My high expectations for this book turned out to be accurate. What it takes is a must read if you are interested in the reasoning process one of the biggest investors uses to make good decisions.
The Blackstone Way
After messing up an investment he himself approved, Schwarzman implemented a method in which ideas are debated without a final decision being made by any individual alone.
I had fallen into a trap common to many organizations. When people have to pitch ideas, they tend to address the great man or woman sitting at the end of the table. If their idea is no good, the great man or woman rejects them. Regardless of the quality of their proposal, they leave the room with their heads down. A few weeks later, they go through the same routine with a new proposal and leave the room even more slowly than before to show what they think of the decision. The third time, they’re gritting their teeth. The fourth time, the person at the end of the table now feels bad. The proposers aren’t horrible employees, just not that good. But if that fourth idea is near-okay, the boss will end up green-lighting it just to keep everyone happy.
In my enthusiasm to give a new partner a shot with the Edgcomb deal, I had made myself and the firm vulnerable. I had succumbed to a good sales pitch. I learned later that one of the analysts on this new partner’s team had opposed the deal. He couldn’t see it ever working. But the partner had told him to keep his doubts to himself.
I should have been more wary of my emotions and more scrupulous with the facts. Deals aren’t all math. But there are a lot of objective criteria to consider, and I needed to do that at length, in peace, not with two people pushing their views, and me sitting there deciding between them.
Finance is full of people with charm and flip charts who talk so well and present so quickly you can’t keep up. So you have to stop that show. Decisions are much better made through systems designed to protect businesses and organizations than through individuals. We needed rules to depersonalize our investment process. It could never again rely on one person’s abilities, feelings, and vulnerabilities. We needed to review and tighten our process.
I had always been maniacal about not losing money, and the trauma of Edgcomb pushed me further. I began to think of investing as like playing basketball without a shot clock. As long as you had the ball, all you had to do to win was just keep passing, waiting until you were sure of making the shot. Other teams might lose patience and take those off-balance, low-percentage shots from behind the three-point line, the way we had done with Edgcomb. At Blackstone, I decided we would keep moving and passing until we could get the ball into the hands of our seven-foot center standing right underneath the basket. We would obsess about the downside of every potential deal until we were certain we could not miss.
We decided to involve all of our senior partners in our discussions of investments. We would never again allow one person single-handedly to green-light a deal. During my career, I had gotten things more right than wrong, but Edgcomb had shown that I was far from infallible. My colleagues had decades of experience. By working together, arguing and applying our collective wisdom to evaluate an investment’s risks, we hoped we could examine our deals more objectively.
Set Goals which inspire
“It was an ambitious goal. Most people said it was impossible. But I’ve always believed that it’s just as hard to achieve big goals as it is small ones. The only difference is that bigger goals have much more significant consequences. Since you can tackle only one personally defining effort at a time, it’s important to pursue a goal that is truly worthy of the focus it will require to ensure its success.”
Don’t give up
When starting Blackstone, Pete and Stephen wen through dozens of interviews without getting any clients to sign. Giving up would have seemed the right thing to do for most people.
I had to do something. I left Pete and ran into the street to try to hail a taxi. In no time, the rain soaked through my jacket and shirt straight to my skin. My clothes were hanging off me like rags, the water streaming into my eyes and down my face. Every time I thought I finally had a taxi, someone else grabbed it before me. Desperate and drenched, I spotted a cab sitting at a red light and ran over to it. I banged on the back window and held up a limp twenty-dollar bill, hoping the bribe would be enough for the passenger to let us get in with him. He stared at me through the glass. I must have looked bizarre, hammering on the window in my sopping wet suit. He refused. Two more people did the same. I raised my offer to thirty dollars and finally someone accepted.
It was the closest to a deal I had gotten in weeks.
I waved Pete over and he began slowly walking toward me, wetter and grumpier with every step. His full head of hair was pasted to his head as if he were standing in the shower. Pete was used to having cars waiting for him, drivers holding umbrellas as he got in and out. But a year and a half before, he and I had decided to start a business together. And from the look on his face as he walked through the puddles, I could tell he regretted it.
It hadn’t been that long ago that Pete and I could call anyone in Corporate America or in governments around the world and find a receptive audience. Neither of us imagined starting a business would be easy. Nor did we envision being slumped in our seats at Logan Airport on a Friday night, soaked to our skins, without a dollar to show for our efforts.
Every entrepreneur knows the feeling: that moment of despair when the only thing you are aware of is the giant gap between where you find yourself and the life and business you imagine. Once you succeed, people see only the success. If you fail, they see only the failure. Rarely do they see the turning points that could have taken you in a completely different direction. But it’s at these inflection points that the most important lessons in business and life are learned.
Go for it, for real and don’t give up
For me, the greatest rewards in life have come from creating something new, unexpected, and impactful. I am constantly in pursuit of excellence. When people ask me how I succeed, my basic answer is always the same: I see a unique opportunity, and I go for it with everything I have.
And I never give up.
As Arnold tells in his biography and as I’ve experienced myself. If you honestly give it all, you’ll either succeed or feel better about failing because you know you gave your best.
How to find Investors
Putnam gave me a lesson in raising money that would stay with me throughout my career as I raised fund after fund at Blackstone. Investors are always looking for great investments. The easier you make it for them, the better for everyone.
Meeting Jack Welch
When Jack came to learn finance, it took me about one minute to see that Reginald Jones wasn’t off base at all: he had hit a home run. Having Jack Welch go to work on you was like having your brain connected to a dust-buster sucking out everything you know. I’ve never met anyone like him before or since. He never stopped asking questions—torrential, relentless questions—and he instantly grasped the links between one idea and another, even if they were entirely new to him. He was like Tarzan swinging through the trees at blistering speed, never missing a vine, learning more quickly than I could teach.
Getting to know Jack and watching him in action reinforced my growing belief that the most important asset in business is information. The more you know, the more perspectives you have and the more connections you can make, which allow you to anticipate issues.
How to manage stress
When I started in finance, I was ill prepared for the stress of the work. Every point in every negotiation was a fight, with a winner and a loser. People in this business weren’t interested in carving up the pie so everyone got a slice. They wanted the whole pie for themselves. I observed that when I was the one making the decisions and the voices rose and tempers flared, my heart would beat faster and my breathing would become more shallow. I became less effective, less in control of my own cognitive responses.
The fix, I found, was to focus on my breathing, slow it down and relax my shoulders, until my breaths were long and deep. The effect was astonishing. My thoughts became clearer. I became more objective and rational about the situation at hand, about what I needed to do to win.
Why private equity businesses scale nicely
Private equity is equity—ownership or an interest in an entity—that is not publicly listed or traded.
Investopedia
The appeal of the private equity business model to a couple of entrepreneurs was that you could get to significant scale with far fewer people than you would need if you were running a purely service business. In service businesses, you need to keep adding people to grow, to take the calls and do the work. In the private equity business, the same small group of people could raise larger funds and manage ever bigger investments. You did not need hundreds of extra people to do it. Compared to most other businesses on Wall Street, private equity firms were simpler in structure, and the financial rewards were concentrated in fewer hands. But you needed skill and information to make this model work. I believed we had both and could acquire more.
How to attract 10s
Pete and I thought of the people we wanted to run these new business areas as “10 out of 10s.” We had both been judging talent long enough to know a 10 when we saw one. Eights just do the stuff you tell them. Nines are great at executing and developing good strategies. You can build a winning firm with 9s. But people who are 10s sense problems, design solutions, and take the business in new directions without being told to do so. Tens always make it rain.
We imagined that once we were in business, the 10s would come to us with ideas and ask for investment and institutional support. We’d set them up in fifty-fifty partnerships and give them the opportunity to do what they did best. We’d nurture them and learn from them in the process. Having these smart, capable 10s around would inform and improve everything we did and help us pursue opportunities we couldn’t even imagine yet. They would help feed and enrich the firm’s knowledge base, though we still had to be smart enough to process all this data and turn it into great decisions.
The culture we would need in order to attract these 10s would by necessity contain certain contradictions. We would have to have all the advantages of scale, but also the soul of a small firm where people felt free to speak their mind. We wanted to be highly disciplined advisers and investors, but not bureaucratic or so closed to new ideas that we forgot to ask, “Why not?” Above all, we wanted to retain our capacity to innovate, even as we fought the daily battles of building our new firm. If we could attract the right people and build the right culture at this three-legged business, offering M&A, LBO investments, and new business lines, all feeding us information, we could create real value for our clients, our partners, our lenders, and ourselves.
Diversity
At Lehman in the early 1970s, we had people from the CIA and the military, all kinds of different fields, who learned finance on the job. They brought a wide range of skills, perspectives, and contacts to our work. But by the mid-1980s, banks were hiring armies of MBAs who could plug in and do the work immediately.
Pete and I believed that these changes to the culture at the big firms would lead to a shake-out of great people and great ideas. If they were anything like us, they would be searching for ways out. We wanted to be ready for them.
Aesthetics
We bought some furniture, hired a secretary, and divided up our roles. Pete had been a CEO twice before and told me that he didn’t want the hassle of running a business again. He asked me to take the CEO role but with the title of president. One of my first acts was to design our logo and our business cards. I hired a design firm, had them come up with alternatives, and spent an enormous amount of time going over them. The design we chose is the one we still have: simple, black and white, clean, and respectable. I thought the time and money we spent when both were scarce were essential to getting this right. When you’re presenting yourself, the whole picture has to make sense, the entire, integrated approach that gives other people cues and clues as to who you are. The wrong aesthetics can set everything off kilter. Our business cards were an early step in establishing who we wanted to be.
Solving hard Problems
As an investment banker and later as an investor, I found that the harder the problem, the more limited the competition. If something’s easy, there will always be plenty of people willing to help solve it. But find a real mess, and there is no one around. If you can clean it up, you will find yourself in rare company. People with tough problems will seek you out and pay you handsomely to solve them. You will earn a reputation for doing what others cannot.
Rising Big Money
Here is a practical example of what Stephen means by setting big goals.
I thought we should raise a billion dollars for our first fund, which would make it by far the biggest first-time fund ever launched. Pete thought I was dreaming.
“We’ve never done a single private equity deal,” he said. “And neither of us has ever raised any investment money for ourselves.”
“So what?” I said. “I know the guys who do this stuff. I represented them at Lehman. I’ve been in the room.” If they could do it, I assured Pete, we could.
“It doesn’t trouble you that we haven’t done a deal yet?”
“No, it doesn’t.”
“It does me,” said Pete. “I think we should start with a $50 million fund, learn what we’re doing, and then do something bigger.”
I told Pete I disagreed for two reasons. First, when investors put money in a fund, they want to know that theirs isn’t the only money. So if you’re raising a $50 million fund, chances are you’ll have to raise it in increments of $5 to $10 million. And if you’re going to all the bother of raising $5 to $10 million, you may as well save yourself some legwork and ask for $50 to $100 million. Second, investors would expect us to build a diversified portfolio. With only $50 million in hand, we’d have to do a series of tiny deals to get there. Since our expertise was in working with big corporations, tiny deals made no sense.
Pete was still apprehensive. “Why would somebody give us money when we’ve never done anything?” he asked.
“Because it’s us. And because it’s a moment.”
How to sell your vision
As a salesman, I’d learned you can’t just pitch once and be done. Just because you believe in something doesn’t guarantee anyone else will. You’ve got to sell your vision over and over again. Most people don’t like change, and you have to overwhelm them with your argument, and some charm. If you believe in what you’re selling and they say no, you have to presume that they don’t fully understand, so you give them another opportunity. After many discussions, Pete, in his own way, gave in.
“If you feel that strongly, I’ll sign on for it.”
Face adversity
Founding Blackstone wasn’t easy. The following chapters show the struggle Stephen and Pete went through.
We honed our proposal into an offering memorandum—the legal document that explains the terms, risks, and objectives of an investment—and sent it to nearly five hundred potential investors: pension funds, insurance companies, endowments, banks, other financial institutions, and some wealthy families. We made calls and wrote follow-up letters. Once again, our telephones went quiet. We made the mistake of trying out our half-formed pitch on our best prospects, the people we knew best. Rather than being forgiving, they found it all too easy to turn us down. We received just two invitations to meet. Met Life committed $50 million and New York Life $25 million, but only if their investments did not exceed 10 percent and 5 percent of the fund, respectively. Until we raised at least $500 million, their commitments were worthless.
Pete suggested we wait a couple of weeks before making more follow-up calls and refine our approach. This time, I deferred to his counsel. Second time around, we had a better feel for our pitch and arranged meetings with eighteen potential investors.
The Equitable Insurance Company brought us in for two meetings, ten days apart. When we were called back, we hoped it was just a question of signing them up. At the second meeting, the person we had seen just ten days earlier didn’t even recognize us. “Blackstone?” he said. He couldn’t remember anything about us. It wasn’t even a scheduling error. Pete and I left not just deflated but confused. Were we so irrelevant that people couldn’t even remember who we were?
Delta Airlines’s investment fund agreed to meet us if we came to their office in Atlanta. The night before our 9:00 a.m. appointment, Pete had attended dinner at the White House. I met him at Atlanta’s Hartsfield-Jackson airport and we took a cab to our meeting. Pete always had a giant briefcase with him and now also carried a tuxedo bag. When we got out of the taxi, we were still several hundred yards from the Delta building, which was set back from the road. It was hot and humid. I helped Pete lug his bags. By the time we arrived, we were both sweating through our shirts.
A secretary took us down to the second-level basement, not up to the executive floors. The cinderblock walls were painted a bilious green. Pete and I were sticky and disheveled but did our best to straighten up. Inside the small conference room, we were offered coffee. Pete said no; hot coffee on a hot day didn’t sound great. We’re in the South, I thought. We should be gracious. So I said yes. Our host went over to a card table with a hot plate and a metal coffee carafe and poured me out a brown cup with a white plastic insert. “That’ll be twenty-five cents for the coffee kitty.” I dug into my pocket for a quarter.
We were trying to get $10 million from these people. They had read the material and invited us down. We were offering the kind of fund they usually invested in. We went through our presentation with all of our usual enthusiasm, emphasizing our expertise, our contacts, and the opportunities we saw in the markets. When we finished, I asked the executive who had poured me the coffee, “Do you find this of interest?”
“Oh, yes. Quite interesting, but Delta doesn’t invest in first-time funds.”
“You knew we’re a first-time fund. Why did you ask us all the way to Atlanta?”
“Because you’re both famous people in finance and we wanted to meet you.”
When we left, it was steamier than when we arrived. We dragged our bags back toward the road. Halfway there, Pete looked at me and said, “If you ever do that to me again, I’m going to kill you.”
The rejections were horrible and humbling. The setbacks seemed endless. We met people who lied to us or never showed up for appointments even after we had traveled across the country. People we knew well in positions of authority rejected us. Pete and I talked throughout these struggles. He was not someone who failed. He hated failure. But at the same time, he was sixty years old. He was at a different place than I was, with a different mentality. If I had the drive, he had the patience and equanimity. He picked me up and kept me going. He assured me that when you believe in what you’re doing, overwhelmed or not, you have to keep moving forward, even when the quest feels hopeless. Which it did.
Pete was from an immigrant family. His parents had come to the United States from Greece and opened a restaurant in Kearney, Nebraska, where Pete worked as a boy. He went to college and graduate school and made his way in business thanks to his intelligence and personal skills. He understood the journey I was on, the need I had to make this work. It had been his journey too. We were just on different schedules.
“This is a high hill,” he would tell me before a meeting. “This is really pushing it.” But then he’d suck it up, and we’d go off to meet the next investor, where we’d get shot down again.
Six months after we started and had met almost every prospect who would see us, we hadn’t raised a dollar since our original pledges from New York Life and Met Life. We were nearing the end of our list of eighteen when we reached Prudential. Prudential was the number one financier of leveraged buyouts, the gold standard. We didn’t know anyone there well, so we had saved their meeting to be one of our last. By then we would have our pitch perfected. Garnett Keith, Prudential’s vice chairman and chief investment officer, invited us for lunch in Newark, New Jersey.
As I began talking, Garnett took his first bite of a tuna sandwich on white bread, cut diagonally. As I spoke, he would bite off some more, chew, swallow, and not say a word. His jaw would move, his Adam’s apple roll up and down. By the time he was three-quarters of the way through his sandwich, I had said all I had to say. Garnett put down the last quarter of his sandwich, stopped chewing, and spoke: “You know, that’s interesting. Put me down for 100.”
It was so sudden, so casual. There was nothing legal I wouldn’t have done for that $100 million. If Prudential thought it was a good idea to invest with us, others would follow. I wanted to reach over and snatch away the last quarter of that sandwich to make sure Garnett didn’t choke on it.
We were on our way.
Play fair
From the start of Blackstone, Pete and I had agreed that we would never do hostile deals. We believed that businesses were made up of people who deserved to be treated with respect. If all you did as an acquirer was slash costs and take out money until a business collapsed, you would be hurting employees, families, and their communities. Your reputation would suffer, and decent investors would be scared off. But if you invested in improving the companies you bought, not only would their employees benefit from working for a stronger company, but your reputation would be enhanced and you would earn much higher long-term returns—“Friendly Transactions in a Hostile Environment,” as we put it in a Wall Street Journal advertisement. USX would test that.
Determination
Next, we headed to Saudi Arabia. After five days of doing six presentations a day, we didn’t have a single commitment. Exhausted, on our last day in Dhahran, floating around in the hotel pool, I started telling Ken how successful we would be. I laid it all out for him. To be successful you have to put yourself in situations and places you have no right being in. You shake your head and learn from your own stupidity. But through sheer will, you wear the world down, and it gives you what you want. The money had to be out there. I told him to forget about what had just transpired in Saudi Arabia. It was done. Wasted. We were going to be successful, enormously so.
Focus
If you want to do great work, don’t take on too much.
To ensure my message got through, I defined excellence in narrow, practical terms: It meant 100 percent on everything. No mistakes. That is different from school or college, where you can get an A with 95 percent. At Blackstone, that 5 percent of underperformance can mean a massive loss for our investors. It is a lot of pressure, but I suggested two ways to relieve it.
The first was focus. If you ever felt overwhelmed by work, I said, pass on some of your work to others. It might not feel natural. High achievers tend to want to volunteer for more responsibility, not give up some of what they have taken on. But all that anyone higher up in the firm cares about is that the work is done well. There is nothing heroic or commendable about taking on too much and then screwing it up. Far better to focus on what you can do, do it well, and share the rest.
Ask for Help
The second way to maximize your chances of achieving excellence was to ask for help when needed. Blackstone is full of people who have worked on a lot of deals. If you are spending all night trying to solve a problem, chances are there is someone a few offices away with more experience who could solve it in far less time. Don’t waste your time trying to reinvent the wheel, I advised. There were plenty of wheels all around you, ready-made, just waiting for you to spin them faster, further, and in new directions.
How to Worry right
I have always regarded worry as an active, liberating kind of activity. Worrying allows you to articulate the downside in any situation and leads to action to avoid it. We had set up Blackstone to give us reasons to worry, to absorb reams of raw data, so we could develop our intelligence by looking for anomalies and patterns. At its best, worrying is playful, engaging work that requires that you never switch off.
Buying at the right time
Looking back, our initial observation seems to have been a simple one: When people are being stopped, for no good reason, from buying what they need, the system has to adjust. When it adjusts, the price of the commodity will rise. People needed houses, but after the crash, irrational regulators and fearful bankers got in their way. It was just a question of buying in the right way at the right time in the cycle.
Listen to requests about new things
I’ve learned that finance is a simple business. When somebody asks you for something new, the odds that he or she is the only person on the planet at that point of time who would find that of interest is zero. When you get one of those inquiries, it’s potentially a huge opportunity. Those who are asking don’t know that. They are just looking at their own needs. But if those needs make sense and you create the right product to fit those needs, you can roll it out more broadly and your competitors will be left wondering how you figured it out.