What Steve Schwarzman Wants
The private equity behemoth, Blackstone, represents an interesting counterpoint to Blackrock, which I wrote about in my previous post. Both in terms of how the firm cashed in on the bull market – and how it is performing during the recent drawdown.
Over the past year, as worries took shape about the stock market, Blackstone’s stock is up 24 percent, handily outpacing Blackrock, which fell 24 percent and the S&P, down a percent. Over the past five years, the numbers are even more stark:
Blackstone: up 247 percent
Blackrock: up 62 percent
S&P: up 71 percent.
To be sure, Blackstone has not been impervious to the sharper downdraft in recent weeks. Investors have bailed on all financial stocks and Blackstone has suffered in kind, down 18 percent for the year. Still, its dramatic outperformance in recent years highlights the extent to which alternative markets – private equity, real estate, hedge funds and corporate credit – have boomed during the bull market.
What makes the Blackstone/Blackrock comparison even more intriguing is that in the late 1990s, Blackstone owned a large stake in Blackrock. As one would suspect given the egos involved, Fink clashed with Blackstone co-founder Steve Schwarzman and Blackstone sold its position in 1994. Schwarzman has called his decision to sell an historic mistake.
Indeed, it should be said that both Blackrock and Blackstone – co-founded by Schwarzman and Pete Peterson in 1985 – are arguably the two most successful Wall Street startups post Goldman Sachs (1865) and JP Morgan (1895). Blackrock makes it money via a high volume low fee model. Blackstone is the opposite: smaller AUM, chunkier fees. Look at it this way: last year both firms made, in effect, the same amount of money – $6 billion. Yet, it took $9.6 trillion in assets to get there for Blackrock compared to $881 billion for Blackstone. Extraordinarily, Blackstone’s AUM, as of the first quarter, is $955 billion – the firm is a fund flow machine.
The view on Wall Street is that because Blackstone’s AUM is stickier and longer term, compared to whippet quick ETF money, Blackstone will be less exposed to a market downturn. Perhaps: but it's worth noting that Blackstone, like Blackrock, cashed in mightily on a decade of rock bottom rates via its real estate business. It's now the largest landlord in the world – which is probably not a good thing to be in a time of rising interest rates.
Which brings me to Steve.
Out of all the characters I have covered, few if any capture this idea of want more than Schwarzman. And let's not call it greed either. At each stage of his career, from his days as an ambitious investment banker at Lehman Brothers through the emergence of Blackstone as a global power, he has always pushed for more. Yes there were the typical baubles of the ever striving plutocrat – Palm Beach/East Hampton/St. Tropez mansions, jet/helicopter, the cachet of 740 Park Avenue, his name carved in stone at The New York Public Library, but none of this was enough. On Wall Street, if you are never sated, you tend to blow up – or, you can create history.
Which is what Schwarzman has done with Blackstone – a financial firm without precedence in terms of raw profitability and its ability to transform its top executives into billionaires. Moreover, unlike many of his peers, Schwarzman has engineered a stress-free succession plan (contrary to Fink, who does not seem inclined to hand over the reins) with the widely respected Jonathan Gray now running the firm.
Yet he shows no sign of slowing down. Each quarter, when Blackstone announces its results, it is Schwarzman that leads the call and takes the first questions from analysts.
He is 74 years old, worth $34 billion and last year was paid – in cash – $1.1 billion.
Schwarzman popped up on my radar in 2004. Wall Street was still licking its wounds from the bursting of the tech bubble and the corporate crime wave (Enron, Worldcom, etc.)
No one really cared about private equity in those days. Henry Kravis, Barbarians at the Gate – that was the stuff of the 1980s and few took notice of Schwarzman and the money he was minting at Blackstone.
I had read Greed and Glory on Wall Street and though he was not one of the main actors in the Lehman drama, when he was on stage, he hummed with intrigue and ambition.
Blackstone was just emerging as a financial heavyweight, but I could sense that Schwarzman wanted more. He was a big Republican donor, a classmate of President Bush at Yale and there were the vaguest of rumors that he had aspirations to be Treasury Secretary.
I pitched his flak and to my surprise, Schwarzman bought in. Soon the flak disappeared and it was just me and him. Cocktail parties at his apartment, soirees at the Kennedy Center (which he chaired then), long phone calls, everything on the record. This type of access, for a Wall Street executive of his stature, is unusual – it was as if he was inviting me to observe the essence of him.
One day we were being served breakfast in his palatial triplex at 740 Park Avenue that had been passed down from John D. Rockefeller Jr. to corporate raider Saul Steinberg, who upon going bankrupt, sold it to Schwarzman.
He told me he wanted to be a Wise Man like Averill Harriman, the railroad billionaire who created the template of mixing brute fortune with Washington wisdom.
Here is what I wrote in my piece:
Mr. Schwarzman dates his interest in public service to a three-hour lunch he had with the 78-year-old Mr. Harriman, also a Yale graduate, in 1969 at Mr. Harriman's town house opposite the Metropolitan Museum of Art. "I wrote him a letter and told him I was interested in the public world," Mr. Schwarzman recalled. "He asked me to lunch, so I went out and bought my first suit and we had lunch on trays in his living room."
Mr. Schwarzman, then a Yale student, still remembers the small details: the man in the white coat opening the door, the bust of Robert F. Kennedy on the mantle, the calls from Mr. Vance updating Mr. Harriman on the peace talks with North Vietnam, and not least of all the Impressionist paintings on the wall. "I thought -- 'jeez, this is remarkable,"' he said. "And, 'wouldn't it be wonderful if I could have some elements of this in my life when I grow up?"'
I remember the moment as if it were yesterday, the snapping of synapse in my brain. Schwarzman was wearing a crisp white shirt and a power tie: his steely blue eyes bore into me and he had a hunched intensity about him, as if he might explode.
Here was want in its purest form, a disturbance of the heart – as Saul Bellow put it in his description of the cravings of Eugene Henderson, the rich pig farmer and eponymous Rain King – on full display.
In 2007, just as the markets were cresting, Schwarzman put on a fin de siecle, multi million dollar bash to celebrate his 60th birthday. It was on the face of it, a ridiculous thing to do. Wall Street was awash in boom time profits and bonuses and chronicling the excesses of financial kingpins was a sort of holy grail for financial reporters.
Any PR guy would have told him – Steve, now is not the time. But he proceeded: Patti Labelle, Rod Stewart, 500 guests, and, bizarrely, decor that replicated his living room at 740 Park. When he found out that I was going to write it up, he appealed to Arthur Sulzberger Jr. himself to get the piece killed – but I don’t think his heart was really in it.
Yes, the publicity was brutal, but he was no longer just another private equity big shot. Everyone knew his name. Blackstone continued to churn out cash. In 2009 the firm went public. He was now officially a billionaire. But he was not satisfied: his stock was undervalued, he complained to one and all. I did another story on him. He was done talking to me, but I went to a conference and watched him plead his case. He was still vibrating, berating investors: don’t you guys see what I am doing here with this company? You need to buy Blackstone stock – now!
Since that story – September 4, 2015 – Blackstone shares are up 400 percent.
What more can a man want?