can save up to 30 percent of manufacturing costs. When you add value of that magnitude, you make something happen. You’re not just buying and holding, then hoping the wind blows friendly. Every time we do one of these deals, it involves important decisions. The value added is very substantial.