On July 21, 2020, Caixin International Roundtable invited Mr. Stephen A. Schwarzman, Chairman, CEO & Co-founder of The Blackstone Group, to the High-end Dialogue. Mr. Shi Bo, Deputy General Manager & Chief Investment Officer (Equity) of Southern Asset Management, had a dialogue with Mr. Schwarzman on the topic “What It Takes in a Post-Pandemic World”.
During the dialogue session at the roundtable, Mr. Schwarzman introduced how Blackstone navigated the coronavirus crisis, attributed the success of Blackstone to timely learning from mistakes and resolutely capturing opportunities over the past 35 years and also shared his current focus of investment. Mr. Shi commented that Mr. Schwarzman is successful because he is contrarian and open-minded, giving him enough foresight to predict how to make the right investment. And, these two factors can also help us seek out opportunities from a crisis and thus invest successfully. Besides, Mr. Shi talked with Mr. Schwarzman on other issues, including the rationale behind Blackstone’s real estate investment, China’s real estate sector outlook and possible changes in the post-pandemic business models.
Some key perspectives of Mr. Schwarzman and Mr. Shi are highlighted below.
“For anyone who’s successful in the long term, you always have to assume that things go wrong”.
Q: How do you lead Blackstone navigate this crisis in the time of COVID-19?
Schwarzman: For anyone who’s successful in the long term, you always have to assume that things go wrong. I think, in decades we got used to success. But I went into finance at a time in the 1970s where things were not good in the United States. And so I’m always prepared for things to go wrong.
When COVID-19 happened, we thought things would be bad. However, no one, at least in the western world, has ever voluntarily shut their economy for months. The way we dealt with that is as soon as that started happening, we mobilized all of our resources, including bank lines and extra cash, and tried to make sure that we could make it through.
No one in our generation has ever seen anything like that. Fortunately, we learned from the global financial crisis in 2007-2008 and the great depression of the 1930s.
Now, the stock markets are back to where they started, and the economies are coming back, too. It’s reported that China’s economy in the latest quarter was up 3.2%. Given the huge decline in the first quarter, that’s a great performance. And we’ll see that happening in other parts of the world.
So we took advantage of the crisis and when securities collapsed we bought a lot of them at low prices. Now they go up. It looks like we’re somewhat smart.
“You just learn to be happy from success, but it’s when you make a mistake that you must stop to analyze why that happened”.
Q: What was the biggest mistake you have made in your career and why?
Schwarzman: I’ve made a lot of mistakes. Anybody who’s very active always makes some mistakes. The first mistake is about Bloomberg, a very small terminal company then. Michael Bloomberg came to me and asked for an investment of USD100 million. I think I could have bought 20% of the company which today would be probably worth close to USD10 billion.
But I didn’t buy it, because my fund had a life of only 12 years. Michael Bloomberg said, “Steve, I want a partner for life. I’m not going to sell my company to you”.
The other big mistake I made is when we were just starting, we had a potential investment into a steel distribution company called Edgcomb. And this company had been making a lot of money.
At the time we were new. That was like our second or third investment. We didn’t have an investment process. A partner came to my desk and said we should do this. But another partner was against the deal and said the only reason for the company to make money was that steel prices were going up, and when steel prices went down we would suffer a loss.
I listened to the two people, and picked the first person. Three months later, steel prices went down. We couldn’t pay our principal and interest. We were about bankrupt.
What we have learned from this terrible experience is the necessity of an orderly process with written materials, lists of all risks, and all partners debating those risks without any personal loyalty to the people who were bringing the deal. Once we did that from that awful experience, we developed an approach that made us the largest firm in the world and recorded many more excellent investments.
You just learn to be happy from success, but it’s when you make a mistake that you must stop to analyze why that happened and you fix it so it never can happen again. That approach helped us build a business.
So whenever anything goes wrong, instead of making pretend it didn’t happen or just saying it’s bad luck, you force yourself to analyze what you have to do. That’s a longer answer than you wanted.
“You have to be continually inventing new things to do new opportunities”.
Q: How do you make your investment?
Schwarzman: Most things in finance do not remain the same. So I’ve always felt that you have to be continually inventing new things to do new opportunities. And that just because you’re successful, you have to assume that’s temporary success. You have to think what’s going to happen in the future and why that can happen? And how do we position ourselves?
During the big recession in the early 1990s, the U.S. real estate collapsed. Somebody brought us a real estate deal, but we never bought any real estate. However, I realized that the real estate recession was just temporary and when the economy recovered, you’d fill up more of the units that were empty at the bottom of the recession. Therefore, we just started buying, and now we’re the largest owner of real estate in the world.
We’ve done that in other areas, too. Every five or seven years, something gets so bad, and we enter that field when other people are just scared away.
Discussion and Q&A Session
“Making contrarian investment and being open-minded are key to the success of an investment.”
Shi: I’ve learned a lot from the book written by Mr. Schwarzman. While doing his first job of selling handkerchiefs at his family business, he realized the importance of staff training. And, he has developed insights into crisis. All of these show his strong preference for contrarian investment.
When there was a crisis, he looked for the opportunity of buying things cheaply and detected opportunities from the crisis.
Put it in the Chinese way, Mr. Schwarzman is always trying to look ahead at what might happen in business or life and be ready to handle it.
We know Mr. Schwarzman invests in education, including in China where the Schwarzman Scholars is a great success. His way of running the project is very Chinese. Let me explain further. There is a Chinese proverb, “Read thousands of books and travel thousands of miles.” The Schwarzman Scholars project attaches great importance to bilateral people-to-people exchanges: rather than merely encouraging Chinese students to study abroad, it also attracts excellent university students in the West to China for master degree study and encourages them to travel around in China to develop a better understanding of China.
In my opinion, Mr. Schwarzman is very modest to talk about his mistakes. He missed the investment in Bloomberg just because he managed the money on behalf of others which had a time limit, i.e. exit in five or seven years. In contrast, what Bloomberg needed was a long-term investor. In other words, if our investment lasts for a very short period of time we may miss some very important and high-paying projects.
Mr. Schwarzman mentioned his investment in a steel distribution company which boasted good short-term financial performance at the beginning but lacked a momentum for long-term development. We learn from this example that we may lose a lot of money from an investment that lacks long-term prospect if we pay too much to short-term financial performance. Therefore, Mr. Schwarzman advised us to stay tuned for new things and seek out new opportunities, keep up with the times and maintain contrarian mindset in investments.
Next, I would like to ask Mr. Schwarzman several questions.
You’ve just mentioned that your company is the largest investor in the U.S. real estate market. What do you think of the current real estate market in China?
China hopes to vigorously develop the real estate investment trusts (REITs).What are your suggestions on REITs just fledging in China?
Schwarzman: Thank you very much for the questions and your comments on what I said.
There’s a lot of different types of real estate, e.g. hotels, apartment buildings, single-family homes, shopping centers, and industrial warehouses. And making money in real estate is local business in terms of what’s happening in a given place. But it also depends on what asset class you’re investing in.
About three years ago, we were the largest owner of hotels in the world, with about 55% of our total real estate investments in hotels. We sold almost all the hotels and had made sort of three times our money, roughly. And now hotels are only round 6% of what we own.
What did we do after getting rid of the hotels? We started buying warehouses one year earlier. Why did we buy warehouses? Because the great Internet shopping companies, whether they’re Alibaba, JD or Amazon in the United States, we felt they were going to grow extremely fast. What they needed was warehouse space.
The United States is so older country in terms of modern economy. And so it’s hard to get zoning. We bought a huge number of warehouses just like Alibaba or those home delivery companies, except we won’t do the activity. We’ll just provide them with the real estate to deliver to their customers. So we become globally, either the largest or second largest warehouse company.
What’s happened amid the outbreak of the virus is that the prices of warehouses have continued to go up because people are shopping at home and home delivery has exploded. And it is growing very fast. And we’ve done that in China as well. We like warehouses. We didn’t focus on hotels. What we try and do is going with that demand. China has an interesting real estate business because that’s where most people put their savings. In the United States, people put them in the stock market. Chinese people tend to be skeptical about the stock market. They like to own real estate because you can feel it and touch it.
What I’ve learned about real estate is that it is quite cyclical. And it’s been cyclical in terms of values in China as well. The time to buy real estate is when other people are pessimistic.
Shi: Mr. Schwarzman, you mentioned in your book that the success of any investment largely depends on the very economic cycle. The cycle can significantly influence an enterprise’s growth track, valuation and potential return. In light of what we’re in the cycle and the impact of COVID-19, what areas do you think have the best investment opportunities for the moment?
Schwarzman: In terms of cyclical opportunities. I think you were asking where we are in the cycle and how we look at things.
We’ve had a very long economic expansion since the financial crisis in 2007. Now we have this interruption from COVID-19 and it’s going to be the restart of an economy. And so the interesting thing is what’s going to come out first and last?
So the business model in the wake of COVID-19 is going to be somewhat changed. More high-tech start-ups will launch new business in the future, e.g. purchasing switching to online, less high fashion business, reduction of long air travels and rebalancing of supply chains. Financial institutions basically do pretty well during the crisis, unlike their weak performance in the 2007-2008 financial crisis. They are not disrupted a lot this time.
Shi: In your opinion, what is at the heart of the pandemic’s impact on enterprises’ business model, economic model and economic landscape?
Schwarzman: What’s important is to recognize some things have been temporarily changed (by the pandemic) but some other things probably permanently damaged. And so part of investing now is figuring out who the winners and losers are going to be. As a result of COVID-19, how long will it take for things to return? And what is needed in the new world? What is needed by us?
I told our people to first invest in what we call “good neighborhoods”. A good neighborhood is where good things are going to happen, where there’s going to be growth, and where you’re going to be a winner in the new post-pandemic environment.
The second thing is a re-emphasis on great management because good management isn’t good enough. The world is changing so quickly that you must have somebody in charge of an area who is fantastic, that kind of person who just knows where to go, who can sense danger, who can sense opportunity, who’s a great leader, who knows how to pick people to work with. The world’s changed in a profound way. And the only way to be protected is to have these great leaders working in your organization.
Good is not good enough. We need great.
Risk alert: Investors should be cautious about investing in funds.