In his new book What It Takes: Lessons in the Pursuit of Excellence, Blackstone chairman, CEO and co-founder Stephen Schwarzman shares insights from his long career and, specifically, lessons learned from an expensive mistake he made when starting the firm three decades ago. This according to an article in Chief Investment Officer.
The 1989 deal was a $330 million leveraged buyout of steel distributor Edgcomb Metals. Schwarzman recalls the internal disagreement about the proposed investment, adding that at the time his firm did not have an organized process in place for reviewing and assessing risk. Schwarzman’s partner David Stockman (former director of the Office of Management and Budget in the Reagan Administration) opposed the deal, arguing that if steel prices decreased the company would go bankrupt and Blackstone would be ruined. But Schwarzman pushed ahead. Shortly after the deal closed, steel prices fell.
“When the deal was complete,” the article reports, “Blackstone investors lost a combined $32.5 million on their $38.9 million or 84% of their investment.” It adds, “A back-of-the-envelope calculation suggests Blackstone’s potential exposure to losses was approaching $150 million. By comparison, the firm had raised $810 million for its launch in 1987.”
Schwarzman’s painful takeaways from the experience:
- No individual should ever be the sole person to make an investment decision.
- There should be a rigorous and intensive risk assessment process.
- “You start out by looking at every conceivable way that you can get into trouble by owning something. And we do it with a group of us, not one really smart person,” Schwarzman reportedly explained at a recent talk, adding that those participating in the process should ask basic questions such as, “If something goes wrong, how wrong can it go?” and “Can that affect your preservation of capital?”
- If more than one thing can go wrong, Schwarzman argues, then the process should require a debate on all of them to determine “what the correlation is between those bad things.”
According to Schwarzman, Blackstone’s process has proved successful over the years, with more than 700 investments, no liquidations and only one bankruptcy filing–which he says represents only a tenth of one percent of all the firm’s deals.