Stephen Schwarzman The New Masters of the Universe: America's Landlord

Meet Blackstone founder Stephen Schwarzman, a billionaire with a penchant for being politically incorrect. He's the first of our series profiling powerful asset managers on the global financial landscape.
Stephen Schwarzman, co-founder, chairman and CEO of Blackstone Group.

Stephen Schwarzman, 69, won’t reveal who he voted for in the recent U.S. But it's easy to guess. Mr. Schwarzman, one of the most hard-boiled chiefs of financial capitalism, will have wonderful things in a Trump government to look forward to – for example, a dismantling of regulations and laws to make investing easier and enable more growth.

Well, that and that the founder and CEO of Blackstone Group, a global private equity and financial advisory firm, has been a vocal proponent of the free market. He once likened President Barack Obama's tax policies to the Nazi advance across Europe at the start of World War II.

Later, the Republican Party stalwart took back the comparison, but the plans were also not implemented.

As one of Wall Street's most successful financiers of recent years, Mr. Schwarzman's political influence is undeniable. He once explained how he formed close ties to Mitt Romney, former head of Bain Capital and 2012 presidential candidate. The two had gotten back 24 times their stake in a joint investment. “That’s the way friends are made in financial business.”

In mid-2016, Mr. Schwarzman rose to become the world’s largest property owner.

Mr. Schwarzman has long since broken away from investing in companies, his original business. His business activities have become more diversified over the years. With Blackstone being the world's largest property owner, the firm is doing what banks used to do.

Previously, the amount of loans granted alone by Blackstone was close to $80 billion. Investment companies borrowed money through loan funds that refinance themselves directly through investors. Blackstone’s real estate business grew enormously following the 2007 acquisition of Equity Office Properties Trust for $39 billion.

In mid-2016, Mr. Schwarzman rose to become the world’s largest property owner. Low interest rates were super fuel for further acquisitions. All together, Blackstone’s properties already had a value of €135 billion, or $143.4 billion, by 2015. No one in the U.S. nor in India currently has more office space than Blackstone.

Jonathan Gray, who is the executive responsible for the business segment, has been designated Mr. Schwarzman’s successor. Mr. Gray’s masterwork was the purchase of Hilton Hotels in 2007 for $26 billion, where he took the company off the stock exchange and then in December 2013 put it back in. The following October, America’s landlord sold 25 percent of Hilton shares for $6.5 billion to the Chinese HNA Group.

Also belonging to Mr. Schwarzman’s empire are 50,000 apartment buildings, which are expected to be turned into money on the stock market in 2017.

In his core business, private equity, the New Yorker has 90 shareholdings in his portfolio. In Germany, he owns the moderately successful outdoor brand Jack Wolfskin, where Americans have already had to inject €75 million in capital, as well as 45 percent in optics manufacturer Leica, which has long been famous for making cameras.

In 2006, Blackstone was even for a time the second largest shareholder after the German government in Deutsche Telekom with 4.5 percent. But the U.S. titan abandoned plans to make the Bonn-based company a global player. Mr. Schwarzman knew full well that Germany is still cautious towards private equity firms, which is perhaps why he is careful to act so friendly.

Blackstone has been listed on the stock exchange since 2007, and the firm has exhibited widely fluctuating performance and gains. In 2012, a good $800 million was accrued after taxes. After that, profits skyrocketed to $3.7 billion, only to plunge down again in 2015 to $1.6 billion.

But that is only the group’s profits, not its funds. One reason the industry is very controversial is that the calculation of the fees – beyond the standard rate of 2 percent  – is often not transparent. After all, in 2014, 58 percent of Blackstone profits consisted of performance fees, which are profit-related sums (respectively 20 percent of the investments' profits). The nice thing for Mr. Schwarzman is that these performance fees are taxed as carried interest and not earned income – were this the contrary, double the tax rate, up to 40 percent, would be due. Legislators shy away from addressing this issue.

In 2015, Mr. Schwarzman pocketed an epic $800 million, including capital gains. Alone the dividends on his 20-some percent share in Blackstone brought in $640 million. Not bad for the son of a storeowner from Philadelphia, who after graduating from Harvard Business School joined the investment bank Lehman Brothers. That's where Mr. Schwarzman became close friends with his boss, Peter Peterson, who had served as U.S. Secretary of Commerce under President Richard Nixon. In 1985, the duo formed their own company. Upon going public, the company raked in $1.9 billion. Since its founding, Blackstone has bought and sold companies valued at $200 billion.

A person like Mr. Schwarzman lives to set standards and sees wealth as proof of success. It’s all a question of honor and it has its price. For his 60th birthday, he threw a $3 million party for 1,500 guests. Rod Stewart and Patti LaBelle performed. It's been said Mr. Schwarzman heard a journalist say he would never work again if he had, say, $150 million in the bank.

Mr. Schwarzman's response was one of his classic shots to the heart. “That’s probably the reason why you’ll never have $150 million.”

 

Hans-Jürgen Jakobs is a former editor-in-chief of Handelsblatt. To contact the author: [email protected]