Stephen Schwarzman is considered one of the founding fathers of private equity. He co-founded Blackstone in 1985 and is chairman and CEO. The New York private equity firm has $545 billion in assets under management, but things weren’t so easy for the firm when it launched more than three decades ago. Schwarzman’s new book, What it Takes: Lessons in the Pursuit of Excellence, weaves life-lessons that the executive learned in his time on Wall Street, in private equity and as a philanthropist with basic advice for readers.
Q: With all the problems Blackstone had raising its first fund in the 1980s, what advice do you have for new firms trying to fundraise now?
The experiences that I described in the book are universal. It’s hard as a smaller manager or a new manager to get people’s attention and get easy yesses. It’s a very painful process. It’s also very helpful to have people working with you who know people you are going to be seeing if possible, just because it gives you additional credibility. There is no getting around we were one for 17 in terms of success with investors. [Back then] we were well-known people, not private equity investors. Back in the day, you could sell yourself to LPs based on more generalized talent and knowledge of finance… Recommendations from third parties are really important. Having a differentiated strategy is also really important. Having tenacity and going back to the people who tell you no—not to annoy them but sometimes they haven’t completely understood your selling proposition. Sometimes things change within their own organization in terms of priorities. Just because someone rejected you doesn’t mean six months later, or nine months later, it’s not worth another attempt. Don’t try the same exact way. You have to be somewhat adaptive and evolved in terms of how you approach the description of your fund.
Q: What’s the biggest error an emerging manager can make?
Absolutely the biggest error is going to your best prospects first. It’s human nature to go to your best prospects so you can get the most momentum possible and make the easiest sales possible. What it mostly does is destroy the opportunity to achieve success, because presentations at the fundraising cycle aren’t nearly as good as when [you have already] made 25 to 30 percent of your presentations. Inevitably, you will know how the market is responding to you, how to answer questions you haven’t thought through and what the market is looking [for]. There has to be a meeting between what you think and what the market thinks. If the market doesn’t agree with what you think, you will fail. If you are selling something the market doesn’t want, it’s better to know that early before you get to your best prospects so you can adapt your fundraising strategy.
Q: Did you have a placement agent for the first fund?
We didn’t start out with a placement agent. We started out alone. We needed a placement agent for Japan, so we hired Credit Suisse First Boston and Bankers Trust, which subsequently sold to Deutsche Bank. After we started working on Japan, we started talking to them about where we were having problems in the U.S. We were very fortunate to have professional advice and relationships. In one case in particular, this was General Motors’ pension fund, which was the largest corporate pension fund [back then]. We’d been rejected four times by the PE team. One of the people was very good friends with the head of real estate, so we got in the door on the fifth time through real estate. He really liked what we were doing with private equity. He talked amongst his colleagues, and we ended getting a $100 million commitment for Fund I.
Q: What’s one deal you regret not doing?
There are a lot of deals I regret [not doing]. I wanted to buy into Bloomberg when the valuation was around $500 million. I could’ve bought 20 percent for $100 million. Bloomberg is now worth $50 billion. That $100 million would be worth $10 billion. That was 1989. Why did I pass? I didn’t want to pass but Mike Bloomberg said he didn’t want a partner who would want to sell his interest at any time. He would never sell his. I explained that our capital had 10-year life and he said that was too short. By the way, Mike has never sold his stock either. He was good to his word.
Q: What are you reading?
Non-fiction now. I used to read all the Jack Reacher novels. I would sort of gobble those things up. But they don’t produce many Jack Reacher novels anymore. Now for some reason, I’m sort of more interested in non-fiction. I just finished a book that basically describes the eight times a [U.S.] president has died or left office. The vice president would have succeeded them—what happens to the country, to those vice presidents? A lot of times the vice presidents are chosen because of their different philosophy than the president, they deal with a different constituency. The country gets someone whose philosophy may not be what you’re expecting.
Action Item: Here’s the SEC filing for Blackstone’s latest flagship fund.