Here is an unofficial transcript of CNBC's Michelle Caruso-Cabrera's interview with Stephen Schwarzman, chairman of Blackstone Group.
Caruso: What is the logic of the deal with China and the country investing $3 billion in Blackstone?
Schwarzman: Well, I think from the Chinese side, it makes a lot of sense. In March, they announced they were going to do something with their $1.2 trillion of foreign exchange reserves, to increase the return on those. And they announce they were going to segregate $200 billion to start and form a new company, which is going to be called the "China Investment Company" and it's very much like the government of Singapore Investment Company or the Abu Dhabi Investment Company, and look for higher return investments.
I think for whatever the series of reasons, that one of my partners called on them, and they became interested, without our knowledge, actually, in the IPO, and called us and indicated that they had an interest in buying $3 billion in the IPO, which was obviously too much of a $4 billion offering. So what we did was increase it. And I think, from their perspective, and they talked to us about having non-voting stock, and they wanted to make sure that they stayed under the governmental approval level of 10%. So they wanted to be at 9.9%.
And I think that they were looking, on the one hand to have a non-controversial investment, but what's most important here is that this is a historic investment because it's the first time the Chinese have used their foreign exchange reserves, which are the largest in the world. Which are growing extremely rapidly into a commercial type of relationship to recycle these vast amounts of money.
It's important for the world currency flows, for capital flows, for this money not just to build up in one country, China. And if they can recycle it, give it to folks like us, we'll reinvest it, we'll keep some of the profits and they'll keep some of the profits. And that way, as the money moves around the world, it facilitates trade, it facilitates investment and it helps open China to further investment by us there as well.
Caruso: I was just about to ask, what's the logic from Blackstone, taking the investment from China?
Schwarzman: Well, I think the logic from our perspective is that it does a number of things. One is that it facilitates a larger transaction. But it does a number of business things in terms of our focus on that part of the world. You know, I am in the midst of working on an IPO and we have restrictions from our lawyers and the SEC in terms of what they call a “Quiet Period.” So I can't talk about benefits to Blackstone, per se but what I'd say in a general sense is that having relationships in other parts of the world is always a good thing. And I think, given the way this particular country is organized, it certainly fits in that kind of rubric.
Caruso: We know you're very interested in issue of American competitiveness, and maintaining American competitiveness. How does doing this deal with China help keep America great?
Schwarzman: Well, I think the way it helps is that to the extent that capital is brought back into the United States to help us invest, to grow our country, and even to export that capital to other places in the world to make our companies, which we represent, more competitive is a very good thing and it's almost a perfect paradigm of what one is supposed to do in a global system with money. You're not supposed to horde it. You're not supposed to just spend it in your own country. To the extent that you give it to other people who can then employ that money productively, that creates an increased living standard.
Caruso: Have you spoken with Hank Paulson? What did he say about it? Is he excited about it?
Schwarzman: Actually, it's quite interesting that, ah, Hank has a whole variety of restrictions on him as a result of working at Goldman and being so active in China, of who he's allowed to talk to, and what he's allowed to say. Ah, we've talked to Bob Kimmet, who is the Deputy Treasury Secretary and to Hank's chief of staff, all of whom can walk into the next room and talk to Hank.
Caruso: But you can't talk to Hank.
Schwarzman: But, I was not allowed to talk to Hank on that. But the Treasury is very positive, as I think has been reported today. And Hank spoke publicly today, from what I've been told, and had some very positive things about this investment, which would be logical, because it would be consistent with the objectives of the U.S. government, which is opening China to the extent possible.
Caruso: Still, do you think the investment might become politicized? Will there be some who are critical of it in Washington, in Congress?
Schwarzman: I think that there is a very, very small minority of people who, as described to me, are typically against anything that has to do with China. However, from what I know today, that this investment has been very well received, in large part because the Chinese have been very sensitive, to have non-voting shares, to have the amount of ownership be within a non-control range.
They do not have member on the board of directors. And so it's really a passive investment in what they hope will do well for them. And that's one of the changes, along with the change in the paradigm, of recycling this money, which is so important to so many people, that on balance, from what we know, there's been an extremely positive reception to this transaction from virtually all constituencies.
Caruso: If I could broaden it out, is there a private equity bubble right now?
Schwarzman: Well I don't really want to talk about that, because I don't feel legally I can. If I could, I'd give you my normal, kind of snappy, direct answer. But you know, we're working hard on a variety of transactions and we lose most of them because the prices are high. And I think generally one has to be how one generally is, you know, selective, about what one does.
Caruso: Did you hear Jeff Immelt's interview this morning?
Schwarzman: I did not.
Caruso: He was very complementary of you. One of the things he did say though was that prices were high. Joe asked him, "is it cheap money, is it cheap stock?" What is it? And he pointed to the sales of GE Plastics and said, "a few years ago there were no strategic players. Now we've got strategic players coming out." He said, "If private equity wants to play right now, they're execution really has to be flawless."
Schwarzman: You know, we looked at GE Plastics, and we got the due diligence, and were soundly beaten, which is OK, by Strategic, which I believe is from Saudi Arabia, which has access to enormous amounts of petrodollars. The idea that Strategics has appeared at this stage of the M&A cycle, the economic cycle is quite normal.
Strategics tend not to enter the M&A business when you’re coming out of a recession, because they're still, in effect, licking their wounds from missing their numbers, or whatever problems they're dealing with. They have been delayed in terms of being active in the M&A cycle, in large part because of the Sarbanes Oxley concerns. But as they've accommodated to that more, as the economy has gotten into its fifth year of economic expansion in the U.S. and is vigorous everywhere else in the world, Strategics have more confidence, and we now get beaten by Strategics on occasion, whereas we didn't used to.
Caruso: Is Sarbanes Oxley hurting American competitiveness?
Schwarzman: Ah, I believe so.
Caruso: Should they change it?
Caruso: In what way?
Schwarzman: I think that 404 in regulation, in section 404, and the kind of compliance where there seems to be very few people in the business community or the accounting community who believes that the cost of achieving the kind of precision, in the avoidance of the most minor mistake is worth the cost benefits of it. Sometimes there's multiple checks, of things that are so insignificant, that it diverts a whole company and their activity, and there's a balance in life, and nobody wants there to be wrong numbers and nobody wants fraud and so it's important that those things get addressed. But sometimes, when the system overcorrects, which all systems do, some of the money that goes into that Herculean task could be spent on new products that could be introduced, that could help that company grow. And I think there's a pretty widespread view that we've overshot, and I know the SEC is looking into it, and once everybody knows there's a problem, usually you can make a change. If they don't know it, change never happens.
Caruso: The New York Times said that the immigration bill hurts companies, or employers are concerned. Employers are concerned that legislation will lead to labor shortages. Do you have an opinion?
Schwarzman: I'm not an expert on that bill because we've been through a lot of different approaches on immigration. It's a very difficult area where people have very strong opinions on it. Generally, labor can be more of a problem with the whole approach that we've had to national security and visas, leave aside the immigration issues, which are complex enough. But you find, with the technology workers and the limitation of H1 visas, that most business people in the technology area are complaining long and loudly that they just don't have access to a work pool.
Who wants to be here? And the tragedy of some of this is that some of our companies are being forced to open facilities in India or China following the workers that want to be here, who simply just can't get the appropriate visas. And so corporations say, ‘I have no choice. I need access to this intellectual resource. I don't want to. I would like them to be here.’ So the whole issue of having open borders for immigration is part of what makes America a unique place and has always sort of refurbished our intellectual capital over the last 200 years and however this immigration bill gets done. Part of the problem with that was what do you do with people who've snuck in, what is equitable? And the political system will address that, but for businesses themselves, you do need a steady supply of hard-working, clever people to power the growth in the United States.
Caruso: Back to China, chief of Asia. How did that all come about?
Schwarzman: We were not trying to sell them stock in an IPO. That was not anything that was on our mind. We were interested in talking to them about our private equity products and real estate and the other types of things we do, because it was an introductory meeting to what will be the largest capital pool in the world. And so that's a normal type of visit.
And so when they responded later that they were interested in investing in the offering, that was really almost astonishing, because you must remember that for decades, this is not something that the Chinese government would do. And it's a lot like taking money from the Federal Reserve in the United States. And so, it was quite an unusual thing, in fact it would not be something that you would normally ask, so this is a signal from them. And you should talk them as opposed to me. They'll know better what's in their mind. But this is a very powerful signal and it's a historic change after decades of not re-entering the world. They re-entered the trade world, but this is now re-entering the capital markets world other than recycling of money through the purchase of buying governmental obligations.
Schwarzman: Treasuries, and this has got profound implications, not just for the United States, but globally, because we may not be the only country in the United States where they do this sort of thing. And given the fact that they're building foreign reserves, at a rate of, depending upon who's doing the measuring, $250 billion to $400 billion a year now, that if they didn't adopt a different change of posture, along with other things that governments discuss with other governments, that you'd have a buildup that would really be not in the best interests of the global system.
Caruso: What do you say to critics who say this is just part of the Chinese way of throwing money at the situation in order to assuage Congress?
Schwarzman: I don't know that that really would make sense. Based on what they announced, I just go with what they announced and assume it's true for the time being, that they want to take at least $200 billion and start recycling that money, in the commercial world and I would assume that that would grow significantly over time, assuming that their reserves continue to grow.
But I don't know that that's a show trial. They went out of their way in this particular investment, because they hadn't even set up yet their state investment corporation, that they facilitated this investment. Through a variety of means, including approvals right up to the top of the country. And in that regard, we could have been the lucky beneficiary, in that sense, of summit meeting with Henry Paulson and Madam Wu. But it's a precursor of other things, because if you had $200 billion, what would you do with that money? And so the premise of what you were saying, that this is just some odd way of pleasing somebody, when you start moving hundreds of billions of dollars around, announce you're going to do it, then you start doing it, that's usually a sign of something pretty profound.
Caruso: What was it like negotiating with them?
Schwarzman: Ah, it was easy. They were remarkably professional and the whole discussions and negotiations took only three weeks.There is virtually no government in the world that you could imagine doing a commercial transaction, fully done with it's legal papers in three weeks, in fact, in the commercial world itself, that's pretty remarkable.
So I would give people on the Chinese side of this deal, exceptionally high marks in terms of their ability to respond. You know each night as we were negotiating, we'd have a bunch of things go their way and they'd sort of make exceptionally fast decisions, all logical, and come right back at you, so you could be, almost, in a continual negotiating posture in a comfortable way, you know, there were no unreasonable positions taken.
Caruso: Critics would say that that’s the result of their top-down government structure, which has other ripple effects, which are negative.
Schwarzman: Well, I don't know that that's the reason or whether it's due to the talents of some individuals. You know, all systems have pluses and minuses and we operate around the world and we always like it when some aspects of it are as regards us, and they certainly can get things done when they want to. And from what I've heard, when they don't want to, they don't happen very quickly, so in that regard, maybe they're not so different from you and me.
Caruso: Private Equity - Where are we in this cycle?
Schwarzman: Well, we're pretty extended. I think you can see that the U.S. is pretty slowed down appreciably.
Caruso: Are you talking about the economic cycle or the private equity cycle?
Schwarzman: I am talking about the economic cycle. And, the U.S. is about the slowest growing country in the world. I know this may not be the self-image of the United States. But the blow-off of the residential housing business and the fact that Americans use their house value as sort of their savings account, and that when the value of the houses either stops going up or goes in reverse, that usually creates some issues.
In terms of purchasing, you’re seeing cars purchased less, and while we're not in a recession, I don't think we'll go into a recession, but we certainly have growth rates that appear to be somewhere between 1 and 2%. Trying to measure a big economy like the United States, I've always found, is fruitless. We hang on every number as if they're actually true. I tend to think they're more or less just directional.
And the direction has been down. And that's not surprising. What I think is going to keep us going is that everyone around us, that's Europe, Asia, Canada, it almost doesn't matter where you turn, is doing quite well. And asset values have been going up, in large part because the interest rates have stayed down globally. And the world's awash with money. And so, you can put that together and come to a number of different conclusions, the way that people always do. But I think there's close to unprecedented liquidity on a global basis
Caruso: What makes you worried? What could go wrong?
Schwarzman: Well, there are many, many things that could go wrong. And what stops this almost coordinated expansion globally, is typically exogenous events. Bad governmental trade policies, people raising the barriers in their countries. So that capital stops flowing to between countries, to finance certain countries that will throw them into recessions. Accidents in the capital markets, like long-term capital that create uncertainty and put a big risk premium back into the debt markets; terrorist activity that deals some type of very substantial blow to communications or the psyche in certain population centers. There are a lot of things, most of which are not the normal economic cycle things, which you can look back you, can see, and say, ‘Jeez if I'd only thought of that.’ But most things like that are unpredictable.
If you just take an example, in Thailand, where the military just took over, 4-5 months ago, all of a sudden they just closed their capital markets. You couldn't get capital out and there was almost like a quiet before a storm and people said, ‘What do you mean I can't get my money out?’
And the markets started moving and somebody thought about it and said, ‘We can't do that.’ But if you take a large country and something like that happened then it would have different consequences. So we live in a very integrated world now and it's dangerous because it's integrated. It’s also a uniquely advantageous time because it's integrated. And I think that those of us who live in the financial business have to always be looking with one eye over our shoulder to see what might happen and what might go wrong.
Caruso: How long is money going to be cheap?
Schwarzman: I don't know. If you can tell me, I'd be glad to invest with you too.
Caruso: If you can get in front of wherever the Chinese are going you can make a lot of money. Clearly, they're going into private equity. Where else are they going?
Schwarzman: Well, they've been very active in commodities because they're a purchaser of an immense amount of commodities, because they've single-handedly had the largest building boom in history, certainly since World War II. And I think that's been an area that's profited dramatically from their needs.
Caruso: How big are the deals going to get?
Schwarzman: For some reason, people are fixated on that. I don't know why. We did one that was for $39 billion and we didn't give it a lot more care, frankly than we a deal that is like $4 billion. They all have to be well done. They all have to be good. You know, the size of the deals is really a function of the liquidity of the capital markets and how much equity you can marshal for that one transaction. Big is not necessarily good. It's good if the numbers are right. And it's not good if they're not.
Caruso: But a lot of people are using the move up the size curve to justify saying now is the time to get into big caps, because now they're finally going to move along with small and mid caps because of guys like you.
Schwarzman: Right. Well, I think there's been more value in the big cap area for people buying companies, because they haven't performed as well. In terms of what the practical limits are, I leave that to others to define that. I've never been interested in that, because you can get wildly different answers. Because if you bid with a corporate buyer and they decide they want to put up $10 billion in equity to facilitate a transaction then you'll get a dramatically bigger deal than if you're just dealing with private equity people. And so the idea of how big you can go is really definitional.
I'm much more focused on the goodness of deals and the returns you can make rather than just doing something large because you know you can, or you want to push an envelope. I don't think we're in the envelope pushing business. We should be trying to do well for the people who give us money. That’s really the job of fiduciaries.