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Influencers Transcript: Stephen Schwarzman, April 25, 2019

ANDY SERWER: No matter the height of his success, Steve Schwarzman isn’t satisfied.

Straight out of Harvard business school, Schwarzman joined Lehman Brothers, where he rose to managing director at just 31 years old.

He left it behind in 1985 to co-found the private equity firm Blackstone Group, which raised $830 million for its first fund.

The company has since grown into a giant—with $512 billion in assets under management and 23 offices worldwide.

Schwarzman is here to talk about what his investments reveal about where the economy is right now and where it’s headed.

Hello and welcome to Influencers. I'm Andy Serwer and welcome to our guest Stephen Schwarzman, who is the co-founder and CEO of The Blackstone Group. Steve, great to see you.

STEPHEN SCHWARZMAN: Good to see you, Andy.

ANDY SERWER: So I want to start off by asking you about a recent gift you made, $350 million to MIT, to help create the Stephen A. Schwarzman College of Computing. And my understanding is it's all about AI. So the question is why MIT and why AI?

STEPHEN SCHWARZMAN: Well, why MIT is one of-- they're one of the greatest, if not the greatest, scientific university in the world with huge numbers of Nobel Prize winners and Turing Prize winners. But MIT was a vehicle in a way, you know. The gift there enables them to double their faculty in the computer science area, set up a new college, and have faculty members as links to the other schools of MIT. So what this will enable MIT to do is become the first AI-enabled university in the world. Everyone at MIT will be able to have those skills.

And you know, the reason also for MIT was because they will be focused on the ethics of the introduction of these technologies, which are extremely powerful and could on the negative side create higher levels of unemployment, people being replaced by computers and machines. And that's sort of the fear.

On the other hand, on the good side, these technologies will do remarkable things for human beings in terms of education, in terms of medicine, improving the time to market for medicines, lowering the cost, procedures being cheaper, more accurate, all kinds of wonderful things in almost every area of society.

So what was important for me in the ethics area is to make sure unlike the internet, which has got a lot of good things but has encouraged bullying and fake news and all kinds of odd behaviors, which are not controllable, that you know, we do things the right way.

And my other objective with that gift was to increase US competitiveness. And if we were going to double the faculty in computer science at MIT, it was quite clear to me that the other great universities in the United States would dramatically increase their budgets and raise outside money because who wants anyone to get ahead of them?

And then if we get both of those things to happen, then engaging the US government to put up very significant moneys to advance these technologies is the way we used to do things in the past with the space launches and competing with Sputnik in the 1950s. We need a more robust national policy. Other countries are doing the same thing. And it's a bit of a wake up call. So that gift at least in my mind has basically created, has the potential to create, all of these positive things for the country and looks like that's on track to happen.

ANDY SERWER: So really, AI was an area that had the most potential for a multiplier effect, it sounds like, I mean, of all the things that you could have picked, does that kind of [INAUDIBLE]?

STEPHEN SCHWARZMAN: I think that's right because it's not just AI. There's other technologies like quantum computing that are exceptionally profound in terms of their impact. And you know, all this moves into robotics and other types of things. When you take the whole complex together, it's transformative for the workplace, for the country, and ironically, challenging and important for mankind. So this is like a big field and important. And that's why you know, I've engaged with it.

ANDY SERWER: You mentioned technology writ large and the foibles that exist there. Do you think that social networks and ad platforms and such like Facebook and the like need more regulation at this point, Steve?

STEPHEN SCHWARZMAN: I think they think they need more regulation. And from hanging around with some of the major participants in the tech business now, it's quite clear that regulation is coming one way or another. For the US tech companies, I meet with these people.

They talk about why are the tech standards being created by Europeans at a time when Europeans don't have an entry into the whole industry? And we have to fashion what's appropriate for the industry because we have the leading companies in those industries. So I don't think there's a reluctance to deal with a regulatory issue. It all depends how it's done.

ANDY SERWER: Yeah, it's interesting because I think when they didn't want regulation, the dysfunction in Washington was beneficial. But now that they see the need for it, it's not helpful like it is for so many businesses, right?


ANDY SERWER: So with all of the endeavors that you have-- and we'll talk about them a little bit more-- Yale, MIT, the Schwarzman Scholars, the New York Public Library, how do you choose what to focus on?

STEPHEN SCHWARZMAN: Well, that's very good question. Because I'm so busy, I'm not doing a lot of choosing, that what happens is people bring me interesting ideas. You can't do them all. I like to do things that are transformative, things that create a new paradigm. It's sort of like starting little Blackstones again.

It's a familiar type of activity for me. But it's just deployed in the not for profit sector. And I like to do something that will change an institution or change the future, you know, the way the Schwarzman Scholars is changing attitudes in China about the rest of the world, rest of the world to China. It's a fascinating thing that's enormously respected both in China and outside.

And the objective there is to create a country of future leaders, will end up being around 13 thousand steady state, that can impact the dialogue in the world involving China and the outside world so that we have a greater shot at peace and mutual benefit. And if we can do that, which we will, we're doing it, it's a reality, then that's a wonderful thing as you know, sort of like a gift to society. And I care about stuff like that. I don't do it because somebody tells me.

ANDY SERWER: Right. Have you ever thought, Steve, about what really motivates you? I think you said about your father, who had a store and did OK, that he was content with what he had and that that sort of struck you as not who you were, that you wanted more. What is it that really drives you then?

STEPHEN SCHWARZMAN: I think it was probably my mother, you know, because we all have like a gene pool. And then we all have the environment that we operate in. And you know, my mother was a very positive life force. And I like the concept of creating things and excellence and winning. I've always liked this stuff as a kid. And so if you're lucky enough in life, you still have the same feelings you do as a kid. You may modulate them a bit. But your personality is intact. I haven't changed that much. And so I enjoy creating things. I enjoy something new. I enjoy creating excellence and change in a positive way.

ANDY SERWER: I read that you ran track in high school, speaking of being competitive when you were younger. How did that influence you? I know that you've given to the national track and field organization here.

STEPHEN SCHWARZMAN: I loved running. Most of us love things we're good at I just happened to inherit that. My dad ran also. And it's just wonderful, that idea that you're sort of out there alone testing the limits of what your own capacity is and pushing yourself and having great results and being on a team of other people, you know, sort of doing the same thing. We were sort of fourth in the United States. It's a big country.


STEPHEN SCHWARZMAN: And we were just in one state out of 50 in sort of the mile relay. But I got-- actually, I saw a woman on television in the Olympics who fell down in the last hurdle when she was ahead. She would have gotten a gold medal. As it worked out, she got nothing. And and, you know, for an athlete, you know, winning an Olympic gold medal in that sport, that's everything.

And so I figured she was so depressed, I invited her to New York to go to the US Open Championships and, you know, sort of get her out of what I thought-- I didn't know this person-- like a funk. How could you not be, you know, totally depressed, and, you know, take her up to see John McEnroe in the broadcast booth and just do a nice thing and get her back with more confidence for the future. And so I did that.

And she told, you know, sort of somebody at the US Track & Field Foundation. And they came to see me and said, could you support some of our athletes? I said, sure, what do you need? And so now I'm underwriting 25 of them. And in the last Olympics, I think we got-- I think it was four golds with these athletes, three silvers, and three bronze, something like that.

And I've learned that you can't train as a track athlete after you get out of college unless somebody supports you because you need two or three jobs. And you have to train twice a day. She can't do that. And so the nice thing for me is when these great talents say if I hadn't had this support, I would have had to quit the sport. And it's my destiny to win, not mine, theirs. And you make it possible. That's like a nice feeling.

ANDY SERWER: That must be gratifying. Do you get a chance to run at all still?

STEPHEN SCHWARZMAN: I'm on the treadmill every morning. I don't like running on uneven surfaces. As you get older, you know, sort of even surfaces are better. Yeah, but I--

ANDY SERWER: Excellent.

STEPHEN SCHWARZMAN: Still out there.

ANDY SERWER: Good. Shifting gears a little bit, I want to ask you about income and wealth inequality. And Ray Dalio recently wrote a long piece about capitalism and why he thought it wasn't working and how to fix it. One of his solutions included higher taxes, investment also, but higher taxes on wealthy people. What are your thoughts on that subject just generally?

STEPHEN SCHWARZMAN: Well, I think it's an important subject. And you know, I've thought about this a lot because whenever you find, you know, some unusual things happening in society, there are reasons. And you know, what I've learned, just independent of Ray but confirming, is that about half the country two or three years ago couldn't write a $400 check in an emergency.

And they live paycheck to paycheck. They have no savings. And their net worth per capita is about the same as the bottom 50% of the population of Greece. So within the United States, it's all not the United States imagined. Like we're half the prosperity of people in Greece at the bottom of Greek society. That is not what people expect America to do when we have an average GDP per capita around $55,000.

So that means some people are making a bunch more. And a lot of other people are making less. So the issue is-- I don't believe it's tax policy per se because we have the most progressive, which means graduated, income tax in the developed world. We have 1% of the population paying, depending upon location, 40% to in New York state 51% of the income taxes.

And so the top is paying a lot of the taxes. But the system isn't working. And I think the reason is I would call it income insufficiency for the bottom 50% of the country. And I think it's really important that we solve this problem because you're not going to have a cohesive society if these people can not participate in it, if they're not--

ANDY SERWER: How can we solve it?

STEPHEN SCHWARZMAN: Well, it's not so hard to solve, actually. It's very much correlated to education. At the same time this problem developed, the US went from number one in the world when I was younger and going to public schools to number 35. When you go from number one to number 35, something bad is going to happen. People won't be able to get quality jobs. And they don't have training, even if they're not college-prepared to do other things.

And there's a whole way of reorganizing education, paying more money to teachers, getting other people in the classroom. The baby boomers-- we can still read and write. Probably about 15%, depends how you measure it, 15% to 30% of Americans can't. That's no way for these people to progress. And we can educate everybody here. But if you look at where we are at number 35, we're surely not doing it. And we need some type of Marshall Plan to address this issue.

ANDY SERWER: Investing in education in the United States.

STEPHEN SCHWARZMAN: Making education work.

ANDY SERWER: Would you work on a plan to do that?

STEPHEN SCHWARZMAN: Sure. I-- you know, I've been thinking about things like this because our country can't deliver the promise that people of my generation had unless we dramatically improve. You can have different philosophies of what you think is right and wrong and so forth. When you go from number one to number 35, whatever your philosophy is, if it's being deployed, doesn't work.

ANDY SERWER: It's not working. Let me ask you a little bit about President Trump, two questions. First of all, do you think people misunderstand Donald Trump?

STEPHEN SCHWARZMAN: Geez, that's in the eye of the beholder. So it's hard for me to comment on something like that.

ANDY SERWER: I mean, but let me-- OK. Let me ask the next question then about his tax policies specifically then. Where do you stand on that? And are you concerned as some are that we're increasing deficits and essentially mortgaging the future by cutting taxes and running up the deficit?

STEPHEN SCHWARZMAN: Well, what I'd say is nobody likes the consequence of large deficits. And the question is, how do you make the whole thing fit? You know, one question that the current administration addressed was our complete non-competitiveness in terms of income taxes for corporations. You don't win a job creation race by having the top taxes in the developed world for corporate activity.

You should at least be in the middle if not the most competitive. If you look, for example, at how well Ireland has done with the lowest tax rates, it doesn't take a big brain to recognize that there is a correlation between low taxes and economic activity and employment. And so that's a good thing to do.

But we also need to have investments in people that correct this problem of the bottom 50%. It has to be done. And, you know, no one wants to increase taxes unless it's on someone else.

ANDY SERWER: But are there social programs, Steve, besides this investment in education you're talking about that might be required to address that problem?

STEPHEN SCHWARZMAN: I think you have to find a way, because my conceptualization of this is that it's an income insufficiency problem, is that you have to find a way to increase the income.

ANDY SERWER: Does that mean increasing the minimum wage, for instance?

STEPHEN SCHWARZMAN: I think it does.

ANDY SERWER: So you're for that at this point.

STEPHEN SCHWARZMAN: And what happens if you would do that is you're not just increasing the minimum wage. Minimum wage only applies to 15% of the people in the country. But if you did something in that area that it will force up the income for other people in that company. In effect, that's a tax on the business community, isn't it?


STEPHEN SCHWARZMAN: And the only reason you would want to accept such a tax is if you actually got a result. And you have to have proof if you will, not of a concept in general. But how are we going to go from number 35 back up towards number one?


STEPHEN SCHWARZMAN: I think-- and you might be surprised-- that if you could make that proof, make that argument, have that plan, that people would say, we've got to do something.

ANDY SERWER: Well, it sounds like you think that. Let me ask you about China a little bit. Obviously, you are an old China hand, an experienced China hand, I should say.

STEPHEN SCHWARZMAN: Yeah, I'm not so old.

ANDY SERWER: OK, right, thank you. But you have the Schwarzman Scholars at Tsinghua and have been investing there and understand the country. I think a lot of people agree with President Trump that the old rules that were established when China was very much a developing country-- and it no longer is-- should be changed. The question is is he going about it the right way in terms of forcing China's hand? What do you think of the trade dispute? And how do you think it's going to get resolved?

STEPHEN SCHWARZMAN: Well, I think the trade issues will result in a trade agreement, you know, in the next two months because both countries think that's important. How he got there is non-traditional. Virtually every other president in my lifetime since China was opened by Nixon and Kissinger in I guess it was 1972, three, has failed, every one of them. And we're not going to fail this time. We will not get an agreement that covers every issue that would be our ask.

And the reason for that, of course, is that the Chinese system, which you know, doesn't really make itself susceptible of complying with all of those assets, a mixed system with a very big government sector in their economy and all kinds of different incentives and controls. And so to wean China off of that system is not about a trade negotiation with a short-term solution for 70 years of different evolution and a different fundamental business model than we have in the West.

This is a start. And as China gets more wealthy, it'll be easier for them to change. As China manufactures their own intellectual capital, they will want to protect it. And so I think what we're going to have is a very good start. But you won't get 100% of what some people would say, well, we should get all that.

And you're dealing with a society structure that doesn't do any of that, pretty much. And so they'll think they've gone far. We'll think they've made progress, but it's a start. And so like most things in American politics, you will have some divisiveness of that.

But if you step back and you say, are we better off with a really good first step as opposed to whichever previous president you want to pick that you think is terrific. They accomplished nothing in this area. I think the proof of concept, you know, who could relate to all of these tariffs?

We've never had that at this scale in our lifetimes. But it apparently did manage to get the attention, which is what it was meant to do. And I think we'll have a successful outcome if you measure by what is in the possible zone. And that's infinitely better than where we were.

ANDY SERWER: What do you say, Steve, to Chinese political leaders? Do you speak candidly to them?

STEPHEN SCHWARZMAN: I do. Yeah, I sort of speak like this. This is my one way of speaking. And you know, what's interesting about them-- and I'm lucky enough to deal with really pretty much all of them-- is if you tell them what's really happening, what the perception is of what's going on, what likely outcomes are as a result of making no change, which won't be good for them, and what is sort of in the fair and reasonable standard, they're very open.

In other words, if you're viewed as somebody who's just operating in the best interests of all parties-- in other words, you can't make a deal if you don't know what the other people really want and have any real concept of what's fair because you're coming from different systems. The Chinese have had the world's most remarkable economic transformation of any society in a 40-year period.

I mean, it's amazing what they've done. And they haven't done it because they don't listen. They haven't done it because they're not smart. They are smart. And they just need the-- they need the honesty. People tell them what's up. And it's up to them to figure it out.

ANDY SERWER: Right. Let me ask you about Blackstone a little bit and the business cycle. It's been reported you guys are raising a big fund, $22 billion, the biggest fund on the way to being even bigger, the biggest fund you guys have raised, the biggest since 2007. And when I saw that I said, uh-oh, does that mean it's the top of the cycle? So where do you think we are in the cycle? And how's Blackstone positioned?

STEPHEN SCHWARZMAN: Well, that's a really good question, Andy. And you know, the cycle was declared over, I think, in the fourth quarter of 2018 last year. And I think everybody was agreed, you know. And not being self-congratulatory, I thought it was crazy what people were saying.

ANDY SERWER: You thought it was crazy when people declared it over.

STEPHEN SCHWARZMAN: Oh, absolutely. And you know, we have about 200 companies. And you know, we saw an economic slowing. But we didn't see a recession. No one of our CEOs saw that happening. And so I don't have to be too smart to know that's what they think. We have at the firm over 100 billion of revenues, 500,000 people working at our companies.

And if they are all seeing the world differently than, you know, the media, I'd bet on them because they're actually they're dealing with customers. And so I think what's happened is global growth has softened for sure, you know. China is not as soft as you think. And that was reported. Oh, surprise, surprise, you know.

They've stimulated their economy. And they're not collapsing. They'll probably grow around six. If you think they aren't performing-- reporting accurately, wherever they were is not going down anymore. It's starting to come up. The US will be-- I don't know-- 2 and 1/4, 2 and 1/2. And it's Europe, ironically, that's really the problem. Europe is 25%--

ANDY SERWER: Why is that ironic?

STEPHEN SCHWARZMAN: Well, they're so big.


STEPHEN SCHWARZMAN: I mean, China is around 15% of the world economy, Europe's 25, US is around 23, and to have the biggest engine in the world that nobody talks about. Everybody talks about the United States. Everybody talks about China. Hardly anybody talks about Europe. And Europe is, you know, sort of in I don't know whether it's no growth--

ANDY SERWER: The sick man of Europe is Europe.

STEPHEN SCHWARZMAN: Yes, yes. And so that's what, you know, we're having a slowing.


STEPHEN SCHWARZMAN: But we're not, certainly in the US, certainly in China, you know, we're not having recessions.

ANDY SERWER: And finally, Blackstone was founded in 1985. It's been a number of years now, Steve, right?


ANDY SERWER: Yes. So Goldman Sachs, 1869. So you know, what do you look to do to make this a sustainable institution? And where do you see Blackstone 25 years from now?

STEPHEN SCHWARZMAN: Yeah, well, Blackstone is a sustainable institution, you know. We've been here it'll be 34 years this year. Our flows of capital going into the alternative businesses dwarf everybody in our field. And it's changed the way institutions who give out money allocate the performance of our types of products. Just to make it simple for our high performance products are about double the stock market after fees and with almost no loss of individual things, let alone a fund.

And so-- and this is over decades, not just one little cycle, measurement cycle. And so if you can make-- if you have an expectation to make double in one area, why wouldn't you give it funds? And so what's happening to the money management industry, it's becoming a barbell where you have on one side of the barbell index funds next to no fees basically mirroring a market so you can't be criticized. And many active managers underperform. So that's where the money is going there.

And on the other side, people need, you know, extra return. And they're going into the alternatives, whether it's private equity, real estate, credit, other types of areas. And we're the leader. And we intend to continue expanding where we see something good. We don't expand for the heck of it. We're in the business of giving great ride to our customers. That's the only reason we exist as a business, to do a great job for people to give us money.

And we measure ourselves pretty simply. Are we the best in the world at what we do in that area that we choose to be in? This is a very easy way to measure yourself. If you're not, that means you have to improve. And so at the firm itself, where we've gone through two generations of succession in effect beyond me, Tony James, who was the president for about 17, 18 years, and now Jon Gray.

And we're very fortunate to have people of-- who reflect the firm's culture and have great talent and people at every position in the firm with the next generation as well. And we believe some simple things like don't lose money. If you don't lose money for customers, and you do really well, and you run your risk to always be protective, then you will do a good job.

So I am extremely optimistic about our future. We just have to not mess it up. And you have to always feel like you're just starting, that you're always at risk, that the world owes you nothing. You have to earn it every day. You're like a basketball player. It doesn't matter what your record is. If you go out and you only score 40 points, and that's what happens to you, you're not going to win.

ANDY SERWER: Fair enough. Steve Schwarzman, CEO Blackstone Group, congratulations on your success, and good luck to you going forward.


ANDY SERWER: You've been watching Influencers. I'm Andy Serwer. We'll see you next time.