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Stephen Schwarzman
Stephen Schwarzman
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Stephen Schwarzman Interview

Chairman and CEO, The Blackstone Group

June 20, 1999
Washington, D.C.

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  Stephen Schwarzman

The decisive moment in your career was probably when you left Lehman Brothers to found the Blackstone Group. Was that a difficult decision to make? There was a lot at stake.

Stephen Schwarzman: Yes and no. I didn't view it as particularly bold. One has to understand context, I think, on this.

In 1984, Lehman Brothers, where I had worked for my career, had been sold to American Express. I actually was the person handling that transaction. I was 36 years old, or 35, I forget which. I had a non-competition agreement, and as part of my wanting to do that deal, I wanted to leave for a variety of reasons. I didn't like what ethically had happened with the firm. I didn't want to be with the people -- not all the people but the leadership people -- so I worked out a situation where I joined the former chairman of the firm at Lehman, who had been pushed out, which necessitated the need for the sale. He and I had always worked very closely together. So all we were trying to do by forming Blackstone was sort of re-forming our own working relationship. We didn't view it -- and on this, I'm sure I was sort of colossally naive -- as that big a step. I knew we had always been successful doing almost everything together, commercially, and I didn't understand why we wouldn't be. The fact that we had no phone, no office, no company, that small little companies like this were not successful in investment banking, in fact they didn't exist at all -- there was only one of them that existed, which was a small firm founded by a fellow named Jim Wolfenson. Jim's currently the head of the World Bank, but even Jim had never done any larger mergers until that time. We just assumed that we would be accepted as the sort of equivalent of a Salomon Brothers or a Lehman Brothers or a Goldman Sachs or Morgan Stanley, and I guess that's the height of ridiculous hubris. Because we were too silly to understand that people might be worried about that, we went ahead, and it worked out.

[ Key to Success ] Courage

It sure did! It worked out pretty well.

Stephen Schwarzman: Pretty well. I must say, for those who haven't the experience of doing start-up businesses, at least in the mid-'80s, it wasn't quite as amusing as apparently it is in 1998 or '97 in the Internet, where there's tons of money available now. That was not the case then.

In New York, which may be atypical in the United States, people are only happy if someone they know well is failing. Particularly when you're more vulnerable in a smaller setting, like we were at Blackstone, I know there were many former colleagues who were staying at big firms, who were looking at what we were doing, and some were hoping that we'd make it. But you know, we were somewhat of a threat if we could make it just in a small organization and end up making a good deal more financially than the people who stayed at the large one. That was, in effect, a threat to a system. We were not aware of this, of course. All we were trying to do was pay the rent. We had more modest expectations at the beginning. But we took a number of large leaps at the firm, and part of that is -- you asked a question earlier, "What makes someone successful?" and I think that another answer is sort of feeling what's going on around you, seeing what's going on around you, and taking a big step to take advantage of that. One of those steps, for us, is the second year we were formed, we decided to go forward with a plan we had when we started, to go into the leveraged buy-out business, and neither my partner or I had ever done a leveraged buy-out, which one might think would be a liability when raising money.

[ Key to Success ] Courage

There's a certain pattern of this in your life.

Stephen Schwarzman: My partner is a very experienced, capable fellow, previously Secretary of Commerce and Chairman of Lehman Brothers. He wanted us to raise $50 million to do our fund and start doing smaller deals, learn, and then raise something larger. I had been over visiting one of the large firms, and I looked at their balance sheet -- it actually was a company called First Boston -- and at that point in history, they had a billion dollars of equity. I said, "You know what? I think it would be fun to have a billion dollars of equity without all the people," and I said, "I think we could do that. "

I went back and met with my partner, and I said, "We're going to raise a billion dollars," and at that time, there were only two other organizations on the planet that had a billion dollars, and he said, "How can we do that? We don't have any experience." And I said, "I know we can." I said, "The time is right." We're in the '80s -- it's sort of 1986. There's enormous momentum. Leveraged buy-outs are becoming very popular. They're going on the covers of magazines, on the front pages of newspapers. There aren't enough vehicles to take advantage of this. We're well-known people. And he said, quite intelligently, "That's a long way from a billion dollars," and I said, "I just know we can do this, and in fact, if we tell people that we want a billion dollars, then if they were going to just give us $10 million for a small thing, they'll give us 50 million, okay, because we'll have scaled up expectations." And he said, "You know, I'm going to be a good partner, but I think we're biting off more than we can chew," and he was probably right. We ended up raising $850 million, going through enormous amounts of difficulty. We subsequently raised another 100 million from one of those investors. So we got to 960 actually, at the end, and it launched the firm in a scale where we always did very big things, because that's what I wanted to do. It's also what my partner wanted to do. He just didn't know that that was achievable. And you know, none of us knew, but he was a good enough partner and a smart enough man to also back my vision of what I thought was achievable.

[ Key to Success ] Vision

Now that's just an instinct, and one has those types of instincts in my type of business. I don't know how one describes how you would know that that could happen, but it's from reading the newspaper, seeing what's going on, feeling what people are talking about, and just knowing that ought to be possible.

Can you recognize that in a young person's who's interested in becoming part of this world?

Stephen Schwarzman Interview Photo
Stephen Schwarzman: Oh sure. Sure. There are certain ways that people think, patterns of thought. In our firm, we've gone into a lot of new businesses, and we're subsequently quite big. We're one of the biggest investors in what are now called alternative assets -- which is leveraged buy-outs, real estate, hedge funds, mezzanine debt -- in the world, and every time we have one of these new perceptions that there's a really interesting thing to be done, you just do it. It's sort of like a basketball player who only shoots when they get a real good sense that they're in the zone, okay? It's not like a player who keeps forcing because they're throwing them the ball, that they've got to put it up, they have a cold hand, and they're throwing up bricks and they have to keep doing it. This is a game that you play only when you have a really strong feeling. It's like fishing in a pond that's been deeply stocked with giant trout. Now, you know that that pond is stocked, but other people don't necessarily agree with you, and there is a certainty that comes when you just know that things are lining up. You don't have to be very smart about this either. We went into the real estate business in 1991. I never bought any real estate. I didn't even understand it. I always felt uncomfortable with real estate, because buildings don't move and neighborhoods change. So can't you make a bad decision? Companies can at least change their products. Buildings don't move. There they are.

We were in the recession and real estate was collapsing. Everybody wanted to sell real estate, and somebody brought us a deal which had a 15-percent yield on it, a bunch of apartment buildings. An -- ironically -- Little Rock, Arkansas, bankruptcy of a savings and loan. I don't know if it was the same one that was involved with, you know, the more popular things of the time, and we could borrow money off of that 15-percent yield and earn about 23, 24 percent at the bottom of a recession with apartments that were close to new. And I said, "Well, what can go wrong here? The economy can't go any worse than it is now. If the economy gets stronger, then rents will go up. It's hard to borrow money now..." (at that time). And even with the difficulty of borrowing money, we were earning 24 percent on our equity. So I figured when times got better, money would be more available, interest rates would be down further, you could borrow more on the property, and so there was no downside, there was only upside. The present moment we were doing it was really already excellent. So why not just buy as much real estate as you could possibly find? And there was a whole country of real estate to be found at that time. Now to me, this doesn't go into the blinding insight mode. Anybody, when told those same facts, I would assume, would act rationally and would be buying real estate. In point of fact, the problem was everybody who would normally be buying real estate had already lost a fortune and was in no position, because most of them were either bankrupt or undergoing enormous difficulties with their existing properties. They couldn't go ahead, and if they went to a bank to borrow money, they were creating bankruptcies for the same banks, so the banks didn't want to talk to them, and we were sort of there alone with two or three other groups of people who had never been in real estate and saw the same things.

[ Key to Success ] Vision

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