WHEN: Today, Tuesday, September 13th
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Stephen A. Schwarzman, Blackstone Chairman, CEO and Co-Founder, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Tuesday, September 13th.
Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.
BECKY QUICK: Thank you. Good afternoon, everybody. It is great to see you all here today.
And, Steve, thank you so much for being here.
STEPHEN SCHWARZMAN: Thank you for inviting me.
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.
(Laughter.)
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: You are beholden to the equity markets, though, and how well things are going there. The last few years you've been selling a lot of assets because equity markets have been climbing. What do you see over the next six to twelve months in terms of how healthy the market is? Because it's a double-edged sword. If the markets are valued highly, you could sell a lot of stuff, but it's harder to find good bargains or properties to buy. So where would you say you are in the cycle right now?
STEPHEN SCHWARZMAN: Well, the answer is that's all okay, because sometimes you are better off selling things, as you say, when multiples are up, and then you buy a lot more proportionally when things are down. But you are always buying and selling at the same time.
Now, we've got an economic recovery that's still going on. And it's a subpar recovery, which is maybe why it's lasted so long. And U.S. consumer, looks like they're in pretty good shape. We've got inhibitors on the growth of the economy that's kind of huge regulatory repression that's going on, sort of like one foot on the brake, one foot on the gas, with a very slow rate of growth -- integration between -- probably the same as Europe, which is not heroic.
So keeping that going for a while strikes me as okay. There's a little bit of wage inflation, which is going to probably impact the growth rate of profits. So that's -- that puts a bit of a ceiling on the equity market.
BECKY QUICK: But does the equity market look expensive to you right now or not?
STEPHEN SCHWARZMAN: Well, if you have interest rates where they are, then you will pop up all asset classes. And so it's a little expensive.
BECKY QUICK: Raise rates, even if -- is it more expensive in this respect?
STEPHEN SCHWARZMAN: You know, people have been talking about this on television for so many years that the Fed might actually do something. You're daring them. Eventually they will give up and do something.
At this point, it's only because you all have become a proxy for the markets. You wanted to move something, or else there's no news. And -- but it won't make a difference to the U.S. economy. It will temporarily impact markets around the world just simply because it will, and it's been years in effect.
So it's something that at some point will have to be normalized. They'll probably start it later this year, but I think the Fed is a very cautious group of people, in large part because, at least for the last few years, you haven't had fiscal policy. So when you get a new president, sort of like John Paul, let's see what happens.
BECKY QUICK: Speaking of a new president, when we sat down with you on "Squawk Box" in January, you said that you would take Donald Trump as the Republican nominee over Ted Cruz. You got your wish, but you still haven't endorsed him officially.
STEPHEN SCHWARZMAN: Well, I think you took away my choice. I was sitting there, minding my own business, and that was that sort of gotcha question at the end of the interview. I thought it was cold out there, and it just got colder when you asked the question.
And so I think this presidential election is like a mystery. I've never experienced something like this, with such low positives for each of the candidates, and frustration, and so little conversation about policies of almost any type. It's turned into some kind of food fight, where people are just talking at each other.
So I think for the public, it's been amusing on one level, but it hasn't been substantive. And I'm hopeful that in the last two months of this that people will start turning to more substantive things. Because if they don't, one of the options is that not as many people come out to vote as they should.
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: It hasn't happened since 1986. And it doesn't look like Washington is lining up anytime soon.
STEPHEN SCHWARZMAN: Well, I was around in '86. I mean, it wasn't, like, ancient history. And --
BECKY QUICK: It was a long time ago.
STEPHEN SCHWARZMAN: You can get stuff done. But you have to understand what your objective is. And you can make these numbers come out, and some people would like it. I would like that. I would like that kind of system.
And I think we would grow faster, which is -- part of the deal here isn't any one group of people. It's doing the right thing for society. And we have to grow faster. We have to reduce some of the regulatory burdens on society.
For example, we've shrunk financial institutions to such a degree that we talk about -- every candidate is talking now about infrastructure, $200 billion in infrastructure. Okay. That's a good idea. But just Citibank has been shrunk about $1.5 trillion since the crisis.
BECKY QUICK: It should help companies like yours, though, who are able to be the one who can pull off a $30 billion deal for GE's real estate.
STEPHEN SCHWARZMAN: Well, yeah, we can do stuff. But our success, which is substantial, is not that important to society.
In other words, we can do great stuff for our investors and the people who work at our companies and accelerate growth and so forth. But we're small compared to the whole society. And we have to get these other macro things right for the benefit of everybody. And then we'll do even better.
In other words, the better the society does, the better we do.
BECKY QUICK: We are almost out of time, but I want to ask you about some very specific opportunities.
Back in June, I think at the Bernstein conference, you talked a little bit about oil, energy markets, and what's been happening there. And I think your words were that the energy markets have managed to make everybody look like bozos because it's been so volatile.
STEPHEN SCHWARZMAN: That sounds like the language I would use.
BECKY QUICK: Well, we watched oil close. It's around $45, but it was down substantially today. It's back below $45. So you feel any wiser about this? Is this a good place to invest right now?
STEPHEN SCHWARZMAN: Well, I think the prices -- the values of certain of the energy opportunities have sort of been arbitraged out. So you need a little more pain again. And the nice thing about a commodity is always be prepared to deliver pain as well as gain.
So I think the energy area will continue to need a lot of ()tapro(). There's still companies involved that haven't used the public markets because they don't have access to get money. I think we're probably -- I think you asked me a question about would I be buying -- investing in energy. It was $27 a barrel. I think I said something like doesn't feel like it's going to get too much lower. I think that was the right thing here.
I think we're in, you know, like a decent trending range, 40 to 50. And if you can find interesting opportunities -- and we've got a bunch of them right now. So I like that area.
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.
BECKY QUICK: Unfortunately, we do have a shot clock here, and we are out of time. But I want to thank you very much for joining us today.
(Applause.)
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