Always bet on black

The bigger The Blackstone Group gets, the leaner Stephen Schwarzman gets. The president, CEO and co-founder of the New York financial services group has cut all carbohydrates out of his diet. He eats, ?in unlimited amounts,? fish, chicken, turkey, vegetables, fruit and salad. But no pasta, bread, potatoes or rice. Schwarzman is clearly pleased with this regime's trimming results. ?It's exceptionally effective,? he says, smiling.

At a private equity conference in Miami a year ago, Schwarzman was the featured speaker at lunch. While the assembled investment professionals tore into their carbohydrates, Schwarzman proudly trumpeted his recent weight loss and joked that certain industry friends in the audience could stand to lose a few pounds. He also alluded to an historic episode of overindulgence from which many in the crowd were beginning to feel an acute hangover. ?For you people out there in VC,? he said, ?good luck.?

Make no mistake – Schwarzman still looms large at Blackstone at a time when the firm itself appears to be the biggest private equity firm around, not to mention one of the most successful financial services providers on the Street. Four months after Schwarzman's comments in Miami, Blackstone closed the largest buyout fund ever raised, the $6.45bn Blackstone Capital Partners IV. The new pool of capital could not have come at a better time. US corporations are weakened, laden with debt and struggling to refocus on core strategies. Banks are risk-averse. Strategic buyers are inwardlooking. A perfect time, then, to command the world's largest buyout fund, bolstered by the advantage of having golden corporate connections going back to the early days of the private equity industry.

When Fund IV closed, John Ford, Blackstone's spokesman, commented: ?It's a bigger pot, which allows us to make larger investments if that's appropriate.? The firm wasted no time in finding an appropriate investment. In November, the Blackstone announced a deal to acquire Northrop Grumman's auto parts division, TRW Automotive, for $4.7bn – the largest private equity deal inked in 2002. This month, high-yield bonds supporting the TRW deal go on sale with the goal of rounding up $1.4bn ? the largest junk bond issue in nearly two years.

Few people, large margins
Other than private equity, Schwarzman, together with Blackstone co-founder Peter Peterson, also oversees a number of complementary, and equally dominant, business lines. Blackstone's restructuring advisory group is busy these days, to put it mildly. The firm runs a boutique mergers and acquisitions practice. Its real estate investment group, which raised a $1.5bn fund and a $700m international fund in 1999 and 2002 respectively, is one of the most highly regarded in their industry. In 1999, Blackstone created a mezzanine debt investment group and rounded up north of $1bn for a debut fund. A year ago, Blackstone added on a collateralised debt obligation group. The group's recently formed hedge fund advisory business, Blackstone Alternative Asset Management, counts CalPERS among its clients.

For all the success of the businesses run by Schwarzman, he is not proud of their largeness so much as their leanness. Schwarzman values efficiency, low overhead and doing more with less. Protein over carbs. When Blackstone closed its first private equity fund in 1987 on $950m, it was then the largest pool of private equity investment capital of its kind. But Schwarzman claims the dollar figure was fairly arbitrary. A year earlier, while waiting to meet with friends at First Boston, Schwarzman flipped through an annual report of the company and saw that it had $1bn in equity capital. ?I thought it would be a good idea if we had the same amount of capital as they had,? he remembers, ?but without any of the people.?

Keeping headcount to a minimum was indeed a key objective. Today Schwarzman describes his firm approvingly as ?intimate,? and notes that, other than the private equity group, none of the other five business groups employ more than 30 professionals. Having the biggest fund, he says, ?was just how it turned out, but it was never the objective per se. In all of our businesses, we wanted to be one of the top three firms in the world in whatever the activity was, but also keep the group to the smallest number of people. One needs to pick businesses where relatively few people can control a very large amount of assets.?

?There are famous runners who ran for years and never lost a race. Why not? They liked winning?

Schwarzman notes that his many-dollars, few-people approach has helped create camaraderie and teamwork, where the real estate team helps the private equity team and the corporate debt team helps the restructuring team, etc. He then adds, very matter-of-factly, ?this also happens to be an extremely profitable model. The margins are quite large.?

Schwarzman and others close to his firm describe Peterson ? the former CEO of Lehman Brothers and US Secretary of Commerce under Richard Nixon ? as the wellconnected statesman of the firm, overseeing strategy and artfully selling Blackstone's services to great men of the business world. Schwarzman, 21 years younger than Peterson, has been CEO of Blackstone from day one, and is more akin to its Commander-in-Chief, or, more specifically, the Secretary of War. ?I'm CEO because Pete was too smart to want do to that job,? Schwarzman jokes. But Schwarzman is clearly the right man for the dayto-day battles of building an investment behemoth, say people who work with him. Blackstone owes much of its incredible success to Schwarzman's knack for quickly internalising reams of information, and then marshalling the right resources for the right course of action. He is described as very smart, a world-class multi-tasker, efficient, cautious, but once he feels he understands a plan of action, aggressive about getting it done. This combination of personality traits has clearly worked to his advantage professionally.

?I thought it would be a good idea if we had the same amount of capital as they had, but without any of the people?

Holding on tight
Schwarzman and Peterson do not have reputations for eagerly letting junior partners take the reins of the firm they built. The two also continue to enjoy the lion's share of carried interest. Over the years, a number of partners have left the firm. While turnover, to be sure, is not an unusual phenomenon in private equity, sources say many of the partner defections from Blackstone were related to their inability to wrestle control and economics away from the two founders. Sami Mnaymneh left the mergers and acquisitions group to form H.I.G. Capital in Florida; Roger Altman, Austin Beutner, Anthony Grillo and Neeraj Mital left to form Evercore Partners; David Mariano left the restructuring group to join Wellspring Capital Management; David Stockman spun out to form Heartland Industrial Partners; Glenn Hutchins left to form Silver Lake Partners. Last month, the co-head of Blackstone's real estate group, Thomas Saylak, joined Fortress Investment Group. In a 1998 article in Business Week, Schwarzman noted the unusually high degree of control he and Peterson wielded over Blackstone, but insisted this was good for the firm. ?A lot of places have blown up because control was not centralised,? he told the magazine.

Schwarzman says that recognising the achievements of the people who work for Blackstone is one of the firm's core values. But clearly, the firm remains his and Peterson's. ?A partner at Blackstone is a highly paid person who still serves at the pleasure of the king,? says the consultant who works with the firm. Increasingly, Schwarzman is the reigning king of Blackstone as Peterson becomes less active in the day-to-day activities of the firm.

?A lot of places have blown up because control was not centralised?

No one, least of all Schwarzman, doubts that he can continue leading Blackstone from success to success. People who have known him for the better part of his life say Schwarzman has an uncanny ability to succeed. Schwarzman makes a point of noting that he does not come from wealth. Born in 1947, his father owned a Philadelphia dry goods store that sold linen, curtains and draperies. After graduating from Abington High School, he attended Yale University where he majored in psychology ? ?good for understanding people's motivations,? he says. He briefly considered pursuing a PhD in psychology. He pondered becoming a lawyer, even a rabbi. ?I wanted to counsel people,? he says.

In 1969, Schwarzman's first job out of college was a nine-month stint at ?a small firm called Donaldson, Lufkin & Jenrette.? His career in finance was almost sidetracked by a military assignment. ?I was in the Army reserves in the infantry,? he remembers. ?There was a six-month training period alongside the people who were, in most cases, training to go to Vietnam. At the end of advanced infantry training they lined everybody up and called out their name and where they would be going next. I think there were only about six or eight of us out of 200 to 250 who went back to civilian life, and the rest of the people almost all went to Vietnam.?

Schwarzman was among those to revert to civilian life. He went to Harvard Business School, where he became friends with a fellow student, Joseph Perella, now the chairman of institutional securities and investment banking at Morgan Stanley. Perella says he remembers Schwarzman as being very driven, but also in possession of personal skills that would have suited a psychologist or a rabbi. ?He was a lot of fun to be around,? says Perella. ?He was serious but he didn't take himself too seriously. He was a guy you wouldn't mind having a drink with, or if you had a problem, you could talk about it with him.?

Ain't no cowboy
After receiving his MBA in 1972, Schwarzman went to work for Lehman Brothers. A year later, Peterson joined the firm. In 1977, at the age of 31, Schwarzman became a managing director at the firm. Most of his time was devoted to mergers and acquisitions advisory work. By 1984 he had become chairman of the firm's M&A committee.

Despite the age difference, Schwarzman and Peterson found they were a perfect fit professionally. ?He had a real method of attacking problems in an extremely logical way,? says Schwarzman. ?I was probably more intuitive.? Schwarzman's intuition led him to quit Lehman Brothers after it was sold to Shearson in 1983 and form Blackstone with Peterson.

Blackstone continues to operate with the same button-down intensity as Lehman Brothers, but Schwarzman says he has gone out of his way to create an atmosphere devoid of internal power struggles. ?Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional,? he says. ?That was the principal reason why the firm was sold.?

Private equity was the first new line of business for Blackstone, as Schwarzman and Peterson parlayed their M&A advisory skills into a buyout business. But unlike many private equity pioneers, says Perella, Schwarzman was no cowboy. ?I've seen lots of wild risk-takers over the past 30 years,? says Perella. ?But Steve has an inherently conservative streak. If he doesn't understand something completely, he doesn't do it.?

Perella notes that Blackstone, in the late 1980s, briefly flirted with launching a risk arbitrage operation, as was then popular on Wall Street. ?When Steve realised how much you could lose on one deal blowing up, he decided it wasn't for him. He is able to say no and walk away. A lot of people I meet think they are master of everything, but I think Steve really has a healthy perspective on what he can control.?

Once he understands an issue, which doesn't take very long, controlling it is something at which Schwarzman excels. He gives the go-ahead for every investment made at the firm. The firm itself is perhaps his greatest subject of attention. Having built a valuable franchise, he is fanatical about protecting its reputation and spends lavishly on legal and other services to this end.

The gut instinct
Schwarzman is funny, selfdeprecating and charming in person, which has gotten him far in his professional and personal life. But according to people who have worked with him, Schwarzman knows how to turn off the charm as well. ?He's happy to pay you as long as you deliver results,? says someone who has occasionally felt the blunt end of Schwarzman's personality. ?But he is unbelievably demanding. It doesn't matter what the excuse is ? ?Get the job done!??

Joseph Perella: ?If Steve doesn't understand something completely, he doesn't do it? Jimmy Lee: ?Blackstone didn't do what a lot of other firms did, and a lot of that is due to Steve?

?He really understands what makes human beings tick,? says a long-time business associate. ?And he knows when he needs to be charming and when to draw the line and be tough. He's pretty good in the bustingheads department.? Although Blackstone's investment record is not devoid of blemishes, Schwarzman's attention to detail and aversion to big risks has allowed the firm to steer clear of many of the disasters that befell major private equity firms during the late 1990s, including theatre chains, startup telecom services providers and, on the real estate side, telecom ?hotels?.

Jimmy Lee, the vice chairman of JP Morgan Chase, who is Schwarzman's friend as well as frequent source of debt financing, says Schwarzman's success cannot simply be explained by Blackstone's exacting due diligence processes. ?I'd put him in the Jack Welch Hall of Fame for having that gut instinct,? Lee says, referring to the always-winning former CEO of General Electric. ?LBO firms today are really defined not by what they did in the past but by what they didn't do. Blackstone didn't do what a lot of other firms did, and a lot of that is due to Steve.?

Schwarzman's energies are not entirely consumed by work. In fact, many who know him are surprised that his energies are not entirely consumed by his private life. Schwarzman and his second wife, Christine Hearst, an attorney, are extremely social and active with organisations like the New York City Ballet. The Schwarzman charm has often been unleashed for charitable fundraising. ?He is a wonderful person to have as an honorary chairman,? says a colleague. ?He gets people to buy tables at events like there's no tomorrow.?

The Schwarzmans appear from time to time in the society pages, but not all of their activities are high-brow. ?He's fun,? says Perella. ?If it's 11 at night and you want to go out and have a drink or go dancing, Steve will put on his dancing shoes.? ?Not too many people know that he and Christine love to go out dancing,? says another friend. Ballroom dancing? ?No. Rock and roll.?

Committed to doing things well
While Schwarzman is proud of his middle-class background, he certainly does not seek to maintain a middleclass lifestyle now that he has risen to the top of the finance industry. The Schwarzmans live in a 34-room triplex on Park Avenue that used to belong to Saul Steinberg, the onetime corporate raider and chairman of bankrupt insurance company Reliance Group, whose management style was not as risk-averse as Schwarzman's. Steinberg sold the apartment to Schwarzman amid a devastating personal liquidity crunch.

Schwarzman has no plans to ease up on his social life, and no plans to scale back his involvement at Blackstone. But the scale of the firm did convince him to bring in another senior-level partner to help. Late last year Blackstone named a new vice chairman – Hamilton James, CSFB's chairman of global investment banking and private equity. ?We were lucky enough to attract somebody of Tony James' background,? says Schwarzman. ?As for me, very little changes. It just enables me to start new things for the firm if there's something worth doing.?

One question particularly puzzles Schwarzman ? does he believe that he may not have the same drive to succeed now that his firm dominates the market and the financial rewards of that success are already his? ?You are introducing a new concept to me,? he says. ?There is a commitment to excellence, a commitment to achievement and a commitment to doing things really well that are actually part of a person and his value system. It's not particularly impacted by whether one's net worth is X, Y or Z.?

adds: ?There are famous runners who ran for years and never lost a race. Why not? They liked winning. It was in their character to want to win.? Unquestionably, it's in Schwarzman's character too.

Blackstone ? a success story
1985: Steve Schwarzman and Peter Peterson leave Lehman Brothers' mergers & acquisitions division to set up their own buyout and advisory firm. The Blackstone Group opens for business with four staff and $400,000 of capital.

1987: Blackstone closes on $950m for its debut private equity fund, at the time the largest such vehicle in the market.

1991: The firm opens its restructuring and reorganisation practice led by Arthur Newman, which to date has advised distressed clients on liabilities of some $250bn.

1992: Blackstone Real Estate Advisory (BREA) is established and begins making property investments. Today BREA manages over $4bn.

1994: Blackstone sells BlackRock, the asset management business established by Schwarzman, Peterson and Larry Fink in 1988, following a falling-out between the three founders.

1999: Blackstone decides to move into the mezzanine business and raises $1.1bn for a dedicated mezzanine fund.

2000: Blackstone opens an office in London to step its European activity, particularly in private equity and real estate.

2002: The firm launches Blackstone Debt Advisors, a CDO manager, and Blackstone Asset Management, a hedge fund. Blackstone Equity Partners IV closes on $6.45bn, the largest buyout fund in history, taking the firm's private equity dollars under management to over $14bn.