Businessweek Extra - Blackstone’s Steve Schwarzman

We spoke to Steve about his book about the pe world, about China growing up in Philadelphia. Here's that conversation. So if you think private equity, you definitely think of Steve Schwartzman. He co founded the private equity behemoth that is Blackstone today with Pete Peterson in the mid nineteen eighties after a successful career on Wall Street. He writes about his path, or what he calls a collection of inflection points that led him to who he is and where he is today.

It's all in his new book, What It Takes Lessons in the Pursuit of Excellence. It's so great to sit down with you congratulations on the book. Oh thanks, fun to be here. Well, and if you could see us, you could see that we both have very well worn copies of this. It's really a great read, Steve. Congratulations.

As Carol said, you know, one of the things that really jumps out to me is the stories of Wall Street, the stories from your early days sort of getting into it d L. J. Lehman of course Blackstone later on. How has Wall Street changed over the course of your career, Well, wall Streets changed enormously. Uh. When when I got to Wall Street, Uh, there there were a very large number

of firms uh doing different things. When when negotiated commissions were implemented in may day, the cost structure of most of the firms was very high. And what happened is they were no longer competitive when somebody offered to do a brokerage trade for fraction uh. And so you had this uh consolidation that occurred with firms going out of

business emerging with other firms. Uh and and ultimately you ended up with you know, ten firms down from probably in terms of active firms, probably a fifty so so so it was it was a dramatic change that that happened over a ten to fifteen year period and as results of that, everything changed. Is it a better Wall Street today? It's a different wall Street. Uh, it's certainly a much more efficient wall Street. It's a wall Street that can mobilize much more capital. It's a world uh

that that has printed so much money. Uh, not just in the United States, but the deficits that have run uh that that it's easy to to aggregate a lot of money to do a lot of things. It feels like so much of what you've become and what you've created really does go back to those early days, first at del J briefly and then obviously business school. But Lehman Brothers, that's where you were really forged in a lot of ways. Talk to us about that time, the

lessons you took from that experience. Well, Lehman was at that point, uh, fascinating place in the in the investment banking, but a difficult place. I would say, my my first day at work, somebody walked out of the elevator and welcomed me and said, you're very lucky to work here, because nobody here will ever stab you in the back. Actually, they'll just walk right up to you and stab you in the front. And I remember going home my wife said, how is your first day at work? And I said,

this is going to be a really interesting experience. Well, there's a line in your book that you say, Lehman Um, you write how your exit from Lehman had shown you Wall Street at its worst, with everyone for themselves. Yeah, I was le got into financial trouble and and you know, my own view, and everybody at the firm would have a different view, is is that the grown ups didn't protect the institution. They were too worried that the that the CEO who got the firm in trouble would fire

them if they sort of took him on. And and as a result, the firm was sort of frozen and we we had marked market uh loss in terms of our net worth, and so we were forced to uh sell the business because it was discovered that the net worth it's sort of gotten close to disappearing than your

ratings would go and the firm would collapse. So so you know, I I looked at that and it's a firm that was I guess about a hundred and fifty years old something like that, and and say, how how can this ever happen, and I never wanted anything like that to happen to anybody I was associated with. On the other hand, it was fascinating place with fascinating people. Uh. It was before I joined, before there were any MBA classes.

So the people who worked there were like x CIA agents, somebody from the entertainment business, you know, somebody from the oil patch. Everybody had a lot of different points of view, and it was a fascinating place. That's why I went to work there. And you forged some incredibly important relationships as well, not the least of which maybe among the most important, if not the most important, was with Pete Peterson. You know, you guys come out of that experience sort

of scarred in different ways. To do a large extent, you start having breakfast every morning trying to figure out what's going to happen next. Describe for us, if you will, what was at the crux of your relationship with Pete. Well, Pete was twenty one years older than me, and he was known all over the United States, and I was the young guy. Uh. And Pete was a very uh structured Suma cum laude type of process thinker, uh, which

was great. Uh, but I was more of a I guess you would call it sort of intuitive type of thinker. And and so when we did things together, um, you know, he would let me do like all the execution because for a while he sort of like try and rehearse what we do. And I said, don't worry about it. I'll walk in the room. I'll know what. I got this, right, I got this. Let's just you know it'll happen. And it does. So so you know, we were a very

good team for a very long time over thirty years. Uh. And um, you know, sort of incredibly productive and easy to deal with because we each approached the world uh, you know, somewhat somewhat differently, except when you guys went out on your own and that first time when you were looking for some money. You have a great story in the book. Uh there's lot of rain involved. And

you said it. I think at one point like he kind of looked at you like, would you get me into Well, anybody has ever started anything doesn't have to be on Wall Street. Anybody who started anything, including that for profits, It doesn't go the way you think. Everybody who starts something believes they're going to be very successful or they wouldn't start it. And what you find is that the world is not always waiting for you. In fact,

sometimes the world doesn't even respond to you. So when we started, we set out about five letters expecting people we used to do business with to call us and give us an order. And the phone never rang. H that's shocking, right, Uh, just normal courtesy. Uh. In the incident you're talking about. When we started our private equibusiness, you know, I would always call ahead if we were lucky enough to even get an appointment, to make sure

it was all said. I did that we want a solicitation at M I T. And we flew up from New York, uh, and for three o'clock meeting. We're there like a quarter to three, and we knock on the door, and you know, I can remember what that door looked like, you know, with that sort of uh you know, frosted glass so you can't see into it, with printed letters on it, and you know, you keep knocking on it.

Nobody comes and UM, so some janitor came by and I said, excuse me, we're having trouble getting in the door. He said, well, that shouldn't be a problem, but nobody's there. I said, why aren't they there? He said, well, they left for the weekend. I said, but but I called them. They're expecting us, he said, I don't know. They left for the weekend. And so you know, that was like a complete like waste of time. But but then what happened is, you know, some rainstorms came, and you know,

we didn't have a car and driver nothing. We didn't even have an umbrella. And so you wait, you know, like fifteen and twenty minutes for the rain to abate. It kept getting worse. So so I just walked out into the rain to try and hail a cab. But you know, from their administrative building, I was not the only person right, and the people who went to m I T were more clever than me. They knew how many streets up to stand. So I'm like standing in the rain, soaking wet, and then I realized I'm gonna

get nothing. So I said, okay, I'm gonna have to bribe somebody who's in a cab to let me in a cab, so after they drop them off, then I'll be able to go to the airport, taking Pete along with me, who's standing under the covered area and not wet with steam coming out of here. I'm not not complete steam yet, so I so I tried with you know, like twenty bucks, and you know I'd be knocking on people's windows. You know, they wouldn't turn them down. You know,

it's just what you would expect. So increased it to thirty dollars. But these were six dollars. There's more than thirty dollars. And I finally found somebody and they let us in, so Pete had to come and join me. So the rain was just tellusion. You know, he's walking out in a very dignified way, but there's no way you can be dignified when you end up being soaking wet, and you know, he sort of looked at me and give me one of those what did you get me into?

So obviously things have gone better since then. But I do wonder, from from a Wall Street and an investing perspective, from the creation of black Stone, if you were to pick one sort of catalytic moment, and you talk a lot about inflection points, Look, what was the moment with black Stone where you thought, okay, we've made it. Was it a deal, was it a higher, was it an exit? What was it. Well, they're all of those things that

are keys, as you've identified. There was one moment, uh, and we were raising our first buyout fund, and I said some modest objective of a billion dollars, which would have made us either the second or third biggest fund in the world. And neither Pete nor I had ever made an investment. So so this is somewhat of an assertion, uh,

that that that the world wasn't taking up. And we we had burned all of our close relationships and we had like seventy five million dollars, but it was all contingent on getting to five million because nobody wanted to be too big and we'd almost run out of everybody and uh, and we had a meeting at the Prudential Insurance Company in New Jersey, which was a lunch uh and uh we weren't close to the prew uh, and we came up with a concept because just selling a

private equity fund wasn't selling, that we put in our advisory revenues UH to to create a higher return for the investor. And so I was going through this um this concept as we were eating lunch at Prudential, which I had trouble with anyhow, because the menu didn't make sense. I didn't realize that that instead of the price next to things, there were calories. I couldn't understand, you know why the desserts cost so much. So so I'm sitting there and doing my my thing. Uh. In the chief

financial officers a person named Garnett Keith uh. And he was eating a tuna on white bread cut on a diagonal uh. And you know, I was watching you meat as I was pitching. Uh. And you know, he finished the first half of the sandwich, and then he finished half of the second part of the sandwich, and he looked up and he said, you know, I like this. I'll take a hundred million. And at that point, Prudential, which is the largest investor in UM in private equity

in the world, the gold standard. I just couldn't believe because that he did that, because if he did it, other people would follow and we would be successful. And I just kept watching and hope he wouldn't choke on the rest of that, because over right, and then we get nothing. So so you know, all entrepreneurs have have many moments where you go from like a certain failure to to hope and and and you know sort of

success that happened to be one of them. You know, it's funny in your book to you, right, you can't learn to be a manager, but you can learn to be an entrepreneur. You can't. I'm sorry, you can't learn You can learn to be you can learn to be a manager, but you can't learn to be an entrepreneur because being an entrepreneur involves seeing a lot of things simultaneously put him together and have the desire and the the ability to just say, Okay, this is gonna work.

I'm just going out there to make it happen. There is no fallback, there is no net, you know when when you're up on the high wire and you know the only reason you do that is that you are sure. Now, the fact that nine out of ten new businesses fails means that it is a delusional exercise. Right, So so to be that delusional and go out when the percentages are against you takes a certain kind of person who believes that they've figured it out to do it anyway. Well,

they don't think they're at risk. People who do these you know sort of books or whatever or interview entrepreneurs and talk about you know, you really like risk. Nobody likes risk, nobody tries to fail and and you know, so I've always found that whenever I do anything, whether it's a new charitable thing or whether it's you know, expanding different parts of of the firm, I like to be completely convinced that whatever we're doing is going to work. And I usually, um can explain to anybody why I

think what I think, and it's rational. But interestingly, hardly anyone ever responds and and competes with us when we start, because people are comfortable doing what they do. Uh, So you can tell them we're doing something else and they go, that's interesting, and then they just go back to what

they're doing. And it's part of the human condition. The same way when you start something and you think it's going to be easy because what you're doing is in somebody else's best interest, they like basically, no matter what they say, they like to continue what they're doing because

it works at that point in time. So so you have to come up with something that's that's really compelling, and then after you fail convincing them, you then go away for a while and you come back again, and if that doesn't work, you go away, you come back again. You never give up. And if you're failing everywhere, that means you need to fine tune what you're doing so you don't just keep doing the exact same thing forever.

But but the tenacity and the emotional stability you need in the fact, in the face of endless rejections is really not for everyone. Well, I feel like this leads and if if we may just talk a little bit about what's been going on in the world at large, because I feel like you have such a great vantage point in terms of some of the macro issues, and I think about US China and what you're just talking

thing about. I think you have two individuals who completely believe that their course is the right one in terms of US China trade. Um, you know both of them. You've been on behalf of the administration to China. I think you said in your books something like eight times talk about tenacity. Yeah, yeah, how do you see this

working out? Well? I think it's it's more interesting than two people because China has been the most rapidly growing country probably in world history over a forty year period, and then they did that with enormous energy central planning and also adopting a lot of things that are emerging markets countries do, which is hiding behind high terror falls uh. Closing its markets and if not closed, not making them as accessible is as the as the developed world does.

Uh and doing different things with intellectual property. And you know the US uh in um uh nineteenth century sort of did the same thing. We were a poor little country UH, and we found a way to use tariffs to protect ourselves at a certain point. That creates imbalances around the world. So so now that you know, China's got three trillion dollars of reserves, uh, it's it's the biggest producer and fulfiller of jobs in the world. So

jobs have moved from the developed world to China. Wealth has moved and the global financial crisis basically created problems for the developed world. So now we have roughly half of the people, for example, in the United States who have income and insufficiency. Uh. They're in a bad way. Uh. And and that creates populism. And and when domestic candidates for being attacked don't result in change for the people

who are in trouble, they find a foreign devil. Uh. And I was pretty sure it was going to be China for those reasons so so so in effect, China recognizes that that the circumstances of the world have changed. Um. But but like all people who have a really good deal, why would you change it? And you only change it because there's there's pressure and the change ends up being in their interest. On the other hand, UM, there are people in their country who don't believe that they just

want things the way they are. Remember, people don't like to change. And so here we have the developed world, represented by the United States, who wants them to change. So so it's a very interesting thing where China knows it has to change, the US wants them to change. It should be easy, uh, except uh, it's not easy because people don't like giving up advantage. Uh. And on the u S side, Uh, they would want to accomplish this rebalancing as quickly and as thoroughly as they can.

So so what's what's happening over the last two and a half years roughly, is these two giant countries, which which together have somewhere between thirty five of the world's economy. So this is like the two parents fighting, uh, and the children you know, are like hiding uh And they're upset. That's the rest of the world. It's just slowing trade. But long term potential decoupling of these two giant countries actually results in lower growth for everyone, right And how

much do you worry about that? How much do you worry about that decoupling, because that seems to be the biggest worry in the world right now, is that mom and dad will come together. They're splitting of the world. Right. Well,

partly that's happening because because there hasn't been the overlap. Uh. And and I think that because ultimately, um, you know, people are rational on a certain level, that that as as these two countries see that that's not working for them, uh, that that they'll come to a table, which is what's

happening now for the I guess the third time. Uh. And they're doing it not to just be helpful that they're doing it as they as they recognize that the short term in in trying to can remain fine with policy adjustments, but they're borrowing from their future and long term, if you really go off on your own and decouple, uh and have a slower growing world, what's the win? And that that's not a win, That's what and what

can you, Steve Schwartzman do to help this along. Well, I think there are a lot of people who know both countries, and I think it's it's it's important that that that people understand where this is ultimately going, which is not in their interest, and ultimately I I believe that people will act in their self interest and there will be an adjustment. No, no one can predict the way.

Sort of the media wants what's going to happen in October, and you know it's sort of in the you know, sort of I guess, but it's a who knows, because it's really about for the primarily it's about China. They have their hardliners, they have their reformers. What do they actually want to put on a table? And President she has to balance that right now, well, somebody has to balance it. And and and in May when the trade talks basically were I was gonna say suspended, but at

that point there were ended. Uh, you know, the balance of reform versus you know, sort of the harder line position. The harder line people you know, in effect had more influenced. Now as it's all becoming more complicated, not just because of trade, other decisions that China has made over the last two or three years are creating more complexity there. You know, they've got other things going on us as well.

They put pressure on them. Uh. That that that they're coming and saying, let's let's see if we can do something, uh is sensible. Uh It You can't get caught up in two people or any administration, because if we don't solve this problem. The attitude of the Democrats towards China is is, if not identical uh to to the current administration, it's pretty close. So I think China recognizes that, you know,

this is a structural issue. It's not a one US president. Uh. And so getting something to lower the temperature and helping growth globally is in everybody's interest. Will you keep going back on behalf of the administration? Well, I keep going back generally, Jason, because I have a you know, sort of an academic program called the Schwortzman scholars which is like the roads, and I go for that, and I have some business stuff and and you know, the trade stuff,

you know, sort of continue. So I always have a pretty full plate when I when I go to China. When your country calls, you say in the book, and I was curious what that program, the Shortsman Scholars program. By working so much knowing the United States, working so much in China, getting to know their society, their culture, their leaders, what that has taught you and maybe something that I feel, especially as the US China negotiations go on,

something that maybe people aren't aware of. Well, I think I conceptualized this in UH because I could feel, you know, a problem starting. I was wrong. It happened faster. But we're now in our fourth class UH, and it's it's

really fascinating to see how things are changing and adjusting. UH. You know, our program UH was was the only academic program ever been endorsed UH in China by the President of China, which happened to be President She's first proclamation after he was elected UH and President Obama did that for the U. S. Side. So so we have a

very unique UH position UH in China. And I think it's a very important place because as as things, you know, when they're bad between the countries, there's more nationalism on both sides UH that UM. You know, you you need a place that symbolizes, you know, sort of recognition that you need to understand what's going on both countries and

and find solutions. Choiceman scholars is global. We get about our students from thirty six other countries, and so it's a bringing together of some of the best and the brightest future leaders of the world. UH to get a master's degree, but basically learn about China and then be able to go back to their countries as as influencers, whether they become heads of countries or media celebrities, or

or heads of law firms or businesses. UH to be able to interpret what China is doing and also feedback to China when it's when it's when it's doing stuff that doesn't appear to be working. You know, here's what you should be thinking about. And that was Steve Schwartzman's CEO, chairman and co founder of Blackstone Group. You've been listening to Bloomberg this week Extra Shorter. Tuned into Bloomberg Business Week Radio Live Monday through Friday at two pm Wall

Street Time. That's I'm Bloomberg Radio. I'm Carl Math and I'm Jason Kelly. This is Bloomberg