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.
Charlie Munger: Invert And Use “Disconfirming Evidence”
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 a very good job of acquiring capital and some new patterns recently in particular. But the facts of publicly traded private equity firms have not reflected that same sort of enthusiasm. I think Blackstone has gone from something around 35 to around $26 over the course of the last year. Why is that? What is that a reflection of?
STEPHEN SCHWARZMAN: That’s a reflection that investors are wrong.
BECKY QUICK: More specifically?
STEPHEN SCHWARZMAN: Well, rapid growth — very long periods of time, 8 to 10 years, we deliver a terrific value proposition, which is why we grow so rapidly. And for some reason, people seem to think this is an adventure that will only happen once. In other words, that we’ll buy a company and we make money from part of our management fees as well as carrying interest. And I think they think it’s like some magic show that’s about to end.
And this has been going on for my entire career. And the reason is that when we buy something, it’s not like buying a public stock. We are more or less guessing. And if it doesn’t work out, you take a loss, you sell it. But before we buy something, no matter what it is, real estate or companies, we do a very thorough due diligence. We have access to all information, which is different than a public money manager.
We have a plan to change the company to accelerate its growth. And then we put leverage on top of it. And that would give you mathematically a much, much higher return, which in fact happens over almost every measurable point in time. So I think, because we’re a relatively new asset class and our results are somewhat unpredictable — in other words, I don’t want to be selling an asset that’s gone down because the world has gone down. If it’s a wonderful company, if I want to sell it, I’d sell it after everything goes well.
So in that period where we’re not selling something, somebody thinks that our firm isn’t doing well. Well, it’s like a farmer. It’s still growing. It’s under the ground. So when the crop comes out and we cut it, and it’s a huge crop. And then they will say, well, that will never happen again.
So this is sort of a silly sort of analytic approach. And, ultimately, they will change.
BECKY QUICK: One of the things that both candidates have been fairly clear about is that they are taking a more protectionist stance. Neither one of the two major candidates is in favor of TPP. We’ve had things mentioned like tariffs being slapped on Chinese or on others, all kinds of trade barriers.
I just wonder, for you, who is traveling so often and speaking to leaders of both business and politics around the globe, what impression you get from them and how worried you are about that.
STEPHEN SCHWARZMAN: I was just out at the G20 in Hangzhou last week. And what they were talking about is how trade is sort of some modern low growth rate, and how this populism and anger and concerns about globalization are affecting all kinds of countries in terms of the political will of people to keep the system open.
And that’s the number one issue, in effect, because I think we’re facing a lot of issues all at the same time. I mean, you have globalization, which has made some groups — poverty reduced by — I think it’s 700 million people in the world. But you have also got this tech revolution.
And the tech revolution, and the disruption and the change, I believe destroys more jobs than it creates. And imagine a world where nobody drives cars. Sounds pretty neat unless you’re a cab driver. And so these — technology is putting an enormous burden.
BECKY QUICK: And you could say the same thing about every technological progress cycle that we’ve gone through. Maybe it’s our fault for not retraining people better and having other jobs for them.
STEPHEN SCHWARZMAN: But I think that’s for sure clear. I mean, the U.S. used to be Number 1 30 years ago in education. We are now ranked Number 27. Now, when you go from Number 1 to Number 27, something not good is going to happen to your population. And we are feeling the effects of that. And this is something that has to be addressed to give everybody in America a really fair shot. You can’t do it without having a top-level education across the board available to everyone.
BECKY QUICK: You mentioned carried interest a little bit ago. And that is something that both Hillary Clinton and Donald Trump said that they would try and close what they see as a loophole in the tax system, carried interest very specifically.
I’ve spoken with both of them about it, and they’ve gotten pretty riled up about things. When the Obama administration first, back in 2010, was talking about getting rid of this, you were very vocal about your thoughts on it, got in a little bit of hot water for that. I just wonder what you think with these two candidates when it comes to carried interest.
STEPHEN SCHWARZMAN: Well, I think there’s a general frustration in society. And we’ve got a tax system that it is almost impossible for any even vaguely intelligent person to — you know. And I think what we need is restructuring with everything on the table.
I happen to be someone who believes in much more of a flat tax system. It seems to work in other places in the world. And it’s something that’s explicable and understandable to people. And I would be in favor of getting rid of virtually all tax preferences if you can drive the number lower. And in that scenario, something would happen to carried interest, but it’s important that we take an overall look at the system. And it’s tough to do.
BECKY QUICK: Very quickly, your favorite idea outside the energy patch, if you are looking at international markets, if you’re looking anywhere you can, if there’s one place where you think the deals are a little better than other places.
STEPHEN SCHWARZMAN: Well, we bought some stuff in the U.K., like when everybody was depressed. You know, somebody called us and said, I’ve got hundreds of billions of dollars of real estate, and I’d have to leave redemptions and — so that was a good thing. We like that, when there’s dislocation.
We are still seeing interesting things in the United States in real estate. The prices have gone up a bit, but there’s still some very interesting things that you can do, although the distress is sort of out of the United States. We’ve actually — hard to believe — bought some stuff in Brazil, because they’ve been about as beaten up, I guess, as a country can be. I think — there’s a bunch for sale now on the continent.
BECKY QUICK: You mean real estate or just companies?
STEPHEN SCHWARZMAN: These are companies. Prices in the U.S. are a little high for companies. So you have to be careful. The first rule of investing is don’t lose your money. That’s actually the second rule.
And fortunately for us, in most of the businesses we’re in, we don’t have to invest like liquid managers. If we don’t see anything attractive, it’s sort of like playing basketball without a shot clock. We don’t shoot. We just wait for an easy shot. If you keep passing the ball around and nobody drops it, eventually they get bored and you get a layup. That’s sort of our style of investing.