Studying Schwarzman

I just finished reading “What It Takes” by Steven Schwarzman, the CEO and co-founder of Blackstone. The book is a memoir of his life starting with working in his father's linen shop to the largest owner of alternative investments in the world. Here are the 3 most important lessons I took away.


Lesson 1: Simplify complex problems by focusing on two or three issues that will determine the outcome.


Schwarzman learned this best while working in mergers and acquisitions at Lehman Brothers in the late 1970s. At the age of 30, he sold Tropicana to Beatrice for $488 million, the second largest M&A deal that year.


The largest hurdle for him? Figuring out the purchase structure through a mix of stocks, cash, and tax implications.


Rather than worry about the paperwork, deadlines and outside voices, he put all his time and effort into the deal structure, the most important issue holding up the sale.


Another complex problem Schwarzman capitalized on was buying real estate held by public companies for the sum of their parts. Blackstone had a process of figuring out the as-is value, how to fix it up and find the perfect buyer afterwards.


No other company was even able to value each property by itself in a timely manner. Blackstone finished the race before the others had even started.


Perhaps the biggest advantage to solving complex problems is having the right people on your team. Schwarzman is always looking to hire people who are 10 out of 10. “Eights just do the stuff you tell them. Nines are great at executing and developing good strategies...But people who are 10s sense problems, design solutions, and take the business in new directions without being told to do so. Tens always make it rain”.


Solving complex problems is hard enough. Solving them with the wrong people is almost impossible.


Lesson 2: Be forward thinking


Starting a new fund in 1991, Schwarzman and Peterson had to really sell their investors why real estate was a good bet. At that time, real estate was bottoming out while investors were still wary from the recession.


In order to alleviate this thought process, they created a novel idea for the fund. “We decided that for every three dollars an investor pledged to our real estate fund, two dollars could be discretionary. They could make a pledge but if they didn’t like the specific deals we were presenting, they could hold back two-thirds of it”.

In a normal fund, limited partners provide capital to the general partners and have very little to no say in the investments.


Schwarzman and Peterson’s structure allowed for the opposite. Allowing the investors to choose where they place their money created more trust. More trust resulted in larger capital commitments the next time around.


Identifying strong target markets for single family homes and industrial real estate were two other areas Blackstone jumped ahead of the competition.


Invitation Homes, a subset of Blackstone, acquired 50,000 single family homes from 2012 to 2016. The criteria for investing in certain cities had to have the following: increasing population, job growth, and median household income, low crime rates and good affordable rent to own price among others.


Cities like Phoenix, Seattle, Las Vegas, Tampa bay, Orlando, and Jacksonville fit the bill. This article illustrates the past 10 years of housing trends. Many of the cities Blackstone started buying in 2012 ended up towards the top of the list.


You can read more about Invitations homes and their start here.


As for industrial, Blackstone is now the largest corporate landlord in the US. Out of all the sectors in real estate over the last ten years, industrial has been the best performing asset class.


They noticed early on just how much eCommerce was changing buyers' spending habits. Since then, they’ve been a thorn in the side of longtime leader Prologis.


What’s next for them? Jon Grey, the potential successor to Steve Schwarzman sees Blackstone investing in “knowledge centers”, fast growing cities that attract young professionals in droves. Think of cities like New York, San Francisco, Seattle, London and Berlin.


Lesson 3: Have an upside


When starting Blackstone, Schwarzman and his partner Pete Peterson knew they needed to acquire equity in their companies. “As M&A bankers, we would be running only a service business dependent on fees. As investors, we would have a much greater share in the financial upside of our work”.


Investments through LBOs (leveraged buyouts) did just that. Acquiring companies with large amounts of debt, establishing operational improvements over the years, and selling at a price more than what they paid for.


As a benefit, monthly cash flow from these companies allowed them to focus more time and effort into other investments. That extra time and effort allowed Blackstone to enter the real estate game and the rest is history.


What Steven Schwarzman has been able to accomplish throughout his career has been nothing short of amazing. The many lessons and stories told made for a great read. If you’d like to order the book, you can buy it on Amazon here.


Thanks for reading.

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