Steve Schwarzman At Delivering Alpha Conference: Market A Bit Pricey

“If you have interest rates where they are then you will pop up all asset classes. So it’s a little expensive for my taste,” he said Tuesday at the Delivering Alpha conference sponsored by CNBC and Institutional lnvestor.

Audio below

Also some REALLY rough notes

Steve Shwarzman – Blackstone

I would say that’s too high for low performance ad there’s resistance to doing that. In a way that was leftover form a period of time when there was really v strong performance…i don’t’ think tha’ts equitable

Hege funds.. Understand can’t deliver not exciting rates of return and charge as if you’re delivering something different. This is a market  twill adjust and is adjusting.

Before we buy something not matter what this is real estate, we do through dd. (have access to private co that you don’t in public companies)

We have plan to accelerate it’s growth and then we put leverage on it 7:06

Carried interest: i think there’s a general frustration i society now. We’ve got a tax system that is almost impossible for anyone even vaguely intelligent person to figure out. And i think what we need a restructuring with everything on the table. I happen to be someone wh o believes much more in a flat tax system, it seems to work in other parts of the world. And it’s something thats’ inexplicable and understandable to people. I’d be in favor of getting rid of all tax preferences if you can drive the number lower… in that instance something would happen to carried interest. But it’s important that we look at the overall look at the system and it’s  tough to do.

Our success.. I s not that substantial to society… we’re small compared to the whole society. We have to goes the se other mcro thigs right…

Oil – the values of certainly energy opps have been arbitraged out for a bit.. I think the energy area will continue, will need a lot of capital, there are still companies involved htat haven’t used the public markets bc htey don’t’ have acess to money.

I think we’re in ad decent trading range 40-50, and if you can find interesting opps, we have a bunch of them right now. I like that area.

Fave idea: 21:32

We’re stil seeing interesting things in real estate in the US, we bought some stuff in brazil bc they have been as beaten up as ac country as can be… prices in the US are a bit high for companies.

First rule of investing is don’t lose your oney. That’s actually the second rule.

It’s sort of like playing basketball without a clock shot… that’s sort of our style. (Don’t shot unless opportunity)

 

More from CNBC’s unofficial transcript

BECKY QUICK: So the conference is Delivering Alpha. And we want to talk about who’s done well, who hasn’t done well. It’s been a little bit of a difficult year for the hedge funds. And I was just reading a UBS study last week that suggested hedge funds have lost something like $56 billion from wealthy investors. A lot of it’s going to private equity, so I thought I would hit you with a hard question right off the bat.

Do you think these investors are right to be taking monies out of the hedge funds and into private equity, like you?

STEPHEN SCHWARZMAN: I think right now it’s been a difficult time for liquid securities generally. And interest rates have been astonishingly low. I guess two-thirds of the country and the world have government interest rates of 1% or below, negative.

So it’s made it hard. So private equity is an asset class where you actually have control of an asset. And you can fix it. You can change strategy and you can drive the turns. And at this point in the cycle, you can borrow money very cheaply. So the performance in a good private equity firm, one of their funds, would run 700, 800 basis points over the S&P and, in good years, go up to 1500.

So private equity is basically a wonderful asset class, but you have illiquidity. So what you are giving up for the liquidity is, for some people, a lot. But if you have enough money that you don’t need access to your money 100% of the time, you get a marvelous increase in return.

BECKY QUICK: Lack of liquidity is one thing. But I was reading recently that you and several of the other private equity firms have started 20-year funds. Your money is essentially locked up for 20 years. I think you’ve raised almost $5 billion for that.

20 years is a really long time. How do you convince somebody to hand over control of their money for 20 years and who’s actually giving you this money?

STEPHEN SCHWARZMAN: Well, these are pension funds who have long-term liabilities. And the advantage of investing in that form is that the money is compounded over a very long period of time. Normal private equity fund basically has an investment outstanding around four years, sometimes five, sometimes three. And so you have a very high rate of return. You’re giving your money back. And then you have to wait to reinvest it, at which point the money goes into liquids and doesn’t do as well.

So the theory of the case is that if you have money outstanding for a very long period of time, the compound rate of return will be less, but the duration is so much longer that you come out just fine.

BECKY QUICK: What kind of returns are you promising on a 20-year fund? And, again, this is locked up for 20 years. You can’t even promise it’s going to be the same manager over that period of time.

STEPHEN SCHWARZMAN: Well, I think promising is probably not the right characterization, you know, over that period of time. But I think you’re looking for a net return in the 12, 13 area, maybe 14. And so the key is picking a business with the durability. It’s not that different than when Warren Buffett put so much money into Coca-Cola, because it’s going to be here and it’s a good thing to own for the long term. There’s certain businesses like that.

But in a disruptive, technology-driven world, it becomes more difficult to find those undisrupted potential companies. But the theory mathematically would work out quite well.

BECKY QUICK: Let’s go back to the hedge funds, because they charge a little differently. Two and twenty. What do you think about that rate structure?

STEPHEN SCHWARZMAN: I would say that’s too high for low performance. And there’s resistance to doing that. And, in a way, that was left over from the period of time where there was really very strong performance. You can’t generate with somebody 2 years and 20 years. I don’t think that’s equitable.

BECKY QUICK: Well, you see investors in a year like this pulling money out of hedge funds and putting it into private equity.

STEPHEN SCHWARZMAN: But hedge funds are changing too. They understand that they can’t deliver nonexciting rates of return and charge as if you’re delivering something different. So this is a market that will adjust and is adjusting.

BECKY QUICK: Private equity has done

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