Transcription
[Music] From our studios in New York City, this is Charlie Rose.
>> C. Schwarzman is here. He is the CEO of the Blackstone Group. He co-founded Blackstone in 1985 with Pete Peterson and a $400,000 investment. It is now the world's largest alternative investment firm with over $200 billion under management. He is one of the most widely known leaders in private equity. He recently announced the Schwarzman Scholars Program which will fund 200 students each year for study at one of China's best universities. I'm pleased to have Steve T. Schwarzman back on this program to talk about not only these philanthropic activities but also his look at the economy and his look at the alternative investment world. So welcome.
>> Good to be here. Let me start with the Chinese this the scholars program. Is it your hope to do something like Cecil Rhodes did with the Rhodes Scholarship?
>> Uh, absolutely. And what what he was doing was a little bit different. He was taking people from the British Empire fundamentally plus America, right?
>> And sending them to Oxford. Uh, and he started his uh scholarship in 1902.
>> So it reflected the realities uh of the 19th century.
>> Okay. So what are you trying to do? What I'm trying to do is be in the 21st century, >> use the same basic model of attracting terrific uh uh kids who finished college uh for a year in graduate school. Uh and these are these are kids that are going to be successful anyhow. Uh and what we're trying to do is create a group of future leaders, thought leaders, right? Uh uh from around the world. So, we're going to have 45% Americans, 20% Chinese, uh, and 35% from the rest of the world from the top 20 economies >> from Latin America, from Europe, from Africa, from wherever.
>> Absolutely. And then what we're trying to do is introduce them to China. Uh, we're going to have the leaders of the country come and visit them. Uh, we're going to have them assigned uh, mentors uh, from the real world. So, if they're studying law, for example, look at the head of the largest law firm in Beijing to take them to work, show them how that works, meet their families. Uh, we're going to have them go around the country for two to three trips a year with professors to get a sense uh not just of the big cities, but the way the rest of China works, so that these students can be thought leaders when they go back to their countries.
Uh the issue we're trying to address uh is that if China continues growing at three times the western world even if it falls to two times and it's creating 10 million jobs a year and the west is producing at the bottom of the cycle net no jobs uh that there's bound to be envy unhappiness uh on the part of the west in large part because nobody ever blames themselves for their own failures uh and that this can create a situation of hostility from the west to China. Then you get into a feedback loop from China to the west and you could end up with trade tensions, economic problems and military tensions.
>> One of the interesting things is Chinese leaders have been sending their kids to school in the United States, including Xi Jinping's child is at Harvard. Again, I forgotten which I think Harvard.
>> Harvard. And and so they've been getting and and one of the hopes that they have and that the world has and America is that they will come back with a view of the United States. You know, that's different from what their parents might have had.
>> I think that's right. The ratio, Charlie, is about 8:1. In other words, uh currently there are eight times the number of students coming from China, for example, to the United States, uh as there are Americans going to China.
>> How many I mean it's also the question of the university. How did you choose this university?
>> Part of that was a was an accident. uh when we went public at at Blackstone uh in 2007 the Chinese government uh bought 9.9% of our they didn't even have the fund that it was actually the government right uh it was non-voting stock and as part of that I was asked to be uh on the board of the Chenua right school of economics and management >> and as a result of that that became my home base if you will uh and Chenua is one of the top two universities It's where the current president of China uh went to school. It's where the previous uh president of China went to school. So it's pretty much of a power alley uh if you will uh in China. So it's a logical place. Uh and actually Chenua uh was started in 1911 by Americans. Uh as part of the Boxer Rebellion uh China had to pay reparations to the United States. US government basically said look I don't want the money you keep the money you start a university and it was Cheninoa so they have a natural orientation uh towards uh the states.
>> And and how did the how does the Chinese government feel about that investment in Blackstone?
>> Well, we're about close to even now with dividends.
>> Because after you went public that was a decline in your stock and they must have been a little bit.
>> Well, I think I think what happened uh is that all financial stocks went down a lot uh and we went down a lot less than the other ones. And I just checked the other day and I think we're the fourth best performing stock in the financial area in the Western world. Uh and and so they'll be back to even uh pretty soon, which is, you know, not a bad outcome.
>> Okay. I want to turn to what you're doing with veterans and come back to Blackstone. uh you and Jamie Diamond and other people enormously interested in veterans coming back from Afghanistan and Iraq, finding jobs, finding a way because of the enormous contribution they made and having been away and having, you know, given so much for the country, have a chance to participate. What are you doing?
>> Well, what we're doing uh at uh at Blackstone is we committed to hire 50,000 uh veterans uh over the next uh five years.
>> Uh and I feel really strong.
>> 50,000?
>> 50,000.
>> Uh we we have uh quite a large uh operation in terms of one of our seven business lines which happens to be private equity. uh we own about 80 companies uh with $120 billion of revenue and 730,000 employees.
>> So our ability to hire 50,000 shouldn't be really hard for us. Uh I feel extremely strongly about this. Uh and and the reason is that the the type of sacrifice that the people in the military make is hard to imagine uh for regular citizens. Uh and as a result of the stress that they're under, there are 28 military people a day who return to civilian life who commit suicide. It's actually intolerable that that type of situation exists caused in part by high levels of unemployment. So to the extent our firm can provide a place where they can come to work and and lead more welladjusted lives, I I think it's sort of a a moral issue.
>> Do you want to do that?
>> Other firms will look at what you're trying to do and say we should follow suit. We should make our own commitment to veterans.
>> I I also think it's good business. I mean, these are people uh who are used to doing things when they're told uh often taking a lot of initiative.
>> Working together because it's life and death.
>> Used to working in teams some people used to having command uh I I don't think uh this is u uh meant to be an iliamazinary type of uh activity I think it's good for us.
>> Good for them. Good for the.
>> And it's good for them.
>> Right. You gave $100 million to the library. I may I may have the wrong number but I was about that.
>> That's true.
>> How do you decide about your philanthropic commitments?
>> That's that's a great question uh and I'm still developing the answer. Uh I I make major commitments where I see uh a major need uh and there are many different areas uh where people find need and satisfy it. I happen to like things in the educational area. I believe that a great education is a passport uh to a different type of life and particularly in the world we're living in now uh it's really essential and if I can help in various situations have people have that boost.
>> Uh and and have that advantage uh I tend to respond to that. So at the library we have a huge number of people. Uh uh New York City uh as you know has has people living here from I think it's around 140 countries or 170 countries somewhere in that area. Uh that the library serves uh people uh who don't have the advantages uh necessarily. Some do but it's a place where you know you can you can take out books, you have the advantage of librarians, you have computers. So just the opposite of what you might think, attendance at libraries is going way up.
>> So when you make that kind of commitment, what is your standard of accountability? I mean, in in this case, I assume you didn't do this because you wanted your name on the building. You wanted to do this because you want to make a difference. And you want to make sure if you're giving that level of of a gift that they the money is spent wisely.
>> Well, the advantage here is that I knew how they were going to spend it.
>> Yeah.
>> Uh and the reason I responded to this.
>> But that was because of negotiation that takes place.
>> No, that this is because uh uh I was on the board of the library, right? And they hired um uh one of the major consulting firms to figure out how to reconfigure the library system, create a modern lending library uh in the main uh branch of of the library and be able to deliver better services and put themselves in better financial shape. It was a terrific plan. And so what happened is the head of the library came over to visit me as these things tend to work and and suggested that you know I give them a hundred million they could then have a lead gift to implement their plan so you get a multiplier of close to a billion dollars.
>> Uh and uh you know they said by the way we'd put your name on the building and I said sure it sounds like a great thing because there have been numerous meetings on how this uh uh program would kick off a whole reinvigoration of the library system reaching all kinds of middle income and lower income people. So I really like that. I also do uh major support for the parochial school system in New York. Why do why do I do that? That that's an easy one. Uh they have the same basic uh ethnic uh mix uh and and and uh economic mix uh of of lower income people uh and they graduate about 99% of their kids whereas the public schools are somewhere around 50. So my wife and I are supporting that because it's just changes the lives of these people uh because they're they have 96% that go on to college and it's transformational and I've done other things around the world that haven't been disclosed that that uh tap into that.
>> Uh and uh I like education as as a vehicle uh for for changing people's lives.
>> And giving them an opportunity.
>> Exactly.
>> Exactly.
>> You said you have seven lines of business. Obviously, one is private equity, another is hedge fund, third is real estate. Uh what are the other four?
>> Well, uh we we we have a large credit business that does highly leveraged credit. Uh we have an M&A advisory business. We we have a troubled company uh restructuring business. uh and we raise money uh for other people in the alternative asset classes from institutional investors.
>> So what's the investor climate like in 2013?
>> Well, it's just a variety of questions embedded in that one question. Uh the basic economy around the world is uh okay, right?
>> Uh the US is growing somewhere around 2 and a.5%.
>> Better than Europe, but not as good as China. and and Europe's pretty much hit the bottom, right?
>> Uh of where it's going to go. It's got no net growth now. Uh and Asia has slowed down. Uh it's getting close to a bottom. Uh and we'll have global growth somewhere in the 3.5% 3 and 3/4% uh zone. So, we're not looking at things going backwards except potentially a little bit in Asia, but there's still plenty of growth there. China for example sort of a worst case that most people uh look at you know would be six to seven uh the Chinese themselves uh are thinking seven to eight to just be not put put a precise point to it uh anytime you have major countries growing at that level somebody may be critical it's a little slower than the old nine or 10 but it's still remarkable so so the overall environment isn't uh uh as pessimistic if you will uh as uh as it's been uh US in particular is is quite uh interesting because we have a revolution going on in the energy business uh in the United States which is presenting.
>> What impact is it going to have on the United States uh in terms of making it certainly energy independent and not dependent on energy from the Middle East?
>> Well, it does a lot of really neat things, right? Well, what what happens is that our price of natural gas is going to be way below world levels. Uh, and that's going to enable us theoretically to do all kinds of things. Uh, first, um, it's it's a clean fuel. Uh, which is a very important environmental thing. Uh uh second uh because it's cheap uh we're going to be able to attract companies from around the world to locate in the United States in the prochemical area and all kinds of allied uh types of uh businesses. Third, uh we're going to convert overtime uh to um uh gas powering utilities uh which uh is is is pretty cheap. uh we could uh convert cars to natural gas.
Um, the amount of money that we would save in the United States would be the equivalent to a peace dividend plus we'd have a clean fuel. Uh we already use natural gas in a lot of cities for buses.
>> Right?
>> Um, and it's it will be the natural logical fuel for the United States.
>> A better source of propulsion for cars than electric.
>> You got to make electricity. Uh, so so you could look at it, I guess, uh, you know, either way. You'd have to build new electric plants uh, and and so forth.
Um, I look at this just in terms of dreaming.
>> As to what the United States could become as a result uh of this.
>> The dream United States could become what?
>> Oh, could could significantly increase its growth rate. We can be attracting companies investment from all over the world because we have such cheap energy and we have a rule of law here and we have safety and not all the places where you produce energy have rule of law or are safe or don't have threatening neighbors very close by or instability in their populations. So this can be uh a kickstart uh for for a new uh uh uh economic uh age uh in America if you were to dream.
>> Uh you have been a Republican, a strong supporter of Republican candidates, including uh Governor Romney. Uh what what are your worries about President Obama and his economic stewardship of the country?
>> Well, we we've already had four years. we had an election uh and and and the president won uh and and so the public has spoken uh about a lot of uh issues and I think that it's important that everybody try and make the country work as effectively uh as he can. I I think he's trying uh to do that. Uh he he's not having uh you know enormous success uh legislatively. Uh I think his heart is in the right place.
>> Well, he may get immigration reform and and obviously gun control is a very different issue.
>> I think I think the immigration uh reform is a is something everybody pretty much wants. Uh it's it's something that the Democrats have promised and it's something the Republicans need. Uh and the president wants it. So you have, you know, the two houses of government all set up. You have the president and it's an important thing for the country at large. So the chance that that happens should be pretty good. Uh and I I think on the economic side, what what they need to do is is really complete all these regulatory reforms.
>> Okay, tell me how you see tax reform that I I I think with uh individual tax reform uh that that something closer to a flat tax.
>> Is is is much more equitable. You could have two different levels or maybe even three.
>> So move away from progressivity.
>> Just it's not moving away from progressivity because you'll always have some.
>> Right?
>> But if you got rid of almost all deductions and just let everybody know what they have to pay, they'll pay it. Uh and and stop with these tax preferences. So for example, Troy, everywhere in the world that I know of where they've gone to that system, they raise more money, the society does really well. I mean, sing uh um uh Hong Kong uh is a case in point. Russia did the same thing.
>> And.
>> So no matter where your economic status is, you'd pay the same rate of federal.
>> You don't have to pay tax.
>> No, I didn't say that. That's one version of a flat tax. If you believe in product uh progressivity, you you could have.
>> A higher rate but some.
>> Right but but but the key is make it simple so nobody can cheat uh and include uh a broad group uh and you'll raise more money. It'll it'll be simpler and the chip should fall where they do. Most people I know who who talk about tax reform start with the idea we could eliminate some deductions and therefore in some cases lower rates and corporate rates as in addition.
>> Yes.
>> Um, why isn't there more um why do you think we don't have more uh movement for that?
>> My experience with change is that I I happen to be personally very comfortable with it. Most people aren't.
>> Yeah.
>> They they don't like change.
>> They don't know how it's going to work for them. uh they know how their lives work, they know how a system works and they don't like to uh uh think about different alternatives. Uh this this one happens to be pretty straightforward and easy.
>> Where do you stand on the carrot interest?
>> Well, carried interest is just one of those many things that's going on.
>> That ought to be considered as in terms of reform.
>> I I think we have a whole system that needs to be performed reformed. Current has only been around for 80 years. This is not some kind of new thing uh that's been developed.
>> And you think it's equitable?
>> Uh I I think it doesn't matter what I think. Uh we have a country that needs more revenue. Uh and and we we have a focus on an issue. Uh I think this issue will be dealt with in the context uh of of a broader uh type of arrangement.
>> And and if we have that kind of smart broader uh thing if people are paying more tax some people that's okay.
>> I think you're the largest real estate investor in the world aren't you?
>> That's true.
>> Um, housing seems to be on the increase certainly in terms of the American economy. Uh many people will argue that housing recovery will lead economic recovery because it affects so many other industries right uh that are part of the construction industry. Do you see are you enthusiastic about what you see happening in housing?
>> Yeah, I think uh we we started actually buying individual houses from foreclosure uh about a year and a quarter ago. We're now the largest owner of houses in the United States.
>> Can you say we're the largest investor in houses in the United States which therefore says that we have confidence in the future of the housing market in the United States?
>> Absolutely.
>> And in fact, it's turned out to be so even faster than we wanted it to.
>> Uh because housing as as you know uh within the last year has on average gone up around 10%. Uh in the cities where we've been buying it's gone up 20 to 25%. Uh because housing was so beaten down, right? There were a lot of markets down 40% from the top with very little construction. Meanwhile, America is about the only developed world country that continues to grow its population. And so, as a result of that, you're developing shortages uh in in housing.
Uh and because rates are now lower and people are getting more confidence back. And the Federal Reserve has certainly done all it can to encourage the purchasing of houses uh and other types of risk more risk assets that that's already turned. Almost every market in the United States is going up. Construction has gone from close to 500,000 houses a year at the bottom to about 900 and some odd thousand. and it needs to get back to a million5. So, we've already made a goodsized journey uh up from the bottoms.
Uh but there's a lot lot more to go. Uh and and people have not been replacing the housing stock for the last 5 to seven years at the rate that they need to to deal with the population. So, your supply demand is going to have to get uh in balance.
Uh and we're very optimistic uh about uh this asset class and it's turned out to be so.
>> The pension programs in America need reform. How secure should people feel with the pension plans that they participate in?
>> Well, pension plans are long-term obligations uh to pay people uh their retirement benefits uh and and they have in effect uh ups and downs uh as a function of markets and where they invest. It's been a tough uh last five years uh for these funds uh in large part because of the big declines that happened uh around the financial crisis.
Uh so so they're facing a number of uh challenges in large part because benefit levels throughout uh a lot of the last decade or two have been uh increased and they they have a number of uh options that are facing them.
Uh one of which is to change their rates of return on their investments. uh which is where we come into that picture because our types of investments over the last three decades uh in private equity have been about a thousand basis points which is 10% for people who don't follow finance more than the stock market. Our real estate has averaged 16% more than the stock market. And so what you're seeing is one thing the pension funds are doing is decreasing uh their investments in the regular stock market or the regular bond market and they're shifting more of their money to the types of things we do because they can repair their situations and make sure that their beneficiaries get that money uh by by giving money to uh people like ourselves.
So, so what what's happening is that they're taking a much more uh proactive basis uh to do that and they're looking at other types of things uh uh to be done.
>> Can you raise all the money you need to do all the investments you want?
>> Uh at the moment uh we're in a pretty advantageous uh position because not only are they giving more money to our asset class, but they're simplifying the number of managers they give money to. So they're giving it to the better performing managers and they're also trying to lower their own internal overheads.
>> Uh by reducing the number of people they have to keep track of.
>> Yeah.
>> Uh and so for us uh we're finding it um uh pretty easy at the moment uh to be raising funds. We also have the kind of returns uh that I mentioned in these areas as well as in our fixed income areas that uh are comparably uh high so that it becomes a relatively easy decision uh for them to give us money for which I'm eternally grateful because I remember starting when we had no assets.
>> Indeed. And you've done something right. Uh one of your investments is SACE. Are you worried about that?
>> Well, I can't comment on I can't comment on uh uh SACE because we have an investment and it's in the news uh all the time. So So that one is not for global television.
>> You can't say whether you're concerned or not about what might happen.
>> That one's still not concerned uh you know for me to talk about on uh global television. I can't really address that.
>> When you look at hedge funds versus private equity, what's the better revenue generator for you?
>> Well, private equity is a bigger business. Uh we are the largest investors in the world in uh hedge funds, right? Uh and it's it's that that's um a different type of business involving for the most part very liquid securities uh and and uh using uh what is called hedging. So so you're not just you know uh long and believing in investment. You can be long and believing in some investments and you can be pessimistic on other ones and and short them. The rates of return on private equity tend to be much higher.
Uh and and the reason is that you have control of businesses or control of real estate. You can change the management. You can change the business strategy and it's not passive.
Uh and and and today because people were so traumatized uh by the financial crisis, people really want a lot of liquidity.
Uh so the kind of longerterm investments without liquidity that we do in most of our uh uh activities and alternatives uh basically create an enormous spread between the return on liquids generally uh and um uh the return on illquids.
>> You once explained to me uh what you thought your best instinct was, that you could look at investment material and you could see something that other people didn't see. There was something would always stand out to you uh that was different that made you take notice as to something. What was that philosophy?
>> First of all, you know, we're we're a little like a a doctor, you know, where you start out saying, "Do no harm."
>> Yes.
>> Uh first rule, don't lose money. Don't take a risk that can put you in a situation where you do lose money. Secondly, um you want to be looking for an upside that if you make certain changes uh in a company, not only can you do well, but you can do very well.
>> On on on a personal basis, um I'm always looking for paradigm shifts. uh when everything's going one way, uh most people can figure out how to do something interesting. I'm personally much more engaged on major macroeconomic shifts. So, for example, when real estate collapsed in 1989 to 1992 and we had the resident res what's it called the RTC, right?
>> Uh uh resolution trust company. Nobody wanted to buy real estate. It got down to the bottom and somebody brought us a potential investment which we could price any way we want basically.
>> And we picked a 16% return at the bottom of the cycle with no leverage. I didn't know anything about real estate, but I said if we can create a 16% return borrowing no money and then we can borrow a little bit of money on top of it. So, we're getting like a 23 24% return that when we filled up this 20% vacant set of apartments, in effect, that would give us a 45% return. And then as the world got still better, the rents would go up and we'd make like 55%. And I didn't see a downside.
>> And that was the start of our giant real estate business. And each one of the businesses we've gone into, there's always some point of inflection where even when you describe it to other people, they either don't believe it or they're so traumatized by the problems they're already dealing with, they don't want to deal with it, or people won't finance them because they've lost so much money for other people. Or they just don't like change.
>> And these aren't hunches. They're they're based on just mathematics and observation.
>> And fundamentals.
>> And and it's not trying to go against the crowd. It's basically just seeing that the world has changed.
>> And moving on it with enormous uh uh confidence uh marshalling as many assets as you can uh and just going for it. Uh it's in effect what we did uh uh in housing. That wasn't my perception. That was our real estate group led by John Gray who's a terrific uh uh investor.
>> And that's the way you really uh do very well in our kind in our world.
>> Thank you for coming.
>> It's my pleasure.