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The Blackstone Group L.P. (NYSE:BX)

June 11, 2013 1:55 pm ET

Executives

Stephen Allen Schwarzman - Co-Founder, Chairman of Blackstone Group Management L.L.C, Chief Executive Officer and Chairman of Executive Committee

Analysts

Matthew Kelley - Morgan Stanley, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Hi, everyone. We'll get started in here. So I'm Matt Kelly, the Morgan Stanley's asset manager analyst. I have the pleasure of hosting the keynote fireside chat with Steve Schwarzman, CEO and Co-Founder of Blackstone. Very timely topic, surely, it's The Blackstone right now. And Steve, thanks for joining us.

Blackstone has been public for almost 6 years now, and this firm is growing to $218 billion of assets under management as of the latest quarter across 4 distinct operating segments of asset management. So with that, Steve, welcome. Thanks for joining us.

I'll dive into a few questions before I give the audience a chance to ask some later in the presentation. So first, I wanted to ask you just kind of from the perspective I've mentioned you managed $218 billion in assets across 4 segments so -- and you also have $36 billion of dry powder to invest. So given that, I'm sure the room would be interested to hear your thoughts at a high level on underlying economic growth as you see it through portfolio companies, and also where you see some of the most attractive investment opportunities currently?

Stephen Allen Schwarzman

Well, first of all, I'd like to thank all of you for being here. Nobody really has to do it. So I'm glad you're here. Following Jamie is like being a rowboat in the back of an aircraft carrier, so I doubly the appreciate you being here. It's always very colorful. A lot of fun. I remember when Jamie came to work right after business school, and we were just starting Blackstone, and we had an office in the Seagram Building, 3,000 square feet for the 2 of us. Two people in search of a strategy. And Sandy Weill had just left American Express, where they had been marginalized, pushed out of the firm, and he hired a younger guy right from Harvard Business School whose name was Jamie Dimon and they had nothing to do either. And so we both go to the Four Seasons, if we were feeling affluent, and try and get somebody to do something with us. And if that didn't work, the 4 of us would have dessert afterwards and just make pretend we were somebody when we were all going no place fast. And so it's interesting over the course of time to watch what happened with Jamie's career and Sandy's and ours as well. It's been really interesting adventure, I think, for everybody and he's done a terrific job with JP with whom we have very close relations. So my question, what's going on in the world? Well, it's pretty easy to see it. We have a lot of different vantage points. In our Private Equity business alone, we've got like $120 billion of revenue and 730,000 people working at our companies, and it's global. And so we get really good feeds. And in the Real Estate business, we're the largest owner of real estate in the world. And so you get to see all kinds of stuff among other things that we do. What we're seeing is that the States has real pockets of strength. Residential housing is for real. Obviously, some stimulated by the Fed but they're coming out of the woodwork. In the markets where we've been active over the last year, you have -- which is '13, '14 markets and housing, you've had increases of 20%. We picked the good ones because average house prices have been up around 10. You've had a new house construction up around 950,000, up from 500-some-odd thousand at the bottom of the crisis on their way to someplace, if it's more normal it will be around $1.5 million. So you're seeing a lot of strength in housing, and it's coming from almost every place geographically. You even have Detroit in double digits. I don't know how that happens but apparently, there you are. So that's sort of the big winner. Auto and that whole complex is a big winner. They're doing over 15 million cars this year, up from 8.5 at the bottom. And then you have the energy complex, which is really, really a revolution. This is hard to underestimate the impact of energy and all the natural gas that's being produced and all the subsidiary types of things that come from that activity. And if you add on top of that, technology which is still a very big pocket of strength and quite robust in the United States, you've got some really good stuff happening. On the other hand we do have the U.S. government at work, trying to decrease growth as rapidly as they can. And so they've, unfortunately, had some success in that area, and that leaves us somewhere in the 2-plus area. Nobody is smart enough to know exactly where in the 2s, could be in the lowers, could be a little towards the middle, I don't know. There's nothing too much running away at the same time. You see people like Wal-Mart, Costco with pressure at the bottom on same-store sales and that kind of stuff. So the way we look at it, there's good forward momentum. Real estate, generally, in the States is doing well, which we can talk about at some other point in this. Europe is really fighting enormous headwinds just as its first year of finance or maybe its second year since the Europeans didn't quite figure this out. That you can't shrink your financial institutions and have economic growth -- economic growth and credit extension correlate almost 1:1. Basel III is shrinking and they almost designed a unique system to punish European financial institutions, and it's being successful. And so you have some of the northern countries doing okay, the southern countries doing quite badly as you know with huge unemployment. It's probably close to a bottom, actually. But when we buy things now in Europe, we do it with the expectation that nothing good is going to happen for quite a while. If the deal works under that scenario the investment works, that's fine. So we're finding, in terms of areas of opportunity, we can buy warehouses, for example, with sort of close to filled. They don't have to be filled because you can fill in more, you do better. But yields unleveraged of 9%, 10%, if you can do that put some. The other on top of, you got a 19% or 20% return. Now I'd probably make a fair bet, if I bet with you, that whenever you go to the play you don't earn 19% or 20%. By warehouse, in north of Paris, you can do that. And there's not a lot of risk with that other than the euro staying together, which we believe is going to happen. So there are some very interesting things to do there but it's not because of the economy. In Asia, you got a much more complex picture just because you've got a lot of different economies there. They're not always in sync. China has been slowing. I realize it's sort of an area of observation that China could be growing as low as 7.5%. If you take the U.S. in the 2s and China in the 7s, somehow it doesn't look so bad. If you're watching CNBC it looks like it's the end of the world, may be Bloomberg too. Who knows? But they're still committed to putting enormous money in the system in China. They believe that their existing economic model will not work in an optimum way in the future. The export-driven model in China, if you talk to the leadership of the country, is not where they're headed. They're aware that with increasing wage costs, which they want to have happened, right, they're trying to become a middle-class developing country. They are #100 in the world in terms of income per capita. If you're 100 in the world income per capita, you don't have a lot of money. The fact that they have the largest reserves in the world at about 3.4 trillion is the way the West looks at them. The way they look at themselves, except for a few coastal cities, is that they are a poor country, and they want people to earn more money. When they earn more money, they can't have this big export business because their costs are going up significantly. So what's going on in China is the government, new government, interesting group, they want to pivot for more internal growth in China, more services, more opening of their economy to the West so they can bring in more capital and expertise. So those are trends you'll see there. India, which is also quite a significant-sized economy, is really struggling a bit. The Indians do very well being self-confident. They sort of lost their confidence. Growth is down for about 9% to 5%. The central government is losing a lot of their cohesion and power in terms of the perception by the people. The states are getting a lot more, so it's a very uncoordinated type of situation, which is making everybody un-confident. And so the bias there is probably a little bit on the downside. But one of the great things about our business whenever it looks like it's raining, it's sunny somewhere, right? So in terms of something to do, we bought the second biggest office park in India at a 10% rate of return on leverage. You put leverage on it, you make 20. Who are the tenants? They're sort of marginal companies called IBM. IBM and the 20? If IBM issued bonds, anybody in the audience know what the rate would be? A 10-year bond for IBM? 2.5? We're getting 20. This is not so bad, okay? The second biggest client is someone I know you've heard of but wouldn't put in the same credit pile is called Goldman Sachs. You are allowed to mention that word as a credit. So the whole office park is basically just Americans. It's like it floated over from New Jersey, and it's amazing that you could do this. Why did that happen? Because the developer, and the way it works in Asia, is they don't have visibility to finance each building. And so they put them together in a company, sometimes it's a family company and if the company starts having trouble with a few projects, all of a sudden, the whole empire is in trouble. And so for us, this is a terrific opportunity because their trouble is our opportunity. And we can buy some wonderful things where somebody just needs money. So those are the 2 big countries out there. Australia, we've been buying a lot of stuff. And their currency has been a little overvalued and there the reflected glory, if you will, not some oversimplify it but it's easy to understand this way of China just because Australia has so many resources. And what you're seeing around the world as when you look at the developed world -- excuse me, the developing world, a lot of it refers to China. Because if you're in Latin America and you're selling copper from Chile or Peru to China, and their economy goes down a bit, all of a sudden, they're not buying so much copper. If you're selling them coal from Colombia, same thing. If you're selling them iron ore from Brazil, same thing. You're not selling as much. And what happens? You look at the Brazilian economy and that's really soft and part of it is they're not getting this lift even though they created a lot more middle-class. People in this great, great, great run, it's -- they're feeling whatever happens with China. So the global economy is doing okay in the United States but probably 150, 200 basis points under what we could do with the right sort of governmental policies. Europe is like wandering around for a while with a few countries doing okay. And Asia will not probably be turning up in the next year or 2. It could be more in the same kind of zone. That's not a bad world for us because it's relatively knowable, and there are real shortages of capital in certain parts of the world and in certain industries like energy, for example. I was with the head of the largest energy company at least in the Western world, and he was telling me that even at the size of his company he just simply can't get all the projects. In our world, you want to be in a situation where somebody actually needs money rather than you telling them they need it because you need to make an investment. Supply demand really works for us, and there are a lot of pockets where despite the money that the Fed has created and the European central banks have created and now the Japanese are creating that there's still a bunch of places where you can really put money out and very, very good returns. In fact, the alternative area has benefited by people's fixation on liquidity. I don't really care that much about liquidity as long as I've got enough that I can feel safe. I feel safe investing in the things that we invest in. Why wouldn't I feel safe? We make huge amounts of money and we don't lose. So that's sort of my definition of safety. And because so many people were traumatized by the financial crisis, they still want to keep abnormal amounts of liquidity. So the premium for our type of investing, which I wouldn't say is riskless but it is much less risk because of our ability to do due diligence than just buying liquid securities where anything could happen to you. If you don't like it you can sell them. The only difference is we can't sell ours but we get compensated with much higher returns and much more knowledge of what you're buying. So that was a long wandering answer to the question that you asked.

Matthew Kelley - Morgan Stanley, Research Division

But lots of interesting things in there, so thank you. So part of what you said leads me to my next question about asset growth. So I think you had a slide in your investor day, since 1995 28% compound annual growth of assets under management in an environment where a lot of your traditional competitors are shrinking or struggling for growth. So as you -- you talked about some of the investment opportunities, where do you see some of the strongest pockets for future asset growth from here?

Stephen Allen Schwarzman

It is remarkable, I remember, when we just started the firm and almost everybody turned us down for everything. Our first fund, our 17 closest relationships turned us down. I don't know how much sort of psychic pain you can take in this audience but we've been given a lot of psychic pain over our career and so every investor that we have and we've got I guess now around 1300 of them outside of retail investors, 1300 institutional. Investors is really a priced relationship, and we treat them that way. So we've grown about 28% compounded. So if you could imagine starting your career with no assets and now we've got $220 billion, and that's probably measured incorrectly because it only takes the equity if we buy a real estate building for sort of $0.5 billion we only count $100 million of the equity and the 4x as leverage we don't even count. So we really have massive amounts of assets at this point that we keep coming up with new ways to grow. Because what happens is when we started the firm, we basically started it in the M&A business because this is what I used to do around the M&A department at Lehman Brothers, when there was a Lehman Brothers in the dark historical days of the 1970s and early 80s and then we started the Private Equity business. When we went into business, what we said is, "The only reason we need to exist is to do things other people aren't doing and to do what we do as well as you can conceivably do it." And any expansion that we were going to do, we wanted to improve the businesses we already owned. And that was our strategic plan. Start with an advisory business, go into private equity and then go into other businesses that would be great on their own but would make the existing mix stronger, and you had to do it with people who were 10s on a scale of 10. This is a very simple model in finance. If you're in business with 10s, it's like -- how many of you watch the Sunday night game with the Heat and the Spurs? Wow. Lebron and all these people, that's a 10. I mean, they crushed them. And that's what you need to do a great job starting a new business. So we went into real estate in '92. We went into our hedge fund to funds business in '91. We have our credit business, we went into '99 when everybody else was doing venture capital. And 99 out of 100 deals done that year went busted. And we are in about 11% return compounded. So every business we're in we have a strategic plan. What are the new products that we would like to add where we think the investors can make lots of money with very little risk? And I was just sort of prepping for this, and we have like 10 new things we're doing. It's really fantastic. Every time we go out now, people have learned to like us. Maybe that's because we're slightly likable, but we also give them a great pride. So for example, in Private Equity, we've averaged 900 over for 27 years, 900 basis points over the S&P. And I told you about the 1600. Our hedge fund business is like 400 over the hedge fund index with 1/3 of the volatility. And our credit business is sort of -- it's a lot of different products so it's hard to give you an exact measurement. But one thing just like our mezzanine fund has earned, started in 2006, earned 24% compound. At 24% through the financial crisis, this is mezzanine, right? This isn't supposed to do more than roughly 11%, 12%, 13%. So when you say, "Is the firm going to continue to grow?" We have like 10 new things we're doing, and I can't tell you about some of the other ones just because we don't like to give our secrets away because finance is sort of unfathomable. And if we tell you what you're doing and this actually isn't a completely intimate group, you might actually repeat that to someone. So we can't do that for you, but there's a steady stream of new things that we do that keeps the firm growing. I'm not sure whether we could grow at 27%, 28% forever because as you get bigger, at a certain point, you inevitably slow down. What I would say, which is fascinating, is in the last 2 years, we've raised more money for new products than our next 4 competitors combined. There are not many companies that can say something like that and that's because each 1 of our 4 big investment areas is either the largest in the world or the second with great performance. And what's happening is we're reaching a point because the alternatives are creating much, much more return that institutions are basically saying, "Why shouldn't I allocate more money to an area with more return rather than just regular liquids?" And the answer is, any rational person would, right? Because it's not a 1-year, 2-year phenomena. This has been going on for several decades. And so what's happening is our percent of wallet for these large institutions is going up steadily and quite rapidly. At the same time, they're trying to lower their costs, which means they'd like to have fewer people working at these places, and so they're giving more money to their best managers. So we're caught in this sort of wonderful situation where they're allocating more money to our asset class. We're the #1 firm in our asset class, and they're allocating disproportionately to us. And I've been doing this for decades, and this is like some kind of gold moment as a result of all these factors lining up. So maybe if I don't see you all be hiding because it's not so golden like x number of years but at the moment this is really we're in the way of some very substantial forces. The same way the pension funds don't have enough money to necessarily all meet all obligations. Their easiest way to solve their problems is to just have higher returns, and we're the beneficiaries of that trend.

Matthew Kelley - Morgan Stanley, Research Division

Okay. And then shifting gears a little bit because I know a lot of investors for your stocks focus more on the realization side. One of the things we haven't talked as we talked about investment and raising assets. Now if we talk about monetization, so as you look out for the industry as a whole piece, a whole -- I should say, alternative asset managers as a whole and for Blackstone specifically, what do you think are the kind of 1 or 2 swing factors to realizations and leading to distributions to shareholders over the next couple of years?

Stephen Allen Schwarzman

Yes. Well, it's sort of a pretty logical thing that when we buy assets, we're not supposed to sell low and buy high, right? So we've got a cyclical upswing coming in at least the U.S. part of the economy. We have the banking system. Jamie probably described U.S. banking systems and very good shape now, not so in Europe. And so what's happening is that with markets going up, financing costs for buyers of things that we have sort of are quite reasonable. Even if they go up a little bit, it doesn't matter much that our assets are worth a lot more and will continue to with an economic rebound. And then what happens in that stage, we start exiting. And just, for example, just 1 of our 4 businesses in the first 5 months this year we did -- we raised $6 billion just in IPOs. I mean, geez. That's like a lot, and it's just 1 of our 4 businesses. And so you'll be seeing more and more realizations over the next few years. It's a normal type of cycle. I've been doing the same thing for almost 30 years. Usually, when people get concerned that there won't be robust realizations, they're almost always wrong. And then it comes in, and there are billions and billions of dollars and then people go, "My goodness, that's billions of dollars. That's a lot." And that's what's supposed to happen. We have over doubled the amount of assets we have when we went public 6 years ago at the time that most financial institutions are lucky if they're flat. Lucky if they're flat. And that stuff is in their busy compounding, and when we choose to sell it, it's going to be a happy day. I own 23% of the stock of the firm, so I'm on your team out there if you're owners of Blackstone. I'm on your team. If you don't own our securities, I'm waiting for you to be on our team. And so our interest are the same. And I don't like to sell too early but I'm very joyful when we have huge realizations because that's good for my children, apparently. And so that's going to happen.

Matthew Kelley - Morgan Stanley, Research Division

Okay. If we drove down a little bit more into some of your business segments. So Private Equity, I think, investors look at that as potentially your most mature business out of the 4. Now what we're seeing is you're growing in some newer strategies such as tactical opportunities. Energy isn't new but it's smaller for you as a percentage of the pie. And then the secondaries capabilities that you just acquired? So can you talk about the new areas of growth and how big you think some of those could be over time?

Stephen Allen Schwarzman

Well, it is a more mature part of the business but that doesn't mean it's mature. We have a large private equity fund. The returns we're getting on our BCP VI fund are really strong. I think, John, would have been 30s -- 20s, net 20s. For the investments we're making in Private Equity that's not so bad for those of you in the investment business. Our energy fund is only compounding at the moment at around 88%, and that is not a typo. There aren't many people who compound at 88%. And that fund is only about $2.5 billion. I would speculate that the next energy fund will not be $2.5 billion with that kind of record. I don't know why they didn't buy it in greater size the first time. We've told them that would happen. Our historic record in energy has been a 40% compound rate of return. After fees, we've never lost money on any investment. So you would think investors would want to buy something like that. And apparently, investors are not always interested in making money, they're interested in psychological comfort. So they'll be very comfortable the next time they have an opportunity to buy this and it will be significantly larger. Our tactical opportunities fund is really an interesting thing. What we're doing is because we're the only firm that's in all the different buckets of the alternative class without censure because it's too small for us even though it's interesting. What we've done is we've decided to have one area that invests in all these different asset classes at the same time, and we were trying to hit for some of our pension fund clients like a mid-teens return with high current income, so we made a mistake and it's mid-20s. Mid-20s isn't so bad either for a rate of return, and we're seeing a lot of receptivity to that product. And then we just bought a secondaries business from Crédit Suisse. Thank you Ben Bernanke, thank you Paul Volcker, thank you Basel III. These are wonderful -- 3 wonderful friends of ours. They are forcing everybody out of very good businesses, and these orphan businesses go to firms like us if we're alert and clever. And this a business. Just to give you some idea of how growth happens in our world. This is a very well-managed business at First Boston, where the people who are running the business used to work for Tony James at DLJ. Tony is our President. He's a terrific, terrific guy and a great talent and he inspires enormous loyalty from all these ex-DLJ'ers who keeps showing up at our doorstep. And this another group of them. Now, when they were are Crédit Suisse, they had a number of handicaps. The first is, if you're part of an investment banking firm as you might have some familiarity consultants who greenlight you for institutional money, as a policy they don't want to greenlight you because they think there's a conflict between being an investing banking firm and generating fees and rotating people around as compared to people who do what we do. So these lovely people from First Boston couldn't get anybody to recommend them. Secondly, no other firm would take them on to sell their product, so we've had great success and are very happy here at Morgan Stanley doing things with you all that worked out for us and worked out for you. But nobody will do that for Credit Suisse if they're at Morgan Stanley. So they were marooned just into their own system. Now the day we buy them because they've got an excellent investment record, all those consultants who wouldn't touch them will give them a big yes then we'll put them into other systems to sell where you wouldn't touch them before. Third, they have access to our 1300 LPs, and it was like these kids were like kids in a candy store. We took them to our private equity annual meeting and the head of this group we call Strategic Partners who was like a sailor who'd been underwater for like on a nuclear sub for 2 years and just surfaced. They're a bunch of beautiful people waiting on the dock and he couldn't figure out who to talk to first, assuming he is talking, and that's what it was like for these Crédit Suisse guys to be at our meeting. Plus, fourth thing, not to beat this dead horse, but we can take them into other products like real estate, for example, huge asset class almost nobody is buying real estate secondaries. And we have a unique knowledge base and in that sector so we can start really large real estate secondary firms that nobody else in the world could do, or if they do it they wouldn't have any credibility. So that's one example in a "mature" business of sort of how we will put growth into that.

Matthew Kelley - Morgan Stanley, Research Division

Okay. Well, you could segue into real estate. So real estate, you've taken a ton of share but just curious on your overall thoughts. Investors haven't really increased their allocations to real estate, necessarily, it's been more Blackstone taking share so how far along are we into that process? Where are you building out the Real Estate business and how long of a process is that build out? Have you think about it?

Stephen Allen Schwarzman

Well, on real estate, real estate is a wonderful business because actually it's our simplest business. It's much easier to invest in real estate than it is in the company. Companies are very complex, very dynamic and what you find about real estate that's very comforting is first of all, buildings don't talk, right? Try managing Morgan Stanley, all you people talk. You all have personal needs. You all can do other things with your life, okay? It's a real effort to keep everything in place. A building, there it is, right? Also, buildings don't move. If they do, you're in California, but they're just there, okay? You can buy them with no people, right? And you can have a little group that just manages them yourself. Supply and demand, I mean, you can see the building. It's there, right? It takes roughly 3 years for supply to build because everything that gets built needs somebody in a government to approve it, right? You just can't throw buildings up all over. You got to get building permits. People keep records of these things, so you can find any city in the world what supply is coming at you. If there's enormous supply, you sell. How difficult is this? I don't know why everybody screws it up just about, but it's a very simple business once you understand that compared to the other businesses we're in, it's a lot easier. Now take the United States as a real estate market, for example. You don't have to have huge growth in United States. Say, we're growing at 2.5% -- 2.4%, whatever at the last quarter. And you may pretend you have a building and make pretend that it's 10% vacant and make pretend that 2.4% growth is translated into the growth in your number of tenants, the take up in the building. So in 4 years, your building is going to be completely filled and when the building is filled, the rents go way up. And nothing particularly good is happening in the United States. And if you own that building at a good price and those rents starts skyrocketing, you are one happy person. If you do it on leverage, you are even happier still, right? So it's really a business that can profit from the slow-growing environment. It can profit from a fast-growing environment that, that brings more people out to build so you get to exit quicker, okay? And overall, it's a business where it's very difficult to screw it up unless you're the person buying it way over replacement value just because the world is going to get so good and then people build a lot, the cycle ends and you go down with it. Now these same basic principles operate all over the world and we've always managed to recognize these kinds of cyclical factors, in large part, because they're almost impossible to miss. I can't say that everybody who's in real estate misses them, somehow they get caught up in this stuff. So what's happened is we've now evolved into the largest owner of real estate in the world. There are not many people who should say that. It should be no one else, right, if that's true. And it's really a remarkable thing because in the firm's history, we've lost less than 1% of principal as a leveraged equity owner. Imagine all the banks. I think you worked at one or some part of Morgan Stanley is a bank, or whatever. And I'll bet you lost more than 1% on your real estate loans like every other bank in the world. Okay? Really big losses in senior debt. We had virtually no losses in the equity. So what's happened is if you want to play this sector, we have become sort of the default place to invest because even through the crisis we've had very, very good returns. And if you've averaged 1,600 basis points over the stock market for 20 years, I mean imagine that, that's like, who does that other than Jim Simons or something? I mean, it just doesn't happen. Well, it's happening. Our latest Real Estate fund is up 32% compounded in the last 2 years. I mean it's happening today. And as a result of that, we are getting hugely disproportionate allocations from almost everyone who allocates to the Real Estate asset class, and we're adding more and more products. We're expanding geographically and we're being accepted in that regard. So if you look at our model, we're ultimately -- we cover most places in the world with senior debt mezzanine in different types of equity exposure. You have a business that should be appreciably bigger than where we are now. And the difficulty for anyone catching up is as we continue to do these things and have less and less competition for anything of scale. We're currently operating at roughly 4x the size of anyone else, and it looks like it's 4x the size going away and that -- it's really an extremely unusual situation because as someone else is trying to raise money, the markets are not in love with that asset class because the memories are too short. So when new people come out to compete with us, which they will try and do, they usually buy in one person who's been maybe an okay investor, maybe not, who meets some other person who maybe was an okay investor, maybe not, and they present themselves as some kind of new split the atom variety, although in their whole career they got hurt, too, at the bottom. And so the institutions for the most part look at this and go, "I'm not sold. I'm not sold." And it will take some period of time before that group can prove themselves, which some will do. But you're looking at a 5- to 10-year advantage, I believe, for us and we're not sitting around being self congratulatory like I may sound. We're like pressing the envelope to do the right things to open other places and to stay very prudent and careful while we're doing it. So that may be more than you want to know about Real Estate. It's a wonderful business.

Matthew Kelley - Morgan Stanley, Research Division

Okay. I think, we'll open it up to audience questions now. I've got some more, but -- anybody in the audience? I will keep going in the meantime. So one of the business we didn't talk about is the Hedge Fund Solutions business, how do you -- you talked about at the investor day entrants into the retail channel for the hedge fund. So for all the speaking high networks on the retail seem like a big opportunity for Blackstone and some of your peers as well, but how do you think about which products make the most sense to enter those channels with and what the demand is as well?

Stephen Allen Schwarzman

Well, it's interesting. We're finding for -- or what I call our lockout products sort of our Private Equity, Real Estate funds, credit funds have really receptivity at retail because retail systems and retail financial advisers are getting more and more current and understanding in the nature of the products that if you can make much more money for your customers, that's a good thing. And so we have a whole team of people geared to explaining those products and help market them, but at least, it's important giving support and follow-up for those type of products. Now in the liquid areas, it's a little, little more difficult than hedge funds just structurally. And although retail systems seem to like the hedge fund products and sell more of it than the lockout product and so we have one product that's going to be coming out through, I'd like to say, not the company but category. Mutual fund complex, which we've completely reengineered for them as a unique product. We've got a rip that I guess is in your system through our hedge fund people, and this is getting, I'd say, slow and steady receptivity. We're used to a lot of products periodically, and then they go away, and this is more of an everyday type offering.

Matthew Kelley - Morgan Stanley, Research Division

Opening it up back up to the audience.

Stephen Allen Schwarzman

Anybody have any complaints about the hotel? We own it.

Unknown Analyst

As you grow, how do you maintain the quality of your employees? Because obviously, that's going to be difficult to scale the way you are and then finding the best people.

Stephen Allen Schwarzman

In terms of attracting people?

Unknown Analyst

Yes.

Stephen Allen Schwarzman

Yes. Geez, it's easier as you get more successful. I remember when we started, hardly anybody wanted to work for us. They want a big guarantees, they wanted a big part of the firm and I found out that most of them are mediocre and somebody else was actually doing their work. They were perfect creatures of large firms. They were excellent at taking somebody else's work and giving it to you. And in a smaller setting, that was completely useless since there was no other person to do the work that they could hand off. Now as a much more mature business, it's amazing. I couldn't get hired at Blackstone. I don't know whether that's a good or bad. But it does make me think for a bit. I mean, we have too many smart people that it's astonishing. As an entrepreneurial business, you know when you're successful because it's when people really want to join you who have enormous records of success. And we don't find recruiting challenging. I will tell you, the first 10 years, it was agony. You had to take people out. You had to beg them. You had to promise them their life would be good because it would, but if they don't see enough models of that success, they're skeptical. People who join us now, expect us to do well. We expect them to do well, and it's been a marvelous transformation. We run the firm like it's a small business. Everyone of our businesses meets on Monday. Everyone in the world gets in a conference room in private equity, for example at 8:30. We've got screens around from Mumbai and Hong Kong and London, and we discuss every deal going on in the world. Everybody can see everything. It's completely open. We do, at 10:30, Real Estate for 1.5 hours. Same things, slightly different cities. Some are the same, some aren't. Everybody from our first year associates and the most senior person knows everything that's going on. It's like a small firm. We do the hedge funds at 2:00. With the partners, we don't take on a whole group. It's like 180 people. It's too big for that, the people at different functions. They're on that, on the investor side. And then we finish up with credit at 4:00 with the partners from that area. So what happens is at the end of a day like that, you actually can come to a meeting like this and make pretend you actually know what you are doing because you actually do because you have this huge amount of information. And then we use the knowledge we get to transfer the insights from one part of the business to another. And we covered the world geographically as well. And -- but we do it with everybody at the firm, they see me and they see Tony every week and we comment on stuff anybody can comment in those meetings and we train people to understand relative value and we don't think we're a large firm. We only have roughly 1,800 people globally. And if you look at the scale of the staff we have, every one of our investing groups globally is somewhere around 125, 150 people. That's including the first and second year students out of college that they now call analysts. Analysts used to be grown-ups but now apparently they're first and second, third and fourth year people. And everybody feels they're part of the fabric of the firm because they are. We run like totally horizontal in that regard. It's a fun place to work.

Matthew Kelley - Morgan Stanley, Research Division

Other questions?

Unknown Analyst

Your competitor recently attract a lots of high-profile government employees and join to them, so I just want to hear your comment on that and what's your strategy to compete with them?

Stephen Allen Schwarzman

What was that?

Unknown Attendee

General Petraeus. [indiscernible]

Stephen Allen Schwarzman

What about General Petraeus? We didn't attract him.

Unknown Analyst

No, I'm just saying your competitor attracts them. So what's your strategy to compete with your competitors?

Stephen Allen Schwarzman

I'm not understanding the -- I didn't hear it.

Unknown Attendee

It's a competitive strategy or [indiscernible].

Stephen Allen Schwarzman

What? With General Petraeus?

Matthew Kelley - Morgan Stanley, Research Division

In general, like a high-profile employee. I think, the question was more general.

Stephen Allen Schwarzman

Well, geez, I thought that was an interesting strategy because he's an interesting person, General Petraeus. The -- each of our firms operates in a different way to maintain our profile and create value. Now I don't know how many -- how old some of you are but we have a former Morgan Stanley person named Byron Wien working at Blackstone. I just went to Byron's 80th birthday, so I'm feeling really young and Byron sort of trots around the world and it's amazing to watch this. And was on Morgan Stanley's nickel so you got complete credit for this. But when Byron goes to, like, CalPERS, they take every investment professional in the place and they jam them in the room and it happens all over the world. So we've chosen to do this in a way that we think is relevant to our constituency. I think what was done with General Petraeus is also very interesting and clever. I think it's a part-time job for him. And investment banking firms, as you know from working at one, always have had an a history of having a few high-profile people around, have convening power and other things. And I thought that was a good strategy, frankly.

Matthew Kelley - Morgan Stanley, Research Division

Question back there.

Unknown Analyst

I'll go back to your question about complaints on the hotel. On the Park Avenue side, the pianos disappeared, didn't it? As you come up the steps? And if you're going to do anything on the outside, the curtain wall is, isn't that kind of grimy on the 4 sides? It needs power washing.

Stephen Allen Schwarzman

What was he saying about? Is he saying something that we're all [indiscernible] down the 4 walls? I guess, we'll better work on that.

Matthew Kelley - Morgan Stanley, Research Division

Any other last questions before I wrap up here? There's one, back there, from a brave soul.

Unknown Analyst

Realizing we've had a few head takes here on the rates side of the world, what's your thoughts on how rising rates could impact cap rates for real estate? And how do that impact your thoughts and realization in investing?

Unknown Attendee

[indiscernible] impacts of rising interest rates on cap rates.

Stephen Allen Schwarzman

Yes. The question is increase of the rising interest rates on cap rates. If the interest rates were to go up a lot really quickly that should affect the value of real estate. Sometimes, a -- the reason behind the rise in interest rates is important. If it's inflation, one of the things that's interesting about real estate, particularly with shorter dated type real estate, is if you got more inflation, you'll have more increase in rents. And so in that sense, you're a bit indexed because you'll get an artificial bump in your revenue, the same way you've had an artificial bump in your cost structure through interest rates. So if you're really having either a stronger economy or a stronger economy plus inflation, then things could work out quite well. If you just stay in a very slow growth environment and interest rates double or triple, of course, that would affect values, but that's a linear way of looking at things. If you assume the Fed is confident as opposed to some other alternative, they're not going to raise interest rates a lot without seeing that the economy is responding. If I've learned anything from watching the Bernanke Fed, they're not going to try and kill an economic recovery to support your question.

Matthew Kelley - Morgan Stanley, Research Division

Okay. I think that's all we have time for. Steve, thanks again for joining us. I really appreciate it.

Stephen Allen Schwarzman

Thank you.

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Source: The Blackstone Group L.P. Presents at Morgan Stanley Financials Conference 2013, Jun-11-2013 01:55 PM
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