Schwarzman: “We were stunned at the reception”

PEO: Other than the amount of money you were able to raise, what struck you as being unique to this most recent fundraising?

Stephen Schwarzman: We’ve been raising private equity money since 1986. This was clearly the most unusual fundraising in the sense that it was by far our easiest.

Our previous fund, Blackstone Capital Partners IV, was the biggest in the world when it was raised in 2002. As we’ve been growing the firm, we have in some cases increased our funds by double. One year it went up two-and-a-half times – that kind of scale. So we’re used to increasing. This time we just had no idea what the market was like. We basically went out initially with a $10 billion expectation. We wanted to have more, but we didn’t want to look like we would

This was clearly the most unusual fundraising in the sense that it was by far our easiest. We actually didn’t go out and make sales calls.

fail. We frankly had no idea what the demand would be for investment. We were the first of the big funds to go out into the market for double-digit billions. We were sort of stunned at the reception. We actually didn’t go out and make sales calls. From just announcing the thing, from the people who just contacted us, we had $16 billion to $18 billion of demand, which is, I think, completely unprecedented.

So the issue for us was how big should we be, and how big would our limited partners be comfortable with us being? We eventually settled on $15.6 billion. It certainly could have been bigger.

During this period we were investing the money as well, because we had our first closing in December of 2005. We found that there were a lot of large deals,

You could be committing $750 million per deal without co-investment, and still meet diversification thresholds.

most of which we didn’t do, but some of which we did do. Our ability to put out the money at what we think will be good returns was certainly there, as we anticipated that it would be. We just increased the fund size to get to our final close and then left money on the table for our brethren. [Laughs] So that was the story of the fundraising. It was highly unusual by historic standards. There were major asset allocation increases by probably two-thirds of our US investors. The fund finished up somewhere around 70 percent existing investors and 30 percent new. We gave the priority to existing investors.

PEO: Certainly your LPs need to be comfortable with the amount of money you raise. But did you find yourself arguing that, given the vastness of the overall M&A market, they should in fact be comfortable with your firm pursuing much, much larger deals than it has historically?

Schwarzman: That was clearly one of the points. But in fact, as one increases the size of the deals, you just put out more equity money. It’s not like we’re scaling to do a lot more deals than we ever have been. It’s just that with more money, you’re able to do bigger transactions. The number of firms that can compete for those larger transactions diminishes the more money you have. It’s a pretty logical argument. I think the argument wins at the end of the day because it’s true. The empirical reality of if is shaping up. I think people got comfortable that deal sizes would increase.

A fund ideally should have at least 20 to 25 investments. That should be a minimum for diversification. You could be committing $750 million per deal without co-investment, and still meet diversification thresholds.

PEO: Is one of your chief arguments for pursuing larger deals that you can attract better management?

Schwarzman: That’s one of the arguments, and it’s for sure true. We’re finding that to be the case. For a really terrific manager, working in a private equity

As you’re working with much larger companies, the ability for a manager to make $100 million, $200 million is really there.

setting has a lot of advantages. You don’t have the tyranny of quarterly earnings. You can mutually set long-term growth plans and manage to that long-term plan. Money isn’t a problem, because we have plenty of money to invest in the companies. There is a terrific alignment of interest between the managers and the shareholders. In other words, we hope these people will become extremely affluent. As you’re working with much larger companies, the ability for a manager to make $100 million, $200 million is really there. So if you’re a manager, you can make more money, you can have less quarterly earnings pressure, freedom of action and help define your long term goals.

As I talk to the CEOs of public companies, one of their concerns is how do they keep their people, given the employment proposition that a large private equity firm can put on the table for a senior manager.

PEO: Already a fourth of your new fund has been spoken for in new deals. Given this pace, will you be back in the fundraising market in a couple of years?

Schwarzman: You never know whether the past is prologue. Based on our current pace, we’d be raising another fund in three to four years.

PEO: How much does Blackstone have under management now?

Schwarzman: had $16 billion to $18 billion of demand

Schwarzman: It’s unclear in our world how you count. One of the amazing things to me is how much we’ve raised. We’ve raised $63 billion since 1987 for alternative asset investing and $30 billion of that in the last twelve-months.

If you look at the returns for our asset classes, and then at our firm’s results within those asset classes, you can see why the money gets allocated to us.  The question is, can you handle the money? I’m quite confident that we can.

The asset management world is moving toward alternatives because of the returns being there for the best managers. Then you get the concentration issue, as people responsible for money are trying to give it to the top-tier managers. For those top-tier managers, it’s pretty remarkable being on the receiving end of it. I remember, in 1987, flying across the country for a $10 million limited partner meeting, and was happy to do it, frankly, because $10 million was better than no million. Now all the allocations keep going up. It’s happening in Europe and in the States.

PEO: Clearly you’re doing something that the LPs like. . .

Schwarzman: And we love them too. I remember when we had no LPs. I remember our first circle and every circle since. You can never take your investors’ confidence for granted. It’s a big commitment for them to trust us. We take that trust unbelievably seriously.