In Good Company with Nicolai Tangen - Stephen Schwarzman founder and CEO of Blackstone

Episode Date: April 26, 2023

Have we reached peak inflation? Is there more economic turmoil to come? And how did he end up in a bar fight in Trinidad? Tune in and find out! The production team on this episode were PLAN-B’s Nikolai Ovenberg and Niklas Figenschau Johansen. Background research was done by Sigurd Brekke with input from portfolio manager Mikael Modum BiletLinks:Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Hi everyone, and welcome to our podcast in good company. I'm Nikolaj Tangen, the CEO of the Norwegian Southern Wealth Fund. In this podcast, I talk to the leaders of some of the largest companies we are invested in so that you can learn what we own and meet these impressive leaders. Today, I'm speaking to the legendary Stephen Schwarzman, the founder and CEO of Blackstone, the world's largest alternative asset manager. Blackstone has grown into a massive financial company. We own over half a percent of Blackstone, translating into 5 billion kroner or 500 million US dollars.

Stephen Schwarzman is one of the most successful and influential people in global finance. You for sure don't want to miss this one. It's a big honor to be here with you. Thank you so much for taking the time. Well, it's my pleasure. You have written this book, which I have in front of me, and it's called What It Takes. So my first question is basically going to be, what does it take?

Well, it takes, depending upon what you're thinking of achieving, it takes enormous focus. It takes emotional stability because you always have a lot of setbacks. It takes something that is a pretty unique plan. If you really want to have large success, it takes a big vision. I've always found that just doing what other people do and trying harder is not nearly as good as doing something different than what everybody's doing. When you left Lehman Brothers in 1985 to start Blackstone, what was your vision and your dream? Well, the dream emotionally was to feel the same way about what you you could be continually learning and meeting new people because I really liked that feeling.

What we tried to do was create a new type of financial institution. Hard to believe, but in 1985, there weren't what are now called M&A boutiques. MICHAEL GREENSTONE M&A is mergers and acquisitions. PETER SIEGELMANN Right. I didn't even think about that. I just thought that since at that point, I was running the largest merger and acquisition department by volume, that we could just do more of that. And the same people we were servicing would do business with us.

So that was the flywheel, the first business we were thinking about. But we came up with a strategic plan where we wanted to go into what's now called the private equity business, because I was advising the people who were in that. It was a very small industry. There were probably eight to 10 firms. And the people running them were all basically around my age, except one. And so I knew them very well, and a lot socially in addition. So that was viewed as a great potential business.

And the third thing we wanted to do was to go into new businesses in finance, typically when they were cyclically depressed. So we knew a turn was coming. And to be successful because my partner and I didn't have the knowledge in every business, we wanted to hire somebody who was a 10 on a scale of 10, who had great domain knowledge to build that business. And the third part of that strategy is we always wanted to keep control of that business so we always could have ethical behavior. And that was our three-port strategy. And as odd as it sounds, we're still executing that strategy.

You for sure are. Now, you say that you can learn to be a manager and you can even learn to be a leader, but you can't learn to be an entrepreneur. What does that mean? That means you can train and be trained to do a lot of jobs pretty well, to do a lot of jobs pretty well, including learning how to be a manager. It's a particular skill to do that, as you know from being one. But being an entrepreneur, which is a whole mix of things, it involves visualization, creation of new things, being alone, which most managers don't like, because when you start something, it's really just you or you and your partner. And then you have to go out and recreate everything.

It's a super heavy lift. And so people who like to do things like that, where there's a real prospect of failure, have a different makeup. And it requires 24-7 energy. And entrepreneurs look like they're taking risks, but entrepreneurs don't think they are, or else they wouldn't be doing it. And so risk is in the eye of the beholder, in a way. And so those people tend to be different. What's the main difficulty that people underestimate when they set up something? when they set up something? They misestimate the pain and suffering of being alone, being rejected,

finding out that some of the assumptions that you made to go forward might be wrong. So you have to like pain a bit? That's why many people are not entrepreneurs twice. That if you get through that period, then you make a successful outcome of it. You know, the idea of just going completely on your own again isn't so appealing. Has your investment philosophy changed since you started the firm? Yeah, it has. So what kind of things are you looking for now that you didn't necessarily look for 35 years ago?

Well, when we started, I had never made an investment. So only back in the mid-1980s could you go out and raise a huge pool of capital with two people who have never made an investment? We raised a total of $950 million back then, a million dollars, which- It was enormous at the time, right? It was enormous. Absolutely enormous. Still quite a lot of money. Yeah, well, not compared to where we are now, but I still think it was quite large. So when I started, we hadn't made an investment,

so we ended up making in our third investment a mistake, which was made by me. That was a steel company. Yes, that was a steel distribution company. And I sat at my desk. It was like, make pretending you were a grown up. And I sat at my desk, and I called them both in, and I listened to them, sort of simulating King Solomon. And I picked the person who had brought the transaction.

And we went forward with it. And the other person at the time said, I don't think that this investment will pay its principal and interest within three months. Well I think it was wrong. It was six months. And it was a disaster. And we put more money into it. We almost lost that. I sold that business to a French steel company. And we still lost the equity.

We got the second amount of money we paid back, and we protected all the banks who were in the deal. And it was a searing experience for me. In your book, you have 25 rules, and one of them is don't lose money. Right. Which sounds a bit like, I mean, it sounds a bit, if you excuse me, a bit of a lame advice because it's kind of, it sounds a bit, if you excuse me, a bit of a lame advice because it's kind of so obvious. No, actually not so. I realized having worked so hard to raise the money that I made one limited partner in particular furious.

And he had a right to be because we had lost his money on that. And it made a huge psychological impression on me. And I almost started crying when I was talking to this person who was then screaming at me. And in my family, neither of my parents ever raised their voice. So I heard raised voices in sports, but not in an intimate setting. And I almost started crying when this guy was yelling at me. And I remember walking out and saying, I'm never going to have this happen to me again in my life. What has that done to you then? Has it meant that you have become too risk-averse at times?

No, not really. It's risk-averse all the time. It never changes. And by that, I mean every time we look at an investment, our point of view is, is there any realistic alternative that could happen to us once we make this investment where we will lose money. And if that's the case, we don't go forward. So it doesn't make you risk averse.

It just makes you risk sensitive. Yeah, absolutely. Now, if you look at them switching to the kind of happier side of things and to the making money side, when you look at your best deals, have they got something in common? Yes. What is that? They're the easiest ones to say yes to. What does that mean?

That means in every organization that commits capital, you always end up with a thick memo, goes to an investment committee, it gets debated. And the most successful deals require the least debate, have the least controversy. They just seem completely logical at the time you do them. And that's usually how they work out. and that's usually how they work out. The more meetings you have to have on something, I've found that the outcomes can be good, but they're seldom great.

And some of those investments sometimes become ultimately uninteresting. So that's one thing I've learned. The second thing is to have a really great investment, you have to be in a really good neighborhood. You have to be working in an area where good things happen, where there's growth, good things happen, where there's growth, or if it's a cyclical, where it's really a violent kind of upside that you're going to be experiencing. Yeah, very interesting. If we were to move tack a bit here, so we are in a, what should we say, interesting times for sure, right? For sure. For sure.

Now, you have been through, I think, seven recessions. Where are we now? What is the world looking like? Well, we're going through a period, really, that was created by the pandemic, which affected the entire world, particularly the industrialized countries, US, Europe, and Asia. And as they say from studying the pandemic in 1919, pandemics affect almost everything. And usually it takes five years to figure it out. So we're in the end of the third year now. And as a result of the pandemic, people were locked down all over the world. And they didn't go to offices.

And at least in the West, about 90% still had their jobs. And they ended up saving an enormous amount of money because they weren't spending it on clothes. They weren't going to restaurants, the movies. They weren't going on vacations. They basically were living at home. And those savings are now being deployed. And so there was an explosion of purchases and desires for experiences,

which has not stopped. Now, there's also massive government stimulus, different in different countries, but it all put a lot of money in savers' hands. The mismatch of the production of goods that happened because different countries came out of the pandemic at different times, even within a country, different parts of it, our country, for example, and the states, some states were well-finished with COVID and other ones weren't, that there weren't enough goods for all the people to buy. And that mismatch created very high levels of inflation, regardless of what government had what policies. Inflation was everywhere.

So now we have the central banks raising interest rates. And they're raising them very quickly. And usually, when central banks do things like that in order to try and kill inflation, if they raise rates very high, very fast is that dislocation really playing out in financial institutions. But we're having all kinds of issues with financial institutions in the United States. started sort of last weekend. And we had two large bankruptcies, mostly caused by banks buying, over the last two years, very low interest loans, which is prevalent in Europe, of course. And as the Federal Reserve, central bank, and the ECB is going to do some version of

this, I think, starts increasing interest rates, those old bonds that the banks own aren't worth as much as when they bought them. And the higher the central bank raises it, the bigger those discounts are. And those discounts can be viewed as losses, and those losses decreases the capital in the banks, which makes depositors, when it's pointed out to them, nervous. And if they take their money out, and those bonds have to be sold to pay them off because you can't sell loans very easily in a bank, that then creates losses of capital and losses potentially of confidence, which is what happened. And our government responded to that by guaranteeing the deposits of those two banks. On the other hand,

guaranteeing the deposits of those two banks. On the other hand, people who deposit money in other banks are then worried, well, they get that protection if something goes wrong. The answer is no one knows. And so that creates more uncertainty. In Europe, up, the increases of the ECB are also starting to affect bank valuations with those stocks going down. What may happen as a result of this is that there may be more regulation on banks, certainly there will be in the United States, and uncertainty on depositors as to where to leave their money. To the extent that money goes either just to a few big banks or it goes into the capital markets, there may be less firepower for the banking system to fuel the economy. RAOUL PAL, Do you think there's a lot more turmoil to

come? JOHN BRENNAN It's hard to say. There'll be a period of adjustment after you have the second and third biggest bankruptcies in the financial system in the United States. That period of adjustment could result in a variety of different scenarios. I think most people think that for medium size and smaller banks, there'll be more pressure on those institutions. There's been a bias for 50 years to create larger and larger banks.

Europe has always had large banks. In the United States, when I started, there were something like 15,000 banks. It was a huge number of banks. Of course, there'll be less. The new form of re-regulation for the mid-sized banks will create pressure on economic growth, which will slow the economy. Are we going into a recession? If that scenario happens, then it seems more likely that you would have a recession in that scenario. Have we seen the peak of interest rates?

What a great question. Have we seen the peak? Well, we've seen the peak this week because investors have gotten so scared that they've changed their expectations for what's going to happen dramatically. They're projecting a much more profound slowdown than they were thinking before. I think the central banks are committed to getting inflation down to quite low levels. We say in the United States 2%. That could be 2.8%.

No one knows. But I think that the central banks won't give up on their quest to do that. But what will happen over a relatively short period of time is that there'll be some uncertainty as to how high they need to go again. And so they'll monitor the economy for the next two or three months and get that sense. And if inflation isn't really starting to respond, then they'll continue on their journey higher. So we should expect a breather now and then going higher? I think there are different ways of defining a breather. It could be either a pause or continuation to increase,

but at the 25 basis point level, that's a quarter of a percent in the United States. And there'll just be more caution by the central banks. So where would you put your money now? I always put my money in Blackstone products. Why am I not surprised? That's turned out to be a good outcome. Yeah, I think it's, yeah, for sure has made you an incredibly well-off person.

But do you think there will be a place to make money over the next, let's say, three years? Absolutely. Because what will happen if the financial dislocations that are happening now forces the economy down, as you say, I've been through this seven times, that there will be a lot of forced sellers of assets. And you'll have lower asset prices and people under real pressure. And the way our business is constructed at Blackstone, we raise money ahead of time and then only deploy it.

Unlike managing stocks, we don't deploy the money until we happen to have interesting things to do. What happens is that there become a huge number of very interesting things to do within that three-year window. That's when you do your best deployments. You don't make the most amount of money when you're buying near tops of markets. And you usually can tell when you're at a top because your friends who aren't very smart are making a lot of money. And the reason they are is there's too much credit around.

So now credit is going to contract. And when that happens, there are a lot of businesses that suffer and people who become overextended. And that is like the moment for us. My approach has always been, our approach is, you wait until you think you're at the bottom. You don't have to invest at all at the bottom. It's just fine if the world starts getting better. Yeah. Why is that? So you talk about that you want a 10% bounce from the bottom before you get engaged. Why is that? Well, because what happens is people always think that you're buying at the right time.

And so if it's a bunch cheaper than it used to be and you buy something, it can go down further and then it could stay that way for a few years. There's one example I use. You could have bought an office building in 1982 after oil collapsed that first time. And in 1992, it still would have been the same price. You wouldn't have made any money. If you bought it in 1992 when it all started going up, you would have done really well. So calling bottoms is something that you'd think would be logical, but it ends up not being completely wise. Moving on to leadership,

what's the best leadership advice you have ever received? Well, leaders listen. What's the best leadership advice you have ever received? Well, leaders listen. And asking people their views is a very important thing. And I've found, as a leader, not being the first person to speak is really important. I think in a leadership position, every word you use gets amplified by the listener. So you have to be exceptionally careful about what words you choose and the emphasis you put on words.

You talk about hiring the 10s. Now, what is a 10 compared to a 9 or 8? Well, a 10 can do almost anything. If they were a basketball player, they'd be like Michael Jordan, you know, or Steph Curry. Or if they were a football player, they'd be like Tom Brady, who's the greatest of all time as a quarterback. How do you find them? How do you identify them? Well, they sometimes seek you out. Sometimes they're extremely well-known. And you know one when you see it, when you're talking to someone. Tell me, how do you know it? Oh, it's pretty easy.

You meet someone and you start talking about something in their sphere of influence. And, you know, they just light up and they're perceptive, and they explain what's going to happen, and why it's going to happen, and what they've done in the past with these types of things. And conversations with people like this professionally can be pretty unstructured. professionally can be pretty unstructured. And they see the whole field of play. They have a sense where the world's going. They can explain what they do.

So now we are in a job interview, and here is my CV. And how are you going to find out whether I'm a 10? Well, it depends. I never know when I interview somebody what I'm going to talk about. I'll read their CV before I go into the room. Usually, at the bottom of a CV, they always have something odd like, climbs the Himalayas jumping on one leg. You know, they write something where they really want you to talk about it. And so depending upon my mood, you know, I'll go right for that and say, well, what makes you go up mountains on just one foot?

Is it too easy on two feet? And so you've now, you've now created a bond with that person because they wanted you to ask about that. So, they obviously have an answer. Now, one of the things we are concerned about as a fund is CEO pay. And I'm actually not going to talk about your pay because that's mainly from your ownership in Blackstone. But do you think there is such a thing as too high CEO pay? Well, it's an interesting concept because I don't think that much about pay. Why not?

Here, everybody tends to invest in the investments that are made. And that's how really big money is made. So it's completely aligned with our investors. And our people get well paid because people who do our kind of work historically have gotten well paid. So there's a certain competitive nature if you decide to take a different point of view, you can't hire people. I think that as long as our investors are doing great, and investors in our stock are doing great, and our people are doing well, that's fine.

RAOUL PAL, But when you look at elsewhere in the US, are there times when you think, gee, that was over the top? PETER BAKERLIN, Yeah, I think the answer for that is sure. There are certain times people have been paid money. I sort of look at it, I scratch my head, and I go, what is that about? Where is the value being added? I don't mind large compensation packages for people who are truly gifted and are creating something unique. If you were Bill Gates starting Microsoft, my goodness, changed the world.

Now, one of the things which is happening in the world now, of course, is the relationship between China and the US. Now, you've been interested in China for a long time. What kickstarted your interest in China? What was interesting, I took my children to China in 1990. And just for your listeners, to show you how much the world has changed, we were one of only very few people in an automobile in Beijing and in Shanghai. Everyone else was on bicycles. It was extraordinary.

Bicycles everywhere, cars nowhere. In 1990, China's gross national product per capita per person was probably around $200. Now, the average is somewhere around $13,000. So it was the most rapid growth of any large country in history. So it's an interesting place. I hadn't been back since 1990. And we were going public in 2007. And I got a phone call from somebody I didn't know well, who I'd hired after three interviews to be our partner in China.

Two months after he joined us, he called and said that he was on the board of their largest bank. After the board meeting, the chairman of the board said there was somebody wanted to see him. And it was two individuals. And he called me after that meeting. And he said they wanted to invest $3 billion in the Blackstone IPO. I said, well, they must be very rich. He said, no, they're not rich. I said, well, they must be very rich. He said, no, they're not rich.

I said, well, where do they work? And he said, they don't have jobs now. I said, so two unemployed, not rich people are going to give us $3 billion. I said, is there a reason you're making this phone call to me? Because I was watching television. It was nighttime, and I was reading some of my office work at the same time. And the phone rang. That's when we actually had phones that rang as opposed to carrying them around. And he said, yes, you should take them seriously. I said, why?

I said, what did these guys do before? He said, well, one was the deputy finance minister of China and the other one was the deputy head of the central bank of China. I said, well, why were they fired? He said, they weren't fired. They were just removed from what they're doing to do something else. I said, well, why aren't they doing it? He said, well, they haven't been reassigned yet, but there's a rumor that China is going

to start a new sovereign wealth fund and that they are going to be the two top people. And I said, well, why are we taking this seriously? He said, well, you obviously know nothing about China. And two people in these positions would never come to see you. And that's the China Inc. wanted them to do it. I said, what's China Inc.? He said, Steve, it's China, the country. They're speaking for the country.

Now, you've been incredibly close to the people who really matters there ever since. How do you read the situation now? Well, the situation now is pretty complex. I think the pandemic has made life and communication among countries all over the world different. And so the pandemic is ending in China now. After three years, it ended after two years in the developed world. I think it's pretty clear the relationships are strained.

And that needs to be addressed. And how do you assess the relationship between China and the US now? Well, I just said the relationship is really strained. And that type of thing entire world's economy. People think of them as just two countries among roughly 200 countries in the world, right? 1% of the countries. But they're like 42% of the economy of the world. So these are very important issues when countries are not in a more seamless kind of relationship

and they're having difficulties. So that affects the whole world. So, you know, that affects the whole world. We have tens of thousands of young listeners to this podcast. What kind of advice would you give them to the young people today? You should recognize that you're only going to be really good at something that you'll really love. When you enter the grown-up world, there are all kinds of different jobs to take. Some are very prestigious. Some aren't.

You can start with a prestigious job to gain foundational skills, but you have to end up doing something that you love. Because if you just sort of like what you do, then it is work. If you do something where you have the aptitude and the care and the excitement of what you're working on, it's not work. It just becomes you. And that's when you can do some extraordinary things. So, it's really about finding a match between something you don't know, which is the outside world, and yourself, which you increasingly learn more about as you get older. Well, Stephen, it certainly seems like you have found the perfect match between what you love, your passions, and what you are exceptionally good at. Thank you so much for having taken the time.

It's been a true pleasure. Well, it's great to have the opportunity. You have an incredibly challenging, interesting job, and that makes it fun for you. And for the rest of us, I feel very fortunate to have stumbled into finance, particularly since I don't have good math skills. So it shows you that what makes you successful in something isn't necessarily what people would think. And knowing how people think is more important in finance and how they'll act or the ability to identify problems and how to solve them is more important than math.

And everybody thinks finance is math. And it's not. I agree. Very good. Thank you. So, Stephen, one thing that not many people know about you is that when you were a student, you had a summer job at a Norwegian tanker.

And you were sailing to South America, and I think you got into a bit of trouble at a bar in Trinidad and were saved by the Norwegian crew. Well, that was true. Is it perhaps something you don't want to talk about? No, no, no. It was a fun part of my life. When I was 18, between my freshman and sophomore year, my first and second year in college, I wanted to see the

world. I wanted to learn something. So I decided an interesting thing to do would go to sea. So I went to the Caribbean, and I went to Trinidad. And so we had our one night in Trinidad, and I saw a very attractive woman there. So I went over to see what my luck would be for that night. And some people came over to me very angry at me, and I had no idea why they were angry at me. And one of them sort of hit me.

And I'm not used to being hit. me and one of them sort of hit me. I'm not used to being hit and I couldn't understand what was going on. My crew members came to defend me and it ended up like being in a movie where people were fighting with each other and taking chairs and hitting them over other people. And I was just standing there going, what in the world is happening here? So retrospectively, I found out that that woman was evidently, you know, was supposed to be with a guy from that other crew. Well, how would I know something like that? and And it ended up as like a you know

The police ended up coming and breaking the fight up and that was my first day on shore But you know, I learned that I like Norwegian cheese And I think they had Ringnes beer. That's right. And I was working in the engine room, and it was so hot there. It's like 110 to 120 degrees. And I would drink this beer, and I could watch it coming right out on my skin.

And so it was a tough, tough first job. Well, Stephen Trostman, from the engine room of a Norwegian tanker to the COO, founder of Blackstone, what a journey. Well done. It's a fun journey.