“We were so low that people would take advantage of us. People we knew well would just lie to us. One of my favorites was a company we did an enormous amount of work for and really helped save. We then went to see the CEO and he said, ‘I really love you guys but we just don’t make these kinds of investments.’”
When you hear an investment banker recounting the tribulations of raising a private equity fund, your first response might be to get out the metaphorical small violin in your head. But when I met-up recently with Stephen Schwarzman, The Blackstone Group’s Chairman, CEO and co-founder, and heard several statements like the one above, I came to appreciate that he and his co-founder, gentleman capitalist (and former Commerce Secretary) Pete Petersen, endured their fair share of indignities and near-fatal setbacks on the road to establishing Blackstone as an alternative investment management powerhouse.
At 38 years old at the time of Blackstone’s founding, Schwarzman was already successful and celebrated for having played an integral role in orchestrating a rescue of Lehman Brothers from a set of risky trades spurred on by its then-trader-CEO Lew Glucksman. But Schwarzman’s journey from banker to Wall Street entrepreneur to head of a $500-billion-plus asset manager is more interesting and nuanced than I had realized. On that basis alone, Schwarzman’s new book easily clears the hurdle rate for the entrepreneurially minded, and especially for those interested in the unique challenges of scaling a financial services business from scratch.
Feature image by John Moore/Getty Images
At its best, the book conveys Schwarzman’s core insights through detailed and sometimes amusing recountings of pivotal moments throughout his career and, somewhat surprisingly, his personal life. As you would expect from a Wall Street titan, many of the moments singled out involve big deals, big fund commitments and other assorted forms of triumph.
Image via Stephen Schwarzman
But far more insightful are the episodes recounting Schwarzman’s misjudgments, such as his inflexibility in negotiating with Larry Fink over Fink and his team’s ownership interest in Blackstone Financial Management, which was at one time half-owned by Blackstone and would be renamed BlackRock in the wake of the Fink-Schwarzman fallout:
“I made the mistakes of an inexperienced CEO: I let the differences between us brew … Instead, I should have recognized that when a situation changes and a business is doing extremely well, sometimes you have to make accommodations.”
Although there was no silver lining in the separation with Fink, other misjudgements detailed in the book became integral in helping to transform Blackstone from just another shop of Wall Street dealmakers into an institution. An especially notable occurrence in that journey was Schwarzman’s ill-fated decision to purchase Philadelphia-based steel distribution company Edgecomb, and the subsequent rebuking he received from an LP when the company’s performance nosedived along with steel prices:
“He asked me to sit down and started screaming at me. Was I a complete incompetent or just stupid? What kind of imbecile would squander his money on something so worthless? How could he have given a dime to someone as inept as I was? As I sat there absorbing the punishment, I knew that he was right. We were losing their money because our analysis was flawed. I was the person who had made the decision. I don’t think I have been as ashamed as that in my life before or since.”
In the wake of the botched investment, Blackstone fully revamped its investment process in an effort to depersonalize and de-risk decisions, create shared accountability for each deal and institute a so-called constructive confrontation process that included an “only criticism” rule. That process has resulted in a distinct way in which the firm does things, which has enabled it to grow beyond private equity and become one of the world’s largest real estate and discretionary hedge fund investors.
After offering detailed stories of business successes, including Blackstone’s heavily subscribed IPO and its robust recovery from the 2008 financial crisis, the book pivots to Schwarzman’s international relations and philanthropic endeavors, which he attacks with as much intensity and purpose as his day job.
Schwarzman’s well-known support of President Trump may not be aligned with the views of many elite university presidents and academic leaders, but his hands-on approach to funding cutting-edge programs at universities (including Tsinghua, MIT, Yale and Oxford) has generated widespread interest and appreciation. And as he makes clear in the book, bold, nine-figure gifts that can have long-term impact are the kind he likes to specialize in.
More specifically, Schwarzman’s philanthropy focuses on confronting the forces that could push the US and China towards a Thucydides trap (i.e., the theory that when a rising power threatens a ruling power, the result is often war) and the responsible development of AI and machine learning technologies. Schwarzman takes the time to explore the dangers and opportunities posed by both topics and the benefit of approaching these issues through a university frame.
Image via Stephen Schwarzman
In the process, he reveals a sophisticated perspective informed by his near-unparalleled access to world leaders, CEOs and the heads of leading research institutions. When I asked him to elaborate on any additional donations in the works, he pointed out that he has already made very large commitments. However, he did allow that he shared a particular interest in the development of quantum technologies and acknowledged China’s strong position in quantum-related research.
The book ends on a more instructive note with Schwarzman’s 25 Rules for Work and Life. Some of the ideas on his list will cover topics that may seem familiar to those who have read their fair share of how-to-be-successful-by-successful-people guides (e.g., hire 10s whenever you can, the best executives are made, not born, time wounds all deals). But I was particularly interested in probing him about #19, “Don’t lose money!!!”, which looks to be his first among equals principle given that it is the only rule followed by three exclamation points.
In light of all the unicorns that have passed Blackstone by and the firm’s recent move into the biotech space via its acquisition of life sciences investment platform Clarus (which has now been renamed Blackstone Life Sciences), I asked him whether or not it was time to modify his rule for today’s investment climate. Schwarzman conceded that his bias has “hindered us” and that the firm was trying to adapt “within our comfort zone.” He also added that Blackstone would be moving into the growth equity area in an effort to back “real companies” that have momentum towards profitability, adding that the number of organizations who can write $500 million dollar checks for those kinds of companies is limited.
On the face of it, making a move into growth equity isn’t an especially notable development for a large investment firm. But as the book reinforces time and again, when Blackstone starts hanging around a new investment neighborhood, big things often wind up happening. Silicon Valley should take note.