It’s hard to beat today’s frothy fundraising market for jumping ship to raise a debut fund. But Stephen Schwarzman, chairman, CEO, and co-founder of Blackstone Group, this weekend cautioned young professionals to think twice before taking the plunge.
“The biggest mistakes I’ve seen people make in their careers is, when they’re good, after two or three years…they announce that they’re going out to start their own firm,” said Schwarzman, 67, when asked to give advice to new MBAs working in the buyout business.
Schwarzman, who co-founded Blackstone with Peter Peterson in 1985, made his remarks Sunday, Feb. 1 during an on-stage interview with Josh Lerner, professor of investment banking at Harvard Business School. The interview took place in front of an audience of MBA students, private equity professionals, reporters and others attending the school’s 21st annual Venture Capital & Private Equity Conference.
Schwarzman said he’s “begged, literally begged” some of these start-up-minded hopefuls not to do it, pointing out that they’re not far along enough in their careers, that they lack the experience and credibility to raise money and succeed. “They sort of looked at me like I was trying to discourage them so that they’d stay at Blackstone,” he said.
“That’s actually not the case,” Schwarzman said. “If someone really wants to go out on their own they’re going to go anyhow.” But he added: “Every (young) person who’s made that decision, in my view, has failed. Everyone. You have to have a certain cumulative knowledge and judgment and so forth in finance, and then you can go out.”
Schwarzman acknowledged the current fashion of viewing career failure, especially early on, as a springboard to great achievements. He said that failure may be an option in a field like venture capital, but not in private equity. “A few years” might pass, he said, before the founding partners realize that they’ve taken a wrong turn in their careers. They get “detoured for years, and getting back on a better track is really hard,” he said. “This is an extremely consequential decision for you and you’ve got to get it right.”
He counseled those that insist on trying to launch new firms to have something unique to offer. “You better have something that the world doesn’t have,” he said. But, even then, he added, “you might screw it up through your own ineptitude.”
To be sure, the story of Schwarzman’s own start in private equity appears to belie his cautionary remarks. He was just 37 when he co-founded Blackstone in 1985, having earlier worked for Peterson in the M&A advisory department at Lehman Brothers.
Boutique M&A advisory work was their first line of business, he said, but the pair soon had their eye on raising a buyout fund. They were drawn by the prospect of generating a steady stream of management fees that could sustain them while looking for investment opportunities, and of earning the still-standard 20 percent profit-share.
But this was in an earlier era and the buyout business wasn’t nearly as crowded. Blackstone raised a vintage-1987 fund of $800 million. “Only in the old days could you actually go out and try to raise $1 billion with two people who never made an investment…,” Schwarzman said. “That takes a high persuasive power, and an understanding of capital markets.”