In fact, he was “almost too relaxed,” one of my colleagues remarked, referencing Schwarzman’s appearance today at the PEA conference in New York. The founder of Blackstone Group was interviewed by Dow Jones’ Shasha Dai.
And Dai didn’t toss out softball after softball. She opened by asking him about his personal feelings on Lehman’s collapse (Schwarzman got his start at Lehman; Dick Fuld was in his partner class). His answer, by the way, was a believable “It’s very sad.” She closed by asking about Blackstone’s stock price, which has traded at close to a 50% discount since its IPO last year. He said Blackstone’s stock price was initially a scapegoat for the credit crisis, but that by this point the whole financial sector has been hit.
The most interesting answer I heard was regarding the way Blackstone is going to deploy all that money.
Schwarzman said that the average equity check in Blackstone’s last fund was $400 million. Holy mother of leverage! Do you realize what that means for $20 billion-plus deals like Equity Office and Hilton?
So the $400 million equity check hasn’t changed since the credit crunch, it’s just the deal size that has. Blackstone, like pretty much everyone else, is throwing in 1:1 equity to debt in deals these days. Meaning its still writing $400 million equity checks, but for $1 billion deals instead of $10 billion. Ok, you can still do deals of up to $4 billion or $5 billion. I buy it. But how does that translate to returns?
It ruffled Schwarzman’s feathers a bit when Dai started pressing him on this topic, though I think its because she got her hairs crossed, following up with a question more geared toward exits. I wish she would have asked him to tell us: (A) How Blackstone has the personnel and infrastructure capacity to manage a portfolio with 10 times as many companies; (B) How they’ll get their returns if they aren’t using half as much leverage, which no matter how you paint it, is where they get their returns. Are they just crossing their fingers that enough credit will come back eventually to do dividend recaps? (C) Is Blackstone out of touch with the middle market? What’s going to motivate a mid-market to company sell to Blackstone, when it’d become one company in a portfolio of a million, versus selling to one of the other thousands of middle-market buyout firms?
So Mr. Schwarzman, if you’re reading this (which might indicate you really aren’t doing as many deals as you say you are), I’d like to hear your case.
PS: here is a more in-depth summary of SS’s answers to some questions that got asked after my laptop died.