Stephen Schwarzman: The Pursuit of Excellence
November 25, 2020 12:30 PM
Register for this event
Stephen Schwarzman: The Pursuit of Excellence
November 25, 2020 12:30 PM
RegisterSpeaker(s)
Stephen A. Schwarzman
Chairman, CEO and Co-Founder, Blackstone
Moderator(s)
Mo Lidsky
Principal & Chief Executive Officer, Prime Quadrant
Biography
Stephen A. Schwarzman is Chairman, CEO and Co-Founder of Blackstone, one of the world’s leading investment firms with $881 billion Assets Under Management (as of December 31, 2021). Mr. Schwarzman has been involved in all phases of Blackstone’s development since its founding in 1985. The firm has established leading investing businesses across asset classes, including private equity, where it is a global leader in traditional buyout, growth equity, special situations and secondary investing; real estate, where it is currently the largest owner of property in the world; hedge fund solutions, where it is the world’s largest discretionary hedge fund investor; and credit, where it is a global leader and major provider of credit for small, middle-market and other companies. Blackstone has also recently launched major new businesses dedicated to infrastructure and life sciences investing, as well as delivering the firm’s investment management expertise and products to insurance companies.
Mr. Schwarzman is an active philanthropist with a history of supporting education, as well as culture and the arts, among other things. In 2020, he signed The Giving Pledge, committing to give the majority of his wealth to philanthropic causes. In both business and philanthropy, Mr. Schwarzman has dedicated himself to tackling big problems with transformative solutions.
In 2007, Mr. Schwarzman was included in TIME’s “100 Most Influential People.” In 2016, he topped Forbes Magazine’s list of the most influential people in finance and in 2018 was ranked in the Top 50 on Forbes’ list of the “World’s Most Powerful People.” In 2019, Schwarzman published his first book What It Takes: Lessons in the Pursuit of Excellence, a New York Times Best Seller which draws from his experiences in business, philanthropy and public service.
Mr. Schwarzman holds a B.A. from Yale University and an M.B.A. from Harvard Business School. He has served as an adjunct professor at the Yale School of Management and on the Harvard Business School Board of Dean’s Advisors.
Episode Transcript‍
Mo Lidsky (00:26)
Hi, and welcome to today's session of Lunches with Legends™ where we connect with some of the most illustrious individuals in the financial world while supporting vital health care organizations in our communities. If you have not already made your donation, please take a moment go to the donation page at the top right of this site. 100% of the dollars you donate will go toward COVID-19 relief and pediatric mental health so we would greatly appreciate your support. Just before we begin, I want to thank our generous sponsors of this series, especially our gold sponsor KPMG. We are incredibly grateful to KPMG for their friendship and their very generous support. And we would also like to thank our three silver series sponsors, which include Venterra Realty, Creaghan McConnell group and TD Bank. We are so appreciative of your generosity. Now without any further ado, I'd like to introduce our very special guest today Mr. Steve Schwarzman sharing an abridged bio on it with you. So, Steve Schwarzman is the chairman CEO and co-founder of Blackstone, a leading global investment firm with over half a trillion dollars in assets under management across private equity, real estate, hedge funds, credit infrastructure and life science businesses. In both business and philanthropy. Steve is focused on tackling major challenges with transformative solutions and among His most notable gifts, he's established a new Center at the University of Oxford to redefine humanities for the 21st century, created a new college at MIT studying artificial intelligence, and founded the highly prestigious international Fellowship Program, eponymous Lee named the Schwartzman scholars at Ching Hua University in Beijing to educate future leaders about China. Steve is a member of the Council on Foreign Relations, the Business Roundtable, the International Business Council of the World Economic Forum. And Among his many honors and awards, he was named by Barron's as one of the world's best CEOs by Forbes as the Top 50 Most Powerful People in the World as well as Time's 100 Most Influential People. In 2019, Steve published his first book, What It Takes: Lessons in the Pursuit of Excellence. And it is a New York Times bestseller which I've thoroughly enjoyed. And I would strongly encourage each of you to get your copy ASAP. Steve, thank you so much for joining us.
Steve Schwarzman  (02:52)
Well, thanks a lot. Glad to be here.
Mo Lidsky (02:55)
So, I must tell you I think the story of your formative years is I found it incredibly inspiring and everything from you working in your father's linen store to being state champion, and track to the transformative impact you had on your peers in the army and the ivy League's. So, it's clear how your grit and your commitment and your creativity have brought the global powerhouse of Blackstone to fruition. So perhaps you could start the conversation with those that impacted you and maybe I could begin by asking what's the best piece of advice or wisdom that anyone has ever important on you?
Steve Schwarzman (03:38)
Well, there's been a few The first was don't drop out of Harvard Business School. Like I was thinking of doing. That's quite a good piece of advice. I found it a little boring. , by Christmas of my first year, and I called my, my previous employer guy named Donaldson, Lufkin & Jenrette, which is a major securities firm and told him I wanted to drop out and he told me that he wanted to drop out also. He found it boring, and he was going to become, go to the economic school at Harvard and become a PhD. And he didn't, and it worked out fine for him. And so, I shouldn’t, and it would work out fine for me. So, I guess, proof of concept. That was good advice by Duke.
Mo Lidsky (04:41)
Alright, sounds great. So, you founded Blackstone, , at this point now, more than 35 years ago, and after this remarkable career at Lehman, and clearly, it's been an extraordinary success. But can you maybe share with us, what was your original motivation driving you to launch your own asset management firm? And now withstanding your orientation towards solving really big problems, like did you ever dream that you'd end up sitting here today?
Steve Schwarzman (05:11)
Well, I didn't dream I'd be sitting here today. But everybody on this call is, is in some type of family business and these businesses get established one way or another. And there's always a series of, of factors that lead to that in mind. It was because Lehman was where I worked, I was head of the merger department at the time, and the firm got into real financial trouble. And either you were going to change the management or bring in some external capital, or the firm was going to get sold, and I was asked to sell it in three days, because we actually had no net worth left, because of a bad trading position, which was a secret, once those secrets are no longer secrets, then, , your liability structure typically collapses, you lose your ratings. And that's the end of your business. And so, , I sold the business and, and the American Express, when I, when I approached American Express to sell it, I told him, I didn't want to stay with the company, because I didn't think selling it was the right solution needed to management change. And the guys 10 years older than me, were on the board. And they were worried about protecting themselves, they want to stand up and take on the CEO, who was the problem. And so, we ended up selling the business. And then, , through a series of misunderstandings, if you will, the Board of American Express decided, if I didn't stay, they weren't going to do the deal. Because I was pretty well known at that point. And, and so I got stuck staying for a while. And I wanted to leave for the same reasons, had nothing to do with American Express, or, or anybody at Shearson. It had to do with my not wanting to be with the Lehman people. Because I don't believe they, they did what I thought at the time, and this is a funny word, the moral thing. , sometimes you put yourself in jeopardy to do the right thing to protect an organization and its continuity, they chose not to do that. And so, I didn't want to be with them. Just as simple as that. So, when I left, I had pretty much of a non-competition agreement. And so, the only thing I could do was an area that we weren't, which was in the buyout area, and some M&A. But we ended up doing a settlement word where American Express got part of the, the fees for a limited period of time and the limit of my non-compete. But basically, I couldn't join a big organization the way I normally would. And so, it left me starting one that was smaller, with the former chairman of Lehman who had been forced out, which created the problems. And so, the two of us were just like, basically, in, I think it was like 2000 square feet. He had a secretary, I didn't because we capitalized ourselves with $400,000 of money. Which, if it's your own money, it's a lot but in the great sweep of the financial community, it's not much and I just watched that money like an hourglass like the sand going out.
Steve Schwarzman (09:37)
We sent letters to 500 companies we thought we'd be deluge with business and, and most of these companies we knew and, and nobody responded. And I thought the mailing isn't Those were the days when the 1980s Five when there was mail, and not email, but snail mail, and I thought whoever brought it to the post office, it just got lost. Because nobody ever responded to it. So, so we called all these companies. And at the end of it, we still didn't get any business. So, for those who like starting their own company, talk about not much fun. Talk about frightening. This is like cosmic rejection. Yeah. And so, after a month of just sitting in an office with nothing happening, I said to my partner, I said, Pete, what do we do now, he said, We wait two more weeks and call them all again. So that's very innovative strategy. And we did get somebody to hire us, for $50,000. And that was less than any legal bill I had gotten in my career at Lehman, and I guess the rest is history much painful. Because entrepreneurship is only a great thing when it works. And nine out of 10, things don't work. And we had some close calls. Now, of course, one of the most profitable and largest financial institutions, certainly in the money management area world, and our market cap is around $74 billion. today. That's, that's a lot more than the 400,000 we started with. But the amount of rejection you take, on the way is truly a humbling experience, and I'm grateful for everyone who gives us money. And I don't forget anyone who gives us money, now we have a lot of money and, and I used to fly across the United States to raise $5 million from somebody. Now we have people who give us a billion dollars or $2 billion, not everyone, but some, some do, and I even got somebody to give us a commitment for $20 billion, which is the second biggest in history of sort of alternative asset money raising. But part of what you need to do, as a, I guess, you'd call it, managing partner, whatever, Â my title is to have everybody else forget for not forget that every investor is a privilege, that they give us money. And we must do a great job. Because our business is pretty simple. We're like a restaurant, we're only as good is our last meal. Nobody who gives you money, cares about your life story. They really just want you to do what you promise them.
Steve Schwarzman (13:31)
And so, we have an obligation to always make good on that promise. First, don't lose money. And secondly, deliver the kinds of returns that that we tell people we're capable of, and, and that plus innovation of going into new areas, has, sort of created us, way, way, way bigger than everybody else in the world. So, people look at us and go, geez, you guys must be a big deal. I look at it just the opposite. Every day is a new day. If we don't do what we promise people, we won't end up having much in the way of assets and that ability to pass that on, that hunger, that commitment to excellence, that that uncompromising sense of energy, openness, integrity that it takes to get someplace. Everybody at the firm, and we have 3,000 people now directly, and we control companies with another 500,000. So, this is actually not a little thing anymore, but we think about it like it's a little thing.
Mo Lidsky (15:02)
If I could just double, click on that. How have you personally evolved your management style from a company in which people connected with you and kind of felt your energy and your value system to now a company that's managing 1,000's of employees? And how do you maintain that same value system that same alignment?
Steve Schwarzman (15:22)
Well, actually, that's part of the part of the trick of running your great firm? And the answer is, we continue to be in everybody's face, just like the people on this call, keep touch with the people who work for them. So, in a way, that immediacy of the small organization has to be shared with everybody. So, what we do is, we start each week with what we call Blackstone TV, which is, you have the leaders of the firm, our head of government relations, sometimes our general counsel. Just speak to everybody if the firm video allows us to do that now, with zoom, and, and so we basically we have fun, we'd let people know, it's like everybody's in management committee. Here's what we're thinking about, here's what's going on. So, we manage the business very horizontally. And we're very open so that everybody feels that they're involved with, with what we're doing, and shares our values, and our hopes and our aspirations, if you will. And then each of our major businesses meets for about an hour and a half, sometimes two hours, all day Monday. And there are like four of us who go to every one of those meetings. And it's private equity, we go for all the private equity deals, we make comments, everybody else can make comments. And so, everybody at the firm sees a lot of us every week. And I'm a great believer, not in me as a person, the firm's go way, way, way beyond me. Everybody who's there, shares the same belief system. Yeah, as we grow it, we want to make sure that whatever we're doing, can be folded into the kinds of meetings we have on Monday, so that everybody understands what we think about everything that's going on, we can have a dialogue. It's not meant to be didactic. I learned from all these meetings, for sure. And so, in finance, unlike some of the people on this call, in finance, nothing stays the same. And there are no patents to protect you. So, people can imitate what you do. So, it's a constant struggle, for innovation, for seeing new patterns, about where you can invest. And it's part of keeping people excited. It was fun today, before I was doing this, it's time of year where you decide who you're going to make partners that are kind of firm. And so, I interview everybody.
Steve Schwarzman (18:56)
So, this is a nice break for me. And we have a remarkably talented, younger person who happened to be in our private equity area. And I said, I said, How do you like being at the firm has been there for sort of 12 years, he said, he said, Steve, it is so much fun. I'm excited. Every day, I'm doing all these new things that I'm doing some of the biggest things in the world and they're working out wonderfully and I just sort of like can't wait for tomorrow. And I said to myself, how wonderful that we can have amazingly talented people fired up. And we have that all over the firm because at our place if you if you don't feel that way, you shouldn't be there. Because it moves fast. Like being on a really great NBA team. And can you imagine being on the court, if somebody is throwing you the ball and you don't bring your hands up and hits you in the face? That's the end of the point, basically, but you just can't be on the team. Right? And so, we have that spirit. It's, it's not because of me, it started because of me. But I'm sort of getting older. I mean, I don't feel older. But CDC says, I'm elderly, so I can get vaccine or something. But now everyone who's at the firm, has grown up in this system. So, if somebody else shows up, and we make a hiring mistake, and they don't have this drive, and they don't have this curiosity, they basically leave quite quickly, not because I have anything to do with it, or we have a system where it's sort of like, Hey, who are you? That's not how we behave, that's not our values. And if they don't change, then they can't stay.
Mo Lidsky (21:15)
I want to come back to something you said just a little bit ago, you mean, something interesting about, there are no patents and finance. And you constantly have to innovate. And certainly, Blackstone has done incredible amounts of innovation. I guess the other challenge of that, the other side is how you manage risk as you're innovating, and you've developed a reputation for risk management or preserving capital. And obviously, that's evidenced by the billions of dollars that institutional investors have entrusted you with. What do you believe have been some of the keys to your success in managing risk for three and a half decades? And after that, I'll probably follow along if we don't get to it, but and what are some of the greatest risks that you're concerned about today?
Steve Schwarzman (22:02)
Well, the way you learn to manage risk is by losing money. Try it. Everybody, and I would say I daresay everyone on this call, has lost money doing something, whether it's buying a stock that they thought was really good that went down, whether it was introducing a new product in one of their companies, they thought would be good. And it wasn't whether they did a small acquisition, and it didn't work out the way they thought, whether they did something bigger, and that didn't work out. Nobody in finance, hits 100%. It's just not possible because there's so many decisions that get made. And so, what happens is, is part of running a great business or running a great family group is learning from your mistakes. And, and never making the same mistake twice. Most human beings, try not to even focus on their mistakes, it's quite fascinating, or they blame somebody else. You can't do that. Because the only reason that person could make that mistake, if you're the person in charge, is that you put that person there. And you didn't train that person. So, either you either hired the wrong person, or they were the wrong type of person for the position, or they weren't trained. It's sort of like not their fault. And you also didn't put in protective systems to protect them from bad judgments. So, they visited that bad judgment on everyone. And so, you have to understand that that's the dynamic and if there is a mistake, and in my case, the third deal we did, we lost 100% of our equity, and I had people screaming at me, for those who don't like to be screamed at, because in my family, nobody ever raised their voice. I didn't realize till I went into college. That that was odd. I never heard anybody. It's my two brothers, my parents. I didn't Why would you ever raise your voice at some point? It just didn't make sense. But I had people screaming at me and I decided that was never going to happen again. So how do you deal with risk when you don't want to lose money? If that's a sinequan know what you're doing? Well, you learn okay. They're usually A variety of variables in every decision that involved downside. And what we do is we analyze those. And basically, I only pay attention to the top two or three, because those are the ones that really make the difference. And we repeatedly have meetings to debate among ourselves, and everyone has to participate in the debate. I don't believe in like paid audiences, I don't need anybody in a meeting to watch the rest of us think about that. Right? They got to read the same stuff. They've got to be a participant, that's the way you train people. And most variables, there's what's the probability that bad thing is going to happen? And how bad will the bad thing be? And so, you have that debate rigorously. And if you have three different meetings, like on the same thing, by the time you finish with a bunch of smart people in the room, and I recommend this for everybody who's on the call, you really know what your risk is.
Steve Schwarzman (26:29)
No upside justifies risking financial capital. So, I know I'm like an entrepreneur, people think I like risk. I've created a lot of stuff. Entrepreneurs hate risk. That's like, BS. Entrepreneurs love risk, who likes risk, you like a good return. But you don't want people screaming at you. And you're like a doctor, it's like, do no harm. Don't start out losing people's money, you'll find how unappealing that is, when they do it to me, I don't like that. So, by having that kind of rigorous debate. It's not even that you need a unanimous vote. What happens with smart people, you can see the risk, and you say, well, it's just too much, we're not going to take it the other side of the analysis. Of course, the upside, the upside is much easier. Because there's no meeting that anybody ever goes to when a new proposal where there's not somebody believing there's an upside. Right, and you do the same process. And by the time you have several meetings, with each meeting, resulting in the proposers of the investment having to go back and do the research, that further research, that kind of meeting I'm talking about, generates those questions. , you just keep learning and at a certain point, you say, Okay, we got it, we're okay. We're okay. And what this process also does, is it makes the approval of go decisions, not the responsibility of the people who propose the investment. Because most people who walk in a room think it's their ability, their job is to get what they want to prove to prove, and they will shade what they tell you. They will play with facts. They won't lie. But they'll display them in a way that isn't actually balanced. In our place, we don't do this, right? Because when you finish looking at things, it's a personal, non-personal, it's just about the goodness of the investment. And it also protects everybody, as people if we get one of those variables wrong, we don't have as good an outcome. It's not the fault of the quote, team. It's the fault of all of us, we have a fair shot on goal here. And so, we have a place every year where, for the last whatever, we've been voted the best place to work in finance. And it's because we protect our people. And what we're interested in is a good outcome.
Mo Lidsky (29:42)
Other than deals specific risks, are there any broad based or sort of a more macro risk that you're concerned about today? Anything that you could share on that front?
Steve Schwarzman (29:53)
Well, it changed a little with the US elections. But our number one risk is political. And that may be an odd things to say but as being a US-based company, we had some pretty odd things being discussed by the left wing of one of our two parties, and there was a chance that really could destabilize our own country. And the way the election turned out, that's pretty much off the table. We have, Democrats, and it's pretty clear now Joe Biden's much more of a centrist than the left side of his party. Some good nominations this last week being president. And on the other hand, the suppose that democratic blue wave, just the opposite happened, the republicans who didn't like those left-wing policies, basically, decreased the majority of the Democrats in the House by two thirds, appears that the Senate will be held by the Republicans as well, which is a break on some of these excesses that were discussed 37 of our 50 legislatures now have more republicans than them, Democrats they gained in the selection. So, the country in a pretty remarkable thing, decided they didn't want to run to the left. And has now got more balance. Now, in certain states where some of your members may operate like New York State, it's basically controlled by progressives with all kinds of strange proposals, which some of which have become law. And the state is having an extremely hard time with COVID. And the prospects at the moment don't appear particularly rosy, I'm hopeful, the same thing will happen, that there'll be a move to the center, what I've learned from investing globally, is that bad governments give you bad outcomes. Typically, as a business, and good out, good governments have the opposite effect. And so ironically, government becomes your biggest risk, they're, they're supposed to be representing you. And, and creating sort of a better life for everyone. As it works out, that's the number one source of risk. I mean, you've got a financial system throughout, certainly North America, Asia, most of Europe, is in pretty good shape, as a result of the reforms after the global financial crisis. So, finance doesn't appear to be the vulnerability it's really where we leave ourselves after this COVID situation, which is really devastated individuals and families and, and put a huge burden on society with increased alcoholism, and drug use, and depression, and unemployment and all these things that go together. That's a risk for a society which also affects the political component.
Steve Schwarzman (34:28)
Fortunately for all of us, these remarkable people in the pharmaceutical and research world have come up with a miracle in less than a year. I mean, you've got two vaccines, or any, I guess the third with AstraZeneca at 90%. Your Oxford won, with Pfizer and Moderna being 95% effective, and Johnson and Johnson are reporting I'm sure they'll have the same kind of results, there's a very effective vaccine in China, that it's been used, and the Indians are going to come out and what there's, this is just simply remarkable. And from watching the media, as we all do, you think that COVID, somebody won the presidency on that is going to be with us forever. If you have 95%, efficacy, and everybody took this vaccine, which everybody won't, but by the end of it, I think a lot of people are going to be doing this, then the impact of COVID is going to go away probably within if you had to guess 12 months, and you probably will have much more economic growth, although some will continue to be difficult and some patterns will change in the economy, will people travel as much even once you can? Or will they like zooming all together?
Mo Lidsky (36:18)
So that we just actually get a little deeper on that on that global economic growth? So obviously, COVID is impacted society and markets in a president manner. And obviously, the vaccine will be a catalyst. But do you see any other catalysts for increasing global economic growth? Because even before COVID, growth was sort of stagnating? And do you see any other catalysts in the picture?
Steve Schwarzman (36:43)
Well, you've already got interest rates that are at such record lows, that you can't depend on that. The only way to stimulate growth, I guess, as an economist would say is you need fiscal stimulus to start growth. I also think that once people feel safe, from a health perspective, they're going to come back with a vengeance on certain types of things. I mean, I have nice houses, I think the people on this call probably have nice houses. I don't know how many people want to be sentenced to be in their houses. And there are most of society that have places to live in that aren't so big. And once you tell people it's sort of like you blow a whistle, and you say, all safe, that's not going to be in the next three months. But as this vaccine rolls out, I don't think you can underestimate the impact of deferred purchases, deferred experiences. And then people wanting to reestablish more aspects of what we used to call a normal life. Now, you won't get stories back and malls in the same way because you don't need to do all that it's sufficient to do online purchasing. That doesn't mean all malls will be gone, and all retail will be gone. That won't happen. But the mix will certainly not dramatically swing back in that. That industry, but a lot of other things. I think we'll experience real uptick.
Mo Lidsky (38:49)
I wanted, just you touched on rates, and the fact that the Fed and other measures, central banks that basically cut rates to zero. So, given the implication of all risk assets in this kind of low return environment. , how are you managing expectations of your investors who are used to considerably higher returns, especially over a 35 year 30 year period that corresponded with one of the most meaningful declines in interest rates? , how are you managing and thinking about those expectations?
Steve Schwarzman (39:22)
Well, I think what you have to do is you have to be if you're talking about assets, that are equities, equity related assets, you're going to have to be involved with asset classes that have more than normal, absolute growth, because that's the way you're going to be able to deal with interest rates when they start turning around. And you have to make sure you don't set them up at such ridiculous valuations, that you're in a value trap in that regard. But when, when you have interest rates that swing up nobody's been mentioned that interest rates can go up, I don't know, I've been around doing this stuff over 50 years, I found they go up. And they and they go down. And right now, everyone's assumptions is that they'll never go up. But I've also found is the smart people are never wrong with their logic. They make mistakes on their assumptions. And the assumption that rates will stay longer for long, what is it lower for longer? , that's, that's fine, I'm not fighting that. But what I'm seeing when you rack up all these deficits, and you have most countries fiscal situation, sort of a mess, with being annual deficits. Usually, that results in something happening, whether it's higher interest rates, or inflation, or something doesn't, doesn't just stay where it is, today, where there's slack capacity today, globally, for manufacturing, to the extent manufacturing is important, although it's a minority of global economies as with services of being higher. So I think second thing with our types of businesses where you can control the assets, rather than just buy securities, that that then you have to have very robust management plans, business plans, strategic tactical plans, to add value to assets, if you don't have that capability, you won't be able longer term, I think to do as well, as you used to, we look at it and say, Okay, what does it take? I guess that's the name of the book. , what does it take for us to, to solve that puzzle that you just put on the table? Well, you better buy, right, you better be in good neighborhoods, where growth is high, and you better have a plan to make that operating assets better than it was. And so, I think you can do that we've managed to do that I was just talking to this morning, another one of these people I was interviewing, who worked at the firm. And he was telling me how he worked on a deal. And he just talks to investment bankers in his country and one of our assets, we're going to take public at seven times profit. Now, part of that is because multiples went up in India, and we've done a great job with this company. But at some point, it's going to be like a little harder. And we'll find a way through improvements to make sure the returns remain good.
Mo Lidsky (43:19)
You mentioned earlier again, I forget the exact word you use, but above normal growth rates are above average. Where are you finding those above average growth rates? Where are you finding yield? And how do you think investors should be readjusting their portfolios in this type of market?
Steve Schwarzman (43:40)
Well, those are two different questions. The first is that we're finding these types of what I would call very successful investments by staying in successful neighborhoods. So, we have a big emphasis on technology and Life Sciences. Currently, this is where some very innovative interesting things are happening. And where we can go places through our knowledge for example, in life science, our group, everybody's a PhD, forget guys like me, who just generic financial people, we don't add that much. But we've got people picking molecules that are right, to develop and test 94% of the time. That's, that's pretty astonishing. And we have a growth equity business that you should invest in. I'm doing it. No, we're our first two deals are Huge homeruns because what we do at Blackstone, which is different, is for example, if somebody invest with us, he sweeps them into our discount purchasing program, because we're one of the biggest business groups in the world. So, we buy things really cheaply, and we let anybody who's a portfolio company benefit in that. And we also have all kinds of expertise, that, that companies can use, and people are happy to invest with us. Because we can cross sell their products within our own group. And so, we start out with almost guaranteed in certain cases, products, successes for companies that join the group. So, all business people, everybody on your call, is probably pretty clever. We all find a way to win. We've got a lot of structural ways of doing it.
Mo Lidsky (46:11)
You said those are two separate questions. So, I gathered the second question is, how should investors be readjusting their portfolios in this type of market?
Steve Schwarzman (46:20)
I think as long as rates remain where they are, which is very low, and governments are flooding in their economies, you stay in equities, and you enjoy the ride. Because you've got it all working for you forget valuation, in that sense. However, when any of those factors change, then then you no longer are in the same super stimulated world. I don't know how long that will go on. But when you see interest rates starting to go up, the chance that equities will continue performing as well as I think lower, much lower. And I would keep, , Bond portfolios reasonably short, you don't earn much anyhow, what's an extra 1% of return to take duration risk? I mean, really families don't think like that. You're planning for the long term. So that's, I would look at those macro changes, and you don't have to be a genius, they announced them. And your job is to do something when they announced them, not as soon. They're either they're kidding. Or this time is different. It won't have any effect. Because the rides been so good
Mo Lidsky 48:01
Couldn't agree more. Just let me change subjects to something quite different. I want to come to the geopolitical conversation, particularly because of through your work at Blackstone and do your philanthropic initiatives with the Schwartzman scholars. You've had deep relationships with the leadership in China, and you've kind of had this front row seat to their evolution on the global stage. So, considering some of the recent challenges and kind of the last administration with China, and certainly in the last few years, and now with this new administration in place, what what's your personal outlook for the US China relations? And what does that mean for investors globally?
Steve Schwarzman 48:42
Well, I think there's no doubt that the US and perhaps a lot of the West has moved into a zone where they recognize that longer term, they will be competing with China. That doesn't mean that you won't be able to find common areas where two countries can work together, and regions can work together. And some of those may change. As the Chinese Tell me, we don't want to be American, or we would. So different form of government, it's been around over in one form or another, from the Emperor to the Communist Party, for over 5000 years, distinguished history, and, historically, they've always been, as best one can figure it out. 20 to 25% of the global economy. So, China looms Very large. We've had a change in the United States, which I guess is officially January 22. The Joe Biden and, and the Democrats, and they announced their foreign policy team yesterday. And these are smart, thoughtful people. And they, they speak relatively softly compared to the current administration, which the Canadians have had a lot of experience with. The Congress, and the United States still shares the same basic views on a variety of issues with China that they had before the election, and after the election, I think it'll be expressed differently, I think there'll be much more coordination between the United States and its allies. And I think China will, can continue on its current path, which involves more internalization, as a result of being denied certain high tech, semiconductor, other products. And China will continue to grow faster than any major country, in the world, significantly. So, this year, it'll be the only major company country that's growing. There'll be up 2%, probably, this year, despite COVID it's pretty amazing. And so, China will grow. , I believe there'll be more hurry engagement between the new Biden administration and China. What that results in is too early to tell. There'll be areas where the two countries, which comprise together just to shock you, if you learn nothing else, in this call, China and us together are depending on which set of numbers you're using, is somewhere between 35 and 40% of the entire world's economy.
Steve Schwarzman (52:34)
Now think about that. There, there are, I guess, somewhere around 220 countries, something like that. And what's your 1% of the come countries have? Have 35 to 40% of the whole pie. So, what that tells you is that there will be relationships between those two countries and their allies. And the only question is, how much accommodation where they'll be in either side? to the, to the issues that are uncompromisable? And what can you do around that? So, China's been opening, its financial sector is slow, but it's coming. They've given a bunch of people licenses. On the other hand, on certain tech areas, they want to maintain control of what their people know and hear and see. And they are not going to vary on that. There's a whole bunch of things that that they will overtime, do by way of forms. And in the shorter term. There are all kinds of things you can do on climate, on health, on terrorism, where our interests are basically aligned, and so we'll find those and reestablished better balance. There'll be some, like, human rights, where I think we will not see eye to eye on a lot of that, though. There may be some areas where we can, but fundamentally, they have a different attitude to classic western country in that area.
Mo Lidsky 54:38
Yeah. Two more questions I want to just cover off with you is because I see we're kind of edging in on time. One it just if you were restarting Blackstone today, what would you be doing differently? And essentially, I'm asking what's the vision for the next 30-35 years but that love to hear your thoughts on what you would do differently, if you were starting today?
Steve Schwarzman (55:02)
Well, geez, I'd be successful right out of the box and have no I wouldn't have the scars. I know what to do, because everybody on the call knows, as you become more experienced, you learn how to do things better, may miss something that's a late breaking news item. But your basic managerial skills are better your ability to deal with people anticipate things, it's the nature of experience in most cultures, it's sort of venerated. And so, I think if we started Blackstone, again, we'd have a different change in focus, as we did 35 years ago you'd have much more sort of tech life science, growth equity. Focus, with largest, Blackstone is the largest owner of real estate in the world, just by the by, we're really not a private equity firm, they call us that we have almost $600 billion of assets under management. And that understates really what we are, because that that would be an asset under management would be the equity, for example, in a company you own wouldn't be the value of the company, and it wouldn't include the debt and the capital structure. And so, we're probably getting a lot closer to a trillion dollars. I mean, this is big numbers, these are US dollars. And I would do the same thing, in terms of identifying asset classes that are really gonna do well, the strategy we have is still the right strategy, which is why we're continuing with it, which, which is always going into new areas, when they're either cyclically depressed and coming out, what one other helpful hint to you, is, don't pick bottoms. One, you're not that smart, two, nobody knows. And three, sometimes you stay at a bottom for 10 years, you pick the bottom, it just didn't come out. And there's nothing like having dead money, a real estate in Houston, for example, you could have bought 1982, or three, when oil and gas prices plummeted in 1992. office buildings use with the same price. Right, I eat so picking bottoms isn't a good idea. Another lesson for you, which I knew then, that I know better now is when things are cyclical lows. Wait until they start recovering. It doesn't matter if you miss the first 10 or 15% of profit. From the bottom, what's important is that the circumstances in that area have changed. And, and you can even get on that train at any stop. Right, and you load the boat as it's coming out of the bottom, but you don't load the boat on the way down. And when it is at the bottom. Because if you buy too early, you waste all your time and have the psychic pain of losses waiting for things to turn. If you buy at the bottom, unless it bounces, you don't make anything for a while anyhow. It's easy to just always make money. Right? And to do that, you just wait till they start going up.
Mo Lidsky (59:24)
I hear you. Let me just ask one last question. Because I, we can't particularly because this Lunches with Legends™ as a charitable endeavor. I think it's appropriate to just mention, first of all, you signed your name to the Giving Pledge, and you have made some of the most transformational gifts. So maybe if we could just close off with what a success and impact in philanthropy mean to you, and how do you measure it? I mean, the MIT college in artificial intelligence, how do you measure the success of these things? I mean, do you sound remarkable, but what does it mean to you?
Steve Schwarzman (59:58)
Well, I tend to get attracted to things that that I see going on where I can, I either can anticipate something very bad happening and want to put something in place to stop it. Or I can see the benefit of doing something that's very substantial. So just by examples for some scholars in China, I sort of 2011 I sort of anticipated that if China was going to grow very rapidly, eventually, they were going to create friction with the rest of the world, and I wanted to put something in place to stab future leaders in the world, Â sort of graduate school level, like the Rhodes sort of see what's going on in China and go back to their countries, and explain to them what China was thinking, but also feedback loop to China, to tell them when they were doing something that wasn't really selling. And so that was trying to protect the world. And, and we still serve that function now of almost everybody else has been marginalized, and we're in good graces. In China, we just, if you can believe this, we had sort of a 4% investment 4% acceptance rate in this program more competitive than Harvard, or Stanford. And we made all these We made an offers to roughly 156 people, we got 153. I mean, this is like surreal. And all from those kind of very excellent University. So that was one thing with College of Computing at MIT is based around artificial intelligence, which has the opportunity to, to, to be a force for good. And using AI to develop new medicines and efficiencies, or a force for not so good, with large scale unemployment potentially, and other things. So, so being involved in that both on the technical side, but also on the ethical side, to train scientists to be sensitive to what they're doing, as well as the business community, I think you can measure how that's going to work.
Steve Schwarzman (1:02:47)
I did a program at Yale, where I went to college, I'm sort of loyal to them I turned up as sort of a bumpkin. And , I left with a really good set of values and a lot of knowledge. And what I'm doing there is building their first student center in a performing arts center, it's going to be the center of campus. They never had a center, they operated through the Oxford Cambridge, sort of college system, without a central core. So now we're gonna have a central core, we can have graduate students, professors, and undergraduates all be in the same place, it'll handle 1,000's of people, it'll be open most of the day and night. It'll have all kinds of things, all the clubs, from the university, I'll meet there, it will be the hub and it will change people's relationships, it'll change the university, it's got the person, perfect location, right, , in the center of the university, and I've done something very large for Oxford, combining all of their humanities faculties and doing a big Performing Arts Center and starting another AI ethics operation, but there, it'll be domiciled out of the philosophy department, which is number one in the world, and their humanities areas, number one on the world. And so, something magical is going to come out by tapping into Oxford in all of their major areas to focus on what's good or bad for AI. So, so I, I do things because I think we can affect large scale forces. And, and nobody else in effect can do those. Because they haven't done them and , you have to be a little deranged to do these types of things, because when I think about them and develop them, they're very expensive, right? And usually somebody says, well, you're gonna pay for all this, aren't you? And you look at them and you say, You must be kidding. By, , at MIT, I, , I was worried about us competitiveness. I wanted to make sur, MIT had a dream that they'd love.
Steve Schwarzman (1:05:32)
I was working with the President, I said, What's your dream? And because I saw all the AI being developed in China, and he said, Well, my dream is to, I'd love to double my faculty in computer science. I said, Okay, what else? He said, Well, , I need a bunch of these people, to basically take my entire university and make it AI enabled, so will be the best generator of knowledge in the world. And I said, Yeah, that sounds pretty good. He said, Yeah, he said, Â what's going to happen? I said, what? he said, every other major university is going to compete with us. Because they don't want us to be number one, they want to be number one. And he said, this will result in a huge explosion of money, and effort put into this area, which is important for our national interest, but also for science generally. So, I looked at that, and I said, Okay, this is terrific. I said, How much does it cost? He said, I don't know, it's just a dream. I said, Well, price it out. So, it was 1,000,000,001. So, he said, Well, why don't you give me 1,000,000,001. So, what I want to do just sort of jump off a ledge. I said, I'm not gonna give you 1,000,000,001 I, and , so we negotiated again, 350. And then because I'm not a scientist, I said, if I'm going to give you 350, you have to put up 350. Because if you don't put up 350, You're the guys who know what they're doing. I just sort of have a hunch. And I said, if you put up 350, and I put up 350, then it's no word 700 were in great shape, will raise the other four 400, which is what we're doing. And so, they did it in three weeks. Make money. So, each of these projects, , the last few years, I've done like a billion dollars, , of my own money. And , created these really marvelous things, , for the good of the world. Yeah. And for me, , I just respond to things where I think there's a compelling need, that nobody else is either filling, or probably will. It's, it's no different than when we go into a new area in our business. And people aren't filling it. Usually like going in first. And if I see it, I, and those, those have, almost all of them have worked hugely. So that's what I do. It's sort of fun.
Mo Lidsky (1:08:29)
Steve, that is fantastic. On behalf of all of us, kudos to you for all that you do for our country, our world. Blackstone for your investors, really, and thank you so much for sharing your incredible insights with us. We really appreciate your generosity of time and wisdom and hope to do it again soon. And for all the participants really thank you for joining us. And if you haven't yet donated, please do so, by going to the top right of the website, click on the link that was sent to you. Lastly, we'd love your feedback and how we could make these conversations better every time so please complete the survey to bottom. Make sure pick up one of these absolutely the Steve's book, by the way, anybody donates $1,000 or more by end of day, I'll personally send you a copy of Steve's book. And really, Steve, thanks again for your support of Lunches with Legends™ and the projects that sponsoring.
Steve Schwarzman (1:09:18)
Thank you very much and  if you if you want overtime, you shouldn't invest in our Blackstone products. And I say that because I do. Yeah, not because you should. , these are good things to do with your family's assets. That's what my family is basically invested in.
Mo Lidsky 1:09:44
Absolutely. Steve, thank you so much for your participation. Look forward to seeing you again soon. Wishing everyone a wonderful day.
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Stephen Schwarzman: The Pursuit of Excellence
November 25, 2020 12:30 PM
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