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